Continuing to report a discharged debt as due and outstanding after bankruptcy is a violation of the US Bankruptcy Code, says the U.S. Bankruptcy Court for the Middle District of Florida.

The case?  In re Fox, 3:05-bk-12267 (Bankr. M.D.Fl).  Here, the court relied heavily on two of my cases, Russell v Chase Bank USA, NA (In re Russell), 378 BR 735 (Bankr. EDNY 2007) and Torres v. Chase Bank USA, NA (In re Torres), 367 BR 478 (Bankr. SDNY 2007), for the propositions that

[w]hen a creditor falsely reports unpaid balances which are stayed or discharged by a bankruptcy, it impermissibly attempts to collect that debt in violation of the automatic stay . . . and the discharge injunction . . .

The case involved a prepetition debt due to Navy Federal Credit Union.  I am glad to see that the Court chose to follow the sound logic of the Torres and Russell courts, though it always concerns me when I see a new case come out on this topic.

Sadly, many attorneys fail to set up their facts properly and provide the creditor with an opportunity to correct the offending tradeline.  Thankfully, a very competent and well-reasoned attorney was in control of this case.

I will be speaking at a CLE on this subject in the near future, so please stay tuned for more information.

The decision can be accessed here.

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Let’s say a proof of claim is filed in a bankruptcy case. The proof of claim is for a personal injury claim that, under normal circumstances, would be outside the bankruptcy court’s jurisdiction. When the debtor objects to the filed claim, can the bankruptcy court then exercise jurisdiction so as to hear the underlying claim?

Yes, says the U.S. Bankruptcy Court for the Southern District of New York in the recent case of In re Alper Holdings USA, 2008 WL 1389771 (Bankr.S.D.N.Y. 2008). In this case, the Court dealt with exactly this question - could it consider a personal injury claim over which it other had no jurisdiction?

Section 157(b)(2) of title 28 of the United States Code provides a non-exhaustive laundry list of matter that fall within the category of “core” proceedings, and specifically excludes the “liquidation or estimation of contingent or unliquidated personal injury or wrongful death claims against the estate for purposes of distribution in a case under title 11.” Section 157(b)(5) goes to say that “the district court
shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending. . . .”

The Court sidesteps this problem by noting that the proof of claim does not concern “the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims” so as to implicate Section 157(b)(2)(B), but rather merely concerns the allowance or disallowance of timely filed proofs of claim as a matter of law.

The bankruptcy courts in the Second Circuit have repeatedly held that proceedings to determine the allowance or disallowance of claims are core matters. See Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1389(2d Cir.1990); Enron Power Mktg., Inc. v. Nevada Power Co. (In re Enron Corp.), No. 03-09332, 2004 WL 3015256, at *5 (S.D.N.Y. Dec. 28, 2004); In re Chateaugay Corp., 111 B.R. 67, 76 (Bankr.S.D.N.Y.1990).

So why does this matter to you, the consumer bankruptcy lawyer who seldom confronts these issues? The next time you object to an inaccurate proof of claim filed by a mortgage servicer or debt buyer, there is some chance that the creditor will state that the bankruptcy court does not have jurisdiction to consider the underlying debt inasmuch as it is created and controlled by state and non-bankruptcy law. Using the holding in this case, you may be able to keep the ear of your bankruptcy court to secure a favorable ruling for your client.

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Can you keep your secured property after bankruptcy so long as you continue to make payments?  In the old days (i.e., before the bankruptcy laws changed in 2005) the answer was a resounding YES.  But the new Code cast a shadow of that with the advent of Section 362(h).  For over two years, the consumer debtor’s lawyer has had to answer that question with a shrug crossed fingers.

Now comes the Connecticut case of In re Caraballo, Case No. 07-32469 (D. Conn. 2008) which faced head on the question of whether, after the enactment of BAPCPA, Capital Communications Federal Credit Union v. Boodrow (In re Boodrow), 126 F.3d 43 (2d Cir. 1997), cert. denied, 522 U.S. 1117 (1998) and BankBoston, N.A. v. Sokolowski (In re Sokolowski), 205 F.3d 532 (2d Cir. 2000), remain binding authority that (1) a debtor has an option (the “ride through option”) to retain real property collateral and maintain current performance under the subject loan documents and (2) the secured creditor may not foreclose based solely on the debtor’s filing of the bankruptcy petition and failure to reaffirm.

Caraballo involved a debtor who sought to reaffirm a mortgage owed to HSBC Mortgage Services.  Though the court found no reason to deny the reaffirmation, it raised the issue sua sponte of whether such a move was necessary at all.

The court used Northwest Airlines Corp. v. Association of Flight Attendants-CWA (In re Northwest Airlines Corp)., 483 F.3d 160, 169 (2d Cir. 2007) and Garcia v. Teitler, 443 F.3d 202, 207 (2d Cir. 2006) to determine that Congress would have been aware of the pre-BAPCPA “existing landscape” of Boodrow and Sokolowski allowing ride-through for real property and personal property.  Noting that Congress eliminated the ride through option for personal property in BAPCPA, the court assumed that by failing to specifically do so as to real property in BAPCPA the intention was to leave it intact post-BAPCPA.

The question, then, is how the court could have affirmed the so-called fourth option for real property but not for personal property?  True, BAPCPA eliminated the automatic stay for unreaffirmed personal personal but did it provide a secured lender with the ability to repossess based solely on the bankruptcy trigger?

Here’s the thing - Boodrow and Sokoloski both accepted that it was a stream of payment, not a “technical default” such as bankruptcy, that prohibited a secured creditor from repossessing property.  There is nothing in BAPCPA that changed those rules; in fact, BAPCPA merely addressed the automatic stay.  It gave a creditor the ability to seek non-bankruptcy recourse to the extent permitted by law.  In the Second Circuit, such non-bankruptcy law is a non-starter.  So in my mind, the secured creditor is left with nothing but an empty bag; no automatic stay, but no ability to repossess in the face of current payments.

In re Caraballo is attached for your review.

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