Bankr. M.D.N.C.: In re Oasis Cigar Ed Boltz Tue, 11/12/2024 - 15:52 Summary: Diggs Restaurant Group and other creditors  argued that Oasis Cigar Club's Chapter 7 filing was unauthorized, as they claimed the company’s members had not voted to approve the filing. Oasis Cigar Club responded that its board of directors had authorized the filing, providing relevant documentation, though the movants questioned the legitimacy of the board’s authority and claimed judicial estoppel should prevent the company from asserting that the board had authority. The court ruled that the burden of proof to show a lack of authority rested on the movants, who failed to provide sufficient evidence to meet this burden. The court also declined to apply judicial estoppel, citing a lack of evidence that Oasis Cigar Club had intentionally misled any court regarding its governance  and “the longstanding principle that judicial estoppel applies only when ‘the party who is alleged to be estopped intentionally misled the court to gain unfair advantage,’ and not when ‘a party’s prior position was based on inadvertence or mistake.’” Martineau, 934 F.3d at 393 (quoting John S. Clark Co. v. Faggert & Frieden, P.C., 65 F.3d 26, 29 (4th Cir. 1995)).. Consequently, the motion to dismiss was denied, allowing the bankruptcy case to proceed. Commentary: The portion of this opinion requiring a showing that a party "intentionally misled the court to gain unfair advantage" in order for judicial estoppel to apply  is useful for the recurring cases where defendants in personal injury or mass tort cases attempt to block Plaintiff Debtors  from maintaining their undisclosed claims.  They must both show that the debtor intentionally misled a court,  not merely inadvertently failed to disclose the often long-forgotten claim,  but that such nondisclosure  was to gain unfair advantage.  With an unlimited North Carolina exemption for personal injury claims,  finding that unfair advantage would be difficult.   With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_oasis_cigar.pdf (431.57 KB) Category Middle District

Bankr. W.D.N.C.: In re Gabriel Custom Homes Ed Boltz Tue, 11/12/2024 - 15:51 Summary: Trident, the Debtor’s main creditor, argued that the  bankruptcy filings were part of a “scheme to delay, hinder, or defraud creditors,” as outlined in Section 362(d)(4) of the Bankruptcy Code, due to multiple bankruptcy filings affecting the same property. However, the court found that Trident did not present sufficient evidence to prove this claim. Multiple factual issues, including the Debtor’s relationship with the property’s tenant and details of the lease, were not substantiated with evidence by either party. The court emphasized that it could not make assumptions based on pleadings alone and denied Trident’s motion without prejudice, allowing the issue to be raised again if more evidence is provided. The court also denied the Debtor’s motion to disqualify Trident’s counsel as moot. Finally, the Debtor was ordered to file a Disclosure Statement and Plan of Reorganization within 30 days. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_gabriel_custom_homes.pdf (319.78 KB) Category Western District

Economics Review: Catherine, Sylvain and Ebrahimian, Mehran and Yannelis, Constantine, How Do Income-Driven Repayment Plans Benefit Student Debt Borrowers? (October 07, 2024). Ed Boltz Mon, 11/11/2024 - 15:56 Available at:    https://ssrn.com/abstract=4980610 Abstract: The rapid rise in student loan balances has raised concerns among economists and policymakers. Using administrative credit bureau data, we find that nearly half of the increase in balances from 2000 to 2020 is due to deferred payments, largely driven by the expansion of income-driven repayment (IDR) plans, which link payments to income. These plans help borrowers by smoothing consumption, insuring against labor income risk, and reducing the present value of future payments.  We build a life-cycle model to quantify the welfare gains from this payment deferment and the channels through which borrower welfare increases. New, more generous IDR rules increase these transfers from taxpayers to borrowers without yielding net welfare gains. By lowering the average marginal cost of undergraduate debt to less than 50 cents per dollar, these rules may also incentivize excessive borrowing. We demonstrate that an optimally calibrated IDR plan can achieve similar welfare gains for borrowers at a much lower cost to taxpayers, and without encouraging additional borrowing, primarily through maturity extension.  Commentary: Particularly to the extent that unpaid balances,  in the mass aggregate,  are used by the Congressional Budget Office  (CBO)  for not only "scoring"  the costs of  any student loan relief,  whether bankruptcy discharge or otherwise,  and also by opponents to relief to waive an red flag about how massive the amount of student  loan debt there is (with the imputation of equally massive borrower  irresponsibility,  data  showing that half of the increase in these balances is due to deferred payments  is a helpful counter.   This is especially true when coupled with other findings that  "deferred payments"  were often the result of improper  student loan servicing,  as servicers often found it more profitable to grant extended and repeated forbearances rather than enrolling borrowers in appropriate Income Driven Repayment plans. It does appear that the Department of Education,  in its most recently promulgated rules regarding nonbankruptcy hardship relief,  has attempted to recognize something of this same thing in gauging the financial impact of that relief. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document how_do_income-driven_repayment_plans_benefit_student_debt_borrowers_compressed_1-1-38.pdf (333.31 KB) Document how_do_income-driven_repayment_plans_benefit_student_debt_borrowers_compressed_1-39-71.pdf (814.65 KB) Category Law Reviews & Studies

4th Cir.: Universal Life Insurance v. Lindberg- Arbitration Award Affirmed Ed Boltz Mon, 11/11/2024 - 15:38 Summary: The Fourth Circuit Court of Appeals affirmed the district court’s decision granting summary judgment to Universal Life Insurance Company (ULICO) in a breach of contract case against Greg E. Lindberg. The case arose from a guaranty agreement signed by Lindberg, which held him personally liable for an arbitration award against his company, Private Bankers Life and Annuity, Ltd. (PBLA). ULICO initiated arbitration after accusing Lindberg of improperly transferring $524 million from a ULICO trust account to PBLA. The arbitration panel ruled in ULICO's favor, ordering PBLA to pay $524 million, which PBLA failed to do. ULICO then pursued Lindberg in court for the amount under the guaranty agreement. The district court found the agreement unambiguous and held Lindberg liable. On appeal, the Fourth Circuit found no error in the district court's judgment and upheld the ruling Commentary: For (just a few of the) other decisions related to Greg Lindberg,  see: 4th Cir.: Dash BPO v. Lindberg- Dismissal for Failure to Adequately Plead Fraudulent Concealment N.C. Ct. of App.: Causey v. Southland- Shareholders Cannot Intervene to Insurance Company Liquidation United States v. Greg E. Lindberg With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document universal_life_v._lindberg.pdf (115.23 KB) Category 4th Circuit Court of Appeals

Law Review: Schwartz, Alec, The Practical Consequences of Metaphysics: Who Owns a Fraudulent Transfer Claim in Bankruptcy? (July 31, 2024) Ed Boltz Mon, 11/11/2024 - 15:35 Available at:    https://ssrn.com/abstract=4912213 or http://dx.doi.org/10.2139/ssrn.4912213 Abstract: This article seeks to answer the deceptively complex question: in bankruptcy, who "owns" a fraudulent transfer cause of action? Termed the "metaphysical issue" by the Second Circuit, courts and practitioners have reached a variety of conclusions to this question, mostly rooted in statute taken out of context and oblivious to both the history and purpose underlying such text and the immense practical consequences of getting it wrong.  Though the text of the Bankruptcy Code makes it clear that the trustee can bring certain fraudulent transfer claims, the Code does not address what happens to the state law causes of action which, prior to bankruptcy, belong to the creditors and which, after bankruptcy, shape the claims brought by the trustee pursuant to 11 U.S.C. § 544(b). This leaves the question of whether the bankruptcy trustee, upon the filing of a bankruptcy petition, fully owns the fraudulent transfer claims or whether the creditors retain some rights to these claims---rights which, if not fully disposed of by the trustee due to practical or statutory limitations, may rear their head once more.  The article evaluates four possible outcomes of ownership:  The trustee owning nothing,  The trustee holding a duplicate claim,  Partial ownership vesting in the trustee with a remainder interest for creditors, and  Full preemption of state law claims by the federal Bankruptcy Code (with full ownership by the trustee).  By delving into the history of both bankruptcy and fraudulent transfer law, the purpose of bankruptcy law, and the various ways in which the Bankruptcy Code modifies fraudulent transfer claims, the article provides fresh arguments that anything less than the trustee's full and preempting ownership of federal fraudulent transfer claims would undermine Congressional intent. In addition to legal analysis, the article highlights the practical implications of determining claim ownership, emphasizing the trustee's need for clarity to maximize the value of the bankruptcy estate and the role a coherent understanding of fraudulent transfer claims plays in courts' determination of what constitutes property of the estate. The conclusion offers insights for practitioners, including strategies to mitigate risks associated with creditors using tort claims to bypass the bankruptcy process. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document the_practical_consequences_of_metaphysics_who_owns_a_fraudulent_transfer_claim_in_bankruptcy.pdf (861.34 KB) Category Law Reviews & Studies

W.D.N.C.: Herlihy v. DBMP- Relief from the Automatic Stay Requires both Bad Faith and Objective Futility Ed Boltz Mon, 11/11/2024 - 15:33 Summary: The District Court affirmed a Bankruptcy Court decision denying appellants' request to lift the automatic stay on their asbestos-related claims against DBMP LLC. The appellants, representing asbestos claimants, sought to pursue claims in state court, but the Bankruptcy Court denied the motion, applying the In re Robbins factors to assess whether to lift the stay. The Bankruptcy Court determined that lifting the stay would likely harm the bankruptcy estate, hinder reorganization, and disrupt judicial economy by potentially leading thousands of similar claims back to state court. The District Court reviewed the Bankruptcy Court’s analysis and agreed there was no abuse of discretion. Appellants argued that DBMP’s bankruptcy filing was in bad faith, necessitating a lift of the stay under Carolin v. Miller. However, the court found Carolin did not compel the Bankruptcy Court to lift the stay based on bad faith alone and that both subjective bad faith and objective futility were required for such a finding, which the Bankruptcy Court did not establish. The District Court concluded that the Bankruptcy Court had correctly balanced the Robbins factors and committed no error of law, thereby denying the appeal and affirming the stay. Commentary: This same Carolin standard  for dismissal/lifting of the stay,  which requires both bad faith and objective futility,  applies in not just Chapter 11 cases,  but also Chapter 13. Objective futility is more than mere infeasibility. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document herlihy_v._dpmp.pdf (207.54 KB) Category Western District

Law Review: Pang, Belisa, Invisible Mortgages in Bankruptcy (June 05, 2024) Ed Boltz Mon, 11/11/2024 - 15:27 Available at:   https://ssrn.com/abstract=4939831 Abstract: This paper identifies a previously unexplored channel through which bankruptcy affects consumer welfare: the presence of retained mortgages and their invisibility in post-bankruptcy credit reports. Using credit bureau data, this paper reveals that approximately 70% of mortgagors in Chapter 7 bankruptcy and 56% of those in Chapter 13 bankruptcy had mortgages in good standing when they first filed. Similarly, court records show that 74% of mortgagors in Chapter 7 bankruptcy intended to retain their mortgages, and only 7% of properties intended for retention were foreclosed within three years, compared to 69% of those intended for surrender. This demonstrates that, surprisingly, most homeowners who filed for bankruptcy nevertheless did not default on their mortgages. However, once the homeowners filed, nearly 79% of their mortgages disappeared from their credit reports or stopped being updated. In other words, the homeowners stopped getting credit for keeping their mortgages current; their mortgages became invisible. Using event studies, this paper shows that this mortgage invisibility harms these homeowners, leading to a 15 to 30-point reduction in their credit scores, a $1,500 decrease in their credit card limits, and a 1 percentage point increase in their auto loan interest rates. Therefore, this paper advocates for reporting practice changes to better reflect the financial realities of retained mortgages in bankruptcy. Commentary: This is a recurring problem for Chapter 7 debtors since by not reaffirming a secured debt, that creditor isn’t reporting their on-going payments to the credit bureaus, depriving them of those payments to help rebuild  their credit score.  This is less of an  issue  with car loans, since those are more often reaffirmed and also because clients more easily grasp the risk of a repossession deficiency.  It  continues,  however,  to be an issue with mortgages, since ride-through is still the preferred option and often the only one allowed by bankruptcy courts.  The first thing when explaining this to a client is to make sure they understand the difference between the liability that the Deed of Trust creates against the house (i.e., if the mortgage isn’t paid the house will be sold at foreclosure) and the client’s personal liability (i.e., that they would owe any deficiency.)  It is also important that paperwork clearly disclose the options regarding reaffirmation and ride-through, but that the bankruptcy judge generally won’t approve reaffirmations for real property.  This is to counteract the invariable statement (which is likely the Unauthorized Practice of Law)  made by the mortgage servicers that "your lawyer screwed up" as the debtor should have  signed a reaffirmation.  The reason that a mortgage company might not report on-going payments is both out of spite on their part, but also out of an over-abundance of caution. If, instead of making all of their post-discharge payments on time, the client had been delinquent, there is case law holding that reporting such delinquency to a credit bureau is a violation of a debtor’s discharge, since the debtor wasn’t personally delinquent. Since they can get burned for reporting bad information, mortgage companies often take the safe route and choose to not report any information.  One of the key facts of the credit reporting laws is that creditors can only report accurate information. They are not, however, required to report any  information,  instead choosing  to remain silent.  It is possible, nonetheless, for a client to still get their payment history included in their credit report., as follows:  The client should request a payment history from the mortgage servicer.  The client should then file a dispute with the three credit bureaus, attaching a copy of the payment history from the mortgage servicer.  The credit bureaus are  required to verify the accuracy of the debt and dispute with the mortgage servicer within 30 days.  At that point, the mortgage company can either:  Remain silent, in which case  the credit bureau must accept the nonfrivolous information provided by the client;  Accurately report information.  The mortgage company would be hard pressed to explain how a payment history it prepared was inaccurate.  The client will need to repeat this process on a regular basis, to update the information.  Additionally, the client should keep the payment history, since that can be provided to anyone they’re applying to for new credit.  This process, while a headache for debtors, at least gives them a route to accomplish their goals, whether they follow through or not is a different question.   With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document credit_reporting_and_mortgage.pdf (70.5 KB) Document invisible_mortgages_in_bankruptcy_compressed.pdf (414.78 KB) Category Law Reviews & Studies

M.D.N.C.: Vaughn v. Navy FCU- Dismissal of Pro Se Consumer Rights Lawsuit Ed Boltz Mon, 11/11/2024 - 15:18 Summary: Vaughn, who represented himself, filed a complex, convoluted and confusing complaint against Navy Federal with numerous claims, including violations of various U.S. and foreign statutes, breach of contract, breach of fiduciary duty, and allegations of discrimination.  The court dismissed each claim due to a lack of factual support, failure to specify how Navy Federal violated particular statutes, or because the statutes did not provide a private cause of action. Vaughn also failed to establish the existence of a fiduciary duty or contract with Navy Federal. Additionally, his motion for default judgment was denied as Navy Federal had responded appropriately to the case. The court found Vaughn’s remaining motions moot and dismissed the case. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document vaughn_v._navy_federal_credit_union.pdf (140.29 KB) Category Middle District

Bankr. E.D.N.C.: In re Celebration Cottage AB- Single Asset Real Estate Entity Ed Boltz Mon, 11/11/2024 - 15:16 Summary: In Celebration Cottage AB, LLC, the bankruptcy court denied the motion by BIP Canton, LLC to designate Celebration Cottage AB, LLC as a Single Asset Real Estate (SARE) entity,  despite assertions that the real property constituted a single project that generated most of the debtor’s income.  Designation as a SARE  would require expedited creditor protections and alter the debtor's Chapter 11 restructuring process. Celebration Cottage owns four properties: a cottage, two adjacent vacant lots in Atlantic Beach, NC, and a property in Morehead City, NC. The court found that these properties did not function as a single economic project since only the three Atlantic Beach properties were occasionally used together for events, while the Morehead City property was used separately for short-term rentals and as a residence. As a result, the court concluded that the properties did not meet the criteria for SARE designation and could proceed under subchapter V of Chapter 11, which is designed for small business reorganization. The court also noted that Celebration Cottage’s listing of the Atlantic Beach properties for sale and continued use of the Morehead City property as a rental showed that the properties were not being held solely as passive real estate investments. Consequently, the court denied the motion to designate Celebration Cottage as a SARE entity and held BIP’s motion for relief from the automatic stay in abeyance for further hearing. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_celebration_cottage_ab.pdf (144.23 KB) Category Eastern District

Law Review: Pang, Belisa, The Bankruptcy Revolving Door (January 31, 2024) Ed Boltz Sat, 11/09/2024 - 21:39 Available at:   https://ssrn.com/abstract=4911339 Abstract: Using credit report data dating back to 1997, this study unveils that nearly 46% of consumer bankruptcy filings in 2023 came from people with a prior bankruptcy record. This percentage has increased at an average rate of 61 basis points per year since 2016. The majority of repeat filings occur after a discharged case rather than a dismissed one, and nearly half of refilers have previously filed under Chapter 7, challenging conventional beliefs about repeated filings. Moreover, the temporal gap between successive filings is substantial, with most refilings occurring over 7 years after the initial filing. This paper then reveals that a person's past filings are strongly correlated with increased future filings after 7 years, even after controlling for a wide range of variables including debt levels and demographic characteristics. Therefore, this paper contends that the prevalence of refiling can be attributed to two main reasons: first, individuals with a prior bankruptcy frequently face new financial distress, and second, they are more predisposed to file for bankruptcy compared to those with no bankruptcy record. Commentary: While this study does reveal that individuals are more likely  to file subsequent bankruptcies  if they have previously successfully filed bankruptcy,  the results do not indicate that filing  bankruptcy,  particularly Chapter 13,  is used as a stalling technique.  Only 7.6% of all refilers,  despite their notoriety, filed two dismissed Chapter  13 cases within a year, and not all of these individuals engage in abuse. (In fact,  extension of the automatic stay §362(c) for more than 30 days and subsequent confirmation of their plan both require a demonstration of good faith.) That  this research shows that many borrowers  need to file subsequent Chapter 7 bankruptcies,  particularly when the borrower continues to have non-dischargeable debts (whether student loans or reaffirmed personal liability for secured debts)  does also open the question about  whether or how much Chapter 13 bankruptcy,  with its less frequent discharges,  is truly worse than the quicker and more certain Chapter 7 discharge,  if those also lead to repeat filings.  Both may instead be traceable as much to continued lack of income or other subsequent financial distress as  to deficiencies in the debt relief provided under either regime.   While this paper does find that the amount of non-dischargeable student loan debt increases the likelihood of a subsequent bankruptcy,  but it is not clear that the author similarly examined  the amount of reaffirmed debt,  which is essentially not discharged either,  to determine the extent to which Chapter 7 debtors,  attempting to holding onto cars and houses,  similar to most Chapter 13 debtors,  are successful.  A repossession of foreclosure following a reaffirmation, resulting in a deficiency balance,  would seem likely to increase the odds of another bankruptcy. On a more venal note for consumer debtor attorneys,  this research does point to past clients as a potential source  for future clients,  especially as the earlier relationship allows for direct contact For additional commentary,  see: Credit Slips:  Bob Lawless- Revisiting How Many People Have Filed Bankruptcy     With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document the_bankruptcy_revolving_door_compressed.pdf (579.31 KB) Category Law Reviews & Studies