About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Recent Bankruptcy Court Decisions
by 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.
Written by Craig D. Robins, Esq.Recent Long Island Bankruptcy Court Decision Addresses How to Allocate Non-filing Spouse’s Share of the Tax Refund
(This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer.)
April may be tax time for most consumers, but bankruptcy judges seem to address bankruptcy tax issues year round. That’s because tax refunds have been a constant and significant source of potential funds for trustees, who are often quite willing to litigate the issues involved.
However, with the increased bankruptcy exemptions in New York, perhaps there will be fewer tax refund disputes.
In the past two years, I devoted many blog posts to issues concerning tax refunds and bankruptcy.
I also devoted two columns of my monthly articles published in the Suffolk Lawyer to the topic of tax refunds of non-filing spouses. A recent decision by Central Islip Bankruptcy Judge Robert E. Grossman here in the Eastern District of New York now requires that I write monthly third column on the subject. First, let me provide some background on the other two cases.
The 50/50 Rule for Allocating Tax Refunds in Bankruptcy Cases has been the Previous Standard in New York
In my May 2009 column, I raised the issue: Who owns the non-filing spouse’s tax refund in a bankruptcy case, and how do you apportion it?
The Marciano case out of the Southern District of New York adopted the 50/50 Rule — a simple and straight-forward approach in which the refund is apportioned equally between the two spouses regardless of the source of income or tax withholding. In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007). Local bankruptcy practice since that time has adopted that rule.
Non-Filing Spouses Do Not Have to Contribute Their Share of the Tax Refund into the Chapter 13 Plan
In December 2010, I focused my column on a decision by Judge Grossman which addressed this issue: What happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
At the time, Judge Grossman held that a non-filing spouse is not obligated to devote his or her share of a joint tax refund to plan payments made to the Chapter 13 trustee.
In that case, In re Malewicz, No 8-09-74807-reg, 2010 WL 4613119 (Bankr. E.D.N.Y., Nov. 4, 2010), the Court ruled that a non-debtor spouse’s share of a joint tax refund received post-confirmation is not property of the debtor’s estate or part of the “projected disposable income.”
Therefore, unless the non-debtor spouse specifically consents to contribute the refund to the plan, the non-debtor spouse’s share of tax refunds received post-confirmation need not be turned over to the trustee.
Thus, the non-debtor spouse in that case was not required to devote his share of tax refunds to the Chapter 13 plan. The non-filing spouse’s share of the tax refund is not property of the estate and it should not be included in the calculation of Chapter 13 plan payments.
At the time, the Malewicz case seemed to be the end of the road on the issue. You had the 50/50 rule, so what else could come up?
The Duarte Decision Introduces New Standard for Allocating Tax Refund
In October 2010, Carlos Duarte, a typical consumer, filed for Chapter 13 relief individually, without his wife. Through his attorney, fellow Long Island bankruptcy lawyer Lawrence S. Lefkowitz, he offered 50% of the couple’s joint 2010 tax refund into the plan and asserted that the other 50% belonged to his wife, and was hers to keep.
After all, the 50/50 Rule, for determining each spouse’s respective rights to a tax refund, is a test employed by a majority of Bankruptcy Courts in New York.
The debtor also pointed out a 2009 decision by Judge Alan S. Trust which held that “spouses filing joint returns who equally share the liability for payment of the taxes, should equally share the benefit of any tax refund.” In re Spina, 416 B.R. 92 (Bankr. E.D.N.Y. 2009).
However, Long Island Chapter 13 bankruptcy trustee Michael J. Macco noticed an unusual aspect of the family’s tax situation: only the husband paid withholding tax during the 2010 tax year; the wife did not pay anything.
The trustee then objected to confirmation of the plan, arguing that the entire 2010 refund resulted from an overpayment made solely by the debtor-husband.
The trustee argued that there was only a presumption that the 50/50 Rule should be used, and that the facts of this case rebutted the presumption. He insisted that the debtor pay 100% of the tax refund into the Chapter 13 plan based on a different rule known as the “Withholding Rule.”
Under the Withholding Rule, which is considered the majority approach, the tax refund is divided based upon the extent to which the refund is attributable to the separate withholdings of each spouse.
At the confirmation hearing, Judge Grossman granted confirmation, but reserved decision as to whether the non-filing spouse was required to turn over 50% of the tax refund.
New “Separate Filings Rule” Now Governs Allocating Spouse’s Tax Refunds in Bankruptcy Cases
In a decision issued in July 2011, Judge Grossman ruled that neither the 50/50 Rule should be applied, nor the withholding Rule. Instead, he adopted a totally different formula known as the “Separate Filings Rule,” first enunciated by the Tenth Circuit in the case, In re Crowson, 431 B.R. 484 (10th Cir. BAP 2010). In re Carlos Duarte, no. 8-10-78606-reg, (Bankr. E.D.N.Y. July 12, 2011).
The Judge clarified the issue before the Court: since the debtor consented to turn over his share of the tax refund, the sole issue was determining how to calculate the debtor’s interest in the tax refund.
After reviewing in detail the considerations for rejecting the other rules (there are four of them), Judge Grossman held that it was necessary to use a formula based on a calculation of what each spouse’s tax obligation would have been if the spouses had filed separate tax returns.
Then, he said there should be a calculation of the contributions each spouse had actually made towards the total tax payment.
Unfortunately, this new method will be messy and the Judge even pointed out that this approach “is not a ‘bright-line rule’ and therefore it is not simple to understand or apply.”
The Judge stated that “This Court is not ruling that the Trustee, the debtor and the non-debtor spouse in each case must undertake this analysis in order to determine each parties’ interest in a joint income tax refund, but this formula shall be employed where the parties do not agree on the proper allocation.”
Judge Grossman’s “Separate Filings Rule” approach will certainly produce the fairest result to all concerned, but if the parties cannot reach a resolution, they’ll certainly have a fair amount of work on their hands and they’ll have to study the formula details set forth in the Duarte and Crowson cases.
I recently spoke with the debtor’s attorney who had just prepared the separate tax returns (for bankruptcy calculation purposes only), and he was optimistic that he and the Chapter 13 trustee would work out a resolution as to the actual numbers without the need for further litigation.
Future Bankruptcy Court Decisions on Tax Issues Ahead?
On a separate note, I anticipate we may see another bankruptcy tax case in the near future. The Court did not address whether the Bankruptcy Code requires a debtor to turn over pre-confirmation tax refunds as opposed to post-confirmation tax refunds. Judge Grossman went so far as to point this out in a footnote.
Since I have seen this issue arise several times recently, I wouldn’t be surprised to see this issue come before the Court in a case where the parties cannot reach a resolution on their own.
NOTE: You can review copies of some of the actual decisions I cited in this post by clicking on these links: In re Carlos Duarte, In re Spina, In re Malewicz.
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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 September 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.
Written 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.
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.
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
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.
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.
Written by Craig D. Robins, 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.
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.
Written by Craig D. Robins, Esq.A decision from the 7th Circuit Court of Appeals last week illustrates the importance of providing accurate information in the bankruptcy petition. In that case, debtors from Michigan failed to do so and were denied a discharge. (Stamat v. Neary, 7th Cir. Mar. 24, 2011).
This Bankruptcy Filing Was Far From Ordinary
Dr. and Mrs. Stamat of Illinois filed a high-debt Chapter 7 bankruptcy case in July 2007. Dr. Stamat is a medical doctor who operates a pediatric clinic. The wife owns a medical billing company. They sought to discharge over $1.5 million in debt.
After being examined, the trustee alleged that the debtors failed to list numerous assets and transactions including past business interests, two limited partnerships, a $10,000 law suit settlement payment, and $90,000 obtained from a refinance. The trustee also alleged that they misreported their 2006 income.
Accordingly, the trustee sought to deny their discharge by bringing an adversary proceeding under Bankruptcy Code section 727, arguing that the debtors concealed estate assets with intent to defraud their creditors, fraudulently made false statements under oath, and failed to satisfactorily explain the loss of assets — some pretty serious charges.
The bankruptcy court agreed with the trustee, denying the debtors a discharge. The debtors unsuccessfully appealed to both the District Court and the Court of Appeals, who held that the debtors made numerous material omissions which displayed a reckless disregard for the truth.
Debtors Were Far From Candid and Honest
The debtors indicated in their petition that their 2006 gross income was $53.000. However, their 2006 tax return indicated that Dr. Stamat grossed $265,000 from his medical practice and his wife grossed $22,000 from her billing business. That’s quite a disparity.
In addition, the debtors failed to disclose past investment and business interests, as well as ownership interests in various limited partnerships, which information they were required to list in the Statement of Financial Affairs, which is one of the schedules of the bankruptcy petition.
The debtors also refinanced their home twice in the two years before filing the bankruptcy petition, receiving over $90,000 in cash, and they failed to report that as well.
Bankruptcy Relief is for Honest Debtors
The decision underscores a basic tenet of consumer bankruptcy – that an honest debtor is entitled to a fresh new financial start. Honesty and candidness are paramount.
The Court stated that the debtors knew or should have known that the information they provided was inaccurate and that the cumulative effect of their false statements was material. This established a pattern of reckless indifference to the truth.
What Can We Learn From This Case?
First, the debtors in this case are both intelligent and educated. They ran a medical practice. So they were smart enough to know what they were doing. When it came to their bankruptcy petition, they made not one omission, but many. It appears that they did so to deceive the court.
If the debtors had merely neglected to schedule one particular asset, or if they merely provided inaccurate information about their income, they likely would have been able to coast, assuming that they were immediately forthright about amending their schedules to provide accurate information.
However, in this case, the debtors’ failure to provide accurate information was so wide-spread, that it was impossible for the court to overlook, as the only reasonable conclusion was that the debtors intentionally acted to withhold important information.
The bottom line is that it is important to be as accurate as possible when disclosing information about your financial situation. Failure to do so can result in having the court deny your dischage.
Written by Craig D. Robins, Esq.Being in Foreclosure is Bad Enough but Don’t Compound Problems by Damaging House in Retaliation
Public sentiment these days is that mortgage banks are evil for bringing so many foreclosure proceedings against suffering homeowners in a difficult economic climate, especially when there are frequent headlines about lenders engaging in shoddy and improper foreclosure tactics.
So whether justified or not, many homeowners are angry that the big banks are seeking to foreclose on their homes when times are tough. Some of these angry homeowners want to “get back” at the bank. However, if you are a homeowner in a foreclosure situation, be careful how you vent that anger.
Foreclosure Rage Becoming More Prevalent
There are numerous stories of homeowners in foreclosure who have intentionally damaged their homes upon moving in an effort to punish the bank — something we can call “foreclosure rage.”
Some homeowners are taking out their frustration on the lender in an effort to get even by vandalizing their own home.
While it is usually acceptable to take items of reasonable value, such as appliances, others, in an act of foreclosure rage, totally gut the home, strip it of almost everything, including flooring and plumbing, and then maliciously inflict serious damage by destroying walls, pouring cement down the toilet, creating floods by leaving the water on, and exposing the house to the elements and vermin by removing windows and doors.
However, as one recent case shows, the immediate emotional relief that damaging the house brought was certainly not worth it.
One Homeowner Goes on the Foreclosure Rage Rampage
A homeowner who went on the war path against the mortgagee in a fit of foreclosure rage recently paid the price.
Michael Zahniser of Illinois had just been served with foreclosure papers. The next day he removed the back door of his house and stripped the interior. He also removed cabinets, countertops, doors, light fixtures, gutters, pieces of siding, and tile floors. He left the house with no door and a gaping hole in the wall.
He subsequently filed a Chapter 7 bankruptcy to eliminate any obligation on the mortgage deficiency, and presumably to eliminate other obligations like credit card debt.
The mortgage lender, Byron Bank, was not amused and brought an adversary proceeding in bankruptcy court arguing that Mr. Zahniser should not be able to discharge his obligation to the bank under Bankruptcy Code section 523(a)(6). That section provides that debtors who willfully and maliciously injure someone’s property cannot escape liability for doing so.
Last month, the bankruptcy court found that the bank proved that the debtor intended to cause injury to the bank’s interest in the house and that the debtor acted willfully and maliciously.
The bankruptcy court also determined that the items that the debtor took and the state that he left the house in demonstrated that he was not merely trying to collect what would have been valuable for himself, but rather, that he was trying to deny value to the mortgage bank.
In determining what part of the bank’s deficiency claim should be non-dischargeable, the court ascertained the amount necessary to rehabilitate the house, and that amount was $50,000. The court also added $19,000 in attorney’s fees to that. The case is Byron Bank v. Zahniser, 2010 Bankr. LEXIS 4623 (Bankr. N.D.Ill, December 13, 2010).
In some ways the homeowner here was lucky. The bank sought to have the entire deficiency held non-dischargeable. However, the court only permitted that part which was caused by the malicious injury to be non-dischargeable.
Almost all mortgages have boiler plate language that prevents a homeowner from engaging in this type of conduct. If you are a homeowner in foreclosure, think twice as to how you should vent your frustration and anger against the bank.
Written by Craig D. Robins, Esq.
Today the U.S. Supreme Court gave us another interpretation of the how the means test should be used in bankruptcy cases by deciding that only consumers who have car loans or car leases can claim a certain motor vehicle “ownership expense” deduction on the means test.
Justice Elena Kagen, in her very first decision since ascending to the Supreme Court, ruled in an eight-to-one opinion that the BAPCPA means test is designed to enable creditors to recover as much as possible while ensuring that consumers seeking bankruptcy relief have enough money to maintain a reasonable standard of living.
The case, Ransom v.F.I.A.Card Services, N.A., had been frequently discussed at national bankruptcy symposiums that I’ve attended during the past year. Even though the case is not a victory for the consumer (it is basically a win for the credit card companies), it was not unexpected either. The Supreme Court upheld the decision of the U.S. Court of Appeals for the Ninth Circuit.
Ransom Case Now Governs Who Can Take Ownership Expense Car Deduction on Means Test
What the case means is that only consumers who have a car loan or car lease can take an additional deduction on the means test that car owners whose vehicles are totally paid off cannot take.
This additional means test deduction can sometimes be significant in enabling a consumer to either pass the means test in a Chapter 7 case or pay substantially less in a Chapter 13 case.
The Ransom decision does not change local practice here in New York at all, as consumer bankruptcy practitioners here have customarily only taken the vehicle ownership expense deduction when the consumer debtor had a car loan or lease.
In her ruling, Justice Kagan sought to interpret the language of the means test statute, which provides that a debtor may claim only “applicable” expense amounts. While the law does not define applicable, the Justice cited dictionary definitions such as relevance and appropriate.
In her decision, Justice Kagan also relied on the “statutory context” that in chapter 13 bankruptcy cases, means testing deductions fill in “amounts reasonably necessary to be expended” by above-median-income debtors.
Finally, Justice Kagan noted that bankruptcy law has a “core purpose of ensuring that debtors devote their full disposable income to repaying creditors.”
What Can Consumer Debtors Do to Get Around the Ransom Decision?
Here is how some bankruptcy debtors who do not have financed vehicles, side-step the issue so that they can obtain the additional means test deduction. Instead of keeping an older, non-financed vehicle, they trade it in for a newer car that is financed by a loan or lease. They do this prior to filing for bankruptcy.
Assuming that they engage in this “pre-bankruptcy planning” in good faith, and that they truly need a newer, more-reliable vehicle, then no one should be able to argue that engaging in such a transaction is abusive bankruptcy conduct.
Even Keeping an Older, Non-Financed Car, Results in an Additional Means Test Deduction
In our jurisdiction, the U.S. Trustee permits debtors to utilize a certain additional IRS used car deduction if the debtor’s car is an older car, which is one which is at least six years old. This is because a good part of the means test deductions are based on IRS cost of living deductions.
If a debtor has an older car, then the debtor can take an additional $200 deduction on the means test. This applies even if the car is financed, in which case the debtor can get a double deduction.
By Craig D. Robins, Esq.
Recent Appellate Decision Says Filing All Pay Stubs May Not Be Necessary
We all know that under the new bankruptcy laws, debtors are required to file copies of all pay stubs for income received during the 60-day period prior to filing.
To put teeth into this requirement, the law further provides that failure to do so will result in the automatic dismissal of the bankruptcy case – a scary thought. What happens if a debtor files just one pay stub, but otherwise documents the payments they received?
The Second Circuit Court of Appeals just decided a case last month, on August 9, 2010. It held that debtors do not need to file all of their pre-petition payment advices if they otherwise document all payment received from employers during the 60-day pre-petition period.
This case addressed for the first time in our circuit what obligations the Bankruptcy Code imposes upon a debtor with respect to the filing of payments advices. The bottom line is that debtors merely need to provide the necessary information on payments as opposed to the actual pay stubs themselves.
The Pay Stub Requirement in Chapter 7 and Chapter 13 Bankruptcy Filings
When Congress revised the bankruptcy laws in 2005, it imposed a new requirement under Bankruptcy Code section 521(a)(1)(B)(iv) that debtors provide written verification of their current income by filing “copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor.” Payment advices are typically pay stubs.
Bankruptcy Rule 1007(c) requires debtors to fulfill this requirement within 14 days after filing the petition. However, if the debtor fails to file the payment advices within 45 days of the filing date, then Code section 521(i)(1) provides for automatic dismissal.
Bankruptcy counsel typically file pay stubs with the bankruptcy court by ECF, and send copies to the trustee, at the same time the petition is filed or shortly thereafter.
The Recent Riffle Case
Stephen Riffle and his wife filed a routine Chapter 13 case in the Western District of New York in 2008. His attorney only filed the debtor’s last pay stub during the 60-day pre-petition period because that was the only pay stub that the debtor retained.
The pay stub contained the debtor’s earnings and deductions for the pay period and also stated the debtor’s year-to-date earning and payroll deductions in various categories.
In addition to filing this one pay-stub, the debtor also filed a chart entitled “Sales Earnings Report,” which had been issued by the debtor’s employer and showed the debtor’s gross earnings for each pay period from the beginning of the year. Debtor’s counsel believed that these two documents satisfactorily disposed of the payment advice requirement.
However, an aggressive creditor, Community Bank, disagreed, and after 45 days filed a motion asking the bankruptcy court to confirm that the case was dismissed for non-compliance with the statute. The Chapter 13 trustee opposed the dismissal, arguing that the two documents that the debtor filed represented full compliance with the statutory requirement.
The bankruptcy court agreed with the debtor and trustee; the District Court affirmed, and so did the Second Circuit. Community Bank v. Riffle (In re Riffle), no. 08-4440-bk (2d Cir. 08/09/10).
The Relatively-New BAPCPA Statute that Provides for Filing Payment Advices Is Very Poorly Worded
The Court of Appeals noted that it had not previously decided what obligations 521(a)(1)(B)(iv) imposes upon a debtor and further stated that “the statute, to put it mildly, is not a model of syntactical clarity. At least two grammatically valid readings of the statute are possible, each of which would place a different requirement on the debtor.”
The Court determined that the statute was ambiguous and provided an analysis in which it dissected clauses and words, explored different grammatical meanings, discussed how certain words modified other words, and focused on how interpreting one participle could lead to two different grammatical conclusions – both of which would be technically correct.
“Other Evidence” of Payment is Acceptable
In the end, the Court chose “the payment-focused interpretation” over a “document-focused interpretation” and held that the statute requires a debtor to file either all payment advices received within 60 days pre-petition – or – other evidence of payment received during this period.
“Although neither reading is perfectly satisfying, we conclude that the payment-focused interpretation is superior,” the Court said.
The Court commented that the documents that the debtor filed “created a very clear picture as to the amount of income the debtor received in the 60 days pre-petition” and thus met his obligation under the statute.
What this Case Means to Long Island Bankruptcy Practitioners
The Second Circuit clearly indicated its desire to follow a more liberal, practical-sense approach in its interpretation of the statute. Basically, as long as a debtor provides all of the relevant information regarding payment received during the relevant period, as opposed to the actual “pieces of paper” the debtor received (pay stubs), then the debtor has complied with his statutory requirements.
Income Breakdown Not Required
The Court also commented that the Bankruptcy Code does not require a breakdown of gross and net income on a per-pay period basis. However, a debtor must identify monthly net income.
Practical Tip: What Do You Do If the Debtor Has Not Received Any Payment Advices During the 60-day Period?
When there are no payment advices, then there is nothing to file. However, the bankruptcy court clerk’s office does not know that there is no documentation, so it is prudent to prepare an affidavit for the debtor to sign indicating this fact, and file this “Affidavit in Lieu of Payment Advices” the same way you would ordinarily file the pay stubs.
Practical Tip: Have Debtor Request Info from Employer
Debtors often do a poor job of retaining papers, and frequently discard or misplace pay stubs. If a debtor has discarded or misplaced his pay stubs, then most employers will be able to print a report containing the same information, that should provide all of the necessary details to comply with the statute.
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 SEPTEMBER 2010 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.
Written by Craig D. Robins, Esq.
One Long Island Bankruptcy Judge Permits Cram-Down; Two Do Not
Several months ago I was excited to report that Central Islip Bankruptcy Judge Dorothy T. Eisenberg issued a decision permitting a Chapter 7 debtor to cram-down a second mortgage. (See my December Suffolk Lawyer article, “Chapter 7 Cram-Down of Second Mortgages”.)
That decision was very newsworthy, as it permitted homeowners whose homes were underwater to “strip-off” and remove a wholly-unsecured second mortgage.
However, we have since heard from our two other Long Island Bankruptcy Court judges.
Judge Eisenberg Permits Chapter 7 Cram-down
The decision granting this relief was In re Lavelle, No. 09-72389-478, 2009 WL 4043089 (E.D.N.Y. November 25, 2009). In that case, Judge Eisenberg determined that a Chapter 7 debtor may avoid a subordinate mortgage lien if that lien is wholly unsecured, based on an analysis of Bankruptcy Code section 506.
Judge Eisenberg, in her decision, also commented on the seminal Supreme Court case of Dewsnup v. Timm, 502 U.S. 410 (1992), stating that she found no authority in it that prevents a Chapter 7 debtor from cramming down a second mortgage in a Chapter 7 case.
The Distinction Between ‘Strip-Down” and “Strip-Off”
Judge Eisenberg focused a large part of her decision on Dewsnup which held that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. However, she pointed out that there is a difference between “stripping down” a mortgage and “stripping off” a mortgage.
Stripping-down refers to removing that portion of a mortgage that is unsecured, which is done pursuant to § 506. On the other hand, “stripping off” is essentially cramming down a mortgage, which means removing its lien status altogether. She determined that stripping-off was permissible in Chapter 7 cases.
Our Two Other Bankruptcy Judges Have Since Held Differently
Once Judge Eisenberg released the Lavelle decision, the Long Island bankruptcy bar was abuzz about the possibility of being able to cram-down undersecured second mortgages for their Chapter 7 debtor clients. However, there was no guarantee that our other two bankruptcy judges would follow Lavelle. Now we know that they will not.
Judge Grossman Denies Cram-down
Just last month, Judge Robert E. Grossman issued a decision in a case involving a somewhat similar set of facts and denied the debtor’s application to cram-down and strip-off the second mortgage – even though the mortgage lender defaulted and failed to file any response whatsoever. In re Pomilio, —B.R.—, No. 09-72389-reg, 2010 WL 681300 (E.D.N.Y. February 23, 2010).
Judge Grossman discussed Judge Eisenberg’s Lavelle decision, stating that she set forth a “well reasoned argument which finds support in a number of scholarly articles.” However, he felt constrained to apply her argument to the facts of his case.
In Pomilio, Judge Grossman began his analysis with Bankruptcy Code Sections 506(a) and (d), and the Supreme Court’s holding in Dewsnup, that a Chapter 7 debtor cannot bifurcate a secured creditor’s claim into a secured claim to the extent of the fair market value of the subject real property, and an unsecured claim for the remaining balance
He reached a different conclusion than Judge Eisenberg, determining that the “stripping down” process was simply not available to a Chapter 7 debtor.
Judge Trust Adopts Judge Grossman’s Position Denying Cram-down
Last week, Judge Alan S. Trust issued the Caliguri decision in which he expressed his position against Chapter 7 cram-downs. In re Caliguri, No. 09-75657-ast, slip op. (E.D.N.Y. March 16, 2010). In that decision, Judge Trust referred to both the Lavelle and Pomilio decisions and stated, “This Court adopts the analysis in Pomilio and concludes that a Chapter 7 debtor may not avoid the lien of a wholly undersecured, consensual mortgage lien holder.”
Judge Trust pointed out that post-Dewsnup courts have generally interpreted Dewsnup to prohibit Chapter 7 debtors from avoiding (stripping off) liens which are wholly undersecured for the same reasons that a Chapter 7 debtor may not reduce a secured mortgage claim to the fair market value of the property.
He further pointed out that such a reading of Dewsnup is a proper and consistent application of Section 506.
Practical Tips
Practical Tips
A debtor has a one in three chance of having his or her case land in Judge Eisenberg’s Court, in which event, the debtor will likely be able to successfully bring a Chapter 7 cram-down proceeding. If the case is pending before Judges Trust or Grossman, their position is clear that the debtor cannot.
However, at some point down the road, there will certainly be a higher court decision establishing the issue for sure, at which point all of our judges will be obligated to follow it.
Get Copies of Bankruptcy Decisions Reported in this Article
Check back to view this post in a few days and I will have copies of the Long Island Bankruptcy Court decisions that I cited in this post.
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 APRIL 2010 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 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.
Written by Craig D. Robins, Esq.High Court Issues Decision on Attorneys’ Ability to Give Legal Advice to Bankruptcy Clients
The U.S. Supreme Court ruled today that a provision of the 2005 Bankruptcy Act, which bars attorneys from advising clients to take on more debt before filing for bankruptcy protection, is permissible in certain situations.
I first wrote about this case, Milavetz, Gallop & Milavetz v. United States, a year and a half ago when the Eighth Circuit Court of Appeals ruled that the provision was unconstitutional: Portion of New Bankruptcy Laws Declared Unconstitutional. Court of Appeals Strikes Down Provision which Prevented Attorneys from Advising Clients .
The Court of Appeals had ruled that the provision barring such advice was unconstitutionally broad and violated free-speech rights
Now, the Supreme Court unanimously reversed that ruling, but with a caveat.
Today’s decision, which was written by Justice Sonia Sotomayor, said the provision prohibiting such advice was valid, but should be read narrowly. She said that the law only prohibits attorneys from advising clients to abuse the bankruptcy system.
However, Justice Sotomayer indicated that it would be permissible for lawyers to advise clients contemplating bankruptcy to take on additional debt in certain situations. She wrote that bankruptcy lawyers could advise clients to refinance a mortgage or purchase a reliable car prior to bankruptcy on the grounds that doing so would reduce the debtor’s interest rates or improve the debtor’s ability to repay.
“It would make scant sense to prevent attorneys and other debt relief agencies form advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors,” Sotomayor wrote.
Professionals specializing in bankruptcy “remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case,” Sotomayor wrote.
How This Decision Affects Bankruptcy Attorneys and their Clients
I often encounter a situation where my client’s car lease is about to end. Before the 2005 Bankruptcy Amendment Act (BAPCPA), I would have simply advised the client to immediately surrender the existing car and obtain a new car lease or car loan, as getting a new car is easier to do before filing for bankruptcy than after.
However, BAPCPA contained a provision which prevents attorneys from advising clients to incur debt in contemplation of bankruptcy. So, for the last five years, I’ve been technically unable to give clients such advice.
Today’s Supreme Court decision now clarifies that as long as my advice is not meant to abuse the system, it is considered appropriate. Of course, a bankruptcy attorney cannot advise a client to go out and charge up debt when the client has no reasonable expectation to repay it — providing such advice would be considered abuse, and therefore a violation of the statute.
I view the decision as a victory of sorts because it enables us bankruptcy practitioners to do what we’ve wanted to do all along: give honest and appropriate advice to clients in order to reach a beneficial result, as opposed to taking advantage of the system and defrauding creditors.
Bankruptcy Attorneys Are Debt Relief Agencies
Justice Sotomayer also upheld the BAPCPA’s requirement that attorneys make certain disclosures in their advertisements and ruled that attorneys who provide bankruptcy assistance are debt relief agencies within the meaning of the law.
Having to label bankruptcy attorneys as “debt relief agencies” seems silly, and serves no useful purpose. However, the requirement is rather benign, and more of a nuisance than anything else.
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About the Photo: That’s my son, Max. To see more Max, click: Super Ninja Bankruptcy Attorneys