Friday, February 27, 2009

Thursday's Vote by Full House on Chapter 13 Mortgage Cramdown Delayed to Next Week Amid Frenzy of Amendments, Disagreements Among Democrats

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

This is an update of the Chapter 13 mortgage cramdown legislation since my Bulletin of February 19 called Prospects for Bankruptcy Mortgage Modification After Obama's February 18 Speech on the "Homeowner Affordability and Stability Plan".

1) Over last weekend and on Monday (2/23/09) Democratic leaders were giving signals that the legislation, having passed the House Judiciary Committee with amendments on January 27 (see the transcript of this hearing), would come to the full House for debate in the latter half of this week. On Monday, according to the news service Reuters, House Speaker Nancy Pelosi stated that a new bill repackaging the legislation would be introduced later that day (2/23) and could be debated on the House floor on Thursday (2/26).

2) Indeed on Monday H.R. 1106 was introduced. (It is titled the same as its predecessor, H.R. 200: Helping Families Save Their Homes Act of 2009). The new bill packages H.R. 200, basically as it was voted out of the House Judiciary Committee, with a number of important other mortgage-relief provisions, some of which, not coincidentally, are supported by Republicans. (Note that every Democrat on the Committee had voted for H.R. 200, every Republican had voted against it.)

the contents of amended H.R. 200, the new H.R. 1106 also:
  • Adds protection from liability for mortgage servicers who implement mortgage loan modifications.
  • Permanently increases deposit insurance limits to $250,000 for the FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration), and increases their borrowing authority.
  • Amends the Hope for Homeowners Program in various ways to make it more workable, including an incentive to servicers of up to $1,000.
  • Authorizes the federal VA, HUD and Agriculture Department to pay the guaranteed portion of any losses incurred by mortgage holders or servicers resulting from Chapter 13 mortgage cramdowns.
  • Fixes the Chapter 13 trustee fee at 4% for plan payments made under the new cramdown provisions, with court discretion to waive these fees for debtors with income less than 150% of the official poverty line.
3) As of Wednesday (2/25) this combined bill was slated for 1 hour of General Debate" by the full House on Thursday, February 26. In the meantime dozens of amendments were proposed before the deadline to do so, by both Democrats and Republicans, a number by the latter which would have deleted the mortgage cramdown provisions entirely.

On Thursday this General Debate session (see transcript) occurred from 12:15 p.m. to 1:30 p.m, with vigorous speeches on both sides (including a couple in support by one of the cosponsors, Rep. Earl Blumenauer of Oregon).

Here are representative excerpts from the debate, first from another cosponsor, Rep. Brad Miller, (D.) North Carolina:
[I]it is remarkable after all that has happened in the American economy to still hear the talking points of the banking industry and the securities industry repeated verbatim without criticism, simply parroted. That the banking industry is really all about helping folks, that's what caused the problem; that they were trying too hard to help people; that they loaned, perhaps not wisely but too well.
The reality is, this is not going to affect the availability of credit. We've got plenty to judge that by. There have been rafts of economic studies by real economists in peer review journals that show that when you compare lending practices in one place and another at the same time with different laws, there is very little, if any, difference.
Now, the minority has tried to tap into the American anger at banks by calling this a bailout. The reason that the banking industry is so virulently opposed to this, this is the only proposal to deal with the foreclosure problem that does not give them tax money. We aren't begging them, we aren't bribing them to do the right thing; we will make them do the right thing. They will modify mortgages in the way they should have, voluntarily, involuntarily in bankruptcy court if they don't do it voluntarily.
And by Lamar Smith, (R.) Texas, the Ranking Member of the House Judiciary Committee:
This bankruptcy provision not only will fail to solve the foreclosure crisis, but also will make the crisis deeper, longer and wider. Allowing bankruptcy judges to rewrite mortgages will increase the overall cost of lending. Lenders and investors will hesitate to put up capital in the future if they fear that judges will rewrite the terms of their mortgage contracts. Less available capital and increased risk means that borrowers will pay higher interest rates in the future.
Allowing bankruptcy judges to rewrite mortgages will also encourage borrowers to file for bankruptcy. Under this bill, a borrower will be able to reduce, for example, a $500,000 mortgage to $400,000. When housing prices rise in the future, that borrower has no obligation to pay back the
100,000 amount they crammed down. Thus, the borrower receives a $100,000 windfall. And experts predict that receiving this windfall will provide an incentive for borrowers to file for bankruptcy.
If bankruptcy filings increase as a result of this legislation, which is predicted, it is unlikely that the country's only 368 bankruptcy judges could handle the additional caseload in an effective manner. This will prolong the crisis as borrowers wait for their bankruptcy plan to be court-approved.
The House floor debate ended with "no resolution thereon."

4) Already shortly before the start of this General Debate reports were surfacing that a postponement of a vote would likely occur. Overnight stories after the floor debate from the Associated Press and the Wall Street Journal indicate that the immediate cause of the delay were concerns about the legislation raised by conservative "Blue Dog" Democrats and "centrist" pro-business New Democrat Coalition members in a private meeting earlier this week . The debate is feeding off of the perceived national angst of the "responsible homeowners" who are continuing to be current on their mortgages, that they not be made to pay for the mistakes of those who supposedly made foolish or even greedy choices. Republicans in the floor debate constantly raised the concern of favoring the "irresponsible" at the expense of the "responsible." For example, by Rep. Jim Jordan of Ohio: "94 percent of mortgages are being paid on time. It is wrong to tell those individuals they are now going to have to in some way compensate or not be able to get credit in the future to accommodate those individuals, that 6 percent, who have behaved in an irresponsible fashion."

A meeting is scheduled for next Monday evening (3/2/09) for Democrats with Housing Secretary Shaun Donovan about this bill and its role in the Administration's overall "Homeowner Affordability and Stability Plan." And next Wednesday, March 4, is the Administration's self-imposed deadline to provide additional details about that Plan, and some Democrats want assurances that non-bankruptcy mortgage modification efforts will be effective before approving bankruptcy cramdowns as a tool of last resort.

What This Delay Means
There continues to be strong indication, as of yet, that bankruptcy mortgage cramdown legislation in some form will pass, and do so within the next few weeks. The Wall Street Journal story above states that a vote on the House Floor is not expected until at least next Tuesday. The Associated Press story above reports that the Senate is expected to get back involved in the legislation "within two weeks." But the delay unquestionably favors creditor organizations and others who are putting tremendous effort into narrowing it. The current central question seem to be whether or not the legislation will be significantly restricted, such as being limited only to subprime mortgages. And as with all controversial bills, the pragmatic question is whether there will be enough votes to get past a potential Republican filibuster in the Senate. With the Minnesota Coleman/Franken Senate race still tied up in litigation, and with Sen. Arlen Spector of Pennsylvania being the only Republican Senator thus far publicly supporting the bill, there is certainly a question about whether there will be the necessary 60 votes needed to get to a floor vote in the Senate.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, likely by mid- or certainly late next week. PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Thursday, February 26, 2009

Ninth Circuit Affirms Oregon Bankruptcy Court that "Student Account and Deferment Agreement" Is a Nondischargeable "Loan" Under Section 523(a)(8)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

McKay v. Ingleson

Ninth Circuit Court of Appeals, Case No. 07-35362
February 23, 2009

"[W]hether a student’s financial arrangement with the university she attended constituted a nondischargeable educational loan under [§ 523(a)(8) of the] Bankruptcy Code."


The Ninth Circuit Panel held that the debt was dischargeable by comparing the terms of a written agreement memorializing the debt with the ordinary and dictionary meanings of the term "loan," by determining that in the agreement the "value of the actual benefit received" was sufficiently clear and it "sufficiently articulate[d] definite repayment terms," and finally that a "loan" need not include either an exchange of money or the repayment of "a sum certain."

McKay filed a Chapter 7 bankruptcy (pre-BAPCPA) listing Vanderbilt University as creditor under a “Graduate and Professional Student Account and Deferment Agreement” (“Agreement”). Neither she nor the University sought a determination of the dischargeability of the obligation under that Agreement. She received a discharge. About two years later, Vanderbilt University retained an attorney, John Ingleson, to collect the balance on the Agreement, resulting in a default judgment in the amount of $38,250.53 against McKay. This represented tuition, housing, dining charges for one term, plus less than $2,500 on a "Flexible Spending Account" of miscellaneous purchases, and late fees and collection costs.

Shortly thereafter McKay reopened her bankruptcy case and filed an adversary proceeding against the University and Ingleson, asking for a determination that the debt to the University had been discharged and alleging violation of the discharge injunction of § 524. Bankruptcy Judge Trish Brown granted summary judgment in favor of the University and Ingleson, and the U.S. District Court Judge Garr King affirmed. McKay appealed (apparently only as to Ingleson.)

The Statute

11 U.S.C. § 523(a)(8), as applicable to this pre-BAPCPA case, made non-dischargeable a “loan . . .made under any program funded in whole or in part by a . . .nonprofit institution.”

(This language is all still in the statute after BAPCPA, but there is additional language which may well have affected this opinion. See the addition of subsection § 523(a)(8)(B) stating in part: "any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code.")

The Agreement

The Ninth Circuit Panel provided only a few snippets of the Agreement:
After reciting that the parties “desire the convenience of deferring payment for . . . educational services,” the Agreement states that the “[s]tudent, as purchaser of the educational services,” would be billed monthly. “Any balances not paid by the end of each calendar month [would] be assessed a late fee of one and one-half (1.5%) percent per month.” The Agreement further states that "[a]ll amounts deferred are due not later than” a specific date close to the end of each semester.
The unpublished U.S. District Court opinion below also noted that the "Agreement provides for recovery of attorney fees and collection costs incurred in collection of unpaid balances due under the Agreement," and made clear that debtor executed this Agreement.

The Rationale
In determining whether the Agreement was a "loan" the Ninth Circuit Panel focused on the following:
1) The "ordinary meaning of such term": Even accepting McKay's argument that "the Agreement is a revolving credit account (specifically, a credit card) rather than a loan," "revolving credit accounts are considered loans in everyday parlance."
2) Dictionary definition of "loan": "[s]omething lent for the borrower's temporary use on condition that it or its equivalent be returned."
3) Money is not necessarily exchanged between lender and borrower, such as in the "creation of debt by a credit to an account with the lender upon which the debtor is entitled to draw immediately."

The Panel then primarily relied on an Eighth Circuit BAP opinion Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449, (B.A.P. 8th Cir. 1998). There the debtor attended classes without prepayment of the tuition but rather with a promise to pay for that tuition later. This promise was memorialized by a promissory note. The BAP reasoned that "the College was, in effect, 'advancing' funds or credits to [debtor's] student account," and she "drew upon these advances through immediate class attendance." The BAP determined that the lack of money changing hands was "immaterial."

The Ninth Circuit asserted that the "Johnson court’s analysis is persuasive, and we find no relevant differences between the Agreement here and the arrangement in Johnson."

The debtor raised a number of arguments that the Agreement did not constitute a "loan," none of which the Ninth Circuit found "persuasive":
1) "[T]he loan payment must 'reflect the value of the benefit actually received, rather than some other ill defined measure of damages or penalty'.”: The Court agreed with this principle but ruled that "the cost of tuition, housing, board, and various other items and fees were readily available to her, and the amount she was required to repay was determined by the costs of these items."
2) "[T]o constitute a loan, the Agreement would have had to sufficiently articulate definite repayment terms.": Again, the Court agreed with debtor's principle, but determined that the Agreement's statement that " '[a]ll amounts deferred are due not later than' a specific date close to the end of each semester" was sufficient to meet that principle.
3) "[T]he loan agreement did not indicate a sum certain": The Court responded that while this may be "one of the factors that may be considered in determining whether a loan exists," "[w]e are not convinced that a loan requires a sum certain."

Local Connections
Ninth Circuit opinions come relatively rarely from the Oregon bankruptcy court. This one involved a 2003 Chapter 7 case filed on behalf of the debtor by Gary L Marcy of Snyder & Associates; in 2003 Terrance J. Slominski, Slominski & Associates reopened the case and filed the adversary proceeding on debtor-plaintiff's behalf, as well as filed the appeal to the District Court and then to the Ninth Circuit. Tara Schleicher of Farleigh Wada Witt, was attorney for Vanderbilt University in the adversary proceeding and the appeal to the District Court. David B. Gray of Swensen & Gray was attorney for John Ingleson in the adversary proceeding and both appeals. Oral argument before the Ninth Circuit panel was in Portland on December 10, 2008, with Circuit Judges Diarmuid F. O’Scannlain, Susan P. Graber and Jay S. Bybee, with Judge O'Scannlain writing the opinion for the panel.


In my opinion, the Ninth Circuit panel's 7-page opinion is not persuasively written. For example, the opinion relies heavily on the Eighth Circuit's Johnson opinion but provides very little about the terms of the financial agreement there before stating summarily that there were "no relevant differences." What little Judge O'Scannlain's opinion does provide about the agreement in Johnson, for example that it included a promissory note, made is sound more like a "loan" than the terms in the present case. It would appear that this case's lack of any conventional promissory note language clearly stating a debt and a commitment to repay it is a significant difference which merited attention. In addition it was at least bad form in the recitation of the facts to call the financial arrangement at issue a loan when whether or not it should be so characterized is what needed to be determined. District Court Judge Garr King's unpublished opinion of two years ago is just slightly longer but is much better written, cites better authorities, and presents the rationale more convincingly.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Wednesday, February 25, 2009

New Wife Creditor Wins Nondischargeability Battle With Ex-Wife Debtor: A Judgment for Statutory Attorney Fees Alone Fits Within Section 523(a)(6)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Suarez v. Barrett (In re Suarez)
Ninth Circuit BAP No. SC-07-1401-MoJuKw
January 16, 2009

In "a case of apparent first-impression in the Ninth Circuit," may a Chapter 7 debtor "discharge a state court judgment for attorneys fees and costs under § 523(a)(6) of the Bankruptcy Code in which that is the only monetary liability imposed on her for civil contempt in violating a court order."

No, she may not. Since Suarez's conduct leading to the contempt judgment was "willful and malicious," the debt arising from that conduct constitutes an "injury" under § 523(a)(6). The lack of any underlying compensatory damages in the judgment is not a meaningful distinction; a judgment debt consisting only of statutory attorney fees and costs arising "as a result of" Suarez’s willful and malicious violation of an injunction is nondischargeable.

Good Summary of the Law of § 523(a)(6)
Because debtor-defendant was not represented by counsel on appeal, "in the interest of completeness," the BAP "address[ed] briefly all of the relevant issues presented in a § 523(a)(6) determination such as this." So this opinion is a handy outline of the elements of a § 523(a)(6) claim.

Barrett won a state court judgment against her husband's ex-wife, Suarez, for contempt of a court injunction, which had been imposed because of an alleged assault by Suarez on Barrett. The judgment required Suarez to serve 5 days in jail and to pay $11,573 in Barrett's attorney fees and costs. Suarez filed a Chapter 7, and Barrett sought a declaration of nondischargeability of her monetary judgment as a willful and malicious injury, under section 523(a)(6). The bankruptcy court determined that the judgment was nondischargeable, and Suarez appealed.

Debtor's Argument
Suarez argued that
since Barrett received no damage award for any injury, and the Fees and Costs Judgment awarded was merely statutory and penal in nature and not compensatory or punitive, it fails to satisfy the elements of a willful and malicious “injury” under section 523(a)(6) and is therefore dischargeable.
A Summary of the Elements of a § 523(a)(6) Claim
§ 523(a)(6) excludes from discharge "any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity."
  • "The creditor must prove that the debtor’s conduct in causing the injuries was both willful and malicious."
  • "Willfulness requires proof that the debtor deliberately or intentionally injured the creditor, and that in doing so, the debtor intended the consequences of his act, not just the act itself."
  • "The debtor must act with a subjective motive to inflict injury, or with a belief that injury is substantially certain to result from the conduct."
  • "For conduct to be malicious, the creditor must prove that the debtor: (1) committed a wrongful act; (2) done intentionally; (3) which necessarily causes injury; and (4) was done without just cause or excuse."
Nondischargeability of Contempt Sanctions
The BAP here did not read § 523(a)(6) or any other part of § 523(a) to make contempt sanctions per se nondischargeable. Without any controlling Ninth Circuit law, while acknowledging "[t]wo frequently cited bankruptcy court cases holding contempt judgments nondischargeable" "as a matter of law," the Panel relied chiefly on a 2001 Eighth Circuit decision, Siemer v. Nangle (In re Nangle), 274 F.3d 481 which did not go so far. The rule of Nangle is: "when the debtor’s conduct leading to the contempt judgment was 'willful and malicious,' then the debt arising from that willful and malicious conduct suffices as an injury and is nondischargeable under section 523(a)(6)."

Application of Nangle Standard
On the "willful" element, the Panel held "that Suarez's Injunction violations were clearly 'willful' within the meaning of section 523(a)(6) because they were aimed at Barrett and substantially certain to result in injury to Barrett." And Suarez' conduct was “malicious” "because she knowingly and intentionally violated the Injunction, her conduct was wrongful, done without just cause or excuse, and that it caused Barrett “injury” in the form of attorneys fees and costs."

"Injury" Without Compensatory Monetary Award
As stated above in the summary of the elements of a § 523(a)(6) claim, the creditor must show that the intentional, wrongful act necessarily caused injury. Is this element met when a judgment excludes any compensatory damages, includes only statutory attorney fees and costs? The Panel found no Ninth Circuit or any other circuit case law on this narrow question, but analogized to a Ninth Circuit opinion holding that a judgment for sanctions against a debtor for filing a frivolous appeal was not dischargeable regardless that the judgment was only for attorney fees and costs.

The Conclusion
"Although we appreciate the fine line Suarez would have us draw between contempt judgments with and without compensatory awards, it is clear that the Fees and Costs Judgment debt was 'as a result of,' 'with respect to' and 'by reason of' Suarez’s willful and malicious violation of the Injunction. Barrett’s action against Suarez arose solely out of those wrongful acts . . .." Therefore, that judgment debt is not dischargeable under § 523(a)(6).

The Concurring Opinion
The Concurring judge believed that the conclusion of nondischargeability was plainly dictated by the 1998 Supreme Court's opinion, Cohen v. De La Cruz, 523 U.S. 213: "Although there was an underlying monetary judgment in Cohen, that factual circumstance did not impact the Supreme Court’s statutory analysis, nor should the lack of a damages judgment here impact ours" Since the judgment here "unquestionably is 'as a result of', 'with respect to' and 'by reason of' debtor's violation of the injunction and court order," "[t]he plain meaning of § 523(a)(6) as construed by the Cohen court compels our conclusion that the fees and costs are nondischargeable."

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Monday, February 23, 2009

What Bankruptcy Attorneys Need to Know About Obama's "Homeowner Affordability and Stability Plan" (Other Than the Mortgage Cramdown)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

All eyes of the bankruptcy world are fixated on a single portion of President Obama's "Homeowner Affordability and Stability Plan" he presented last week, the Chapter 13 mortgage cramdown. But he talked about that for just one three-sentence paragraph towards the end of his 42-paragraph speech, and it takes up just one sentence of the dense 3-page White House "Executive Summary" of the Plan. Every bankruptcy attorney, especially but not just those representing debtors, needs today to understand what is in the mortgage cramdown legislation, and to monitor its progress. But both creditor and debtor attorneys also need to know what else the new administration is doing on the home foreclosure front. The initiatives announced last week will have direct consequences throughout the consumer debtor-creditor world.

This Bulletin briefly summarizes the "Homeowner Affordability and Stability Plan" as pertinent to debtor-creditor attorneys, and gives quick access to resources related to it.

Note that the Administration is preparing detailed guidelines to be released on March 4, and various component of the Plan are to go into effect that day.

The Homeowner Affordability and Stability Plan:
Has 3 components (the quoted titles are from the Administration's Fact Sheet):

1. "Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices"
New refinancing program for homeowners:
  • with conforming Fannie Mae and Freddie Mac mortgages
  • who are now current on their payments
  • who can't refinance because of debt-to-equity rules
Loosening these debt-to-equity rules will enable refinancing at lower, fixed interest rates "for an estimated 4 to 5 million currently ineligible homeowners."
2. "A $75 Billion Homeowner Stability Initiative to Prevent Foreclosures and Help Responsible Families Stay in Their Homes"
A loan modification program for homeowners.
  • who are either underwater or have high mortgage debt compared to income
  • who are either not current or at risk of default
"Shared Effort to Reduce Monthly Payments."
  • Lender reduces interest rates so the monthly payment is no more than 38% of income
  • Principal reductions at option of lender with government partially sharing in these costs
  • Government will share costs with the lender to bring interest rate down to 31%
  • Servicers receive $1,000 for each qualifying modification, plus month fees as long as borrower stays current, up to 3 years
  • Additional incentive payments to mortgage holders and to servicers if modification occurs while at-risk homeowner is still current
  • $10 billion partial guarantee for lenders to encourage modification in face of potential further price declines
  • Modification lasts 5 years to promote long-term affordability, then interest gradually increases back to pre-modification rate
3. "Support Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac"
Increase funding commitment to Fannie and Freddie to strengthen mortgage markets and affordability.

Continued purchase of Fannie and Freddie mortgage-backed securities by Treasury Department to aid stability and liquidity

Increase allowed mortgage portfolios by $50 billion to $900 billion.

Resources for Attorneys (AND for Clients, especially the ones marked with " ** ")

1. The briefest outline of the "Homeowner Affordability and Stability Plan," the 3-page Executive Summary referred to above.

2. A more detailed outline, fleshing out the above one, the 8-page Fact Sheet, also mentioned above.

3. **A practical 5-page Questions and Answers for Borrowers about the Homeowner Affordability and Stability Plan, with a section for "Borrowers Who Are Current on Their Mortgage Are Asking," and for "Borrowers Who Are at Risk of Foreclosure Are Asking."

4. **A financial description of three hypothetical homeowners and how they could be helped under the Plan: "Support Under the Homeowner Affordability and Stability Plan: Three Cases"

5. A cautiously optimistic Forbes article called Fixing Foreclosures: Carrots, Sticks And Questions, with the byline: "Obama's plan is likely to be the most effective to date, but many details are still unknown." Contains an interesting suggestion by a former HUD General Counsel under President Clinton, Howard Glaser, that the voluntary mortgage modifications ought to contain a provision that if modified they will be immune from Chapter 13 cramdowns, even if the modification is not successful. "You say that, and investors will be running--stampeding--to modify as many loans as they can."

6. A foreclosure defense litigator's insightful blog titled "The proposed bankruptcy amendment will even help those who don't want to file" shows how the non-bankruptcy modification arena would change drastically once the Chapter 13 cramdown law passes and the lenders' entire motivation structure changes with it.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Friday, February 20, 2009

Bankruptcy Code Preempts State Fair Debt Collection Claim, and Precludes Federal One, Against Creditor Filing Proof of Claim on Time-Barred Debt

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

B-Real, LLC v. Chaussee (In re Chaussee)
Ninth Circuit BAP No. WW-08-1114-PaJuKa
December 18, 2008


The act of a creditor filing of a proof of claim in a bankruptcy case on a debt that is time-barred does NOT of itself subject the creditor "to liability for violation of state and federal fair collection laws." State consumer protection laws which might prohibit such creditor behavior are preempted under the Supremacy Clause, and the federal Fair Debt Collection Practices Act is precluded by the claim-determination scheme of the Bankruptcy Code. This was an issue of first impression in the Ninth Circuit, resolved in a lengthy opinion (43 pages, including the 11-page concurring opinion).

Procedural Context

A Chapter 13 debtor in the Western District of Washington filed an adversary proceeding against a collection company, B-Real, LLC, for violations of the Washington Consumer Protection Act and the federal Fair Debt Collection Practices Act. The alleged violations arose from B-Real "filing two proofs of claim in Debtor’s bankruptcy case for debts Debtor maintains she did not owe and were time-barred." Bankruptcy Judge Karen Overstreet denied a motion to dismiss Debtor's adversary proceeding complaint for failure to state a claim, and B-Real appealed.

The Preempted State Law Claim

The BAP stated its "task in resolving the preemption issue here is to determine whether the [Washington Consumer Protection Act], as a state regulation, is consistent with the structure, purpose, and operation of the Code as a whole." It relied primarily on a 1996 Ninth Circuit opinion, MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910. There the court of appeals did not allow a Chapter 11 debtor to sue a creditor for malicious prosecution in federal district court, after the creditor had filed a proof of claim in bankruptcy court. That proof of claim had been disallowed after objection by the debtor. The Ninth Circuit had held that debtor's state law malicious prosecution claim "was completely preempted by the structure and purpose of the [Bankruptcy] Code."

The Ninth Circuit relied on MSR Exploration and its progeny for the following arguments for preemption:
1) "A comprehensive federal system": the detailed Bankruptcy Code is intended by Congress to be a comprehensive federal system to bring together and resolve all of the rights and duties of debtors and creditors.
2) Uniformity: there is a "need for uniformity in bankruptcy law [so that is] a factor militating against allowing the assertion of state law claims against actors in bankruptcy cases."
3) Would deter participation in the claims process: "[T]he threat of later state litigation may well deter debtors and creditors alike from participating in bankruptcy cases." "Allowing debtors to recover under the CPA solely because a creditor filed a proof of claim may skew the incentive structure of the Code and its remedial scheme and could discourage creditors from filing a claim." It "might encourage debtors to dispense with the claim objection process in favor of an adversary proceeding, needlessly casting all concerned into costly litigation."
4) Misconduct in connection with bankruptcy case: Although "not all state claims 'related to bankruptcy' may be preempted by the Code, in [its prior] decisions the Ninth Circuit and this Panel have steadfastly held that the Code preempts substantive state law claims and remedies for alleged misconduct that occurs in connection with a bankruptcy case."
5) Broad definition of "creditor": Although B-Real's claim was allegedly not against debtor but someone with a similar name, because of the Code's broad definitions of "creditor" and "claim," disputed claims must nevertheless be resolved within the bankruptcy system.
6) Sufficient bankruptcy sanctions: "[T]he availability of sanctions for the filing of an improper claim in a bankruptcy proceeding, whether through the use of Rule 9011 or § 105(a), reflects Congress’s intent that the law relating to bad faith and willful misconduct in bankruptcy proceedings be developed case-by-case in the context of the federal bankruptcy law, not by application of state law."

The Precluded Fair Debt Collection Practices Act Claim

The BAP relied greatly on the 2002 Ninth Circuit opinion Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, in which the Court of Appeals had upheld a federal district court's dismissal of a class action case filed on behalf of former Chapter 7 debtors on a Fair Debt Collection Practices Act ("FDCPA") claim against a creditor for accepting house payments on a discharged debt. The Ninth Circuit panel had held that a FDCPA-based alleged violation of a bankruptcy discharge is precluded by the Bankruptcy Code.

In Walls, the Ninth Circuit highlighted that debtor's FDCPA claim was exclusively based on an alleged violation of the bankruptcy discharge. In that prior case the Court reasoned:
The Bankruptcy Code provides its own remedy for violating § 524, civil contempt under § 105. To permit a simultaneous claim under the FDCPA would allow through the back door what Walls cannot accomplish through the front door—a private right of action. This would circumvent the remedial scheme of the Code under which Congress struck a balance between the interests of debtors and creditors by permitting (and limiting) debtor’s remedies for violating the discharge injunction to contempt. “[A] mere browse through the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code . . . demonstrates Congress’s intent to create a whole system under federal control which is designed to bring together and adjust all the rights and duties of creditors and embarrassed debtors alike.” [Citing MSR Exploration.]
The BAP here also relied on MSR Exploration's emphasis on the Bankruptcy Code being a " 'whole system' designed to comprehensively define all rights and remedies of debtors and creditors" The Panel made much of the fact that MSR Exploration "dealt with precisely the type of creditor conduct involved here, the filing of a disputed proof of claim in a bankruptcy case." Even though MSR Exploration dealt with the preemption of state law claims, the Panel found the same reasoning "also applicable in analyzing whether Debtor’s FDCPA claim is precluded under these facts." It held that "where the [Bankruptcy] Code and Rules provide a remedy for acts taken in violation of their terms, debtors may not resort to other state and federal remedies to redress their claims lest the congressional scheme behind the bankruptcy laws and their enforcement be frustrated."

The Panel pointed out how the procedures in the bankruptcy system for filing and resolving objections to claims "clearly conflict" with the detailed debt validation procedures of the FDCPA, and therefor "the provisions of both statutes cannot compatibly operate."

The Panel also found unpersuasive debtor's argument that the bankruptcy Code does not provide appropriate remedies for dealing with "a creditor's misconduct in filing an improper proof of claim." It found debtor's burden of objecting to a claim to be reasonable, a sensible responsibility which debtor bought into with her voluntary filing of the bankruptcy case. The Panel also found that Rule 9011 "provides an adequate remedy for dealing with baseless proofs of claim," along with the court's authority under § 105(a) “to impose sanctions for a pattern of bad faith conduct that transcends conduct addressed by particular rules or statutes.”

The Panel finally noted that "we join what appears to be a significant majority of courts from across the country that have come to the same conclusion" that the Bankruptcy Code precludes a debtor's FDCPA claim for the filing of a proof of claim.

The Concurring Opinion

The concurring judge got to the same conclusions that the state law was preempted and the FDCPA was precluded, but wrote to argue that "the act of filing a proof of claim is neither a violation of the CPA by definition nor a debt collection act under the FDCPA."

The state Consumer Protection Act addressed "unfair acts or practices" occurring "in the conduct of any trade or business." The judge believed that the "filing of a proof of claim cannot reasonably be construed" to be conduct within that language.

The judge also argued that the filing of a proof of claim is not a debt collection activity under the FDCPA, since the former is part of a debt validation procedure in bankruptcy court while the latter governs "the methods used to collect a debt" and has "nothing to do with whether the underlying debt is valid." And the purpose of the FDCPA, protecting consumers from abusive debt collectors, is not "implicated" in the claims procedures in consumer bankruptcy cases "because the claims process is highly regulated and court controlled."

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Thursday, February 19, 2009

Prospects for Bankruptcy Mortgage Modification After Obama's February 18 Speech on the "Homeowner Affordability and Stability Plan"

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

President Obama, as anticipated, included a reference to the pending bankruptcy mortgage cramdown legislation in a major speech yesterday presenting his "Homeowner Affordability and Stability Plan." It was a short reference--three sentences in his presentation of his multi-pronged plan to address the foreclosure crisis, perhaps soft-pedaled because it is controversial. Congressional Democratic leaders now say they intend to introduce a major housing package next week incorporating the President's initiatives, including the cramdown bill. The House version of that bill, HR 200, The Helping Families Save Their Homes in Bankruptcy Act of 2009, was passed, with amendments, by the House Judiciary Committee on January 27, 2009.

President Obama's Speech
According to a transcript of his Feb. 18 speech ("as prepared for delivery"), Obama said:
Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure.

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.
A three-page "Executive Summary" of the "Homeowner Affordability and Stability Plan" provided by the White House contained one sentence on the issue: "Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options"

Congressional Intentions
According to an article yesterday in CQ Politics (by Congressional Quarterly, Inc.), HR 200 as "marked up" and passed by the House Judiciary Committee "is expected to make up a portion of the major housing package." According to this source the House Financial Services Chair Barney Frank and Senate Banking Committee Chair Christopher Dodd "have come to an agreement in principle on the package," which Frank "expects the bill on the floor sometime next week." An earlier article in the Washington Post also cited Barney Frank as the source for similar information.

Other Developments
An article was recently published in the Harvard Law and Policy Review unabashedly promoting Chapter 13 mortgage cramdown. Its author is Adam J. Levitin, an associate professor at Georgetown University's law school. He is becoming a vocal and often-quoted proponent of the legislation. He testified at the House Judiciary Committee's hearing on January 22, and his 27-page written testimony there is an excellent both scholarly and very readable argument in support of mortgage cramdowns, especially in its refutation of the positions of the credit industry. This Harvard Law and Policy Review article is a much shorter--9 page--and still excellent explanation of the problems with non-bankruptcy modifications, reasons why the Chapter 13 option is necessary, and reasons why the detractors are wrong.

Creditor organizations continue to vigorously oppose the legislation. After the President's speech, the Mortgage Bankers Association issued a press release which included the following:
David Kittle [MBA's Chairman] added the following regarding the proposal to allow bankruptcy judges to treat the underwater portion of the mortgage as unsecured debt:

“We are disappointed to see the President endorse bankruptcy as a means to help delinquent borrowers. Our fear is that any borrower who can’t be helped by this program will have a hard time being helped by bankruptcy. So their bankruptcy plan will fail, they will lose their home anyway, and will now be stuck with the black mark of bankruptcy on their record; inhibiting their ability to buy or rent a home in the future.”

And an article of a few days ago by the conservative Heritage Foundation titled "Mortgage Modifications in Bankruptcy Would Undermine Homeownership, Prevent Few Foreclosures" addresses the following five "myths":
  1. Current law provides no relief from fore­closure for primary residences.
  2. Allowing strip-down will not increase the cost or reduce the availability of mortgage loans.
  3. The Bankruptcy Code allows mortgages on vacation homes, boats, and expensive cars to be stripped down.
  4. Allowing strip-downs will help consumers.
  5. Allowing strip-downs will help the economy.
However, as of yet even creditor organizations concede, publicly and privately, that bankruptcy mortgage cramdown in some form will very likely pass into law in the current legislative session.

The next Bulletin updating this legislation will be published on this website-- soon as there is any new activity in Congress, likely by late next week.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys