SHORT SUMMARIES OF SOME RECENT
CONSUMER BANKRUPTCY CASES
prepared by:
SCOTT F. WATERMAN, ESQUIRE
IANNELLO, WATERMAN & MUIR, LLP
January, 2008- December 18, 2009
ATTORNEYS FEES
In re Jensen, 2008 WL 2405023 (Bankr.E.D. Pa. 2008) (per. Frank, J.)(slip opinion)
Debtor’s counsel filed a fee application seeking compensation of $29,000. Due to counsel’s inexcusable breach of his obligations under the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, the application was disallowed. At some time after the case was commenced but prior to confirmation, counsel for the debtor placed a mortgage on the debtor’s home for the purpose of protecting his fee as the attorney’s fees were getting higher and higher. Counsel filed an Amended Statement of Compensation and in it he referenced the mortgage. Later, counsel disclosed that he had placed a mortgage on debtor’s home in the 8th Amended Plan. After confirmation, counsel filed the fee application. The Court easily concluded that when counsel placed the mortgage on the property prior to confirmation, the property interest he obtained was property of the estate. Citing Rule 2016(b) and 11 U.S.C. §330 the court ruled that counsel must apply and receive court authorization prior to collecting any money or property from the estate. See In re Berg, 356 B.R. 378 (Bankr.E.D. Pa. 2006). Unapproved transfers run afoul of 11 U.S.C. §363. Counsel can place the money in an escrow account pending court approval. In addition counsel also violated the automatic stay under 11 USC §362(a)(4) by placing the mortgage on the debtor’s home. The court ruled that there is “no economic expedience” defense available to an attorney who violates the rules governing attorney compensation in bankruptcy cases. Counsel was ordered to satisfy the mortgage on the debtor’s property. The court allowed counsel to “purge” his improper conduct and then apply for compensation again. See also In re Jensen, 2008 WL 2550556 (Bankr. E.D. Pa. 2008)
In re Johnson, 408 B.R. 61 (Bankr. W.D. Pa. 2009)(per Deller, J.)
A Chapter 13 debtor’s counsel refused to file a Motion for Wage Attachment on behalf of his client who had a confirmed chapter 13 plan until his client paid him in advance for his services. Counsel’s 2016(b) statement indicated that the fee charged was a flat fee and it failed to indicate any additional fees would be charged for additional services. In addition, counsel had not filed an appropriate fee application for fees and the confirmed Chapter 13 plan did not indicate that any additional fees would be charged. The bankruptcy court held that absent an appropriate application for approval of fees, counsel for the debtor could not charge the debtor any additional fees even post confirmation that was contrary to the confirmed plan. As a sanction the court required counsel to disgorge all fees paid to him in the case and ordered him to file the Motion for Wage Attachment.
In re Delcorso, 382 B.R. 240 (Bankr.E.D. Pa. 2008)(per Fehling, J.)
The United States Trustee filed motion to impose sanctions on a Chapter 7 debtor’s attorney for advice given prior to the commencement of her Chapter 7 case which ultimately resulted in the denial of the debtor’s discharge for effecting a fraudulent transfer. Upon the advice of bankruptcy counsel, nine days before she filed for bankruptcy, the debtor transferred her property which was titled solely in her name to herself and her husband as tenants by the entirety. The debtor then took the Pennsylvania tenants by entirety exemption exempting over $113,000 of equity in the home. Upon advice of counsel the debtor failed to disclose in her statement of financial affairs of the transfer. Counsel had no reasonable legal support for his position that the transfer was lawful and not fraudulent. The Court ordered counsel to disgorge fees and pay a small sanction for his conduct.
In re Weisel, 400 B.R. 457 (W.D. Pa. 2009)(per Agresti, J.)
A utility company terminated electric service without seeking relief from the automatic stay from the court stay as a result of a Chapter 13 debtor’s failure to timely pay for post petition utility service. The debtors filed an adversary action alleging that the utility was required to seek stay relief from the Court prior to terminating service. The court granted the utility company’s motion for summary judgment holding that when the debtor failed to provide adequate protection payments within 20 days of filing the bankruptcy, they lost whatever statutory protections they would have under the Code against having their utility service terminated. The court noted that the debtors could have sought a hearing with the court prior to termination or could have moved to amend their plan to include the post petition arrears. Since the debtor’s ignored the problem, the utility was not required under the Bankruptcy Code to seek relief from the automatic stay to terminate service based on the debtors’ failure to timely pay for post petition utility service. See In re Brooks, 2009 WL 189849 (Bankr. E.D. pa. 2009) (per FitzSimon)(slip opinion)(Proofs of Claims below)
DISCHARGE INJUNCTION VIOLATION/ IPSO FACTO CLAUSE
In re Baker, 390 B.R. 524 (Bankr. D. Del 2008)(per Sontchi, J.)
Chapter 7 debtors filed an emergency motion to reopen their bankruptcy and to hold their car lender, Ford Motor Credit Company, in contempt for improperly repossessing their car after they received a discharge even though they were current in payments. During their case, the debtors timely signed a reaffirmation agreement with the lender but it was disallowed by the court as an undue hardship. Distinguishing the case from In re Anderson, 348 B.R. 652 (Bankr.D.Del. 2006), the court ruled that the 4th option of retaining and paying for a car loan was not completely eliminated by the BAPCPA amendments. Moreover, the Court held that when a debtor timely executes a reaffirmation agreement, which is ultimately denied, enforcement of the ipso facto clause in the loan contract is prohibited and the lender had no right under Delaware law to repossess the car. The court ordered the lender to return the vehicle and pay compensatory damages (lost wages) and attorney’s fees.
DISCHARGE ISSUES/ EXCEPTIONS 523 & 727
In re Ritter, 404 B.R. 811 (E.D. Pa. 2009)(per. Frank, J.)
A credit card company brought an adversary action against a debtor seeking to exempt from discharge credit card charges under 11 U.S.C. §523(a)(2)(A)or(C), i.e. “false pretenses, false representation or actual fraud theory or in the alternative to deny debtor a discharge based on alleged inadequacy of her financial records. The creditor alleged that the debtor obtained over $9,000 in cash advances, including $4,400 within 70 days of the bankruptcy filing, and or wrote convenience checks on the credit line on her account when she did not have the intent or ability to repay the credit card company. The creditor argued that each time the debtor used her credit card - she made an implied representation that she had both the intent and ability to repay the debt. The court noted that there is a split of authority regarding what representations a debtor makes when she uses a credit card and it adopted the narrower view that the use of a credit card constitutes an implied representation of subjective intent to repay the debt – not a representation of the debtor’s ability to repay. The Court then concluded that providing intent must be made by evaluating the totality of circumstances, such as (1) length of time between the date of charges and the bankruptcy filing, (2) whether an attorney was consulted before or after the charges were made, (3) the number of charges, (4) the amount of charges, (5) the debtor’s financial condition at the time charges were made, (6) whether the charges were above the account limit, (7) whether the debtor made multiple charges on one day, (8) whether the debtor was employed, (9) the debtor’s prospect for employment, (10) the debtor’s financial sophistication, (11) whether there was a sudden change in spending habits, and (12) whether any of the purchases were for luxuries (13) length of the lending relationship. Applying these standards the court found that the debt was dischargeable because the creditor could not prove that the debtor incurred the debt without intending to repay it.
In re Biege, 417 B.R. 697 (M.D. Pa. 2009)(per Thomas, J.)
A Chapter 13 debtor reopened his case and filed an adversary proceeding against his student lender alleging a violation of the discharge injunction for charging post petition interest where the proof of claim was paid in full in the bankruptcy. Creditors may accrue post petition interest on non dischargeable debts during the course of a bankruptcy case and student loans are non dischargeable in a chapter 13 case. 11 U.S.C. §1328(a)(2). The court also noted that creditors are not entitled to include post petition interest on a proof of claim, 11 U.S.C. § 502(b)(2), and therefore the Proof of Claim filed by the lender did not encompass the entire debt between the parties. However, the debtors could have modified the loan in their Plan so as to terminate the accrual of post petition interest 11 U.S.C. 1322(b)(2), but failed to specifically do so. Therefore, the court found that the lender did not violate the discharge injunction.
DISTRIBUTION PRIORITY TO CREDITORS
In re Owens, 400 B.R. 447 (Bankr.W.D. Pa. 2009)(per Markowitz, J).
A Chapter 7 debtor and his non-debtor spouse objected to the trustee’s proposed distribution of proceeds obtained from the sale of their home titled as entireties property, arguing that Pennsylvania state law requires that the chapter 7 trustee is required to distribute the proceeds to unsecured creditors to which they are jointly liable instead of to priority creditors to which the debtor alone is liable. The debtor listed 4 jointly held unsecured creditors totaling an amount of $19,000.00. The IRS and Pennsylvania Department of Revenue filed priority claims over $50,000.00 The debtor objected because while the debtor’s obligation to those jointly held creditors was discharged, his wife’s obligations were not would remain if they were not paid by the distribution The Court overruled the objection holding that to the extent that even if Pennsylvania common law tenancies by entireties has any bearing on distribution of funds it is preempted by the distribution scheme set forth in the Bankruptcy Code. See Calpine Corp v. O’Brien Energy, Inc., 181 F.3d 527, 532 (3rd Cir. 1999)(the Bankruptcy Code precludes the distribution of assets, except as provided in the Code.)
EXEMPTIONS
In re Nielson, 401 B.R. 149 (Bankr. M. D. Pa. 2009)(per Thomas, J.)
The Chapter 7 Trustee objected to the exemption claimed by the debtor in her prepetition unliquidated workers compensation claim that was settled post petition. The debtor identified in her schedules a pending worker compensation claim and exempted the proceeds under 11 USC 522(d)(5) and (d)(10)(c). After the bankruptcy filing she reached a settlement of the claim for $52,000.00. It was agreed that $10,000.00 was for future medical expenses and $42,000.00 was for future wage claims. The Bankruptcy Court overruled the objection and held that a debtor could exempt her right to receive disability benefits reasoning that as of the petition date the debtor possessed the right to receive disability benefits and worker compensation benefits qualify as disability benefits under 522(d)(10)(c).
In re Radinick, __ B.R. __, 2009 WL 4456817 (Bankr.W.D. Pa. 2009)
The debtor filed for divorce prior to her bankruptcy filing. The bankruptcy court ruled that the debtor’s interest in her husband’s 401k plan was an asset of the bankruptcy estate even though it was titled solely in his name because under Pennsylvania law the right of equitable distribution vests immediately upon the initiation of a divorce action. This interest exists even if the property is not distributed to the debtor within 180 days after the bankruptcy case is commenced. The court deferred on ruling whether the debtor could exempt the property under 11 U.S.C. § 522(d)(12) as it was unknown whether the debtor would receive an equitable distribution from the 401k plan. Note: The exemption under 11 U.S.C. § 522(d)(12) for an ERISA qualified 401k is unlimited.
LIEN AVOIDANCE
In re Mansaray-Ruffin, 530 F.3d 230 (3rd Cir. 2008) (per Rendell, J.)
A chapter 13 debtor filed a plan which invalidated a mortgage lien by providing for it as an unsecured claim without initiating an adversary proceeding as required by Federal Rule of Bankruptcy Procedure 7001(2). The mortgage company did not object to the plan which was then confirmed. The debtor proceeded to file an unsecured claim on behalf of the mortgage company. The mortgage company then brought an adversary action seeking a determination that its mortgage continued unaffected even though the debtor crammed down the mortgage in a confirmed chapter 13 plan and filed the unsecured claim on its behalf. The Bankruptcy Court and District Court held that the mortgage lien was not affected by the confirmed plan. In a 2-1 decision the Third Circuit affirmed holding that the debtor’s filing of an unsecured proof of claim did not invalidate the mortgage lien; that the debtor’s provision in his confirmed plan treating the mortgagee’s claim as unsecured did not invalidate the mortgage lien and the mortgagee did not waive its right to challenge the plan’s invalidation of its lien by not objecting to the debtor’s confirmed plan. The Court reasoned that the plan provision which treated the lien as invalid was not to be considered a final and controlling order under 11 U.S.C. §1327 where the debtor failed to invalidate the lien through an adversary proceeding. The Federal Rule of Bankruptcy Procedure in this case is mandatory and requires that questions regarding the validity of a lien (as compared to the mere valuation of a lien) must be determined by an adversary action, to allow for greater procedural due process protection of the lienholder, as compared to the more relaxed notice requirements of the plan confirmation process.
In re Weichey, 405 B.R. 158 (Bankr.W.D. Pa. 2009)(Per Agresti, J.)
Chapter 13 debtors filed adversary proceeding, seeking to strip the lien of the Defendant's second mortgage from their residence located in Butler, Pennsylvania which residence they alleged held a value of $127,000. The lender claimed the value of the Debtor's residence to be approximately $224,000. The parties stipulated that the only issue to be determined by the Court was “one of valuation” of the property subject to the mortgage lien. The parties each had expert appraisers testify as to the value of the house, and the court noted one error on the debtor’s appraisal’s report. The report indicated that a comparable property had a three car garage (based on faulty multi-listing information), while in reality it had a one car garage). In addition, the appraiser should have provided a detailed analysis of the recent decline in home prices, rather than based his findings on personal observation.
However, the court found more significant reasons to question the creditor’s appraisal. First, there were a number of errors in his report regarding the subject property. The report showed the property was un-zoned, but in fact it was zoned R-1 residential. The report did not mention an apparent defect in a gable, the unfinished trim work or unfinished landscaping on the subject property. Moreover, he could not testify whether the 3 comparables were serviced by public sewer and water as compared to septic/ well system on the subject property, and claimed it would not make a difference, which was not accepted by the Court. In addition, creditor’s appraiser opined that having bottled propane rather than natural gas heat had no bearing on price, yet the debtor’s appraiser pointed out that propane is more expensive. Secondly, it appeared that the appraiser for the creditor chose comparables near a shopping center, not in a rural countyliving setting where the subject property was located. Finally, the creditor’s appraiser explanation on the standard to apply comparable sales was at odds with the USPAP (“Uniform Standards of Professional Appraisal Services” published by the Appraisal Foundation. Under Pennsylvania law, licensed appraisals are required to comply with USPAP. Therefore, the Court ruled in favor of the debtors and permitted the mortgage to be stripped off.
MEANS TEST ISSUES/ MOTION TO DISMISS § 707(b)
In re Liegey, 2009 WL 3817902 (Bankr.M.D.2009)(per France, J.)(slip opinion)
The United States Trustee filed a Motion to Dismiss a Chapter 7 case under 11 U.S.C. §707(b) alleging abuse. Section 707(b) applies only when a debtor’s debts are “primarily consumer debts.” At issue was whether the debtor’s debts were consumer. The moving party, bears the burden of establishing that the debts were primarily consumer. “Consumer debt” is defined in the Bankruptcy Code as “debt incurred by an individual primarily for a personal, family or household purpose.” 11 U.S.C. § 101(8). To determine whether the debt is consumer debt the court must examine the purpose for which the debt was incurred. The court adopted the majority approach that if more than 50% of the total debt is consumer debts they are “primarily” consumer debts. The debtor’s schedules were unclear as to whether the debts were primarily consumer. In fact, the debtor listed on page 3 of the petition that the debts were ‘primarily consumer debts.” There was a question whether the debtor was liable for some business debt. The court ruled that only those corporate obligations where the debtor either co-signed or guaranteed are relevant to the determination. Moreover, the court ruled that the debtor’s refinanced mortgage on his home with his wife was consumer debt. Had the debtor produced evidence other than mere testimony that the proceeds went to pay corporate expenses, the court may have ruled otherwise. As the balance of the debtor’s mortgage exceeded the value of his other debt, the court ruled that the debtor’s debts were “primarily consumer debts” and therefore the case was subject to possible dismissal under §707(b).
MEANS TEST/ AUTOMOBILE OWNERSHIP ALLOWANCE
In re: Weiderhold, 381 B.R. 626 (Bankr. M.D. Pa. 2008)(per Opel, J.)
The Court allowed debtors to claim vehicle ownership expenses on unencumbered vehicles denying the US Trustee’s Motion to Dismiss for abuse. Debtors owned three (3) vehicles, all unencumbered. If those expenses were disallowed the debtors would have sufficient income to raise the presumption of abuse. The Court noted a split on this issue, even within the Middle District on the issue. Judge Thomas, finding that transportation expense was not permitted on Form B22-A where there was no lien, and Judge France, finding that it was permitted on Form B22-C, regardless of whether there were liens. The Court accepted a “plain language” analysis by the debtors to the extent that the code §707(b)(2)(A)(ii)(I) states that the monthly expenses shall be the debtor’s applicable monthly expense, as provided by national and local standards. The Court agreed with the debtors that the word “applicable” refers only to the total number of vehicles, rather than to the number for which they make installment payments. The Trustee on the other hand posited that the debtor’s actual expense controlled. Judge France found that the term “applicable” cannot be interpreted to mean “actual”, given that the word “actual” is later
used in a later portion of the sentence.
CHAPTER 13 ISSUES
In re Baden, 396 B.R. 617 (Bankr. M.D. Pa. 2008)(per Thomas, J.)
The Chapter 13 Trustee objected to the debtors’ plan as failing to satisfy the ‘projected disposable income” requirement because the debtor did not include his receipt of prepetition unemployment compensation benefits as income in the B22C Form. Under section 101(10A)(B) “current monthly income” does not include “benefits received under the Social security Act.” The debtor argued that unemployment benefits are an indirect payment administered by the states but created under the auspices of the Social Security Act and therefore are excluded. The Bankruptcy Court disagreed ruling that unemployment compensation is not a “benefit received under the Social Security Act”. But see In re Munger, 370 B.R. 21 (Bankr.D. Mass. 2007) and In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007) two cases holding that unemployment compensation is not to be considered current monthly income.
In re Tonti, 406 B.R. 265 (M.D. Pa. 2009) (per Thomas, J.)
An unsecured creditor and the Chapter 13 trustee objected to the Debtor’s plan, arguing that the Debtor did not properly account for expenses on secured property under §1325(b) (1) (B). The creditor and the trustee argued that, once properly accounted for, the Debtor’s disposable income would increase. They also argued that the Debtor should not include loan payments on a surrendered property as an expense item under §707(b) (2) (B). The Court was called upon to discuss the meaning of “disposable income” as set forth in the Bankruptcy Code Sec. 1325(b) (2) and (3). The Court disagreed with the objectors and stated that expenses were to be determined under § 707(b) (2) (A) and (B). Citing the analysis of BAPCPA provisions in In re: Mundy, 363 B.R. 407(2007), the Court found that the Debtor was entitled to deduct payments that were contractually due on the petition date even if the Debtor planned to surrender the collateral. The Court held that the Debtor was correct in deducting amounts due to secured creditors and his projected disposable income was calculated correctly.
Applicable Commitment Period under 11 U.S.C. 1325.
In re Lopatka, 400 B.R. 433 (Bank.M.D. Pa. 2009) (per Opel, J.)
An above median Chapter 13 debtor with negative disposable income proposed a 36 month plan. The Chapter 13 Trustee objected arguing that the above median debtor must be 60 months unless the plan provided for 100% payment of all allowed unsecured claims. The court overruled the trustee’s objection reasoning that the “applicable commitment period” as set forth in 11 U.S.C. §1325(b)(4) does not have a temporal meaning and does not create a plan length requirement citing In re Kagenveama, 541 F.3d 868, 876 (9th Cir. 2008). Rather it is a multiplier in a formula that determines the amount of disposable income that must be paid to unsecured creditors.
In re Davis, 392 B.R. 132 (Bankr.E.D. Pa. 2008)(per Fox, J.)
Above median debtors with negative disposable income as determined by the B22C Form filed a 36 month plan. Their actual income exceeded their actual expenses by $872 a month. Most of the plan payments were to pay mortgage arrears. The Chapter 13 Trustee objected arguing that because the debtors were above median, their plan must be a five year plan. The court citing In re Kagenveama, 2008 WL 2485570 and In re Brady, 361 B.R. 765 (Bankr.D.N.J. 2007) ruled that the “applicable commitment period” is a multiplier not a temporal time period and because the debtors had a negative disposable income as determined by B22C, the debtors only needed to be in a 36 month plan. The Trustee’s objection was overruled and the plan was confirmed.
In re Vidal, 2009 WL 3299370 (Bankr.M.D.Pa. 2009)(per Thomas)(slip opinion)
An above median income debtor filed a Chapter 13 Bankruptcy, however his monthly disposable income according to Form B22C was negative $456.25. The Debtor proposed plan payments for 36 months in the amount of $393.00 per month. The Trustee objected to confirmation based upon §1325(b)(1) in that the plan does not provide for the payment of all the debtor’s actual disposable income for a minimum of 5 years. The Trustee based the objection upon the debtor’s Schedules I and J showing a future, positive income flow. The Court recognized the” inconsistent decisions and haphazard results” among the various districts, and found that it would “comport with the letter of the legislation”. The debtor’s historical income pursuant to Form B22C was found to be determinative. The court treated the applicable commitment period as a multiplier, not a temporal time period and since the disposable income as dictated by the B22C Form was negative, the debtor was allowed to have a 36 month plan.
Post Confirmation Modification
In re Miles, 415 B.R. 108 (Bankr.E.D. Pa. 2009) (per Sigmund, J.)
In two separate Chapter 13 cases, the Chapter 13 Trustee objected to confirmation of plans which provided for post petition plan payments to be made directly by debtor to the mortgage lender. The court indicated that the relevant considerations in determining whether to allow Chapter 13 debtor to make direct payments to creditors are (1) ability of trustee and court to monitor future direct payments, (2) potential burden on Trustee, (3) possible effect upon trustee's salary or funding United States Trustee (UST) system, (4) potential for abuse of bankruptcy system, (5) number of payments proposed to pay targeted claim, (6) plan treatment of each creditor to which direct payment is proposed to be made, (7) consent, or lack thereof, by affected creditor to proposed plan treatment, (8) debtor's ability to reorganize absent direct payments, and (9) good faith of debtor in proposing direct payments. The court agreed with the principle that that is improper to make direct payments to creditors solely to avoid paying the trustee’s commission, Accordingly, the court denied confirmation of a plan which provided for the debtors to pay off their mortgage judgment in full by direct payments, but allowed a plan which allowed for direct payments for a newly negotiated 15 year loan.
In re Stonier, 417 B.R. 702 (Bankr.M.D. Pa. 2009)(per Opel, J.)
Chapter 13 debtors sought to modify their confirmed plan to pay pre and post petition mortgage arrears to the trustee and make future mortgage payments directly to the mortgage company. The Trustee objected arguing that all post petition payments should be funneled through its office. The Bankruptcy Court overruled the Trustee’s objection holding that the debtor could modify their plan to allow them to make direct monthly payments to their mortgage lender instead of using the Trustee as a conduit. The Court ruled that since there is no Bankruptcy Code, Bankruptcy Rule, or even local rule in the Middle District requiring mortgage payments be paid through the Chapter 13 Trustee, the trustee cannot compel the debtor to make conduit payments. Moreover, the language of §1326(a) suggests that payments to creditors can come from sources other than the Chapter 13 Trustee. The court cited In re Miles, 415 B.R. 108 (Bankr. E.D. Pa. 2009), which provided 9 factors to determine whether to allow debtors to make
direct payments, although it did not adopt all of the factors.
In re Smith, 388 B.R. 603 (Bankr. E.D. Pa. 2008) (per Fox, J.)
A chapter 13 debtor who had chosen not to provide for a secured creditor in his plan that was onfirmed, thereby enabling the creditor to move for relief from stay to exercise its rights in the real estate that secured its claim, moved to modify his confirmed plan in order to add a new class consisting of this creditor. Section 1329(a) does not permit a post-confirmation modification to create a new secured creditor class and provide for it. The Court held that the proposed modification was not permissible.
PROOF OF CLAIMS/ CLAIMS OBJECTIONS
In re Brooks, 2009 WL 189849 (Bankr.E.D. Pa. 2009)(per FitzSimon, J)(slip Opinion)
A Chapter 13 debtor objected to an untimely secured proof of claim filed by a law firm which urportedly had represented the debtor prior to the bankruptcy and which had obtained a municipal court judgment against the debtor after the debtor had filed his bankruptcy case. The creditor law firm claimed that it had no notice of the debtor’s bankruptcy prior to the entry of the judgment and it was not listed in the debtor’s schedules. Citing In re Myers, 491 F.3d 120, 127 (3rd Cir. 2007), the Court ruled that the state court judgment obtained after the debtor filed a bankruptcy was void ab initio even if the creditor had no notice of the bankruptcy and, therefore, could not be a secured claim. Moreover, the Court ruled that the proof of claim bar date as set forth in Rule 3002(c) is a “strict and nonnegotiable deadline, whether or not a creditor received notice” and there is no provision … for extending the bar date simply because the creditor had no notice of the case, citing In re Nwonwu, 362 B.R. 705, 707-8 (E.D. Va. 2007). Accordingly, the Court disallowed the claim. However, all was not lost for the creditor. The Court noted that because the creditor was not listed or scheduled by the debtor the debt would not be discharged. See 11 U.S.C.§ 523(a)(3)(A)(providing an exception to discharge for debts “neither listed or scheduled by the debtor.”
In re Zilka, 407 B.R. 684 (Bankr.W.D.Pa. 2009)(per McCullough, J.)
The Chapter 7 Trustee in an asset case filed a motion to confirm balances owed to Bayer Heritage Federal Credit Union on its four unsecured claims filed in the case. The Debtor objected to the motion arguing that each of the claims was fully discharged outside of bankruptcy. The Debtor based his argument on the fact that Bayer issued account statements to him indicating the outstanding balances on the loans were $0.00 due to charge offs by the creditor and that Bayer had issued 1099C Cancellation of Debt forms for each of the loans. The account statements for two of the loans show charge offs occurring four day after the filing date. The other two loans were charged off almost six months after the case filing.
The Court dismissed debtor’s first argument holding that the issuance of account statements with zero balances due to a charge off by the creditor does not equate to discharge of the debt. As to the second argument regarding the issuance of the 1099C, the Court held that the filing of this form does not constitute an admission by the creditor that the debt has been discharged. Rather, it is an information return filed in compliance with the IRS reporting requirements; and, where issued incorrectly, this form could be amended. The reporting requirement assumes some other act has occurred to discharge the debt. The issuance of the form itself, cannot, therefore, be regarded as an admission by the creditor. Moreover, under Pennsylvania law, the discharge of a debt, based on a promissory note, requires either an intentional voluntary act on the part of the lender such as the surrender or destruction of the instrument creating the obligation or an agreement not to sue or otherwise renouncing the creditor’s rights against the debtor, in writing. 13 Pa.C.S.A. § 3604(a). In the instant case, neither of these actions were taken. The court issued an order in favor of Trustee allowing the four claims as filed.
In re Jasinski, 406 B.R. 653 (Bankr. W.D. Pa. 2009)(per Deller, J.)
The Debtor filed objections to eight proofs of claim. At issue was whether a creditor who has timely filed a proof of claim in a Chapter 7 Bankruptcy is required to file another proof of claim when the case is subsequently converted to a chapter 13 case. The Debtor asserted in his Objection to Claims that because no proofs of claim were filed in the converted chapter 13 case, the original claims filed in the chapter 7 case should be disallowed. Only two claimants responded arguing that there was no requirement for them to re-file their proofs of claim in the chapter 13 case and that disallowing the timely filed chapter 7 claims would be inequitable and result in a windfall to the debtor.
The Court declined to impose the requirement that the creditors re-file claims in the converted case, because it found that the Code was silent on the matter and that the imposition by the Court of such a requirement would be counter to the general purpose of the Bankruptcy Rules, that is the “just, speedy, and inexpensive determination of every case and proceeding. The Debtor sought to have default judgments entered in the objections where there had been no responses; however, the Court denied the Debtor's request for a default judgment because it found that the Debtor's Objection to Claims was without merit on its face. In concluding that the request for default judgment was denied, the Court further stated that denial was also appropriate because (a) the Debtor had not suffered any cognizable prejudice because he has generally acknowledged the creditors' claims in his schedules and because such creditors already timely filed their claims when the case was in chapter 7; (b) there is no dispute as to the material facts of this case because the underlying basis of the Objection to Claims rested solely on a question of law; and (c) default judgments are generally disfavored in the law.
REAFFIRMATION AGREEMENTS
In re Kahn, 406 B.R. 269 (Bankr. E.D. Pa. 2009)(per Frank, J.)
A Chapter 7 bankruptcy debtor had her car loan reaffirmation agreement approved by the Court. After the case was closed a dispute arose in which the debtor claimed that the creditor, in violation of the reaffirmation agreement unlawfully repossessed the car and failed to return the vehicle. Significantly, the debtor never asserted that the creditors acted in violated of any provision of the Bankruptcy Code (such as a violation of the discharge injunction under section 524(c)). The Bankruptcy Court held that it did not retain subject matter jurisdiction to adjudicate a post discharge dispute regarding a car lender’s alleged breach of a reaffirmation agreement in a no asset Chapter 7 case where the debtor fails to claim that the creditor violated a provision of the Bankruptcy Code. The Court concluded that an enforceable reaffirmation agreement is a new contract to which conventional contract principals apply and are construed in accordance with relevant state law. Congress did not contemplate bankruptcy involvement in reaffirmation agreements beyond the approval process set forth in sections 11 U.S.C. 524(c)and (d). It was contemplated that disputes between the parties regarding reaffirmations would take place in non bankruptcy courts applying non bankruptcy law.
STUDENT LOANS
In re Miller, 409 B.R. 299 (Bankr.E.D. Pa. 2009) (per Frank, J).
A permanently disabled Chapter 7 debtor receiving social security disability filed an adversary action to discharge a $20,000 student loan as an “undue hardship” under 11 U.S.C. § 523(a)(8). Although the debtor received only social security disability for herself and her children her husband earned over $39,000.00 a year. The debtor and her non-debtor husband lived in a home owned by both spouses with monthly mortgage payments exceeding $2,100 a month. Even though the non-debtor’s husband was jointly liable for the mortgage, and not responsible for the student loan, the Court held that the joint monthly housing expense was not reasonably necessary as it exceeded the IRS Standards for Housing and Utilities and Other Expenses. The court held that the IRS Standards can be used as evidence (although not the only evidence) regarding what is a reasonable cost of housing. The debtor would then need to proffer evidence suggesting that the housing in her county was higher than the IRS Standard allowances or that the debtor and her family could not secure housing at a lower cost and still maintain a minimum standard of living. Because the debtor was unable to do so, the Court granted the student lender’s motion for summary judgment.
In re: Johnson, 400 B.R. 167 (M.D. Pa. 2009) (per France, J.)
After receiving her discharge, the Chapter 7 Debtor moved to reopen her case seeking to discharge her student loan debt. The Debtor’s adjusted gross income in 2004 was $48,432.00. The Debtor had a law degree but had been unable to pass a bar exam. The Court found that the Debtor’s expenses included items that were not necessary such as: visits to tanning salons, expensive hair treatments, and frequent spending at bars and restaurants. The debtor lived in a two-bedroom townhouse. The Court noted that the Debtor “failed to demonstrate why she needed a two-bedroom, rather than a one-bed room townhouse.” The Court found that the Debtor failed to meet any of the three factors under the Brunner hardship test. The Court’s opinion concluded by noting that under “good faith efforts made to repay,” the Debtor had made a mere $662.00 on her loans totaling over $150,000.
TRUTH IN LENDING/ RESPA/ MORTGAGE LITIGATION
In re Madera, 586 F.3d 228 (3rd Cir. 2009)(per Soliveter, J.)
A Chapter 13 debtor filed an adversary action against their mortgage lender alleging violation of Truth in Lending Act (“TILA”) and the Real Estate Settlement Practices Act (“RESPA”). The bankruptcy case was filed after the mortgage lender obtained a default judgment against the debtor in a mortgage foreclosure action. The bankruptcy court granted summary judgment which was affirmed by the District Court. On appeal, the Third Circuit affirmed holding that the Rooker-Feldman doctrine barred a TILA rescission claim because rescinding the loan would invalidate the foreclosure judgment by the Court of Common Pleas. The court also held that the debtors failed to provide evidence that the title insurance charge for refinancing the loan was unreasonable and needed to be disclosed.
In re Harris-Pena, 2009 WL 3319921(Bankr.E.D. Pa. 2009)(per Raslavich, J.)(slip opinion)
A chapter 13 debtor filed an adversary action against her mortgage lender under Act 6 of 1974, 41 P.S. § 101 et seq., and other consumer protection statutes, claiming that the interest rate charged to the debtor for mortgage which acted as a second lien violated the statute. The debtor’s second mortgage had an interest rate of 11.9% and the face amount of the Note was for $51,660.00, which included over $3,870 in financed settlement charges. Act 6 establishes a maximum lawful interest rate for residential mortgages other than first mortgage liens, which at the time the mortgage was obtained was 8%. See 31 Pa.B. 1591. Act 6 also only applied to residential mortgages which have a principal amount of $50,000 or less. However, based on the plain language of the definition of “finance charge” under the statute, the court recognized that the “principal amount” of the loan, for purposes of Act 6 excludes finance charges and actual settlement costs. Therefore the face amount of the note and the principal amount of the loan are not the same for purposes of Act 6. Thus, even though the face amount of the note was greater than $50,000, deducting the financed settlement costs, the principal amount of the loan was actually $47,789.50. Accordingly, the court granted summary judgment in favor of the debtor holding that the interest rate charged to the debtor violated Act 6. Note, Act 6 has since been amended to increase the principal amount to over $217,000. 41 P.S. § 101(Supp. 2009)
Esher v Decision One Mortgage Company, 417 B.R. 245 (E.D. Pa. 2009)(per Savage, J.)
A chapter 13 debtor filed an adversary action against his lender under the Truth in Lending Act (“TILA”) alleging inter alia, that it failed to include the title insurance fee in excess of the refinance rate as a “finance charge” when he refinanced a mortgage loan. TILA requires lenders to disclose the cost of credit to borrowers by disclosing among other things, the amount financed, the finance charge and total sale price. The “finance charge” is the sum of all charges minus certain exclusions Reasonable charges for title insurance are excludable. Unreasonable title insurance charges must be included in the “finance charge.”. 12 C.F.R. §226.4(c)(7). Thus, if a borrower is charged the full title insurance rate, when he was entitled to a discounted refinance rate, the extra fee may be a “finance charge.” The disclosure requirements are strict. A borrower may rescind a loan when there is an improper disclosure. In Pennsylvania, title insurance rates are governed by the Manual of the Title Insurance Rating Bureau (“Manual”). According to the Manual, if a borrower refinances his mortgage and had previously obtained title insurance within 3 years and the ownership had not changed, the homeowner is entitled to be charged a lower title insurance rate. In this case, the debtor was not charged the lower refinance rate, but rather the full rate. Accordingly, the debtor argued that the extra amount paid was a “finance charge” that was not disclosed and under TILA he was entitled to rescind the mortgage.
Nevertheless, the Bankruptcy Court granted summary judgment in favor of the lender concluding that it was the debtor’s burden to show the lender at the time of the closing that he previously had title insurance. On appeal, the District Court vacated the decision holding that the bankruptcy court, and apparently a number of other bankruptcy courts, have been applying the wrong standard on who has the burden to prove that the borrower is entitled to a lower title insurance rate. The plain language of the Manuel does not require the borrower to have the burden to advise the lender that it had title insurance when the borrower refinances within three years. The borrower has no burden of production. Note: Subsequent to execution of the mortgage in this case, in 2005 the Manuel was amended specifically placing the burden on the insurer if a deed or unsatisfied mortgage was recorded within 3 years to determine if the borrower is entitled to a discounted rate.