Bankruptcy: Plan Confirmation - Value of Vehicle

     In the case of In re: Rodnok the United States Bankruptcy Court at Richmond, Virginia, sustained a creditor's objection to the debtors' second modified Chapter 13 plan based upon the valuation of collateral. 

     In Rodnok the creditor, who had a Ford Aerostar van as collateral, filed a proof of claim stating the value as $13,075, which the debtors had not objected to. The debtors argued that the value of the van was already decided in the approved first modified plan to be $9,300, and that a redetermination was barred by the doctrine or res judicata. The creditor argued that the Court was not bound by the value determined in the first modified plan when it was determining approval of the second modified plan. 

     The Court stated that in determining whether a secured creditor should be bound to the value of its collateral as provided for in a confirmed Chapter 13 plan, the Court had to look at Bankruptcy Code §506 (a). This code section states that a claim is a secured claim to the extent of the value of the creditor's collateral and is unsecured as to the extent that the debt owed to the creditor exceeds the value of the collateral. Value of the collateral can be determined in any hearing concerning the disposition or use of the collateral or the confirmation of a plan affecting the secured creditor's interest. Bankruptcy Rule 3012 requires that notice of the hearing be given to the holder of the secured claim before a court may determine the value of that creditor's collateral. 

     In Rodnok the Court determined that the creditor was not provided the appropriate notice that the debtors were going to modify their secured claim, and therefore the creditor cannot be bound by the value assigned in the debtors' first modified plan, which was book value. 

     The Court found that the value of the van was $12,000. The creditor based its determination that the van had a value of $13,075 on the N.A.D.A. As evidenced by the certificate of title, the van came with numerous extras, adding to the overall value of the vehicle. The debtors claimed a deduction for excessive mileage, but the Court noted that at the first meeting of the creditors the debtors stated that the van had only 25,000 miles on it. Overall, the Court found that the value of the van more closely resembled that proposed by the creditor. Accordingly, the Court sustained the creditor's objection to the debtors' second modified plan. 

     The lesson of Rodnok, as it is in so many cases, is that creditors should retain the serves of counsel who has extensive experience in creditor representation.

Bankruptcy: Motion to Annul Automatic Stay upon Debtor's Third Petition

     In the case of Blue Ridge Bank v. Boswell the United States Bankruptcy Court at Roanoke, Virginia, denied the creditor bank's motion to annul the automatic stay. 

     In Boswell the debtor had twice previously, just prior to the bank's scheduled foreclosure sales, filed a bankruptcy petition on the eve of foreclosure. With each of the two bankruptcy filings, the debtor failed to provide schedules, a statement of financial affairs or a plan. When the Bankruptcy Court dismissed the debtor's second petition, the Court ordered the debtor not to file another petition for 180 days from the entry of the original order of dismissal. The debtor complied with this order. 

     The bank scheduled a third foreclosure sale, and at the same time, the debtor presented a letter from her attorney indicating that a third bankruptcy petition had been filed. The bank proceeded with the sale, announcing that the sale would be subject to bankruptcy court confirmation. After the sale, the bank moved to annul the automatic stay, arguing that the Court had discretion to validate actions taken in violation of the stay. 

     The Bankruptcy Court found as fact that the foreclosure trustee was advised by the bank and its counsel to proceed with the foreclosure sale of the debtor's residence, and that each was fully aware of the debtor's Chapter 13 petition. At the same time, the foreclosure trustee chose not to consult with the debtor, who was in attendance at the sale, or the debtor's attorney, whose identity was known to the trustee. In fact, the foreclosure trustee received only the bank's point of view and then obtained indemnification from the bank for any personal liability resulting from the sale. The Bankruptcy Court noted that under Virginia law, a trustee under a deed of trust is a fiduciary for both the debtor and the creditor and must treat them with perfect fairness and impartiality. 

     The Bankruptcy Court ruled that its dismissal of the debtor's second petition prohibited the debtor from filing any petition for a period of 180 days from entry of the original order of dismissal. The debtor filed her Chapter 13 petition nine days after the prohibitory period had expired. The debtor acted in accordance with the Court's directive and with her rights under the Bankruptcy Court. Further, the bankruptcy trustee reported that the debtor was current in her plan payments and that he was prepared to recommend confirmation. The Bankruptcy Court noted that such evidence did not support a finding that the debtor was abusing the bankruptcy process. 

     Accordingly, the Bankruptcy Court declined to annul the automatic stay of Bankruptcy Code §362, and the bank's motion to annul the stay was denied. 

Collections: Post Judgment Collection - A Focus on Debtor's Interrogatories

     Once judgment is entered, what is next? Although all creditors would like for the judgment amount to "fall from the sky", it does not. Sometimes debtors will pay, either in full or in incremental payments. Sometimes creditors can garnish wages or accounts, or issue a levy on property. Sometimes creditors can bring a creditor's bill to sell real estate. But what can be done when the above listed remedies are not, or at least are not yet, options, or when there is no information about the debtor from which to devise a post judgment collection plan? Virginia Code §8.01-506 provides a good start - Debtor's Interrogatories. For the price of a summons to answer interrogatories (usually $44.00 plus service charges) an attorney can summon the debtor to appear before the court granting the judgment (or other court should the matter be transferred by the judgment court) or a Commissioner in Chancery (a lawyer appointed by the court to serve in this capacity) to examine the debtor's personal estate, specifically, to answer questions about income, assets and the debtor's general ability to pay in order to attempt to satisfy the judgment. The summons is enforceable by a capias (arrest warrant) which is issued through the court.

     The interrogatory procedure is summary in nature. No pleadings are required. No trial by jury is available. Under recent amendment to Virginia Code §8.01-506, the creditor may, as part of the interrogatory system, require the production of account books or other writings that contain evidence of the judgment debtor's estate, provided that the creditor gives an affidavit stating that he believes the books exist and identifies them with reasonable certainty.
     Virginia Code §8.01-506 allows a debtor to request that the interrogatories be held at a court most convenient for the debtor. Therefore, if the debtor moves far from the creditor's area, it may not be cost effective to pursue the interrogatories.
     It is important to note that a creditor cannot conduct debtor's interrogatories - only an attorney can. This certainly can be frustrating for creditors who take their own uncontested judgments and file their own garnishments, but it is a reminder as to why creditors are better served by turning all accounts over to counsel for collection prior to seeking judgments so that counsel can assess the attorney's fee provided in the contract or note, and can keep the entire process moving.

Bankruptcy: IRA Funds are not disposable income in Chapter 13

       The case of Solomon v. Cosby, decided by the United States District Court in Baltimore, Maryland, served as a good review (although bad outcome) of how Individual Retirement Account funds are treated in a Chapter 13 bankruptcy.

     The Appeals Court reversed the Bankruptcy Court's decision that IRA funds are disposable income, and that the debtor's Chapter 13 plan should be rejected as not paying "all of the debtor's projected disposable income".
     In Solomon, the debtor, a retired physician, had proposed a Chapter 13 plan excluding approximately $1.4 million invested in an IRA. The debtor was facing tort claims of sexual misconduct from several former medical patients who sought damages of $160 million at the time he filed his Chapter 13. The plan provided for only $45,000.00 over five years.
     The Appeals Court held that under the clear terms of Bankruptcy Code §1325(b)(2), the debtor's IRA funds are not "income". Both the statutory definition of "disposable income" as income that is received by the debtor, as well as the requirement that projected income must be calculated over the life of the plan, contemplate income that a debtor is actually receiving at the time of the confirmation hearing, the debtor was not actually receiving any disbursements from his IRAs. The debtor also insisted that he had no intentions of withdrawing funds from the IRAs during the life of the plan.

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: Debtor's Chapter 13 Plan Cannot Favor Student Loans

     The U.S. District Court in Alexandria, in the case of Gorman v. Birts, while approving the bankruptcy court’s test to consider the debtor’s chapter 13 plan, reversed its decision to confirm the plan because it unfairly discriminated against unsecured creditors by proposing to pay the debtor’s student loans outside of the plan.
     Bankruptcy Code Section 1322(b)(5) permits a plan to provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final plan is due. In Gorman the debtor’s student loans would qualify as this type of long term debt.
     The parties in Gorman agreed that Bankruptcy Code Section 1322(b)(5) is subject to the unfair discrimination limitation described in subsection (b)(1). By proposing to pay her student loan outside of the plan the debtor in Gorman designated a separate class of unsecured claims. As a result of the proposal, the student loan lender would be paid more than three times as much in dollar amounts as the other unsecured creditors, even though the student loan debt constituted only one-third of the total unsecured debt. Accordingly, the question presented was whether the differential treatment constituted “unfair” discrimination under Bankruptcy Code Section 1322(b)(5).
     As the bankruptcy court in Gorman recognized, courts across the country have not settled on a uniform test to assess whether a classification unfairly discriminates within the meaning of the statute. Courts have developed two primary tests to evaluate what constitutes unfair discrimination, neither of which has been adopted by the 4th Circuit (our local circuit). The 8th Circuit’s test in the case of In re Lester (a 1991 case) has been widely applied. Bankruptcy courts in this District have also applied a slightly different test from the case of In re Linton (from an E.D. of Virginia bankruptcy court in 2011). The bankruptcy court in Gorman applied a hybrid version of the Lester and Linton cases. The Circuit Court in Gorman found that the proposed test of the bankruptcy court included all of the factors relevant to a reasonable determination and was the proper test to apply in this case. However, the Circuit Court found that the decision of the bankruptcy court in Gorman that the plan did not unfairly discriminate against the non-student loan creditors was clearly erroneous.
     Using the non-dischargeable nature of student loans, as cited by the bankruptcy court in Gorman, as a basis for discrimination would eviscerate the detailed priority system of Bankruptcy Code Section 507 and make preferential treatment of student loans the rule rather than the exception. The Circuit Court agreed with the view that there are strong policy considerations underlying the student loan program that would favor preferential treatment of student loan debt; however, that is not the law. By not designating student loans as priority claims under Bankruptcy Code Section 507, Congress chose not to categorically treat them differently. Otherwise, the bankruptcy court in Gorman relied on the debtor’s status as a single mother with three children in concluding that the discrimination was reasonable. The debtor did not point to any case law supporting her view that student loans are properly favored under these circumstances. The Circuit Court found that the bankruptcy court erred in finding a reasonable basis for the discrimination. The court sided with the bankruptcy trustee, who challenged the bankruptcy court’s good faith finding by arguing that the debtor had acted in bad faith by failing to pledge her entire disposable income to the plan, instead proposing to retain the disposable income of half of the amount she dedicated to the plan for these creditors. The Circuit Court in Gorman ruled that the bankruptcy court abused its discretion in failing to consider the effect of the disposable income issue on its finding of good faith.