In the case of In re Pinti, 2007 WL 744031 (Bkrtcy.S.D.N.Y.,2007), the Debtor filed a voluntary petition for Chapter 13 bankruptcy. Schedule B of Debtor’s petition listed a 2004 Ford F250 valued at $10,400. The Vehicle was purchased by the Debtor pursuant to a retail installment contract on July 26, 2004. In Schedule D, the Debtor listed Ford Motor Credit Company with a claim of $28,000 secured by the Vehicle.

The debtor fell behind on the car payments, and Ford moved to lift the stay. The debtor did not object to the motion but, after the stay was lifted, the debtor filed a motion to expunge Ford’s claim as fully satisfied by sale of the Vehicle; the Debtor characterized the post-petition seizure of the Vehicle as a “surrender” by the Debtor that was in full satisfaction of the amount owed on the Vehicle. Ford opposed the Motion to Expunge, noting that the Debtor’s original Chapter 13 plan did not provide for surrender of the Vehicle to fully satisfy the debt, and that such a provision would have been objectionable in any event. Ford also requested that after liquidation of the Vehicle, any shortfall be allowed as an unsecured claim.

Judge Cecelia Morris interpreted the “Hanging Paragraph” of 11 U.S.C. § 1325(a)(5) to apply where the debtor’s Chapter 13 plan opts to surrender the collateral, preventing the creditor from asserting an unsecured claim for any deficiency. Put another way, the Court interpreted the Hanging Paragraph as permitting a debtor to surrender collateral in full satisfaction of the claim as part of a Chapter 13 plan.

The impact of this ruling on New York bankruptcy cases is enormous, as debtors who surrender their automobiles no longer need to be concerned with a deficiency increasing their required Plan payments in Chapter 13.

Congratulations to my fellow NACBA member Andrea Malin of Genova & Malin, Wappingers Falls, NY for her excellent representation of this debtor’s interests.

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On December 22, 2006, the U.S. Bankruptcy Court for the Western District of New York issued a Decision & Order in In re Peaslee, 2006 WL 3759476, Bkrtcy. W.D.N.Y., December 22, 2006 (No. 06-21200) (”Peaslee “). In Peaslee, the Court found that Section 506(a)(1), rather than the Section 1325(a)(9) Hanging Paragraph, governs the treatment of the secured claim of a motor vehicle financer, even though the debtor has purchased a replacement motor vehicle within 910 days of the filing of their petition for personal use, where: (1) it is shown that the secured claim includes amounts loaned to the debtor to pay off the debtor’s negative equity in a trade-in vehicle, not to pay any part of the actual purchase price of the replacement vehicle, so that not all of the debt included in the secured claim is secured by a purchase money security interest; and (2) the Court, on all of the facts and circumstances presented in these refinancing of negative equity cases, in the exercise of its discretion, as specifically provided for by Section 9-103(h) of the New York Uniform Commercial Code, determined that a transformation rather than a dual status rule would be in the best interests of all of the parties and the Bankruptcy System.

On January 10, 2007, the Court issued a Decision & Order in In re Jackson, 2007 WL 63582, Bkrtcy. W.D.N.Y., January 10, 2007 (No. 06-21044) (”Jackson “). In Jackson, the Court found that: (1) where the applicable retail installment contract did not itself indicate that negative equity had been refinanced, any interested party objecting to a motor vehicle financer’s secured claim receiving treatment under that Section 1325(a)(9) Hanging Paragraph had the initial burden to demonstrate that the secured claim included debt that was not secured by a purchase money security interest; (2) the objecting party could utilize the appropriate NADA Guide value to meet their initial burden of proof as to the trade-in value of a trade-in vehicle, the retail value of a used replacement vehicle, or manufacturer’s suggested retail price of a new replacement vehicle; (3) notwithstanding a determination by the Court that an interested party using NADA Guide values may have met their initial burden of proof to demonstrate the refinancing of negative equity, so that a motor vehicle financer’s secured claim included debt that was not secured by a purchase money security interest, the motor vehicle financer always retained the right to demonstrate that in fact no negative equity in the trade-in vehicle was refinanced and to request a hearing for the Court to make that determination; and (4) in the event the Court determined that the allowed secured claim of a motor vehicle financer was to be treated under Section 506(a)(1), the motor vehicle financer always retained the right to dispute any alleged retail value for the vehicle in question, and to request a hearing for the Court to determine the actual retail value.

On February 8, 2007 the same court ruled in In re Grant, 2007 WL 417029 (Bkrtcy.W.D.N.Y.,2007) that the holdings in the above cases were sound, and reinforced it’s decisions.

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A new court decision highlights why debtors who file Chapter 13 so that they can cure their mortgage arrears often find their accounts loaded with junk fees after the case is completed. This is an area ripe for litigation, and an area in which I’ve begun to accept new referrals.

In In re Nosek, 2007 WL 682581 (Bkrtcy.D.Mass. 2007) the debtor executed a $90,000.00 adjustable rate note (”Note”) with Ameriquest secured by a mortgage on her principal residence. When Nosek began missing payments on the Note, Ameriquest instituted foreclosure proceedings. To halt the foreclosure, Nosek filed for bankruptcy under Chapter 13. When Ameriquest received a payment, whether it was from the Chapter 13 Trustee on account of the arrears or Nosek herself for the then currently due installment, Ameriquest would apply the funds to the oldest outstanding contractual obligation due under the Note. If the payment was insufficient to satisfy a contractual obligation in full, Ameriquest would place the funds in a “suspense” account. In theory, the suspense account acted like a collection bucket to hold the payments until there were enough funds to satisfy one in full.

The Court noted several flaws with Ameriquest’s accounting system and found an overall failure to properly and timely account for Nosek’s payments. First, the process did not distinguish between pre-petition and post-petition payments; it simply looked to satisfy the oldest contractual obligation first. Thus, when a payment was received from the Chapter 13 Trustee or from Nosek, it was matched against the oldest outstanding contractual obligation. If the payment did not satisfy that contractual obligation in full, the funds were placed in a “suspense” account. Second, even when the total funds in the suspense account were sufficient to satisfy a contractual obligation in full, Ameriquest did not necessarily post them in a timely manner. Third, the accounting system, and the payment history Ameriquest generated for the rest of the world, gave the impression that Nosek was delinquent in her payments. It did not show that Nosek was current, something she claimed prevented her from refinancing her Note with another lender. Although Ameriquest claimed to have manually credited Nosek with having made the payments and internally considered her current, nothing in its accounting system, or on the payment history provided to her, reflected this.

The court, after lengthy discussion of the issues, awarded $250,000.00 in emotional distress damages and $500,000.00 in punitive damages under Section 105(a) for Ameriquest’s violation of Section 1322(b) of the Bankruptcy Code.

If your practice encompasses Chapter 13, let me know and I’ll be glad to walk you through the process of determining whether any of your discharged clients have a valid cause of action against their mortgage servicer.

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In yet another victory for consumers seeking to enforce their rights in bankruptcy court, Judge Leif M. Clark of the Western District of Texas got it right.  In the case of In re Calvillo, Plaintiff sued a Defendant in bankruptcy court alleging, among other things, a violation of the Fair Credit Reporting Act.  The Defendant made a motion to dismiss, claiming that a Plaintiff cannot make a claim under the Fair Credit Reporting Act in bankruptcy court due to preclusion issues.  To support this position, the Defendant used the case of Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2001).

However, the court found more persuasive the reasoning offered up by Judge Frank Easterbrook, of the Seventh Circuit, who authored a decision of a panel of that circuit which rejected Walls. See Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004); see also Turner v. J.V.D.B. & Associates, Inc., 330 F.3d 991 (7th Cir.2003); Hyman v. Tate, 362 F.3d 965 (7th Cir.2004). Said Judge Easterbrook, “When two federal statutes address the same subject in different ways, the right question is whether one implicitly repeals the other – and repeal by implication is a rare bird indeed. It takes either irreconcilable conflict between the statutes or a clearly expressed legislative decision that one replace the other.” Id., at 730, citing Branch v. Smith, 538 U.S. 354, 273 (2003). Judge Easterbrook concluded that neither was to be found in the case of the FDCPA. Similar logic indicates the ruling in that circuit would be the same were the FCRA before the court.

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The case of In re Hale, — B.R. 0000, 2007 WL 196599 (Bkrtcy. E.D. Wash. 2007) the debtors commenced a Chapter 13 case and filed a proposed plan. Under paragraph VII entitled “Special Provisions,” the debtors stated “Debtor’s (sic) are surrendering house.” The initial plan would have required a monthly payment of $549.76 to fund the plan, which had a proposed base of $19,791.36 and an estimated term of 36 months. On March 14, 2003, Origen Financial, LLC (hereinafter “Origen”) filed a Proof of Claim in the total amount of $107,825.33. As completed by Origen, the form indicated that based upon the fair market value of the home, Origen held a secured claim of $78,770 and held an unsecured claim of approximately $29,055.33.

After a number of modifications, the Plan was confirmed. On August 30, 2006, three and one-half years after the filing of the Origen Proof of Claim, the debtors objected to that claim. Meanwhile, Origen foreclosed its lien non-judicially by making a credit bid of $107,000 at the foreclosure sale. On September 16, 2005, Origen sold the home for $120,000 to a third party and received net proceeds of $100,611.08, leaving a deficiency of $31,595.38 on the obligation.

The court noted that in Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), the Supreme Court held that although bifurcation of many secured claims into both a secured and an unsecured claim was required by § 506(a), § 1322(b) precluded bifurcation of first position residential home mortgage claims. Chapter 13 debtors, therefore, were required to pay residential mortgage lenders in accordance with the terms of the underlying obligation regardless of the value of the residence. The bifurcation of the claim was disallowed.

The crux of the case, however, deals with the res judicata effect of a confirmed Chapter 13 Plan. Once a Chapter 13 plan is confirmed, the plan is res judicata as to all matters contained in the plan. Trulis v. Barton, 107 F.3d 685 (9th Cir.1995). Typically, Chapter 13 plans do not effect or purport to determine the nature and extent and validity of a claim. In re Hobdy, 130 B.R. 318 (B.A.P. 9th Cir.1991). Confirmation of plans does not effect the validity of a claim nor its classification as secured or unsecured. Chapter 13 plans determine the treatment to be accorded claims and are res judicata as to the treatment described in the plan. Plans are not res judicata as to the allowance or disallowance of a claim. Allowance of a particular claim is generally not referenced or effected by the plan. In re Shook, 278 B.R. 815 (B.A.P. 9th Cir.2002).

There is an exception to the general rule that confirmation of a Chapter 13 plan has no res judicata effect on the nature, extent or validity of a claim. That exception occurs when the plan specifically so provides. Plans may modify the rights of the holders of claims in a manner disallowed by the Code if the plan clearly and specifically so provides and due process requirements are met. But by failing to refer to the unsecured claim of Origen with any specificity, the court held that the Plan at issue was not res judicata as to the lender.

The moral of the story is to craft your Plan carefully, being sure to refer to claims with specificity and provide due process to the creditor at issue. Without doing so, the terms of the Plan cannot be deemed binding against the creditor.

Technorati Tags: bankruptcy, chapter 13, res judicata, hale, court decision

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