Americash case – a commentary of the CDIL case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is an interesting case concerning a cash advance store and their standing as a creditor, which part of the code applies to them, etc. It is also a good case about preparedness and good trial advocacy.

 

The text of the Americash v Marquardt & McCool and Jones case is a long but very interesting read. I reprinted it here.  If you have not read it yet, click on the hyperlink to review it.

There is a lot an attorney can learn from this case. It coming from the Central District of Illinois (basically the middle of the state), it will be reviewed more closely in the Southern District of Illinois (in which I practice), than a case from another state, for example.

There are a few points to be learned from this case:

  • Most obviously, do not go out and get a loan just before filing bankruptcy. A bankruptcy attorney will advise this from the outset; it just makes sense.
  • This case finds that these payday lenders are not open-ended loans and are not subject to a Motion for Discharge through 523(a)(2)(C)(II), but still through the general provisions of fraud under 523(a)(2)(A)
  • Or it can be if the Attorney and the Creditor are prepared. Not bringing in the loan officer for the debt was an error here. Ms. Ferguson was not the face-to-face loan representative. Additionally, he could not explain how these kinds of companies, who routinely give loans to lower income customers, rely on the Debtor’s representations.

Another error, and one that will be hard to avoid in the future, is that they did not prove reliance.  It is hard for these kinds of companies to show reliance – particularly if they get their own credit report as part of the loan process. I have also successfully defended these kinds of actions of those grounds – If their credit report shows a debt, a lender should not be angry that the debt was left off the application.  If leaving off the debt was so offensive to them, they should not have given out the loan!

This will prove to be a useful case throughout Illinois Districts as it is a very well thought-out decision. Debtor’s attorneys will find the discussion of the case useful if they face an adversary proceeding challenging the dischargeability of a payday loan debt.

 

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

 

 

The Americash case from the Central District of Illinois: discharging a payday loan

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is an interesting case concerning a cash advance store and their standing as a creditor, which part of the code applies to them, etc. It is also a good case about preparedness and good trial advocacy.

 

 

From the Central District of Illinois:

The Honorable Mary Gorman, Chief Bankruptcy Judge

Adversary No. 16-07012 (Case No. 15-71944) – AMERICASH LOANS v DAVID C. MARQUARDT, Adversary No. 16-07012 (Case No. 16-70161) – AMERICASH LOANS v TANIKA M. McCOOL and CARLOS K. JONES.

Before the Court are complaints to determine the dischargeability of debts in two separate adversary proceedings brought by AmeriCash Loans, LLC (“AmeriCash”), against unrelated debtors, David C. Marquardt and Carlos K. Jones. AmeriCash claims that the loans made to Mr. Marquardt and Mr. Jones (together “Debtors”) before their bankruptcy filings should be excepted from each of their discharges because of misrepresentations made by each Debtor in obtaining the loans. Because AmeriCash failed to meet its burden of proof as to either Debtor, judgment will be entered against it and in favor of the Debtors in each proceeding.

  1. Factual and Procedural Background

Because the same legal issues were raised in each of these proceedings, they have been consolidated for purposes of this Opinion. Each proceeding, however, arises from a distinct bankruptcy case and involves an independent set of facts.

  1. David C. Marquardt

David Marquardt signed and filed his voluntary Chapter 7 petition on December 31, 2015. According to his Statement of Financial Affairs (“SOFA”) filed with his bankruptcy petition, Mr. Marquardt paid his bankruptcy attorney $1038 on June 26, 2015. In amended schedules, Mr. Marquardt listed an unsecured debt owed to AmeriCash in the amount of $1200 for what he reported was an October 2015 installment loan.

AmeriCash filed a Complaint Objecting to the Dischargeability of Indebtedness asserting that the debt owed to it by Mr. Marquardt was obtained by fraud and was therefore nondischargeable. Specifically, AmeriCash alleged that on November 14, 2015, Mr. Marquardt applied for and entered into a consumer loan agreement (“Agreement”) in the amount of $1200, which was paid out to Mr. Marquardt on December 7, 2015. AmeriCash claimed that by entering into the Agreement, Mr. Marquardt represented that he intended to repay the loan.

AmeriCash further claimed that it justifiably relied on Mr. Marquardt’s representation and incurred damages when Mr. Marquardt failed to make any payment on the loan prior to filing bankruptcy. Attached to the complaint was the purported Agreement dated December 4, 2015, containing the typewritten name of “David Marquardt” in the signature line.

Mr. Marquardt did not respond to the complaint and AmeriCash moved for an entry of default and default judgment, which was followed by its Amended Motion for Default Judgment, Entry of Default Order and Entry of Default Judgment Order (“Default Motion”).

At a hearing on the Default Motion, the Court informed AmeriCash that it would not rubberstamp a default judgment, explaining that it had a duty to independently review the sufficiency of the evidence in support of the complaint. Noting that the only alleged misrepresentation AmeriCash claimed it relied on was Mr. Marquardt’s promise to repay the loan, the Court set an evidentiary hearing for August 9, 2016.

Less than a week before the scheduled evidentiary hearing, AmeriCash filed an Amended Complaint Objecting to the Dischargeability of Indebtedness (“Marquardt Amended Complaint”), again alleging that by entering into the Agreement, Mr. Marquardt represented that he would repay the loan. The Amended Complaint also asserted that Mr. Marquardt made a false representation to AmeriCash regarding his intention to file bankruptcy, which AmeriCash claims made the debt nondischargeable under §523(a)(2)(A). In an additional count, the Amended Complaint alleged that the debt was presumed to be nondischargeable under §523(a)(2)(C)(II) because the loan was a cash advance aggregating more than $750 that was an extension of consumer credit under an open end credit plan obtained on or within 70 days before the order for relief under the Code.[1]

Attached to the Amended Complaint was a copy of the Agreement. At the August 9th hearing, counsel for AmeriCash informed the Court that he was not prepared to put on evidence, stating instead that the Amended Complaint and attached documents spoke for themselves. The Court counsel that it would not rubberstamp a default judgment and that he would need to present evidence to support AmeriCash’s allegations, including evidence of how AmeriCash justifiably relied on any representations made by Mr. Marquardt.

The Court also questioned whether AmeriCash could proceed on its new claim made pursuant to §523(a)(2)(C), as debts on payday loans are not included in the definition of an “open end credit plan” that would be entitled to a presumption under the subsection. AmeriCash was given an opportunity to brief the issue and all matters were reset for evidentiary hearing on October 11, 2016.

AmeriCash subsequently filed its Memorandum of Law in Support of Plaintiff’s Motion for Default Judgment, conceding that the debt in question did not meet the statutory definition of an extension of credit under an open end credit plan as is required by §523(a)(2)(C). AmeriCash maintained, however, that the elements of §523(a)(2)(A) were met, arguing that Mr. Marquardt misrepresented his intention to file bankruptcy in applying for and entering into the Agreement.

At the October 11th evidentiary hearing on the Default Motion and Amended Complaint, AmeriCash offered testimony from Brenda Ferguson, AmeriCash’s branch manager in Springfield, Illinois. Ms. Ferguson testified that she is familiar with the application procedures for potential AmeriCash customers, and that as part of that process, such customers are required to make certain representations to AmeriCash, including whether they have filed or intend to file for bankruptcy protection. Information regarding whether an applicant has filed bankruptcy is confirmed by a search of the public records. Ms. Ferguson further testified that she had access to the customer files maintained by AmeriCash and she identified the Agreement related to Mr. Marquardt’s loan. She testified that, when a loan is made, the terms and conditions are reviewed with the borrower and that she had no reason to believe that the required procedures were not followed with respect to Mr. Marquardt. One term of the Agreement is a representation that the borrower has no intention of filing a bankruptcy petition.

Although she stated that she has access to AmeriCash files, Ms. Ferguson did not testify that she had reviewed Mr. Marquardt’s customer file or that she had personal knowledge of the circumstances of his loan application and approval.

To the contrary, she admitted that her testimony was limited to what is normally done in the application process and not based on any knowledge whatsoever of what actually occurred in Mr. Marquardt’s case.

Ms. Ferguson was asked by the Court whether she had a copy of the Agreement with Mr. Marquardt’s actual signature on it. In response, she stated that he had applied online and that a customer service representative would have called Mr. Marquardt as part of the loan process and read the terms of the Agreement to him. AmeriCash’s attorney asserted that under Illinois law, electronic signatures are valid. When asked for any evidence that Mr. Marquardt had, in fact, signed the Agreement electronically, however, he produced no further documents or testimony.

At the close of testimony, the Agreement was admitted into evidence. AmeriCash’s attorney stated that he would rely on his previously filed memorandum of law and submitted no closing argument. Mr. Marquardt was present in the courtroom during the hearing but did not participate in the hearing.

 

  1. Carlos K. Jones

Carlos K. Jones and Tanika M. McCool filed their voluntary Chapter 7 petition on February 10, 2016. According to the SOFA filed with their petition, Mr. Jones and Ms. McCool had paid their bankruptcy attorney $365 within one year before filing for bankruptcy, although the date of the payment was not indicated.

They also listed an unsecured nonpriority debt owed to AmeriCash in the amount of $720, which was described as a payday loan. Their schedules do not indicate when the debt was incurred. AmeriCash filed a Complaint Objecting to the Dischargeability of Indebtedness against Mr. Jones (“Jones Complaint”). In the Jones Complaint, AmeriCash alleged that the debt owed to it by Mr. Jones was obtained by fraud and was therefore nondischargeable under §523(a)(2)(A) and (C). Specifically, AmeriCash alleged that, on December 21, 2015, Mr. Jones applied for and entered into a consumer loan agreement (“Agreement”) in the amount of $2500, representing to AmeriCash that he intended and was able to repay the loan.

AmeriCash further claimed that it justifiably relied on Mr. Jones’ representations and incurred damages when Mr. Jones failed to make any payment on the loan prior to filing for bankruptcy. In addition to claiming that the debt was nondischargeable under §523(a)(2)(A), AmeriCash also asserted that the debt was presumptively nondischargeable under §523(a)(2)(C)(II) because it was a cash advance aggregating more than $750 that was an extension of consumer credit under an open end credit plan obtained on or within 70 days before the order for relief under the Code. Mr. Jones did not respond to the Complaint.

At an August 9, 2016 status hearing, the Court expressed the same concerns raised in the Marquardt proceeding about AmeriCash’s status as a payday lender and whether it would be able to proceed on a cause of action under §523(a)(2)(C). The Court questioned whether a payday loan could be an “open end credit plan” as required to raise the presumption AmeriCash was relying on and provided AmeriCash’s attorney with citation to case law suggesting that the presumption could not apply to the loans. AmeriCash’s attorney responded by stating that a Chicago bankruptcy judge had recommended pleading the applicability of the presumption to its loan transactions because the allegations of misrepresentation it was making, based solely on a failure to pay, were otherwise insufficient to prevail. AmeriCash was given an opportunity to brief the issues and the matter was reset for evidentiary hearing on October 11, 2016.

AmeriCash subsequently filed its Memorandum of Law in Support of Plaintiff’s Complaint Objecting to the Dischargeability of Indebtedness, conceding that the debt did not meet the statutory definition of an extension of credit under an open end credit plan that would entitle it to a resumption of nondischargeability under §523(a)(2)(C). Still wishing to proceed under §523(a)(2)(A), however, AmeriCash argued in its brief that Mr. Jones misrepresented his intention to file for bankruptcy protection in obtaining the loan. Attached to the memorandum were Mr. Jones’ January 12, 2016 credit counseling certificate, the portion of Mr. Jones’ SOFA indicating the prepetition payment to his bankruptcy attorney, and a copy of the purported Agreement dated December 21, 2015, containing the typewritten name of “carlos jones,” on the signature line. The Agreement included a representation that the borrower did not intend to file bankruptcy.

At the October 11th evidentiary hearing on the Jones Complaint, AmeriCash offered the testimony of Springfield branch manager Brenda Ferguson. As in the Marquardt proceeding, Ms. Ferguson testified that she was familiar with the application process for AmeriCash customers. She stated that when an application is received, AmeriCash runs a public records search to determine whether the applicant has filed a bankruptcy petition. In addition, Ms. Ferguson testified that when a customer applies for a loan online, they must check a box indicating that they do not intend to file for and do not have a pending bankruptcy. According to Ms. Ferguson, AmeriCash relies on these representations. She stated that when a customer applies for a loan online, a representative of AmeriCash will follow-up with the customer by telephone and go over the loan terms with them. Ms. Ferguson testified that she has access to the files maintained for AmeriCash customers. She did not, however, testify that she had reviewed the customer file of Mr. Jones, and conceded that she had no personal knowledge as to the transaction between AmeriCash and Mr. Jones.

At the conclusion of the hearing, the Agreement was admitted into evidence but no other documents authenticating the electronic signature of Mr. Jones were presented. Although Ms. Ferguson testified that Mr. Jones would have checked boxes during the loan application process to make the representations AmeriCash allegedly relied on, no documents with any boxes to check were presented. Again, AmeriCash’s attorney relied on his memorandum of law previously filed and offered no closing argument. Mr. Jones was not present at the hearing.

 

  1. Jurisdiction

This Court has jurisdiction over the issues before it pursuant to 28 U.S.C. §1334. All bankruptcy cases and proceedings filed in the Central District of Illinois have been referred to the bankruptcy judges. CDIL-Bankr. LR 4.1; see 28 U.S.C. §157(a). The determination of the dischargeability of a particular debt is a core proceeding. 28 U.S.C. §157(b)(2)(I). These matters arise from the Debtors’ bankruptcies themselves and from the provisions of the Bankruptcy Code, and may therefore be constitutionally decided by a bankruptcy judge. See Stern v. Marshall, 564 U.S. 462, 499 (2011).

III. Legal Analysis

  1. Default Judgment Standards

The entry of default judgments is governed by Federal Rule of Civil Procedure 55, as made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7055. See Fed. R. Civ. P. 55; Fed. R. Bankr. P. 7055. A movant is not entitled to a default judgment as a matter of right, even though a debtor is in default for failing to answer or otherwise respond to a complaint. AT & T Universal Card Servs. v. Sziel (In re Sziel), 206 B.R. 490, 493 (Bankr. N.D. Ill. 1997) (citing Wells Fargo Bank v. Beltran (In re Beltran), 182 B.R. 820, 823 (B.A.P. 9th Cir. 1995)); see also New Austin Roosevelt Currency Exch. v. Sanchez (In re Sanchez), 277 B.R. 904, 907 (Bankr. N.D. Ill. 2002) (citing Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001)). The granting of a default judgment lies within the sound discretion of the court. Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir. 1990) (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1322 (7th Cir. 1983)).

This Court has previously discussed the entry of default judgments in the context of adversary proceedings in bankruptcy. See First Bankers Trust Co. v. Dade (In re Dade), 2012 WL 1556510, at *1 (Bankr. C.D. Ill. May 1, 2012). In Dade, the Court explained that in “bankruptcy, where a debtor has a presumptive right to a discharge, default motions should not be granted unless the movant demonstrates that its debt is nondischargeable as a matter of law.” Id. at *4 (citing Sanchez, 277 B.R. at 907 (citing Valley Oak Credit Union v. Villegas (In re Villegas), 132 B.R. 742, 746 (B.A.P. 9th Cir. 1991) (court must determine whether a plaintiff is entitled to judgment); Lovell v. McArthur (In re McArthur), 258 B.R. 741, 746 (Bankr. W.D. Ark. 2001) (noting that bankruptcy courts have taken a conservative approach and sometimes refrain from granting default judgment motions which deprive debtors of discharge)); Attorneys’ Title Ins. Fund, Inc. v. Zecevic (In re Zecevic), 344 B.R. 572, 576 (Bankr. N.D. Ill. 2006)). The policy underlying these decisions is to minimize the risk that lenders may coerce settlements or obtain default judgments against unrepresented and cash poor consumers, regardless of the merits of the complaint. See Sziel, 206 B.R. at 492; Mercantile Bank v. Canovas, 237 B.R. 423, 427 (Bankr. N.D. Ill. 1998). It is for that reason that the Court will enter judgment only if the evidence submitted establishes a prima facie case for nondischargeability. See Dade, 2012 WL 1556510, at *4; Canovas, 237 B.R. at 427.

As AmeriCash must establish a prima facie case for nondischargeability regardless of whether it seeks a default judgment or a judgment on the merits, the Default Motion in the Marquardt proceeding will be discussed with the Marquardt Amended Complaint and the Jones Complaint.

  1. Nondischargeability Under §523(a)(2)

AmeriCash has alleged that the debts owed to it by the Debtors are nondischargeable on a mix of legal theories under §523(a)(2).

Section 523(a)(2) provides in relevant part:

(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt—

* * * *

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

* * * *

(C)(i) for purposes of subparagraph (A)—

* * * *

(II) cash advances aggregating more than $925 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable; and

(ii) for purposes of this subparagraph—

(I) the terms ‘consumer’, ‘credit’, and ‘open end credit plan’ have the same meanings as in section 103 of the Truth in Lending Act[.]

11 U.S.C. §523(a)(2)(A), (C)

 

A party seeking to establish an exception to the discharge of a debt generally bears the burden of proving each element of the claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-87 (1991). Exceptions to discharge are construed strictly against a creditor and liberally in favor of a debtor. Ojeda v. Goldberg, 599 F.3d 712, 718 (7th Cir. 2010); Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992).

  1. Presumption of Nondischargeability – §523(a)(2)(C)(i)(II).

As a preliminary matter, it is necessary to address AmeriCash’s asserted claim of presumed nondischargeability under §523(a)(2)(C)(i)(II), which it now concedes is not applicable to either Debtor. In order for the presumption of nondischargeability to apply to a debt under §523(a)(2)(A), not only must the debt arise from a cash advance aggregating more than $925 within 70 days before the case filing, it must also be an extension of consumer credit under an open end credit plan as that term is defined in section 103 of the Truth in Lending Act (“TILA”). 11 U.S.C. §523(a)(2)(C)(i)(II), (ii)(I). TILA’s definition of an “open end credit plan” does not specifically refer to payday loans. Truth in Lending Act, Pub. L. No. 90-321, §103, 82 Stat. 147 (codified as amended at 15 U.S.C. §1602). Sections 1637 and 1638 of TILA, however, differentiate between open end credit plans and transactions other than under an open end credit plan. See 15 U.S.C. §§1637-38.

Section 1637 deals with open end consumer credit plans, while §1638 encompasses all other consumer loans, including payday loans. See 15 U.S.C. §§1637-38; Brown v. Payday Check Advance, Inc., 202 F.3d 987, 991 (7th Cir. 2000). Open end consumer credit loans generally involve revolving credit lines such as credit cards. Brown, 202 F.3d at 991. Payday loans have fixed payment dates and thus are closed end transactions. See 815 ILCS 122/1-10; 815 ILCS 122/2-5(c). Payday loans are not open end credit plans as defined by TILA and are not entitled to any presumption of nondischargeability under §523(a)(2)(C).

At the August 9th hearings held in both proceedings, the Court expressed concerns about AmeriCash’s asserted claims, including whether they were entitled to a presumption of fraud under §523(a)(2)(C). When asked for authority for treating the payday loans as open end credit plans, AmeriCash’s attorney’s only justification for the pleading was the alleged gratuitous advice of a Chicago bankruptcy judge. And despite the fact that the Agreements clearly provide that they are subject to the Illinois Payday Loan Reform Act, contain other disclosures required by both the Payday Loan Reform Act and §1638 of TILA, and are unquestionably subject to both laws, AmeriCash’s attorney asserted that the loans in question were not payday loans because they were not given in exchange for a post-dated check. Only after being given an opportunity to research the issue and being required to submit a brief did AmeriCash concede that the loans were not open end credit plans under TILA and therefore not entitled to a presumption of nondischargeability under §523(a)(2)(C).

Federal Rule of Bankruptcy Procedure 9011, provides that by presenting any pleading, motion, or other paper to the court, an attorney certifies that “to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances[,] . . . the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing, existing law or for establishing new law[.]” Fed. R. Bankr. P. 9011(b)(2). Very little research was required to confirm that loans subject to the Payday Loan Reform Act do not qualify as open end credit plans that would be entitled to the presumption created by §523(a)(2)(C). The Court does not believe that AmeriCash’s attorney did any research prior to asserting the claims under §523(a)(2)(C) in these proceedings and counsel’s comments at the August 9th hearings tend to justify that belief.

AmeriCash and its counsel are admonished that strict adherence to Rule 9011 is required. The debts for which AmeriCash seeks a determination of nondischargeability clearly do not fall within the presumption under §523(a)(2)(C), and AmeriCash was never justified in pleading that the presumption applied.

  1. Nondischargeability under 523(a)(2)(A).

In order to prevail on its §523(a)(2)(A) claim, AmeriCash must prove that: (1) the Debtor made a false representation or omission which the Debtor either knew was false or which the Debtor made with reckless disregard for the truth; (2) the Debtor intended to deceive or defraud; and (3) AmeriCash justifiably relied on the false representation. See 11 U.S.C. §523(a)(2)(A); Field v. Mans, 516 U.S. 59, 74-75 (1995); Ojeda, 599 F.3d at 716-17.

As a starting point, it must be determined whether Mr. Jones or Mr. Marquardt even made the misrepresentations alleged by AmeriCash. In each proceeding, AmeriCash offered as evidence a copy of an Agreement containing a signature of an AmeriCash employee and the typewritten name of the Debtor.

Under the Illinois Payday Loan Reform Act, all payday loan agreements must be in writing and signed by both parties. 815 ILCS 122/2-35(h). Each Agreement recites that it is subject to the Illinois Payday Loan Reform Act and therefore the Agreements are only enforceable if they were signed by both parties. Because neither Agreement contained an actual signature of one of the Debtors, AmeriCash’s attorney asserted that electronic signatures are valid under Illinois law. That is true if, in fact, a document has been electronically signed.

Under the Illinois Electronic Commerce Act, “[w]here a rule of law requires a signature, or provides for certain consequences if a document is not signed, an electronic signature satisfies that rule of law.” 5 ILCS 175/5-120(a). And generally, “nothing in the application of the rules of evidence shall apply so as to deny the admissibility of an electronic record or electronic signature into evidence: (1) on the sole ground that it is an electronic record or electronic signature; or (2) on the grounds that it is not in its original form or is not an original.” 5 ILCS 175/5- 130(a).

Although neither Mr. Jones nor Mr. Marquardt responded to the allegations against them and have not challenged the admissibility of the Agreements, AmeriCash is still required to lay a foundation for their authenticity, despite their admission at trial.[2] See 3 See Fed. R. Evid. 901; see also Pearson v. United Debt Holdings, LLC, 123 F. Supp. 3d 1070, 1073-74 (N.D. Ill. 2015) (failure to properly authenticate evidence is sufficient to preclude the court from considering it, even if the evidence would have been admissible but for the failure to authenticate (citing Estate of Brown v. Thomas, 771 F.3d 1001, 1005-06 (7th Cir. 2014)). “An electronic signature may be proved in any manner, including by showing that a procedure existed by which a party must of necessity have executed a symbol or security procedure for the purpose of verifying that an electronic record is that of such party in order to proceed further with a transaction.” 5 ILCS 175/5-120(b).

This can be done through the testimony of a witness with knowledge. See Fed. R. Evid. 901.

AmeriCash called a single witness in each proceeding—Brenda Ferguson. Ms. Ferguson testified generally about the application process for obtaining loans. However, she provided no testimony, and AmeriCash offered no other evidence, of how electronic signatures are executed, verified, or maintained. Ms. Ferguson admitted that she did not personally review the applications or Agreements with either Debtor. And while she did state that she had access to customer files and records, she provided no testimony that she had reviewed or was familiar with the Debtors’ specific case files or records maintained by AmeriCash. Put simply, Ms. Ferguson’s testimony was unhelpful in determining whether the Debtors signed the Agreements and whether, in doing so, they made the alleged misrepresentations. She had no knowledge of whether either Debtor signed the Agreements and, apparently, she made no effort to find out what AmeriCash’s records might show about their signatures before she testified. In the absence of any evidence that either Debtor signed an Agreement, no finding can be made that either Debtor made the specific representations contained in the Agreements.

Of course, AmeriCash could have offered proof that the alleged misrepresentations were made by the Debtors through oral statements made on the phone or through the online loan application process. But AmeriCash failed to call any witnesses with actual knowledge of the application process for either Debtor and did not compel either Debtor to attend the hearing to testify. Having offered no proof that the Debtors actually made the alleged misrepresentations, AmeriCash cannot prevail.

There are other problems with AmeriCash’s case. For example, even if there had been some proof that either Debtor had actually represented that he was not intending to file bankruptcy, such representations are generally not given much weight in proceedings such as these. In fact, courts in this circuit have held that a representation of having no intention to file bankruptcy is entitled to no weight in establishing the dischargeability of a debt. See I Need Cash, Inc. v. Powell (In re Powell), 2011 WL 5101753, at *4 (Bankr. C.D. Ill. Oct. 27, 2011) (Perkins, J.); In re Sasse, 438 B.R. 631 (Bankr. W.D. Wis. 2010). This is so because, regardless of its truth or falsity or the debtor’s intent, “it is tantamount to a prepetition waiver of the right to a discharge in bankruptcy.” Powell, 2011 WL 5101753, at *4; see also Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th Cir. 1987) (it is against policy for a debtor to contract away the right to a discharge in bankruptcy).

Likewise, a promise to pay in the future is generally not the type of representation that can support a claim for nondischargebility. For purposes of determining dischargeability under §523(a)(2)(A), a debtor’s representation must relate to a past or existing fact. Dade, 2012 WL 1556510, at *5 (citations omitted); Powell, 2011 WL 5101753, at *4. Ordinarily, a representation may not be based upon a failure to perform or an agreement to do or not do something in the future. Powell, 2011 WL 5101753, at *4. “Only where the debtor never intended to perform at the time he made the promise will the misstatement of intention constitute a fraudulent misrepresentation.” Id. (citations omitted).

AmeriCash contends that the Debtors misrepresented their intention to repay their loans in accordance with the terms of the Agreements. But “[a] broken promise to pay a debt does not, without more, render the debt nondischargeable.” Powell, 2011 WL 5101753, at *5 (citation omitted). Rather, AmeriCash “must establish that at the time the loan was obtained there existed no intent on the part of the [D]ebtor to repay the debt.” Id. An intent to deceive may be established through direct evidence or inference. In re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). The existence of fraud may be inferred if the totality of the circumstances presents a picture of deceptive conduct by the debtor that indicates he intended to deceive or cheat the creditor. Cripe v. Mathis (In re Mathis), 360 B.R. 662, 666 (Bankr. C.D. Ill. 2006); Shelby Shore Drugs, Inc. v. Sielschott (In re Sielschott), 332 B.R. 570, 572 (Bankr. C.D. Ill. 2005) (Lessen, J.).

AmeriCash’s allegations are essentially based on timing. In both cases, AmeriCash contends that the Debtors incurred the debt within the month or two preceding bankruptcy, which it suggests is indicative of the Debtors’ intent not to repay their loans. The only evidence it offered in either proceeding, however, was the testimony of Brenda Ferguson—which provided no insight into the Debtors’ subjective intent—and a copy of the Agreement, which, as discussed above, was not authenticated and will not be considered on the issue of misrepresentation.

AmeriCash might have called the Debtors as witnesses or presented other evidence about the Debtors’ financial conditions from which the Court could have inferred fraudulent intent. But AmeriCash chose not to do discovery in either case and to present nothing more than it did. What was presented was wholly inadequate to establish fraud or misrepresentation and accordingly, AmeriCash cannot prevail.

Without an actionable misrepresentation, the issue of justifiable reliance by AmeriCash need not be reached. But for the sake of completeness, a brief discussion is merited. The standard for showing justifiable reliance is less demanding than that of reasonable reliance. Ojeda, 599 F.3d at 717. The Supreme Court has described justifiable reliance as requiring only that the creditor not “blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Field, 516 U.S. at 71 (internal quotation marks omitted). In other words, “a creditor has no duty to investigate unless the falsity of the representation would have been readily apparent.” Ojeda, 599 F.3d at 717 (citing Field, 516 U.S. at 70-71). Whether a creditor justifiably relied on a debtor’s representation “is determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff.” Id. (citing Field, 516 U.S. at 71-72).

AmeriCash is a payday lender, and payday lenders are in the business of providing loans to the insolvent. Such companies charge interest rates upwards of 400%, presumably based on the high-risk nature of the transactions. They make these loans based on little more than proof of income, and not on the strength of a credit report or financial statement. Payday lenders, like AmeriCash, are almost never justified in relying on a debtor’s assurances of repayment. See EZ Loans of Shawnee, Inc. v. Hodges (In re Hodges), 407 B.R. 415, 419 (Bankr. D. Kan. 2009). Ms. Ferguson testified that AmeriCash relies on the representations made by applicants when giving out a loan. But she did not explain how or, more importantly, why it is that AmeriCash relies on such representations. So, even were the Court to accept that the Debtors knowingly made false representations to AmeriCash with the intent to deceive it, there is no evidence of reliance—let alone justifiable reliance—beyond Ms. Ferguson’s bald assertions.

  1. Conclusion

Because AmeriCash has failed to establish a prima facie case under §523(a)(2) as to either Debtor, it is not entitled to recover on its Default Motion or on the merits of its claims in either proceeding.

 

 

 

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

[1] 1 The citation to the Code provision AmeriCash attempts to invoke is actually §523(a)(2)(C)(i)(II). Moreover, AmeriCash cites the $750 figure that was applicable to cases commenced following the enactment of the BAPCPA in 2005.

The dollar amounts set forth in §523(a)(2)(C), however, are subject to regular adjustment pursuant to §104, with $925 being the applicable amount at the time the Debtor filed his Chapter 7 petition. See Revision of Certain Dollar Amounts in the Bankruptcy Code, 81 Fed. Reg. 8748-01 (Feb. 22, 2016).

 

[2] In a bench trial, the “judge has the flexibility to provisionally admit testimony or evidence and then discount or disregard it if upon reflection it is entitled to little weight or should not have been admitted at all.” Bone Care Int’l, LLC v. Pentech Pharmaceuticals, Inc., 2010 WL 3894444, at *1 (N.D. Ill. Sept. 30, 2010) (citations omitted); see also SmithKlineBeecham Corp. v. Apotex, Corp., 247 F. Supp. 2d 1011, 1042 (N.D. Ill. 2003) (Posner, J.) (“In a bench trial it is an acceptable alternative to admit evidence of borderline admissibility and give it the (slight) weight to which it is entitled”), vacated upon rehearing en banc and aff’d on other grounds, 403 F.3d 1331 (Fed. Cir. 2005).

 

A review of the Griffin case (credit reports and the FCRA)

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is a synopsis of the Griffin case from the Northern District of Ohio:

The debtor states that the creditors/defendants violated the Fair Credit Reporting Act by requesting and obtaining her consumer report from credit reporting agencies TransUnion and Experian with no “permissible purpose,” as prohibited under the FCRA. She says defendants falsely represented that access was authorized for “account review” purposes, despite knowing that she no longer held an interest in the subject property; that her debt had been discharged in bankruptcy; and, that Defendants were legally prohibited from pursuing further collection activities against her. Debtor also says that each impermissible inquiry is a separate violation of the FCRA and that Defendants have received thousands of similar disputes from other consumers whose credit reports were requested despite the fact that their debt had previously been discharged in bankruptcy.

The creditors argued a legalistic definition of “harm” – saying the harm was not “substantive” and therefore the bankruptcy court had no jurisdiction and defendant would have to sue in another Court (which would have cost her more time and money). The Court found that an unauthorized dissemination of one’s personal information, even without a showing of actual damages, is an invasion of one’s privacy that constitutes a concrete injury and denied the Motions to Dismiss filed by Creditors.

The debtor has yet to win the case, but the Court made it clear it has the authority to hear the case and make a ruling!

***

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

 

Church Music Director delay in filing due to Easter Programming not a Unique Circumstance…

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

 

Massachusetts: Denied. Church Music Director’s Motion for Extension of Time to File Appeal Where the Reason for Delay in filing was Not a Unique Ordinary Circumstance (Attorney said he was consumed by duties of being Church Music Director).

LAURA SHEEDY, Debtor/Appellant v. CAROLYN BANKOWSKI, * Standing Chapter 13 Trustee, and WILLIAM HARRINGTON, United States Trustee for Region I, Defendants. 16-10702. United States District Court, District of Massachusetts.

Sheedy’s bankruptcy case has a long history, but the facts pertinent to the issue before this Court are simple. On June 8, 2010, Sheedy filed for relief under Chapter 13 of the United States Bankruptcy Code in the Bankruptcy Court. [ECF No. 12-1 at 4]. By 2015, the Bankruptcy Court had not confirmed Sheedy’s Chapter 13 plan. As a result, on September 23, 2015, the Standing Chapter 13 Trustee, Carolyn Bankowski (“Bankowski”), filed a motion to dismiss the case. Id. at 8. The Standing Chapter 13 Trustee is a private individual appointed by the United States Trustee to oversee the administrative aspects of a bankruptcy case. U.S. Department of Justice, Executive Office for United States Trustees, Handbook for Chapter 13 Standing Trustees 1-1–1-4 (2012). The Bankruptcy Court granted Bankowski’s motion to dismiss on October 20, 2015. [ECF No. 12-1 at 8]. Following this dismissal, on December 8, 2015, Bankowski submitted her Final Report and Account and Request for Discharge of Trustee (“Final Report”). Id. Sheedy filed an Objection to the Final Report, arguing that Bankowski had unlawfully deducted a fee of $7,512.50. Id. at 12. After a hearing, the Bankruptcy Court overruled Sheedy’s objection, and entered an order to that effect on March 10, 2016. Id. at 38.

On Monday, March 28, 2016, Sheedy filed a Notice of Appeal late, and simultaneously filed a motion requesting an extension of time within which to file the Notice of Appeal. [ECF No. 12-1 at 8]. In the Motion for Extension, Sheedy’s attorney claimed he missed the filing deadline because he was a music director in a church and was consumed by the duties of that job leading up to Eastertide, which began the weekend the Notice of Appeal was due. Id. at 42. He argued that missing the filing deadline by one business day was excusable neglect, allowable under Federal Rule of Bankruptcy Procedure 8002(d)(1). Id. Bankowski and the United States Trustee both filed Objections to the Motion for Extension. Id. at 44.

The Bankruptcy Court denied the Motion for Extension, writing “[t]he Motion is denied for the reasons stated in the Objections to this Motion filed by the Chapter 13 Trustee and the United States trustee.” [ECF No. 9 at 58]. On April 10, 2016, Sheedy appealed the Bankruptcy Court’s denial of the Motion for Extension. [ECF No. 1]. In this appeal, the parties disagree as to whether Sheedy’s filing of her Motion for Extension one business day past the deadline set by Federal Rule of Bankruptcy Procedure 8002(a)(1) met the standard for excusable neglect.

 

Because the reason for delay is the most important Pioneer factor, the Court need not address the remaining factors. The First Circuit has repeatedly viewed the “reason for delay” factor in the Pioneer excusable neglect analysis to be dispositive. See, e.g., Villoldo v. Ruz, 821 F.3d 196, 205 (1st Cir. 2016) (in affirming a district court’s finding of no excusable neglect, “reason for delay” factor treated as dispositive); Venegas-Hernandez v. Sonolux Records, 370 F.3d 183, 187 (1st Cir. 2004) (in affirming a district court finding of no excusable neglect, the court stopped its analysis after the “reason for delay” was found lacking); United States v. $23,000 in U.S. Currency, 356 F.3d 157, 165–66 (1st Cir. 2004) (same). Because Sheedy’s counsel failed to provide a unique or extraordinary circumstance to explain his delay, the Bankruptcy Court did not abuse its discretion in finding that his excuse of inadvertence did not qualify as excusable neglect.

 

Here is the ruling:

Currently pending before the Court is Laura Sheedy’s (“Sheedy”), appeal, pursuant to 28 U.S.C. § 158(a), of the Bankruptcy Court’s  denial of her Motion for Extension of Time to File Notice of Appeal (“Motion for Extension”). Sheedy, the Debtor/Appellant, argued below and argues here on appeal that she failed to file her Notice of Appeal by the deadline due to “excusable neglect” under Federal Rule of Bankruptcy Procedure 8002(d)(1), and thus her Motion for Extension should have been granted. For the reasons discussed herein, the Court AFFIRMS the Bankruptcy Court’s decision denying the Motion for Extension.

  1. BACKGROUND

Sheedy’s bankruptcy case has a long history, but the facts pertinent to the issue before this Court are simple. On June 8, 2010, Sheedy filed for relief under Chapter 13 of the United States Bankruptcy Code in the Bankruptcy Court. [ECF No. 12-1 at 4]. By 2015, the Bankruptcy Court had not confirmed Sheedy’s Chapter 13 plan. As a result, on September 23, 2015, the Standing Chapter 13 Trustee, Carolyn Bankowski (“Bankowski”), filed a motion to dismiss the case. Id. at 8. The Standing Chapter 13 Trustee is a private individual appointed by the United States Trustee to oversee the administrative aspects of a bankruptcy case. U.S. Department of Justice, Executive Office for United States Trustees, Handbook for Chapter 13 Standing Trustees 1-1–1-4 (2012). The Bankruptcy Court granted Bankowski’s motion to dismiss on October 20, 2015. [ECF No. 12-1 at 8]. Following this dismissal, on December 8, 2015, Bankowski submitted her Final Report and Account and Request for Discharge of Trustee (“Final Report”). Id. Sheedy filed an Objection to the Final Report, arguing that Bankowski had unlawfully deducted a fee of $7,512.50. Id. at 12. After a hearing, the Bankruptcy Court overruled Sheedy’s objection, and entered an order to that effect on March 10, 2016. Id. at 38.

On Monday, March 28, 2016, Sheedy filed a Notice of Appeal late, and simultaneously filed a motion requesting an extension of time within which to file the Notice of Appeal. [ECF No. 12-1 at 8]. In the Motion for Extension, Sheedy’s attorney claimed he missed the filing deadline because he was a music director in a church and was consumed by the duties of that job leading up to Eastertide, which began the weekend the Notice of Appeal was due. Id. at 42. He argued that missing the filing deadline by one business day was excusable neglect, allowable under Federal Rule of Bankruptcy Procedure 8002(d)(1). Id. Bankowski and the United States Trustee both filed Objections to the Motion for Extension. Id. at 44.

The Bankruptcy Court denied the Motion for Extension, writing “[t]he Motion is denied for the reasons stated in the Objections to this Motion filed by the Chapter 13 Trustee and the United States trustee.” [ECF No. 9 at 58]. On April 10, 2016, Sheedy appealed the Bankruptcy Court’s denial of the Motion for Extension. [ECF No. 1]. In this appeal, the parties disagree as to whether Sheedy’s filing of her Motion for Extension one business day past the deadline set by Federal Rule of Bankruptcy Procedure 8002(a)(1) met the standard for excusable neglect.

  1. LEGAL STANDARD

Federal Rule of Bankruptcy Procedure 8002(a)(1) states that “a notice of appeal must be filed with the bankruptcy clerk within 14 days after entry of the judgment, order, or decree being appealed.” A bankruptcy court may extend this time “upon a party’s motion that is filed: (A) within the time prescribed by this rule; or (B) within 21 days after that time, if the party shows excusable neglect.” Fed. R. Bank. P. 8002(d)(1). Because Sheedy moved for an extension to file a Notice of Appeal after the expiration of the 14 day deadline, this appeal turns on whether Sheedy showed excusable neglect under Federal Rule of Bankruptcy Procedure 8002(d)(1)(B).

III. STANDARD OF REVIEW

This Court has jurisdiction to hear appeals from the Bankruptcy Court pertaining to “final judgments, orders, and decrees.” 28 U.S.C. § 158(a). An order denying a Motion for Extension under Federal Rule of Bankruptcy Procedure 8002, which governs deadlines for such motions, is a final order. Balzotti et al. v. RAD Investments, LLC et al. (In re Shepherds Hill Dev. Co., LLC), 316 B.R. 406, 413 (B.A.P. 1st Cir. 2004). District courts reviewing an appeal from a bankruptcy court generally review findings of fact for clear error, and conclusions of law de novo. See TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir. 1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719–20 n.8 (1st Cir. 1994).

A bankruptcy court’s denial of a motion for extension based on excusable neglect is reviewed for abuse of discretion. See Vasquez v. Cruz (In re Cruz), 323 B.R. 827, 829–30 (B.A.P. 1st Cir. 2005) (“[W]e review the bankruptcy court’s determination regarding the existence of excusable neglect for abuse of discretion.”); Lure Launchers, LLC v. Spino, 306 B.R. 718, 721 (B.A.P. 1st Cir. 2004) (same); Eck v. Dodge Chem. Co. (In re Power Recovery Sys.), 950 F.2d 798, 801 (1st Cir. 1991) (“The question of excusable neglect is by its very nature left to the discretion of the bankruptcy court whose decision should not be set aside unless the reviewing court, a district court or court of appeals, has a definite and firm conviction that the court below committed a clear error of judgment.”). A court abuses its discretion “when a material factor deserving significant weight is ignored, when an improper factor is relied upon, or when all proper and no improper factors are assessed, but the court makes a serious mistake in weighing them.” Foster v. Mydas Assocs., Inc., 943 F.2d 139, 143 (1st Cir. 1991) (internal quotation marks omitted). Furthermore, “a court invariably abuses its discretion if it predicates a discretionary decision on a mistaken view of the law.” Mirpuri v. ACT Mfg., Inc., 212 F.3d 624, 627 (1st Cir. 2000).

  1. DISCUSSION

On appeal, Sheedy argues that such a small delay in filing is excusable neglect, and that her Motion for Extension should have been granted pursuant to Federal Rule of Bankruptcy Procedure 8002(d)(1). Moreover, Sheedy argues that she is not required to show “unique or extraordinary circumstances,” and that, even if she is, a religious holiday is sufficiently unique.

Bankowski argues that the delay in filing the Motion for Extension is not attributable to excusable neglect because inadvertence, absent unique or extraordinary circumstances, cannot meet the standard. Furthermore, Bankowski responds that Sheedy must provide a “satisfactory explanation” for the delayed filing, which she is unable to do.

The term “excusable neglect” is broad, and whether a particular reason for delay qualifies as “excusable neglect” is determined by “latitudinarian standards.” Pratt v. Philbrook, 109 F.3d 18, 19 (1st Cir. 1997). “Congress plainly contemplated that the courts would be permitted, where appropriate, to accept late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond the party’s control.” Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 388 (1993).

The Supreme Court refused to “limit the ‘neglect’ which might be excusable to those circumstances caused by intervening circumstances beyond a party’s control,” Pratt, 109 F.3d at 19 (discussing Pioneer), and specifically noted that negligence could qualify as neglect, Pioneer, 507 U.S. at 394.

All neglect, however, does not qualify as “excusable neglect.” A determination of whether the neglect at issue is excusable “is at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission.” Id. at 395. Courts consider the following factors in determining whether the alleged neglect was excusable: “the danger of prejudice to the [opposing party], the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.” Id.; see also United States v. Union Bank for Sav. & Inv. (Jordan), 487 F.3d 8, 24 (1st Cir. 2007). “The four Pioneer factors do not carry equal weight; the excuse given for the late filing must have the greatest import. While prejudice, length of delay, and good faith might have more relevance in a closer case, the reason for-delay factor will always be critical to the inquiry.” Hospital del Maestro v. N.L.R.B., 263 F.3d 173, 175 (1st Cir. 2001) (quoting Lowry v. McDonnell Douglas Corp., 211 F.3d 457, 463 (8th Cir. 2000)).

Although the latitudinarian Pioneer standards for excusable neglect were announced in a decision interpreting the Federal Rules of Bankruptcy Procedure, the Supreme Court intended for those standards to apply to all instances where “excusable neglect” appears in the applicable federal rules of procedure. See Pratt, 109 F.3d at 19; Pioneer, 507 U.S. at 391–93.

Following Pioneer, the First Circuit does not always require a showing of “unique or extraordinary circumstances” to establish excusable neglect. See Graphic Commc’ns Int’l Union, Local 12-N v. Quebecor Printing Providence, Inc., 270 F.3d 1, 4 (1st Cir. 2001).

However, a showing of “unique or extraordinary circumstances” is still required when the neglect is only “[m]ere ‘inadvertence, ignorance of the rules, or mistakes construing the rules,’” which do not generally qualify as excusable neglect. Mirpuri, 212 F.3d at 631 (quoting Pioneer, 507 U.S. at 392).

Here, counsel’s explanation for the delay seems to amount to mere inadvertence. The First Circuit has explicitly observed that the excuse that the “attorney was preoccupied with other matters . . . has been tried before, and regularly has been found wanting.” de la Torre v. Continental Ins. Co., 15 F.3d 12, 15 (1st Cir. 1994). “A heavy workload and/or inattention of an attorney do not ordinarily constitute excusable neglect.” Deo-Agbasi v. Parthenon Group, 229 F.R.D. 348, 349 (D. Mass. 2005). Although the existence of “unique or extraordinary” circumstances might raise mere inadvertence to the level of excusable neglect, the Court is not persuaded that the Bankruptcy Judge abused her discretion in concluding that the responsibilities in connection with a religious holiday that Sheedy’s counsel knew about well in advance did not qualify as a unique or extraordinary circumstance. Knowing that he would have additional responsibilities around Easter, Sheedy’s counsel could have and should have planned his schedule and workload accordingly. Moreover, the Notice of Appeal did not require an onerous amount of work to create and file. “Most attorneys are busy most of the time and they must organize their work so as to be able to meet the time requirements of matters they are handling or suffer the consequences.” Stonkus v. City of Brockton School Dep’t, 322 F.3d 97, 101 (1st Cir. 2003) (quoting de la Torre, 15 F.3d at 15); see also Ruiz v. Principal Fin. Group, No. 12-40069, 2013 WL 6524655, at *2 (D. Mass. Dec. 10, 2013) (“attorney being ‘occupied with other hearings does not constitute excusable neglect.’”) (quoting Hawks v. J.P. Morgan Chase Bank, 591 F.3d 1042, 1048 (8th Cir.2010)). Besides being busy, Sheedy’s counsel offers no other explanation that might excuse the delay. Thus, it was not an abuse of discretion for the Bankruptcy Court to have determined that the neglect in this case, which counsel explained merely as excessive busyness around a holiday, did not rise to the level “excusable neglect.”

Because the reason for delay is the most important Pioneer factor, the Court need not address the remaining factors. The First Circuit has repeatedly viewed the “reason for delay” factor in the Pioneer excusable neglect analysis to be dispositive. See, e.g., Villoldo v. Ruz, 821 F.3d 196, 205 (1st Cir. 2016) (in affirming a district court’s finding of no excusable neglect, “reason for delay” factor treated as dispositive); Venegas-Hernandez v. Sonolux Records, 370 F.3d 183, 187 (1st Cir. 2004) (in affirming a district court finding of no excusable neglect, the court stopped its analysis after the “reason for delay” was found lacking); United States v. $23,000 in U.S. Currency, 356 F.3d 157, 165–66 (1st Cir. 2004) (same). Because Sheedy’s counsel failed to provide a unique or extraordinary circumstance to explain his delay, the Bankruptcy Court did not abuse its discretion in finding that his excuse of inadvertence did not qualify as excusable neglect. See Mirpuri, 212 F.3d at 631.

  1. CONCLUSION

Although this Court may have decided this issue differently than the Bankruptcy Court if this were a matter of first impression, the standard of review in this case constrains this Court’s authority. For all the reasons stated above, this Court finds the Bankruptcy Judge did not abuse her discretion, and therefore AFFIRMS the Bankruptcy Court’s decision denying Sheedy’s Motion for Extension.

SO ORDERED.

Dated: January 6, 2017 /s/ Allison D. Burroughs

ALLISON D. BURROUGHS

***

About the blogger: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!

 

 

 

Fair Credit Reporting Act and Bankruptcy – the Griffin Case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is an interesting case concerning a creditor still reviewing a discharged debtor’s credit report and continuing to collect on the discharged debt.

 

ND Ohio: Debtor’s FCRA Complaint Against Bank of America & Bayview alleging that BANA Obtained her Credit Report and Commenced Collection Activities Knowing Debt had been Discharged in Bankruptcy

United States District Court for the Northern District of Ohio, Eastern Division

December 28, 2016, Decided; December 28, 2016, Filed

CASE NO. 1:16 CV 1259

CASSANDRA GRIFFIN, Plaintiff, v. BANK OF AMERICA, N.A., et al., Defendants.

MEMORANDUM OPINION AND ORDERThis matter is before the Court on the Motion to Dismiss filed by Defendant, Bank of America, N.A. (“BANA”) (Docket #13), and the Motion to Dismiss Count I of the Complaint filed by Defendant, Bayview Loan Servicing, LLC (“Bayview”) (Docket #18).

  1. The Complaint. Ms. Griffin alleges BANA and Bayview violated the Fair Credit Reporting Act, 15 U.S.C. §§ 1681, et seq. (“FCRA”), and the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692. et seq. (“FDCPA”), by unlawfully obtaining her credit report from credit reporting agencies and unlawfully continuing collections activities against her, despite having been notified of the fact that any and all debts Ms. Griffin had previously owed to either BANA or Bayview had been discharged in bankruptcy years prior.

In Count One. Ms. Griffin alleges that BANA and Bayview violated the FCRA by requesting and obtaining her consumer report from credit reporting agencies TransUnion and Experian with no “permissible purpose,” as prohibited under the FCRA. Ms. Griffin alleges Defendants falsely represented that access was authorized for “account review” purposes, despite knowing that she no longer held an interest in the subject property; that her debt had been discharged in bankruptcy; and, that Defendants were legally prohibited from pursuing further collection activities against her. Ms. Griffin argues that each impermissible inquiry is a separate violation of the FCRA and that Defendants have received thousands of similar disputes from other consumers whose credit reports were requested despite the fact that their debt had previously been discharged in bankruptcy.

In Count Two, Ms. Griffin alleges Bayview violated the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692e and 1692f, by repeatedly contacting her in an attempt to collect a debt that Bayview had been notified was discharged in bankruptcy. Ms. Griffin asserts Bayview materially misrepresented that a debt was still owed by Ms. Griffin on the Mortgage, in violation of 15 U.S.C. § 1692e(2)(A); that Bayview’s dunning letters, account statements and other mail correspondence violated 15 U.S.C. § 1692f, by attempting to collect interest, late fees, foreclosure-related fees, attorneys’ fees, taxes, and/or insurance premiums to which Bayview is not entitled; and, by impermissibly accessing her consumer report as a part of its collection efforts, in violation of 15 U.S.C. § 16921-(1).

In her Complaint, Ms. Griffin states that Defendants’ actions have caused and will continue to cause her mental distress and anguish, stemming from an ongoing invasion of her privacy. Ms. Griffin states that she justifiably fears that Defendants will continue to unlawfully access her personal, private and financial information; continue to attempt to collect payment from her on the discharged debt; and, cause harm to her credit or otherwise harm her economically. Ms. Griffin seeks actual, punitive and statutory damages, as well as attorneys’ fees and costs.

  1. Motions to Dismiss. BANA filed its Motion to Dismiss on July 22, 2016 (Docket #13) and Bayview filed its Motion to Dismiss Count I of the Complaint on August 8, 2016 (Docket #18). Both BANA and Bayview seek dismissal of Ms. Griffin’s FCRA claim (Count One) for lack of subject matter jurisdiction. Defendants argue that pursuant to Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). Ms. Griffin lacks Article III standing because she failed to allege any facts demonstrating she suffered a cognizable, concrete and particularized injury as a result of either BANA or Bayview pulling her credit report and that bare procedural harm is insufficient.

Ms. Griffin filed her Brief in Opposition to Defendants’ Motions to Dismiss on September 13, 2016. (Docket #24.) Ms. Griffin argues that the protection of consumer privacy is a stated purpose of the FCRA; that the privacy rights conferred under Section 1681b of the FCRA are substantive rather than procedural in nature; and, therefore, that the alleged procedural violation constitutes an injury in fact sufficient to establish standing under Spokeo. See Thomas FTS USA, LLC, Case No. 3:13 CV 825, 2016 U.S. Dist. LEXIS 85545, *28 (E.D. Va. June 30. 2016) (“an unauthorized dissemination of one’s personal information, even without a showing of actual damages, is an invasion of one’s privacy that constitutes a concrete injury sufficient to confer standing to sue”); Rogers v. Capital One Bank (USA), N.A., 1:15 CV 4016, 2016 U.S. Dist. LEXIS 73605, *2 (N.D. Ga. June 7. 2016).

BANA and Bayview filed Reply Briefs on September 23, 2016 and September 29, 2016 respectively. (Docket #s 28 and 29.) Both argue that regardless of the FCRA’s legislative history and purpose, and regardless of parallels to a common law invasion of privacy claim, Ms. Griffin must allege concrete and particularized damages and has not done so.

Standard of Review. Pursuant to Fed. R. Civ. P. 12(b)(6), a complaint must provide sufficient facts to state a claim that is plausible on its face in order to withstand dismissal. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Fed. R. Civ. P. 12(b)(1) provides for dismissal of a complaint for lack of subject matter jurisdiction. When Article III standing is at issue, the plaintiff must allege facts sufficient to establish the requisite individualized harm. See Keener v. Nat’l Nurses Org. Comm., 615 F. App’x 246, 251 (6th Cir. Ohio 2015).

Article III of the United States Constitution limits the jurisdiction of Federal Courts to justiciable cases and controversies, and requires a plaintiff have standing to file suit. To establish standing, a plaintiff must allege (1) an injury-in-fact; (2) a causal connection between the injury and the conduct complained of; and, (3) a likelihood that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). To establish an injury-in-fact, a plaintiff must show “‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual and imminent, not conjectural or hypothetical.'” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). A concrete injury must be real, not abstract. However, intangible injuries may be concrete where (1) the “intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit” and (2) Congress identified and elevated the intangible harm to the status of a legally cognizable injury. Id. at 1549. In Spokeo, the Court recognized, “[T]he violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact. In other words, a plaintiff in such a case need not allege any additional harm beyond the one Congress has identified.” Id. (citing Federal Election Comm’n v. Akins, 524 U.S. 11, 20-25 (1998); Public Citizen v. Department of Justice, 291 U.S. 440, 449 (1989)).

In enacting the FCRA, Congress sought to protect a consumer’s right to privacy, in part by ensuring the confidentiality of consumers’ credit information. See 15 U.S.C. § 1681; TRW Inc. v. Andrews, 534 U.S. 19. 23 (2001). To that end, Congress limited the circumstances in which a consumer report may be obtained. 15 U.S.C. § 1681b, entitled “Permissible purposes of consumer reports,” provides, in part. as follows:

(f) Certain use or obtaining information prohibited. A person shall not use or obtain a consumer report for any purpose unless–

(1) the consumer report is obtained for a purpose for which the consumer report is authorized to be furnished under this section; and

(2) the purpose is certified in accordance with section 1681e of this title by a prospective user of the report through a general or specific certification.

15 U.S.C. § 1681b(f).

15 U.S.C. § 1681b(a)(3) sets forth the purposes for which a reporting agency may lawfully furnish a consumer report, stating as follows:

Subject to subsection (c) of this section, any consumer reporting agency may furnish a consumer report under the following circumstances and no other:

* * *

(3) To a person which it has reason to believe—

(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or

(B) intends to use the information for employment purposes; or

(C) intends to use the information in connection with the underwriting of insurance involving the consumer; or

(D) intends to use the information in connection with a determination of the consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status; or

(E) intends to use the information, as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; or

(F) otherwise has a legitimate business need for the information–

(I) in connection with a business transaction that is initiated by the consumer; or

(ii) to review an account to determine whether the consumer continues to meet the terms of the account.

(G) executive departments and agencies in connection with the issuance of government-sponsored individually-billed travel charge cards.

15 U.S.C. § 1681b(a)(3).

The question the Court must answer is whether the foregoing statutory provisions create a substantive right, the violation of which is sufficient to establish standing under Article III. Although decisions rendered since Spokeo vary by Circuit, the Court finds the decision in Burke v. Federal National Mortgage Association, Case No. 3:16 CV 153 2016 U.S. Dist. LEXIS 105103 (E.D. Va. Aug,. 9, 2016), to be persuasive, given its factual similarities to Ms. Griffin’s case. Burke claimed Federal National Mortgage Association violated § 1681b(f) of the FCRA by obtaining her credit report, at least twice, without a permissible purpose. Federal National argued that Burke’s alleged harm of increased risk for identity theft or further invasion of privacy were speculative and lacked particularity, thus, failing to satisfy Article III standing requirements. Burke argued that in enacting the FCRA, Congress created a substantive right to privacy and, therefore, that a procedural violation of the FCRA was sufficient to establish standing.

The Court in Burke agreed that the privacy interest protected under the FCRA was a substantive right and denied defendants’ Motion to Dismiss for lack of standing, finding as follows:

The FCRA was meant to protect the interest of privacy. The portion of the FCRA at issue here is clear that one’s consumer report is not to be obtained except for the limited purposes specifically provided by the statute. The language and context of this provision seem to establish a statutory right to privacy based in one’s consumer report. As Spokeo counsels, this Court must defer to history and the judgment of Congress in deciding whether the alleged harm constitutes an injury-in-fact. In some sense, the right at issue can appear procedural, as it is a mechanism intended to prevent future harms. Yet, given the purposes, framework, and structure of the FCRA, the right to privacy established by the statute appears to be more substantive than procedural.

Burke, 2016 U.S. Dist. LEXIS 105103, at *10 (citing Thomas v. FTS USA, LLC, Case No. 3:13 CV 825, 2016 U.S. Dist. LEXIS 85545 (E.D. Va. June 30, 2016)).

Following the reasoning in Burke, the Court in Firneno v. Radner Law Group, PLLC, Case No. 2:13 CV 10135, 2016 U.S. Dist. LEXIS 142907 (E.D. Mich. Sept. 28. 2016), examined whether the unauthorized viewing and retention of a plaintiff’s private financial information is a violation of privacy sufficient to satisfy the concreteness element for Article III standing. Id. at 11. Plaintiffs in Firneno claimed the named defendants had unlawfully obtained their credit and FICO scores, addresses, partial social security numbers. and debt amounts. The Court held that the “right to privacy is ‘more substantive than procedural’ such that the alleged violation is a concrete harm.” Id. See also Moody v. Ascenda USA Inc., Case No. 16-CV-60364, 2016 U.S. Dist. LEXIS 140712 (S.D. Fla. Oct. 5, 2016); Perrill v. Equifax Information Services, LLC, Case No. A-14-CA-612, 2016 U.S. Dist. LEXIS 117104 (W.D. Tex. Aug. 31, 2016).

Based on the foregoing, the Court finds that the FCRA violations alleged by Ms. Griffin are sufficient to establish Article III standing, as the right to privacy contemplated by Congress under the FCRA is a substantive and, as such, the alleged violations committed by Defendants when they obtained Ms. Griffin’s credit report without a permissible purpose constitute a concrete harm. Accordingly, the Court has subject matter jurisdiction over Ms. Griffin’s FCRA claim and the allegations set forth in the Complaint are sufficient to withstand dismissal.

Conclusion. The Motion to Dismiss filed by Defendant. Bank of America. N.A. (Docket #13) and the Motion to Dismiss Count I of the Complaint filed by Defendant, Bayview Loan Servicing, LLC (Docket #18) are hereby DENIED.

A status conference remains set for January 3, 2017 at 9:00 a.m.

IT IS SO ORDERED.

/s/ Donald C. Nugent

DONALD C. NUGENT

United States District Judge

DATED: December 28, 2016

 

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About the blogger: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

Bankruptcy filings slightly higher in 2016

http://www.dsnews.com/daily-dose/01-11-2017/bankruptcy-filings-finish-2016-upward-turn

Bankruptcy Filings Finish 2016 with Upward Turn

DS News Sponsored Post: After falling year-over-year for five consecutive years, the number of bankruptcy filings bumped up nationwide by 6 percent from the previous year in December 2016, according to December 2016 AACER bankruptcy data reported by Epiq Systems.

Bankruptcy filings totaled 56,394 in December, which was a decrease from November’s total of 59,300, but an increase from December 2015’s total of 53,844 (an increase of approximately 2,500). For the complete year of 2016, there were 771,894 bankruptcy filings nationwide (or 64,324 per month), down from 2015’s full year total of 819,431 (about 68,286 per month).

The average number of filings per day in December 2016 was 2,685 over 21 days, a decline of close to 300 from November’s daily average of 2,966 over 20 days. November experienced 188 fewer filings than in the month prior. Bankruptcy filings averaged 3,075 for full year of 2016 over a period of 251 filing days.

December’s total of 56,394 bankruptcy filings was less than half of the peak total of 114,820 for the month of December, recorded in 2010.

Click HERE to View the Entire Report

The state with the most cumulative filings for all of 2016 was California with 71,955. As was the trend all year, Illinois was second in year-to-date filings with 52,674. The next three states with the most cumulative filings were Georgia (46,669) Florida (43,850), and Ohio (36,188).

Tennessee and Alabama continued to rank first and second among states in bankruptcy filings per capita for December with 5.57 and 5.48 for every 10,000 people, respectively. Those numbers were slight declines from November’s numbers of 5.65 and 5.52. The national average of filings per capita in December 2016 decreased slightly over-the-month from 2.51 down to 2.48, though it has increased nearly 50 basis points since January 2016’s average of 2.02 percent.

Epiq Systems is a leading global provider of technology-enabled solutions for electronic discovery, bankruptcy and class action administration. Top legal professionals depend on us for deep subject-matter expertise and years of firsthand experience working on many of the largest, most high-profile and complex client engagements. Epiq Systems, Inc. has locations in the United States, Europe and Asia.

About Author: Brian Honea

Brian Honea’s writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master’s degree from Amberton University in Garland.

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As a bankruptcy attorney in Mount Vernon (and all of southern Illinois), Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

Chapter 13 claim and the FDCPA

As a bankruptcy attorney in Mount Vernon and all of southern Illinois for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need

In a flurry of party and amici briefs, the issue of whether a proof of claim for a stale debt gives rise to an FDCPA claim has been briefed before the Supreme Court. Midland Funding v. Johnson, No. 16-348 (petition filed Sept. 16, 2016). The case is on appeal from the Eleventh Circuit decision that the “Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred.” Johnson v. Midland Funding, LLC, C.A. No. 15-11240, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016). The issue is currently pending in courts around the country including the First, Third, Sixth, Seventh and Eighth Circuits. Oral argument is scheduled for January 17th.

Courtesy of NCBRC – January 11th, 2017

Foreclosure proceeds: a review of the Bayview case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need. Bayview v Gold from the Eastern District of Virginia concerns foreclosure sale proceeds.

ALG was the first lienholder of the townhouse owned by the Debtor. ALG foreclosed and sold the property for $512,000.00. ALG paid their debt of $32,785.00. $456,802.72 remained.

Normally this would go to the second lienholder of the townhouse (Bayview), but the Debtor filed a Chapter 7 bankruptcy before ALG could pay Bayview. ALG instead gave the funds to the Chapter 7 Trustee. The Trustee disbursed the funds to the creditors (mostly to taxes owed by the Debtor), filed his/her proper paperwork showing the disbursement; the paperwork was approved by the court and the case was closed and a discharge granted.

Bayview was aware of the bankruptcy filing and even filed a Motion for Relief from Stay in the case. They did NOT file a claim to allow it to receive any Trustee funds.

Bayview sued to force the Trustee to pay back the funds Bayview believed were owed to it. It argued that “… the sales proceeds from the foreclosure sale were not property of the estate because the foreclosure sale was completed prior to the filing of the petition in bankruptcy and the debtor, therefore, had no interest in the … property.”

The last half of that is correct – once the foreclosure sale takes place, the debtor has no interest in the property. If a person wants to save their house from foreclosure they MUST file a Chapter 13 reorganization before the sale of the property. If they file after the foreclosure sale, they cannot use the bankruptcy to protect the property.

But the court ruled that a foreclosure sale does NOT prevent the Debtor from having an interest in the sales proceeds. “Until the proceeds of sale are paid to the secured lender — in this case the sales proceeds were held by a third party, the trustee under the prior deed of trust — the debtor has an interest in the proceeds of sale even though they are subject to the lien of a secured lender.”

Bayview dropped the ball. It did not file a claim in the case. Had it done so, and provided proof of its lien on the property, it would have been paid in full.

It missed the deadline to set aside the Order approving the Trustee’s disbursement. It missed the deadline to appeal the Order. It filed a Complaint against the Trustee, the IRS, ALG, etc. in a shotgun approach – with many theories in the hopes of finding the right argument to get funds due to them. Unfortunately for them, the Court denied all of Bayview’s arguments.

Is there any benefit to the Debtor? No. Not really. Filing bankruptcy only grounds to a halt the bank’s disbursement to other lienholders and, eventually, the Debtor.

But that can be advantageous to a Debtor – it guarantees the Debtor’s exemption will be (at least) addressed by the Trustee and the Court. A Debtor will not have to fight with the bank for his or her exemption (assuming he or she is entitled to an exemption) but instead will have a ready-made forum to argue the matter. If a Debtor is entitled to any of the proceeds, he or she will get it (once approved by the Court). This will save the Debtor time and legal expenses.

If a Debtor is worried the bank may stall, or even deny, his or her exemption in the real estate proceeds, filing a Chapter 7 before the disbursement of the funds, because of this case, may help.

About the author: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!

Bayview Servicing v Gold; Memorandum Opinion: Foreclosure Sale Proceeds

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is an interesting case concerning foreclosure sale proceeds. It is a long case but interesting!

Eastern District of Virginia: Surplus Proceeds from Foreclosure Sale of Bankrupt’s Home were Properly Paid to BK Estate and Not Note-holder

Bayview Servicing v Gold; Memorandum Opinion

This case is before the court on the motions of H. Jason Gold, the former chapter 7 trustee (the “Trustee”), and ALG Trustee, LLC, the trustee under a first deed of trust (“ALG”), to dismiss this case.  The Amended Complaint was filed by The Bank of New York Mellon fka The Bank of New York, as Trustee for Certificate Holders of the CWALT, Inc., Alternative Loan Trust 2006-OA9 Mortgage Pass-Through Certificates, Series 2006-OA9 (the “Noteholder”) which held the note secured by a second deed of trust and Bayview Loan Servicing, LLC, as servicing agent for The Bank of New York Mellon fka The Bank of New York, as Trustee for the Certificate Holders of the CWALT, Inc., Alternative Loan Trust 2006-OA9 Mortgage Pass-Through Certificates, Series 2006-OA9 (“Bayview”) which was the servicing agent for the Noteholder.  They seek to hold the Trustee personally liable for distributions he made in accordance with this court’s final order approving his Trustee’s Final Report and Trustee’s Proposed Distribution. The Complaint also seeks recovery of the disbursed funds directly from the Internal Revenue Service and the Virginia Department of Taxation, creditors to whom the Trustee disbursed pursuant to this court’s order, and a judgment against ALG for delivering the proceeds from its foreclosure sale under the first deed of trust to the Trustee rather than the Noteholder whose note was secured by the second deed of trust on the foreclosed property.

 

Standard for Decision on Motion to Dismiss

A motion to dismiss made under Fed.R.Civ.P. 12(b)(6) challenges the legal theory of the complaint, not the sufficiency of any evidence that might be adduced. Advanced Cardiovascular Sys., Inc. v. Scimed Life Sys., Inc., 988 F.2d 1157, 1160 (Fed. Cir. 1993). In reviewing the legal sufficiency of the complaint, the court accepts as true all well-pleaded allegations and construes the factual allegations in the light most favorable to the plaintiff. Randall v. United States, 30 F.3d 518, 522 (4th Cir. 1994). The court does not have to accept the plaintiff’s legal conclusions based on the facts or accept as true unwarranted inferences, unreasonable conclusions or arguments. Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008).

 

Facts

The facts alleged by the Noteholder are simple. The debtor owned a townhouse located at 1219 Duke Street, Alexandria, Virginia, that was subject to a first and second deed of trust. The note secured by the second deed of trust was held by the Noteholder.  Prior to the debtor filing his petition in bankruptcy, the first trustholder caused ALG, the trustee of the deed of trust securing its loan, to sell the property pursuant to the first deed of trust which ALG did on October 25, 2013, for $512,000.00. The first trustholder was paid $32,785.00 which paid the note in full. After payment of the costs of the foreclosure sale, ALG had remaining sales proceeds of $456,802.72 which it ultimately paid to the Trustee. ALG’s accounting was filed with and approved by the Commissioner of Accounts for the Circuit Court for the City of Alexandria which reflects these facts.

ALG would ordinarily have paid the second trustholder — the Noteholder in this adversary proceeding — its claim, to the extent of the funds available. ALG did not disburse the balance of the sales proceeds to the Noteholder prior to the debtor filing his petition in bankruptcy on January 2, 2014. In light of the bankruptcy, ALG paid the balance of the sales proceeds to the Trustee on March 28, 2014.  The Trustee filed his Final Report on March 17, 2015, and noticed it for a hearing to be held on April 14, 2015. It plainly showed receipt of $456,802.72 as “Foreclosure Proceeds 1219 Duke St. Alexandria Va.” Trustee’s Final Report, Individual Estate Property Record and Report, Form 1, Line 10. There were no objections to the Trustee’s Final Report and it was approved by the court. The court entered an order approving the Trustee’s Final Report on April 21, 2015, and the Trustee disbursed in accordance with it. He filed his Chapter 7 Trustee’s Final Account and Distribution Report Certification That the Estate Has Been Fully Administered and Application to Be Discharged on October 1, 2015.  The case was closed on October 6, 2015.

 

The sales proceeds were disbursed in payment of the costs of administration of the bankruptcy estate and to the IRS and the Virginia Department of Taxation pursuant to their proofs of claims for priority tax claims. There was no disbursement to the Noteholder or the unsecured creditors.

 

The Noteholder knew of the filing of the petition in bankruptcy. Attorneys for both the Noteholder and Bayview filed notices of appearance in the case. Bayview filed a Motion for Relief from Stay or in the Alternative Adequate Protection. The Trustee filed a response stating that the property had been sold at foreclosure prior to the filing of the petition in bankruptcy. Both the Trustee and Bayview attached copies of the City of Alexandria tax records showing that the property was no longer titled in the debtor’s name. Bayview withdrew its motion for relief from stay. It never filed a proof of claim.

 

Property of the Estate

The key to the Noteholder’s claim is that the proceeds of sale from the foreclosure were not property of the bankruptcy estate. Complaint at ¶¶39, 45, 48 and 59. This proposition is not well taken. The Noteholder asserts that the sales proceeds from the foreclosure sale were not property of the estate because the foreclosure sale was completed prior to the filing of the petition in bankruptcy and the debtor, therefore, had no interest in the Alexandria property. Abdelhaq v. Pflug (In re Abdelhaq), 82 B.R. 807 (E.D. Va. 1988); In re Wolfe, 344 B.R. 762 (Bankr. W.D. Va. 2006); In re Ulrey, 511 B.R. 401 (Bankr. W.D. Va. 2014). While it is true that the foreclosure sale was completed prepetition and that the debtor had no further right in the property that does not mean that the debtor did not have an interest in the sales proceeds from the foreclosure sale itself.

The starting point is § 541(a) of the Bankruptcy Code which provides that the bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The scope of § 541(a)(1) is broad. United States v. Whiting Pools, Inc., 462 U.S. 198, 205,103 S.Ct. 2309, 2313, 76 L. Ed. 2d 515 (1983). It includes property in which a creditor has a secured interest. Id. at 203, 103 S.Ct. at 2313.

Although Congress might have safeguarded the interests of secured creditors outright by excluding from the estate any property subject to a secured interest, it chose instead to include such property in the estate and to provide secured creditors with “adequate protection” for their interests.

Id. Congress expressly changed the treatment of secured lenders that had prevailed under the Bankruptcy Act of 1898 with enactment of the Bankruptcy Code of 1978.  Section 506(a) of the Bankruptcy Code now permits an undersecured creditor — a creditor whose lien exceeds the value of the collateral — to bifurcate its claim into two claims: a secured claim to the extent of the value of the collateral and an unsecured claim for the balance of the claim. The presence or absence of equity — whether the secured creditor is oversecured or undersecured — does not affect whether an encumbered asset is property of the estate.

 

Whiting stands for the proposition that a debtor retains an interest in his property that is subject to creditor action until the last act divesting the debtor of his property interest is completed. Until then, the debtor retains an interest in the property and — if the last act divesting the debtor of his property is not completed prior to the debtor filing a petition in bankruptcy — the property interest becomes property of the bankruptcy estate. In Whiting, the IRS seized Whiting Pools’ trucks prior to the debtor filing its chapter 11 petition in bankruptcy. The IRS refused to return the vehicles, arguing that the debtor had no further interest in the trucks. The Supreme Court held that the IRS had a lien on the trucks and had properly seized them but that the sale of the trucks had not been completed prior to the filing of the petition in bankruptcy. Pursuant to the Internal Revenue Code and regulations, the trucks had to be sold once they were seized. If there had been a prepetition sale, the trucks would not have become property of the estate. Seizure alone was not sufficient. Id. at 211, 103 S.Ct. at 2317; see also In re Moffett, 356 F.3d 518 (4th Cir. 2004) (relying on Whiting in affirming bankruptcy court’s decision requiring creditor to turn over car that was repossessed pre-petition but not sold); In re Anderson, 29 B.R. 563 (Bankr. E.D. Va. 1983) (holding that debtor’s right to redeem truck was property of the estate that a bankruptcy court could compel an entity in possession to turn over).
This principal has been applied in numerous cases in Virginia dealing with foreclosures. Under state law — which controls under Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L. Ed. 2d 136 (1979) – the debtor has no further interest in the real property once ALG sells the real property at public auction and signs a memorandum reciting the fact of the sale, the name of the purchaser and the sales price. At that point, the debtor has no further right to redeem the real property.

 

None of the cases address the proceeds of a foreclosure sale.  Until the proceeds of sale are paid to the secured lender — in this case the sales proceeds were held by a third party, the trustee under the prior deed of trust — the debtor has an interest in the proceeds of sale even though they are subject to the lien of a secured lender. It is not a question of whether there is any equity in the proceeds of sale. Even if fully encumbered, the debtor retains a right in them. In Whiting, the Supreme Court was not concerned with the presence or absence of equity in reaching its decision.  The extent of equity is a consideration in determining adequate protection but not in determining whether the trucks were property of the bankruptcy estate. Because the trucks were property of the bankruptcy estate, the IRS had the obligation to turnover the trucks if adequate protection was given.

 

For bankruptcy purposes the proceeds of sale are cash collateral and are subject to 11 U.S.C. § 363. Even though as a practical matter in most chapter 7 cases the chapter 7 trustee will not be able to provide adequate protection, that does not cause the sales proceeds to cease to be property of the estate. If the secured creditor files a motion for relief from the automatic stay, it will likely be granted and the sales proceeds paid over to the secured creditor to the extent of its claim. Nonetheless, the chapter 7 trustee retains the right to seek to use cash collateral under 11 U.S.C. § 363.

 

The Noteholder fails to distinguish between the real property in which the debtor had no interest and the proceeds from the foreclosure sale in which the debtor did have an interest. The proceeds of the foreclosure sale had not been paid to the Noteholder when the debtor filed his petition in bankruptcy. Thus, he had an interest in the entire proceeds when he filed bankruptcy — not just the proceeds in excess of any liens.

 

Finality of Order Approving Trustee’s Final Report

If the Noteholder or its servicing agent had filed a proof of claim or taken any other action in the bankruptcy case before the order approving the Trustee’s Final Report was entered, the Trustee would have disbursed the sales proceeds to the Noteholder. However, the order is now final and binding on the Noteholder and Bayview, its servicing agent.

 

The Noteholder asserts that the order approving the Trustee’s Final Report was not a final order. A final order is an order that disposes of all matters and leaves nothing to be done except ministerial actions. That is exactly what the order approving the Trustee’s Final Report did. The Trustee reported on the administration of the estate in his Trustee’s Final Report. He reported on the assets that constituted property of the estate. He reported that he had received $456,802.72 in cash from “Foreclosure Proceeds 1219 Duke St. Alexandria Va.” He proposed a scheme of distribution to the creditors. After notice and an actual hearing the court entered its order approving the report and the proposed distribution. At that point there was nothing left to be done in the case except for the ministerial duty of the Trustee to execute the order — that is, disburse the money pursuant to the order. Having done so he reported back to the court that he had made the distributions. Chapter 7 Trustee’s Final Account and Distribution Report Certification That the Estate Has Been Fully Administered and Application to Be Discharged. (Docket Entry 95; re-filed as Docket Entry 96) (The docket entry states that “The United States Trustee does not object to the relief requested.”) Id. The case was closed. Order Discharging Trustee and Closing Case. (Docket Entry 97).

 

One consequence of an order being final is that it becomes appealable. District courts have jurisdiction to hear appeals from final judgments, orders, and decrees entered by the bankruptcy court. 28 U.S.C. § 158(a)(1). The law articulating rigorous finality standards for the appealability of orders in non-bankruptcy cases is largely inapplicable in bankruptcy cases. The concept of finality is applied in a “more pragmatic and less technical way in bankruptcy cases than in other situations.” In re Swyter, 263 B.R. 742, 746 (E.D. Va. 2001) (quoting Comm. of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 241 (4th Cir. 1987). “To avoid the waste of time and resources that might result from reviewing discrete portions of the action only after a plan of reorganization is approved, courts have permitted appellate review of orders that in other contexts might be considered interlocutory.” Dalkon Shield, 828 F.2d at 241. Considerations unique to bankruptcy appeals, such as the protracted nature of the proceedings and the large number of interested parties, require a less rigorous application of the finality rule. In re Saco Local Dev. Corp., 711 F.2d 441, 443-48 (1st Cir. 1983). A bankruptcy “order is final and appealable if it (i) finally determines or seriously affects a party’s substantive rights, or (ii) will cause irreparable harm to the losing party or waste judicial resources if the appeal is deferred until the conclusion of the bankruptcy estate.” Swyter, 263 B.R. at 746.

The Noteholder’s argument that the order approving Trustee’s Final Report was not a final order would mean that it was not appealable. If it was not appealable creditors alleging that the scheme of distribution was in error would have a very difficult time correcting that error. They would be unable to appeal the order until the trustee had actually disbursed the money to creditors. Such an aggrieved creditor would face the argument that the appeal was moot because effective relief could not be granted once the funds have been disbursed. While it may be possible to recover disbursed funds in some cases and properly re-disburse them, in many cases the number of creditors to whom distributions are made and the size of the distributions would render relief illusory. In short, in many cases a properly aggrieved creditor would have no recourse to an incorrect trustee’s final report or an improvidently entered order approving it.

 

In the context of a chapter 7 case with assets to be administered, there is no order more central to payment of creditors than the order approving the trustee’s final report. “It alters the status quo and fixes the rights and obligations of the parties.” Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692, 135 S.Ct. 1686, 1692, 191 L. Ed. 2d 621 (2015) (order denying confirmation of a chapter 13 plan and granting leave to file an amended plan is not a final order). It establishes which creditors receive distributions and the amount of the distributions. It allows the chapter 7 trustee to make the distributions. After the trustee makes the distributions, the trustee files a final report that accounts for the disposition of assets and the distribution of funds to creditors and for administrative expenses. The case is then closed.
In this case, the Trustee gave notice of his Final Report on March 18, 2015. No objection was filed and the Final Report was approved by court order on April 21, 2015. The order approved the Trustee’s administration and proposed distribution of the estate’s assets. Since the order resolved all of the issues relating to the Final Report, it is a final, appealable order. See In re Carr, 321 B.R. 702 (E.D. Va. 2005) (hearing debtor’s bankruptcy appeal of the bankruptcy court’s final order approving trustee’s final report); In re Kristan, 2008 Bankr. LEXIS 3964, 2008 WL 8664765, at *2 (B.A.P. 1st Cir. Dec. 15, 2008) (determining that bankruptcy court’s order approving the chapter 7 trustee’s final report was a final, appealable order); In re Hollingsworth, 331 B.R. 399 (8th Cir. 2005) (hearing debtor’s appeal of order approving chapter 7 trustee’s final report).

Orders approving trustee’s final reports are final orders. They are fully appealable. Even if an order is improvidently entered, it is binding. United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 270, 130 S.Ct. 1367,1377, 176 L. Ed. 2d 158 (2010) (“A judgment is not void … simply because it is or may have been erroneous.” quoting Hoult v. Hoult, 57 F.3d 1, 6 (1st Cir. 1995)). In Espinosa a chapter 13 plan improperly provided for the discharge of a student loan. Although the order approving the chapter 13 plan was improvident, it was final, and the student loan was discharged.

The remedy for a creditor who believes an order is erroneous is to appeal to the district court or to seek relief in the bankruptcy court under Fed.R.Bankr.P. 9023 and 9024 which incorporate Fed.R.Civ.P. 59 and 60, respectively. They are not available here. The order approving the Trustee’s Final Report was entered on the docket on April 21, 2015. There was no motion under Rule 9023. Instead, the Noteholder filed this adversary proceeding on August 30, 2016, seeking to collaterally attack the final order. It was the wrong procedural device, and in any event outside the permitted time period of Rule 9023. This adversary proceeding was filed more than 16 months after the entry of the order approving the Trustee’s Final Report. Rule 9023 requires a motion to be filed within 14 days.

 

Rule 9024 provides that a motion alleging mistake, inadvertence, surprise or excusable neglect; newly discovered evidence; or fraud, misrepresentation or misconduct must be brought within one year after the entry of the order. Again, the Noteholder used the wrong procedural device and it was filed outside the one-year period in any event.

 

Rule 9024 also provides that a motion alleging that the judgment is void, has been satisfied or any other reason that justifies relief must be brought within a reasonable time. A reasonable time may be longer or shorter than the one-year period referred to for mistake. Here the Noteholder was aware of the entry of the order when it was entered. There is nothing in the Complaint to explain why the Complaint was filed so late. There is nothing in the Complaint to support the argument that the court did not have jurisdiction to enter the order or that the order was otherwise void. None of the grounds set out in Rule 60(b)(4) through (6) which are incorporated into Rule 9024 are applicable and, if applicable, was not timely pursued.

 

Res Judicata

One of the consequences of a final order is it is res judicata as to all matters that were raised or could have been raised. “Res judicata acts as a complete bar to the second action and precludes the litigation of all grounds for defenses and recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior action.” In re Prof’l Coatings (N.A.), Inc., 210 B.R. 66, 75 (Bankr. E.D. Va. 1997). Res judicata bars the subsequent action when three elements are satisfied: (1) the prior judgment was final and on the merits and rendered by a court of competent jurisdiction in accordance with the requirements of due process; (2) the parties are identical or in privity in the two actions; and (3) the claim in the second matter is based upon the same cause of action involved in the earlier proceeding. Grausz v. Englander (In re Grausz), 321 F.3d 467, 472 (4th Cir. 2003); In re In re Varat Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996); In re Williamson, 327 B.R. 578, 583-84 (Bankr. E.D. Va. 2005).

 

All of these elements are present in this case. First, the order approving Trustee’s Final Report was final and on the merits regarding the Trustee’s distribution of the proceeds from the foreclosure sale.
Second, the Noteholder was a creditor and party in interest in the bankruptcy case. “In the bankruptcy context a party in interest is one who has a pecuniary interest in the distribution of assets to creditors.” Grausz, 321 F.3d at 473; Willemain v. Kivitz, 764 F.2d 1019, 1022 (4th Cir.1985). Moreover, it actively participated in the bankruptcy case. It filed a motion for relief from the automatic stay. Counsel for Bayview filed a notice of appearance. (Docket Entry 56).

 

The third element is whether the claim in the second matter is based upon the same cause of action involved in the earlier proceeding. The Court of Appeals “recognizes that ‘[n]o simple test exists to determine whether [claims are based on the same cause of action] for claim preclusion purposes.”  Grausz, 321 F.3d at 473 (quoting Pittston Co. v. United States, 199 F.3d 694, 704 (4th Cir.1999)). Generally, “claims are part of the same cause of action when they arise out of the same transaction or series of transactions or the same core of operative facts.” Varat, 81 F.3d at 1316. In Grausz, the Court of Appeals found that the “core of operative facts” in the two actions — the fee application proceeding and the malpractice action — were the same.

 

Both actions relate to the nature and quality of legal services the Linowes firm provided to Grausz in connection with the bankruptcy proceeding. See In re Iannochino, 242 F.3d 36, 47 (1st Cir.2001); In re Intelogic Trace, Inc., 200 F.3d 382, 387 (5th Cir.2000) (noting that the “central transaction” involved in the fee application and malpractice claim was the provision of professional services). The fee application proceeding necessarily included an inquiry by the bankruptcy court into the quality of professional services rendered by the Linowes firm. The court was required to “consider the nature, the extent, and the value of such services” before awarding fees. 11 U.S.C. § 330(a)(3). See also Iannochino, 242 F.3d at 47; Intelogic, 200 F.3d at 387. By granting the Linowes firm’s second and final fee application, the bankruptcy court impliedly found that the firm’s services were acceptable throughout its representation of Grausz … Grausz’s malpractice claim, which alleges that the firm was negligent in advising him about disclosure requirements, addresses this very same work. We conclude, therefore, that the fee applications and Grausz’s legal malpractice claim arise out of the same “core of operative facts.” The malpractice claim is rooted in the same cause of action as the earlier claim for fees.

Grausz, 321 F.3d at 473.

 

The claims in this adversary proceeding are based upon the same issues resolved by the order approving the Trustee’s Final Report — that is, whether the sales proceeds from the foreclosure sale were property of the estate, how they should be distributed, and the Trustee’s commission which is based on distribution of property of the estate. The chapter 7 trustee’s commission is based only on distribution of property of the estate.  In re Market Resources Dev. Corp., 320 B.R. 841 (Bankr. E.D. Va. 2004). Just as in Grausz, the court in awarding the Trustee his commission must necessarily have found that the sales proceeds were property of the estate to be distributed by the Trustee. If the court had found that the sales proceeds were not property of the estate, the Trustee’s commission would have been substantially less. In re Eidson, 481 B.R. 380, 388 (Bankr. E.D. Va. 2012). In approving the scheme of distribution, the court necessarily found that the sales proceeds were unencumbered property of the estate to be distributed in the order of priority set out in 11 U.S.C. § 726. If the Noteholder had a better claim to the sales proceeds, the Trustee’s Final Report would have provided for a distribution to the Noteholder rather than the administrative claimants, the IRS and the Virginia Department of Taxation. The third element of res judicata is present in this case.

 

The Court of Appeals examined two additional matters in Grausz. The first was whether on the date the final fee order was entered, Grausz “knew or should have known there was a real likelihood that he had a malpractice claim against the Linowes firm.” Id. at 474. The “second practical consideration, [was] whether the fee proceeding in bankruptcy court provided Grausz with an effective opportunity to litigate his malpractice claim.” Id. The Court answered both in the affirmative. As to the first, Grausz knew of the adverse claim made against him. He had accused counsel of incompetence and counsel had withdrawn as his bankruptcy attorney. As to the second, there were “[p]rocedural mechanisms . . . available for Grausz to raise his malpractice claim in connection with the fee proceeding.” Id. at 475.

 

The additional considerations are present in this case. The Noteholder knew or should have known that the Trustee had the sales proceeds. The Trustee advised the Noteholder and Bayview in his answer to the motion for relief from the automatic stay that the property subject to the Noteholder’s lien had been sold at foreclosure before the bankruptcy case was commenced. The Noteholder and Bayview had ample opportunity to determine that there had been a pre-petition foreclosure resulting in sales proceeds subject to its lien and to determine that they had been turned over to the Trustee.  It had ample procedural means to have the Trustee pay the sales proceeds to it, including objecting to the Trustee’s Final Report.

 

All of the elements of res judicata are present and the Noteholder is barred from litigating the issues raised in the Complaint.

 

The Trustee’s Immunity

The trustee asserts that he has immunity from the lawsuit because he was acting pursuant to an order of this court.  While trustees do not hold absolute immunity, they are immune from suit if acting under the direct orders of the court. Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchinson), 819 F.2d 74, 76 (4th Cir. 1987). The Court of Appeals stated that “if a trustee is acting under the direct orders of the court, there is immunity. In the absence of an explicit court order, however, a factual issue may arise regarding whether the trustee has acted within her authority.” Id. See also In re Sapp, 641 F.2d 182 (4th Cir. 1981). In McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1168 (4th Cir. 1997), the Court of Appeals stated:

We have previously outlined the nature and scope of a bankruptcy trustee’s liability. In Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir.1987), we held that a bankruptcy trustee may be held liable in his or her official capacity as a trustee for acts of negligence. However, a trustee may be held personally liable only for willful or intentional misconduct. Id.

 

In this case, the Trustee acted pursuant to the order approving the Final Report which explicitly directed how the sales proceeds would be distributed. There is no allegation — and none can be made — that the Trustee acted outside his authority or in contravention of the final order. He is, therefore, immune from this suit.

 

Claims Against Third Parties

The Noteholder’s claims against the IRS and the Virginia Department of Taxation depend upon the proceeds of sale not being property of the estate. The Noteholder argues that they are not property of the estate and therefore they remain the Noteholder’s property. Because they are the Noteholder’s property, it asserts, the IRS and the Virginia Department of Taxation improperly received them and were unjustly enriched. They should return the funds to the proper owner. As discussed above, the sales proceeds were property of the estate. Assuming, for the sake of argument, that the Noteholder was correct that all of the proceeds should have been paid to it, the IRS and the Virginia Department of Taxation, nonetheless received the proceeds pursuant to the order of this court. There is no independent basis that would require them to pay the money to the Noteholder. The only remedy is to vacate the order approving the Trustee’s Final Report in which case the disbursed funds would be returned to the Trustee for proper distribution. The Noteholder has no independent action against either the IRS or the Virginia Department of Taxation.

 

The Claim Against ALG

There remains one further claim. This is against ALG. The Noteholder asserts that ALG breached its duties because it improperly paid the remaining sales proceeds to the Trustee.  One duty of a foreclosing trustee is to properly pay out the proceeds of the foreclosure sale to the parties entitled to them. This is normally based on a title report. In addition, the trustee needs to know the proper amount to be paid and should request a payoff statement from the intended recipient. Absent a review of the title report and the payoff statement, ALG runs the risk of disbursing the sales proceeds to the wrong party or in the wrong amount. For example, if the proceeds were greater than the payoff and ALG were to pay all the proceeds to the Noteholder, the debtor would be aggrieved. The Noteholder would have been paid too much at the expense of the debtor. Similarly, if the Noteholder was not paid in full and some proceeds were paid to the debtor on the mistaken belief that the Noteholder was paid in full, the Noteholder would be aggrieved. The foreclosing trustee needs to resolve these issues.
In this case, the Noteholder complains that ALG paid the remaining sales proceeds over to the Trustee. The Noteholder claims that this was improper because it was not property of the estate and should not have been paid to it. This has been discussed above and is not a valid grounds for imposing liability on ALG because the proceeds of sale, although encumbered by the lien by the second trustholder, were property of the estate.  More importantly, however, §§ 541 and 542 of the Bankruptcy Code provide that a custodian or party in possession of property of the estate must turnover the property to the Trustee. It is for the Trustee to then disburse the property. In this case ALG complied with its statutory obligation under the Bankruptcy Code and delivered the remaining sales proceeds to the Trustee. The cover letter stated that it is up to the Trustee to disburse the funds to “junior lienholders and/or the Debtor” as may be appropriate. Complaint, Ex. 2. This is all that is required by ALG. ALG complied with the Bankruptcy Code which is the supreme law of the land and which supersedes any other state law concerning ALG’s duties in these circumstances. ALG is not responsible for the Trustee’s subsequent conduct.

 

Conclusion

The Complaint will be dismissed as to the Trustee because he received property of the estate and disbursed it pursuant to an express order of this court. He is immune from suit in this case. The order was never appealed and has not been sought to be vacated or reconsidered.

The Complaint will be dismissed as to the IRS and the Virginia Department of Taxation. They received property of the estate that was disbursed pursuant to the order of this court. The sales proceeds cannot be recovered by a creditor who asserts an error in the distribution. If the final order of this court authorizing and directing the distribution were vacated, the sole party entitled to recover the funds would be the Trustee. The funds would be returned solely to the bankruptcy estate and would be subject to further administration and distribution upon further order of this court. It would not be paid directly by the Noteholder.

The Complaint will be dismissed as to ALG because it properly complied with its duties under §§ 541 or 542 of the Bankruptcy Code which is the supreme law of the land and supersedes state law obligations in this respect. ALG is not responsible for the subsequent disbursement of the funds from the bankruptcy estate.

Alexandria, Virginia

December 14, 2016

Signed by the Honorable Robert G. Mayer

 

 

 

About the author: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!

 

Student Loans and Chapter 13: a review of the Engen case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Kansas has recently ruled on an issue very important to some debtors: Student loans and their treatment in a Chapter 13 Plan.

Read a synopsis of the case here.

Student loans are considered a non-priority unsecured debt in bankruptcy. However, the debt is non-dischargeable. This means that the debt (principle and interest) survives the bankruptcy and you will have to continue to pay the debt when your bankruptcy is completed.

Chapter 13 bankruptcy is a consolidation of all debt into one payment. Non-priority unsecured debt share a base amount that is paid over time and in proportion to the debt owed. The larger the debt, the more they will be paid from that base. For example – if your Chapter 13 Plan provides for a total sum of $10,000.00 to be paid to the general unsecured base, and your student loans are 65% of your debts, it will receive 65% of the $10,000; or $6,500.00.

When the bankruptcy is over, you will have paid $6,500.00 to your student loan. But interest continues to accrue during the 3-5 years you are in the Chapter 13. Depending on how much you owe, this may only pay some of the interest only. The principal may have remained untouched.

As the court says: “pro rata distribution of the plan funds to all unsecured creditors, and the inability to pay off the student loan debt faster than its nondischargeable interest may be incurred, could result in the debtors owing more at the end of their plan than they owed going into it. Hardly the goal of chapter 13 bankruptcy.”

However, courts in the past have rejected that argument in treating student loans differently than other non-priority unsecured debt.

The only success attorneys have had in treating student loans differently is if there is a co-debtor on the loans. In that case the co-debtor can pay the loan directly (if it was their loan) or if the debt is paid its regular monthly payment inside the plan.

The Kansas Court has found that, despite their categorization by the Bankruptcy Code and Court rulings, student loans ARE a different type of debt than other non-priority unsecured debts.

It helped to have a sympathetic debtor – the OTHER unsecured debts had been paid down 83% before the case was filed. During the life of the bankruptcy the student loans will presumably receive their “fair share” relative to what the other unsecured debts have already received pre-petition.

Quite likely that will be the factor most courts will use to distinguish this case from ones in the future. Also, it is likely the lender did not object to the Plan. Had it objected would the court have ruled differently?

But Debtors with a similar situation may finally be able to find relief from their student loan debt in a Chapter 13 filing.

 

 

 

About the author: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!