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Case Bites: Interesting Issues and Decisions from This Week’s Cases

In a Chapter 20 cramdown of a junior lien, can the junior lienholder file an unsecured claim for the amount of the voided lien? (9th Cir. BAP) Can an heir to real estate cram down a reverse mortgage in chapter 13? (Bankr. S.D.Miss.) Does a non-filing ex-spouse have to ask the bankruptcy court for permission to modify a domestic support order in the divorce case? (Bankr. N.D.IL.) Is the confirmation of a chapter 13 plan res judicata on the amount of mortgage arrears? (Bankr. W.D.PA.) Can a bankruptcy abstain from reopening a bankruptcy when the Debtors have been litigating dischargeability in state court? (Bankr. N.D.GA.) Is surrender of secured collateral post-confirmation per se bad faith to justify denial of the plan amendment? (Bankr. E.D.WI.)

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Bankruptcy Court Penalizes Debtor’s Counsel For Filing Motions to Pay Filing Fee in Installments When Counsel Received $500.00 Pre-petition Retainers, Filing Petitions Without Wet Signatures and Commingling Funds

On August 5, 2019, the Bankruptcy Court for the Western District of Pennsylvania entered an order sanctioning Debtors’ counsel. In this miscellaneous proceeding, the Court examined the practices of a large volume bankruptcy filer in multiple cases. Compare this result with the disbarment and report to the UST, USA, and to other disciplinary bodies in In re Pina, No. 18-15928-JKO, 2019 Bankr. LEXIS 1915, at *1 (Bankr. S.D. Fla. June 25, 2019).

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Bankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage

In 2004 the Debtors purchased their home with a $209,000.00 purchase money deed of trust held by Bayview Loan Servicing (Bayview). In 2006 the Debtors obtained a second mortgage from Madison Management Services (Madison). In 2017, the Debtors and Bayview entered into a loan modification agreement that provided for a new principal balance of $257,566.94.

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Case Bites: Interesting Issues and Decisions from This Week’s Cases

Can a chapter 13 plan modify student loans so that interest does not accrue during the bankruptcy? (Bankr. D.CT. July 23, 2019) Can an above-median income debtor’s confirmed chapter 13 plan payment be modified 18 days post-confirmation using schedules I and J? (Bankr. S.D.IL.) Is an owner/manager of an incorporated creditor liable for a creditor’s violations of the automatic stay? (Bankr. S.D.TX.) Can a debtor change the venue of their case? (Bankr. D.Tenn.) Does a chapter 13 debtor have to file her tax returns before the deadline in order to have them available at the 341 meeting of creditors? (Bankr. E.D.WI.)

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Bankruptcy Court Denies Disqualification of Creditor’s Counsel/Co-Defendant in Adversary Proceeding for Violation of the Automatic Stay

The debtor filed a chapter 13 bankruptcy case the day before the foreclosure sale of his residence. The debtor notified creditor’s counsel of the filing but counsel proceeded with the foreclosure sale regardless. Creditors’ counsel believed the residence was not property of the estate based on the local land records.

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Bankruptcy Court Rules Judgment Lien Only Partially Avoided When Some Equity Exists Under Section 522(f)(1)(A)

The value of Debtor’s real estate was $90,147.00. The first mortgage was $70,100.13 and the judicial lien was $88,609.56. The Debtor’s homestead exemption is $15,000. 735 ILCS 5/12-901. The Bankruptcy Court addressed Debtor’s argument that when a judicial lien partially impairs an exemption, it can be fully avoided under Section 522(f)(1)(A).

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Siding with Minority, Bankruptcy Court Rules the 365-Day Anti-Modification Rule of Section 1325(a)(9) Applies to Vehicles

Within one year of filing his chapter 13, the Debtor jointly purchased a vehicle and cosigned a note with his son. The son does not live with the Debtor and the Debtor has not used the vehicle. At filing, the Debtor proposed to cram down the total amount owed to the value of the vehicle. The Debtor argued that the 730-day anti-modification provision in the hanging paragraph of Section 1325(a)(9) doesn’t apply because the vehicle was not purchased for his benefit.

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Bankruptcy Court Rules Vintage Undrivable Car Not Entitled to Vehicle Exemption

The Debtors filed a chapter 7 bankruptcy and listed a 1937 Ford Tudor as an asset. The vehicle was described as “Bad Transmission — fair condition.” At filing the transmission was inoperable and the seats were removed. As such, the vehicle was not capable of being driven or operated on the roadway. However, the vehicle was registered and insured. After the bankruptcy was filed, the car was repaired and operable. The Debtors claimed the vehicle exempt under the Idaho motor vehicle exemption ($7,000.00) which provides in relevant part “[a]n individual is entitled … to an exemption of one (1) motor vehicle to the extent of a value not exceeding seven thousand dollars ($7,000).” Idaho Code § 11-605(3).

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Taggart Watch – Bankruptcy Court Asserts Authority Citing Taggart and Fines PHH for Violations of Rule 3002.1

This case consolidated three bankruptcy cases with similar facts. In two cases (Gravel and Beaulieu), the Court entered an order determining that the Debtors had cured all prepetition defaults and were current on all post petition mortgage payments (Debtor Current Orders) to the PHH Corporation (PHH). Thereafter PHH issued incorrect mortgage statements including charges that contradicted the Debtor Current Orders. The chapter 13 trustee filed a motion for sanctions based on PHH’s flagrant violation the orders and of Fed. R. Bankr. P. 3002.1.

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Taggart Watch – District Court Discusses Contempt Against Third Parties Who Aid or Abet Contemnor

The most recent case to cite Taggart v. Lorenzen, 139 S. Ct. 1795 (2019) is a non-bankruptcy case discussing the enforcement of an injunction against the defendant and against third parties conspiring to violate the injunction. This case is interesting as it raises the possibility of enforcing the discharge order against not only the creditor but other third parties who conspire with the creditor to violate the discharge order.

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Bankruptcy Courts Have Discretion to Allow Chapter 13 Debtors to Make a Curative Payment After Expiration of the Plan Duration Says District Court

On June 25, 2019 the District Court for the Eastern District of Michigan reversed and remanded a decision by the Bankruptcy Court about late plan payments. The Debtors were in a 60 month plan which provided for monthly payments and payment of their 2017 tax refund. At the expiration of the 60 month plan, the Debtors had not paid the refund to the Trustee. The Trustee filed a motion to dismiss and shortly thereafter the Debtors submitted their refund to the Trustee. The Debtors asked the Court to deny the motion to dismiss arguing the Bankruptcy Court had discretion to allow them to cure the default.

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Bankruptcy Court Suspends Counsel for Changing Schedules After Signing. Employing “Trust But Verify” the Court “Peeked and Shrieked.”

It’s going to be a bad opinion when the judge brings up Pandora’s Box in the beginning of the opinion and titles the last section of the opinion “This Is The End.” On June 25, 2019 the Bankruptcy Court for the Southern District of Florida, in a 172 page opinion (including attachments), suspended an attorney from practice for two years before the Bankruptcy Court, terminated her CM/ECF privileges, referred the attorney to District Court’s attorney review committee and the Florida Bar with recommendations to disbar, and referred the attorney to the United States attorney for investigation.

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Case Bites – Interesting Bites From This Week’s Cases

If service of an adversary complaint is not completed until 21 days after the Clerk issues the summons, and no response is filed, can a Court sua sponte deny a request for entry of default judgment for improper service? Can a chapter 13 Trustee avoid the claim of a creditor who did not perfect its security interest until after a chapter 13 is filed? Are negative procedural rulings against a party grounds to recuse the bankruptcy judge for bias? What is the standard to challenge a trustee’s decision to settle litigation? Can a motion for sanctions under Rule 11 be dismissed as untimely if filed after final adjudication of the offending pleading or motion?

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7th Circuit Rules Chicago Can Not Ignore the Automatic Stay and Hold Vehicles Until Tickets are Paid

On June 19, 2019 the 7th Circuit Court of Appeals affirmed the decisions of the lower bankruptcy courts. In four chapter 13 bankruptcies, the City of Chicago impounded vehicles owned by the Debtors for failure to pay multiple traffic fines. After the Debtors filed chapter 13, the City refused to return the vehicles claiming they needed to maintain possession to continue their perfection on them and wouldn’t return the vehicles until the fines were paid.

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Bankruptcy Court Rules Exemption Planning Doesn’t Justify Exemption Disallowance Unless there is Fraudulent Conduct

On June 14, 2019 the Bankruptcy Court for the Western District of Wisconsin overruled the chapter 7 trustee’s objection to a claimed exemption. Prior to filing their bankruptcy, the Debtors sold non-exempt property including stock and four parcels of real estate. They deposited the funds ($177,000.00) in a Prudential annuity account. Fourteen (14) days later, the Debtors filed a chapter 7 bankruptcy and claimed the funds as entirely exempt under Wisconsin’s retirement benefits exemption.

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District Court Examines Split in Authority Whether Religious and Charitable Donations Are Permissible Expenses In Determining Undue Hardship in Student Loan Discharge Proceeding

On June 12, 2019 the United States District Court for the Southern District of New York entered an order affirming the order of the bankruptcy court. On June 20, 2017 the Debtor filed a chapter 7 bankruptcy and received a discharge. He filed an adversary against the Educational Management Corporation (“ECMC”) seeking a discharge of his student loans under 11 U.S.C. §523(a)(8).

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DC Circuit Rules Waiver of Res Judicata Not Binding on the Court and Once Raised A Debtor Needs to Submit Evidence To Support Mistaken Nondisclosure

On June 7, 2019 the United States Court of Appeals for the District of Columbia Circuit addressed whether the failure to disclose their discrimination claims judicially estopped them from participating in a lawsuit. The Debtors were part of a 47-member class action against the District of Columbia (DC) alleging race and age discrimination.

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Mom’s Pre-petition Payoff of Debt Considered Preferential Transfer Says 10th Circuit BAP

On June 4, 2019 the Bankruptcy Appellate Panel for the 10th Circuit Court of Appeals (BAP) affirmed the decision of the bankruptcy court. Prior to filing bankruptcy, the Debtor owed over $20,000.00 to his attorneys, Stevens, Littman, Biddison, Tharp and Weinberg, LLC (Law Firm). The Debtor signed a promissory note with his mother in which he promised to pay his mother $21,672.65. Three days later Debtor’s mother paid $21,672.65 to the Law Firm. The terms of the loan indicated the money was to be used exclusively to pay the debt to the Law Firm and was not a general loan to be used for any other purpose. The payment was made directly by Debtor’s mother to the Law Firm from an account owned solely by her. Of importance, the Debtor, in his Statement of Financial Affairs indicated that his mother paid the Law Firm on his behalf.

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District Court Holds Condo Association’s Interest Is Not Protected by 1322(b)(2) Because It Is Both A Security Interest and a Statutory Lien (Subtitle: Good Case to Brush Up on Exceptions to Anti-Modification Rule of 1322(b)(2) Regarding HOA and Condo Association Liens)

On May 21, 2019, the United States District Court for the District of New Jersey reversed the dismissal of the Debtor’s chapter 13 petition and remanded it for a redetermination of the feasibility of the proposed plan.  The Debtor was represented by NACBA member Herbert B. Raymond.

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5th Circuit Rules That Bankruptcy Courts May (But Not Shall) Allow Reimbursement of Fees for Filing, Credit Counseling and Credit Reports to Debtor’s Attorneys in Chapter 13

On May 13, 2019, the Fifth Circuit Court of Appeals ruled on an appeal stemming from several cases involving no-money-down chapter 13 business models, wherein the debtor’s attorney agrees to advance the costs of filing fees, credit counseling course fees, and credit report fees on behalf of the debtor. The case pitted the Bankruptcy Court for the Western District of Louisiana (represented by two chapter 13 trustees) against the chapter 13 debtor’s bar.

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