4th Cir.: Talley v. Folwell- Overpayment of State Retirement Ed Boltz Wed, 05/07/2025 - 16:33 Summary: In Talley v. Folwell, the Fourth Circuit affirmed the dismissal of constitutional claims brought by retired North Carolina teacher Patsy Talley, who had received over $86,000 in retirement overpayments due to a longstanding administrative error. When the Teachers’ and State Employees’ Retirement System (TSERS) discovered the error eight years later, it began recouping the overpaid amount through a reduction in Talley’s monthly benefits. Talley did not dispute the overpayment but alleged that the state violated her due process and equal protection rights by reducing her benefits without a prior hearing or clear standards governing recoupment procedures. The district court dismissed most of Talley’s claims, holding that Eleventh Amendment immunity barred her official-capacity claims and that the individual defendants were protected by qualified immunity. The court also found her equal protection and substantive due process claims failed to state a plausible constitutional violation. The Fourth Circuit agreed, finding that any alleged lack of pre-deprivation process was cured by a post-deprivation hearing before an administrative law judge. The court emphasized that the recoupment process was rational and statutorily authorized, and that Talley had not shown a clearly established constitutional right requiring a hearing before benefit reductions in this context. Her motion to amend the complaint to add new plaintiffs was also denied as untimely and procedurally deficient. Commentary: If TSERS merely made an administrative error (as appears to be the case here), and there is no allegation that Talley knew about the overpayments or fraudulently induced them, then no § 523(a) exception would appear to apply, and the debt would be dischargeable in bankruptcy.   This raises the next critical issue: even if the overpayment is discharged, TSERS may argue for a right of recoupment or setoff, which are equitable doctrines that allow deduction from ongoing payments even in bankruptcy.    N.C. Gen. Stat. § 135-9(b)   expressly allows  TSERS to recover overpayments by offsetting against future benefit payments. If Talley was not receiving future payments from TSERS (e.g., if she had already taken a lump sum or otherwise separated from the system), then recoupment might not be possible, and the state would be limited to collection as a creditor—and being dischargeable without further ability to collect from other sources. With proper attribution,  please share this post.  Blog comments Attachment Document talley_v._folwell.pdf (226.35 KB) Category 4th Circuit Court of Appeals

Law Review: Abigail B. Willie, Do Bankruptcy Judges Belong in Chambers? Rethinking Inherent Civil Contempt Power in Bankruptcy, 90 Brook. L. Rev. 737 (2025). Ed Boltz Tue, 05/06/2025 - 16:59 Available at:    https://brooklynworks.brooklaw.edu/blr/vol90/iss3/2 Abstract: In recent years, the Supreme Court of the United States has recognized limitations on the adjudicatory authority of the bankruptcy judge in certain contexts. In the face of this seeming erosion in the previously presumed power of the bankruptcy judge, the time is ripe to consider areas in which a bankruptcy judge’s adjudicatory authority may be further challenged. Inherent civil contempt power is one such area. Contempt power in the bankruptcy context has been murky since the creation of the non-Article III bankruptcy court in 1978. While today, courts generally agree that bankruptcy judges possess (at least some) inherent civil contempt power, this conclusion often rests on the extension of Article III case law on inherent contempt power—most notably, Chambers v. NASCO. However, a close examination of Chambers calls into question the soundness of this extension. This Article contributes scholarship on the history of how federal statutes and rules have treated contempt in the bankruptcy context—a strange story marked by the creation of non-statutory “judges,” the questionable vesting of adjudicatory authority in non-judges, the application of Article III case law to a non-Article III court, and the promulgation of federal rules that brought confusion and inconsistency—the ghosts of which still haunt bankruptcy law. It then examines the current state of the law on inherent civil contempt in bankruptcy, including the application of Chambers, and ultimately calls for the abandonment of the Chambers-based approach. It argues instead for an approach based on a theory of implicit delegation of the inherent contempt power of the district court to its bankruptcy judges. The implicit delegation-based approach is consonant with the jurisdictional and referral statutes that govern the district court’s relationship with its bankruptcy judges, does not offend constitutional concerns, and puts to rest much of the search for the “limits” of a bankruptcy judge’s inherent civil contempt power. Commentary: While most contempt decisions in consumer bankruptcy cases arise under a statutory basis-  clear under 11 U.S. Code § 362, at least implicit under 11 U.S. Code § 524(a)(2) and (i),  and derived under Rule 3002.1-  that is not always the case.  The recent 4th Circuit decision in Sugar/Sasser v. Burnett,  where the dismissal with prejudice and monetary sanctions against the attorney,  relied on the bankruptcy court's inherent contempt power.  Whether or not this article points to a limitation on those contempt sanctions may be raised as that case was remanded for further hearing, as the parties could argue that the implicit delegation of contempt powers could be rescinded and the district court here this matter directly. In terms of the delegation of contempt power by the district court to the bankruptcy court,  it is noteworthy that bankruptcy  courts have been generally hostile to the idea that bankruptcy trustees,  particularly in Chapter 13 cases,  can similarly delegate their authority and powers (such as to bring avoidance actions)  to debtors. With proper attribution,  please share this post.    To read a copy of the transcript, please see: Blog comments Attachment Document do_bankruptcy_judges_belong_in_chambers_rethinking_inherent_civi_compressed.pdf (11.31 MB) Category Law Reviews & Studies

S.Ct.: US. V. Miller Ed Boltz Tue, 05/06/2025 - 15:28 Summary: The Supreme Court held that while §106(a) of the Bankruptcy Code waives sovereign immunity “with respect to” §544 of the Code, that waiver does not extend to the state-law claims that a trustee uses as the basis for a §544(b) fraudulent transfer action. The case arose when a Chapter 7 trustee attempted to claw back $145,000 in misappropriated debtor funds that had been used to pay the shareholders' personal IRS liabilities. Since sovereign immunity would normally preclude a creditor suit under Utah’s fraudulent transfer laws against the United States, the Government argued no “actual creditor” could exist to satisfy §544(b)’s threshold requirement. The Tenth Circuit had held that §106(a)’s waiver extended to the state-law claims nested within §544(b), thus abrogating sovereign immunity in full. The Supreme Court reversed, concluding that §106(a) only provides jurisdiction to hear §544(b) actions—it does not waive immunity for the underlying state-law causes of action that the trustee must borrow to prevail. Justice Jackson, writing for the majority, emphasized that sovereign immunity waivers must be narrowly construed, and cannot be read to create new substantive rights. She rejected the idea that §106(a)’s waiver of immunity should be read to eliminate the “actual creditor” requirement in §544(b), stating that doing so would untether the trustee from the very creditors whose rights §544(b) is meant to emulate. Although the trustee argued that the phrase “with respect to” in §106(a)(1) was broad enough to cover state law, the Court found that context—and precedent—cut sharply against that reading. Justice Gorsuch dissented, arguing the trustee wasn’t trying to alter §544(b)’s elements but merely invoking a statutorily waived affirmative defense (sovereign immunity) that would otherwise block an otherwise valid state-law claim. Commentary: This could  limit  trustees in coupling  §544(b) with state fraudulent transfer statutes,  with their longer (usually 4 year)  Statutes of Limitations,  to pull back prepetition tax payments to the IRS, the SBA or on federal student loans.  Particularly as to student loans,  this could provide opportunities for consumer debtors (at least those with the ability to wait on filing) for pre-bankruptcy planning. With proper attribution,  please share this post. To read a copy of the transcript, please see: Blog comments Attachment Document u.s._v._miller.pdf (157.34 KB) Category Law Reviews & Studies

Bankr. W.D.N.C.: Martinez Quality Painting v. Newco-Merchant Cash Advances as Avoidable Transfers Ed Boltz Mon, 05/05/2025 - 16:29 Summary: In this adversary proceeding arising from a Chapter 11 case, Martinez Quality Painting & Drywall, Inc. (“Debtor”) sought to avoid approximately $799,250 in payments made under two merchant cash advance (“MCA”) agreements with Newco Capital Group VI, LLC (“Newco”), alleging the transfers were constructively and actually fraudulent under § 548 of the Bankruptcy Code, as well as under North Carolina’s Uniform Voidable Transactions Act, and that the MCA contracts were void ab initio under New York’s usury laws. The agreements at issue involved payments of $575,000 from Newco in exchange for over $799,000 in daily withdrawals from the Debtor’s bank account. While each MCA was labeled as a “purchase of receivables,” the Debtor alleged these were de facto loans with effective interest rates exceeding 40%, thus violating New York’s criminal and civil usury statutes. Newco moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(1) and 12(b)(6), arguing that the agreements were not loans and that even if they were, they were exempt from usury laws under North Carolina law. Judge Edwards denied the motion as to subject matter jurisdiction and rejected Newco’s argument that the Debtor failed to allege a plausible fraudulent transfer claim. Importantly, the Court declined to engage in a definitive choice-of-law analysis at the pleading stage but assumed, for purposes of the motion, that New York law applied per the MCA contracts’ express choice-of-law provision. Crucially, the Court distinguished between the application of New York’s civil usury statute (§ 5-511 of the General Obligations Law) and the criminal usury statute (§ 190.40 of the Penal Law). Following precedent in In re Azalea Gynecology (Bankr. E.D.N.C. 2024), the Court held that a corporate debtor like Martinez could not affirmatively invoke the criminal usury statute, as it is only available as a defense. However, the civil usury provision remains a viable basis for alleging the MCA agreements were void, thereby supporting the plausibility of a § 548(a)(1)(B) constructive fraud claim. The Court emphasized that, under Fourth Circuit precedent (In re Jeffrey Bigelow Design Grp.), the key question in constructive fraud claims is whether the Debtor’s estate received reasonably equivalent value—not whether the agreements were labeled as “loans” or “sales.” Because the Debtor alleged it received $575,000 but paid $799,250, a potential Excess Amount of $224,250 existed that may constitute avoidable transfers. However, the Court dismissed without leave to amend the Debtor’s claims premised on actual fraud (§ 548(a)(1)(A)), finding no allegations of intent to hinder, delay, or defraud creditors, and likewise rejected a stray reference to preferential transfers under § 547, since the Defendant had been paid in full prepetition and had not filed a proof of claim. The Court allowed the Debtor’s claims for recovery under § 550 and turnover under § 542 to proceed, and granted leave to amend only the state law claim brought under North Carolina’s UVTA, noting it contradicted the Complaint’s insistence that New York law governed. Commentary: In the ongoing judicial reckoning with predatory MCA contracts in bankruptcy, Judge Edwards’ opinion reflects a nuanced and debtor-friendly interpretation of reasonably equivalent value under § 548, while recognizing statutory limits on the application of New York’s criminal usury laws to corporate borrowers. Notably, this decision affirms that civil usury under N.Y. Gen. Oblig. Law § 5-511 remains a viable sword—even if the criminal statute may only be raised defensively. This case complements and follows the reasoning of In re Azalea Gynecology (E.D.N.C. 2024) but goes one step further by sustaining the debtor’s constructive fraud claim based on a civil usury theory, providing a roadmap for other  debtors* and trustees facing similar MCA overreach. Importantly, Judge Edwards reaffirms that constructive fraudulent transfer claims must focus not on gross repayment totals but on the net effect on the estate—reminding debtors’ counsel to frame avoidance theories in terms of net value lost, not just oppressive terms. The decision further bolsters the viability of challenging MCA schemes in bankruptcy, especially where excessive “fees” and recoupment exceed market equivalents, even without a proof of claim on file. *That Chapter 13 debtors do not necessarily have the statutory authority to bring these sorts of actions  themselves and with Chapter 13 trustee,  who will not gain any direct benefit from the time and effort prosecuting this sort of case,  might again mean that a debtor should either consider another Chapter,  i.e.  Chapter 11 where the debtor could bring this action (as was done here) or Chapter 7,  where the trustee's own pecuniary interest encourages this sort of action.  Alternatively,  a Chapter 13 debtor could provide for delegation of this authority in a non-standard provision.   Lastly,  as mentioned in the recent post regarding Sliwinski v. Sliwinski,  the debtor first commencing an Adversary Proceeding under Rule 7001(3)   and then filing a motion  under Rule 19(a)(2) to join the Trustee as a necessary and even involuntary plaintiff.  The factors for the court to consider include: (1) the extent to which a judgment rendered in the person's absence might prejudice that person or the existing parties; (2) the extent to which any prejudice could be lessened or avoided by: (A) protective provisions in the judgment; (B) shaping the relief; or (C) other measures; (3) whether a judgment rendered in the person's absence would be adequate; and (4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document martinez_quality_painting_v._newco.pdf (612.71 KB) Category Western District

“Credit Scores Improve Immediately After Filing for Bankruptcy.” That’s from an October 2024 consumer bankruptcy study done by Lending Tree. The average person saw their credit score increase from 533 to 602. (This matches two studies, in 2014 and 2015,  done by Federal Reserve banks.) Some people–the people with the worst scores going into bankruptcy–saw an improvement of up to 193 points!  Generally, those with credit scores below 620 saw an increase when they filed bankruptcy. People with scores above 620, usually saw a drop. Most people with a credit score around 640 see a drop to around 630. People with scores around 650 fell to around 640. High scoring individuals, with scores around 700, fell to around 665. Most people with a 640 score leave bankruptcy with a credit score around 630. These are averages. Your score will be influenced by your complete credit history during at least the last three years. So everyone is different. But we can say two things with confidence.  If you still have a decent credit score, bankruptcy doesn’t hurt much. If you have a terrible score, it will help a lot. No problems getting new credit cards The Lending Tree study shows that people have most no problems getting new credit, in the first two or three months after bankruptcy. Find Out More You can find out more about the five ways bankruptcy gives you a new start. The post What Does Bankruptcy Do to Your Credit? appeared first on Robert Weed Bankruptcy Attorney.

When an individual files for Chapter 7 relief, the goal is to keep their exempt property and discharge their dischargable debts. A corporation does not receive either of these benefits in Chapter 7, meaning that it turns over all of its property to be liquidated and still owes the remainder of its debts after the case is over. So why would a corporation ever for Chapter 7?Bad Stuff Can Happen Before going into the reasons for a company to file Chapter 7,let me talk about some more of the negatives. When a company files Chapter 7, the Trustee gets to look into its financial affairs. If the owners have been paying themselves back in the year before bankruptcy, the Trustee can sue to recover that money. If the board has breached its fiduciary duty, the Trustee can sue them. Additionally, when a company files for Chapter 7, the attorney-client privilege now belongs to the Trustee so the Trustee can ask the lawyer what the company's insiders discussed with counsel.  These are all reasons why filing Chapter 7 can have negative consequences for the people who made the decision to file. Finally, filing Chapter 7 does not dissolve a company under state law so that once the case is over, there is still a corporate shell Considerations for a Corporate Chapter 7So why would a corporation file Chapter 7? Over the years, I have given clients several reasons why a company might file Chapter 7.If a company still has assets, management might elect to file Chapter 7 to turn over the liquidation process to  a third party. Under the corporate trust fund doctrine, management of an insolvent company can be personally liable if they take those assets and put them in their own pockets. Collections lawyers are always looking for someone else to sue and letting a Trustee investigate the company's finances and then do the actual liquidation gives some protection to the Board. If a company has third party investors, they might be quick to question management's decision to handle the wind-up on their own (especially when the Board forgot to mention that the company was in financial peril). A second reason is when a company is facing multiple lawsuits and doesn't have the money to pay defense counsel. If the company does nothing, judgments will be entered and the company will be served with post-judgment discovery. If the post-judgment discovery is ignored, a court may compel the officers and directors to answer it. Bankruptcy schedules and the statement of financial affairs contain much of the same information as would be provided in post-judgment discovery but the information just has to be provided one time. Yes, judgment creditors could pursue the company after Chapter 7, but a collections lawyer with a contingent fee agreement is likely to close the file once bankruptcy is filed.Filing Chapter 7 may be of particular value where the insiders would like to purchase the assets. If the board authorizes a sale of technology that hasn't been monetized to an insider, they are setting themselves up for a breach of fiduciary duty suit. On the other hand, if the insider negotiates a deal with the Trustee and gets a court order approving the sale, both the board and the purchasing insider should be protected. Of course, someone else could always bid more but at least the Board would have done its duty by letting a third party Trustee handle the sale.A third reason to file Chapter 7 is where a creditor is bringing weak alter ego or fraudulent transfer claims against the owners for the sake of harassment. If the company files Chapter 7, the targets of these suits can negotiate a deal with the Trustee. However, this is not a sure thing. The Fifth Circuit treats a motion to compromise claims as being equivalent to a sale of the cause of action. Cadle Company v. Mims (In re Moore), 608 F.3d 253 (5th Cir. 2010).  The annoying creditor can always come in and bid more for the claim, knowing that part of its purchase price will come back to it when the Trustee pays claims.This strategy only works if the creditor lacks the sophistication or ability to outbid the target of the litigation. Additionally, sometimes the Trustee will hire the state court lawyer as special counsel to pursue the insiders which just transfers the fight to the bankruptcy court. Does It Make Sense? The takeaway here is that filing Chapter 7 for a company is not always the answer. Sometimes a bankruptcy filing just creates more trouble for the people authorizing the case. Before authorizing a corporate Chapter 7 it is important to think about both the benefits and the detriments. Once the case is filed it can't easily be withdrawn. As one Western District Judge once said:Chapter 7 bankruptcy is not something that you can dip your toe into in order to check the temperature of the water. It is  something you jump into and you can only be rescued from it if you can show cause.  In re Dreamstreet, Inc., 221 B.R. 724, 725-26 (Bankr. W.D. Tex. 1998).    

“Credit Scores Improve Immediately After Filing for Bankruptcy.” That’s from an October 2024 consumer bankruptcy study done by Lending Tree. The average person saw their credit score increase from 533 to 602. (This matches two studies, in 2014 and 2015,  done by Federal Reserve banks.) Some people–the people with the worst scores going into bankruptcy–saw an improvement of up to 193 points!  Generally, those with credit scores below 620 saw an increase when they filed bankruptcy. People with scores above 620, usually saw a drop. Most people with a credit score around 640 see a drop to around 630. People with scores around 650 fell to around 640. High scoring individuals, with scores around 700, fell to around 665. Most people with a 640 score leave bankruptcy with a credit score around 630. These are averages. Your score will be influenced by your complete credit history during at least the last three years. So everyone is different. But we can say two things with confidence.  If you still have a decent credit score, bankruptcy doesn’t hurt much. If you have a terrible score, it will help a lot. No problems getting new credit cards The Lending Tree study shows that people have most no problems getting new credit, in the first two or three months after bankruptcy. Find Out More You can find out more about the five ways bankruptcy gives you a new start. The post What Does Bankruptcy Do to Your Credit? appeared first on Robert Weed Bankruptcy Attorney.

E.D.N.C.: Alston v. NCR- Consumer Rights Claims are Not Assignable but are Personal Injury Torts Ed Boltz Fri, 05/02/2025 - 17:38 Summary: James Alston, claiming to  have been assigned FDCPA claims from a third party (Louis Greene), brought various claims against  National Credit Systems, Inc.  under the Fair Debt Collection Practices Act (FDCPA).    Judge Flanagan  found that Alston lacked standing to prosecute this matter,  since FDCPA claims are personal tort claims, and under North Carolina law, such claims cannot be assigned.  Accordingly,  the case was  dismissed without prejudice for lack of subject matter jurisdiction under Rule 12(b)(1). Commentary: This case (and those it relies on, e.g.Investors Title Ins. Co. v. Herzig, 330 N.C. 681 (1992) ) has implications beyond just questions of assignability,  particularly as it holds that FDCPA claims (and also those under other consumer rights statutes)  are considered personal tort claims.  As personal injury torts, those consumer rights claims would be fully exempt under  N.C.G.S. § 1C-1601(a)(8). With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document alston_v._ncr.pdf (637.79 KB) Category Eastern District

Proposed 2025 Formal Ethics Opinion 1- Obligations Related to Notice When the Lawyer Leaves a Firm Ed Boltz Fri, 05/02/2025 - 17:29 Available at:   https://www.ncbar.gov/for-lawyers/ethics/proposed-opinions/ Summary: Should this FEO be adopted,  these are the steps that must be taken so that affected clients are adequately notified when a lawyer departs a law firm. Determine which  clients are affected:  This could include those: With whom the departing lawyer has an ongoing professional relationship; This would not in most circumstances seem to include clients in cases that have completed,  received a discharge,  been dismissed,  or closed. For whose legal matters the lawyer was responsible at the time of departure; With whom the lawyer had significant client contact or provided substantial legal services.   Notice must be sent to the client informing them: That the lawyer is leaving and where they are going (if known);  That they have the right to choose their counsel; Of their three main options:  stay with the current firm, go with the departing lawyer, or  select new counsel. The current case status; An accounting of any client property held in trust; Any responsibility for fees/costs already incurred; The deadline by which the client must elect representation; Instructions for file and fund transfer (with client consent); and  Any necessary details about new fee agreements or changes in billing if choosing the departing lawyer. Commentary: This FEO  only addresses the ethical requirements that the NC State Bar places on lawyers when one leaves a law firm.  As usual,  it is not exactly congruent with actual consumer bankruptcy representation,  particularly for larger multi-attorney consumer debtor firms (such as my own)  where there often are several "primary  attorneys"  involved in various aspects of a case  or for law practices that represent mortgage  servicers or other creditors.   It would certainly be helpful,  especially as I have directly been recently involved in both circumstances where an attorney left my firm and also cases where a lawyer for a large mortgage servicer departed,  if there was clearer,  supplemental guidance in the Local Rules for the three districts in North Carolina,  about when   and how departures and substitutions of counsel should be handled. With proper attribution,  please share this post. To read a copy of the transcript, please see: Blog comments Attachment Document proposed_2025_formal_ethics_opinion_1.pdf (111.27 KB) Category Law Reviews & Studies

4th Cir.: Carpenter v. Douglas Management- HOA Fees are Not Transfer Fees under NCGS 39A Ed Boltz Thu, 05/01/2025 - 15:51 Summary: The Fourth Circuit affirmed the dismissal of a class action complaint filed by a North Carolina homeowner who alleged that fees charged by an HOA management company and its software provider for real estate closing documents violated the state’s transfer fee statute and constituted unfair and deceptive trade practices. Plaintiff Susan Carpenter, acting as trustee for the H. Joe King, Jr. Revocable Trust, sold two properties subject to homeowners’ associations. To complete the closings, she was required to obtain “statements of unpaid assessments” from the management company, William Douglas Management, through the HomeWiseDocs.com platform. Carpenter was charged fees ranging from $175 to $255 for those documents. Alleging these charges were unreasonable, she brought a putative class action asserting violations of North Carolina’s “transfer fee covenant” ban (N.C. Gen. Stat. § 39A-1 et seq.), the Unfair and Deceptive Trade Practices Act (UDTPA), and other related claims. The Fourth Circuit, applying North Carolina law, held that these charges did not qualify as “transfer fees” under N.C. Gen. Stat. § 39A-2(2), because they were “payable upon the preparation” of the assessment statements—not “upon the transfer” of the property or “for the right to make or accept” such transfer. The court noted that the statute’s exclusion for “reasonable fees” to prepare such statements did not imply that unreasonable ones were automatically unlawful. The court also found no violation of the UDTPA, emphasizing that allegations of excessive pricing, absent more, do not establish a claim under the statute. Other claims—unjust enrichment, negligent misrepresentation, civil conspiracy, and violation of the North Carolina Debt Collection Act—were deemed derivative and likewise dismissed. Commentary: Importantly, the court sidestepped broader equitable considerations, including the fact that these fees are often unavoidable for sellers, who are functionally compelled to pay them in order to satisfy closing requirements set by lenders and title insurers. Though the North Carolina General Assembly amended the HOA statutes in 2020 to cap such fees going forward (N.C. Gen. Stat. § 47F-3-102(13a)), this case illustrates how difficult it is to retroactively challenge those charged before the amendment. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document carpenter_v_william_douglas_management.pdf (155.01 KB) Category 4th Circuit Court of Appeals