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Craig D. Robins, Esq. New York Bankruptcy Attorney, Longisland bankruptcy attorney

“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”

Craig D. Robins, Esq.

Bankruptcy Practice

Discharging Christmas Gift Purchases in Bankruptcy – An Unusual Case

Posted on Wednesday (January 9, 2013) at 2:00 am to Bankruptcy Practice
Chapter 7 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Bankruptcy adversary proceeding over Barbie doll purchases.  Will same result happen on Long Island?Written by Craig D. Robins, Esq.

 
An Unusually Entertaining Decision from Several Years Back Teaches Valuable Lesson
 
Bankruptcy attorneys often get busy towards the end of January each year as consumers, having just finished their family holiday obligations, receive a new round of ever-increasing credit card bills, compelling them to seek bankruptcy advice.
 
Of course, many of these bills contain charges for holiday gift purchases made just weeks before.  An interesting and most unusual opinion from 1992, which I found most entertaining for a bankruptcy court decision, addressed this very issue.   In re Johannsen, 160 B.R. 328 (Bkrtcy. W.D.Wis. 1992).
 
However, as unusual as this decision is, its importance to us today really has nothing to do with the atypical subject matter.  To me, the real lesson to be learned from this case is that no matter how sure you are of being successful with litigation, you can still end up losing what appears to be a slam-dunk case. 
 
To further pique your interest, let me quote some of the wording from the published opinion:
 
“[s]he’s short and buxom with a tiny waist and remarkably long legs which — despite her age (34) — are cellulite free.”
 
This is not the typical verbiage we usually see in judicial decisions.  But here, the judge is talking about Barbie, the iconic plastic doll manufactured by Mattel, and a perennially favorite gift to young girls everywhere.
 
Can You Discharge $1,100 of Barbie Dolls Purchased Just Before Filing for Bankruptcy?
 
The debtor in this case, a woman who filed Chapter 7 jointly with her husband even though they were in the process of divorce, bought some Barbie dolls from Sears for her seven-year-old daughter, intending them to be Christmas presents.  Shortly thereafter, the debtor filed for Chapter 7 relief, seeking to discharge various debts including her Sears credit card debt. 
 
The debtor had made several purchases including Barbie and Ken items, a Barbie case, a Barbie armoire, and an extensive wardrobe of Barbie clothes.  The purchases totaled $1,100.  That’s a lot of Barbie toys! 
 
All of these purchases were made in the five weeks prior to filing the bankruptcy petition, including one purchase of $178 which was made a mere two days before the petition was filed.
 
Sears Brings Adversary Proceeding
 
Sears then filed an adversary proceeding pursuant to Bankruptcy Code § 523(a)(2)(C), claiming that the debt for these Barbie doll purchases, which the debtor charged on her Sears credit card, should be declared non-dischargeable.
 
An adversary proceeding contesting dischargeability is essentially a federal lawsuit brought within a bankruptcy.  Sears commenced this with a federal summons and complaint, leading to a full-blown trial in which both the debtor and a Sears employee testified.
 
In bankruptcy proceedings, creditors have a few grounds to challenge the dischargeability of a debt, and they must do so by adversary proceeding.
 
Sears argued that the debts for these purchases should be non-dischargeable under several theories including § 523(a)(2)(A), which prevents discharging a debt if was incurred by false pretenses, and § 523(a)(2)(C), which prevents a debtor from discharging a debt of more than $500 for “luxury goods or services” incurred within 40 days prior to filing.  (Note: the dollar amount and number of days in the statute has since changed.)
 
Sears contended that the Barbie dolls and accessories were not reasonably necessary for the debtor or her daughter’s support or maintenance.  The Sears employee testified that the Barbie dolls of the type purchased were at the higher end of the price scale of toys sold by Sears.
 
The Parties Introduce Evidence at Adversary Proceeding Trial
 
The debtor testified that some of these purchases consisted of “collector” Barbie dolls.  She even introduced the Sears Christmas Catalog as an exhibit.  But on cross-examination, the debtor testified that she was just a waitress earning minimum wage and that she had been separated from her husband, and was receiving support and maintenance.
 
Sears brought to the court’s attention that the debtor could have purchased a much less-expensive Barbie doll for just $9.99, but the debtor responded that the collector Barbies were investments which would appreciate in value.
 
The debtor also testified that her daughter owned a collection of 25 Barbie dolls, to which Sears argued was proof that the additional Barbies were clearly luxury expenses, as they were not necessary for the daughter’s welfare.  After all, how many Barbies does a seven-year-old need?
 
Just gleaning these facts would probably lead any bankruptcy attorney to conclude that the Barbie purchases would certainly be non-dischargeable.  The judge even pointed out that these purchases may have been foolish and irresponsible in light of the debtor’s financial condition.
 
Bankruptcy Judge Issues Surprise Decision
 
However, the judge held that the debt was indeed dischargeable!  He stated: “Although this case at first glance appeared to be a classic case for § 523(a)(2)(C)’s luxury goods exception, subsequent investigation and testimony revealed no evidence of such intent in making the relevant purchases.”
 
The judge pointed out that the discharge exception for luxury goods provided a presumption that the debt ought not to be discharged, basically a conclusion that the debtor did not have the intent to pay the debt.  However that presumption can be rebutted and the debtor did just that.
 
Apparently, the debtor was only added to the petition at the last minute, and at the request of divorce counsel.  In addition, the judge determined that the debtor, at the time she made the various purchases, had the intent to pay for them, despite her precarious financial circumstances.
 
Lessons to Be Learned from this Case
 
Imagine the surprise to Sears’ counsel of this highly unexpected result!  But that’s the lesson.  You never know how the court will rule, and being sure of the merits of your case is no guarantee for success.
 
Although we have some fine trustees in this district, I’ve found some of them to suffer from myopic vision when evaluating the cases they litigate against consumer debtors.  A review of the written decisions from the Eastern District of New York shows numerous instances in which trustees have vigorously litigated, only to lose. 
 
I would suggest a more pragmatic approach involving settlement would have better served both trustee and debtor, alike.  This may be especially true when considering the extent that some bankruptcy courts will go, as is the case here, to favorably enable debtors to get a fresh financial start. 
 
Hopefully all litigants will become more open-minded to pragmatic approaches towards case resolution.
 
Also please note that the Johannsen case does not necessarily mean that another judge would rule similarly or that another debtor today, who is in a similar situation, would fare as well as the debtor in this case.  I think Mrs. Johannsen was incredibly lucky with the result she obtained.
 
Click here to see a full copy of the Johannsen decision
 
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the February  2013 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call  (516) 496-0800 . For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
 
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Suspended Bankruptcy Attorney and Paralegal Punished

Posted on Tuesday (December 11, 2012) at 8:00 pm to Bankruptcy Practice
Chapter 7 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Brooklyn Bankruptcy Court punishes bankruptcy attorney and paralegal as a bankruptcy petition preparerWritten by Craig D. Robins, Esq.
 
In Recent Brooklyn Case, Attorney and His Paralegal Flaunted the Bankruptcy Petition Preparer Statute
 
Non-attorney bankruptcy petition preparers can get into a heap of trouble if they do not accurately follow certain Bankruptcy Code provisions designed to protect consumer debtors.
 
This was evident in a case just decided by Judge Carla E. Craig, the Chief Bankruptcy Judge of the Eastern District of New York, sitting in the Brooklyn Bankruptcy Court.
 
To make matters more interesting, the case also involves disgraced attorney, Peter J. Mollo, who was the subject of my column in May 2012:  Two Bankruptcy Attorneys Get Into Serious Trouble Over E.C.F. Filings .
 
Mollo, despite having been suspended from practicing law earlier this year, continued to represent clients and tried to get away with it by forging another attorney’s name on several bankruptcy petitions which he then filed.
 
Judge Craig sanctioned him in a decision dated March 22, 2012.  In re:  Clyde Flowers, (01-12-40298-cec, Bankr. E.D.N.Y.)
 
It seems that Mollo didn’t learn his lesson and immediately embarked upon a new scheme to circumvent his suspension by having his paralegal, Anna Pevzner, continue to meet with debtors and prepare petitions.
 
When the Office of the United States Trustee learned about this conduct in four separate Chapter 7 consumer cases, it quickly brought proceedings against both of them, seeking sanctions and disgorgement of fees.
 
After several evidentiary hearings, Judge Craig issued a 31-page decision on September 28, 2012, in which she severely sanctioned both of them and in doing so discussed the various statutory requirements that bankruptcy petition preparers must adhere to. In re Edith L. Moore, et. al., (12-41111-cec, Bankr. E.D.N.Y.).
 
  
What is a “Bankruptcy Petition Preparer?”
 
A bankruptcy petition preparer (BPP) is essentially a non-attorney who prepares bankruptcy petition legal forms.
 
Congress was so concerned about vulnerable debtors who had been victimized by non-attorney petition preparers who rendered bad legal advice and charged unreasonable fees that in 1994 it implemented Bankruptcy Code section 110 which is devoted to regulating their services.
 
That section defines a BPP as a person, other than an attorney or an employee of an attorney, who prepares a bankruptcy court document for a fee. 
 
Since BPPs are non-attorneys, they are not permitted to give legal advice and may only type documents and charge a reasonable fee for doing so.
 
That means that they cannot assist with determining what assets are exempt or what exemptions statutes to use, nor can they suggest what chapter to file.  They cannot offer advice as to whether a debt is dischargeable or whether a car loan should be reaffirmed.
 
In addition, BPPs may not collect, receive, or handle the court filing fees in connection with a bankruptcy case.  That means that BPPs cannot file petitions with the bankruptcy court.
 
BPPs may not us the word “legal” or any similar term in any advertising.  This is to prevent them from misleading the public into thinking that they are authorized to practice or render legal advice.
 
If a BPP prepares a petition, the BPP must sign it (there is a special area of the petition form devoted to this) and print his or her name, address and Social Security number.
 
The BPP must also disclose, under penalty of perjury, any fee or compensation received for preparing the documents, and the BPP is obligated to file a declaration as to this within ten days of the filing of the petition.
 
Code section 110 also provides for the assessment of various penalties for BPPs who act negligently or with intentional disregard for the Bankruptcy Code and Rules, or if the BPP commits any fraud, or unfair or deceptive act.
 
In such instances the court can award actual damages, and the greater of $2,000 or twice the amount paid to the BPP, and reasonable attorneys fees and costs. 
 
In addition, each failure to comply with a particular subsection of the statute, such as failing to sign the petition, include the Social Security number, disclose the fee, etc., is punishable by a fine of not more than $500.
 
The statute also requires the court to triple the fines if the BPP failed to disclose the identity of the BPP.  As you will see, it was this provision that really socked Mollo and Pevzner big time.
 
Court Imposes $45,000 Sanction Against the Suspended Bankruptcy Attorney and His Paralegal
 
After Mollo was sanctioned in March, potential clients were still contacting him from his advertising, which he did not stop.  Rather than turn them away, he had Pevzner, his paralegal of six years, meet with them, and in some instances, he met with the clients as well.
 
She then prepared the bankruptcy petitions, and rendered legal advice in doing so.  She had the debtors sign a retainer agreement which contained the name of a different attorney who did not have anything to do with these cases.
 
At the hearing, Paralegal Pevzner admitted that she prepared the petitions and claimed that she was not an employee of Attorney Mollo and worked strictly as a “volunteer” for him without salary.
 
Pevzner testified that she was familiar with Bankruptcy Code section 110.  Although Code section 110 required the BPP to sign the petition and provide a declaration as to legal fees, she did not do that either, claiming that this was an “honest mistake.”
 
Judge Craig stated that both Attorney Mollo and Paralegal Peyzner were not credible witnesses and concluded that Pevzner repeatedly violated a number of subsections of the statute and that they both engaged in the unauthorized practice of law.
 
The Judge pointed out that Mollo continued to hold himself out as a bankruptcy attorney, despite his suspension, and despite his representations to the Court in the earlier case.
 
It was clear to Judge Craig that Paralegal Peyzner was the BPP, as she prepared the petitions.  However, the Judge applied an unusual theory and held that Attorney Mollo was vicariously liable for Peyzner’s violations.
 
The judge rejected Peyzner’s claim that she was a volunteer, and instead concluded that she continued to be an compensated employee under Mollo’s direction.  Thus, the Court found that Mollo also violated the same provisions of section 110 under the doctrine of vicarious liability.
 
As for punishment, Judge Craig directed both of them to disgorge all fees received, being $3,100, and in addition, fined them jointly and severally $15,000.  However, it did not stop there.
 
Because Paralegal Peyzner failed to disclose on the petitions that she was the BPP, Judge Craig stated that she was required to triple the fine to $45,000 as provided by the statute.  Hopefully, this duo has finally learned their lesson.
 
As with many things, consumers get what they pay for.  A BPP cannot give legal advice and at most, can only act as a data entry clerk.  There are no requirements that a BPP take any courses or be certified.  Yet, bankruptcy is a highly complex area of the law.
 
There are many horror stories about consumers who lost valuable assets, believing that they were exempt, because a bankruptcy petition preparer drafted the petition. 
 
The Office of the U.S. Trustee takes BPP improprieties very seriously.  Last year they brought 504 actions against BPPs across the country.
 
If you are a consumer looking for a bankruptcy attorney, make sure the attorney is legitimate and currently admitted and in good standing.  If anything seems suspicious, think twice about using that attorney.
 
To see the decision in this case, click here:  In re Edith L. Moore, et. al., (12-41111-cec, Bankr. E.D.N.Y.). 
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the November  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
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What Happens When a Debtor Forgets to Schedule a Personal Injury Suit

Posted on Tuesday (August 21, 2012) at 3:43 pm to Bankruptcy Practice
Chapter 7 Bankruptcy
Personal Injury and Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

bankruptcy and personal injury -- make sure causes of action and law suits are scheduled in the bankruptcy petitionWritten by Craig D. Robins, sale Esq.

 
A Consumer Bankruptcy Debtor Can Lose Standing to Litigate if Lawsuits Are Left Out of the Petition
 
There is one question that Chapter 7 bankruptcy trustees like to ask debtors twice at the meeting of creditors: “Are you currently suing anyone or do you have the right to sue anyone?”
 
The reason trustees like to ask this question twice is because many debtors forget to tell their attorneys that they have a cause of action, decease which can be a valuable asset worth administering.
 
Causes of action are considered assets that must be disclosed in the bankruptcy petition.  Because of their unusual nature (they’re intangible, mind unliquidated and contingent), many consumer debtors just don’t think about them like they would a more typical asset like a car or bank account.
 
Consequently, many debtors don’t tell their bankruptcy attorneys about them even when asked.
 
A debtor who neglects to list such an asset can end up in a heap of trouble – sometimes losing the possibility of exempting the asset or seeking recovery, or in extreme cases, losing the ability to obtain a bankruptcy discharge.
 
Judge Alan S. Trust, sitting in the Central Islip Bankruptcy Court, issued a decision a few years ago in which he denied a debtor’s application to re-open a case to pursue a P.I. cause of action.  In this month’s column I will discuss non-disclosed causes of action which can be a P.I. case or any other right to sue.
 
Bankruptcy Code Provides for Duty of Disclosure
 
The debtor’s obligation to disclose a cause of action is based on Code section 521(a) which requires a debtor to schedule “contingent and unliquidated claims of every nature” and provide an estimated value of each one.
 
The trustee has the ability to step into the debtor’s shoes and pursue any litigation claims the debtor has.  It is therefore essential that the debtor disclose all contingent and unliquidated claims so that the trustee can make a determination of whether to pursue those claims for the benefit of the debtor’s estate.  In re: Costello, 255 B.R. 110 (Bankr. E.D.N.Y. 2000).
 
When a debtor inadvertently omits a cause of action or pending suit from the bankruptcy schedules in the petition, and the trustee catches this at the meeting of creditors, the resolution is usually simple.  The trustee directs debtor’s counsel to amend the schedules and the trustee investigates the viability of pursuing the cause of action.
 
However, resolving a non-disclosed cause of action becomes much trickier once the bankruptcy case is closed, and that has a lot to do with the concept of standing.
 
There are Issues with Re-Opening a Bankruptcy Case to Amend Schedules to Include an Omitted Law Suit or Cause of Action
 
Here’s the typical scenario:  Debtor had a cause of action stemming from injuries suffered in an accident.  However, the debtor neglected to tell his or her bankruptcy attorney about it.  Then, for whatever reason, when questioned by the trustee about the right to sue anyone, the debtor testified that he or she did not have the right to sue anyone.  The case then was routinely closed and the debtor received a discharge.
 
Then, a year or two passes during which time the debtor’s personal injury attorney brings suit and is about to settle the case.  However, defense counsel advises P.I. counsel that they did a bankruptcy search and discovered that the plaintiff filed for bankruptcy relief but failed to schedule the cause of action for the accident.  They tell the surprised P.I. attorney, “Sorry, there’s no longer any settlement money on the table because your client lacks standing as a plaintiff in the P.I. case!” 
 
That’s because even after a bankruptcy case is closed, non-disclosed causes of action and litigation remain the property of the bankruptcy estate, unless abandoned by the trustee.  Case law provides that if the trustee never knew about the potential estate property, the trustee could not have abandoned it. 
 
Thus, even though the bankruptcy case was closed, the cause of action is still the sole property of the trustee, and the debtor lacks standing to commence or continue a the suit.  Upon learning of this, P.I. counsel will invariably make a frantic call to debtor’s former bankruptcy counsel.
 
So what can bankruptcy counsel do in this situation after getting the frantic call?  Nationally, there are two schools of thought – estopping the trustee and estopping the debtor.  In the Fifth, Seventh, Tenth, and Eleventh Circuits, the Courts have found that the trustee should not be estopped from commencing or continuing a suit, as the trustee is the real party in interest.
 
These Courts, however, punish the debtor, who they say should be estopped so that any excess proceeds, instead of going to the debtor, instead go back to the defendant.
 
The reasoning here is to protect the integrity of the bankruptcy process while preserving assets of the estate for distribution to creditors.  Doing so deters dishonest debtors who fail to disclose assets, while at the same time, protecting the rights of creditors.
 
However, there does not seem to be any appellate authority in the Second Circuit.  My personal experience with these situations is that the court will permit trustees to reopen a case to administer a non-disclosed asset in most situations, provided that there is no egregious evidence of bad faith on the part of the debtor.
 
Keep in mind that if the asset was not disclosed, then the debtor did not avail him or herself of any applicable exemption, such as the personal injury exemption, now a minimum of $7,500.
 
If debtor’s counsel were to try to re-open the case and amend the schedule of exemptions, the trustee would likely object.  The best case scenario may be to negotiate a disposition with the trustee in which the debtor gets half the exemption.
 
In one case before Judge Trust, the debtor sought to re-open the case to amend schedules to include a non-disclosed P.I suit against the Long Island Rail Road.
 
Even though the debtor had already retained separate P.I. counsel prior to the bankruptcy, the debtor did not tell his bankruptcy attorney about it and did not truthfully answer the trustee’s questions about pending lawsuits.
 
The District Court, where the P.I. case was pending, permitted the suit to be dismissed upon learning of the prior bankruptcy filing, stating that the debtor lacked standing.  When the debtor sought to re-open the bankruptcy case to get standing, Judge Trust refused to permit the debtor to do so, citing the debtor’s lack of good faith.
 
In the March 2010 opinion, Judge Trust, using colorful football terminology, stated that debtor’s motion to re-open appeared to be “an effort to make an end run around the District Court’s dismissal order.”  In re: Carlos Meneses (05-86811-ast,  Bankr.E.D.N.Y.).
 
The practical tip here is to question your client and question again about possible causes of action or potential claims.  Also, if you later discover an omitted asset, amend your schedules immediately.
 
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How Far Can a Bankruptcy Judge Go To Assist Inept Counsel?

Posted on Wednesday (May 16, 2012) at 10:00 pm to Bankruptcy Exemptions
Bankruptcy Practice
Bankruptcy Procedure
Chapter 7 Bankruptcy
Issues Involving New Bankruptcy Laws
Suffolk Lawyer

How far can a bankruptcy judge go to assist inept or inexperienced counsel?Written by Craig D. Robins, Esq.

  

After I wrote about some bankruptcy court decisions last month which involved some quirky and unusual facts (Two bankruptcy attorneys got into trouble over E.C.F. filings), some of my colleagues requested that I continue to discuss similarly odd and interesting cases.  Fortunately, we have one that is fresh off the docket.

 

On April 24, 2012, Judge Alan S. Trust, sitting in the Central Islip Bankruptcy Court, here in the Eastern District of New York, happened to issue a decision in just such a case, so we now have appropriate fodder for this month’s column. 

 

The decision, which is just as interesting for what is says, as for what it does not, involves protecting a debtor’s entitlement to receive funds, trying to be creative with exemptions, and seeing how a client might suffer from attorney ineptitude for being unfamiliar with bankruptcy practice and procedure.

 

Perhaps most importantly, it also leaves one thinking about how far a judge can or should go to assist counsel who is clueless.  In re Cho, no. 11-75595-ast, (Bankr. E.D. New York 2012).

 

In August 2011, Mr. and Mrs. Cho filed a typical Chapter 7 consumer bankruptcy petition here on Long Island.  About a month before filing, the debtors’ car lender repossessed their Honda.  Unbeknownst to the debtors at the time, a week before the filing date, the lender sold the vehicle at auction, and the sale resulted in a surplus of $5,000.

 

The debtor’s bankruptcy attorney, a lawyer from Queens who shall remain nameless, advised Chapter 7 Trustee Robert Pryor at the meeting of creditors, that the debtors’ vehicle had been repossessed pre-petition, resulting in a surplus, and that the debtors had received and deposited a check for the surplus post-petition.

 

Debtor’s Attorney Tries to Be Creative – Unsuccessfully

 

The trustee soon demanded that the debtors turn over the entire surplus amount.  Instead of doing that, the debtors amended their Schedule of Assets to include an ownership interest in the vehicle (which they no longer owned).

 

They also amended their Schedule of Exemptions (which opted for New York State exemptions as opposed to the more liberal federal exemptions) to exempt the vehicle in the sum of $4,000 pursuant to C.P.L.R. § 5205(a)(8), and to also increase their cash exemption by $1,000 to cover the additional value of the surplus pursuant to C.P.L.R. § 5205(a)(9).

 

The trustee believed that he was nevertheless entitled to the full surplus amount, so, with the help of his able associate, Michael Farina, he brought a motion to compel the debtors to turn it over.  The debtors responded, acknowledging that they no longer owned the vehicle, but argued that they were entitled to exempt the surplus as cash.   The trustee responded and pointed out that the amended schedules were improperly done and therefore fatally defective.

 

The trustee’s observation was correct.  Eastern District of New York Local Bankruptcy Rule 1009-1(iv) provides that in order for an amendment of exemptions to become effective, the debtor must first file and serve the amended exemptions on the U.S. Trustee, all creditors, and all other parties in interest, and then file proof of service with the court.  Here, the debtors’ attorney both neglected to file, and neglected to serve.

 

One would think that the debtors’ attorney, after reading the trustee’s papers alleging this neglect, would take immediate corrective action.  However, he did not.  At the hearing, which was held in December 2011, Judge Trust generously gave debtors’ counsel a week to comply with the local rule requirement.

 

However, inexplicably, counsel then filed the amendments but neglected to serve them.  This led the trustee to file supplemental objections.  At a subsequent hearing, Judge Trust gave the debtors’ counsel one last opportunity to meet the procedural requirements, which he finally did.  The matter was now marked for submission.

 

The issue before the court was whether the debtors could exempt the surplus cash under New York law, and whether the debtors could exempt the vehicle.

 

In his decision, the judge first pointed out that New York residents who file bankruptcy after June 21, 2011 have an option of selecting either the New York State or federal exemptions, and that the debtors here chose to claim the New York State exemptions.

 

Bankruptcy attorneys know that a debtor can exempt up to $5,000 of cash pursuant to the New York State cash exemption set forth in Debtor and Creditor Law sec. 283(2), provided that the debtor does not utilize the homestead exemption.

 

Judge Trust determined that, at the time of filing, the debtors did not own cash.  Under DCL § 283(2), “cash means currency of the United States at face value, savings bonds of the United States at face value, the right to receive a refund of federal, state and local income taxes, and deposit accounts in any state or federally chartered depository institution.”

 

The judge, following the overwhelming majority of courts, determined that the debtors had a “pre-petition vested right to receive payment” of the surplus which did not constitute “cash.”  A right to receive payment as evidenced by a check in transit is not “cash.”

 

In addition, since the debtors did not have an ownership interest in the vehicle on the date of filing, nor did they have a right of redemption, they could not exempt the vehicle.

 

However, Judge Trust indicated that the debtors could exempt $1,000 of the right to receive payment.  This is because of the relatively new exemption under C.P.L.R. § 5205(a)(9) which permits debtors filing after January 21, 2011, to utilize a $1,000 wildcard exemption for any personal property, provided that the debtor does not claim a homestead exemption.

 

Since the car was only in one spouse’s name, and the debtors did not claim a homestead exemption, they were entitled to one, $1,000 wildcard exemption which could be applied to the surplus.  The judge ordered them to turn over the balance of the surplus to the trustee.

 

Debtors’ Counsel Neglected to Use the Best Exemption to Protect His Clients — a Fact the Judge Did Not Point Out

 

Here’s why I found the decision especially interesting.  First, the debtors’ counsel initially botched up amending the exemptions – not once – but twice.  Judge Trust gave counsel two opportunities to correct the mistake.  Counsel finally figured out what to do on the third try.

 

Of course, we will never know what Judge Trust was thinking, but one can’t help but wonder if his granting counsel an opportunity to remedy the defective filings was also an opportunity for counsel to reconsider the exemption scheme counsel had elected. 

 

Had counsel opted for the much more generous $10,825 federal wildcard exemption provided in the federal exemptions by Bankruptcy Code § 522(5), he would have been able to protect 100% of the surplus.  In essence, it appears that counsel chose the wrong exemption scheme to the detriment of his clients.

 

An Interesting Issue:  How Far Can or Should a Judge Go to Educate Inept or Inexperienced Counsel?

 

However, a judge can and will only go so far in telling inept or inexperienced counsel what to do.  Would it have been out of line for the judge to tell debtor’s counsel that counsel didn’t have a sufficient understanding of law and procedure, and was not following the best legal strategy?  This is not a role that judges have.  They cannot advocate for one party.

 

Just to be clear, we will never know if Judge Trust was aware that debtor’s counsel botched up the exemptions, but if Judge Trust was aware of this issue I would assume that he would take the position that it is not his place to point out that counsel could have protected the entire surplus if the federal exemptions were used.

 

Based on my experience watching cases in court over the past three decades, this seems to be the way almost all judges handle such issues – they will not tell counsel how to practice law, even if that ultimately hurts an innocent client.

 

Accordingly, the debtor-clients here suffered and will have to turn over many thousands of dollars that they could have kept had their attorney had a better understanding of bankruptcy law and selected the better exemption scheme.  And that point is not in the decision.

 

Click this link to see a copy of the Cho decision in Case No. 11-75594-ast. 

 

 

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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the June  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.        (516) 496-0800  (516) 496-0800   (516) 496-0800   (516) 496-0800   . For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 

 

 

 

 

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Two Bankruptcy Attorneys Get Into Serious Trouble Over E.C.F. Filings

Posted on Monday (April 30, 2012) at 9:15 pm to Bankruptcy Practice
Lawyer to Lawyer
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Attorneys who file bankruptcy petitions and papers by E.C.F. must abide by the court rulesby Craig D. Robins, Esq.

 

Flouting E.C.F. Filing Rules Has Grave Consequences

 

 

“The following is a cautionary tale of what occurs when the uninitiated attempt to practice before the bankruptcy court without a firm grasp of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.” 

 

“Even the most well intentioned practitioners can inadvertently wreak havoc on unsuspecting clients by failing to appreciate the complexity of the bankruptcy process. It is also a prime example of how things can escalate when an attorney is less than candid with the Court about his or her mistakes.” 

 

The preceding words were taken verbatim from a recent Massachusetts decision that severely castigated an attorney for messing up a consumer debtor’s bankruptcy filing and then lying about it to the court.  This month I will discuss that case, and another from one of our own courts here in the Eastern District of New York, both of which lambasted attorneys who utterly failed to abide by the rules.

 

Inexperienced Attorney Makes Mess of Bankruptcy Filing

 

In the Massachusetts case, Bankruptcy attorney Georgia S. Curtis was authorized to use E.C.F., but was grossly unfamiliar with how to do so.  “E.C.F.,” which stands for Electronic Case Filing System, is the computerized court website system through which attorneys file court documents such as bankruptcy petitions  In Re:  Jackquelyn D. Stallworth, 2012 Bankr. LEXIS 740 (Bankr. D. Mass 2/8/12). 

 

Since 2003, every petition and other court document that I’ve filed with the court has been done through my office computer, while logged into the court’s E.C.F. website.  For almost a decade, all bankruptcy attorneys are required to file their bankruptcy petitions, motion papers and other documents by E.C.F.

 

When Curtis filed her client’s petition, which was only the second petition that the attorney had ever filed, her inexperience got the best of her as she neglected to file the Creditor Matrix or the Statement of Social Security Number.  These are mandatory requirements, and failure to abide by them, as Curtis soon learned, is fatal.

 

Nine days later the court dismissed the petition.  Curtis also failed to file the Credit Counseling Certificate and page 3 of the petition, which is one of the petition pages that contains the attorney’s signature. 

 

Curtis then thought she could file a motion to vacate the dismissal by e-mail (which is not the appropriate procedure for filing a motion).  However, she messed this up as well, by attaching the wrong PDF document.  The court ordered her to correct this mistake within two days.

 

Did Curtis do that?  No.  Instead of correcting the deficient filing, two weeks later she filed a second Chapter 7 case without her client’s knowledge.

 

The petition in the second case contained only the debtor’s name, which was spelled incorrectly, the last four digits of her Social Security number, and the county of her residence, omitting her street and mailing addresses, as well as reference to her prior filings.

 

Additionally, the schedules accompanying the Debtor’s petition were blank or were otherwise incomplete, which, if taken literally as pointed out by the judge, reflected that she had neither assets nor any creditors. 

 

The judge then issued a sua sponte order to show cause directing Curtis to show cause why the court should not sanction her and suspend her E.C.F. filing privileges.  Because this petition was basically a blank, it also caught the attention of the United States Trustee who brought a motion against Curtis seeking to have her disgorge the legal fee. 

 

Over several order to show cause hearings, Curtis testified that she did indeed file all necessary documents when that was not true.  She also offered conflicting and contradictory explanations of what had happened. 

 

The judge wasn’t happy.  He suspended Curtis’s E.C.F. privileges, but indicated that Curtis could purge her “civil contempt” by becoming re-certified with E.C.F.  (All attorneys are required to participate in an E.C.F. training course as a prerequisite to obtaining authority to file by E.C.F.).

 

In addition, the judge stated that he had reasonable cause to believe that Curtis violated the Rules of Professional Conduct and referred the matter to the District Court for further disciplinary proceedings.

 

Curtis had a problem adhering to the court’s E.C.F. rules: she violated them.  That led to a suspension of her E.C.F. privileges.  But her problems increased exponentially when she lied to the court.  That led to a most serious referral that might result in her losing her license to practice. For a legal practitioner, not knowing what you’re doing is bad enough; perjuring yourself in court: indefensible.

 

Suspended Attorney Files Petitions in Other Attorney’s Name

 

On March 22, 2012, Judge Carla E. Craig, sitting in the Brooklyn Bankruptcy Court, issued another interesting decision involving attorney ineptitude and impropriety with the E.C.F. system.  In re:  Clyde Flowers, (01-12-40298-cec, Bankr. E.D.N.Y.) 

 

Peter J. Mollo was a Brooklyn bankruptcy attorney who had just been suspended from practicing law in this state in January 2012 by the Appellate Division for several reasons such as endorsing a check without permission.

 

That left him with a bunch of bankruptcy clients whose petitions he had not filed.  What he should have done was transferred the files to another attorney after first consulting with his clients.  Instead, he called another local attorney, Brian K. Payne, and asked him if he would take over representation.  However, no final agreement was reached. 

 

Mollo, nevertheless quite eager to get these four cases filed, revised the petitions to indicate that the debtors’ attorney was now Payne — even though Payne never agreed.  Mollow then filed these four petitions under his own E.C.F. account and forged the electronic signature of Payne on each petition. 

 

When the U.S. Trustee got wind of this after Payne sent a letter to the Chief Judge and others indicating that Mollo had filed petitions without his knowledge, consent, authority or signature, the UST immediately brought a motion to sanction Mollo, revoke his authorization to use the E.C.F. system, disgorge his fees, and compensate replacement counsel. 

 

At the hearing, Mollo admitted that he “made terrible egregious, unbelievable errors.”  The judge determined that Mollo violated Bankruptcy Rule 9011 by filing a forged document, an act that warranted sanctions.

 

Mollo agreed to disgorge all legal fees received, which was complicated by the fact that he kept such poor records that he was not sure how much he actually did receive.  He also agreed to compensate each debtor’s replacement counsel.  He lost his E.C.F. privileges, not that he would have been legally able to use them in light of his suspension. 

 

Finally, the judge thought additional sanctions were warranted given the egregious nature of Mollo’s violations and their similarity to the conduct that got him suspended in the first place (forging signatures).  Judge Craig sanctioned Mollo an additional $3,000, stating that Mollo’s conduct compromised the integrity of the court system and the electronic filing process.

 

 

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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the May  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.   (516) 496-0800  (516) 496-0800    (516) 496-0800  (516) 496-0800 . For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
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The Business Debt Loophole to the Bankruptcy Means Test

Posted on Thursday (December 29, 2011) at 1:00 am to Bankruptcy Means Test
Bankruptcy Practice
Suffolk Lawyer

Business Debt Exception to the Bankruptcy Means TestWritten by Craig D. Robins, Esq.
 
Some Debtors Who Have Primarily Business Debts Can Avoid Having to Do the Bankruptcy Means Test
 
The means test, which turned six-years old last month, was intended by Congress to create an objective standard for permitting only those consumers who are not “abusing” the privileges of bankruptcy to get Chapter 7 relief.
 
In general terms, if a consumer debtor has an income that is relatively high in relation to his or her expenses, the consumer will not pass the means test and will not be eligible to file Chapter 7 bankruptcy.
 
The Business Debt Exception to the Means Test
 
The means test only applies to individuals whose debts are “primarily” “consumer debts,” as opposed to business debts, as set forth in Bankruptcy Code §707(b). 
 
A debtor can check a box on the first page of the means test to declare that his or her debts are primarily non-consumer debts, and then avoid the rest of the means test, also known as Form B22A.    Click here to take a look at the actual Means Test form.
 
Congress could have told us what exactly “primarily” means, but they didn’t bother to, so we have to analyze this word.  Webster’s Dictionary defines “primarily” as “for the most part.”  Most courts have focused on this definition to mean “more than half.” 
 
Thus, if more than 50% of the debtor’s debts are non-consumer debts, the debtor is automatically eligible for filing a Chapter 7 case without having to bother with the means test.  There is no presumption of abuse for such cases.
 
Determining What “Consumer Debts” Are in Bankruptcy Cases
 
So what exactly is a consumer debt?  The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.”
 
In analyzing whether a debt is a consumer debt or not, bankruptcy courts have developed a “profit motive” test: if the debt was incurred with an eye towards making a profit, then the debt should be classified as a business debt. 
 
Thus, the mortgage on an individual’s home would clearly be a consumer debt, and the mortgage on a vacation home would also be a consumer debt.  However, if that vacation home was also purchased as an investment and rented out, then the mortgage would qualify as a business debt.
 
One bankruptcy court permitted a debtor to deem one of the three mortgages on his home to be a non-consumer debt because the proceeds were used to fund a business venture.
 
Most credit card debts are obviously consumer debts.  However, if an individual used a credit card for business purposes, then it could be reasonably argued that the resulting liability is a business debt.
 
Other examples of business debts include personal guaranties on business obligations, investment losses, and motor vehicle accident liabilities.  Domestic support obligations such as child support and maintenance are generally considered consumer debts.
 
Some Varieties of Debt Are Neither a Business Debt Nor a Consumer Debt
 
According to conflicting bankruptcy court decisions, some debts are in limbo.  For example, although some courts have held that student loans are not consumer debts, the Second Circuit has held that they are.
 
Any liability as a responsible person for taxes on a business is clearly business debt.  However, there is no clear-cut answer in this jurisdiction as to whether personal income tax obligations are consumer debts or not.  Courts outside of New York and the Second Circuit have reached different conclusions on income tax debt.
 
In one case in the Sixth Circuit, the court rejected the application of the profit motive test, concluding that income taxes can be distinguished from consumer debts for several reasons.  Tax debts are not incurred like consumer debts as they are not incurred voluntarily. 
 
Tax debt is assessed for the benefit of the general public whereas consumer debt is incurred for personal and household purposes.  Finally, tax debt arises from income and earning money whereas consumer debt results from consumption and spending money.  In re Westberry, 215 F.3d 589 (6th Cir. 2000).
 
Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
 
Most individuals with a failed mom and pop business will not be able to take this shortcut as their mortgage debt alone will likely exceed their business debt. 
 
The Business Debt Exception to the Means Test Has Limitations
 
Just because a debtor can by-pass the means test does not mean that a debtor can use it as a loophole to escape other good faith requirements.
 
In a Michigan decision from earlier this year, the bankruptcy court addressed a situation involving husband and wife debtors whose debts were genuinely primarily business debts.  They had over six million dollars of unsecured debts from failed real estate investments. 
 
However, both debtors were doctors whose budget showed that they were living on $42,000 of monthly expenses – what the court described as a very lavish and extravagant lifestyle.  They each drove a Mercedes Benz and had a BMW in the garage.
 
The court commented that even though the debtors did not fail the means test, they nevertheless lacked good faith because they could have easily adjusted their budget while still maintaining a nice lifestyle, and paid their creditors a significant dividend through a Chapter 11 plan.  In re Rahim and Abdulhussain, No.l 10-57557 (Bankr.E.D.Mich 12/16/10).
 
Practical Tips for Bankruptcy Attorneys to Help Their Clients
 
If the characterization of a particular debt that is not clear-cut in this jurisdiction, such as tax debt, enables your client to pass the means test, how should you tackle the situation?
 
That really depends on how aggressive you want to be.  My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position. 
 
You should be prepared for presenting your arguments to the U.S. Trustee as they have the initial burden of proof to support a dismissal motion under Bankruptcy Code § 707(b).
 
You would also want to review the matter with your client before filing the petition and prepare a letter that the client signs, acknowledging the aggressive position and the potential risk of defending a dreaded Bankruptcy Code §707(b) motion that the U.S. Trustee brings.  Defending Bankruptcy Code §707(b) motions will certainly be a topic for a future column.
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the November 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
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Bankruptcy Court Filing Fees Increase November 1, 2011

Posted on Tuesday (November 1, 2011) at 9:00 pm to Bankruptcy Practice
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy

 New York Bankruptcy Filing FeesWritten by Craig D. Robins, treatment Esq.
 
 

 

 

With relatively little notice, sales bankruptcy court filing fees have increased.

The Judicial Conference of the United States Bankruptcy Court voted to increase various bankruptcy court filing fees, thumb including the fees to file bankruptcy petitions.

For most of us, the increase primarily affects the fees consumers pay to file their bankruptcy cases.  They are increasing by $7.00.

 
 
 
Here are the New Filing Fees, Which Go Into Effect November 1, 2011: 

Chapter 7 bankruptcy cases:  The filing fee is increasing from $299 to $306.

Chapter 13 bankruptcy cases:  The filing fee is increasing from $274 to $281.

 

 

 

Various Other Bankruptcy Filing Fees Are Increasing as Well:

Amending Schedules:  Increase from $26 to $30

Filing Adversary Proceeding:  Increase from $250 to $293

Filing Motion for Relief from Stay:  Increase from $150 to $176

There are other miscellaneous fee increases as well:  Full Schedule of Bankruptcy Court Fees and Charges Effective November 1, 2011.

 
When did the Bankruptcy Filing Fees Change Last?

In my Bankruptcy Update back in February 2006, I wrote that the filing fees were increasing again.

In February 1, 2006, the House of Representatives passed the Budget Reconciliation Act which included fee increases for various court filings, including bankruptcy filings. The Senate previously had approved the measure.
 
That fee increase, which went into affect on April 6, 2006, was strictly a revenue-raising measure.
 
The bill increased the Chapter 7 filing fee by $25 to $299, and increases the Chapter 13 filing fee by $85 to $274. The apparent purpose of the fee increases at that time was to balance the budget though payments from those who could least afford it.
 
Prior to that, on October 17, 2005, when the bankruptcy laws were reformed by BAPCPA, the filing fees increased for Chapter 7 cases from $209 to $274, and for Chapter 13 cases from $194 to $189.
 
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Valuing Houses in Bankruptcy Cram-Down Proceedings

Posted on Thursday (June 30, 2011) at 1:00 pm to Bankruptcy Practice
Chapter 13 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Using appraisers in bankruptcy cram-down proceedingsWritten by Craig D. Robins, Esq.
 
Court Finds Mortgagee’s Appraiser Lacked Credibility in Chapter 13 Mortgage Cram-Down Proceeding
 
Over the past several years, the judges in the Central Islip Bankruptcy Court here in the Eastern District of New York have done an outstanding job issuing well-reasoned decisions covering a variety of issues.
 
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out.  These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road.  They may explain a complex issue of law. 
 
They can also provide insight on some of the recent changes to the law and how counsel should interpret these new provisions.  Sometimes the decisions are merely entertaining and an interesting read.
 
The decisions are easily accessible on the court’s website for free.  I’ve found so many of the Court’s recent decisions important and interesting that I’ve devoted many of my columns to discussing them.  This month’s column is no exception.
 
Last month, Judge Robert E. Grossman issued a fascinating decision which basically pointed out many things a real estate appraiser should NOT do.  Joseph Lepage v. Bank of America, no. 8-10-08287-reg, (Bankr. E.D.N.Y. May 18, 2011).
 
Appraisals in Cram-Downs
 
Lepage was a Chapter 13 bankruptcy case which involved a routine adversary proceeding in which the debtor sought to cram down the second mortgage.
 
A Cram-down, also known as a “strip-off,” is when a debtor strips off and avoids the secured status of the second mortgage because there is insufficient value in the property to secure any part of it. 
 
Debtors have the ability to cram down second mortgages in Chapter 13 bankruptcy cases pursuant to Bankruptcy Code § 1322(b)(2).  One of our three Central Islip judges, Judge Dorothy T. Eisenberg, also permits Chapter 7 debtors to do this as well, something I’ve addressed in a prior column. 
 
A debtor must bring a cram-down application by adversary proceeding, which is essentially a federal lawsuit brought within the bankruptcy case.
 
In order to cram down a second mortgage, the house must be underwater to the extent that there is no equity whatsoever covering the second mortgage.  In other words, the value of the house must be less than the balance due on the first mortgage.
 
The debtor demonstrates this by supplying the Court with an appraisal.  As such, the only defense that the second mortgagee can generally assert is that the debtor’s appraisal is inaccurate, and that the house is actually worth at least a dollar more than the balance due on the first mortgage.
 
The appraisal is therefore very important and, as you will see, using a highly experienced appraiser, at least in the event there is a trial, can be critical.
 
The Recent Lepage Case – The Only Issue Was Valuing the Property for Purposes of the Cram-Down
 
When a mortgagee challenges the appraisal, which is relatively rare, then the Bankruptcy Court ultimately schedules an evidentiary hearing in which the Court decides what the value of the property is.  That was the sole issue in the Lepage case. 
 
In fact, the parties agreed that the only issue to be litigated was the value of the house.  It was agreed that if the Court determined that the house was worth less then the amount due on the first mortgage, then the debtor would prevail on the cram-down proceeding.
 
In Lepage, the debtor asserted that the house, a 900-square foot ranch located in Brentwood, was worth $175,000, which was less than the balance due on the first mortgage. 
 
The second mortgagee, however, argued the house was worth much more – $205,000.  The balance due on the first mortgage was $181,000. 
 
Thus, as long as the Court determined that the property was worth less than that amount, the debtor would be successful with the cram-down application.
 
The debtor used an appraiser who has been an active appraiser for 31 years, and has been licensed for the past 15 years.  There was evidence that he had testified extensively in Federal and state courts.  He even held a law degree.
 
The mortgagee’s appraiser, on the other hand, had only been appraising for eight years, and had only been licensed for four years.  He testified that he had never testified as an expert in any court.
 
Both appraisers testified that they employed the “direct sales comparison” method of valuation in determining the value of the property. 
 
As the debtor’s appraiser explained, this method involves inspecting the property and reviewing Multiple Listing Service reports for sales comparisons.  The appraiser then takes into consideration a number of factors and adjusts the comparable sales to the property. 
 
The court stated that this approach constitutes the best evidence of market value.
 
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as  Brentwood has experienced a steeper than average decline in home prices. 
 
He estimated this decline to be 25% per year.  In addition, he stated that Brentwood contains many properties that have been foreclosed, and are now “REO”– real estate owned by the bank.  Since banks typically sell REO properties for less than market value, this has the effect of depressing all sales of homes in the area.
 
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
 
During cross-examination, debtor’s counsel was able to demonstrate that the approach taken by the mortgagee’s appraiser contained three significant and ultimately fatal deficiencies.
 
First deficiency:  The mortgagee’s appraisal contained valuations based on the fact that the house did not have a garage.  However, during cross-examination, the mortgagee’s appraiser was caught admitting that he did not know whether the premises had a garage or not – a significant factor that affects valuation.  In fact, the house did have one.  That certainly shot down this appraiser’s credibility.
 
Second deficiency: The mortgagee’s appraiser used some comparable properties that were listings and not sales.  A listing is not an accurate indicator of a property’s value and usually has no place in an appraisal.
 
Third deficiency: The debtor’s appraiser took into consideration the effect of REOs in the neighborhood, whereas the mortgagee’s appraiser neglected to do so.  The Court pointed out that this constraint made his report less accurate.
 
Judge Grossman adopted the debtor’s appraiser’s valuation of the property in its entirety, commenting that his methodology was consistent with industry standards and his testimony was credible. 
 
In stark contrast, the Judge described the mortgagee’s appraiser’s methodology as flawed, and his testimony as less credible.  Indeed, the mortgagee’s appraiser even admitted that his omission of REO sales in his calculations rendered his valuation less accurate.
 
In citing caselaw, Judge Grossman pointed out that valuing assets is not an exact science and that the Court must look to the accuracy, credibility and methodology employed by the appraisers.  Courts are not bound by appraisals submitted by the parties and may form their own opinions as to the value.
 
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid.  Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
 
Accordingly, the debtor prevailed and was successful in cramming down the second mortgage to his house.  Kudos go to bankruptcy attorney Alan C. Stein of Plainview, who represented the debtor, and his appraiser, John Breslin, of Huntington.
 
Practice Pointers for Bringing Mortgage Cram-Down Proceedings in Bankruptcy Cases
 
Most cram-down applications are unopposed.  However, if the mortgagee contests your valuation, hire a highly experienced appraiser who will testify in court. 
 
Also, keep in mind that if you have a hearing on valuation, you will either be totally successful or totally unsuccessful – all depending on how the court weighs the competing valuations.  Therefore, it may be wise to play it safe and negotiate a settlement with the mortgagee, for example, by agreeing to reduce the balance on the mortgage substantially.
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the June 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com
 
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Reaffirmation Agreements — Re-opening a Bankruptcy Case to File the Agreement Late

Posted on Thursday (May 5, 2011) at 8:00 am to Bankruptcy Practice
Chapter 7 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

bankruptcy reaffirmation agreementsWritten by Craig D. Robins, link Esq.
 
EDNY Bankruptcy Courts Are Reluctant to Permit Untimely Reaffirmations After Bankruptcy Cases Are Closed
 
(This article originally appeared in the April 2011 Edition of the Suffolk Lawyer.  Since readers of this blog are both consumers as well as fellow attorneys, I will provide some basic info about reaffirmation agreements and then discuss several recent decisions).
 
Here in the Eastern District of New York, we’ve seen a year’s worth of caselaw in the past four months about retaining vehicles after bankruptcy through either reaffirmation or assumption of lease agreements.
 
Yet all of them had to do with one issue – all involved an application made by the debtor’s attorney to reopen a consumer case to reaffirm a vehicle loan (or assume a vehicle lease) which had not been done on a timely basis while the case was open.
 
In this month’s column, I will review this year’s caselaw in our district concerning reaffirmation agreements and briefly touch upon some basics about reaffirmation agreements as they apply to motor vehicles.
 
What is a Reaffirmation Agreement?
 
Filing bankruptcy has the effect of discharging most debts including obligations on car loans and leases.  In a reaffirmation agreement, the debtor voluntarily agrees to remain obligated on a debt that would have otherwise been discharged.  In a lease assumption agreement, the debtor agrees to be obligated on the lease.
 
Under the 2005 Bankruptcy Amendment Act (BAPCPA), car financing companies, after some aggressive lobbying, obtained extra protections that they had not previously enjoyed.
 
Prior to 2005, debtors enjoyed a “ride-through” in which they could ride through the bankruptcy and keep their vehicles without reaffirming them as long as they stayed current on their vehicle loan payments.
 
However, under BAPCPA, if a debtor does not redeem or reaffirm a car loan pursuant to Bankruptcy Code § 524, the lender can eventually repossess the vehicle.
 
That’s because almost all car loan agreements contain boilerplate language that deem bankruptcy as a default under state law, even if the car owner is current with payments.  When there is a default, a lender, under state law, can repossess.
 
Should a Debtor Reaffirm a Car Loan?
 
The general answer is: only when absolutely necessary to enable the client to keep the vehicle.  When BAPCPA went into effect, we bankruptcy attorneys routinely advised our clients to reaffirm all car loans.
 
After all, we did not want our clients’ cars to be repossessed.  However, as the years went by, we learned that most car lenders informally permitted a ride-through.  In other words, they permitted debtors to keep their secured vehicles, even if the debtors did not enter into a reaffirmation agreement.
 
However, a select few, most notably and notoriously Ford Motor Credit, adopted unusually harsh policies in which they actively threatened to repossess vehicles that debtors failed to reaffirm or assume, and sometimes actually went so far as to repossess those vehicles thereafter.
 
The lesson learned was always reaffirm or assume a vehicle financed by Ford Motor Credit.
 
Statutory Obligation for Reaffirming Car Loan
 
The Bankruptcy Code provisions for reaffirming a debt are set forth in § 521(a)(2).
 
This provision requires the debtor to indicate on the Statement of Intention whether he intends to retain or surrender the vehicle, and if the intent is to retain, the debtor must state whether he will redeem (which means to immediately pay the full loan balance, up to the value of the car, in a lump sum payment) or reaffirm pursuant to § 524.
 
In addition, Bankruptcy Code Rule 4008(a) basically requires the debtor to perform his stated intention within 60 days after the date first set for the meeting of creditors.  In other words, a debtor has approximately 90 days from the date of the bankruptcy filing to file a reaffirmation agreement with the court.
 
Here’s the kicker: the Code provides under § 524 (c) that the stay is automatically lifted if these requirements are not timely met, meaning that the car loan lender is then free to exercise its rights to repossess the collateral if there is a default under state law.
 
Judge Grossman Refuses to Permit Late-Filed Reaffirmation Agreement
 
In the case of In re Barry R. Clark, no. 8-10-73746-reg, 2010 WL 5348721, (Bankr. E.D.N.Y. Dec. 21, 2010), the debtor and his attorney neglected to reaffirm the car loan with lender Ford Motor Credit.
 
When Ford actually repossessed the vehicle after the bankruptcy case was closed, the debtor’s attorney essentially said to them: “Wait.  I will re-open the case, seek to vacate the discharge as it applies to Ford, and file a reaffirmation agreement.”
 
Debtor’s counsel, who also happens to be a Chapter 7 trustee in our jurisdiction, then brought a motion to do just that, and it was unopposed.  However, Judge Robert E. Grossman refused to grant it, saying that there is no basis in the Code that permits him to do so.
 
Judge Grossman explained that both BAPCPA and caselaw mandate a process for reaffirming debts that requires strict compliance by the debtor.  He stated that we have this process to protect debtors from the pressure that could otherwise be exerted by overly aggressive creditors to force debtors to pay discharged debts.
 
Debtors obtain very powerful protections through bankruptcy such as being able to discharge debts, and they shouldn’t be able to jeopardize those protections at a time when they are most vulnerable.
 
Judge Grossman concluded that permitting a reaffirmation after the case is closed would undermine the integrity of the bankruptcy process – even though it would mean, as in this case, that debtors could lose their vehicles.
 
So despite arguments by the debtor’s attorney that this case involved “special circumstances” because the debtors needed a car to get to work, and couldn’t earn an income without one, Judge Grossman was insistent that he could not grant the requested relief.
 
The decision also pointed out that both the statute and case law make it clear that a reaffirmation agreement will be unenforceable if it is not made before the granting of the discharge.
 
Congress made it clear that once a debt is discharged, the debtor should not be pressured in any way to repay it.
 
However, upon carefully reading the decision, it appears that if the debtor had entered the reaffirmation agreement prior to the date of discharge, even if it was not filed as required, then the debtor might have been successful with the application.
 
Second Decision Distinguishes Car Leases
 
Just one month after In re Clark, Judge Grossman decided a similar case involving a leased car, as opposed to a car with a loan.  In re Linda J. Mortensen, no. 8-10-75234-reg,( Bankr. E.D.N.Y. Jan. 19, 2011).
 
Here, Monster Gorilla Ford Motor Credit was a lessor and threatened to repo the vehicle since the debtor did not assume the lease.
 
Judge Grossman permitted the debtor to re-open the case to enter into a lease assumption agreement.
 
He stated that reaffirmation of a car loan pursuant to § 524(c) is not equivalent to assumption of a lease for personal property owned by a creditor under § 365(p), and each undertaking imposes different steps and confers different rights upon the parties to the respective agreements.
 
The decision did not indicate whether the assumption agreement had been executed before or after the date of discharge. 
 
Unlike In re Clark, the entry of the debtor’s discharge is not an impediment to the debtor’s assumption of the lease pursuant to § 365(p) which is the section that deals with assumptions of lease.
 
Assumptions of lease are not subject to the discharge or the post-discharge injunction granted under § 524.
 
Judge Trust Reaches Same Conclusion
 
Three months after Judge Grossman issued the In re Clark decision, Judge Alan S. Trust reached the same holding in a case that was very similar in fact.  In re Polyner Mardy, no. 8-10-73819-ast, (Bankr. E.D.N.Y. March 15, 2011).  By now you can guess who the lender was: Ford Motor Credit, of course.
 
In that case, the debtor and his attorney also failed to reaffirm a vehicle loan, and the court entertained an unopposed application to reopen the case to extend the time to file the reaffirmation agreement.
 
Sometimes when one judge reaches one conclusion on a legal issue, another judge in the same court can reach a different conclusion.  However, that was not the case here.
 
Judge Trust held that the court lacked authority to reopen a closed chapter 7 case in which a debtor has received a discharge to allow the late filing of a reaffirmation agreement.
 
So even though the debtor used the vehicle as a taxi, which was his main source of income, the rule of law prevailed over equity.  “Because these reaffirmation agreements are contrary to the stated goal of a debtor receiving a fresh start, they are subject to intense judicial scrutiny and must comply with all statutory requirements.“
 
The debtor’s attorney, who is a highly-experienced Suffolk County bankruptcy lawyer, didn’t help things much as he failed to show up for the hearing on his own motion, and consequently the court marked the application off the calendar.
 
The attorney re-filed the motion a month later.  Inexplicably, he failed to show for the second hearing, although his clients showed up without him!
 
In addition, the Judge criticized the attorney for submitting a sloppy motion, stating that it was “devoid of factual content and legal authority.”
 
The attorney did not include a copy of the proposed reaffirmation agreement, so the court was unable to ascertain if it had been executed prior to discharge.
 
Judge Trust issued a separate order directing the debtor’s attorney to disgorge any fees that he charged for bringing the motions.  Perhaps more importantly, speaking in terms of future credibility, this attorney may have devalued his currency with the court.
 
Judge Trust further clarified that not only must the reaffirmation agreement be executed prior to discharge, but any hearing to approve the agreement shall be concluded prior to discharge as well, according to § 524(m)(1).
 
“The timing of entering into the agreement and court approval thereof, therefore, are critical. Further, any delay in seeking approval once discharge is granted is fatal, and prevents any enforcement of the agreement.”  
 
Thus, it appears that Judge Trust may address such situations in a stricter sense than Judge Grossman, whose decision left the door open for cases in which the non-filed agreement had been signed before discharge.
 
Practical Tips
 
Ascertain early on if you need to reaffirm a vehicle loan or assume a lease.  If so, calender the deadlines which would be 60 days from date of the meeting of creditors.  Then, make sure the creditor forwards you the proposed agreement.  Those lenders that insist on reaffirmation or assumption agreements will certainly send you one.
 
Do not reaffirm a vehicle if the lender permits a ride-through.  Doing so will not bring any benefit to your client unless the lender is willing to modify the terms of the loan by reducing the interest rate, principal balance, or monthly payment.
 
If you definitely need to reaffirm a car loan and need more time to file it, bring an application to extend the time pursuant to §521(a)(2)(B).
 
If you entered into a reaffirmation agreement and neglected to file it prior to discharge, you might be successful in bringing an application to reopen, to file it late, but only if the agreement was truly signed prior to the date of discharge, and probably only if the Judge is not Judge Trust.
 
If you need to file a lease assumption agreement late, you may be successful, based on the In re Mortensen decision.  Also note that lack of opposition to a motion does not guarantee success.  Finally, if you bring any motion, provide the statutory or caselaw authority for doing so, and definitely show up for your hearing.
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Agape World Ponzi Victim, Forced to File Bankruptcy, Later Sued by Agape Trustee

Posted on Monday (March 28, 2011) at 2:00 am to Bankruptcy and Society
Bankruptcy Crime
Bankruptcy Practice
Chapter 7 Bankruptcy
Current Events

Victim of Ponzi Scheme Sued by Bankruptcy TrusteeWritten by Craig D. Robins, Esq.
 
Losing money in a Ponzi Scheme is bad enough.  Being forced to file for bankruptcy relief because of these losses is even worse.  But how about getting your bankruptcy discharge, and then being sued by the bankruptcy trustee overseeing the failed Ponzi business?
 
That’s exactly what happened to one of our clients last month.
 
Agape World, Inc. Lands in Bankruptcy Because of Ponzi Fraud
 
In February 2009, several creditors forced Agape World into an involuntary Chapter 7 bankruptcy in the Central Islip Bankruptcy Court, here on Long Island in the Eastern District of New York.
 
I previously wrote that Ken Silverman was Appointed Chapter 7 Trustee in Agape World Case .  Around that time, it was discovered that Agape president Nicholas Cosmo  perpetrated a Ponzi scheme involving several hundred million dollars.
 
Many Long Island consumers lost their life savings after falling victim to his scheme.  As a result, many of them filed bankruptcy cases themselves.
 
We recently represented one of them and filed his Chapter 7 bankruptcy petition last year.  The unfortunate debtor lost hundreds of thousands of dollars.  Our client’s bankruptcy case itself was unremarkable and was routinely processed and closed as a no-asset case.  The client got his discharge last month.
 
Out of the blue, Ken Silverman, the Agape World trustee, brought an adversary proceeding in the Agape World bankruptcy case against our client.  He alleged that our client had received some distributions from Agape shortly before Agape was put into an involuntary bankruptcy, and that these payments now had to be returned to the Agape bankruptcy estate under several different legal theories.
 
We had not even scheduled Agape as a creditor in our client’s bankruptcy as we had no idea that there was any potential liability to them. 
 
Trustee Recognizes Bankruptcy Discharge
 
In response to the adversary proceeding, we contacted an attorney in the trustee’s office and explained the circumstances of our client’s bankruptcy filing.  It appeared that the trustee was totally unaware of our client’s prior bankruptcy as we had not included Agape or its trustee as a potential creditor.
 
We were concerned that the trustee would nevertheless seek to go forward with the adversary proceeding because the debtor had not listed Agape in the schedule of creditors.
 
However, we advised the trustee that failure to schedule a creditor in a no-asset Chapter 7 case does not, in and by itself, prevent the debtor from discharging that debt.  I previously wrote about Inadvertently-Omitted Creditors in Chapter 7 Bankruptcy Cases
 
Much to the trustee’s credit, he acknowledged that any possible liability of our client to Agape was discharged by virtue of the prior bankruptcy, and within 24 hours of advising his office of our client’s bankruptcy discharge, he withdrew the adversary proceeding.
 
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Craig D. Robins, Esq. is a Long Island bankruptcy lawyer, who is focused primarily on helping individuals and families, find solutions to their debt problems. Read more »

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Craig D. Robins, Esq.
35 Pinelawn Road, Suite 218E, Melville, NY 11747.

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