These days, defendants are getting more aggressive about repelling suits from bankruptcy estates. From jurisdictional squabbles based on Stern v. Marshall to judicial estoppel to failure to preserve a cause of action in a plan, the plaintiff’s road to judgment is just more difficult than it used to be. However, two recent decisions are examples of suits which avoided being detonated by clever challenges. In Matter of Texas Wyoming Drilling, Inc., No. 10-10717 (5th Cir. 7/21/11), a chapter 7 trustee prevailed against a claim that the former debtor in possession had failed to failed to make a “specific and unequivocal” reservation of claims and defeated a judicial estoppel claim. In Crescent Resources Litigation Trust v. Burr, No. 11-1013 (Bankr. W.D. Tex. 7/22/11), a litigation trust created by a plan defeated a defense that claims had not been adequately preserved. (There was another very interesting decision released in the Crescent case the same day about turnover of files from the debtors’ former attorneys. Because that case does not retention language under a plan, I will save that one for another day). You can find the opinions here and here. The Disclosure Statement Wins Out The Debtor in Texas Wyoming filed for chapter 11 relief and confirmed a plan. The plan provided for preservation of “Estate Claims.” The Disclosure Statement defined “Estate Claims” as claims arising under Chapter 5 of the Bankruptcy Code and included a chart listing potential claims, including “Various pre-petition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders.” The Debtor then sued its former shareholders to recover dividends paid under a fraudulent conveyance theory. The defendants sought to dismiss the action claiming that: (a) the Plan did not include a “specific and unequivocal” reservation of claims, (b) the disclosure statement did not name the parties who could be sued; and (c) the Debtor did not disclose the claims in its schedules. Under Fifth Circuit precedent, a plan must “specifically and unequivocally” retain a cause of action. In re United Operating Company, 540 F.3d 352 (5th Cir. 2008). If the claim is not adequately reserved, then the post-confirmation debtor lacks standing to pursue it. When the plan failed, the case was converted and the chapter 7 trustee pursued the claims. The Bankruptcy Court denied the defendants’ motion, but certified a direct appeal to the Fifth Circuit. The Fifth Circuit, in an opinion authored by Edith Brown Clement, made short work of the defendants’ claims. The Fifth Circuit found that it was permissible to consult the disclosure statement to see whether claims had been adequately disclosed. The Court stated: We observe that the disclosure statement is the primary notice mechanism informing a creditor’s vote for or against a plan. See 11 U.S.C. § 1125. Considering the disclosure statement to determine whether a post-confirmation debtor has standing is consistent with the purpose of In re United Operating’s requirement: placing creditors on notice of the claims the post-confirmation debtor intends to pursue. (citation omitted). In light of the role served by the disclosure statement, the purpose behind the rule in In re United Operating, and the fact that, in similar contexts, courts routinely consider the disclosure statement to determine whether a claim is preserved, we hold that courts may consult the disclosure statement in addition to the plan to determine whether a post-confirmation debtor has standing. Opinion, pp. 6-7. While the language in the Plan was generic, the language in the Disclosure Statement identified claims arising under Chapter 5 and stated that pre-petition shareholders were at risk for being sued for recovery of dividends. That was enough to satisfy the “specific and unequivocal” requirement under prior Fifth Circuit precedent. The Fifth Circuit also rejected the argument that failure to list the claims in the schedules would bar the claims under the doctrine of judicial estoppel. The Court noted that there was no inconsistent position taken since the Disclosure Statement specifically identified the claims. The defendant’s argument founders on the first requirement because TWD did not take clearly inconsistent positions. As explained above, TWD’s plan and disclosure statement retained the right to pursue the Avoidance Actions. Because TWD explicitly retained the same claims against the defendants that the trustee is now pursuing, there is no inconsistency in its position. Opinion, p. 9. This holding is a victory for common sense interpretation versus the magical view that any failure to disclose evaporates the claim. The take away from Texas Wyoming is that careful drafting at the disclosure statement stage may avoid creditor heartaches down the road. Court Chooses the Categorical Approach The Crescent Resources case involved 122 related debtors who filed a chapter 11 bankruptcy in Austin in 2009. On December 20, 2010, the Court confirmed the Debtors’ Revised Second Amended Plan of Reorganization. A major feature of the plan was creation of a Litigation Trust. One claim pursued by the Trust was against Edward Burr, a former insider of the Debtors. The claims involved two transactions: 1. Payment of $1.925 million to Burr in April 2007 to cover his personal tax liabilities; and 2. Payment of $4.5 million in cash plus forgiveness of $71 million in debt owed to Crescent in November 2007 in return for termination of his employment and conveyance of a 20% interest in one of the debtors. The Trustee alleged that the transfers constituted fraudulent conveyances under state and bankruptcy law. The Defendant sought to dismiss the claims, asserting that the plan had not “specifically and unequivocally” reserved the claims and asserting failure to plead fraud with specificity. The Defendant raised two arguments with regard to retention of claims: 1) that the plan failed to disclose that the Trust would pursue claims against him personally; and 2) that if the overall description was sufficient, that the plan failed to preserve claims for turnover pursuant to 11 U.S.C. §542. The Plan provided that: The Litigation Trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties. Causes of Action was defined to mean “any and all Claims, Avoidance Actions, and rights of the Debtor, including claims of a Debtor against another Debtor or other affiliate.” It is clear that neither the Plan, the Trust Agreement or the Disclosure Statement specifically referred to Mr. Burr or referred to claims for turnover under 11 U.S.C. §542. The opinion contains an excellent discussion of the cases interpreting United Operating. At the conclusion of its discussion, the Court summarized as follows: (W)hile the Fifth Circuit has not defined what “specific and unequivocal” means, cases have interpreted different plan language on case-by-case bases which this Court can use as guideposts with which to judge the plan language at issue here. Courts have held that listing causes of action by code section is sufficiently “specific and unequivocal.” (citations omitted). The courts have also held that a generic blanket reservation is insufficient. (citations omitted). The cases in the Fifth Circuit all cited United Operating. United Operating, in making its holding, also discussed that one of the purposes of bankruptcy is to “secure prompt, effective administration and settlement of all debtor‟s assets and liabilities within a limited time.”(citation omitted). In order to facilitate this resolution of the estate, “a debtor must put its creditors on notice of any claim it wishes to pursue after confirmation.” (citation omitted). It is for this reason—notice to creditors—that the Fifth Circuit determined that the retention language needed to be “specific and unequivocal.” (citation omitted). This Court agrees with the reasoning behind those cases applying what has been referred to as the “Categorical Approach,” and adopts the test established in Texas Wyoming Drilling to determine if the plan language meets the “specific and unequivocal” requirement. (citation omitted). That test, again, was to make a determination “whether the language in the [p]lan was sufficient to put creditors on notice that [the debtor] anticipated pursuing the [c]laims after confirmation.” (citation omitted). If so, the language meets the “specific and unequivocal” requirement. Opinion, pp. 21-22. The Court found that the reference to “state fraudulent transfer law claims” was not specific and unequivocal because it did not refer to a specific code cite. The Court went on to find that a reference to “Causes of Action arising under chapter 5 of the Bankruptcy Code, including those actions which could be brought by the Debtor under §§544, 547, 548, 549, 550, and 551” was sufficiently detailed so that “a creditor could not feign surprise that the Trust would pursue a claim under Section 542.” Conclusion Taken together, Texas Wyoming and Crescent Resources set a fairly low bar for preserving claims and causes of action under a plan. Both cases take a pragmatic attitude, essentially relying on a surprise standard. From a policy standpoint, it is about fairness. If a creditor is being asked to vote on a plan, it should be clear whether that person runs the risk of being sued. In Texas Wyoming, the Disclosure Statement clearly signaled that the Debtor intended to sue former shareholders who had received dividends. In Crescent Resources, the language could have been stronger, but it wasn’t really surprising that an insider who had received large transfers prior to bankruptcy would be sued. While the Court found that the Crescent language was sufficient, it would have been stronger if it had referred to “Causes of Action arising under chapter 5 of the Bankruptcy Code, including those actions which could be brought by the Debtor under §§542, 543, 544, 545, 547, 548, 549, 550, 551, 552 and 553 which may be brought against any entity receiving a transfer from any of the Debtors during the four years prior to bankruptcy, including but not limited to insiders, employees, officers, and equity holders of the Debtors.”

Here at Shenwick & Associates, we have been following last month's passage by the New York Legislature and signing into law by Governor Cuomo of the Marriage Equality Act ("the Act"), which became effective on July 24, 2011. This law formally recognizes otherwise-valid marriages without regard to whether the parties to the marriage are of the same or different sex. Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy: 1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it: "[t]he law in New York clearly permits a [spouse]'s interest in a tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted). So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest. Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states: "It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage." 2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition. Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person." However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages. Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple." Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so. For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.

Congressman Ruben Hinojosa was one of many representatives who voted for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. As a chapter 11 debtor, he will now be tested to see whether must follow the same rules he voted for, as well as those previously in place. In re Ruben Hinojosa, Case No. 10-70900, pending in the United States Bankruptcy Court for the Southern District of Texas.Special Treatment?Congressman Hinojosa has represented Texas's 15th Congressional District since 1996. On December 18, 2010, he filed a petition for chapter 11 relief after receiving an unfavorable arbitration award in a proceeding brought by Wells Fargo Bank. His bankruptcy case initially raised concerns about preferential treatment when the United States Trustee signed an agreed order exempting the Congressman from closing his pre-petition bank accounts and providing that he did not need to include the notation "Debtor-in-Possession" on his checks. When he inadvertently included copies of his 2009 federal tax return and his financial disclosure statement on his petition and amended petition, he filed a motion to seal those documents. Bankruptcy lawyer and blogger Alexander Wathen unsuccessfully opposed this motion and has filed an appeal. Wathen v. Hinojosa, No. 7:11cv141, pending in the United States District Court for the Southern District of Texas. You can read about it on Alex's blog here, here and here.The Plan and Disclosure Statement Make for Interesting ReadingOn July 15, 2011, debtor-in-possession Hinojosa filed his plan and disclosure statement which appear to contain flagrant violations of the Bankruptcy Code and at least one violation of BAPCPA. The Congressman's Disclosure Statement is largely a puff piece for his service in Congress. Most of the 67 pages discuss his Congressional career, while nearly all of the substantive material that would normally be contained in a disclosure statement is buried in exhibits. To put it charitably, the information contained in the disclosure statement is confusing and contradictory. According to the liquidation analysis, creditors in a chapter 7 liquidation would receive $560,613.56, which would yield a distribution of 20%. The liquidation analysis represents that creditors would receive at least 20% on their claims under the Plan. However, this is NOT what the Plan provides. The Plan states that unsecured creditors will receive sixty payments totaling 0.00009% of their claims. The Congressman's projections indicate that he intends to pay his unsecured creditors (who total nearly $3 million) $250.00 per month. Meanwhile, the Congressman will be spending $3,000.00 a month on rent, $2,244.75 on insurance, $1,154.58 on "college fund and school expenses" and $500.00 per month for "vehicle replacement expense." As a chapter 11 debtor owing primarily business debts, the Congressman is not subject to the means test applicable to consumer debtors in chapters 7 and 13. However, if he were, he clearly would not be allowed to save for his children's college education and for a new vehicle at the expense of his creditors. The Plan also provides for "sale of all or a portion of the non-exempt assets of the Estate which sums amount to an unknown percentage of the Allowed Unsecured Claims." Under the Means for Implementation section of the Plan, it states that the Congressman will liquidate his real estate holdings. However, going back to the liquidation analysis, the Congressman has only one real estate holding--a property valued at approximately $72,000. Neither the Plan nor the Disclosure Statement say when or how the Congressman will liquidate "some or all" of his non-exempt assets so that the promise of liquidation is so vague as to be unenforceable. Another outrageous feature of the Plan concerns the discharge. Under BAPCPA, which Rep. Hinojosa voted for, individual chapter 11 debtors do not receive a discharge until they complete their plan payments. 11 U.S.C. Sec. 1141(d)(5). However, Congressman Hinojosa's Plan states:IT IS THE INTENTION OF THIS PLAN THAT ONCE CONFIRMATION OCCURS, THE DEBTOR WILL BE FULLY, FINALLY AND COMPLETELY DISCHARGED FROM ALL LIABILITIES INCLUDING CLAIMS AND DEBTS AND SHALL BE REVESTED WITH ALL PROPERTY OF THE ESTATE AS HEREIN PROVIDED.It seems like the Congressman was not paying attention the day he voted on BAPCPA. Otherwise, he never would have allowed his lawyers to insert this provision into the Plan. A Final QuestionAt a minimum, it appears that this Plan violates the chapter 7 liquidation test and the absolute priority rule and probably is not proposed in good faith. Creditors will probably not find much to like about this Plan. However, the big question is what will the U.S. Trustee do? In the Western District of Texas, which has the same U.S. Trustee as the Southern District of Texas, the U.S. Trustee nitpicks every minor detail of a plan. Will the same standard apply to Rep. Hinojosa? I hope that the U.S. Trustee will fulfill its role as a watchdog rather than being a lapdog.

Despite clear cut abuse by a mortgage lender, the Fifth Circuit has found that a bankruptcy court lacked authority to enter a broad remedial injunction requiring Wells Fargo to conduct an extensive audit of claims filed in the Eastern District of Louisiana. Matter of Stewart, No. 09-30832 (5th Cir. 7/22/11). You can find the opinion here.Lack of Cooperation, Evasion and Inflated ClaimsThe Fifth Circuit succinctly stated the facts of the case as follows: When elderly widow Dorothy Chase Stewart filed for bankruptcy in 2007, Wells Fargo Bank filed a proof of claim with the bankruptcy court reciting debts owed from an outstanding mortgage on Ms. Stewart’s house. From her limited funds, Ms. Stewart hired a lawyer to request a full accounting of Wells Fargo’s charges.Wells Fargo did not cooperate. It provided a list of charges by type, but without the amount, date, or payee for each charge, and without invoices or proofs of payment for the third-party fees it charged to Ms. Stewart. At a hearing convened by the bankruptcy court, Wells Fargo sent lawyers unfamiliar with her case and unable to provide further information or documentation. As the hearing went on, “errors in billing became evident.” Two further hearings and four months of research passed before the bankruptcy court was able to unravel Wells Fargo’s accounting. After Ms. Stewart’s attorney “painstakingly identified the additional information needed, or explanations required” to review the claim, Wells Fargo finally produced a full reconciliation of Ms. Stewart’s mortgage account. Inspecting those records, the bankruptcy court concluded Wells Fargo’s proof of claim was rife with errors, including: * Calculations that were “wholly incorrect” under the terms of the mortgage contract; * Late fees generated through questionable accounting and imposed without notice to the debtor; * Charges for drive-by inspection reports that were plainly erroneous, with some reports describing a wood-frame house and others describing a house with a brick exterior; * Charges for broker price opinions (BP Os) that Wells Fargo was unable to document, several with duplicative charges, and charges for a BPO that could not have been generated on its stated date because Ms. Stewart’s parish was then under a mandatory evacuation order for Hurricane Katrina; * Attorneys’ fees and cost invoices that were invalid or inadequately documented. The bankruptcy court found that these errors caused Wells Fargo to overstate its claim by more than $10,000. Opinion, pp. 2-3.The Court also referred to another case involving Wells Fargo in which the Court described a proof of claim as:such a tangled mess that neither Debtor, who is a certified public accountant, nor Wells Fargo's own representative could fully understand or explain the accounting offered.Opinion, p. 2, n. 2.Of these violations, my personal favorite is charging for a Broker's Price Opinion at a time when the Parish was under a mandatory evacuation order. Those brokers must have been awfully brave.The Court's ResponseCheating widows is not looked upon favorably in most quarters. The Bible says:Cursed be anyone who perverts the justice due to the sojourner, the fatherless, and the widow.Deut. 27:19.Judge Elizabeth Magner was not very happy either. She found Wells Fargo to have been "duplicitous and misleading." In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008). Judge Magner awarded damages in the amount of $10,000.00 and attorney's fees in the amount of $12,350.00. She further sanctioned Wells Fargo $2,500.00 for presenting a consent order which did not reflect the agreement of the parties and an additional $2,500.00 for filing "significantly erroneous proofs of claim."She also granted broad injunctive relief. In order to rectify this problem in the future, the Court orders Wells Fargo to audit every proof of claim it has filed in this District in any case pending on or filed after April 13, 2007, and to provide a complete loan history on every account. For every debtor with a case still pending in the District, the loan histories shall be filed into the claims register and Wells Fargo is ordered to amend, where necessary, the proofs of claim already on file to comply with the principles established in this case and Jones. For closed cases, Wells Fargo is ordered to deliver to Debtor, Debtor’s counsel and Trustee a copy of the accounting. The Court will enter an administrative order for the review of these accountings and proofs of claim. The Court reserves the right, if warranted after an initial review of the accountings, proofs of claim and any amended claims filed of record, to appoint experts, at Wells Fargo’s expense, to review each accounting and submit recommendations to the Court for further adjustments based on the principles set forth in this Memorandum Opinion and Jones.In re Stewart, supra.The Fifth Circuit RulingThe Fifth Circuit found that the Court lacked jurisdiction to grant the injunction. Relying on Supreme Court precedent, the Fifth Circuit found that past injury is not sufficient to grant an injunction unless there is a "real and immediate threat" that the person will suffer injury in the future. Because there was "no demonstrated likelihood that Ms. Stewart will ever again be subject to an incorrect proof of claim filed by Wells Fargo," she lacked standing to pursue an injunction (and indeed, she had not requested one). The Court also found that the injunction could not be justified based on "the inherent power of the court to protect its jurisdiction and judgments and to control its docket."While the deficiencies found in Wells Fargo's claim here do cast a shadow on its other claims, misdeeds in other cases can be addressed by the judges in those cases. If the case-by-case process, with the discipline of developed jurisprudence, is thought to be inadequate, there remains the rulemaking authorityOpinion, p. 7.In conclusion, the Court stated:We need not here undertake to draw bright boundaries to the well established power of a court to correct abuses of its process. We say only this: the injunction here was outside that boundary. The issued injunction ranges far beyond the dimensions of this case to police a range of cases untested here by the adversary process. Its specific commands are not for the benefit of Ms. Stewart, whose injuries are fully remedied without the injunction. Rather, the injunction is aimed at other cases in which Wells Fargo has appeared or might appear before the bankruptcy courts. While justification for the bankruptcy court’s frustration is plentiful, its injunction lacks jurisdictional legs. We must therefore vacate the injunction as exceeding the reach of the bankruptcy court in this case. (emphasis added).Opinion, p. 7.What It MeansThe problem of mortgage accounting in bankruptcy is a national scandal. Judge Magner recognized the seriousness of the issue and tried to do something about it. Unfortunately, her creative remedy "lack(ed) jurisdictional legs." This does not mean that there are not any remedies. The Debtor in this case got her mortgage cleaned up. The Fifth Circuit tacitly encouraged other debtors to challenge their mortgage accountings. The Court's reference to "the discipline of developed jurisprudence" appears to this author to be a warning to Wells Fargo that it has developed a record of negligence and will be subject to further scrutiny. However, that scrutiny will need to come in individual cases, class actions or the rule making process.While Judge Magner's order was reversed, thanks to Harrington & Myers, who represented the Debtor, Wells Fargo has received a polite but public scolding from the Fifth Circuit. That should count for something. This case also illustrates the need for the Consumer Financial Protection Bureau. Most debtor's attorneys will not have the tenacity of Harrington & Myers. Similarly, the U.S. Trustee's office does not have the resources to handle systemic problems such as this one. While I am generally not a fan of government regulation, this may a case where it is firmly warranted.Coming Attractions:Judge Magner will be speaking on the topic of Mortgage Accounting at the State Bar of Texas Advanced Consumer Bankruptcy Course in Houston, Texas on September 8-9, 2011. She is just one of the many excellent speakers we have lined up.

By NELSON D. SCHWARTZ Tens of thousands of Bank of America’s most distressed borrowers could be evicted and lose their homes more quickly as a result of a proposed settlement between the bank, which is the country’s largest mortgage servicer, and investors in its troubled mortgage securities.For struggling borrowers in better financial shape, the outcome could be more positive: the deal would include incentives for mortgage servicers to help homeowners who have fallen behind on their payments and whose homes are worth less than they borrowed.“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”While powerful investors stand to benefit from the $8.5 billion settlement over the bank’s bundling of shoddy mortgages as securities, the fallout for the nearly 275,000 borrowers who took out those loans depends greatly on how deep they are in the foreclosure process and whether they earn enough money to dig themselves out.While no exact income qualification has been set as part of the agreement, which was announced last month, many servicers use a formula in which borrowers can qualify for a modification as long as the new monthly payment does not exceed 31 percent of their monthly gross income. For borrowers who are unemployed or lack the income to cover even reduced mortgage payments, foreclosure and eviction could be much more immediate.With 1.3 million borrowers at risk of foreclosure, Bank of America has been overwhelmed by the surge in defaults, and the accord has raised hopes that this logjam will finally begin to ease. But skeptics say that previous arrangements, like another multibillion-dollar settlement by Bank of America in 2008, have barely made a dent in the problem.“The mortgage servicers have repeatedly promised to do things and then not done them,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan. “I think it’s positive in general, but I don’t expect it to be transformative of what we’ve witnessed from the mortgage servicers over the last four years.”Matthew Weidner, a Florida lawyer who represents borrowers facing foreclosure, said he was skeptical of promises by the deal’s architects that lower monthly payments would be easier to obtain.“It’s like giving aspirin to someone with cancer,” he said of the proposed assistance. “You had all the big players at the top of the pyramid negotiating but nobody was speaking for the homeowners who have far more at stake at the ground level.”Still, for some of the homeowners now facing foreclosure who took out loans with Countrywide, the subprime specialist bought by Bank of America in 2008, the deal could bring a few quick improvements.Under the terms of the agreement, Bank of America must now start transferring these borrowers to 10 smaller outside servicers, even without the deal being approved in court, which is not expected before November. The architects of the settlement say these subservicers will be far more efficient than Bank of America’s giant payment processing operation.For example, an analysis of data by RBS prepared as part of the settlement found that Bank of America provided fewer modifications as a percentage of unpaid principal than JP Morgan Chase, Wells Fargo, Litton and other servicers. In addition, borrowers defaulted again within six months in nearly one in five cases when modifications were made by Bank of America, a higher rate than other servicers that were studied.Officials at Bank of America contend the company has made nearly 875,000 modifications since 2008, more than any other servicer.Under the new proposal, subservicers will have to provide an answer to homeowner modification requests within 60 days of receiving paperwork, and will get up to 1.5 percent of the unpaid principal balance as an incentive fee for each successful permanent modification.“We wanted smaller, high-touch servicers who would consider every modification option at once, not try this and that,” said Kathy D. Patrick, a Houston lawyer who represented the 22 private investors in the settlement. “Servicers get more in fees for successful modifications than for any other kind of workout, including foreclosure.”The first homeowners should be transferred out of Bank of America by early fall, with each of the 10 subservicers taking up to 30,000 cases. Borrowers with mortgages 60 days past due who have been delinquent more than once in the last 12 months will receive priority in the switch, followed by homeowners who are 90 days past due but not in foreclosure.Homeowners already in foreclosure or who have been declared bankrupt will go to the back of the line, although they will also eventually be transferred, Ms. Patrick said. More than 75 percent of the nearly 275,000 delinquent homeowners have not made a payment in more than 120 days or are already in foreclosure.One unintended consequence of the problems at Bank of America and other large servicers is that many borrowers have managed to remain in their homes despite being in default, and without the income to qualify for a modification. At the time of foreclosure, the typical Bank of America borrower has not made a payment in 18 months.What is more, according to the analysis of RBS data, it takes 30 months on average for a subprime borrower’s property to move from foreclosure to a final sale with Bank of America, nearly a year longer than Wells Fargo, and 10 months longer than SPS, a smaller subservicer likely to be among the 10 selected to take over the former Countrywide loans.“Countrywide made a lot of bad loans and borrowers with no money can’t afford a modification,” said Peter Swire, a former special assistant for housing policy in the Obama administration who helped oversee earlier federal efforts to promote modifications. He is now a professor at Ohio State University. “One discouraging problem is that only a small fraction of Countrywide borrowers will likely qualify,” Professor Swire said.Delores Gosha hopes she will be one of the lucky ones.It has been more than a year since she last made a mortgage payment to Bank of America, raising the risk that her bungalow in the Cleveland suburbs will end up in foreclosure. The bank, she says, has given varying answers as to whether she qualifies for a modification, telling her she did not at one point last week only to reverse course days later and say it was still under consideration. Ms. Gosha said she had had to deal with a multitude of representatives and submit the same documents over and over.While a new servicer might not give her the answer she has been praying for, she said, at least she will get an answer.“I’ve been up and down,” said Ms. Gosha, who is a clerk at a Cleveland hospital. “Can’t somebody tell me something?”Copyright 2011 The New York Times Company. All rights reserved.

By TARA SIEGEL BERNARD After steadily climbing for several years, the number of Americans filing for bankruptcy is on the decline, though that is not necessarily an indicator of an improving economy.The number of bankruptcy filings in June was 120,623, or an average of 5,483 a day, a drop of 6.2 percent from May, when filings totaled 122,775, or 5,846 a day, according to a report from Epiq Systems, which tracks bankruptcy filings. There was one additional day to file in June compared with May. Average daily filings are down nearly 10 percent from June of last year.Though economic factors like foreclosures and unemployment play a role in bankruptcy, over the long run, the filing rate tends to be more closely tethered to the amount of outstanding consumer debt.Access to credit, however, can influence the bankruptcy rate over the shorter term: as lenders tighten their standards, filings tend to rise because struggling consumers can no longer rely on credit cards or other loans to get them through a rough period. But when more new loans are being made, filings tend to fall — at least for a while.“There is a lot of mythology about what drives bankruptcy rates,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “But consumer credit appears to be the most significant indicator.”Over all, he said he expected filings to decline 5 to 10 percent this year, leveling off at about 1.46 million, largely because consumers have slightly more access to credit now than in recent years. But he also said that consumers had taken on less debt in the past three years, which means there is less debt to discharge and fewer incentives to file bankruptcy.That estimate compares with about 1.56 million bankruptcy filings in 2010 and nearly 1.45 million in 2009. Filings surpassed two million in 2005, when many people rushed to declare bankruptcy before a new law went into effect that made it more difficult, and significantly more expensive, to file.There have been 731,237 filings this year. “If they keep going the way they were,” Professor Lawless said, “bankruptcy filings will keep going down a little bit.”So far this year, the vast majority of the bankruptcy cases — nearly 70 percent — were Chapter 7 filings, which provide individuals with the proverbial “fresh start” because their debts are forgiven. (To qualify, filers need to pass a means test to determine whether they are unable to repay their debts.) In contrast, a Chapter 13 filing requires individuals to use their disposable income to pay back a portion of their debts through a three- or five-year repayment plan. Some people choose Chapter 13 because it allows them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments. Slightly more than 27 percent were Chapter 13 filings. (The remainder were mostly commercial filings.) The overall split between Chapter 7 and Chapter 13 filings is consistent with last year’s ratio.While the overall number of bankruptcy filings was down last month, there were variations from state to state. For instance, filings in Georgia rose 13 percent and were up 33 percent in Delaware, compared with May. But filings in Wyoming fell 30 percent, in South Dakota 21 percent, in West Virginia 18 percent and in Wisconsin 17 percent.In both New York and New Jersey, the number of bankruptcy cases dropped by 5 percent.Copyright 2011 The New York Times Company. All rights reserved.

Here at Shenwick & Associates, clients with a variety of marital statuses seek our bankruptcy counsel–single, married, in the process of divorce, filing individually or jointly. Each variation requires the analysis and creativity of sophisticated bankruptcy counsel to avoid potential pitfalls in the process.On June 23, 2011, in CFTC v. Walsh, the New York State Court of Appeals ruled that a woman could keep proceeds from a divorce agreement, even though those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband. In February 2009, federal authorities arrested Stephen Walsh and his business partner Paul Greenwood. According to an article on the case in the New York Times, they were charged with defrauding investors of more than $550 million in a 13 year Ponzi scheme. Although the government did not accuse Ms. Schaberg (the wife of Mr. Walsh) of participating in a crime, they still sought to recover the money she received from her husband in her divorce settlement agreement.The Court of Appeals ruled that ex-spouses have a reasonable expectation that once their marriage has been dissolved and their property divided, they will be free to move on with their lives. Ms. Schaberg's lawyer argued that once the couple had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds. Similar principles may also apply in personal bankruptcy and buttress the argument that marital property divided by a divorcing couple, pursuant to a divorce decree in New York State, would not be subject to fraudulent conveyance or other "clawback" actions by a Bankruptcy Trustee if a spouse filed for chapter 7 bankruptcy after the divorce proceeding.Accordingly, let's assume that a couple with two young children were having marital problems, the husband has substantial debts, cash and stock and the couple owns a house that has appreciated in value. The couple decides that as part of their divorce, the husband will deed the house to his wife and transfer a substantial amount of the stock and cash to his wife pursuant to the divorce decree for support and maintenance. The husband then waits three months and files for Chapter 7 bankruptcy to liquidate his debts and obtain a discharge.Following the Court of Appeals' holding in CFTC v. Walsh, a Bankruptcy Trustee should not be able to challenge the transfer of the house and assets to his ex-wife, thereby making those assets non-exempt or unreachable by the husband's creditors or the Bankruptcy Trustee. Clients with questions regarding bankruptcy and divorce should contact Jim Shenwick.

Since the Supreme Court dropped its constitutional bombshell on the bankruptcy system last week in Stern v. Marshall, 2011 U.S. LEXIS 4791 (2011) (aka Anna Nicole Smith II), lots of people are scratching their heads and wondering what this all means. While Chief Justice Roberts suggested that the decision had only a "narrow" impact, many others, including myself, are not so sure. In this post, I am going to focus on the practical and theoretical impact of the decision.The Practical SideOn the practical side, we are going to spend a whole lot more time fighting turf wars about whether a particular action belongs in bankruptcy court or somewhere else. That means even more motions to withdraw reference and motions to abstain. While Stern v. Marshall focused on the distinction between an Article III federal court and an Article I federal court, the more likely choice will be between an Article I federal court and a state court. While the Supreme Court was troubled by final decision making by judges who lacked life tenure and salary protection, the opinion may lead more cases to be decided by state court judges who lack these protections. One of the chief virtues that Chief Justice Roberts attributed to Article III judges was their freedom from outside influences. However, elected state court judges who must seek campaign contributions from the lawyers who appear in front of them and who are placed in office by an electorate that knows little more than their party affiliation seem to be the polar opposite. Thus, the theoretical and practical underpinnings of the opinion appear to be in tension. A second practical effect will be delay. Bankruptcy Courts have proven to be efficient engines for deciding cases. In the Bankruptcy Court for the Western District of Texas, it is common for an adversary proceeding to go to trial within six months. In the U.S. District Court for the Western District of Texas, a civil action will take closer to two years to make it to trial. Bankruptcy Courts can proceed faster because they do not have a criminal docket which can trump civil actions and because they are not allowed to conduct jury trials. The third practical effect will be that we will be fighting endless battles about finality. If the Bankruptcy Court rendered a final decision based on now-infirm core jurisdiction, can that decision be set aside under Rule 60? If an action is currently pending in Bankruptcy Court and the other party mistakenly admitted core jurisdiction, can they go back and change their mind? Can they file an untimely jury demand and move to withdraw the reference? I think the answer is likely no, but we will spend a lot of time arguing about it.Theoretical ImpactOn the intellectual side, we are going to spend more time thinking about what makes the bankruptcy system unique. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Justice Brennan's plurality opinion referred to "the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power." 458 U.S. at 71. We now know that that "core" is smaller than we thought it was. It seemed that resolving claims between the estate and persons filing claims against the estate would be intimately tied to "the restructuring of debtor-creditor relations." However, based on Stern v. Marshall, it appears to be limited to those functions which are both fundamental to the bankruptcy system and/or unique to the bankruptcy system. What are those functions?To me, deciding claims is the least defensible of these functions because most claims objections revolve around whether a claim is allowable under state law. However, in his concurrence, Justice Scalia opined that determining claims might be permissible. Why is this? Justice Scalia cited a law review article that I haven't read which could likely provide a definitive answer. However, going out on a limb, I would suggest that determining claims is integral to what the Bankruptcy Court does because it is a necessary component of allocating scarce resources between creditors and the debtor. A State Court is concerned with a dispute between the debtor and one of his creditors. A Bankruptcy Court must deal with the debtor and potentially thousands of creditors. If one creditor gets too large of a slice of the pie, it means that everyone else gets less. State Court is all about the race to the courthouse, while Bankruptcy Court is about the collective resolution of claims. This collective aspect is what distinguishes the Bankruptcy Court.What else is fundamental to or unique about the bankruptcy system? At a minimum, I would say: the automatic stay, the discharge, plans and the ability to use cash collateral, to sell assets free and clear of liens and to assume or reject executory contracts and unexpired leases. Each of these provisions is based on a specific Code-created right and does not exist outside of bankruptcy. Consider the automatic stay. It is true that injunctions exist outside of Bankruptcy Court. However, there is no comparable provision that allows for a universal injunction without proving a substantive right or posting security. Additionally, the automatic stay is fundamental to the bankruptcy process because it allows for the collective process to take place.Exemptions pose an interesting question. Most exemptions in bankruptcy are determined by state law. State courts make decisions about exempt property all the time. However, I think exemptions are fundamental for two reasons. First, federal law can displace state law, as in the homestead caps contained in Sec. 522(o)-(q) and the ability to avoid liens under Sec. 522(f). Secondly, a State Court only rules upon an exemption dispute relating to a debtor and a creditor at a specific point in time. A Bankruptcy Court, on the other hand, determines the debtor's exempt property with respect to all of his creditors and draws a line in the sand saying this property is available for creditors and this property is the debtor's. The distinction between preferences and fraudulent transfers raises another interesting question. Both preferences and fraudulent transfers are Code-created rights. However, in Granfinanciera v. Nordberg, 492 U.S. 33 (1989), the Supreme Court held that fraudulent transfers did not involve "public rights." Is there a distinction between them? One distinction is that fraudulent transfer law exists outside of bankruptcy, while preference law does not. A preference is defined by the fact that it occurred on the eve of bankruptcy, while a fraudulent transfer can happen at any time. A fraudulent transfer action recovers property rightfully belonging to the debtor, while a preference action is designed to provide equality of distribution between creditors (and make money for trustee's lawyers). In defining the new boundaries of core jurisdiction, I think it is important to ask three questions:1. Does it involve a Code-created right?2. Does it exist outside of bankruptcy?3. Does it have a collective aspect to it?I predict that an action that satisfies two out of three of these tests will be a core proceeding 99% of the time.

By PETER LATTMAN J.B. Nicholas/Bloomberg NewsThe Ponzi schemes that came to light during the depths of the financial crisis have spawned various lawsuits seeking to claw back money from divorce agreements. Now, in one case, a court has said: Hands off. On Thursday, New York’s highest court ruled that a woman could keep proceeds from a divorce agreement, even if those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband. The decision is a blow to the federal government, which is seeking to force the woman to disgorge what it says are millions of dollars in stolen money. “Ex-spouses have a reasonable expectation that, once their marriage has been dissolved and their property divided, they will be free to move on with their lives,” said Judge Victoria A. Graffeo, writing for the New York State Court of Appeals. The federal appeals court in Manhattan, which had asked the New York State court for guidance on the case, is now expected to prevent the federal government from seizing the woman’s assets. Thursday’s ruling could also affect other divorce cases, like some involving victims of Bernard L. Madoff’s huge Ponzi scheme. The New York State Court of Appeals is hearing a case brought by a man seeking to rescind his divorce settlement with his ex-wife because a large chunk of the marital proceeds were in a Madoff account. The husband, Steven Simkin, kept much of his money with Mr. Madoff after the divorce; his wife, Laura Blank, received cash. After losing the bulk of his assets in the Madoff fraud, Mr. Simkin now wants to rewrite their divorce agreement. In Massachusetts, a Madoff victim has also sued his ex-wife to revise their separation pact. A family court judge dismissed the lawsuit this month, and the plaintiff’s lawyer has appealed. Thursday’s ruling in New York involves Janet Schaberg, 55 years old, the former wife of Stephen Walsh, a former executive at WG Trading, a commodities firm in Greenwich, Conn. In February 2009, federal authorities arrested Mr. Walsh and his business partner, Paul Greenwood, on charges that they had defrauded investors of more than $550 million in a 13-year Ponzi scheme. Mr. Greenwood pleaded guilty last year; Mr. Walsh is fighting the case. Although the government did not accuse Ms. Schaberg of having any knowledge or participation in the scheme, lawyers at the Securities and Exchange Commission and the Commodity Futures Trading Commission went after her money, saying that much of it was ill-gotten proceeds from her former husband’s fraud. In August 2009, a federal judge agreed with the government, freezing most of Ms. Schaberg’s assets, including $7.6 million in cash. Ms. Schaberg, who divorced Mr. Walsh in 2007 after 25 years of marriage, appealed the judge’s order. Her lawyer, Steven Kessler, argued that once she and Mr. Walsh had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds. In an unusual request, the federal appeals court asked New York state’s highest court for guidance on the divorce-law issues instead of a ruling. The case, Judge Graffeo wrote, raised “difficult policy questions” that required the court to weigh the competing interests of returning stolen property to its rightful owners against the innocent former spouse of the defrauder. In ruling for Ms. Schaberg, the court made an analogy between Ms. Schaberg and her divorce settlement proceeds and any person who unknowingly receives tainted money in a business transaction. For instance, the government could not seize stolen money from an architect whom a thief had paid to build his home. The court said its decision to protect Ms. Schaberg, an innocent recipient of stolen funds, over the victims of the Ponzi scheme, was “rooted in New York’s concern for finality in business transactions.” The decision emphasized that fraud victims could try to reclaim their stolen money if the former spouse was aware or participated in the crime. Representatives for the S.E.C. and C.F.T.C. declined to comment. New York divorce lawyers are divided on the decision. Michael D. Stutman, a divorce lawyer in Manhattan, is uninvolved in the Schaberg case, but along with three other lawyers, he submitted a brief that sided with the government. “We disagree with the decision because someone in possession of stolen property should not be able to claim an ownership interest superior to the rightful owner,” Mr. Stutman said. “Here, however, largely because she received ‘title’ to the ill-gotten gains through the divorce, she trumps the claims of people from whom the money was stolen,” he said. Mr. Stutman also questioned the court’s emphasis on what it called New York’s “strong public policy of ensuring finality in divorce proceedings.” He said other facets of divorce law — the amount of child and spousal support, as well as child-custody issues — are all subject to change based on newly discovered facts. “Why is finality all of a sudden so sacred that you’re depriving victims of a fraud from access to their assets?” he asked. Richard Emery, a lawyer for Ms. Blank, who is battling with her former husband in the New York case involving the Madoff fraud, applauded the ruling, calling it ”the right result for families and society.” “The appeals court embraced the plight of a spouse who relies on the right to move on with her life after divorce,” Mr. Emery said. “This consideration trumps the interest of even the federal government.” The Schaberg rulingCopyright 2011 The New York Times Company. All rights reserved.