By Gretchen MorgensonEven as Wells Fargo was reeling from a major scandal in its consumer bank last year,officials in the company’s mortgage business were putting through unauthorizedchanges to home loans held by customers in bankruptcy, a new class action andother lawsuits contend.The changes, which surprised the customers, typically lowered their monthlyloan payments, which would seem to benefit borrowers, particularly those inbankruptcy. But deep in the details was this fact: Wells Fargo’s changes wouldextend the terms of borrowers’ loans by decades, meaning they would have monthlypayments for far longer and would ultimately owe the bank much more.Any change to a payment plan for a person in bankruptcy is subject to approvalby the court and the other parties involved. But Wells Fargo put through big changesto the home loans without such approval, according to the lawsuits.The changes are part of a trial loan modification process from Wells Fargo. Butthey put borrowers in bankruptcy at risk of defaulting on the commitments theyhave made to the courts, and could make them vulnerable to foreclosure in thefuture.A spokesman for Wells Fargo, Tom Goyda, said the bank strongly denied the claimsmade in the lawsuits and particularly disputed how the complaints characterized thebank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courtswere notified.“Modifications help customers stay in their homes when they encounterfinancial challenges,” Mr. Goyda said, “and we have used them to help more thanone million families since the beginning of 2009.”According to court documents, Wells Fargo has been putting throughunrequested changes to borrowers’ loans since 2015. During this period, the bankwas under attack for its practice of opening unwanted bank and credit card accountsfor customers to meet sales quotas.Outrage over that activity — which the bank admitted in September 2016, whenit was fined $185 million — cost John G. Stumpf, its former chief executive, his joband damaged the bank’s reputation.It is unclear how many unsolicited loan changes Wells Fargo has put throughnationwide, but seven cases describing the conduct have recently arisen inLouisiana, New Jersey, North Carolina, Pennsylvania and Texas. In the NorthCarolina court, Wells Fargo produced records showing it had submitted changes onat least 25 borrowers’ loans since 2015.Bankruptcy judges in North Carolina and Pennsylvania have admonished thebank over the practice, according to the class-action lawsuit filed last week. Onejudge called the practice “beyond the pale of due process.”The lawsuits contend that Wells Fargo puts through changes on borrowers’loans using a routine form that typically records new real estate taxes orhomeowners’ insurance costs that are folded into monthly mortgage payments.Upon receiving these forms, bankruptcy court workers usually put the changes intoeffect without questioning them.It is unclear why the bank would put through such changes. On one hand, WellsFargo stood to profit from the new loan terms it set forth, and, under programsdesigned to encourage loan modifications for troubled borrowers, the bank receivesas much as $1,600 from government programs for every such loan it adjusts, theclass-action lawsuit said. But submitting the changes without approval violatesbankruptcy rules and puts the bank at risk of court sanctions and federal scrutiny.When a lawyer for a borrower has questioned the changes, Wells Fargo has reversedthem.Abelardo Limon Jr., a lawyer in Brownsville, Tex., who represents some of theplaintiffs, said he first thought Wells Fargo had made a clerical error. Then he sawanother case.“When I realized it was a pattern of filing false documents with the federal court,that was appalling to me,” Mr. Limon said in an interview. The unauthorized loanmodifications “really cause havoc to a debtor’s reorganization,” he said.This is not the first time Wells Fargo has been accused of wrongdoing related topayment change notices on mortgages it filed with the bankruptcy courts. Under asettlement with the Justice Department in November 2015, the bank agreed to pay$81.6 million to borrowers in bankruptcy whom it had failed to notify on time whentheir monthly payments shifted to reflect different real estate taxes or insurancecosts.That settlement — in which the bank also agreed to change its internalprocedures to prevent future violations — affected 68,000 homeowners.Borrowers having financial difficulties often file for personal bankruptcy to savetheir homes, working out payment plans with creditors and the courts to bring theirloans current in a set period. If the borrowers meet their obligations over that time,they emerge from bankruptcy with clean slates and their homes intact.Changing these payment plans without the approval of the judge and otherparties can imperil borrowers’ standing with the bankruptcy courts.In the class-action lawsuit filed last week, the lead plaintiffs are a couple inNorth Carolina who say that Wells Fargo submitted three changes to their paymentplan in 2016 without approval. The first time, Wells Fargo put through the changeswithout alerting them, according to the couple, Christopher Dee Cotton and AllisonHedrick Cotton.The Cottons’ monthly payments declined with every change, dropping to $1,251from $1,404.Buried deep in the documents Wells Fargo filed — but did not get approved bythe borrowers, their lawyers or the court — was the news that the bank would extendthe Cottons’ loan to 40 years, increasing the amount of interest they would have topay. Before the changes, the Cottons owed roughly $145,000 on their mortgage andwere on schedule to pay off the loan in 14 years. Over that period, their interestwould total $55,593.Under the new loan terms, the Cottons would have incurred $85,000 in interestcosts over the additional 26 years, on top of the $55,593 they would have paid underthe existing loan, their court filing shows.Theodore O. Bartholow III, a lawyer for the Cottons, said Wells Fargo’s actionscontravened the intent of the bankruptcy system. “When it goes the right way, thedebtor and mortgage company agree to do a modification, go to court and say, ‘Heyjudge, modify or change the disbursement on my mortgage.’”Instead, Wells Fargo did “a total end run” around the process, said Mr.Bartholow, of Kellett & Bartholow in Dallas. The Cottons declined to comment.Mr. Goyda, the Wells Fargo spokesman, denied that the bank had not notifiedborrowers. “The terms of these modification offers were clearly outlined in letterssent to the customers and/or to their attorneys, and as part of the Payment ChangeNotices sent to the bankruptcy courts,” he wrote by email.Mr. Goyda said that “such notices are not part of the loan modification package,or part of the documentation required for the customer to accept or declinemodification offers.” He added, “We do not finalize a modification without receivingsigned documents from the customer and, where required, approval from thebankruptcy court.”Mr. Limon and other lawyers say that while the bank may wait for approval tocomplete a modification, it has nevertheless put through unapproved changes toborrowers’ payment plans. According to a complaint he filed on behalf of clients inTexas, instead of going through the proper channels to try to modify a loan, WellsFargo filed the routine payment change notification.The clients also accuse the bank of making false claims by contending that theborrowers had requested or approved the loan modifications. In many cases, thetrustees who handle payments on behalf of consumers in bankruptcy would acceptthe changes Wells Fargo had submitted on the assumption they had been properlyapproved.Mr. Limon represents Ignacio and Gabriela Perez of Brownsville, who say WellsFargo put through an improper change to their payment plan last year.After experiencing financial difficulties, Mr. and Mrs. Perez filed for Chapter 13bankruptcy protection in August 2016. They owed about $54,000 on their home atthe time, and had fallen behind on the mortgage by $2,177. The value of their homewas $95,317, records show, so they had substantial equity.In September, the Perezes filed a payment plan with the bankruptcy court inBrownsville; the trustee overseeing the process ordered a confirmation hearing onthe plan for early November.But in a letter to the Perezes dated Oct. 10, Wells Fargo said their loan was“seriously delinquent” and offered them a trial loan modification. “Time is of theessence,” the letter stated. “Act now to avoid foreclosure.”Because they were going through bankruptcy, the Perezes were not under anythreat of foreclosure. Mr. Perez said in an interview that the letter worried him, so heasked his lawyer to investigate.Then, on Oct. 28, 2016, DeMarcus Jones, identified in court papers as “VP LoanDocumentation” at Wells Fargo, filed a notice of mortgage payment change with thebankruptcy court. It said the Perezes’ new monthly payment would be $663.15, downfrom $1,019.03. In the notice, the bank explained that the reduction was a “Paymentchange resulting from an approved trial modification agreement.”The changes had not been approved by the Perezes, their lawyer or thebankruptcy court, their complaint said.Although the monthly payment Wells Fargo had listed for the Perezes waslower, there was a catch — the same one that showed up in the Cottons’ loan. ThePerezes had been scheduled to pay off their mortgage in nine years, but the loanterms from Wells Fargo extended it to 40 years. The Perezes would owe the bank anextra $40,000 in interest, the legal filing said.“I thought that I was totally crazy, or they were totally crazy,” Mr. Perez said. “Iam 58, in what mind could they think I would agree to extend my mortgage 40 yearsmore? I don’t understand much maybe, but it doesn’t sound legal to me.”Mr. Limon quickly fought the changes.If he had not, Mr. and Mrs. Perez could have faced further complications. Thenew Wells Fargo payments were so much less than the payments the Perezes hadsubmitted to the bankruptcy court that if the trustee had started making the newpayments with no court approval, the Perezes would have emerged at the end oftheir bankruptcy plan owing the difference between the amounts. The Perezes wouldbe unwittingly in arrears, and the bank could begin foreclosure proceedings if theywere unable to make up the difference.© 2017 The New York Times Company.  All rights reserved.

If you are gainfully employed, the payment will most likely come directly from your wages in the form of a payroll control order. If you are self-employed or do not receive a regular pay check, then you will have to make the payment directly to the Chapter 13 Trustee. If you fall behind on your+ Read More The post Paying The Chapter 13 Bankruptcy Trustee appeared first on David M. Siegel.

Texas Bankruptcy Judge Tony Davis had some sound advice for persons setting off on a business venture.   In fact, his words should be mandatory reading in business schools and forums where would be business persons frequent.    He wrote:When two individuals decide to join forces and form a business venture, they can take one of two paths. The first is to seek and pay for sound legal advice to define and structure their relationship and fairly allocate business risks, and to pay for sound financial advice to properly project future financial performance and accurately record the past. Or they can eschew the advice, save a little money, and just wing it. And that can work out fine in those few cases where the venture succeeds and prospers. But failure occurs far more often. And where, as here, business failure goes along with a lack of proper documentation, the parties can end up in litigation, and the attorney fees paid to litigation counsel are many times the fees that would have been paid for proper legal and financial advice up front.Higgs v. Colliau (In re Colliau), Adv. No. 15-1118 (Bankr. W.D. Tex. 5/24/17).Unfortunately, bankruptcy lawyers know this story all too well.   By the time that clients get to us, the time to properly document the deal is long gone and the once friendly parties are antagonistic.However, there is still some wisdom for bankruptcy lawyers here.  A plan of reorganization is a contract.    Careful plan drafting can avoid litigation down the road.  As the late bankruptcy Judge Larry Kelly once said, "You guys drafted this plan and now you're asking me to tell you what you meant?"    Disclosure:  I initially represented the plaintiff in this case.   However, I did not try the case.

Chapter 7 or Chapter 13 For consumers who are thinking about filing for bankruptcy, the advice of which chapter to file from an attorney is the most critical piece of information right from the start. The difference between Chapter 7 and Chapter 13 is significant. Chapter 7 is known as a fresh start which allows+ Read More The post Filing The Right Bankruptcy Case Under The Proper Chapter appeared first on David M. Siegel.

It has been a while since I have done a Fifth Circuit report.   With the new year, I am going to try to get back to chronicling each quarter's decisions from my home circuit.Breach of contract; attorney's fees; abuse of process; malicious prosecution; sanctions; due process Texas Capital Bank v. Dallas Roadster, Ltd. (In re Dallas Roadster, Ltd), 846 F.3d 112 (5th Cir. 1/17/17)This case has only a tenuous connection to bankruptcy but it includes many of the types of issues that lenders and borrowers litigate.    Texas Capital Bank financed Dallas Roadster.   The DEA informed the Bank that it was investigating the Debtor for money laundering.   The DEA ultimately raided the Debtor and arrested its president.    One day prior, the Bank declared the Debtor to be in default.   After the raid, the Bank filed suit and obtained a receivership on an ex parte basis using an affidavit that contained false statements.   Dallas Roadster filed chapter 11 and got its business back from the receiver.   The state court litigation between the Bank, the Debtor and the guarantors was removed to federal court.   The Debtor confirmed a plan in which it provided for all of the Bank's claims except for attorney's fees arising from the Litigation.   The District Court granted summary judgment against the Guarantors on their counterclaims against the Bank.  The case went to trial on the Bank's claim to recover its attorney's fees incurred in the Litigation and the Debtor's breach of contract claims against the Bank.   The District Court denied recovery to both parties.   It found that the Debtor could not recover for breach of contract because it had materially breached the contract first.   The District Court ruled that the Bank could not recover attorney's fees for defending itself against claims of wrongdoing and also used its inherent authority to sanction the Bank and deny attorney's fees.The Fifth Circuit affirmed denial of the counterclaims and also affirmed the ruling denying the Debtor's breach of contract claims.   However, it reversed the findings against the Bank.   It found that the District Court had made an incorrect Erie guess as to how Texas courts would rule.  It also found that the District Court was permitted to sanction the Bank but had to provide it with due process before doing so.The opinion has a good discussion of the difference between abuse of process and malicious prosecution.    A claim for abuse of process must show that process was improperly used after it was issued.   On the other hand, a claim that malice or wrongful intent caused the process to be issued the claim is one for malicious prosecution.  Because the Guarantors sued for abuse of process based on obtaining the receivership they did not have a claim.   A claim for criminal malicious prosecution must show that a person provided false information to the prosecuting party and that this party acted in reliance on the false information.    The claim by the Debtor's president that the Bank did not provide the DEA with exculpatory evidence was not sufficient to give rise to a claim for criminal malicious prosecution.The Fifth Circuit held that the Debtor breached the loan agreements prior to the date that it claimed that the Bank breached the agreements.   The court rejected the Debtor's arguments that its breaches, which consisted of obtaining other financing without notifying the bank, were not material.   The District Court properly weighed the factors identified in Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195 (Tex. 2004) to determine that the breaches were material.  In particular, the reporting violations deprived the Bank of benefits it had negotiated for and placed it at risk.   Because the Debtor breached first, it could not complain about the Bank's subsequent defaults.   The Court's ruling on the Bank's claim for attorney's fees incurred in the litigation involved an "Erie guess," that is, a prediction as to how Texas courts would resolve an issue of first impression.    In Zachary Construction v. Port of Houston Authority, 449 S.W.3d 98 (Tex. 2014), the Texas Supreme Court found that a contractual provision which would insulate a party from liability based on its own misconduct was unenforceable.   The contract between the parties contained a no damages for delay provision.   However, the Port deliberately and intentionally interfered with Zachary's performance.  In that context, the Texas Supreme Court found that the Port could not use the no damages for delay provision to shield itself from liability for its own misconduct.   The District Court concluded that Texas courts would extend this ruling to the case where the lender sought to recover attorney's fees for defending itself from claims of wrongdoing.    The Fifth Circuit found that there was a material difference between using a contractual provision to shield itself from wrongdoing as opposed to recovering the cost of successfully defending itself.   The Fifth Circuit also reversed and remanded the District Court's sanctions award against the Bank.   The District Court found that where litigation was "instigated or conducted in bad faith or there's been willful abuse of the judicial process" it could dismiss claims under its inherent authority.   The Fifth Circuit found that the District Court did have the inherent authority to dismiss claims based on vexatious litigation.   However, before doing so, it had to give notice to the party against whom sanctions were sought and give it the chance to respond.   Because the District Court issued the sanctions sua sponte, it deprived the Bank of due process and a remand was required. Diversity jurisdiction; fraudulent transfers Hometown 2006-1 1925 Valley View, LLC v. Prime Asset Income Management, Ltd., 847 F.3d 302 (5th Cir. 2/3/17)This case raised issues required citizenship for diversity jurisdiction purposes and what constitutes property under the Uniform Fraudulent Transfer Act.    Hometown obtained a judgment against Prime.  Prime had been a party to three management contracts which could only be terminated upon sixty days' notice.   The other parties to the contracts terminated them without giving the required notice and Prime acquiesced.   Hometown then sued the contract counterparties in U.S. District Court on the basis that waiving the fees due during the 60 day cancellation period was a fraudulent transfer.    The District Court dismissed finding that the contracts were not "assets" which could be transferred under TUFTA.On appeal, the Fifth Circuit considered whether diversity jurisdiction was present.   Hometown was a Texas limited liability company with one member, U.S. Bank.  Citizenship of an artificial entity other than a corporation is based on the citizenship of its members.   U.S. Bank is a citizen of Ohio.  However, U.S. Bank was trustee of a trust.   Therefore the Defendants argued that it was necessary to determine the citizenship of each of the beneficiaries of a trust.   The Fifth Circuit rejected this argument, finding that citizenship of a trust is based on the citizenship of the trustee.   Because none of the defendants were from Ohio, there was diversity.   This ruling surprised me because I assumed that the citizenship of an LLC, which is a form of company, would be based on its state of formation.  However, this is not the case.The District Court had relied on several Seventh Circuit cases which had held that termination of a contract according to its provisions was not a transfer of an asset under the Uniform Fraudulent Transfer Act.   The Fifth Circuit said:We agree. The rub is that the contracts here were not freely terminable. Rather, the Advisory Agreements provided for termination without cause upon sixty days' written notice. As a result, termination of the contracts without giving 60 days' notice transferred the fees which would have been paid to the judgment debtor to the contract counterparties.   That was a transfer of property.   As a result, the Complaint stated a cause of  action and should not have been dismissed.Diversity jurisdiction Foster v. Deutsche Bank National Trust Co., 848 F.3d 403 (5th Cir. 2/8/17)Homeowner sued lender and trustee in state court to enjoin a foreclosure sale.   The lender removed the case to federal court.    The district court denied a motion to remand based on lack of diversity.  It dismissed the homeowner's claims with prejudice.   The Fifth Circuit affirmed.The Fifth Circuit agreed that the trustee was improperly joined.   It found that violation of the trustee's duties under the deed of trust would give rise to a claim for wrongful foreclosure.   However, because no foreclosure took place, this claim could not be asserted.    As a result, joining the substitute trustee as a defendant did not defeat diversity jurisdiction.   The Fifth Circuit found that Texas would not recognize a claim for attempted wrongful foreclosure.  As a result, it affirmed the dismissal of the homeowner's claims.   This left the lender free to post the property for a future foreclosure.Denial of dischargeChu v. Texas (In re Chu), 2017 Bankr. LEXIS 2370 (5th Cir. 2/9/17)(unpublished)An orthodontist filed bankruptcy following accusations of Medicaid fraud.   The State of Texas filed suit to deny this discharge.   After a trial, the Bankruptcy Court denied the discharge under 11 U.S.C. Sec. 727(a)(4) and (a)(5).   The Fifth Circuit affirmed.The Debtor argued that the State lacked standing to object to his general discharge because its debt would be non-dischargeable under 11 U.S.C. Sec. 523(a)(7).  The Fifth Circuit rejected this argument as speculation.  Because there was no final determination of the underlying claim, the State had constitutional standing to object to the global discharge.   The Court rejected the Debtor's argument that the Bankruptcy Court had aggregated his false statements to reach a conclusion of reckless indifference to the trust.   Instead, the Court found that the bankruptcy court was permitted to gauge the "cumulative effect of false statements." The Court found that the Debtor had failed to account for loss of assets.   In a personal financial statement four years before bankruptcy, the Debtor had listed assets of $75,500, including jewelry and watches.  In his schedules, he listed only $11,000 in household items, books and pictures worth $1,000 and a ring valued at $500.   Based on the Bankruptcy Court's finding that the Debtor had failed to offer a viable explanation for what happened to the assets, the Fifth Circuit affirmed the ruling that the Debtor had failed to account for assets. Federal Debt Collection Practices Act; turnoverUnited States v. Diehl, 848 F.3d 629 (5th Cir. 2/13/17)This case involved another statute abbreviated as FDCPA, the Federal Debt Collection Practices Act.   The Court found that the FDCPA in its case did not prohibit the government from using the Texas Turnover Statute to collect a debt owed to the government.Homestead exemption; fraudulent transfer Wiggains v. Reed (In re Wiggains), 848 F.3d 655 (5th Cir. 2/14/17)Debtor and spouse partitioned homestead on eve of bankruptcy to avoid limit on homestead exemption under 11 U.S.C. Sec. 522(p).   Court found that maximizing homestead was not sufficient reason to avoid partition as a fraudulent transfer.    Additionally, wife had no right to compensation under 11 U.S.C. Sec. 363(j) because entire community property interest entered estate.Automatic StayGathright v. Clark, 2017 U.S. App. 3258 (5th Cir. 2/23/17)Automatic stay in bankruptcy did not preclude creditor from filing bad check charges.  Criminal actions are exempt from the stay.Bankruptcy fraud United States v. Grant, 850 F.3d 209 (5th Cir. 3/1/17)Debtor filed five bankruptcy cases between 2008 and 2011.   In two of her cases, Debtor only disclosed one of her two social security numbers.   In another case, she failed to disclose two of her prior bankruptcies.   She was convicted on three counts of perjury and sentenced to fifteen months imprisonment.. Fraudulent transfer; damagesGalaz v. Galaz (In re Galaz). 850 F.3d 800 (5th Cir. 3/10/17)Raul Galaz was married to Lisa Galaz.   He owned 50% of Artists Rights Foundation.   When they divorced, Lisa received 50% of Raul's 50% interest.    However, Raul transferred ARF's assets to another entity for no consideration.    Lisa filed chapter 13 bankruptcy and sued to avoid the transfer.  Julian Jackson, who owned the other 50% of ARF, sued Raul for breach of fiduciary duty.   The Bankruptcy Court ruled for Lisa and Julian awarding actual and exemplary damages. In the first appeal to the Fifth Circuit, the Court reversed and remanded.  The Court found that the Bankruptcy Court had no jurisdiction over the claims between Julian and Raul.   It also found that the Bankruptcy Court lacked jurisdiction to enter a final judgment on Lisa's claims against Raul.   On remand, the District Court referred the matter to the Bankruptcy Court for proposed findings and conclusions.   Based on the Bankruptcy Court's proposed findings, the District Court awarded actual and exemplary damages to Lisa.The Fifth Circuit upheld the findings of liability.   Fraudulent intent was a question of fact reviewed under the clearly erroneous rule.   Court found that at least six badges of fraud were present.The Fifth Circuit affirmed the award of $241,309.10 in actual damages to Lisa.   This was based on 25% of royalties received of $969,317.92 less certain reasonable expenses.    Appellants argued that the royalties should have been valued as of the time they were transferred (at which time value was negligible).   However, statute allowed the court to adjust the value "as the equities may require."   The Court also affirmed the award of $250,000.00 in exemplary damages.   Court found that factual finding that loss was caused by fraud, malice or gross negligence was not clearly erroneous.Sanctions; All Writs Act Carroll v. Abide (In re Carroll), 850 F.3d 811 (5th Cir. 3/13/17)This is a sanctions case.   The Carrolls and their wholly owned company filed chapter 7 and were substantively consolidated.   The Carrolls engaged in "troublesome conduct" that "displayed (a) pattern of harassment" toward the trustee.    The Bankruptcy Court enjoined them from filing any further pleadings without court permission and awarded sanctions under 11 U.S.C. Sec. 105(a) in the amount of $49,432.   The Court set out the standard for awarding sanctions under its inherent authority and enjoining vexatious litigants. We begin by noting the bankruptcy court has numerous tools by which to sanction the conduct of individuals. "Federal courts have inherent powers which include the authority to sanction a party or attorney when necessary to achieve the orderly and expeditious disposition of their dockets."  "Such powers may be exercised only if essential to preserve the authority of the court and the sanction chosen must employ the least possible power adequate to the end proposed."  A court must make a specific finding of bad faith in order to impose sanctions under its inherent power.  Moreover, when sanctions are imposed under the inherent power, this court's "investigation of legal and evidentiary sufficiency is particularly probing" and this court must "probe the record in detail to get at the underlying facts and ensure the legal sufficiency of their support for the district court's more generalized finding of 'bad faith.'" Federal courts also have authority to enjoin vexatious litigants under the All Writs Act, 28 U.S.C. § 1651.  Moreover, under 11 U.S.C. § 105, "a bankruptcy court can issue any order, including a civil contempt order, necessary or appropriate to carry out the provisions of the bankruptcy code."  When considering whether to enjoin future filings, the court must consider the circumstances of the case, including four factors:(1) the party's history of litigation, in particular whether he has filed vexatious, harassing, or duplicative lawsuits; (2) whether the party had a good faith basis for pursuing the litigation, or simply intended to harass; (3) the extent of the burden on the courts and other parties resulting from the party's filings; and (4) the adequacy of alternative sanctions.   830 F.3d at 815. (internal citations omitted).The Court had no trouble sustaining a finding of bad faith, stating,  Appellants' suggestion that their conduct was not done in bad faith is belied by their repeated attempts to litigate issues that have been conclusively resolved against them or that they had no standing to assert and by their unsupported and multiple attempts to remove Abide as the trusteeThe amount of the sanctions award was affirmed because it represented the amount of attorneys' fees incurred by the trustee in responding to the Carrolls' conduct.Voidable preferenceTower Credit, Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. 3/13/17)  The Trustee sued to avoid a wage garnishment as a preferential transfer.   The Defendant argued that the transfer occurred when the garnishment order was issued, which was more than 90 days before bankruptcy.    The Court found that a transfer is made when it is "perfected," that is, when a judgment creditor could not obtain superior rights in the property.   However, a transfer also is not made until the debtor has rights in the property.   As a result, each time the debtor obtained wages and the garnishment lien reached those wages was a new transfer.   Therefore, the Court affirmed the judgment in favor of the trustee.  Proof of claim; res judicataKipp Flores Architects, LLC v. Mid-Continent Cas. Co., 852 F.3d 405 (5th Cir. 3/24/17)This case involved the effect of a proof of claim in subsequent litigation.   A creditor filed a proof of claim in a no-asset bankruptcy case.   No party objected to the claim.    The creditor then argued that because the proof of claim was "deemed allowed," it was res judicata in the creditor's subsequent claim against the debtor's insurance company.    The Court found that the claim did not have any preclusive effect where there was never a deadline to object to claims and adjudicating the claim would not have served a bankruptcy purpose.    SanctionsArmendariz v. Chowaiki, 2017 U.S. App.  LEXIS 5531 (5th Cir. 3/30/17)(unreported)Plaintiffs sued various parties for RICO based on a fraudulent transfer action brought in U.S. Bankruptcy Court.    The District Court dismissed the suit but denied a motion for sanctions under Rule 11.    The Court did not give reasons for its denial of the sanctions motion.   The Fifth Circuit affirmed the order dismissing the suit.   However, it reversed and remanded the denial of sanctions.  The Court explained that when a court grants or denies sanctions, it must provide reasons sufficient for the reviewing court to determine the basis for the ruling.  

By Ben LeubsdorfThe total debt held by American households reached a record high in early 2017, exceeding its 2008 peak after years of retrenchment in the face of financial crisis, recession and modest economic growth.The milestone, announced Wednesday by the Federal Reserve Bank of New York, was a long time coming.Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, looking at data back to the end of World War II, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”In the first quarter, total debt was up 14.1% from that low point as steady job gains, falling unemployment and continued economic growth boosted households’ income and willingness to borrow. The New York Fed report said total household debt rose by $149 billion in the first three months of 2017 compared with the prior quarter, or 1.2%, to a total of $12.725 trillion.“Almost nine years later, household debt has finally exceeded its 2008 peak, but the debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said. He added, “This record debt level is neither a reason to celebrate nor a cause for alarm.”The pace of new lending slowed from the strong fourth quarter. Mortgage balances rose 1.7% last quarter from the final three months of 2016, while home-equity lines of credit were down 3.6% in the first quarter. Automotive loans rose 0.9% and student loans climbed 2.6%. Credit-card debt fell 1.9%, and other types of debt were down 2.7% from the fourth quarter.Americans' debt has returned to levels last seen before the recession in nominal terms, but the makeup of that debt has changed significantly. Change in total debt balance, by type, since its previous peak in 2008: The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy.In the first quarter, total debt was 66.9% of nominal gross domestic product versus 85.4% of GDP in the third quarter of 2008. Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, 67.8% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were 73.3% of total debt. Student loans rose from 4.8% to 10.6% of total indebtedness, and auto loans went from 6.4% to 9.2%.Mortgages continue to account for the majority of overall U.S. household debt, though student and auto loans represent a growing share of the total.  Mortgage lending to subprime borrowers has dwindled since the housing crisis in favor of loans to consumers considered more likely to repay. In the first quarter, borrowers with credit scores under 620 accounted for 3.6% of mortgage originations, compared with 15.2% a decade earlier. Borrowers with credit scores of 760 or higher were 60.9% of originations last quarter, versus 23.9% in the first quarter of 2007. Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low. Some 19.6% of auto-loan originations last quarter went to borrowers with credit scores below 620, down from 29.6% a decade earlier. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations.The share of debt considered seriously delinquent — at least 90 days late — is down from recession-era levels, but varies widely by type of loan. Some 4.8% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent. Seriously delinquent rates have climbed recently for credit-card debt, 7.5% in the first quarter, and auto loans, 3.8% last quarter, and remained high—11% last quarter— for student loans, according to Wednesday’s report.Copyright 2017 Dow Jones & Company, Inc.  All rights reserved.

While it is possible to change bankruptcy attorneys in the middle of the case, it often will not make a difference in the outcome of the case. The relationship between a client and a bankruptcy attorney is one of trust, confidence, respect, diligence and communication. If there is a breakdown in any one or more+ Read More The post Changing Bankruptcy Attorneys Mid-Case: Does It Ever Make Sense? appeared first on David M. Siegel.

In our continuing posts about issues related to the decrease in the value of taxi medallions in New York City, this month we are covering two lawsuits regarding the dramatic drop in taxi medallion values. The first lawsuit involves two taxi medallion owners who have filed lawsuits against the New York City and the Taxi and Limousine Commission (“TLC”). This lawsuit was reported in the New York Daily News on May 3, 2017. The plaintiffs, driver Marcelino Hervias and medallion owner William Guerra argue that: (1) the apps for hailing cars and burdensome rules have made taxi medallions practically worthless and have created unfair competition; (2) New York City and the TLC are bound by a rule to create standards ensuring medallion owners remain financially stable; (3) New York City allows the apps to dominate the streets and provide rides similar to taxis, but with none of the financial and legal burdens that medallion owners and drivers face; and (4) the driver has to work harder and longer to cover his monthly medallion loan payments and expenses. Mr. Hervias estimates that his business is down 30% and that he must work extra shift hours each day to make up the difference. Mr. Hervias also states that there is no market for medallions because financial institutions will not lend money to buy a medallion. The attorney for the plaintiffs indicated that this is the first suit of its kind as it pertains to the taxi industry. The article states that Mayor de Blasio and the City’s Corporation Counsel (the entity that defends the City against lawsuits) did not return requests by the Daily News reporter for comments.The second case involves New York City credit unions that manage more than 2 billion dollars in taxi medallion loans are appealing a court ruling that rejected their argument that the TLC treatment of medallions violates the equal protection clause under the United States Constitution. (information about this lawsuit can be found in a May 4, 2017 post on cutimes.com). The credit unions’ legal argument was that medallion owners are required to comply with state regulations, while Uber, Lyft, Gett and other ridesharing services operate without being required to comply with the same regulations. The credit unions argue that such disparate treatment violates the equal protection clause of the 14th Amendment of the U.S. Constitution. However, on March 30, 2017, United States District Court Judge Alison J. Nathan ruled that there was no disparate treatment because a mobile app is not the same as hailing a medallion on the street. The judge wrote that “[q]uite simply, medallion taxicabs are not similarly situated to hire vehicles because medallion taxicabs… have . . . a monopoly over one particular form of hailing.” The ruling also notes that several courts around the country considering similar Equal Protection claims also came to the same holding. The original lawsuit was filed in November 2015 by Melrose Credit Union (‘Melrose”), Progressive Credit Union, LOMTO Federal Credit Union (“LOMTO”) and taxicab industry organizations and individual investors. The credit unions filed a notice of appeal on April 27, 2017 with the Second Circuit Court of Appeals in New York City.It is this author’s opinion that individual lawsuits like that described in the Daily News article are expensive, could take years to conclude and the outcome or result is uncertain. With respect to Judge Nathan’s ruling, many taxi medallion owners would argue that “this is a distinction without a difference”. But Judge Nathan’s ruling is the law, unless it is reversed on appeal.The cutimes.com article noted that Melrose was placed into conservatorship in February by the New York State Department of Financial Services. The article also states that LOMTO is undercapitalized, with a net worth of 5.87% according to the National Credit Union Administration.  These two lawsuits would seem to suggest that litigation will not assist medallion owners whose medallions have dramatically decreased in value.Many taxi medallion owners who’ve consulted with Shenwick & Associates own medallions, which, to use a finance term, are “underwater.” Underwater means that the value of the asset is less than the loan collateralized by the asset. In simple terms, many medallion owners have loans against the medallions totaling $700,000-$900,000 (or more) and the medallions presently are worth approximately $240,000. As Mr. Hervias noted in the Daily News article, if banks are not providing loans to medallion purchasers, in the future it will become increasingly difficult for buyers to buy medallions because of the lack of financing (unless they are all cash buyers).What options are available for medallion owners? One possible solution may be for medallion owners and their organizations to lobby the City of New York and Mayor de Blasio to create a fund to compensate medallion owners due to the disparate treatment faced by medallion owners and the ridesharing services. Another solution is for the city or state to create an entity or mechanism to provide funding or financing for future medallion purchases. The city or state could also look to the ridesharing services to contribute to those funds, though the ridesharing services would argue that their technology is merely “disruptive” and that competition has decreased the value of medallions, not inappropriate actions on their part. Recent articles about the Uber culture would seem to suggest that Uber would not voluntarily contribute to such funds.The issue for medallion owners is: (1) whether they should continue to make loan payments on their medallions, if the value of the loans exceeds the value of the medallions; (2) competition from the ridesharing services has reduced their earnings; and (3) banks are not lending money to finance medallion purchases. If a medallion owner stops making loan payments, he or she will be in default under their loan(s) and the banks can commence litigation to foreclose on the medallions and/or seek repayment of their loans.As we discussed in a prior article dated February 2nd, medallion owners who stop paying their loans have four options: (1) arrange their financial affairs so that they are “judgment proof”; (2). negotiate an out-of-court settlement with the banks that financed their medallion purchases; (3) file for bankruptcy protection or (4) litigate with the banks that loaned them money to purchase their medallions (an expensive and often times losing proposition). The option that is best for an individual medallion owner depends on his or her facts and circumstances.Medallion owners who need such counseling are urged to contact Jim Shenwick.

  A District Court in Oklahoma had the opportunity to examine the requirements for dismissal of a chapter 7 case under §707(a), where the debtor had primarily business debts, in IN RE: BOW D. BUSHYHEAD & D. LYNN BUSHYHEAD, Debtors, SAMUEL K. CROCKER, UNITED STATES TRUSTEE, Appellant, v. BOW W. BUSHYEAD & D. LYNN BUSHYEAD, Appellees., No. 15-CV-89-JED-PJC, 2017 WL 1549467 (N.D. Okla. Apr. 28, 2017).  The usual tool for dismissal of chapter 7 cases by the US Trustee, §707(b), is not available in cases where the debts are not primarily consumer debts.  In the Bushyhead case, the debtors had operated a spa which closed in February 2013.  Of the total debts scheduled in the bankruptcy, 79.8% constituted guaranteed business debts.  The debtors had substantial income at the time of filing, of approximately $10,000/month  and had received a substantial signing bonus and settlement from a prior employer shortly before filing chapter 7.  The US Trustee sought dismissal of the case alleging: 1) the debtors could have used their excess monthly income of $5,776/month to pay 100% of their debt listed in schedules D and F over 60 months; 2) the case was filed to prevent a summary judgment hearing; 3) they failed to make any effort to settle or repay any portion of the business loan with the $180,504 received as bonus and settlement; 4) the debtors lived a lavish lifestyle; 5) the failed to make full and complete disclosures on the bankruptcy schedules until the trustee pointed out the errors and demanded additional information; 6) the debtors were paying debts of family members and other creditors while failing to pay on the business loan; and 7) the debtors inflated their expenses to disguise their financial well being.  The statute provides (a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—(1) unreasonable delay by the debtor that is prejudicial to the creditors;(2) nonpayment of any fees or charges required under chapter 123 of title 28; and(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.11 U.S.C. § 707(a) (emphasis added). While the examples listed are illustrative rather than exhaustive, there is general consensus amount the courts taht the standard for finding cause under §707(a) is stringent and requires evidence of conduct that may be described as 'egregious,' 'extreme,' or an 'abuse' of the provisions of the Bankruptcy Code.  The ability of a debtor to repay a debt, standing alone, is an insufficient basis to support dismissal under §707(a).  There must be a showing that the debtor has taken advantage of the court's jurisdiction in a manner abhorrent to the purposes of chapter 7.   Legislative history with respect to § 707(a) reflects Congress's intent that ability to repay is not itself sufficient to satisfy the requirement for dismissal. See Sen. Rep. 95-989 (1978) (§ 707(a) “does not contemplate ... that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal. To permit dismissal on that ground would be to enact a non-uniform mandatory Chapter 13, in lieu of the remedy of bankruptcy.”). Id. at *6 (N.D. Okla. Apr. 28, 2017).  The court found that the debtors ability to repay the debts did not satisfy the 'for cause' requirement for dismissal under §707(a).  The court supported the bankruptcy judge's conclusion that found that the other factors argued by the US trustee present circumstances that are common, and not improper, in many bankruptcy cases.  Therefore the motion to dismiss was denied.Michael Barnett.  www.tampabankruptcy.com

New Rules To Recover Impounded Vehicles In recent months, there has been a tidal wave of activity surrounding bankruptcy, the City of Chicago, parking tickets and consumers trying to recover their impounded vehicles. For many years, it was common practice for the City of Chicago to release vehicles back to a debtor upon the filing+ Read More The post Filing Bankruptcy After Your Car Has Been Impounded For Parking Tickets, No Longer A Good Option appeared first on David M. Siegel.