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If I file bankruptcy, will I ever be able to buy a house again?

Tue, 10 Aug 2021 16:12:51 GMT

The answer depends on what you do post-bankruptcy.

Rebuild your credit

You’ll need to build a positive payment history after the bankruptcy and raise your credit score. If you have secured debt (house note, car notes) that you continue to pay on time after the bankruptcy, the payments will be reflected on your credit report and help you rebuild your credit score.

You may have unsecured debt you will have to pay after bankruptcy. The most common unsecured debts you will pay after a bankruptcy are student loans. If you pay these on time post-bankruptcy, those payments will be listed on your credit report and help boost your credit score.

Many of our clients tell us that they start getting credit card offers about 90 days after their bankruptcy discharge. These will usually have high interest rates and low credit limits, but they are way to start building a post-bankruptcy positive payment history. Be careful. This only works if you make your payments on time and you carry balances below one-third of your available credit limit.

Wait the necessary time periods.

Usually, you will need to wait 2-4 years before you can obtain financing to buy a new home. The time periods to qualify for a mortgage post-chapter 7 discharge:

All the time periods are cut in half if there were extenuating circumstances causing you to file bankruptcy – unforeseeable substantial reduction in income or extreme increase in expenses due to job loss due to downsizing, death of a breadwinner, or medical expense. A divorce is not considered an extenuating circumstance.

Save a downpayment

If you have a home before you file a bankruptcy, you can sell it after, and the net proceeds after paying off the mortgage are protected from your pre-bankruptcy creditors. The more money you have for a down payment, the more it will increase your chances of qualifying for a new mortgage with a lower interest rate. If you don’t have a home to sell after your bankruptcy, you will need to save for a down payment. The amount required is generally controlled by federal regulations. FHA requires (1) a down-payment of at least a 3.5% down payment if your credit score is 580 or higher and at least 10% if it is 500- 580 and (2) that you not have incurred new debt. VA does not require a down payment as long as the sales price isn’t higher than the appraised value and there is not minimum credit score, although some lenders require a credit score of 620. Your credit score will also impact the interest rate your mortgage company will charge.

Short version – you need to build positive credit history after your discharge (the more “credit lines” the better), raise your credit score and save up for a down payment. Then you may qualify for a mortgage as short as two years after your discharge – perhaps one year if you can show extenuating circumstances.

Foreclosure and eviction moratoriums

Tue, 10 Aug 2021 16:12:47 GMT

Guest blog by Megan Baumer

Federal moratoriums on evictions and foreclosures on federally backed mortgages are currently scheduled to end on July 31, 2021. However, the White House held meetings with local officials from across the country on July 21st to discuss ways to keep people in their homes and to avoid a nationwide eviction crisis. No new extension was announced following those meetings.

Evictions

30-day eviction notice is required for federally-backed properties – apparently even post-July 31.

HUD/FHA and USDA will require landlords to provide tenants with 30 days notice to vacate for non-payment rent. This will apply only if the landlord:

a. has underlying financing

1) backed by the federal government, or

2) purchased or securitized by the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae), or

b. is receiving assistance from the federal government.

While a landlord is receiving mortgage relief, they can’t evict tenants for unpaid rent or late fees or charge tenants late fees or other penalties due to paying rent late. When a landlord stops receiving mortgage forbearance relief, they must give tenants at least 30 days’ notice to vacate.

Emergency Rental Assistance.

There should still be funds available for rental assistance under the American Rescue Plan, which allocated $21.5 billion for Emergency Rental Assistance (ERA). When combined with the $25 billion allocated by the Consolidated Appropriations Act 2021, the total ERA is more than $46 billion.

In late June, the White House called for an acceleration of the ERA funds to renters and landlords. A major problem is that no national infrastructure is in place to disburse the aid, so the states use various agencies and non-profits to disburse the funds. CNBC reported on July 13th that the first $25 billion has been disbursed to the states. However, the Washington Post reported on July 14th that only $1.5 billion of that money has been used by the states for rent, utilities and arrears through the end of May. Only about $8.6 billion of the second ($21.5 billion) round has been disbursed to the states. About 176,000 households have been assisted, but some 11.5 million or 16% of adult renters are behind on their rent. Meanwhile, rents are rising and housing prices are skyrocketing.

Texas has done better than many states - disbursing $336 million of $1.1 billion the federal government provided by June 17th, with nearly $18 million going to renters and landlords every day. (Route Fifty – June 22, 2021).

Locally , on June 10, the Austin City Council approved items to provide $42 million in rental assistance to keep Austin families from being evicted. The $42 million is made up of about $35 million in federal funding from the American Rescue Plan and about $7 million in local funds. Rent payments are made directly to the landlord/property manager/property owner who is owed rent payments. It looks like either the landlord or the tenant may apply.

For applications and other information, go to:

Austin residents: Austintexas.gov/rent - RENT (Relief of Emergency Needs for Tenants)

Travis county: https://traviscounty.onlinepha.com/en-US/

Williamson County, not Austin: http://cityofthrall.com/Wilco%20Forward%20Ph%20III%20Flyer_English.pdf

(This flier refers to payments made from March – December, so it is not current, but the listed contacts are probably the same if funds are still available.)

Also check out Check the Consumer Financial Protection Bureaus general information about assistance programs to homeowners, landlords and tenants at: https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/

Foreclosures

Even after the foreclosure moratorium ends on July 31, most mortgage companies cannot start the foreclosure process before January 1, 2022, unless they have reached out to the homeowner or evaluated a homeowner’s complete application for options to help avoid foreclosure.

On June 25, 2021, HUD announced:

FHA is continuing its extension of the deadline for first legal action and reasonable diligence timeframes for 180 days after July 31, 2021 (which means through January 2022). This extension excludes vacant or abandoned properties.
New forbearance. Homeowners who have not previously been in COVID-19 forbearance have until September 30, 2021 to request a forbearance. The COVID-19 Forbearance for homeowners who request forbearance assistance for the 1st time between July 1, 2021, and September 30, 2021, is for six months.
Extension of forbearance. For homeowners who received a forbearance from their mortgage servicer between July 1, 2020, and September 30, 2020, FHA is providing one additional three- month forbearance extension for those who need and request one.
A new COVID-19 Advance Loan Modification (COVID-19 ALM) for borrowers currently 90 or more days delinquent or at the end of their COVID-19 Forbearance. For homeowners who qualify with a 30-year rate and term, the modification will bring the mortgage current and will reduce the principal and interest portion of their monthly mortgage payment by at least 25 %. Mortgage servicers must offer the new COVID-19 ALM to distressed homeowners with FHA-insured mortgages who have faced a COVID19 related hardship.
For seniors with Home Equity Conversion (reverse) Mortgages (HECMs) who have been negatively affected by COVI D-19, extension requests, servicers must grant homeowners an extension of up to six months before the servicer may call the loan due and payable, if the extension request is received between July 1, 2021, and September 30, 2021. If the HECM loans has already been called due and payable, servicers must approve homeowner requests for an extension for any deadline related to foreclosure and claim submission of up to six months when the request is received between July 1, 2021, and September 30, 2021.

For more information, go to:

https://www.hud.gov/press/press_releases_media_advisories/HUD_No_21_108

Since FHA, VA, and USDA seem to be working in tandem, these extensions probably apply to those loans as well.

https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/

Go to this site for information about how to file a compliant against your mortgage company if you think you have grounds for one. CFPB will forward the complaint to your lender and work to get you a response, generally within 15 days. Consumerfinance.gov. CFPB – June 28, 2021

Property Taxes: The City of Austin’s website says the Travis County tax office temporarily suspended new legal actions against those with delinquent property taxes. The website does not say when this temporary suspension will end. I found this information still up on 7/12/21. However, we had some clients whose property tax liens were set for foreclosure on July 6, 2021. These cases were not new actions to collect but actions filed before the Covid shut downs – that were not being set for foreclosure.

https://tax-office.traviscountytx.gov/about-us/newsroom/2020/183-tax-officetemporarily-suspends-legal-actions

Additional sources:

https://www.cnbc.com/2021/07/13/eviction-ban-about-to-expire-little-assistance-reaches-renters-.html

https://www.washingtonpost.com/us-policy/2021/07/14/eviction-prevention-white-house-moratorium/

https://www.route-fifty.com/health-human-services/2021/06/why-states-have-been-slow-paying-out-billions-federal-rental-aid/174864/

Megan Baumer

Baumerlaw@baumerlaw.com

5th Circuit: No Student Loan Discharge When IBR = $0

Tue, 10 Aug 2021 16:12:46 GMT

The Supreme Court recently finally resolved a Texas student loan discharge adversary which started in 2016. The court by denying a writ of certiorari in June of 2021 in Thelma McCoy v. U.S., 2021 WL 2519193.

This is one of those “bad facts make bad law” cases. (In the interest of full disclosure, I have issues with Brunner and Gerhardt which I have written about previously.)

The Brunner/Gerhardt test has three prongs:

that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself if forced to repay her student loans;
that additional circumstances exist indicating that the state of affairs described in prong one is likely to persist for a significant portion of the repayment period of the student loans, and
that the debtor has made a good faith efforts to repay the loans.

District Court Memorandum Opinion and Order, Case No. 16-08007, Docket No. 79, citing In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003).

Ms. McCoy went back to college in 2000 at the age of 43. Over the next 14 years she obtained a bachelor’s degree in general studies and a master’s and Ph.D. in social work. In the process of obtaining those degrees she incurred $350,000 in student loan debt. (All of her degrees were from state universities, so I would assume that she used the student loan money not only for education-related expenses but for general living expenses, as well.) The record is not terribly clear, but it appears that she was unable to find a fulltime job but was regularly employed on a part time basis, sometimes with more than one job. At the age of 62, 18 months after receiving her Ph.D. she filed Chapter 7 and then filed an adversary proceeding seeking a discharge of her student loan debt. Her total nonstudent loan unsecured debt was $22,500. At the time of her filing and throughout the appeal process, she was in an income based repayment plan which required a zero dollar monthly payment.

Judge Isgur did not write an opinion, but did make findings of fact and conclusions of law which he announced on the record. He found that she had not established that requiring her to pay the student loan debt would impose a current hardship because the payment was zero and all she had to do to maintain the zero payment was to submit annual statements showing that her income had not substantially increased. He also found that she had not offered any proof that she would be unable to submit those statements. No payment, no hardship. Judge Isgur made it pretty clear that this was a burden of proof case – she had the burden and she didn’t meet it.

The District Court’s opinion was more focused on whether there was a change of circumstances after the loans were incurred, citing Gerhardt for the proposition that:

“additional circumstances” encompass circumstances that impacted on the debtor’s future earning potential but which either were not present when the debtor applied for the loans or have since been exacerbated. This second aspect of the test was meant to be a demanding requirement. Thus, proving that the debtor is currently in financial straits is not enough. Instead, the debtor must specifically prove a total incapacity in the future to pay his debts for reasons not within his control. Gerhardt, at 92.

[Internal citations omitted.]

The District Court went on to state: “The timing requirement exists so that courts can examine whether ‘the debtor could have calculated [a particular circumstance] into its cost benefit analysis at the time the debtor obtained the loan.”’ Citing In re Roach, 288 B.R. 437, 445 (Bankr.E.D.La. 2003. I read the transcript of the hearing in McCoy. I am reasonably certain that Ms. McCoy did not perform any cost benefit analysis. The District Court found that the debtor failed to meet her burden of proof on that issue.

There is no mention of the “timing requirement” in Brunner. FYI, Brunner is all of two pages long.

The Fifth Circuit affirmed on the burden of proof issue saying: “McCoy could not satisfy the second prong because, although her payments are set at zero dollars per month, she had not shown additional circumstances demonstrating her inability to pay a higher monthly amount would persist. Therefore, McCoy failed to meet her burden of proof.”

Thought #1: This is an all too common theme in student loan hardship litigation – the only witness is the debtor. The debtor is typically not qualified to offer an opinion on their medical condition and likely future implications. “My doctor said…” is hearsay and is objectionable as such. The last one of these I had (admittedly five years or so ago) we had two of his doctors lined up and the attorney who won his Social Security disability appeal. The U.S. Department of Education surrendered and gave him a hardship discharge of their loans before we filed his Chapter 7. We settled with the main nongovernmental lender for very low payments for just a few years.

Thought #2: Don’t file a bankruptcy and hardship adversary 18 months after graduating. She was 62 when she filed. The adversary was finally resolved five years later when she was 67. She might have had a better chance of getting a hardship discharge if she had waited until she was 67 and then filed.

Thought #3: Why would a judge ever grant a hardship discharge when the debtor is in a zero dollar payment plan? I’m thinking you would need a really sad story.

Supreme Court: Creditor retention of vehicle after bankruptcy filing does not violate automatic stay

Mon, 05 Jul 2021 21:12:33 GMT

The “automatic stay” is imposed when someone files a bankruptcy case. Sec. 362(a)(3) prohibits “ any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” [Emphasis added.] If the person filing bankruptcy owns a vehicle on the date of the bankruptcy filing, it becomes property of the estate when the case is filed. I have been a bankruptcy attorney for 37 years, and it has always been the rule that if a creditor repossessed a car prior to the bankruptcy but it had not disposed of it, the creditor had to return the car to the debtor once the bankruptcy case was filed. This is particularly true in Chapter 13 cases where a repayment plan has been filed and the vehicle is insured.

In January 2021, the Supreme Court issued an opinion in City of Chicago v. Fulton which held that “passive retention” of a vehicle does not constitute exercising control. The court held that the statute requires an “affirmative” act and simple “passive retention” of the car was not an affirmative act. In this case, the City impounded the vehicle for traffic violations, but the legal issues are the same for a creditor who repossesses a vehicle for non-payment of the car note. The opinion doesn’t address some of the actual facts, but in most big cities, cars that are impounded are held in an impound lot with a fence and police or security staff. That doesn’t sound like mere “passive retention” to me, but I’m not going to quibble with the Supreme Court about the meaning of “passive.”

In the final paragraph of the opinion, the court stated:

Though the parties debate the issue at some length, we need not decide how the turnover obligation in §542 operates. Nor do we settle the meaning of other subsections of §362(a). We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3).

The “other subsections” of §362(a) mentioned in the opinion are §362(a)(4) and (6). 362(a)(4) operates as a stay of “ any act to create, perfect, or enforce any lien against property of the estate.” [Emphasis added.] 362(a)(6) operates as a stay of “ any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” [Emphasis added.]

The Supreme Court remanded the Chicago v. Fulton case to the 8th Circuit Court of Appeals by order dated April 12, 2021, to consider whether passive retention of property of the estate violates §362(a)(4) or (6). Although the Supremes remanded for further consideration, I believe the opinion on 362(a)(3) tells us the answer. Section 362(a)(3) prohibits “any act.” Section 362(a)(4) and (a)(6) also prohibit “any act.” It is a basic rule of statutory construction that a word used in a statutory scheme has the same meaning anywhere it is used in that statutory scheme. (the phrase “any act” is not just used elsewhere in thee Bankruptcy Code, it is used in various subsections of the same section. [By the way, (a)(5) also contains the “any act” language.]

In dissent, Justice Sotomayor addresses the practical realities of asserting claims under §542(a) rather than §362(a). Section 542(a) provides:

Except as otherwise provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate. [Emphasis added.]

The practical reality is that §542 requires an adversary proceeding, which requires a filing fee and a request for a temporary restraining order which only lasts 10 days. There must be a hearing on a temporary injunction and a bond may be required. If the creditor wants to draw the process out, it depends on how much patience the judge has with the stall tactics. (I would suggest that FRBP 9011 comes into play, but that is a question for another day.)

Section 542(a) requires the creditor to “deliver to the trustee” the property in question, which raises other practical issues. If the car has been claimed as exempt, the trustee is not going to want to have any part in this process - the trustee is not going to be paid anything for participating and will simply deliver the car to the debtor who (hopefully) will make the plan payments and all of this fuss will be a waste of everyone’s time, effort, and money.

Congress could fix this with a simple amendment to §362 but that is unlikely. I suspect that Bankruptcy Courts around the country will address this through standing orders or local rules that will probably work, but uniformity would be in all parties’ best interests.

Texas Foreclosure Basics

Fri, 04 Jun 2021 17:11:41 GMT

The requirements for foreclosure of real property in Texas depend on the type of mortgage that is being foreclosed upon. There are several types of mortgages, but there are three that are by far the mort common:

* (1) a purchase money mortgage;

* (2) a purchase money second lien and;

* (3) a home equity loan or home equity line of credit.

A purchase money loan is what it sounds like – a loan to purchase the home. In some cases the original loan was refinanced to get a better interest rate but no new funds are advanced. In a “conventional loan,” the borrower/buyer of the home typically makes a down payment of at least 10% of the purchase price. The mortgage is in the amount of the balance of the purchase price.

Many borrowers are unable to make a down payment of 10% or 20% so they have to resort to alternative sources of financing. These may include government guaranteed loans where the borrower/buyer makes a minimal or no down payment but the government guarantees the loan so the mortgage lender is assured of payment. These may also include “80/20” loans or “80/15/5” loans. In these cases, the borrower/buyer makes a down payment of 5% or less of the purchase price and executes a first lien of 80% and a second lien of 15% or 20%.

Homeowners may also borrow against the equity in their home by taking out a home equity loan or home equity line of credit. There are many restrictions on equity lending in Texas, but most of those technicalities are beyond the scope of this article.

Texas residents can also obtain a home improvement loan to make repairs or improvements to the home. Unlike a home equity loan, which can be used for virtually anything, a home improvement may only be used to make improvements to the home. As a result, home equity loans are far more common than home improvement loans.

If a lender is foreclosing on a purchase money lien (whether it is a first lien or second lien), there is a two step process that the lender must comply with.

First, the lender must send a notice letter to the borrower(s) that notifies him that the loan is in default and that if the borrower does not cure the default, the lender intends to accelerate the balance of the loan and foreclose on the property.

“Accelerate” means that the lender is calling the promissory note due. After acceleration, instead of owing monthly payments for many years, the borrower now owes the entire principal balance plus any accrued interest and collection costs.

How much notice the lender is required to give is controlled by the loan documents. Approximately 90% of residential mortgages in the U.S. are on FNMA forms which require 30 days notice, so we commonly call this notice a “30 day notice.” If the loan documents are not standard forms, the notice requirements may be different.

·After the lender sends the 30 day notice, the lender must then send the actual foreclosure notice. In Texas, that notice is called a “Notice of Trustee’s Sale.” The lender must give at least 21 days notice of the sale. In Texas, notice starts on the date of mailing of the notice, not the date of receipt. A mortgage lender may only foreclose on real property on the first Tuesday of the month, so timing can be an issue. For instance, if the lender sends the 30 day letter on March 20, the 30 days to cure the default ends on April 19. There is not enough time to give 21 days notice to foreclose in May, so the lender would have to wait until at least June to foreclose.

Most major mortgage lenders do not start the actual foreclosure process until the loan is at least 90 days delinquent. After the borrower reaches 90 days delinquent, the lender sends the 30 day letter and the actual legal process starts. The result is that most foreclosures take at least 5 months from default to the actual foreclosure.

If the mortgage is a home equity loan or home equity line of credit, there is an additional step to foreclose the loan. After the lender sends the 30 day letter, the lender must file an application for an order allowing the foreclosure in the state district court in the county where the property is located. The application must be served on the borrower and the borrower has 38 days from mailing of the application to file a response. If the borrower files a response to the application, the court has to set a hearing on the application. The Texas Rules of Civil Procedure provide that the application must be set for hearing on an expedited basis. The reality is that the hearing is set for expedited hearing only if the lender requests an expedited hearing. We routinely see cases where the lender files the application, we file a response for the borrower and the lender waits weeks or months to set the application for hearing. Once the application is granted, the lender still has to send the actual foreclosure notice, so the process takes at an absolute minimum of 89 days (30 days, plus 38 days, plus 21 days). The practical reality is that the process may take several more months.

Rebuilding your credit score post-bankruptcy

Wed, 26 May 2021 17:07:21 GMT

The good news is that it is much easier to rebuild your credit after a bankruptcy filing than it was in the past. I have been a bankruptcy lawyer in Texas for 35+ years. I tell clients all the time that 30 years ago if you filed bankruptcy your mom wouldn’t loan you money for 10 years. (The credit reporting agencies could report a bankruptcy filing for 10 years,) Things have changed. I have clients all the time who tell me that shortly after their bankruptcy is discharged they receive credit offers that start with “Sorry to hear about your bankruptcy. Would you like a credit card?” Assuming you have sufficient income, most people can qualify for a mortgage with a decent interest rate two years after your discharge.

You need positive payment history after your bankruptcy.

To rebuild your credit score your credit report will need to show positive payment history after your discharge. If you reaffirm secured debt – car loans, mortgages – and continue paying student loans, all of them will show that your payments are current. If you get credit card offers apply for a few and use them. Your score will be higher if you carry a balance. Shortly after you file bankruptcy the interest rate will be high but if you carry a nominal balance you don’t care what the interest rate is.

Check your credit report after your bankruptcy.

After your discharge you should check your credit report. All of the debts that were discharged can still be listed but the balances should be zero and the comments or status should say discharged in bankruptcy. It is particularly important to check your credit if a lot of your debts have gone to collection. If discharged debts still show a balance or the status is listed as in collection you can dispute the errors by going to the credit reporting companies’ web sites.

Michael Baumer

What will the post-COVID economy look like?

Wed, 31 Mar 2021 17:04:40 GMT

Typically, business related cases have made up 20%+/- of our cases. In the last year it has been approx. 50%+. Some of these calls have been people who are just looking for information about what happens if…? More than half have been “We’re done. What do we do now?” The mix has been more diverse than I saw coming. As expected, I have been hearing from restaurants, bars, hair salons… Many have received PPP loans, so they can pay their employees and their rent, but they have minimal income to pay all of their other normal operating expenses. If their business does not start generating substantial income, they won’t be able to stay open.

I have also heard from several business owners who have businesses I would not have anticipated. Many of them were “non-essential” so they had to close for 60 days. Even as they were allowed to reopen, many remain non-essential so people are just not buying their goods or services yet. My neighborhood Home Depot has been packed all through the stay at home order. I was contacted by a business owner who operates a specialty hardware store that sells primarily to do-it-yourselfers who want to spruce up their homes. Not many people are buying their inventory right now. I have been a regular customer at Half Price Books for years. I haven’t been in any of their stores for almost a year. I am getting my hair cut less often that I normally would.

What do all of the business owners have in common? They are truly small businesses. Under the original Payroll Protection Program “small” businesses are defined as 500 or less employees. The ones I am talking to are 50 or less and many are 15 or less. My law firm has six employees. My concern is that these are the businesses that will not survive. Many are family enterprises so both spouses and maybe the kids work at the business, so what happens to all of them if the business fails?

To be fair, many large businesses are in trouble too. The airlines are all suffering. Hotels are empty or nearly so. Retail is not selling – JC Penney, Nieman Marcus, Stage Stores, Payless, Gymboree, J.Crew, and Sur la Table have all filed Chapter 11. Retail has been struggling for years and this crisis may be the death knell for some of these companies. Malls have been struggling for years because people go to malls less often. More malls will close, which will depress the value of other mall properties. I saw an interview with a CEO of a national restaurant chain who said his company will survive because a large chunk of his company’s sales have always been drive through and they have access to “billion dollar lines of credit.” (Lines – plural.) He actually expressed concern for small family restaurants because they tend to be “sit down” restaurants rather than drive-throughs and they don’t have access to lines of credit. They can’t survive sales with at 25% – or even 50% – of normal.

I am seeing a lot of reporting about concerns for commercial real estate. As more people work remotely, companies are re-evaluating whether all of their employees need to physically be in the office, they may need less space. Facebook has announced that by 2030 they expect that 50% of its employees will work remotely. If more and more employees work remotely will businesses reduce their leased or owned real estate? If they do, will rental rates decline? Will commercial real estate values decline?

There has also been a lot of discussion about how fast the economy will recover. I tried to think of some event that might offer a clue. After 9/11 it took two and a half years for air travel to return to previous levels. 9/11 was a one day event. COVID-19 is an ongoing event. (I have no intention of going to an airport, or car rental agency, or …any time soon.) I looked at some unemployment numbers from previous recessions and the pattern has been “unemployment happens fast, re-employment happens slowly.” I think that the unemployment numbers are seriously misleading. The U.S. labor force is 165 million people. It doesn’t count the people who lost their jobs and haven’t been able to file unemployment claims because some state unemployment systems have been overwhelmed. It doesn’t count people in the “gig economy” who are not employees but independent contractors. It doesn’t count people who have given up looking for a job. In prior recessions some older people who were approaching retirement age couldn’t find new work so they gave up and retired. They are no longer “unemployed.”

This is also an international pandemic – it is not just impacting the U.S. – it is impacting all of “US” everywhere. If economies around the world don’t recover quickly there will be less international trade. Supply chains have slowed down. If auto manufactures are building less cars, they are buying less parts. (From Mexico and China.)

The COVID -19 relief packages may help many small businesses survive the crisis but the long term consequences may overwhelm them. Many small businesses received PPP loans, which helped keep them going in the short term and which they will not have to repay. Many of these businesses also secured EIDL loans, which they do have to pay back over a long term at low interest rates. Many small businesses operate at low profit margins, so this additional debt may compromise their ability to survive.

-Michael Baumer

Ongoing Saga of Homestead Proceeds

Mon, 20 Mar 2017 16:59:47 GMT

In the latest installment of the homestead proceeds saga, the US District Court for the Western District has issued an opinion reversing Judge Gargotta’s opinion in In re DeBerry, 2015 WL 6528024. The District Court opinion can be found on the Western District Court website under Case N. 5:15-cv-01135-RCL, Docket No. 9.

This case starts with an unusual fact pattern as the property in question was the separate property of the debtor husband at the time of filing. The property was sold pursuant to a court order post-petition and the trustee requested and obtained a paragraph in the order approving the sale that stated:

ORDERED, ADJUDGED and DECREED that nothing in this Order shall prohibit John Patrick Lowe, as Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate (the “Estate”) of the Debtor, or any other successor trustee, from seeking to recover the proceeds from the sale of the real property located at 8 Tudor Glen, San Antonio, TX 78257 as an asset of the Estate under 11 U.S.C. §541, to the extent the proceeds from such sale are no longer exempt under Texas Prop. Code §41.001.

Upon sale of the homestead on September 26, 2014, the Debtor netted $364,592. The proceeds were deposited into a bank account solely in the name of the non-filing spouse. $85,000 of those proceeds were subsequently transferred into another account, also solely in the name of the non-filing spouse. Out of that account $50,000 was transferred to Goldstein, Goldstein & Hilley, a criminal defense firm that had previously been engaged to represent the Debtor, by check dated September 29, 2014. The $85,000 in proceeds were not reinvested in another homestead within six months of the sale of the property. (The record is unclear what happened to the remaining $280,000 in proceeds.)

Mr. Lowe then filed an adversary in which he sought declaratory relief that the proceeds of Mr. Deberry’s separate property homestead were also his separate property and that the proceeds became property of the bankruptcy estate, and sought turnover of the proceeds from the non-filing spouse, the criminal defense attorneys and unidentified Jane or John Does.

The defendants filed a motion to dismiss contending that the Texas Proceeds Rule and In re Frost, 744 F.3d 384 (5th Cir.2014) do not apply in Chapter 7 cases. Judge Gargotta agreed, relying primarily on Judge Davis’ opinion in In re D’Avila, 498 B.R. 150 (Bankr.W.D.Tex.2013) and rejecting Judge Bohm’s opinion in In re Smith, 514 B.R. 838 (Bankr.S.D.Tex.2014).

Mr. Lowe appealed and on March 10, 2017, the District Court issued its ruling holding that Judge Gargotta was incorrect and that Frost and the Texas Proceeds Rule do apply in Chapter 7 cases, relying primarily on Judge Bohm’s opinion in Smith. The court also relied on In re England, 975 F.2d 1168 (5th Cir.1992) for its oft cited statement that the purpose of the proceeds exemption “was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds in and of themselves.” The court also relied on In re Zibman, 268 F.3d 298 (5th Cir.2001) which held that a debtor who sold his homestead prior to filing Chapter 7 and was holding proceeds on the petition date was subject to the Texas Proceeds Rule.

This is an important and binding opinion for attorneys in the Western District of Texas and is clearly an important opinion for attorneys everywhere in Texas. (At least until the Fifth Circuit tells us what the official answer is.)

Now for my soapbox. Please feel free to stop reading at this point.

1. Texas enacted the first version of what is now Texas Property Code Sec. 41.001(c) in 1897. That’s 120 years ago. The statute provides, in total: “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” There is nothing in the statute (nor has there ever been) that says that the homestead claimant cannot use the proceeds for some other lawful purpose. What if the debtor needs to buy a car to get to and from work? What if he needs to acquire tools or equipment to perform his vocation? What if he needs to feed his kids? It is not the function of the courts to create statutory limitations through judicial gloss when the legislature has failed to act to impose those limitations.

2. There is a clear rule of statutory construction that Texas exemption statues are to be liberally construed, particularly with respect to homesteads. Woods v. Alvarado State Bank, 19 S.W.2d 35 (Tex. 1929): “The rule that homestead laws are to be liberally construed to effectuate their beneficient purpose is one of general acceptation.” Trawick v. Harris, 8 Tex. 312 (Tex.1852): “Profoundly impressed with the wisdom in which our homestead policy is founded, and fully impressed with its ameliorating influences, we admit that it is entitled to the most liberal construction for the accomplishment of its object.”

3. As noted above, England is almost invariably cited for the proposition that proceeds were never meant to be protected as proceeds, but only to allow the debtor to re-invest the proceeds in another homestead. England cites no authority to support that “holding.” (It isn’t actually holding, by the way.) England is a 1992 opinion. Was there no precedent in 99 years that supports England’s statement?

4. The District Court opinion in DeBerry lists six bankruptcy sections that courts addressing this issue have relied upon: 541(a)(1), 541(a)(6), 522(c), 1306(a), 1306(b), and 1327(b). I have another one that DeBerry and none of the other homestead proceeds cases mentions – 1307(b) which provides:

On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. [Emphasis added.]

It is my opinion that 1307(b) represents a fundamental difference between Chapter 13 (Frost) and Chapter 7 (Smith). 1307(b) allows a debtor in a Chapter 13 case to dismiss his/her case without any cause. One of the very basic goals of Chapter 13 is to encourage/allow debtors to save their home and vehicles and to pay something to unsecured creditors. Many of my debtor Chapter 13 clients file to try to keep their home that they are in default on. If they try to save their home by curing the default but are unable to do so, there are several options available: (1) allow the mortgage holder to foreclose; ( 2) sell the house while in a Chapter 13 and use the proceeds to buy a new homestead; (3) sell the homestead and turn over the proceeds to the Chapter 13 trustee; or (4) dismiss the Chapter 13 and use the proceeds to play “let’s make a deal” with the debtor’s unsecured creditors.

5. Unfortunately, the courts talk about the debtor buying a new homestead while in a pending bankruptcy case as if it is a realistic financial option. For most debtors, that is a false option. If the debtor has sufficient equity in the prior homestead to purchase a new homestead for cash, that is one reality. Most of my clients have relatively low amounts of equity – $50,000 to $100,000. That may suffice as a down payment on a home, but it won’t buy a home Austin, Texas. And lenders will not finance the purchase of a home for a debtor in a pending bankruptcy case.

Home Equity Loan Violations

Fri, 03 Mar 2017 18:16:27 GMT

This is a very long post describing some recent case law with respect to home equity litigation in Texas. These events are significant to a consumer bankruptcy practice, but if the subject is of no interest, you may want to skip it.

The Texas Supreme Court issued two opinions on May 20, 2016 regarding issues related to the home equity loan forfeiture provisions of the Texas Constitution. These opinions make significant changes to Texas case law regarding applicability and enforcement of those provisions. The first case was Garofolo v. Ocwen Loan Servicing, L.L.C., 497 S.W.3d 474 (Tex.2016) and the second is Wood v. HSBC Bank USA, N.A., 2016 WL 2993923 (Tex.2016). It is important that the cases are read in sequential order as Wood relies on Garofolo in reaching its conclusion. (All references to the Texas Constitution herein are to Article XVI, section 50(a)(6) and its subsections unless otherwise noted.)

I found these cases to be confusing (as did my sister who edits my posts) so I write to provide my understanding/interpretation of what they mean. To help you understand where we are going let me summarize at the beginning. Garofolo holds that there is no constitutional violation if a lender violates 50(a)(6) by not curing a violation if none of the cures enumerated in 50(a)(6)(Q)(x) will actually cure the violation. The court goes on to state (in dicta) that a borrower may have a breach of contract claim if the lender fails to cure after notice from the borrower and suffered actual damages. More significantly, Wood holds that if an equity lien does not include all of the terms and conditions required by 50(a)(6), it is not a valid lien under 50(c), and since it is not a valid lien, limitations does not start to run until the lender fails to cure after notice. (The statute of limitations ruling is the big news out of these two cases.) Wood also confirms Garofolo’s statements that a borrower may assert a claim for forfeiture as a breach of contract claim if the claim is asserted under 50(c) as opposed to 50(a).

In Garofolo, the Fifth Circuit certified two questions to the Texas Supreme Court because they involved interpretation of the Texas Constitution. Those two questions were:

1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the cancelled note and release of lien upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply?

2. If the answer to Question 1 is “no,” then, in the absence of actual damages, does a lender or holder become liable for forfeiture of principal and interest under a breach of contract theory when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder, although filing a release of lien in the deed records, fails to return the cancelled note and release upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply?

50(a)(6)(Q)(vii) states that a home equity loan is made on the condition that:

(vii) within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit;

To avoid the suspense, the Court answered both questions “no.” Garofolo starts with one atypical fact – the equity loan in question had been paid in full and the lender filed a release of lien in the real property records before litigation ensued. Ocwen, however, failed to send the borrower the cancelled promissory note and a release in recordable form within a reasonable time after full payment of the loan as required by 50(a)(6)(Q)(vii) and by the deed of trust and the lender failed to cure within 60 day after notice from the borrower as provided in 50(a)(6)(Q)(x). The Garofolo Court held that a breach of the terms of the extension of credit under the terms of the loan documents – in this case, failure to timely return the note and send a release after demand – did not give rise to a constitutional claim for forfeiture. “Our constitution lays out the terms and conditions a home-equity loan must include if the lender wishes to foreclose on a homestead following borrower default.” In other words, an equity lending violation is a shield not a sword, although how the sword is wielded is not made completely clear by Garofolo (or Wood). The court states that “we do not suggest Garofolo is not without recourse. Her remedy simply lies elsewhere – for instance, in a traditional breach-of-contract claim, in which a borrower seeks specific performance or other remedies contingent on a showing of actual harm.” [Emphasis added.]

With respect to the breach of contract claim, however, the Court held that she did not have a claim for forfeiture under a breach of contract theory as it was undisputed that she had suffered no actual damages as a result of the breach. (Although the holder did not send her a release in recordable form, the holder did file an actual release in the real property records so there was no cloud on her title.) The court noted that the 2003 amendments to 50(a)(6) included a change to the forfeiture provision “whereas forfeiture under the original version was arguably triggered whenever a lender ‘fails to comply with [its]obligations,’ the current version does not implicate forfeiture until a lender ‘fails to correct the failure to comply… by’ performance of a corrective measure.”

50(a)(6)(Q)(x) was amended in 2003 to set out the methods by which a lender or holder may correct the failure to comply. The amended statute provides:

Except as provided by Subparagraph (xi) of this paragraph, the lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit if the lender or holder fails to comply with the lender’s or holder’s obligations under the extension of credit and fails to correct the failure to comply not later than the 60th day after the date the lender or holder is notified by the borrower of the lender’s failure to comply by:

(a) paying the owner an amount equal to any overcharge paid by the owner under or related to the extension of credit if the owner has paid an amount that exceeds an amount stated in the applicable Paragraph (E), (G), or (O) of this subdivision;

[Paragraph (E) is the 3% cap on closing costs which is one of the more common violations. Paragraph (G) is the prohibition against pre-payment penalties. Paragraph (O) limits the interest rate to a “rate permitted by statute.”]

(b) sending the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit does not exceed the percentage described by Paragraph (B) of this subdivision, if applicable, or is not secured by property described under Paragraph (H) or (I) of this subdivision, if applicable;

[Paragraph (B) is the 80% loan-to-value limitation. Paragraph (H) prohibits taking “any additional real or personal property other than the homestead” as collateral for the loan. Paragraph (I) prohibits taking an equity lien on ag exempt property.]

(c) sending the owner a written notice modifying any other amount, percentage, term, or other provision prohibited by this section to a permitted amount, percentage, term, or other provision and adjusting the account of the borrower to ensure that the borrower is not required to pay more than an amount permitted by this section and is not subject to any other term or provision prohibited by this section;

[This cure does not refer to any specific provision or prohibition.]
(d) delivering the required documents to the borrower if the lender fails to comply with Subparagraph (v) of this paragraph or obtaining the appropriate signatures if the lender fails to comply with Subparagraph (ix) of this paragraph;

[Subparagraph (v) is the provision that requires the lender to provide the borrower with copies of all documents signed by the borrower related to the extension of credit which were signed at closing. Subparagraph (ix) is the provision which requires the acknowledgment of value to be signed by the borrower and the lender.]

(e) sending the owner a written acknowledgement, if the failure to comply is prohibited by Paragraph (K) of this subdivision, that the accrual of interest and all of the owner’s obligations under the extension of credit are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead; or

[This one presents a problem. Paragraph (K) provides that a borrower may only have one equity loan at a time. The cure provision is that the lender must send the borrower a written acknowledgement that accrual of interest and all of the borrower’s obligations under the extension of credit (including making payments) are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead. But, assuming that the first lien equity loan is otherwise valid, then the first lien is not prohibited by Paragraph (K). The cure provision as drafted would seem to provide only a cure for a third lien equity loan. In short, the cure does not appear to match the violation.]
(f) if the failure to comply cannot be cured under Subparagraphs (x)(a)-(e) of this paragraph, curing the failure to comply by a refund or credit to the owner of $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit with any modifications necessary to comply with this section or on terms on which the owner and the lender or holder otherwise agree that comply with this section.

In this case, the violation – failing to return the cancelled note and sending a release in recordable form – does not fall within the scope of subparagraphs (a) through (e) so it must fall, if anywhere, within the scope of the “catchall” provisions of subparagraph (f). The Court held, however, that under the circumstances the catchall cure would not actually provide a cure. The lender could offer to pay or credit $1,000 but could not refinance the extension of credit as there was no longer any debt to refinance. Garofolo concluded “…if a lender fails to meet its obligations under the loan, forfeiture is an available remedy only if one of the six corrective measures can actually correct the underlying problem and the lender nonetheless fails to timely perform the relevant corrective measure.” [Emphasis added.]

The final paragraph of the opinion states:

The terms and conditions required to be included in a foreclosure-eligible home-equity loan are not substantive constitutional rights, nor does a constitutional forfeiture remedy exist to enforce them. The constitution guarantees freedom from forced sale of a homestead to satisfy the debt on a home-equity loan that does not include the required terms and provision – nothing more. Ocwen therefore did not violate the constitution through its post-origination failure to deliver a release of lien to Garofolo. A borrower may seek forfeiture through a breach-of-contract claim when the constitutional forfeiture provision is incorporated into the terms of a home-equity loan, but forfeiture is available only if one of the six specific constitutional corrective measures would actually correct the lender’s failure to comply with its obligations under the terms of the loan, and the lender nonetheless fails to perform the corrective measure following proper notice from the borrower. If performance of none of the corrective measures would actually correct the underlying deficiency, forfeiture is unavailable to remedy a lender’s failure to comply with the loan obligation at issue. Accordingly, we answer “no” to both certified questions. [Emphasis added.] [Unfortunately, Garofolo does not make clear the distinction between 50(a) and 50(c). More on this infra.]

My response to the Court’s summary:

First sentence: The terms and conditions applicable to home equity loans contained in 50(a)(6) are not “required” to be “included” in the equity loan documents (although most of them typically are included).

Second sentence: A borrower is protected from forced sale of a homestead if the loan “does not include the required terms and conditions – nothing more.”” The opinion suggests that defects in an equity loan are only a defense to foreclosure and not the basis for an affirmative claim against the lender, but… (Look at the fourth sentence).

Fourth sentence: Notwithstanding the holding that there is no constitutional violation or remedy, the court also stated that a borrower may seek forfeiture under a breach of contract theory but:
• only if one of the corrective measures contained in 50(a)(6)(Q)(x)(a)-(f) would actually cure the violation;
• and the lender fails to perform the applicable corrective action following notice from the borrower;
• and the borrower sustained actual damages as a result of the uncured violation.

Fifth sentence: If none of the corrective measures enumerated in the 50(a)(6)(Q)(x)(a)-(f) would actually correct the violation, forfeiture is not an available remedy.

The missing sentence: The Court states elsewhere that the borrower must be able to prove actual damages in order to invoke forfeiture under a breach of contract theory. Under the facts of the case, the borrower in Garofolo sustained no actual damages and has no remedy.

Because of the atypical fact in this case that the loan was paid in full prior to the instigation of litigation, the holding should be limited in its application. (Although I am primarily a debtor’s attorney, I have to agree with the result in Garofolo. The violation was highly technical and the borrower suffered no damages, actual or otherwise. A borrower shouldn’t get a “free house” under those circumstances.)

Wood is the follow up to Garofolo. Wood states:

The primary issue in this case is whether a statute of limitations applies to an action to quiet title where a lien securing a home-equity loan does not comply with constitutional parameters. The parties also dispute whether petitioners are entitled to a declaration that respondents have forfeited all principal and interest on the underlying loan. We conclude that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations. We further hold that in light of this Court’s decision today in Garofolo [citation omitted], petitioners have not brought a cognizable claim for forfeiture. [Emphasis added.]

The determination that there is no applicable statute of limitations is a major change from prior case law which generally held that limitations accrues at closing if the violation was apparent at the time of closing. See, In re Priester, 708 F.3d 667 (5th Cir.2013); Schanzle v. JPMC Specialty Mortgage LLC, 2011 WL 832170 (Tex.App – Austin 2011); Santiago v. Novastar Mortgage, Inc., 443 S.W.3d 462 (Tex.App. – Dallas 2014); Estate of Hardesty, 449 S.W.3d 895 (Tex.App. – Texarkana 2014). [Judge Gargotta took an early lead on the limitations issue in In re Ortegon, 398 B.R. 431 (Bankr.W.D.Tex.2008), a case I lost. Somebody has to try the cases where we don’t know what the answer is.] The borrower did not have to be aware that the extension of credit violated 50(a)(6), as long as it was not concealed. For instance, if the closing costs exceeded the 3% cap on closing costs and that could be determined by doing the math on the HUD-1, the fact that the borrower was not aware of the 3% cap or how it was calculated does not delay limitations from running.

Wood explains the holding in Garofolo, including the scope of that opinion.

Our opinion today in Garofolo clarifies the extent of the protections outlined in section 50(a), including a borrower’s access to the forfeiture remedy. Specifically, we hold in Garofolo that section 50(a) does not create substantive rights beyond a defense to foreclosure of a home-equity loan securing a constitutionally noncompliant loan, observing that the terms and conditions in section 50(a) “are not constitutional rights and obligations unto themselves.” We also clarify that “the forfeiture remedy [is not] a constitutional remedy unto itself. Rather it is just one of the terms and conditions a home-equity loan must include to be foreclosure-eligible. We explain that borrowers may access the forfeiture remedy through a breach-of-contract action based on the inclusion of those terms in their loan documents, as the Constitution requires to make the home-equity loan foreclosure-eligible. In Garofolo we interpret only section 50(a), which sets the terms home-equity loans must include to foreclosure-eligible. Section 50(c), on the other hand, expressly addresses the validity of any homestead lien, broadly declaring the lien invalid if the underlying loan does not comply with section 50. [Internal citations omitted.] [Emphasis added.]

50(a) provides, in relevant part: “The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except: [a list which includes subparagraph (6) which describes home equity loans.] [Emphasis added.]

50(c) provides, in contrast: “No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section…” [Emphasis added.]

Although Garofolo is less than crystal clear that its holding is based on 50(a) as opposed to 50(a)(6), Wood makes clear that the distinction is between 50(a) and 50(c).

Although Garofolo and Wood may seem to say that a borrower may not bring a declaratory relief action regarding an alleged home equity defect, the actual holding is that a borrower may not bring a declaratory relief action based upon alleged constitutional violations. Both opinions make it clear that a borrower may bring an action for breach of contract if the loan is noncompliant and the lender/holder fails to cure after notice. This is significant as a claim for breach of contract gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 38.001 and a claim for declaratory relief gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 37.009. (I say “request” as both statutes are discretionary – the court “may” award attorney’s fees.)

What it the message for practitioners? If a potential client comes to you and you identify a home equity violation, you should draft a notice of violation letter for the client’s signature which identifies the violation with sufficient specificity for the lender to identify the violation, i.e., if the violation is charging more than 3% for closing costs, say that. You do not have to identify the specific statutory sub-paragraph. Do not take any further action during the 60 day cure period. Assuming the lender does not cure, you have a couple of options. Have the borrower default, wait until the lender files an application for foreclosure, then sue the lender for declaratory relief and breach of contract. (And injunctive relief if necessary to stop a foreclosure.) Alternatively, don’t wait for the lender to take action and file a preemptive declaratory relief/breach of contract action. In your pleading, make certain that forfeiture of principal and interest is requested under 50(c), not 50(a). The declaratory relief is that the loan is invalid under 50(c). The breach of contract claim is that the lender failed to cure the violation pursuant to 50(a)(6)(Q)(x)(a)-(e) after notice pursuant to 50(a)(6)(Q)(x).

This is way beyond the scope of this post, but home equity violations may give rise to other claims and causes of action. For instance, there may be claims for DTPA violations. Texas case law holds that a loan is not a “good’ or “service” and will not serve as the basis for a DTPA violation. If, however, the home equity violation is charging closing costs in excess of the 3% cap, one or more of those costs may be a good or service – an appraisal, a survey, a tax certificate……. – which might bring the claim under the DTPA. There may also be RESPA violations, FDCPA violations, FCRPA violation,… (I have seen all of these. This is not meant to be an exhaustive list.) I mention the DTPA in particular as it may give rise to treble damages. (And attorneys fees)

Bandi – Dischargeability under 523(a)(2)(A)

Tue, 24 Jul 2012 17:39:39 GMT

On June 12, the Fifth Circuit issued an opinion addressing the meaning of “a statement respecting the debtor’s or an insider’s financial condition” [and the distinction between non-dischargeability of debts under 523(a)(2)(A) and (B)]. In re Bandi , 2012 WL 2106348 (5 ^th Cir.2012).

523(a)excepts from discharge any debt –

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by –

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; …” [Emphasis added.]

In Bandi the debtors (two brothers) guaranteed a loan their corporation obtained from a friend. Prior to obtaining the loan, one of the brothers represented that he had purchased a home and both of the brothers represented that they had purchased a condominium project and an office building. They even took the friend (and his lawyer wife) on a tour of “their” office building. The brothers did not actually own any of the properties and admitted as much at trial. They argued that their statements were made with respect to their financial condition, so they did not fall within the scope of 523(a)(2)(A) and they were not in writing, so they did not fall within the scope of 523(a)(2)(B), either. The focus of the opinion is on the meaning of “a statement respecting the debtor’s or an insider’s financial condition.”

The court held: “The term ‘financial condition’ has a readily understood meaning. It means the general overall financial condition of an entity or an individual, that is, the overall value of property and income as compared to debt and liabilities. A representation that one owns a particular residence or a particular commercial property says nothing about the overall financial condition of the person making the representation or the ability to repay the debt. The property about which a representation is made could be entirely encumbered, or outstanding undisclosed liabilities of the person making the representation could be far more than the value of the property about which a representation is made.” The court found that the false statements were not statements respecting the debtors’ financial condition within the meaning of 523(a)(2)(A) and the debt was non-dischargeable.

I’m not sure I agree with the court’s definition. The Code does not say “the general overall financial condition” of the debtor – it says a statement “respecting” the debtor’s financial condition. My American Heritage Dictionary defines “respecting” as “In relation to; concerning.” “I own this office building” would seem to “relate to” my financial condition. This may just be one of those “bad facts make bad law” cases. The debtors got their friend to loan them $150,000, at least in part by “puffing.” It doesn’t seem fair for them to get away with it. The court fashioned a remedy so they didn’t.

Michael Baumer

<a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a>

Lien Stripping

Tue, 24 Jul 2012 17:33:51 GMT

We just filed our first “lien stripping” case where we are attempting to strip off a wholly unsecured second lien from a house the debtor owns in Washington DC. The property generates positive cash flow after paying the first lien (which will help the debtor fund her plan), but not enough cash flow to pay the second lien. (The same analysis applies to property here in Texas, but I’m just giving you general info that might be relevant.)

I did a little research and lo and behold, the Southern District of Texas has a procedure for doing this, so basically I just followed/copied/misappropriated theirs. We are doing this by plan provision rather than an adversary. Rule 7001(2) defines adversary proceedings to include “a proceeding to determine the validity, priority, or extent of a lien…” The obvious goal here is to avoid the expense and delay of an adversary. One of the key issues between contested matters and adversaries is procedural due process. In addition to the notice required in the Southern District form, we also serve the registered agent or other appropriate corporate representative. (i.e the president of the bank.) We also serve a “Lien Stripping Notice” separate from the plan which basically says “Hey, you. Yes, you. We are trying to do bad things to you. Pay attention.”

We had a confirmation hearing which has been re-set based upon an amended plan. At the hearing, our Chapter 13 Trustee and I made sure the judge knew what I am trying to do. He did not “approve” this procedure, but he basically said give it a shot and we’ll see how it works. If the creditor objects to doing this by plan provision, we may have to re-file as an adversary, but if they don’t, it looks like it will work.

FYI

Michael Baumer

<a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a>

Discharge of taxes in bankruptcy

Mon, 16 Jan 2012 18:43:16 GMT

Ladies and Gents –

The Fifth Circuit just (1/4/12) issued an opinion that is going to change our world. (Or at least part of it.) In McCoy v. Mississippi State Tax Commission , 2012 WL 19376 (5 ^th Cir. 2012), the court interpreted the hanging paragraph at the end of 523(a) which was added by BAPCPA. That paragraph provides:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.) Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law. [Emphasis added.]

The Fifth Circuit held that “applicable filing requirements” includes the requirement that a return be timely filed. If a “return” is not timely filed, it does not qualify as a “return” under 523(a). Congress has now defined “return” so that a real, actually filed return is not a “return” if it was filed so much as one day late. (Even if it was actually filed more than two years prior to the bankruptcy filing.) (If congress really wanted to change prior law, shouldn’t they have put the hanging paragraph at the end of 523(a)(1)(B)(ii) [instead of after the other 17 unrelated sub-paragraphs and sub-sub-paragraphs in 523(a)] or wouldn’t they have changed the existing wording of 523(a)(1)(B)(ii)? I am not arguing that the result is incorrect. It appears to be “correct” if you read all of this together. I am simply suggesting that this is one more example of a poorly conceived and/or drafted provision our “friends” in Washington left us with to sort out. Although McCoy involved state income tax returns, there is no basic difference between the Mississippi tax code and the Internal Revenue Code as far as filing requirements. (The Mississippi tax code also requires that returns be filed by April 15 ^th .)

Literally one week after McCoy ,(1/11/12) Judge Lief Clark issued an opinion in Hernandez, v. U.S. , Adv. No. 11-5126C (Bankr.W.D.Tex.2012) which made the same analysis with respect to the Internal Revenue Code. He reached the same conclusion Judge King did in McCoy .

To make sure that the client’s tax returns were timely filed, you should probably order a “tax account transcript” for each year in question. (Your client can sign the form so you can order these.)

I am absolutely certain this is not the end of the dispute/discussion over this issue, but advise your clients appropriately. Just my opinion, for what it’s worth.

Michael Baumer

Austin, Texas

Federal Tax Liens in Chapter 13

Mon, 26 Sep 2011 17:45:10 GMT

I recently filed a Chapter 13 case and had an issue arise which I see occasionally that I thought might be of interest to the consumer debtor bar. In my case, the debtor lived in Travis County and owed the IRS taxes for several years, all but one of which would be dischargeable as “stale” taxes. The IRS filed a tax lien, but filed it in Williamson County, not Travis.

The improper filing creates a tax lien against the debtor, but not as against third parties, i.e., a judgment lien creditor, like a trustee in bankruptcy which has the status of a hypothetical judgment lien creditor under Section 544(a)(1) or a bone fide purchaser of real property under 544(a)(3).

This made a huge difference in my case because the debtors had significant equity in their home but did not have sufficient disposable income to pay the IRS claim. If the lien was “good”, they would have had to sell their home to pay the lien. Since the lien was unperfected as against the trustee, the claim became unsecured and they were able to pay significantly less than the amount of the claim. (And the IRS did the right thing and amended their claim so I didn’t have to file an adversary to determine the validity and priority of the lien.)

For a discussion of this issue, see the Internal Revenue Manual, Part 5, Chapter 17, Section 2, which can be found at www.irs.gov/irm/part5/ Scroll down to 5.17.2 titled Federal Tax Liens and get the Service’s take.

The practice tip here is if you get a secured proof of claim from the IRS, don’t assume it is perfected. Check. Most counties have their real property records online now, so it is no great burden. I am not suggesting that this is a common situation, but this is not the first time I have seen it.

Michael Baumer

Law Office of Michael Baumer

Ethical Implications of Recent Supreme Court Consumer Bankruptcy Opinions

Tue, 24 May 2011 17:48:51 GMT

In the last year, the U.S. Supreme Court issued four opinions which addressed what appear to be fairly discrete questions of some practical import to consumer bankruptcy practitioners. Three of those cases have ethical implications which the Supremes either did not comprehend or did not attach much significance to.

The first case, United Student Aid Funds, Inc. v. Espinosa , 130 S.Ct. 1367 (2010), involved a Chapter 13 in which the debtor filed a plan which proposed to pay his student loan debt in full through the plan, but without payment of interest. No one objected and the plan was confirmed. Approximately three years later, the creditor intercepted the debtor’s tax refund, the debtor moved to enforce the confirmation order, the creditor moved to set aside the order as void under FRCP 60(b), and eventually the case ended up before the Supremes. The court held that the order was not void because the court has jurisdiction to to hear student loan hardship discharge cases. The court further held that the creditor was not denied due process although it was not served with a summons and complaint (the creditor was served with a copy of the plan and filed a proof of claim in the case) because Rule 7011 requiring an adversary be filed is procedural, not jurisdictional. Result: debtor wins. Interest on the student loan debt is discharged.

This case places a debtor’s attorney in the unfortunate position that he/she has conflicting duties to the court and to the client. Although the Supremes make it clear that the confirmation order never should have been entered (they refer to the “bankruptcy court’s error”), they nonetheless held that the provision was effective. As a debtor’s attorney I have an obligation to represent my clients zealously within the bounds of the law. Isn’t it my duty to try to get a plan confirmed that provides my client with the most relief possible? The obvious answer is that the relief granted to the debtor in Espinosa never should have been granted. (The relief granted was not within the bounds of the law.) I concede that point, but it was granted so – Which duty is higher – the duty to the court or the duty to the client? The Supremes at least recognized this issue in Espinosa . In the final paragraph of the opinion, the court states: “We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis. As we stated in Taylor v. Freeland & Kronz (citation omitted), “debtors and their attorneys face penalties under various provisions for engaging in improper conduct in bankruptcy proceedings. The specter of such penalties should deter bad faith attempts to discharge student loan debt without the undue hardship finding Congress required. And to extent existing sanctions prove inadequate to the task, Congress may enact additional provisions to address the difficulties United predicts will follow our decision.”

The second case was Hamilton v. Lanning , 130 S.Ct. 2464 (2010), which involved a debtor who took a one time buyout from her previous employer. That income caused her income to be above the median for her state. She proposed a 36 month plan based upon her new job and the trustee objected contending that the Code requires mechanical application of the means test. The court rejected that position and held: “When a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.” This ruling should come as no surprise as the majority of the courts which have addressed this issue have reached the same result – holding that “projected” has to add something to “disposable income.” This is the one opinion of the four that does not raise any serious ethical implications. (You can’t advise your debtor to quit their job so they qualify. Right? Seems pretty straightforward to me.)

The third case was Schwab v. Reilly . 130 S.Ct. 2652 (2010). In that case, the debtor had operated a restaurant before filing a Chapter 7. She claimed restaurant equipment as an asset and assigned a dollar value to the asset of $10,718 which fit within her allowable federal exemptions. The trustee obtained an appraisal of the equipment at $17,200 and moved to sell the equipment subject to the debtor’s claimed exemption. The debtor objected contending that because the trustee did not object to her exemptions, she was entitled to keep 100% of the value. The court disagreed holding that because the dollar value assigned to the asset by the debtor fit within the dollar range of the allowable exemption, the trustee was not required to object to the exemption to preserve the estate’s interest in any value in excess of the exempt interest. This is the case which has resulted in many debtor’s attorneys now including a provision in their Schedule C which states some version of “amount claimed is 100% of market value.”

The problem with this is that it places the trustee in the position of having to at least consider filing an objection to exemptions where the debtor’s schedules include such a provision. This may not be an issue in the “typical consumer case” where the assets consist of basic household goods and a house and two cars. (Of course, how many of us have had clients who listed only minimal jewelry but show up in our office wearing something which was clearly not valued accurately?) It seems that the more common problem scenario for the trustee is the scenario that played out here. The debtor owns something other than basic household goods – inventory, equipment, etc – and assigns a value that fits within the allowable exemption amount (i.e., under the wildcard.) Is it just fortuitous that the value fits within the allowable amount, or did the debtor “lowball” the value to make it fit? The trustee in these cases may feel compelled to object just to preserve the estate’s interest and to get some opinion of value. (Which he is going to pay for out of the $60 he gets out of the filing fee.) I would suggest that if a judge catches a debtor’s attorney doing this on more than a few occasions, there should be serious consequences. (Both for the debtor and the attorney.)

Finally, in Ransom v. FIA Card Services, N.A. , 131 S.Ct. 716 (2011), the court was faced with the issue of whether a debtor gets a vehicle ownership expense on the means test for a vehicle which is not encumbered by any debt. The court concluded that the debtor does NOT get such an expense. For those of us in Texas, this reversed the holding of In re Tate , 571 F.3d 423 (5 ^th Cir.2009). But if the debtor went out and got a title loan for, say, enough to pay the bankruptcy attorney’s retainer, then there would be a debt secured by the car and the debtor would get the full vehicle ownership expense for that vehicle even if the debt would be paid in only a few months. Of course, 526(a)(4) provides that a debt relief agency may not advise an assisted person to incur more debt in contemplation of filing bankruptcy or to pay an attorney for filing a bankruptcy, but the reality is that an attorney is not prohibited from telling his client “You do not qualify for Chapter 7 by a few hundred dollars and if you only had a title loan, you would qualify. I am not advising you to do that, I am just advising you of the fact that you do not currently qualify, but you would if…….” (Wink, wink.)

The unfortunate effect of three of these four opinions is that it places the debtor’s attorney in the precarious position of balancing his duty of fully advising his client of all of their rights and responsibilities while maintaining his duty to the integrity of the system.

Just thinking out loud. (Or is it shouting into the hurricane?)

Michael Baumer

Law Office of Michael Baumer

PRIVATE EMPLOYERS MAY DISCRIMINATE IN HIRING BASED ON A BANKRUPTCY FILING

Wed, 11 May 2011 13:22:31 GMT

The Fifth Circuit recently held that private employers may discriminate in hiring based on a bankruptcy filing. In re Burnett , 635 F.3d 169 (5 ^th Cir.2011). The court distinguished between public employers which may not discriminate in hiring and private employers which may. Neither public nor private employers may discriminate with respect to persons who are already employed based solely on a bankruptcy filing. (The employer in Brunett was Stewart Title Inc. – another reason to not be fond of title companies.) The Fifth Circuit is in line with Rea v. Federated Investors , 627 F.3d 937 (3d Cir.2010).

The bankruptcy code contains provisions dealing with employment discrimination by public and private employers in Section 525 as follows:

(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 . . . a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such grant to, discriminate with respect to such a grant against, deny employment to , terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

Subsection (a) dealing with discrimination by governmental units was contained in the 1978 Bankruptcy Code. Subsection (b) dealing with discrimination by private employers was added in 1984. Both prohibit termination of employment or discrimination of employment based solely on a bankruptcy filing, but there is a small but apparently significant variation in the language of these two provisions. (a) prohibits denying employment based on a bankruptcy filing, but (b) does not. The courts have relied on this difference in holding that a private employer may deny employment based on a bankruptcy filing while a governmental unit may not.

An issue common to both sections is that they prohibit discrimination based “solely” on a bankruptcy filing. Employers will rarely identify a bankruptcy filing as the reason for terminating employment when a general assertion of insubordination or not being a team player will suffice (and is much more difficult to disprove.) Even if an employer does identify a bankruptcy filing as an issue in employment discrimination, as long as it is not the only issue, 525 is presumably not violated.

Law Office of Michael Baumer

Lessons in Islamic Law – Contract Law

Tue, 29 Mar 2011 13:27:43 GMT

The other day, I was reading something in the Tao Teh Ching which reminded me of something I read once in the Quran and I was looking for that and came across the following passage. In case anyone cares, I am not a Muslim, but I never trust what anyone else tells me the Quran says (or the Bible, either), so I read the actual book to see what it really says. Anyway, this is what the Quran says about contracts. (More particularly, promissory notes.)

O believers, when you negotiate a debt for a fixed term,

draw up an agreement in writing,

though better it would be to have a scribe write it faithfully down;

and no scribe should refuse to write as God has taught him,

and write what the borrower dictates,

and have fear of God, his Lord, and not leave out a thing.

If the borrower is deficient of mind or infirm,

or unable to explain, let the guardian explain judiciously;

and have two of your men to act as witnesses; but if two men

are not available, then a man and two women you approve,

so that in case one of them is confused the other may remind her.

When the witnesses are summoned they should not refuse.

But do not neglect to draw up a contract, big or small,

with the time fixed for paying back the debt.

This is more equitable in the eyes of God,

and better as evidence and best for avoiding doubt.

But if it is a deal about some merchandise

requiring transaction face to face,

there is no harm if no contract is drawn up in writing.

Have witnesses to the deal, and make sure

that the scribe or the witness is not harmed.

If he is, it would surely be sinful on your part.

And have fear of God,

for God gives you knowledge,

and God is aware of every thing.

If you are on a journey and cannot find a scribe,

pledge your goods against the loan;

and if one trusts the other,

then let him who is trusted

deliver the thing entrusted, and have fear of God, his Lord.

Do not suppress any evidence,

for he who conceals evidence is sinful of heart;

and God is aware of all you do.

So what are the important principles here?

Contracts should be in writing.
They should be written by “scribes.” (Modern translation: lawyers.)
Don’t leave anything out. (Make sure all important terms are addressed.)
Have it witnessed. (Modern translation: notarized?)
Don’t harm the scribe or witnesses. (Modern translation: don’t shoot the lawyers.)
A written contract is “better as evidence and best for avoiding doubt.” (Modern translation: the parole evidence rule.)
“Do not suppress any evidence.” (Modern translation: tell the truth, the whole truth, and nothing but the truth.)
I have no intention of going here, but two women equal one man, at least for witness purposes, so “if one of them is confused, the other may remind her.” (Modern translation: if you are discussing this with a woman you might want to still talk to you in the future, you should preface the discussion with “Can you believe this?”)

Law Office of Michael Baumer

Fifth Circuit affirms Camp v. Ingalls

Thu, 27 Jan 2011 14:31:44 GMT

On January 21 the Fifth Circuit affirmed the District Court opinion in Camp v. Ingalls .

In that case, the debtor moved from Florida to Texas in 2007 and filed a Chapter 7 in 2008, less than 730 days later. The question presented was what exemptions was the debtor allowed or required to claim.

Section 522(a)(3)(A) which was added by BAPCPA provides that a debtor may claim the exemptions of the state where he was domiciled for the 730 day period prior to filing. If he has not been domiciled in one place for the 730 day period, he claims the exemptions of the state where he resided for the 180 day period prior to the 730 day period. In this case, Mr. Camp would be required to claim Florida exemptions because he was not domiciled in Texas for 730 days prior to filing.

The problem is that Florida’s exemption statutes say that specified property may be claimed as exempt by “residents of this state.” Since Mr. Camp is no longer a resident of the state of Florida, he is not entitled to claim Florida exemptions. The Fifth Circuit held that although Florida has opted out, the Florida exemptions only apply to residents and since Mr. Camp was a non-resident, the Florida opt out statute did not bar him from claiming federal exemptions. (I personally think this is the wrong way to get to the right answer, but they got the right answer, so I’m not going to complain too much.)

In a footnote, the court declined to address the issues of whether 522(b)(3) preempts state law restrictions of extraterritorial application of exemptions and whether the savings clause at the end of 522(b) permits a debtor to claim the federal exemptions when state law opts out and at the same time restricts extraterritorial application of state exemptions.

I have previously written on this issue and opined that I think Judge Gargotta reached the result that Congress actually intended (If you have lived somewhere for less than two years, you have to use the exemptions where you came from), but the statute was not well thought through (i.e., the drafters at MBNA never thought about the issue or looked at individual state laws) and as result, poorly drafted. Because I have way too much time on my hands, I have actually looked at each state’s exemption statutes to see if they have a domicile or residency requirement. Please note that some states have a residency requirement for real property, but not personal property, and vice versa. I made a chart, which I offer for your consideration. Major disclaimer – the chart is about two years old. State laws may have changed since then. I know, for example, that New York is considering amendments to its exemption laws to address this issue.

For what it’s worth………

Michael Baumer

Totality of the Circumstances under 707(b)(3)

Thu, 27 Jan 2011 14:30:28 GMT

Around Thanksgiving, The UST and I tried two 707(b) cases in front of Judge Mott. He took them under advisement and announced his rulings on December 22. He made lengthy recitations of findings of fact and conclusions of law on the record, but apparently will not be publishing these as opinions. If you are going to try one of these cases, you might want to get a transcript as it will provide valuable insight into how he approaches these issues.

The first case was:

Hufstedler 10-11769

In this case the debtors are in their mid-50s with one dependent child. They both work for the state and have for several years so income is fairly secure. Their combined gross income is $109,000 per annum. Just prior to filing, Mr. Hufstedler purchased a term life policy with a death benefit of $100,000 with a monthly premium of $151. Mr. Hufstedler already had term life coverage of approximately $300,000. (Mrs. Hufstedler has approximately $500,000 in term coverage, but it has been in place for several years and the UST did not object to that expense.) He and his wife also purchased long term care insurance with a monthly premium of $431. Although both of the debtors have some medical issues (they both take blood pressure medicine and he takes cholesterol medicine and is a diabetic), their conditions have not materially changed recently and are manageable with medication. The stated reason for these purchases was looking forward and trying to provide for the family in the event one of their medical conditions grew worse.

Judge Mott initially held that long term care insurance is not “health insurance” as contemplated by 707(b)(2)(A)(ii)(I) so it would not be an allowable expense on line 34 of the means test.

He went on to conclude that the long term care insurance was not a “reasonably necessary expense at this time ”, because there was no apparent immediate need and the insurance could be purchased 5 years later (at the end of a hypothetical Chapter 13) for only an additional $91 per month.

Finally, he concluded that the long term care was not a “special circumstance” under 707(b)(2)(B)(i). He recited several cases which opine that special circumstances require something “unforeseeable or beyond the control of the debtor” or “out of the ordinary or exceptional in some way” or for which “there is no reasonable alternative” or disallowing the expense would “result in demonstrable economic unfairness prejudicial to the debtors.”

On the debtors’ side, he did hold that homeowners insurance required under a deed of trust was allowable as a reasonable and necessary expense on line 42 of the means test. (Payments on secured claims.) Although the insurance expense is not really a payment on a secured claim, if the debtor fails to provide the insurance, the lender can purchase single interest coverage insurance and charge the expense to the debtors. (HOA dues were not an issue in this case, but the same analysis should apply.)

He also concluded that the debtors’ cell phone expense was “not particularly excessive.” The UST objected to this expense largely (it seems) because just prior to filing the debtors upgraded their phones when they renewed their service contracts. (Most of us have nicer phones than the debtors.)

The UST also objected (somewhat vaguely) to the debtors’ out of pocket medical expenses which are much higher than normal. I’m not faulting the UST – this is always an issue because medical expenses fluctuate significantly and are not fixed like a house or car payment. Deciding on a specific monthly dollar amount is an imprecise exercise, at best. Although Judge Mott expressed some concern that the expenses might be overstated by some amount, he concluded that the UST had not met its burden in proving the actual amount so the amount listed in Schedule J was allowed.

The second case was:

Babb 10-11551

Mr. Babb is a commercial property manager/developer with Lincoln Properties. Between 2006 and 2010, his income decreased from over $400,000 to approximately $115,000. He is $47,000 over median. He qualifies for Chapter 7 under 707(b)(2). The issue in this case was whether allowing him to obtain a discharge was an abuse under the “totality of the circumstances” under 707(b)(3).

The problem in this case was the house payment. PITI totaled $7600 per month which was roughly equal to his current monthly net income and, although he was optimistic that some deals which had been on hold were moving forward, he could not say with any certainty that his income would increase in the near term. The house payment was 5.5 times the IRS standard. A modification on the first lien is in process, but neither the first or second liens was current. The liens total $1,020,000 and the house is valued at $950,000 (which might be optimistic given current market realities.)

Although Judge Mott accepted the fact the housing expense was not an issue when the home was purchased in 2006, he concluded the expense is “unreasonable and excessive in light of their current circumstances.”

FYI, in both cases he gave the debtors 30 says to convert to another chapter or the cases will be dismissed.

Michael Baumer

Law Office of Michael Baumer

Assigned Ad Valorem Tax Claims in Chapter 13

Mon, 20 Jul 2009 13:35:38 GMT

The following is a recent article published in the State bar of Texas Bankruptcy Law Section Newsletter. It is primarily of interest to consumer bankruptcy law attorneys practicing in Texas.

Chapter 13 debtors whose taxes are not escrowed will occasionally resort to one of the property tax payment services which pay the taxes and take an assignment of the taxing entity’s claim. The upside for the taxing authority: they get their money faster without incurring collection costs. The upside for the debtor: they get to pay the taxes over a longer period of time without incurring collection costs. The downside for the debtor: taxing authorities can only charge 12% interest while tax assignees can charge 18%. If the debtor pays the claim over a longer period of time at 18% interest, they end up paying far more interest. (Actually, the best case for the debtor is for the mortgage company to pay the taxes. That way, the debtor can pay back the mortgage company at no interest.)

BAPCPA added new Section 511 which provides: “If any provision of this title requires the payment of interest on a tax claim… the rate of interest shall be the rate determined under applicable nonbankruptcy law.” It is significant that Section 511 does not define “tax claim.”

There have been a recent spate of opinions on this issue starting with Judge Lynn in In re Davis , 352 B.R. 651 (Bankr.N.D.Tex.2006). Judge Lynn held that the claim of a creditor which paid the ad valorem tax claim prior to filing of the Chapter 13 and held a transfer of the tax lien was a “tax claim” under Section 511 and so was entitled to receive its contractual rate of interest in a Chapter 13. The important point here is the anti-modification provision of Section 1322(b)(2) which provides that a debtor may modify the rights of holders of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”

In In re Sheffield , 390 B.R. 302 (Bankr.S.D.Tex.2008), Judge Isgur went into a more detailed analysis and concluded that although the private company assignee of a taxing authority held a “tax lien”, it did not hold a “tax claim”, disagreeing with Judge Lynn.

Section 101(51) defines a security interest as a “lien created by an agreement.” Ad valorem tax liens are created by state law, not by any agreement. In most of these cases, the tax assignee takes a transfer of the taxing authority’s lien, but they also have the debtor execute a note and deed of trust. As Judge Isgur explains, the lien is not created by the agreement, but arises by operation of state law. In order to obtain an assignment of the tax lien, the taxes must be paid by the assignee. When the taxes are paid, there is no longer any “tax claim.” A new claim arose under the promissory note executed by the debtor. That claim may have resulted from payment of taxes, but it was not a “tax claim.” Judge Isgur makes the further point that the tax assignee did not purchase the taxing authority’s claim – it paid the claim. Judge Isgur concludes: “A state taxing authority may assign its tax claims if state law so provides. Hypothetically, a state could authorize the sale of its tax receivables to a third party. That third-party assignee would presumably be protected by Sec. 511, But, that is not the structure that this State has chosen for the private collection of its property taxes.”

Approximately one month later, Judge Bohm followed Sheffield in In re Prevo , 393 B.R. 464 (Bankr.S.D.Tex.2008). Judge Bohm provides some discussion of the Kentucky and Pennsylvania tax statutes to contrast them with the language of the Texas statute and clarify the issue.

Judge Isgur revisited the issue in January 2009 in In re Kizzee-Jordan , 399 B.R. 817 (Bankr.S.D.Tex.2009). In Kizzee-Jordan , the tax assignee took another approach arguing that Sheffield was inconsistent with the Supreme Court’s opinion in Johnson v. Home State Bank , 501 U.S. 78 (1991) and the Sixth Circuit’s opinion in Glance v. Carroll , 487 F.3r 317 (6 ^th Cir.2007). Neither of those opinions have any relevance to the disposition of this issue and Judge Isgur so concluded. (In short order.) [Judge Isgur confirmed this conclusion again a month later in In re Sotto , 2009 WL 260957 (Bankr.S.D.Tex.2009).]

I have not found any opinions in the Eastern or Western Districts or by any other judges in the Northern or Southern Districts.

Assuming that 511 does not apply to “tax liens” as opposed to “tax claims”, the appropriate rate of interest for tax assignees in Chapter 13 would be the Till “prime plus” approach. FYI, the interest rates confirmed in Sheffiled , Prevo , Kizzee-Jordan and Sotto were 12%, 8.25%, 8.5%, and 7%, respectively. (As a debtor’s attorney, I like the downward trend in rates.)

I would guess that we will see the tax assignee lobby try to get the legislature to “fix” this “defect” in the tax statutes, but until then, your Chapter 13 plans should pay Til l interest, not the contract rate of 15% or 18%.

Michael Baumer

<a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a>

New Legislation Protecting Tenants of Foreclosed Properties

Wed, 08 Jul 2009 13:35:52 GMT

On May 20, 2009, President Obama signed into law The Protecting Tenants in Foreclosure Act. Public Law No.111-22. The law took effect immediately.

The principal protection of the law is that the successor in interest to the foreclosing lender must give a bona fide tenant (not the mortgagee or a family member who is paying market rate rent negotiated as part of an arms length transaction) at least 90 days notice to vacate the property. If the tenant has a lease, they are entitled to occupy the property until the end of the lease. The new owner may terminate the lease on 90 days notice if the purchaser intends to occupy the property. In both cases, the tenant must pay the contract rent to the new owner or they may terminate the tenant’s occupancy in compliance with state law. [There are additional provisions relating to tenants (and owners) of section 8 properties.]

None of these provisions preempts state or local laws providing greater protection to tenants.

The provisions of this law expire December 31, 2012.

My clients are not typically tenants and so are less likely to be hugely effected by this legislation. I do, however, represent many clients who own rental properties which they intend to surrender because they are upside down and the properties do not cash flow. This legislation will effect the tenants of those debtors.

Michael Baumer

Law Office of Michael Baumer

The Future of Chrsyler

Wed, 24 Jun 2009 13:38:11 GMT

On Father’s day morning I watched the McLaughlin Group as I do most Sunday mornings. (Although I frequently turn off the sound while they shout over each other.) At the end of the show, John invites his guests to make a prediction and he makes one, too. John predicted that Chrysler will produce a car that gets 50 miles per gallon and costs less than $5,000 by the end of 2011.

Let’s look at that in pieces. (Although I am going to nitpick with him over some of the details, I am not criticizing John McLaughlin. Keep reading.)

First, it really isn’t Chrysler anymore. It is Fiat/Chrysler. This is more significant than most Americans realize. (Fiat didn’t put up any money to “buy” Chrysler. If the “new” Chrysler crashes and burns, Fiat walks away with minimal consequences. Sweet. Where do I sign up for this for my business?)

Second, a car that gets 50 mpg is really no big deal. This is the easy part, believe it or not.

Third, I think that a “less than $5,000” price tag is seriously optimistic, but I do think we could get into that neighborhood. (This is going to be a very bare bones car. Let me suggest that your teenager doesn’t need to drive a Lexus/Hummer/Suburban.)

Fourth, I am not convinced that Chrysler can produce this (very) theoretical car in the US by the end of 2011. I will concede that Fiat/Chrysler might produce that car somewhere else by then, but that is a very different issue. (I understood that part of the reason we bailed out Chrysler and GM was to help save American jobs. If all of these production jobs move overseas, why are American taxpayers footing the bill to preserve and/or create jobs in Italy?) Historically, the time line from design to market for the US auto industry has been more than 5 years. To shorten that reality, the only option is to tool up to produce an existing Fiat model in the US. One small problem: the Fiats produced in Europe do not comply with US environmental laws. Either Fiat/Chrysler has to get a waiver of existing environmental laws or they have to re-tool their “small engine technology” to comply with those laws. Any bets on which is more favorably received by US taxpayers? And how long will this take?

Another small detail: it takes more than a month or two to re-tool a car plant. Remember all of those car ads on TV that show the robots making the spot welds or spraying paint on cars on the assembly line? All of those robots have to be re-programmed to produce another car. The end of 2011 may be achievable (although improbable), but can Fiat/Chrysler survive that long? Their sales are already down by half from historical levels. (They aren’t the only one, but their numbers seem particularly bad.)

More problematic are two questions that have no happy answer. First, what is the “hot” Chrysler product that people “have to have?” (To keep Fiat/Chrysler in business in the US for the interim period. However long that is.) The short answer is that there is no such product. The Dodge Ram truck is the leading contender, but the Ford F-150 and the Chevrolet C1500 are far more popular. (A very large problem.)

Second, what is the Fiat product that Americans “have to have?” This is the “save Chrysler” notion. In theory, Chrysler is supposed to benefit from Fiat’s small engine technology. Let’s assume for the purpose of argument that Fiat has some super duper technology that will save Chrysler. If that was the case, Americans would be clamoring for that already existing Fiat model. Fiat would be selling thousands/millions/gazillions of those cars, because America is, after all, the home of “sell what sells.”

John McLaughlin’s prediction that Chrysler would produce a 50 mpg $5,000 car by the end of 2011 illustrates the real problem. Most of the Pundits talk about Chrysler being “out of bankruptcy” like that’s the end of the story. The harsh reality is that Chrysler is still in serious trouble. The Fiat deal is life support. (At best.) Chrysler is not viable, Fiat or no Fiat. Chrysler as we know it will cease to exist. The question is the date of the demise, not whether it will happen.

Michael Baumer