BIOGRAPHIES
Scott F. Waterman graduated from Tufts University in 1991 with a dual major in history and political science. He received his J.D. from Temple University School of Law in 1994. He is a partner at the law firm of Iannello, Waterman & Muir, LLP and his practice is focused on consumer bankruptcy and commercial collection matters. He is Pennsylvania State Chair of the National Association of Consumer Bankruptcy Attorneys for Eastern and Middle Pennsylvania. He is also the Chairperson of the Delaware County Bar Association Bankruptcy Committee and is a co-founder and current Chair of the Debtor Bar Roundtable, a group of over 100 consumer debtor bar attorneys located in the Eastern District of Pennsylvania. He is the current Vice Chairperson for the Eastern District Bankruptcy Conference and is a board member of the Consumer Bankruptcy Assistance Project. He is also a member of the Delaware County Bar Association, the Eastern District Bankruptcy Conference and the National Association of Consumer Bankruptcy Attorneys. He is admitted to practice before all Pennsylvania Courts, the United States Supreme Court, the United States Court of Appeals for the Third Circuit, United States District Court for the Eastern District of Pennsylvania and the United States Court of Federal Claims. He is a frequent lecturer at Pennsylvania Bar Institute events.
Supreme Court
Ransom vs. FIA Card Services, N.A., 562 U.S. ____ (2011)(per Kagan J.)
An above median income Chapter 13 debtor claimed an ownership deduction of $471.00 on the B-22C means test form although he owned the car outright. FIA Card Services objected to confirmation arguing that the debtor did not dedicate all of his disposable income to unsecured creditors and could not take an ownership deduction for the car because he did not have a loan or lease payment. The Bankruptcy Court denied confirmation and the Ninth Circuit affirmed. In an 8-1 decision the Supreme Court affirmed holding that a debtor who does not make loan or lease payments cannot take a car ownership deduction on the means test reasoning that the term “applicable” expense as used in the statute only applies if a debtor actually has an expense. Otherwise, Congress could have omitted the term altogether. Without that word, all debtors would be eligible to claim a car ownership deduction.
Anti Discrimination Action
Rea v. Federated Investors, __ F.3d __, 2010 WL 5094250 (3rd Cir. 2010)(per Sloviter, J.)
A debtor who received a bankruptcy discharge in 2003 filed an employment action against a prospective private employer for refusing to hire him in violation of 11 U.S.C. § 525(b) because he filed a bankruptcy. The Third Circuit, affirming the lower court’s dismissal of the lawsuit, held that the Bankruptcy Code’s antidiscrimination of 11 U.S.C. §525(b)provision did not prohibit a private employer from discriminating against a prospective employee who previously filed a bankruptcy. The Court applied the statutory interpretation canon that “where Congress includes particular language in one section of a statute but omits it in other section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusions or exclusions. While the Bankruptcy Code specifically prohibits a government employer from not hiring an individual who declared a bankruptcy, the Code does not have similar prohibition against private employer discrimination. Thus, a private employer could refuse to hire individuals who have declared bankruptcy.
Attorney Fees
In re Synder, 445 B.R. 431 (Bankr.E.D. Pa. 2010(per Raslavich, J.)
Chapter 13 debtor’s counsel filed a fee application for over $8,000.00 for pre confirmation services and an additional fee of $3,660.00 for post confirmation services. His 2016(b) Statement only indicated that he was going to charge $3,000.00 except for adversary actions, motions for relief, and judicial lien avoidance actions. In the case there were no adversary actions filed, but there was a motion for relief filed and settled. The court noted it was not a complex case. The debtor objected to the higher fees. At the hearing counsel failed to produce any evidence either testimonial or documents including a fee agreement between counsel and the debtor evidencing he was entitled to a greater fee than listed in his 2016(b) Statement. The court held that counsel failed to establish that he was entitled to any more than the $3,000.00 fee he listed on the 2016(b) Statement. Note: In Pennsylvania an attorney is required to communicate the basic rate of the fee and other terms of compensation to the client in writing if the attorney has not represented the client on a regular basis. See Pa.R.C.P. 1.5(b). Moreover, 11 U.S.C. §528(a) requires that a consumer bankruptcy attorney have an executed written contract with the client which identifies fees and terms of payment prior to the filing of the case.
Automatic Stay
In re Rodriguez, ___ F3d ___, 2010 WL 5191428 (3rd Cir. 2010)(per Barry, J.)
The Chapter 13 debtors’ mortgage payments included escrow for insurance and taxes and when they filed their case, they had an escrow arrears of over $5,600 which included $1,700 for an escrow cushion which the lender is entitled to collect under RESPA. The lender filed a proof of claim only for the pre petition escrow payments it had actually paid out, not the $1,700 cushion that it was entitled to keep as a reserve. After the bankruptcy was filed the lender revised the escrow analysis by presuming that the escrow balance was zero and increased the debtors’ post petition mortgage payments from $707 to $947 a month. The debtors filed a motion to enforce the automatic stay to compel their mortgage lender to cease post petition collection of pre petition escrow claims arguing that the lender was required to submit the entire escrow shortage as part of its claim, not just what it paid out. The Third Circuit, citing In re Grossman’s, Inc., 607 F.3d 114 (3rd Cir. 2010)(en banc) endorsement of the broad interpretation of the word “claim” to include right to payment, and noting that the mortgage entitled the lender to accelerate and commence a foreclosure action if the escrow was not paid, reversed the Bankruptcy and District Courts. The Third Circuit held that the lender had a prepetition claim for escrow. The focus should not be on when the claim accrues, but whether a claim exists. Accordingly, the lender should have included the escrow cushion in its proof of claim and should not have sought collection of those monies in a post petition calculation.
In re Chang, 438 B.R. 77 (Bankr.M.D. Pa. 2010)(France, J.)
A contractor filed a motion for relief from the automatic stay to file a mechanic’s lien filed against the debtor’s property which was commenced post confirmation. The claim arose after both the petition was filed and the plan confirmed. The court ruled that a post petition creditor has the right to initiate suit against the debtor and obtain a judgment for a post petition debt, but collection activities directed against property of the estate are barred. The Court found that unless provided in a Chapter 13 Plan the property of the estate vests in a debtor upon confirmation, but continues to exist. After confirmation the estate comprises plan payments made by the debtor to the trustee and all property acquired by the debtor until the case is closed. Neither the mechanic’s lien nor the suit commenced against the debtor were actions against estate property. Neither suit was subject to the automatic stay. Section 362(a)(3) and (4) prohibits seeking to collect its claim from property acquired by the Debtor after confirmation without further order of the court and the court declined to lift the stay as to estate property
In re Clouse, 2010 WL 5423712 (Bankr. E.D. Pa. 2010) (Fehling, J.)
Without obtaining relief from the automatic stay or the benefit of counsel, a Chapter 13 debtor entered into a postnuptial agreement almost a year after confirmation. The court noted that there are at least 5 approaches on the legal effect of vesting of property upon the debtor at confirmation. The court agreed with Judge France’s approach of In re Chang. It held that all pre-petition and post-petition property and all post-petition earnings received from services are property of the estate. Upon confirmation, unless the provides otherwise, all property of the estate (whether pre-or post petition) vests back to the debtor. All property received by a debtor after plan confirmation, including earnings, is property of the estate. 11U.S.C. §1306(a). The agreement distributed cash (from debtor’s earnings) and other post confirmation property of the estate to Debtor’s spouse. Such transfers violated the automatic stay. The Court held that the execution of the postnuptial agreement violated the automatic stay of section 362(a)(3) and the entire agreement was void and the court denied the spouse’s motion for relief from the automatic stay to enforce the agreement. The court granted the spouse’s stay relief motion in part to proceed in state court to determine the couple’s family law issues but indicated that that an additional stay relief motion would be required to enforce the state court decision.
In re Chandler, 441B.R. 452 (Bankr. E.D. Pa. 2010)(per Coleman, J.)
The debtor, in the midst of a pending divorce , was in possession of a farm titled as tenants by entirety. Prior to the bankruptcy filing the State Court had issued an order requiring a Conservator to sell the farm and the conservator had entered into an agreement to sell it to a third party. The debtor resisted the sale and his spouse filed a motion for contempt against the debtor. The Debtor then filed a Chapter 11 bankruptcy to prevent the sale, preserve the property, and prevent him from becoming insolvent if the sale took place. The Court ruled that the debtor could avoid the sale to the third party as a bone fide purchaser under 11 U.S.C. §544 and may be able to sell the property himself under 11 U.S.C. §363(h). The Court granted the spouse’s motion for relief from stay to permit allow the parties to proceed with the divorce proceedings to obtain an adjudication of equitable distribution as well as awards of alimony, counsel fees, maintenance and support. However, relief was denied regarding the sale of the real estate until it is determined by the State Court the extent of the debtor’s interest in the Property. In addition, the court ruled that the automatic stay applies to civil contempt hearings and denied the spouse’s motion for relief to proceed with the contempt proceeding against the debtor.
Credit Counseling
In re Prater, 445 B.R. 424 (Bankr.E.D. Pa. 2010)(per Coleman, J.)
A pro se Chapter 13 debtor who did not seek credit counseling prior to the filing requested a 30 day waiver of the credit counseling requirement pursuant to 11 U.S.C. §109(h)(3) for “exigent circumstances.” The debtor filed her case the same day her home was scheduled for sheriff’s sale, but had not contacted any credit counseling agencies for the pre bankruptcy credit counseling prior to her bankruptcy filing. The court held that the debtor is not entitled to a waiver because of her failure to seek counseling prior to the filing of the case regardless of whether she obtained the counseling after the case was filed. Ignorance of the rule is no defense. The court then dismissed her case.
Dischargeability
In re Bryen, 433 B.R. 503 (Bankr. E.D. Pa. 2010)(per Frank, J.)
A Chapter 7 debtor brought an adversary action to determine the dischargeability of federal income taxes incurred as a result of investing in sham tax shelters that his accounting firm had promoted. The I.R.S. defended arguing that the debt was not dischargeable under 11 U.S.C. §523(a)(1)(c) because the debtor had willfully evaded paying his taxes. The court noted that the failure to pay taxes, by itself, does not render the tax debt nondischargeable under that section. To be non dischargeable the debtor must engage in “conduct” that constitutes an attempt to evade or defeat the tax and a “scienter” requirement. Unlike certain other sections of §523, there is no time limitation to initiate a proceeding involving §523(a)(1)(c). The court looked at the totality of the circumstances. Here, the debtor was a C.P.A. and had earned between $80,000 to $200,000 a year, maintained no bank accounts to avoid the risk of having it attached, enjoyed a relative affluent lifestyle including travel overseas on vacation and in the 7 years since the tax obligation was determined, never earmarked a penny towards his tax obligation. As soon the opportunity presented itself, the debtor filed a bankruptcy to attempt to discharge the debt. The Court held that the IRS met its burden of the preponderance of the evidence that the Debtor willfully attempted to evade or defeat the tax debt and the debt was exempted from discharge pursuant to 11 U.S.C. §523(a)(1)(c).
Motions to Dismiss §707
In re Falch, ____ B.R. _____ (Bankr. E.D. Pa. 2011)(per Frank, J.)
A creditor filed a motion to dismiss an individual Chapter 7 debtor’s bankruptcy under 11 U.S.C. §707(a) arguing that the debtor filed his case in bad faith. A majority of the debtor’s debts did not involve consumer debts so the Means Test did not apply. The debtor worked as a property manager on a 52 acre estate earning a salary of $150,000.00 per year. He lived on the estate rent free. The debtor did not have much property except for a 40 foot long Boat with 2 staterooms valued at $170,000 which was secured by a loan costing $1,570.00 a month. The debtor also incurred an additional $750 per month for a slip fee for the boat. With additional maintenance expenses, the debtor was spending $2,700 per month on his boat. While the court noted that high income, by itself does not justify dismissal under §707(a), the proportion of high income combined with lavish lifestyle may justify a 707(a) dismissal. The court applying the test articulated in In re Glunk, 342 B.R. 717 (Bankr.E.D. Pa. 2006), found that paying for the boat was sustaining a lavish lifestyle. Accordingly, it granted the motion to dismiss. Note. The Court wondered how a Chapter 7 debtor can have a very high income (substantially in excess of the amount necessary to support a comfortable lifestyle) without having a lavish lifestyle. The court pondered it may depend on what the debtor does with his money. If he uses it to pay certain expenses that society generally considered worthy such as supporting indigent relatives who are not dependents or giving money to charity as opposed to self indulgent expenditures such as maintaining multiple residences or spending vast sums on exotic vacations or simply accruing substantial savings for the purchase of luxury items.
In re Harkins, 445 B.R. 414 (E.D. Pa. 2009)(per Raslavich, J.)
A debtor filed a Chapter 7 case eight days prior to the eight-year anniversary of her last Chapter 7. The United States Trustee moved to dismiss a Chapter 7 case based on ineligibility for a Chapter 7 discharge. The court denied the motion holding that a debtor could file a chapter 7 case even though the debtor could not obtain a discharge unless there was evidence of bad faith. Theoretically a debtor could file such a case to obtain bankruptcy automatic stay protection and lien avoidance powers under section 522. A review of PACER shows that the debtor died while the case was pending and somehow received a discharge order even though she was ineligible to receive it.
Exemptions
In re Coley, 437 B.R. 779 (Bankr.E.D. Pa. 2010)(per Frank, J.)
The debtor moved to avoid a judicial lien of GMAC pursuant to section 522(f)(1) to the extent that the lien impaired exemptions on home titled jointly with his spouse as tenants by entireties. The judgment was only issued against the debtor husband. The creditor first argued that since the property was marital property it was not property of the estate and cannot be exempted. The court citing section 541(a)(1) and In re Brannon, 476 F.3d at 174 found that argument lacked any merit. The court noted that a judgment against one spouse creates an inchoate lien on the marital property that may be avoidable. See In re Hope, 77 B.R. 470 (Bankr.E.D. pa. 1987); In re Collins, 2007 WL 1074873 (Bankr.E.D. Pa. 2007); In re Wansor, 346 B.R. 147 (Bankr.W.D. Pa. 2006). The court applied the formula set forth in section 522(f)(2)(A) and cites In re Miller, 299 F.3d 183 (3rd Cir. 2002) as controlling precedent. The court applied a three step analysis: (1) Calculating the total “equity” in the property by subtracting the amount of the non avoidable liens from the fair market value without regard to the joint ownership; (2) Dividing the total equity in half to reflect the debtor’s one half share; (3) comparing the debtor’s share of the equity to his claimed exemptions. If the exemptions exceed the equity the judicial lien should be avoided in its entirety. In that case the debtor’s equity exceed the exemption slightly, so the debtor was able to avoid most of the judicial lien
In re Segan, 445 B.R. 467 (Bank.E.D.Pa. 2010)(per Raslavich, J.)
A judgment creditor against both husband and wife objected to the debtor’s use of the wildcard federal exemption of§ 522(d)(5) in the amount of $10,000 on property he owned as tenants by entireties with his non debtor wife. The court noted in In re Brannon,476 F.3d 170 (3rd Cir. 2007), the third circuit recognized that a debtor who owned entireties property was not prevented from taking federal exemptions. The court held that a debtor may exempt entireties property under federal exemptions §522(d) and denied the objection.
In re Tabor, 433 B.R. 469 (Bankr M.D. Pa. 2010)(per J. France.)
A Chapter 7 debtor exempted an IRA under 11 U.S.C. §522(b)(3) she inherited from her mother. The Chapter 7 Trustee objected alleging that an inherited IRA cannot be exempted under either PA Exemptions or the Bankruptcy Code. The Court noted that like an original owner of an IRA, a non spouse beneficiary is not taxed on the assets in the IRA until the beneficiary begins to take distributions. See 26 U.S.C. §408(d)(3). The beneficiary is not treated as having received a taxable distribution from the account if the funds in the decedent’s IRA are transferred from the account directly to another account trustee without the IRA beneficiary exercising control over the funds. Id. The funds in the retirement funds and “retirement funds” and are tax exempt under tax exempt under 26 U.S.C. 408(e). See also In re Nessa, 426 B.R. 312, 315 (B.A.P. 8th Cir. 2010)(Inherited IRA exempt under §522(d)(12). The Court overruled the objection. See also In re Thiem, 2011 WL 182884(Bankr.D. Ariz Jan 19, 2011); In re Weilhammer, 2010 WL 3431465 (Bankr.S.D.Cal. Aug 30, 2010); In re Kuchta, 434 B.R. 837, 743 (Bankr.N.D. Ohio 2010); Chilton v. Moser, 2011 WL 938310 (E.D. Tex 2011), In re Malthusa, M.D. Fla 2011.
Lien Avoidance
In re Dronsfield, 441 B.R. 242 (Bankr. M.D. Pa. 2010) (per France, J.)
Nine years after obtaining a discharge, Chapter 13 debtors reopened their case and filed an adversary action seeking a declaration that the order confirming their plan avoided the judicial lien of a creditor. Their plan indicated that unnamed judgements [sic] will be avoided. The plan neglected to identify the judgment creditor by name or identify the collateral which held the lien. The court noted that under Bankruptcy Rule 9014(a) proceedings to avoid a lien under §522(f) shall be by motion and there is no specific provision of §1322 authorizing lien avoidance through the plan confirmation process. Because the plan language was not specific enough and because of the aforesaid, the court granted the creditor’s motion for summary judgment and held that a judgment lien was not avoided by the order confirming a debtor’s plan. Post Script: The court did allow the debtors to file a motion to avoid the judicial lien under §522(f) but for whatever reason the hearing was never held.
Motions for Relief
In re Borkowski, 446 B.R. 220 (Bankr.W.D. Pa. 2011)(per Deller, J.)
110 days after a Chapter 13 case was closed, Wells Fargo filed a motion to reopen the case and pursuant to Rule 60 sought to vacate a previous order determining that the debtor was current post petition with her mortgage payments as of the date of the trustee’s last distribution in the case. In the Western District the Chapter 13 Trustee acts as a conduit for ongoing mortgage payments. There is a local Rule which requires mortgage lenders to notify the debtors and the Trustee prior to any payment changes and there is a procedure to amend plans to effectuate those changes. During the course of the bankruptcy Wells Fargo sent a notice of payment change which failed to comply with the local practice nor did it file any motion to seek to have the plan amended. Consequently, the plan was not amended and no changes were implemented. As a result Wells Fargo only received $656 a month instead of $1,554 per its notice. Wells Fargo never brought this under funding issue before the court until it filed the motion to vacate before the case closed. The Chapter 13 Trustee filed her Final Report which had an proposed order indicating that the debtor would be deemed current as of the date of her last distribution. Wells Fargo and counsel were served a copy of the Final Report and, inexplicably, did not file an objection to the report or proposed order. Wells Fargo did not appeal or seek a reconsideration of the order. The Court citing the recent supreme Court case, United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010), held that the previous order was a final Order and Rule 60 relief is not a substitute for a timely appeal. Because Wells Fargo received adequate due process by being served with the Final Report, the court denied the mortgage lender’s motion.
In re Alcide, __ B.R. ___ (Bankr.E.D. Pa. 2011)(per Frank, J).
Everhome Mortgage Company, servicer for Everbank filed a motion for relief from the automatic stay under 11 U.S.C. §362(d)(1) and (d)(2) claiming that a Chapter 13 debtor failed to make post petition payments. The debtor denied the motion claiming that Everhome lacked standing to prosecute the Motion. At the hearing Everhome’s Senior Default Coordinator testified on its behalf. The Court found that attached to the Note was a blank endorsement. The Note was assigned numerous times and the last written assignment was issued to Everbank (not Everhome), but was not recorded. The Note was not in possession of Everhome, but rather another party, U.S. Bank. Everhome considered US Bank its “custodian” in maintaining physical possession of the Note. The Note was not admitted into evidence. The court ruled that in order to demonstrate its status as a party in interest for a motion for relief a mortgage servicer must demonstrate that (1) the initiation of the stay relief motion is within its scope of authority delegated to a servicer and (2) the principal itself is a party in interest (i.e. it has a right to enforce the mortgage). In this case the movant failed to provide any testimony or admit the Mortgage Pooling and Servicing Agreement demonstrating it had the authority to initiate mortgage foreclosure proceedings on behalf of Everbank. Accordingly, the Court denied the motion without prejudice.
Mortgage Issues
In re Butler, 2010 WL 4736205 (Bankr.E.D. Pa. 2010)(per Fox, J.)(slip opinion)
Plaintiffs filed an adversary action to avoid a wholly unsecured second mortgage under 11 U.S.C. §506 alleging that the value of the property was less than the amount owing on the first mortgage. Both plaintiff and defendant submitted competing appraisal reports from appraisers whose expertise was not challenged. Both appraisers used the sales comparison approach, but the relied on different comparables and they differed on their opinion of the condition of the property. The court noted that courts are divided as to the valuation date. The court applied the average value of the two appraisals and also considered the average adjusted sales price of the properties located in the town where the property was located and then concluded that the plaintiffs met their burden in demonstrating that the value of their home was less than the amount owing on the first mortgage and the second mortgage can be stripped off.
In re Blythe, 445 B.R. 405 (Bankr.E.D. Pa. 2009)(per Raslavich, J.)
Chapter 13 debtors moved to amend their complaint against a mortgage lender and the lender filed a motion for judgment on the pleadings. Among other counts, the debtors sought to strip down and change the interest rate of the mortgage. The court ruled that because the last payment of the loan was due prior to when the bankruptcy would conclude, the debtors would be entitled to modify the rights of the mortgage and the anti-modification clause of§ 1322(b)(2) does not apply. As a result the value of the secured claim may be determined under §506. The debtors also had claims for TILA, HOEPA and violation of the PA Unfair Trade Practices and Consumer Protection Law (“UDAP”). The mortgage lender argued that the pre bankruptcy mortgage foreclosure judgment barred such claims under the Rooker-Feldman and issue preclusion doctrines. The court disagreed holding that the mortgage judgment was an in rem action where counterclaims are limited. Since the TILA, HOEPA and UDAP claims were in personam claims they would not be precluded. Moreover, any ruling on the UDAP claim will not alter the result of the foreclosure judgment. The Court upheld the debtor’s amendments and denied the lenders motion for judgment on the pleadings.
Objection Proof of Claims
In re O’Brien, ___ B.R. ___ 2010 WL 3894420 (Bankr.E.D. Pa. 2010)(per Frank, J.)
Chapter 13 debtors objected to the proof of claim filed by an alleged assignee of credit card debt arguing that the assignee failed to attach sufficient supporting documents to its proof of claim. Creditors have the burden of proof of proving a claim. However, if the claim is filed in accordance with the Rules of Procedure, it is prima facie valid and the burden shifts to the debtor to produce evidence sufficient to negate the prima facie validity. The Court, following In re Kincaid, 388 B.R. 610 (Bankr.E.D. Pa. 2008) held that the proof of claim was not entitled to prima facie evidentiary status under Rule 3001(f) because it failed to comply with Rule 3001(c), i.e. it failed to attach the assignment or a summary of the chain of title leading to the present assignee. The fact that the debtors scheduled a debt owed to credit card company in a similar amount did not alter the burden. Because the creditor did not present any other evidence in support of the claim the court disallowed the claim.
Sanctions
In re Hill, 439 B.R. 647 (Bankr.W.D. Pa. 2010)(per Agresti, J.)
The court had issued a order to show cause against a mortgage lender and its attorneys as to why sanctions should not be imposed for their misconduct in failing to disclose that three Payment Change Letters had never actually been sent, and were “recreated letters” created years later in an improper attempt to collect a questionable debt while attempting to resolve a matter that was pending before the court. One of the partners of the law firm testified that his firm incurred over $400,000 in un-reimbursed out of pocket attorney and expert fees , had lost clients and self reported the incident to its clients and the Pennsylvania Disciplinary Board. The court noted that it was disappointed by the lack of evidence to show a recognition by the law firm of the need for its attorneys to employ a policy of absolute candor in dealing with the court. The court rejected the US Trustee’s recommendation to suspend the attorney from practicing, pay a sanction, or impose additional CLE requirements, reasoning that the law firm and attorney should receive a public reprimand as an appropriate sanction and that a copy of the order be sent to the Disciplinary Board and the ABI in connection with the attorney’s effort to be certified as a bankruptcy specialist by that organization.