Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of docketing judgments to aid in the collection of your debt. 

     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection. 

     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge. 

     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462: 

     

     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment. 

     

     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment. 

     We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.

Bankruptcy: Denial of Discharge/Failure to Maintain Records

     The United States Bankruptcy Court at Richmond, in Lubman v. Hall, refused to grant a discharge because the debtors refused to keep records required by the trustee and failed to cooperate with the trustee as required by Bankruptcy Code §521(3) and Rule 4005 of the Federal Rules of Civil Procedure. 

     The Court found that the debtors, a U.S. Postal Service computer programmer and a secretary, refused to comply with the trustee's request that they file income tax returns for the previous years, claiming that they were not required to file such returns. The Court ruled, however, that the debtors had a duty to preserve those records which others in like circumstances would ordinarily keep. The basis for the duty was the necessity for the trustee to be able to fully determine the debtors' financial condition. 

     This decision can be used by creditors in all cases - check the debtor's bankruptcy petition for important missing information and bring this to the trustee's attention. 

Bankruptcy: Foreclosure Sale Voided due to Violation of Co-debtor Stay

     In the case of Harris v. Margaretten & Co., Judge Spencer of the United States District Court at Richmond, Virginia reviewed and affirmed a bankruptcy court decision to set aside a foreclosure sale due to a mortgage serving agent's violation of the co-debtor stay provisions of Bankruptcy Code §1301. 

     The District Court found that the debt at issue was a consumer debt upon which the debtor's wife, who had previously received a Chapter 7 discharge, owed an enforceable obligation, notwithstanding her Chapter 7 discharge. The District Court further found that the co-debtor stay was in effect. 

     Judge Spencer ruled that the Bankruptcy Code defines "consumer debt" as "debt incurred by an individual primarily for a personal, family or household purpose." Judge Spencer noted that while courts are split over whether a debt secured by real property qualifies as "consumer debt" under the code, the better reasoned view is that a loan secured by realty may indeed be a "consumer debt." By its plain language, Bankruptcy Code §101(8) requires courts to inquire whether the debt was "incurred...primarily for a personal, family or household purpose." Moreover, Congress elsewhere indicated that such a debt plainly could fall within the statutory definition. Thus, a blanket statement that an obligation secured by realty is never "consumer debt" could not stand. 

     Judge Spencer further stated that the statute requires an inquiry into the purpose of the debt. The Bankruptcy Code afforded this case such scrutiny, finding that the debtors used the loan proceeds to purchase their residence. This finding was indisputably correct, and because such a use constituted a "personal, family or household purpose," the obligation at issue was a consumer debt. 

     The creditor also argued that no co-debtor stay was in effect because the wife's personal obligation on the note had been extinguished by her own Chapter 7 discharge. Again, the District Court stated that the creditor ignored the clear language of the statute, for the stay protects any individual who is liable on such debt with the debtor, or that secured the debt. Personal liability on the debt is not required. Hence, the District Court agreed that a co-debtor stay was in effect at the time of the foreclosure sale, and that the sale was a violation of Bankruptcy Code §1301(a). 

     The creditor argued that even if the Bankruptcy Court had properly found a violation of Bankruptcy Code §1301, it erroneously refused to annul the stay under the facts of this case, and erroneously voided the foreclosure sale. This argument was unpersuasive to Judge Spencer. Even assuming that the Bankruptcy Court was empowered to act sua sponte, the record did not suggest that the Bankruptcy Court erred in refusing to annul the sale and in declaring the foreclosure sale void. Judge Spencer ruled that under the facts of this case, he was unable to find any abuse of discretion. The District Court affirmed that portion of the Bankruptcy Court's ruling that the creditor challenged on appeal.

     The lesson in Harris, as in so many cases, is to ensure competent and experienced legal advice.

Bankruptcy: Post-Discharge Injunction - New Note with Credit Union

     The United States Bankruptcy Court, Western District of Virginia, Harrisonburg, ruled in the case of Mickens v. Waynesboro Dupont Employees Credit Union, Inc. that a credit union that facilitated a discharged debtor’s cosigning of a new promissory note that covered the credit union debt that previously was discharged was liable for a violation of the bankruptcy law’s post-discharge injunction statute, and the debtor had no liability for the note and was entitled to damages and attorney’s fees.

     The Court decided that the issue was whether the fact that the credit union obtained a new note signed by the debtor for his discharged obligation constituted an “act to collect, recover or offset” the discharged debt in violation of the post-discharge injunction under Bankruptcy Code §524 (a)(2).
     The Court in Mickens decided that the credit union’s act, permitting the debtor to cosign the new note, expressly placed the debtor in the same state of personal liability for the exact debt which was discharged. The notice to the cosigner stated this fact. Bankruptcy Code § 524 (c) lays out detailed requirements which must be met for a debtor to reaffirm a pre-petition debt and thereby remain obligated to pay such a debt in spite of the discharge injunction. The Court ruled that the credit union’s actions would be subject to Bankruptcy Code §524 (c). Therefore, they must fall within the definition of “an act” for the purposes of the discharge injunction, however narrowly that phrase may be defined.
     The Court ruled that while no cases with identical facts were readily apparent at the time it ruled, it concluded that the cases which most closely resembled the fact pattern for this case were those which involved “ clumsy attempts to avoid the injunction.” In these cases the creditors’ attempt to circumvent the requirements in the Bankruptcy Code §524 (c) and (d) through a reliance on the voluntary repayment provision in Bankruptcy Code §524 (f).
     The Court in Mickens ruled that the credit union could not make any serious argument that its actions or new note even attempted to comply with the requirements of Bankruptcy Code §524 (c) and (d). There could be no doubt the credit union was aware of the injunction and intentionally permitted and facilitated the debtor’s signing a new note which returned him to his pre-petition position of personal liability for the pre-petition debt. Such action constituted a willful violation of the post-discharge injunction of Bankruptcy Code §524 (a)(2).
     The Court ruled that the credit union was in violation of Bankruptcy Code §524 (a)(2) and the liability of debtor on the note he cosigned with a friend was void ab initio. The credit union also was liable for damages and attorney’s fees.

Bankruptcy: No Discharge After Bankruptcy Fraud

     In the case of Groggins v. Robbins, U.S. Trustee, a Roanoke United States District Court upheld a bankruptcy court decision denying a discharge to a Chapter 7 debtor convicted of bankruptcy fraud. The Court in Groggins agreed with the U.S. Trustee’s argument that the debtor’s bankruptcy fraud conviction collaterally estopped him from contending that he had not made a false oath in connection with his Virginia bankruptcy case, and, thus a discharge was unwarranted. The debtor in Groggins was charged, and pled guilty, to fraud for making a false oath, in that he failed to disclose that he had a prior bankruptcy filing.

Bankruptcy: Debtors Retaining Collateral

     The Fourth Circuit Court of Appeals case of Home Owners Funding v. Belanger stands for the proposition that Chapter 7 bankruptcy debtors may retain their collateral after discharge if they are current in their consumer loan installment payments.

     In Belanger the debtors, who had remained current on their payments, filed for Chapter 7 relief and filed a statement of intent under Bankruptcy Code §521 (2) (a) indicating that they wanted to retain possession of their mobile home. The creditor moved the Bankruptcy Court to compel the debtors to reaffirm the debt, redeem the collateral, or surrender it. The creditor, relying on Bankruptcy Code §522 (2) (a), was obviously concerned that the collateral would depreciate to a value less than the balance due, and would be barred from recovering the deficiency. The Court noted that the creditor is presumed to have structured the risk of depreciation into its loan.
     The Court noted that it has held (in the case of Riggs National Bank v. Perry) that a "default-on-filing clause" in an installment loan contract was unenforceable as a matter of law. Therefore, the creditor could not ask for the collateral merely based on the filing. Note, however, that not all courts take this position; see Dominion Bank v. Koons.
     The Court in Belanger denied the creditor's motion and discharged the debtors, holding that the debtor's had complied with Bankruptcy Code §521 (2) (a) by giving notice of their intent to retain the property while continuing to make payments in accordance with their contract with the creditor.
     Attorneys representing debtors can use this opinion against creditors by urging them to remain current with their loans, but not to sign reaffirmation agreements. Many of you have already run into this problem with debtor's counsel.

Bankruptcy: Discharged Debt Collection - Violation of Bankruptcy Injunction

     The United States Bankruptcy Court at Alexandria, in the case of In Re Billy Ray Evans, ruled that a bank and its attorney violated 11 U.S.C. §524 by attempting to collect a discharged debt. As a result of this the Court ordered both the bank and the attorney to pay to the debtor damages in the amount of $1,000.00, as well as attorney’s fees in the amount of $24,954.00, costs in the amount of $1,159.00 and punitive damages in the amount of $2,500.00.
     In Evans the Court found that the bank had filed a lawsuit in state court seeking to recover possession of the vehicle leased to debtor, or, in the alternative, to recover the value of the vehicle. The Court, however, found that the lawsuit was a mere subterfuge for the bank’s actual intention to enforce a pre-petition debt in violation of the bankruptcy discharge injunction. Cited by the Court in making this finding was the Court’s feeling that the bank made only minimal effort to determine whether the debtor actually had possession of the vehicle prior to filing its lawsuit. It twice referred the matter to repossession services after the bankruptcy case was closed, but the vehicle could not be located. The Court stated that the referrals, rather than confirming that the debtor had possession of the vehicle, raised questions about the bank’s motives. The Court found that the bank used minimal effort, simply to give the appearance that it was interested in recovering the vehicle. The Court stated that if the bank was truly interested in recovering the vehicle (rather than the debt) that there were many things that it could have done that it did not do. The bank made no effort to confirm that it had an immediate right of possession to the vehicle and that it was a proper party to bring the lawsuit.
     Without all of the facts of a particular case I am always reluctant to criticize a court’s decision. However, this decision seems very harsh to me. The lesson for Evans, though, is that creditors must be more aggressive while the debtor is still in bankruptcy court. Creditors must seek non dischargeability motions based upon conversion of property, damage of property, and the like. Also, if post bankruptcy lawsuits for recovery of property become necessary, and, undoubtedly they will, creditors must be certain to use best efforts to reclaim the property, but if unsuccessful in doing so, then to accurately value the property - not simply value the property at the balance due on the debt.

Bankruptcy: Revocation of Discharge - Chapter 7

     In the case of Dean v. McDow, the United States District Court at Norfolk, Virginia affirmed a Bankruptcy Court revocation of the debtor’s discharge of indebtedness.

     The District Court in Dean stated that the Bankruptcy Court did not err in revoking the debtor’s chapter 7 discharge based on the evidence of fraud in the debtor’s earlier reporting of her pre-bankruptcy transfers of property (antiques, collectibles, furniture and jewelry), and her statements about prior involvement in a business, after her operation of a thrift store called “New to You.”
     The District Court found as fact that the debtor received a discharge in her chapter 7 case about two years prior. The Bankruptcy Court later reopened the debtor’s case and revoked her discharge based upon the debtor’s fraud. The debtor raised four grounds on appeal: 1) the complaint to revoke her discharge was not timely filed; 2) the U.S. Trustee did not meet an affirmative duty to investigate the debtor’s bankruptcy and therefore constructively knew of the debtor’s fraud; 3) the debtor did not make false oaths because she lacked fraudulent intent and her misstatements were de minimums; and 4) the revocation was based upon inadmissible evidence.
     The District Court stated that cases dealing with whether the timely filing of a complaint objecting to discharge is jurisdictional are sharply divided. Despite the overall disagreement among the federal courts, the Fourth Circuit has indicated the position it finds more persuasive: the timeliness of a dischargeability complaint is not a jurisdictional prerequisite, but rather presents an affirmative defense similar to the statute of limitations that must be raised in an answer or responsive pleading. The court noted that there was nothing in the debtor’s brief or the 4th Circuit case, Farouki v. Emirates Bank Int’l ltd., to indicate that the dischargeability time limitation of Bankruptcy Rule 4004(a) should be treated differently from Bankruptcy Code Section 727(e)(1). The District Court stated that it was therefore unnecessary to address whether the U.S. Trustee’s complaint was timely filed because the debtor had waived her right to appeal on this point. Failure to raise a non-jurisdictional issue before the Bankruptcy Court will generally be treated by the District Court as a waiver of the right to have the issue heard.
     The District Court stated that the debtor argued for the first time on appeal that the errors and omissions of her schedules should have put the U.S. Trustee on notice of possible fraud, triggering an obligation to investigate. Because the U.S. Trustee began investigating possible fraud only after receiving a telephone call concerning the debtor’s bankruptcy about a year after the entry of the discharge order, the debtor argues that the Trustee could not rely upon the “did not know” provision of Bankruptcy Code Section 727(d)(1). The District Court noted again, however, that the debtor did not raise the issue of the trustee’s knowledge in her answer or at trial, and the issue did not fall within the “very limited circumstances” of plain error which would result in a miscarriage of justice. The debtor waived her right to have this issue considered on appeal.
     The District Court next noted that the debtor did not dispute that her schedules and Statement of Financial Affairs contained false oaths. Instead, the debtor argued that she lacked the fraudulent intent, and that her omissions were de minimus. The District Court noted that the Bankruptcy Court’s determination of fraud was a factual finding reviewed for clear error. The District Court concluded that the Bankruptcy Court did not commit clear error in determining that the debtor knowingly and fraudulently made false oaths and that the oaths concerned materials facts. Nor could the District Court find error in the Bankruptcy Court’s conclusion that the debtor’s failure to read her bankruptcy papers constituted a reckless indifference to the truth and the functional equivalent of fraud.
     Finally, the District Court ruled that the Bankruptcy Court’s admission of certain exhibits relating to the debtor’s fraud, is error at all, did not even approach the standard of error so serious that it went to the integrity of the trial.
     Accordingly, the revocation of the debtor’s discharge was upheld.

Bankruptcy: Reaffirmation Required for Certain Abandoned Collateral

     In the case of American National Bank & Trust Co. v. DeJournette, the United States District Court in Danville ruled that where the debtors defaulted on their debt secured by a car and a tractor prior to filing for bankruptcy, the Bankruptcy Court erred in not requiring the debtors to reaffirm their obligation or redeem the underlying debt in order to retain the secured property.

     The District Court ruled that whether by means of abandonment or claimed exemption, the property at issue was no longer part of the estate. Therefore, the termination of the automatic stay is governed by Bankruptcy Code §362(c)(2), as opposed to Bankruptcy Code §362(c)(1). Pursuant to §362(c)(2), the automatic stay was lifted upon the earlier of the closing of the case and the discharge. Since the automatic stay had already been terminated by operation of §362(c), the District Court ruled that it was incapable of granting the bank's motion to modify the stay. Nevertheless, the District Court determined that it was capable of providing the bank other "effectual" relief. Underlying the bank's request for modification pursuant to §362(d)(1) was a claim that the Bankruptcy Court misapplied Bankruptcy Code §521(2) by not requiring the defaulting debtor to either reaffirm of redeem their obligation in order to retain the secured property. The District Court ruled that the Bankruptcy Court erred in ruling that the debtors did not either have to redeem or reaffirm. In making its decision, the District Court noted that the various circuit courts are split on the issue on whether a non-defaulting debtor must reaffirm or redeem his obligation when he seeks to retain secured collateral, or whether following a Chapter 7 filing, a non-defaulting debtor may simply hold on to the collateral securing the loan and continue making payments under the original loan agreement.
     The District Court concluded that where debtors have defaulted on a secured debt prior to filing a bankruptcy petition, they must reaffirm their obligation or redeem the underlying debt in order to retain the secured property. The District Court noted that one bankruptcy court in this District, in In Re Doss, disagreed with its conclusion and has extended the holding in In Re Belanger, to a situation involving a defaulting debtor. The District Court found that in a situation where the debtor had defaulted on a secured debt prior to filing for bankruptcy, the most efficient and fair remedy is to require the debtor to either surrender the collateral, or, if he desires to retain the collateral, redeem or reaffirm the obligation. Therefore, despite the ruling in Doss, the District Court found that other relevant case law supported its position.
     In conclusion, the District Court found that the appropriate relief in this case was to compel the debtors to either surrender the collateral, or, if they chose to retain the collateral, compel them to either redeem the debt or reaffirm their obligation. Accordingly, the debtors were ordered to file a new statement of intention either to surrender or retain the secured property. If they chose to retain the secured property, the debtors would likewise be ordered to state an intention to either redeem the debt pursuant to Bankruptcy Code §722 or reaffirm their obligation pursuant to Bankruptcy Code §524(c).

Bankruptcy: Dischargeability - Money Judgment

     In the case of In Re: James H. Harris the United States Bankruptcy Court for the Eastern District of Virginia showed a willingness to assist creditors in clear abuse cases. In Harris Judge Tice determined that a debt which resulted from the debtor's conversion of a stolen Mack Truck was exempt from discharge pursuant to the Bankruptcy Code, and determined that the amount of damages excepted from discharge was $11,620.47. The Bankruptcy Court also entered a money judgment for the creditor in that excepted amount, even though at least one Federal District Court has held that a Bankruptcy Court does not have jurisdiction to enter a money judgment in a Bankruptcy Code §523 proceeding.
     Judge Tice stated that every determination by a Bankruptcy Court of the validity of a claim is a determination of whether a creditor is entitled to monetary damages from the debtor. The issues raised regarding the validity or existence or amount of a debt are inextricably interwoven with the determination of dischargeability, and are therefore within the equitable jurisdiction of the Bankruptcy Court.

Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

     Judge Tice, United States Bankruptcy Court in Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis, the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them. 

     The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.
     The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.
     The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).
     As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.

Collection: Creditors Bill

     The action to force the sale of real estate to satisfy a judgment is called a "Creditor's Bill." This action is governed by Virginia Code §8.01-462:
                     Jurisdiction to enforce the lien of a judgment

                     shall be in equity. If it appears to the court

                     that the rents and profits of all real estate subject
                     to the lien will not satisfy the judgment in five years,

                     the court may decree such real estate, any part thereof,

                     to be sold, and the proceeds applied to the discharge

                     of the judgment.
     Although the action may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment.

Bankruptcy: The Automatic Stay

     Federal Bankruptcy law provides for an automatic stay (injunction) to take effect immediately upon filing for bankruptcy. The stay prevents creditors from taking any further action against debtors without court approval. The stay can stop a foreclosure or vehicle auction, even if notice of the filing is given moments before the sale is to occur. The automatic stay, unless lifted by the Bankruptcy Judge, or in some cases the trustee, remains in effect until it is terminated at the time of discharge, at which time it is replaced by a permanent injunction.
     Violation of the automatic stay is a serious offense. A willful violation can result in a finding of contempt of court. Sanctions for violating the stay can be awarded as well. These sanctions can include a fine and/or an assessment of attorney’s fees. A finding of contempt of court is also punishable by a jail sentence. Attorney consultation is always recommended when action against bankrupt debtors is contemplated.
     The automatic stay may be lifted upon proper motion and argument by creditor's counsel. Reasons for making such a motion include, among others, lack of insurance on the property, or other similar reasons resulting in the creditor being unprotected while its rights are being determined.

Bankruptcy: Award of Attorney's Fees Against Creditors

     A debtor sought to recover attorney's fees from a creditor who unsuccessfully challenged the debtor's dischargeability. The creditor had alleged that the items listed on the debtor's statement of financial affairs were materially false, but was unable to convince the Bankruptcy Court. The Bankruptcy Court, however, denied the debtor's request for attorney's fees because there was not evidence that the creditor pursued the complaint frivolously or without substantial justification. The case was In Re: Louise Reynolds Freeman, decided by Judge Tice for the United States Bankruptcy Court, Eastern District of Virginia, at Alexandria.
     The United States Bankruptcy Court for the Eastern District of Virginia also held that debtor's counsel are not entitled to recover attorney's fees from a creditor where the creditor loses a suit objecting to debtor's discharge unless it is proven that the suit was filed vexatiously, wantonly, in bad faith, or for oppressive reasons in the case of In Re Gecowetts. In Gecowetts the debtor's estranged wife filed an action objecting to the debtor's dischargeability of a debt. After a full trial on this issue, the Court allowed the debtor a discharge of all debts. Relying on the "American Rule," the Court found that although the creditor was unsuccessful in the dischargeability proceeding, the action was not filed vexatiously, wantonly, in bad faith, or for oppressive reasons. Therefore, no fees were awarded.

 

Bankruptcy: Redemption - Exercising the Right of Redemption

     Can debtors exercise the right of redemption after discharge has been ordered?
     A decision by Judge Krumm for the Western District of Virginia appears to have answered this question. The case was In Re Hawkins. The debtors sought to reaffirm the bank loan secured by their Dodge Colt. The debtors later learned of Bankruptcy Code §722 redemption rights, and sought to redeem instead of reaffirm. Before redemption was achieved, the chapter 7 discharge was granted. The creditor opposed the motion and alleged that debtors' right of redemption expired when they were discharged in bankruptcy. The court found for the debtors and held that the debtors' discharge did not bar their motion for redemption under § 722. Debtors were clearly entitled to reaffirm debts after discharge under 11 U.S.C.S. § 524. While 11 U.S.C.S. § 722 was silent on whether they were allowed to redeem property after discharge, the court found that it was Congress' intent to consider the concepts of reaffirmation and redemption together. The court reasoned that although the Code is silent as to when debtors may exercise their right to redeem, since concepts from reaffirmation and redemption were considered by Congress together, the time frame for exercising one option should be applicable to the other option. Therefore, the time frame for exercising redemption rights was the same as that for exercising reaffirmation rights.
     Right to redeem / repossess property in Chapter 13 cases:
     In the case of Tidewater Finance Co. v. Moffett, the Fourth Circuit Court of Appeals ruled that a Chapter 13 debtor was entitled to the return of her car, which had been repossessed by a finance company. This decision affirmed the original bankruptcy court decision, as well as the appellate decision of the District Court.
     In Moffett, the debtor, in her reorganization plan, exercised her right to redeem under the Virginia Uniform Commercial Code (“UCC”); the plan provided for full payment of her debt to the finance company, plus interest on the delinquent payments.
     The debtor worked at the Federal Emergency Management Agency, forty miles from her home. A couple of years prior to the bankruptcy filing she had bought a previously owned, three year old Honda Accord from a dealer in Woodbridge, which assigned its loan to the finance company creditor. The car was the debtor’s only means to get to work each day. The debtor made her payments in a timely fashion for a year, and then missed two payments. This prompted the finance company to repossess the car. Later that same day the debtor filed for Chapter 13 bankruptcy. A week after that the debtor’s lawyer demanded that the finance company return the car. The finance company filed a motion for relief from the automatic stay so that it could sell the vehicle. The bankruptcy court denied the motion, however, and ordered the finance company to return the car. In doing so, the bankruptcy judge required adequate protection for the creditor in the debtor’s Chapter 13 plan. The debtor’s Chapter 13 plan provided for full payment of the loan. The finance company returned the car, but appealed to the District Court.
     The District Court Judge found that the debtor had a statutory right of redemption, and also found that the finance company was required to turn over the car once its interest was adequately protected in the Chapter 13 plan.
     The finance company appealed again, this time to the Fourth Circuit Court of Appeals. In his opinion, the Fourth Circuit Court Judge cited that pursuant to the federal bankruptcy code, once a petition is filed, an automatic stay goes in effect. Any party with property that the trustee can use, sell or lease must turn it over to the trustee, after that party’s interest is protected. The district judge said the question in this case was whether the finance company and the car at issue were subject to the referenced code provisions. The judge looked at the UCC as controlling, since the case involved default on a purchase agreement with a secured creditor. The UCC allows the creditor the right of repossession, but within limits. The debtor also has rights upon repossession, including the right to redeem the property under UCC Section 8.9A-623 (c)(2). The Judge ruled that the debtor’s right to redemption becomes one of the “legal or equitable interests” of her bankruptcy estate.
     The 4th Circuit agreed with the lower courts that if the creditor’s interest is protected in the plan, then it must turn over the car. UCC Section 8.9-623(b) allows a debtor to redeem collateral by tendering in full its obligations to the creditor. In this case, the Judge noted that the debtor’s plan did just that. The plan even provided interest to the finance company for the delinquent payments. The Judge wrote: “[T]he bankruptcy plan here provided for the payment of all future installments, the curing of all delinquent payments, and the payment of all applicable interest over the course of the plan”. “Such a flexible approach to repaying claims is precisely what the Bankruptcy Code allows in order to facilitate a debtor’s successful rehabilitation.” The Judge affirmed the lower court’s decision.

Bankruptcy: Dischargeability of Debts Regarding Property Damage-Malice

     In a future blog, we will begin a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice.
     Several cases illustrate well the dischargeability of debts involving property damage. In all cases, the trial and appellate courts are required to adhere to Bankruptcy Code §523(a)(6) which states that a debt causing willful and malicious injury to another entity is not exempt from discharge.
     If you have cases involving property damage that may fall within this code section, please let me know.

Bankruptcy: Lien Avoidance Case Review: After-Acquired Property

     In the case of Butler v. Southern O Corp the United States Bankruptcy Court at Roanoke, Virginia ruled that a debtor who received a Chapter 7 discharge could avoid a judicial lien filed in the previous year against the debtor's real estate in which he had no equity because of outstanding deeds of trust and for which he had filed a homestead exemption. In Butler the Court found as fact that the amount of the judicial lien (at least $115,000), plus the amount of other liens ($76,934), plus any exemption to which debtor might be entitled, exceeded the value of the property of $72,000.00.

     The Court held that the lien was entirely avoidable pursuant to Bankruptcy Code §522 (f). The Bankruptcy Court ruled that it was Congress's intention to protect any further equity the debtor may accumulate, by the reduction of the principal amount of the mortgage, from payments hereafter made by the debtors. Accordingly, the Bankruptcy Court ruled that any future increase in value accrued to the benefit of the debtor as after-acquired property was likewise exempt.

 

Bankruptcy: Debt Declared Nondischargeable due to Debtors Knowledge of Error

     The U.S. District Court in Alexandria, in the case of Nawroz v. Wells Fargo Advisors LLC, in August, 2012, affirmed a bankruptcy court decision which held that a debtor cannot discharge in bankruptcy her obligation to repay a bank for the $28,029.99 that the bank mistakenly credited her IRA.
     Wells Fargo, after mistakenly transferring the funds into the debtor’s IRA, then transferred the balance of debtor’s account, $56,043, to a checking account at another bank, and then closed the debtor’s account with Wells Fargo.
     At trial, the debtor testified that during that time period, she was severely depressed, her home was in foreclose, she lost her business and she was not attending to her business affairs. She also testified that she did not know the funds not belonging to her had been mistakenly transferred to her new checking account. Shortly after the transfer of funds to the checking account, the debtor wrote a checking for $81,000 to Khalil Wadedi, allegedly to avert a family emergency arising from the kidnapping of a family member in Afghanistan. At the time, the checking account held less than $81,000.
     Wells Fargo won a default judgment against the debtor for $36,962.71, covering the funds mistakenly transferred, attorney’s fees, prejudgment interest and costs.
     During the debtor’s subsequent bankruptcy proceedings the bankruptcy court said the debt to Wells Fargo was nondischargeable pursuant to Bankruptcy Code Section 523 (a)(6). The debtor appealed this decision.
     The District Court noted that the debtor knew that her CD account with Wells Fargo held no more than $28,032 in April 2008, and therefore the amount transferred from Wells Fargo to the different checking account should not have exceeded this amount. The debtor subsequently used $81,000 from the checking account after the transfer of funds from Wells Fargo. But for the mistaken credit by Wells Fargo of $28,029, the checking account would have been no more than $56,000 and therefore debtor’s $81,000 check would not have cleared.
     The debtor admitted that she knew the balance of the CD account; therefore, the court reasoned that the debtor must have known that the amount transferred from Wells Fargo to the checking account should not have exceeded $28,032, regardless of what account held the funds prior to this transfer, and that the debtor was not the true owner of approximately $28,000 of the amount in her checking account in May, 2008.

Bankruptcy: Post Discharge Mortgage Statement Held Not to Be a Violation

     The U.S. District Court in Charlottesville, in the case of Pearson v. Bank of America affirmed a bankruptcy court decision which held that the bank did not violate the discharge injunction against creditor action under bankruptcy code section 524(a) by sending monthly statements.
     In Pearson, although the debtor had obtained a Chapter 7 discharge for her debt with the bank, she continued to receive a routine monthly statement from her Bank of America mortgage that provided principal balances, estimated payments, payment instructions and information on how payments would be posted.
     The language in the opening section of the Mortgage Statement clearly stated that the debtor’s loans had been discharged, that such discharge insulated debtor from any efforts by anyone to collect this discharged debt as a personal liability, and that the debtor could not be pressured to pay this debt. The Mortgage Statement’s opening section referenced the fact that some homeowners become concerned after receiving statements and therefore assured the debtor that such letters were sent as a courtesy, and were not a demand for payment.
     The statements also provided that no monthly statements would be sent in the future if the debtor would simply make one toll-free telephone call to an identified number.
     Considering all of the facts, the court held that the statements did not represent a violation of the discharge injunction.

Bankruptcy: Objection to Discharge - Willful and Malicious Injury by Depriving Access to Secured Collateral

       A couple of years ago I tried a case that will be of interest to many lenders who hold a security for their loan. The case was Dominion Credit Union v. Kristle Hembrick, tried in the United States Bankruptcy Court, Eastern District of Virginia Richmond Division, Judge Huennekins.
      The factual scenario is as follows: the Credit Union had made a $30,000.00 loan to the debtor in March, 2006 to purchase a pickup truck from Chambers Auto. The loan was secured by this pickup truck. There was no co-signer for the loan, nor was the debtor married. The debtor’s loan application made no reference for the purpose for which the loan was sought. The debtor listed no other owner or user. Within two months the debtor became delinquent. The Credit Union ordered repossession of the truck. The repossession company could not find the truck, and the debtor offered minimal cooperation, claiming only that another person had the vehicle and took it out of state. The debtor referenced the name of the person, Michael Chambers (this name became important years later, but note that the name of the company from which she purchased the vehicle was Chambers Auto). The debtor did provide a telephone number for Michael Chambers. The repossession company made several attempts to repossess the truck, checking at the debtor’s residence on various days and at various times, but to no avail. Calls were also made to Michael Chambers. On one occasion Mr. Chambers said that he was out of state, and, that he was also in the repossession business. With no luck at repossession, the Credit Union retained me to obtain judgment against the debtor and try collection. While judgment was obtained for over $29,000.00 plus costs, interest and attorney’s fees, collection was difficult, as the debtor was constantly in school and working only part-time. Finally in early 2010 I found the debtor working a sufficient number of hours to garnish, and issued the garnishment. As a result of the garnishment, the debtor filed a Chapter 7 bankruptcy case in March, 2010, seeking discharge of all of her financial obligations – at this point in her life the debtor had accumulated some other debt as well, and was finally about to complete her schooling to become a full time nurse. I advised the debtor’s attorney that I would be objecting to the discharge of this debt based upon the fact that we had been unable to obtain the truck since May, 2006, and that we had obviously lost money due to the debtor’s willful and malicious injury to the Credit Union by depriving it access to and repossession of the collateral securing its loan pursuant to Bankruptcy Code Section 523(a)(6). The debtor’s attorney responded by stating that the truck would be surrendered. Weeks passed without the debtor surrendering the truck, so I filed an objection to the dischargeability of the debt. Subsequently the truck was returned, but in horrible condition, having limited value, resulting in a substantial loss to the Credit Union.
      To prepare for the trial of the case I conducted written discovery and scheduled depositions of the debtor and Michael Chambers. Depositions were scheduled on several dates. On the first date both parties appeared (although almost an hour late), even though I had only subpoenaed the debtor. I excluded Mr. Chambers from the debtor’s deposition – important because Mr. Chambers tried to “control” the proceedings. At the debtor’s deposition she stated, for the first time, that the truck was purchased as a business deal with her brother (although not an actual blood brother, but someone just like a brother, named “John Jones”). She and Mr. Jones had a “falling out” and he left with the truck, never to have contact with him again, and not knowing where either he or the truck was. The debtor denied telling the Credit Union or the repossession company that Michael Chambers had it. The debtor admitted that she and Mr. Chambers were now boyfriend and girlfriend, although she was not sure when this relationship commenced, although probably within six months of the loan. The debtor admitted that Chambers Auto was a family business, but that Michael Chambers’ father ran it. The debtor stated that when it became apparent that she would not be able to get a bankruptcy discharge without surrendering the vehicle to the Credit Union, Mr. Chambers (who had a “questionable” past and had “questionable” connections) “put the word out on the street”, and magically the vehicle was returned to Mr. Chambers. The debtor also stated that they tried their best to put the vehicle back in decent shape, but ran out of time. Following the debtor’s deposition, I tried to immediately take Mr. Chambers’ deposition, but he and the debtor said that they had no time and had a child care problem. A new date was set for Mr. Chambers’ deposition. However, he failed to show on that date. I advised the Court of this lack of cooperation, asked for a continuance to obtain the necessary evidence to prove my case. The Court granted the continuance and set a new trial date. I then set a new deposition date for Mr. Chambers, who, this time did show up, although about an hour late again. Mr. Chambers’ testimony was similar, but somewhat inconsistent with that of the debtor in some key areas.
     On the trial date Mr. Chambers’ failed to appear in Court despite subpoena. His deposition was submitted into evidence, and the Court issued a Show Cause summons against him for his non-appearance. After hearing all of the evidence, the Court ruled that the debtor did willfully and maliciously injure the Credit Union by depriving it access to and repossession of the collateral securing its loan pursuant to Bankruptcy Code Section 523(a)(6), and awarded non-dischargeability to the extent of the Credit Union’s reasonable loss based upon the debtor’s conduct.
     The lesson of Hembrick: be diligent about repossession efforts, document all events, and if the debtor deprives you of the security and attempts to discharge the debt in a Chapter 7 bankruptcy case, object!