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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Bankruptcy and Society
Is Another Wave of Bankruptcy Reform Ahead for 2013? If So, Elizabeth Warren May Spearhead It
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Written by Craig D. Robins, Esq.
The Last Wave of Bankruptcy Reform in 2005 Was Very Pro-Creditor
For eight years leading up to 2005, the banking and credit card industries lobbied Congress incessantly, urging them to believe that American consumers who sought bankruptcy relief were essentially deadbeats.
That year, Congress bought into this perception and promulgated a great number of strict changes to the Bankruptcy Code which made it much harder for the typical consumer to discharge debt obligations in bankruptcy. Consequently, Congress enacted BAPCPA — The Bankruptcy Abuse Prevention and Consumer Protection Act.
This bankruptcy reform was designed to pull every last dollar out of hard-working but suffering middle class families who appeared to have an extra dollar or two to spare — at least on paper, according to a series of controversial calculations called the bankruptcy Means Test — a new eligibility requirement for those seeking Chapter 7 relief.
This bankruptcy reform was designed to pull every last dollar out of hard-working but suffering middle class families who appeared to have an extra dollar or two to spare — at least on paper, according to a series of controversial calculations called the bankruptcy Means Test — a new eligibility requirement for those seeking Chapter 7 relief.
This law was a major victory for the banks, and unfortunately, created an inequitable situation for many consumers.
A respected Harvard University bankruptcy law professor at the time, who I deemed a hero to the typical middle class families I usually represent in my Long Island bankruptcy practice, was a very outspoken critic of these proposed laws.
A respected Harvard University bankruptcy law professor at the time, who I deemed a hero to the typical middle class families I usually represent in my Long Island bankruptcy practice, was a very outspoken critic of these proposed laws.
That was Elizabeth Warren, who was this country’s foremost authority on the sociology of Americans who file bankruptcy.
Senator-elect Elizabeth Warren May be Our Best Hope for Consumer-Friendly Bankruptcy Reform
Ms. Warren became known for her critical opinions of the practices of the banking and credit card industries, and I have written about her previously in this column. In 2000 she co-authored a book, “The Fragile Middle Class,” and “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” in 2003.
Ms. Warren became known for her critical opinions of the practices of the banking and credit card industries, and I have written about her previously in this column. In 2000 she co-authored a book, “The Fragile Middle Class,” and “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” in 2003.
In the latter book she stated, “This year, more people will end up bankrupt than will suffer a heart attack. More adults will file for bankruptcy than will be diagnosed with cancer. More people will file for bankruptcy than will graduate from college. And, in an era when traditionalists decry the demise of the institution of marriage, Americans will file more petitions for bankruptcy than for divorce.”
Some commentators have said Ms. Warren has become the country’s most respected and resonant voice on consumer issues since Ralph Nadar’s zealous quest to protect consumers in the 1970s.
Some commentators have said Ms. Warren has become the country’s most respected and resonant voice on consumer issues since Ralph Nadar’s zealous quest to protect consumers in the 1970s.
Now it looks like the Senate Banking Committee is about to get a serious dose of bankruptcy expertise from the protector of the middle class.
Ms. Warren defeated her Republican rival last month in one of the most expensive and most watched Senate campaigns of the year – for the Massachusetts seat previously held by the late Ted Kennedy.
It is expected that Ms. Warren will land a seat on the high-profile Senate Banking Committee.
More importantly, as a staunch advocate of protecting the consumer, an ardent critic of the banking industry and an outspoken critic of BAPCPA, there is a high likelihood that Ms. Warren, now as a lawmaker, will take the initiative to introduce legislation to reform the problems and inequities created by the Bankruptcy Reform Act of 2005.
There Is No Doubt that Ms. Warren Will Bring Her Liberal, Pro-Consumer Views to the Senate
Ms. Warren created the U.S. Consumer Protection Bureau – a federal agency established in 2010, not only to prevent risky mortgage practices, but also to stop credit card companies from continuing to engage in unfair and predatory business practices.
A great many bankruptcy judges across the country, including several in our own district, have officially and unofficially expressed their frustration with many aspects of the new bankruptcy laws and sometimes their personal opinion that many parts of the law are a disaster.
In addition to making it harder for the middle class to get bankruptcy relief, BAPCPA is flawed and poorly drafted.
This has resulted in many decisions which have caused judges to stray from a strict interpretation of its hastily-drafted words, which can result in an absurd result, and instead focus on a more common-sense analysis.
BAPCPA was drafted primarily by lobbyists, rather than bankruptcy professionals. A significant problem continues to be a lack of consistency among courts in different jurisdictions for enforcing its provisions.
Ms. Warren has pledged to stand up for the little guy against the financial forces of Wall Street. I predict that when Ms. Warren goes to Washington, the likelihood is that we will see her introduce some substantive pro-debtor legislation to amend the Bankruptcy Code, in which she will seek to reform some of the ill-conceived and poorly-drafted aspects of BAPCPA.
She will also likely address issues concerning student loan debt relief, mortgage debt relief, as well as the debt burden on consumers.
Ms. Warren’s election to the Senate is wonderful news for bankruptcy attorneys and middle-class Americans alike.
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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 January 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 (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.
Protecting Frequent Flyer Miles If You Have to File Consumer Bankruptcy – The Complete Guide
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by Craig D. Robins, Esq.
Filing for Bankruptcy Usually Has No Effect on Frequent Flyer Miles and Rewards Points
Most consumers these days have an assortment of frequent flyer miles and credit card rewards points, whether they earn them from having flown on airlines, or acquired them from banks for credit card spending.
For consumers, these miles and rewards points can have a substantial value as they can be used to obtain expensive plane tickets or months of hotel lodging. They can also be used to purchase various goods, or gift certificates redeemable in a variety of retail stores.
I once represented an executive who previously earned six figures, but was now without a job. He had over 800,000 American Express Membership Rewards points – enough to redeem on airlines for several international first class trips, among other things. He could have also easily redeemed them for over $8,000 in retail gift certificates. What happens to these valuable points and miles when a consumer files for bankruptcy relief? Can they be protected?
You may have seen one of my favorite movies, Up In the Air, in which George Clooney, who had millions of air miles, flew around the country terminating executives and other employees. They probably had some air miles, too.
Frequent Flyer Miles and Rewards Points – Are They Even an Asset of Yours?
In deciding how to treat miles and points for bankruptcy purposes, we start by looking at what kind of assets they are.
A consumer who files for bankruptcy must list all assets in the bankruptcy petition. However, there is an issue as to whether frequent flyer miles are an asset that must be listed.
I would say that they do not have to be listed at all in a bankruptcy petition. Here’s why:
All frequent flyer programs have fairly comprehensive terms and conditions that uniformly indicate that the miles and award points have no monetary value whatsoever. These loyalty programs also state that miles are personal and cannot be assigned, traded, willed or otherwise transferred, except with consent of the program.
In addition, most programs state that membership terminates upon a member filing personal bankruptcy. Also, all airline programs vigorously prohibit the sale of award tickets.
Many frequent flyer loyalty programs and point programs, such as the popular American Express Membership Rewards program, expressly state that miles or points are not property of the member, and are not transferable by operation of law to any person or entity. Some actually state that the miles are owned by the program.
Although it can be argued that a consumer debtor has a legal or equitable interest in the miles or points, and that this interest must be reported in the bankruptcy schedules, that argument is defeated by the terms of the loyalty programs which state that the member does not have a property interest in them.
Thus, if a program states that the miles have no value and that they are not owned by the consumer, the reasonable conclusion is that the consumer does not have an asset that must be listed in the bankruptcy petition.
Even if, for the sake of argument, the miles and points were considered “assets of the bankruptcy estate,” most debtors would be able to exempt them under a wildcard exemption.
Bankruptcy Trustees Do Not Ask About Miles and Points
In my twenty-six years of practicing bankruptcy, and having attended many thousands of meetings of creditors in bankruptcy court, I have never once seen any case where a trustee has even asked about frequent flyer miles. There are two reasons for this:
First, trustees recognize that it would be very difficult to administer miles and points as an asset considering they are very illiquid, and secondly, even if they did have value, most consumers who file for bankruptcy, and who have frequent flyer miles, would have miles worth so little in relative terms, that it would not be viable for the trustee to administer them as an asset.
Can a Bankruptcy Trustee Compel a Consumer Debtor to Redeem Miles?
Let’s suppose a creative and aggressive Chapter 7 trustee did learn that a debtor had a substantial cache of miles. Keep in mind that a trustee certainly could not sell an airline ticket – every program clearly prohibits that. Could the trustee compel the debtor to redeem those miles for gift certificates, which the trustee could then try to sell?
I would argue that if the frequent flyer program stated that the miles were not the property of the debtor, then the miles never became an asset of the bankruptcy estate, and the trustee has no right to control that asset.
A trustee would also have great difficulty pursuing them because of the standard provision in most frequent flyer programs, that the debtor’s membership in the program terminates upon the filing of bankruptcy. Technically, upon filing bankruptcy, all miles would then be lost.
However, I believe the frequent flyer programs include this provision to protect the consumer from creditors, similar to a spendthrift provision, rather than punish a consumer for filing bankruptcy. Thus, it is unlikely that an airline’s frequent flyer program would terminate benefits to a consumer for filing bankruptcy, absent any meddling by a bankruptcy trustee. Frequent flyer programs have no incentive to become embroiled in a fight over miles.
Nevertheless, consumers should not be parading the fact that they filed for bankruptcy to the frequent flyer or loyalty program, nor do they have any obligation to do so.
Consumers should therefore be able to emerge from bankruptcy with their air miles in airline frequent flyer programs intact.
Advice for Protecting Rewards Points in a Credit Card Program If You Anticipate Filing for Bankruptcy
There is a major difference between airline or hotel loyalty programs and credit card rewards programs. With the credit card programs from banks such as American Express, Chase, Capital One and others, the likelihood is that the consumer owes the banks money. All such programs have provisions that freeze the points if the consumer falls behind with payments.
Let’s take a typical scenario where the consumer has points in a credit card program such as American Express Membership Rewards. The consumer cannot use those points if the account is in default. That would certainly be the case once the bankruptcy petition is filed if there is any balance owed on the account.
The issue in protecting the points is thus: If you think you need to file for bankruptcy, and you are current with your payments, should you quickly cash out the rewards points before you fall behind and the account goes into default?
The short answer is YES. Here’s why it should be OK to do so. Let’s first address the potential argument the credit card company can conceivably make. They can argue that if the debtor cashes in the points just prior to filing bankruptcy then they engaged in some kind of bad faith conduct.
However, the credit card company would have great difficulty proving this as the debtor should be able to argue successfully that the points were already earned, and that the debtor had the full right to use them regardless of any debt problems or future plans to file for bankruptcy.
When it comes to bankruptcy cases involving credit card debt, the real issue is not whether the consumer redeemed points, but whether the consumer incurred the underlying credit card debt at a time when the debtor knew or should have known that they would not be able to pay their debts.
Also, from a practical perspective, in my many thousands of consumer bankruptcy cases, I have never seen one instance of a credit card bank alleging an impropriety for redeeming rewards points. The value of points in relation to the amount of money that the consumer owes is so nominal, that banks will simply not go to any length at all to pursue a debtor who cashed them in.
Accordingly, I would feel comfortable advising a consumer debtor client to immediately redeem the points or transfer them to an airline’s frequent flyer program, assuming there was no larger issue that the consumer incurred the debt to the credit card company under fraudulent pretenses.
Another bit of advice: If you feel that you are about to fall behind with your minimum credit card payments, pull those rewards points out immediately. Otherwise, they will be frozen. You can transfer the points to airline or hotel loyalty programs, or redeem them for merchandise or gift certificates.
Keep in mind that if you redeem them for goods or gift certificates, you would now have assets that should be listed in your bankruptcy petition.
How One Savvy Consumer Lived on Miles and Points After Filing for Bankruptcy
Let me leave you with an anecdote. Jim Kennedy, a 46-year-old California man, lost his six-figure corporate development job. At the time, he had about a million frequent flyer miles and rewards points in various loyalty programs including 125,000 American Express Membership Rewards points, 85,000 Starwood Preferred Guest points, 400,000 Hilton Honors points, 100,000 Delta Sky Miles, 120,000 American AAdvantage miles, and 200,000 United Mileage Plus miles.
After running out of funds, losing his home to foreclosure, and having no luck finding a job, he filed for Chapter 7 bankruptcy. He emerged from bankruptcy with his miles intact. Thereafter, he lived for months in Holiday Inns and Motel 6’s by converting his frequent flyer miles into hotel points. This also helped his food budget because the motel provided free breakfast to its guests.
He regularly reported his plight on his blog and on Twitter. His story was publicized by a number of newspapers and TV stations on the West Coast. Last year, when he was down to just a month’s worth of free hotel nights, he found a job. The lesson is that frequent flyer miles can sometimes really help, even after bankruptcy.
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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. A version of this article appeared in the February 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. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.Although Bankruptcy Filings May Be Down, Still More Than a Million Consumers Filed This Year
Any way you look at it there are a tremendous number of American consumers filing for bankruptcy right now.
Recent figures show that about one million consumers filed for bankruptcy relief in just the first nine months this year. That’s a lot of consumers getting a fresh new financial start.
However, this number is slightly lower compared with the number of filers from the same period last year when there were 1.1 million bankruptcy filings.
Long Island Bankruptcy Filings Have Decreased Very Little
Here, in the Eastern District of New York, there were 15,882 bankruptcy filings in the first eight months of last year. Yet, so far this year, there have been 15,607 bankruptcy filings.
In my Long Island bankruptcy law practice, we are still extremely busy, but I’ve noticed a slight drop in the number of cases we’ve been filing the past few months.
Do Fewer Bankruptcy Filings Mean the Economy Is Improving?
Unfortunately, the answer is no. We are still in the midst of an economic slump. It appears that many consumers are merely putting off the inevitable.
I have come up with seven reasons why bankruptcy filings have decreased.
Why Have the Number of Bankruptcy Filings Dropped Slightly From Last Year?
1. As a result of the recession consumers are tightening their wallets and pocketbooks and spending less. Data from a recent Gallup poll revealed that consumers were spending significantly less per month in stores than they were previously. Consequently, they may be charging less and getting into less debt.
As Federal Reserve Chairman Ben Barnake commented before Congress this week, consumer behavior both reflects and contributes to the slow pace of recovery.
2. Banks have tightened their lending criteria these past two years. For years, banks gave out credit cards like crazy to consumers. It used to be that you asked for a credit card and you got one. Banks would give our credit cards with a reckless disregard for the consumer’s ability to pay. However, with banks tightening credit, there are fewer credit card accounts that consumers are defaulting on.
3. Many consumers who have been victims of the recession have already filed for bankruptcy relief in the past two years. During this time, there were about three million bankruptcy filings.
4. Some consumers who have really hit bottom are having difficulty coming up with the bankruptcy legal fees and filing fees — a cost that has increased greatly since Congress changed the bankruptcy laws six years ago.
Bankruptcy filings sometimes increase as a recession is ending since consumers who have been out of work have finally gotten new jobs and now want to get their finances in order. Bankruptcy provides a fresh new financial start that can go hand-in-hand with a new job.
5. For a good part of the past year, mortgage lenders put the brakes on the foreclosure process, which was rampant with defective foreclosure suits and shoddy work done by foreclosure law firms. As a result, there have been fewer foreclosures and hence fewer bankruptcy filings to stop them. For example, New Forelosure Law in New York Requires Attorneys to Verify Foreclosure Papers .
However, now that mortgage lenders have begun getting their papers in order, we are in for a new round of foreclosures, which will certainly lead to an increase in real-estate-related bankruptcy filings.
6. Many consumers previously filed for Chapter 7 bankruptcy relief during the past decade. Under the current bankruptcy laws, a consumer must wait eight years from the date of a previous Chapter 7 filing before being eligible to file for Chapter 7 relief again. see Filing Second Bankruptcy is Simple as 2 – 4 – 6 – 8 .
There were about ten million filings during the past years which is a lot of consumers who are ineligible right now to file for Chapter 7 bankruptcy relief, even if they need to. I have many clients who wait it out until they are able to file again.
7. The government has extended the period of unemployment benefits. Consumers often exhaust all of their other remedies before seeking bankruptcy relief, even when it is not in their best interest to do so. However, when the benefits run out, bankruptcy often becomes a necessity.
The Decrease in Bankruptcy Filings Is No Surprise
In January of this year I wrote that Professor Bob Lawless of the University of Illinois College of Law predicted that bankruptcy filings may decrease slightly this year. See: A Million and a Half Bankruptcy Filings in 2011? As it turned out, he was right.
Written 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.
Written by Craig D. Robins, Esq.Every so often we file a bankruptcy case that has a rather unusual asset – and unusual assets sometimes lead to unusual dispositions by the trustee.
Almost two years ago, in 2008, we filed a Chapter 7 bankruptcy petition in the Central Islip Bankruptcy Court here on Long Island that was routine in every respect – except one. The debtor had an unusual asset which the trustee thought he could sell for the benefit of creditors.
Our client, an African-American, had inherited some property 30 years ago that had been in his family for quite some time.
Forty Acres and a Mule
Apparently, the debtor’s great grandfather was a slave in Virginia and upon his emancipation around 1865, he was given some unimproved property in that state – what was then referred to as “forty acres and a mule.”
According to Wikipedia, 40 acres and a mule was a practice in the 1860’s of providing farmable land to Black former slaves who became free as Union armies occupied areas of the Confederacy.
The combination of the land, together with Army mules, was meant to provide a sound start for a family farm.
40 acres (16 hectares) was a standard lot size for rural land, being a sixteenth of a square mile.
Former Slave’s Property Handed Down to Debtor
Over the ensuing years, the great grandfather and his descendants carved up the property several times and transferred it down family lines.
When the debtor inherited some of this property about 30 years ago from his parents, it consisted of two unimproved lots, one about two acres in size, and the other about four acres. Other family members owned adjoining parcels. The trustee assumed that six acres of property had to be worth something.
However, the property was located in a very rural area in Southern Virginia consisting primarily of farms and vacant, unused land. Neither of the debtor’s parcels abutted a roadway; there were no structures on or near the land; and there was no utility service to the land. Basically, the property had very little value.
Nevertheless, the property was not exempt under any statutory authority. Since the debtor did not reside on the land, he was unable to assert the homestead exemption to protect it, and since the bankruptcy case was filed before New York’s exemption statutes changed a few months ago, the debtor could not utilize any wildcard exemption.
The debtor had hoped to keep the property for sentimental reasons, but realized that cooperating with the trustee and obtaining a discharge of his existing debts was more important.
Nevertheless, the debtor knew that there was very little demand for such lots as there were many of them, and hoped the trustee would just abandon it.
Bankruptcy Trustee Tries to Sell Former Slave’s Land
The Chapter 7 bankruptcy trustee, known in local circles for being rather aggressive about pursuing assets, would do no such thing. The trustee brought an application to retain a local Virginia real estate broker to list and sell the property.
I initially tried to persuade the trustee, who I am friendly with, to abandon the property as having no value to the bankruptcy estate. However, the trustee was somewhat adamant so I assured him that the debtor would fully cooperate with him.
The broker tried to sell the parcels for two years with no success. The trustee did not give up. Earlier this month, he fired the broker and brought an application to retain another one. That application was granted just yesterday.
The Trustee Gives Up
Today, quite unexpectedly, the trustee filed a “no-asset report” – just 24 hours after getting court approval to retain a new real estate broker.
By filing this no-asset report, otherwise known as a “Chapter 7 Trustee’s Report of No Distribution,” the trustee advised the bankruptcy court that there were no assets to be distributed and that the case should be closed as having been fully administered.
What happened in 24 hours? I haven’t spoken to the trustee yet, but my guess is that the trustee finally realized what the debtor had known all along – that the property had very little extrinsic value and that it would be very difficult to sell. Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Out of curiosity I called the broker who acknowledged that this property would certainly be a hard-sell.
Non-Exempt Real Estate Stays in the Family
Consequently, the debtor received his discharge (the court actually granted this over two years ago) and he was able to keep all of his assets – including the land remaining from his great grandfather’s emancipation from slavery – forty acres and a mule.
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About the Artwork: The image is a painting by renowned Atlanta Landscape and Wildlife artist Leonard M. DeFoor. He has some great work! Check out his website.
Written by Craig D. Robins, Esq.
In November I wrote about a Long Island attorney, Jay Korn, who, on March 24, 2010, had just jumped eight stories to his death amidst an investigation into whether he fleeced millions in a Ponzi scheme.
He jumped from the roof of his the Hempstead building where his law office was located at 50 Clinton Street.
That led several investors in the scheme to put Korn’s firm, Korn & Spirn, into an involuntary Chapter 7 bankruptcy.
See: Korn & Spirn — Involuntary Bankruptcy Just Filed Against this Beleaguered Long Island Law Firm for a post that contains a fairly detailed discussion of the situation, the bankruptcy case, and an explanation about involuntary bankrutpcy.
Nasssau County D.A. Completes Investigation
The Nassau County District Attorneys Office just concluded, after examining Korn’s financial affairs for a year, that Korn was solely responsible for the Ponzi scheme.
In a statement, Nassau County District Attorney Kathleen Rice said, “The credible evidence did not establish that anyone other than Jay Korn was involved in the alleged criminal wrongdoing.” She added that the D.A. was closing the case.
The Involuntary Bankruptcy Case Continues
The bankruptcy case, which had been filed in November, was assigned to Chapter 7 bankruptcy trustee, Andrew M. Thaler, who is in the process of investigating the decedents financial affairs to ascertain if there are any assets to liquidate for the beneift of creditors, who primarily consist of scammed investors.
The trustee may likely adopt some of the legal theories currently used by the trustee in the Bernie Madoff Ponzie scheme case to “claw back” from those investors who benefited from the scheme.
So far, about $13.1 million in claims have been filed in the involuntary bankruptcy case. However, reported assets so far consist of a mere $2,500 representing funds that were in the law firm’s bank account.
How Did Korn Defraud His Friends and Clients?
Korn told friends and clients that he was administering a real estate investment program and he promised to pay investors returns of 12 to 15 percent per year.
As an attorney, Korn also represented parties in real estate transactions. In one of those transactions, he represented a Manhattan doctor who was purchasing a condo. Two weeks before Korn committed suicide, the doctor wired him $2.5 million for that real estate purchase. The doctor has not seen the money since.
Long Island Bankruptcy Attorney David Baram, a colleague of mine who was with me at the National Association of Consumer Bankruptcy Attorneys Workshop in Puerto Rico last fall, represents Arthur Spirn, who was Korn’s law partner. Spirn says he was a victim of his Korn.
The Nassau County D.A. has not pursued him at all and appears to have been cleared by the D.A.’s investigation.
This is what shredded mortgage files look like
Written by Craig D. Robins, Esq.
In the news this week was an interesting convergence between the need to investigate mortgage fraud and the desire to maximize the distribution to creditors of a defunct mortgagee.
I first wrote about American Home Loan Mortgage Company in 2007, which was based on Long Island. At the time they were one of the country’s largest mortgage lenders and they quickly and utterly collapsed as one of the earliest victims of the sub-prime mortgage meltdown. (see: The Sub-Prime Mortgage Meltdown ).
In 2009, I wrote how the CEO of the company had engaged in fraud — Ex-CEO Of American Home Mortgage Settles SEC Fraud Charges .
Now we have an issue of what will happen to the many thousands of sub-prime mortgage files sitting in a storage room of the now-abandoned company’s Melville, Long Island headquarters — a five-minute drive from my Woodbury office.
What Happens to Mortgage Files When a Mortgagee Goes Out of Business?
American Home Loan, which hasn’t operated since it collapsed in 2007, has been in a Chapter 7 bankruptcy liquidation proceeding for several years now. Earlier this week, the operating trustee asked the bankruptcy court for permission to destroy 4,100 boxes of loan documents.
The trustee is arguing that the local fire marshal wants the boxes of mortgage files removed as it is posing a fire hazard. The trustee is also complaining that it will cost too much to move them and that they should instead be destroyed.
Paying to remove the file boxes to a storage facility costs money — money that would have gone to the creditors of American Home Mortgage who filed claims in the bankruptcy proceeding. The cost of having maintained storage of the files was approximately $15,000 a month.
Two years ago, the trustee had made a similar request which was approved, and several thousand boxes were destroyed at that time after banks and other loan servicers had been given a chance to pick up the files but neglected to do so.
Now there are 4,100 boxes left. My guess is that each box contains 20 files, meaning that the boxes contain the records of nearly 80,000 sub-prime mortgages.
Is Evidence of Mortgage Fraud Being Destroyed by Destroying the Mortgage Files?
Since the earlier batch of files was destroyed, the subject of mortgage fraud has risen to become major headline news.
The robo-signing scandal only became national news this past October when it was revealed that incredible numbers of original mortgage documents were missing and new documents were created for the purpose of bringing foreclosure proceedings. See: New Forelosure Law in New York Requires Attorneys to Verify Foreclosure Papers .
That led the attorneys general in all 50 states to immediately begin investigations into foreclosure procedures, improper mortgage assignments, and all sorts of other mortgage document deficiencies.
Also in the past few months, we have seen massive amounts of evidence turning up all around the country showing that original mortgage loan documents were never transferred as required when the mortgages were securitized and sold to investors.
Now, these ever-so important mortgage files are about to be destroyed. Yesterday the Delaware Bankruptcy Court approved the trustee’s document destruction request.
However, a Legal Aid Society attorney, who also appeared in the proceeding, was successful in requiring the trustee to set aside several hundred of the storage boxes which may contain records still relevant to some pending foreclosures.
She argued that many low income homeowners were victims of deception about how much their mortgage loans would cost, and that the original mortgage files could contain evidence that they had been defrauded. This is another concept I previously wrote about in The Sub-Prime Mortgage Meltdown .
Who Benefits When Mortgage Files Are Destroyed?
As I mentioned, the creditors of the defunct mortgage company stand to receive a (very slightly) larger distribution.
But what about the hapless homeowners who are defending foreclosure proceedings? Perhaps this could be good news for them. Judges are becoming more and more willing to toss out foreclosure suits when the mortgagee is unable to produce various original mortgage documents.
The defense du jour is “show me the note!” A series of recent decisions in foreclosure cases emphasizes the importance of producing original loan documents, holding that they are essential for investors to prove ownership of the mortgages and that the have the right, known as “standing'” to pursue foreclosure. This is something I wrote about a year ago: Mortgage Companies Entitlement to Bring Foreclosure Proceedings: Prove It or Lose It .
If a mortgage which was originated by American Home Mortgage is foreclosed upon (and many tens of thousands are in the foreclosure process now), then it may become easier for the homeowner to defend if the current mortgagee is unable to adequately produce sufficient paperwork.
On the other hand, such document destruction can be the equivalent of a get-out-of-jail card for those business executives in the mortgage industry who took illegal shortcuts. Destroying thousands of files means that valuable evidence that can be used in criminal investigations will be forever gone.
The wholesale destruction of mortgage files has become big news in several other areas of the country this week. A Bankruptcy Judge temporarily blocked the trustee of sub-prime lender Mortgage Lenders Network USA from destroying 18,000 boxes of original loan files after federal prosecutors pleaded that they may be needed as evidence in more than 50 criminal investigations.
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.
Korn & Spirn — Involuntary Bankruptcy Just Filed Against this Beleaguered Long Island Law Firm
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Written by Craig D. Robins, Esq.
Firm of Lawyer Who Jumped Eight Floors to his Death Now in Involuntary Chapter 7 Bankruptcy in Central Islip Bankruptcy Court
The Long Island law firm of Korn & Spirn has had more than its share of woes this year. In March, partner Jay Korn of Rockville Centre committed suicide at the age of 70 by jumping to his death. He shared aHempstead law practice with Arthur Spirn for more than 30 years in a firm known as Korn & Spirn.
He jumped off the roof of the Hempstead office building where he maintained his law practice, landing on an awning eight stories below. That Wednesday morning in March he died about half an hour later.
The big news after the suicide was that it appeared that Korn defrauded dozens of clients out of millions of dollars in a Ponzi scheme. Nassau County District Attorney Kathleen Rice began investigating him the day after he killed himself.
A large number of clients immediately filed complaints thereafter. Garden City attorney Jerome Resiman, who is representing a number of the alleged victims, called Korn “a mini-Madoff,” according to news reports, and said that Korn promised 15% annual returns on investments.
As of April, there were close to a hundred complaints from victims alleging that Korn defrauded them out of about $30 million. In news reports from that time, The District Attorney’s office commented that neither the firm nor Korn’s partner, Arthur Sprin, were under investigation.
Law Firm of Dead Attorney Investigated for Ponzi Scheme Must Now Answer to Creditors in Bankruptcy Court
Yesterday, three creditors who asserted that they had claims against the law firm partnership filed an involuntary Chapter 7 Bankruptcy Petition against the firm. The case is now pending before Central Islip Bankruptcy Judge Dorothy Eisenberg under Case No. 10-79012
The petitioning creditors are Steve Prince of New York, represented by Thomas J. Perkins, Esq., who claimed he was owed $600,000; Lewis J. Rubin of New York, represented by Herbert Kramer, Esq. of New York, who claimed he was owed $2,565,000; and Ahron Glambosky of East Meadow, represented by David Grill, Esq. of New York, who claimed he was owed $1,250,000. That’s a total of $4.4 million in claims for three creditors.
The Creditors Appear to be Victims of the Ponzi Scheme
It appears that these creditors were victims of the Ponzi scheme as they indicated that the nature of their claims were funds entrusted for investments and real estate purchases. It was unclear, however, whether they were alleging that the firm had any involvement in Korn’s alleged Ponzi activities other than financial liability.
The creditors served the involuntary petition papers upon Arthur L. Spirn, P.C., the new law firm of the surviving partner, who moved his office to Garden City after the suicide.
The actual involuntary bankruptcy petition was rather short, consisting of only two pages and no schedules.
What is Involuntary Bankruptcy?
When creditors feel that their funds may have been diverted or embezzled, they have several options. They can litigate in state court or they can force the debtor into bankruptcy, which can often enable the litigation to proceed at a faster pace before a trustee who has considerable legal authority.
One of the powerful remedies a trustee in a bankruptcy case has is the ability to recover payments or wrongful transfers that the debtor made.
Once the court appoints a trustee, the trustee has the right to thoroughly examine the debtor and hold the debtor accountable. However, the trustee can also pursue other parties as well if the debtor transferred funds or valuable assets to those parties without receiving reasonable value in return..
In order to force a debtor into an involuntary bankruptcy, there must be at least three petitioning creditors who are owed at least $10,000 combined. The petitioning creditors must also be able to allege that there are no fewer than 12 creditors overall. In addition, the claims cannot be subject to a bona-fide dispute.
After the petitioning creditors file the involuntary bankruptcy petition, the Bankruptcy Court issues a summons that the debtor has 20 days to respond to. In the Korn & Spirn case, Judge Eisenberg issued the summons today.
Involuntary Bankruptcy Cases Involving Ponzi Schemes Seem to Be Getting More Widespread
The victims of Ponzi schemes often use involuntary bankruptcy proceedings to protect their rights. This is the case with Agape World and Bernie Madoff.
Earlier this week I attended the 2010 Bankruptcy Roundtable at the Nassau County Bar Association. One of the interesting presentations that night was given by David Mahoney, Esq. about issues that arise in bankruptcy proceedings involving debtors who had engaged in illegal Ponzi Schemes.
David is an associate in SilvermanAcompora, the firm of Chapter 7 Trustee Ken Silverman who is presiding over the bankruptcy case of Agape World. I wrote about that case previously — Ken Silverman Appointed Chapter 7 Trustee in Agape World Case .
Judge Eisenberg is also the judge in the Agape World case. She will certainly become a judicial expert in Ponzi schemes.
Written by Craig D. Robins, Esq.The consumer public can be very gullible. Long Island brokerage firm David Lerner Associates — exceptionally well known in the New York metro area for saturating the radio airwaves with advertising spots for its services — was just charged with ripping off consumers by charging excessive fees.
The Financial Industry Regulatory Authority (FINRA) has accused the Lerner firm of charging excessive markups on normally-safe municipal bonds and high-grade mortgage backed securities.
Consumers Fell for David “Poppy” Lerner — Coming Across as a Wise and Trustworthy Father Figure
I remember hearing ads for Lerner’s financial services business on the radio for almost 20 years. His ubiquitous spots seem to run nonstop night and day.In the past decade, Lerner came up with a family-friendly advertising campaign in which he calls himself “Poppy”, referring to the grandfatherly nickname his grandkids call him.
His radio spots created the impression that he was a fatherly figure, out to protect the retired consumer by selling them safe investments.
He also featured numerous spots from alleged customers providing testimonials, praising and thanking him. New Yorkers have heard, “Take a tip from Poppy” a million times.
As it turned out, he generated so much trust that well over a thousand consumers, who I suspect are mostly senior citizens investing their retirement savings, were lulled into, what appears to be, a false sense of security, believing Lerner would treat them well and charge them reasonable fees.
However, Lerner totally ripped off these consumers by unreasonably jacking up the prices that his Long Island financial services business charged, according to the FINRA complaint.
FINRA is now seeking to obtain full restitution for the consumers and a stiff fine against David Lerner Associates and his top-level broker, William Mason.
Incidentally, this is not the first time Lerner has been in trouble. He paid a hefty fine to NASD several years ago.
Many Consumers in Financial Difficulty are Just as Susceptible to Those Taken Advantage of by Lerner
Just last night I met with a very nice couple that consulted me for a bankruptcy filing. They, too, were taken advantage of by smooth-talking radio spokesmen.
They fell for an out-of-state debt settlement program that ripped them off for thousands of dollars while promising them the moon. The couple came to me after just being served with a collection law suit.
Every day I hear convincing radio spots and see slickly-produced television commercials touting debt settlement services. Many of these companies pour big bucks into the commercial production and use quality actors. The commercials boast (unrealistic) promises of curing debt problems.
Many of these spots claim that the debt settlement company is part of some federal debt settlement program, when there is no such thing. Yet, an incredible number of consumers are falling for this.
Two weeks ago I discussed the problems created by debt settlement companies who heavily advertise on radio and TV, making false promises: Debt-Settlement Firms Misled Consumers According to FTC .
Consumers need to become more aware that slick advertising does not make a company reliable. New York Commences Nationwide Investigation Into Debt Settlement Industry — Many Offers to Eliminate Credit Card Debt are False and Misleading.
The bottom line is that consumers need to be much more vigilant. Just because a radio or TV spokesperson appears trustworthy, does not mean that they are.