Monday, August 27, 2012

Bankruptcy: Finance Company Lien - Mobile Home

      In the case of American General Finance Co. v. Hoss, the United States District Court at Abingdon, Virginia, overruled a Bankruptcy Court decision avoiding a creditor’s lien on the debtor’s mobile home. While all agreed that the creditor’s lien was a nonpossessory, non-purchase money security interest, there was a dispute as to whether Bankruptcy Code §522(f)(1) allowed for the avoidance of the lien. The Bankruptcy Court concluded that the lien on the mobile home could be avoided as the Bankruptcy Code permits the avoidance of certain liens which would impair an exemption to which a debtor is entitled to pursuant to Bankruptcy Code §522(b). Virginia Code §34-4 permits a debtor householder to exempt up to $5,000 of property as a homestead exemption. The $4,000 homestead deed filed by debtor qualified for this exemption in the instant case. Property claimed as exempt pursuant to Bankruptcy Code Bankruptcy Code §522(b) is not liable for any debt of debtor which arose before the commencement of a bankruptcy case, but an exception under §522 (c)(2)(A)(I) allowed such exempted property to remain liable for the preexisting debts of a debtor if the debt is secured by a lien which could not be avoided under Bankruptcy Code §522(f).
     The Bankruptcy Court found that Bankruptcy Code §522(f)(1)(B)(i) provides for avoidance of nonpossessory, non-purchase money security interests on household furnishings or households goods that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor.
     Citing its prior decision in the case of In re: Goad the Bankruptcy Court implicitly found that a mobile home is either a household furnishing or good under Bankruptcy Code §522(f)(1)(B)(i).
     The District Court, on appeal, decided that a mobile home was in no manner a household good or furnishing, as required under that subsection. Neither of those terms is defined by the Bankruptcy Code. The 4th Circuit Court of Appeals has explained that household goods under this subsection are those items of personal property that are typically found in or around the home and are used by debtor or his dependents to support and facilitate day-to-day living within the house. The District Court stated that it was clear that a mobile home is virtually incapable of itself being contained within a home. In addition, a mobile home was not the type of thing used “around the home” which facilitates … living within the home.”
     The District Court examined several cases from across the country dealing with this same issue and discovered only one other court which had agreed with the Bankruptcy Court that a mobile home is a household good. Thus, the District Court concluded that the Bankruptcy Court improperly applied Bankruptcy Code §522(f) and that a proper application of that subsection resulted in the lien in question being unavoidable. The Goad case was overruled in that district and is no longer good law before that District Court.
     In summary, the debtor was not entitled to avoid the lien on her mobile home held by the finance company.

Monday, August 20, 2012

Collections:  Sanctions on Improper Fair Debt Claim

      In the case of Guidry v. Clare, a United States District Court in Northern Virginia granted an award of $16,000.00 in sanctions against a debtor who was a plaintiff in a Fair Debt Practices Collection Act (FDCPA).  The Court held that the debtor’s case, which also included state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment, was filed wholly without merit. 
     The Court found that the dispute arose when the debtor wrote the plaintiff, a company that provided cheerleading training, a check for $62.50 for the debtor’s daughter’s class.  The check was returned for insufficient funds.  The company’s office manager (Clare) contacted the debtor to make the check good.  The debtor did not respond.  Over the next several months the company made several other efforts to collect on the check, including a letter from the company’s attorney and from a collection agency.  The company’s office manager also advised the debtor that the company would seek a warrant for the debtor’s arrest if the debt was not paid within seventy two hours.  When the debtor did not respond, the company filed a criminal complaint for misdemeanor larceny by check.  A few days later, a policeman served the warrant on the debtor at the same time he served a warrant from another creditor for felony larceny by check.  The debtor was arrested and released on her own recognizance on both charges.  She paid the face amount of the company’s check, plus a $30.00 bank service charge.  As a result of this, the prosecutor withdrew the bad check charge.
     A few months later the debtor filed its FDCPA action.  After much litigation, the case was dismissed, without prejudice, because the case was not served within 120 days.  The complaint was refiled.  The company’s attorneys sought dismissal and sanctions for filing a frivolous lawsuit.  The Court dismissed the case, scheduled a hearing on sanctions, and ordered the parties to prepare briefs.  After reviewing the briefs the Court concluded that the debtor’s case was “meritless, indeed flatly frivolous”.  The meritless claims included allegations that the company’s manager had failed to make a meaningful disclosure of her identity and debt collection purpose in her telephone calls to the debtor, that a debt collector was barred from filing a criminal complaint, that the company’s manager had made false representations to authorities in order to disgrace the debtor, and that the collection letters failed to disclose their debt collection purpose.  The Court ruled that the letters contained the required disclosures and the purpose of the phone calls were clear.  The Court further ruled that the law prohibits only the threat of criminal action if there is no intent to follow through on the threat.  In this case the intent to follow through was evident from the fact that a warrant was issued, and there was no evidence that the representations to authorities were false or made with an intent to disgrace the debtor.  The Court found that there was also no basis for the state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment.  The Court wrote that “it cannot be forgotten or overlooked” that the case “was spawned by Guidry’s failure to pay a $62.50 debt, or rather by her attempt to pay it with a bad check”.
     Creditors take heart - there is still some common sense in this world!

Monday, August 13, 2012

Real Estate: Criminal Liability for Misuse of Construction Funds

     Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.
      The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Monday, August 6, 2012

Bankruptcy: Amended Proof of Claim for Added Interest and Fees Disallowed in a Chapter 13 Case

     In the case of In re: Michael K. Hedrick, the United States Bankruptcy Court at Alexandria held that in a Chapter 13 case, converted from a Chapter 7 case, a credit union may not amend its proof of claim for a debt from an auto loan.
     Prior to filing for bankruptcy, the debtors defaulted on their auto loan.  The vehicle was repossessed and sold.  There was a deficiency balance due after the sale.  The credit union filed a proof of claim for the joint deficiency claim of $5,693.00, as of the date the case was filed.  Three months after the confirmation of the debtor’s modified chapter 13 plan, the credit union filed an amended proof of claim, increasing its claim by $2,430.00, for post petition interest and attorney’s fees.
     The credit union argued that a Chapter 13 plan must pay unsecured creditors at least as much as under the Chapter 13 plan as they would receive if the case were under Chapter 7.  If this case had been under Chapter 7, joint unsecured creditors - but not individual unsecured creditors - would be paid in full together with interest because of the equity in the jointly owned house.  The credit union used the contract rate of interest.  It treated its post petition attorney’s fees the same as post petition interest.
     The Court noted that even though the proper allowed claim is the original claim filed by the credit union, the credit union may actually be paid more than its allowed claim if the estate is a solvent estate.  The Court “shall confirm” a Chapter 13 plan if all of the requirements of Bankruptcy Code Section 1325(a) are satisfied.  One requirement is that the distribution to unsecured creditors must be at least as much as they would have received had the case been a Chapter 7 case.  The provision for interest on allowed claims in solvent estates is a part of this calculation.
     The Court ruled, though, that the interest rate is the federal judgment rate, not the contract rate or the applicable state rate.  There is no similar statutory provision for attorney’s fees or for other reasonable fees, costs or charges provided for under the agreement which the claim arose.
     The Court ruled that the credit union’s first proof of claim is the proper proof of claim.  The allowed claim of an unsecured creditor in a solvent estate is the same as in an insolvent estate.  It is determined as of the date of the filing of the petition and does not include post petition interest, attorney’s fees costs or other contractual charges.
     The Court ruled that if the terms of a confirmed Chapter 13 plan include post petition interest, the Chapter 13 trustee will pay that interest as provided in the plan.  If the plan does not provide for post petition interest, the trustee may not pay post petition interest.  In this case, the confirmed plan contains no such provision.
     The Court concluded that the proper construction of the Chapter 13 plan was that the allowed joint unsecured claims would be paid 100 percent of the amount allowed joint unsecured claim without interest.  Had the matter been brought to the Court’s attention at the confirmation hearing, the plan would not have been confirmed without a provision for payment of post petition interest on allowed joint unsecured claims.  It was not and the plan was confirmed.
     The lesson of Hedrick: read Chapter 13 plans very carefully and object timely.