The Casner case: missing critical bankruptcy deadlines

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. This case shows that a debtor cannot sit on his rights, a skilled bankruptcy attorney will have the implements in place to avoid critical deadlines!

Click here for commentary on this opinion.

 

In re: MARY EVELYN CASNER, Debtor. Case No. 16-00662 (Chapter 7)

MEMORANDUM DECISION AND ORDER

On January 13, 2017, Specialized Loan Servicing LLC filed a motion for relief from the automatic stay regarding the debtor’s real property located at 1332 Independence Avenue, SE, Washington, DC 20003. The debtor’s attorney seeks to continue the hearing on the motion to February 23, 2017.11 Under 11 U.S.C. § 362(e)(1), the automatic stay would terminate on February 13, 2017 (after the passage of 30 days after the filing of the motion for relief from the automatic stay), unless the court, after notice and a hearing, orders the automatic stay to continue pending conclusion of a final hearing.

___________________________

The debtor’s opposition to the motion hints that there is equity in the property. However, the debtor has claimed the property exempt under a District of Columbia statute that permits a debtor to exempt the entirety of the debtor’s residence.

The debtor does not actually assert that there is equity in the property, and a close examination of the debtor’s opposition reveals that there may be no equity. The debtor scheduled the property as worth $833,860 and does not state what she now believes the property is worth, aside from stating that “the stated valuation of the subject property is way below compatible properties sold in the neighborhood which is attached as Exhibit A.” According to the information in that exhibit, the lowest sale price of a neighboring property is $907,000. One ofthe properties listed in the attached exhibit, located at 1311 Independence Ave., SE, on the block across the street from the debtor’s home, sold for $988,500, an amount that, less typical closing costs, would not suffice to satisfy the debt in this case.

The mortgagee in this case claims that the debtor owes $1,564,690.77. The debtor asserts that the mortgagee has overstated the amount owed because “the arrearages calculated by Movant includes principal payments which are added back to the outstanding balance thereby overstating the principal amount due[.]” The debtor also questions certain fees assessed and included in the arrearages.

The debtor does not state what the correct amount owed is, but even if the entire $613,996.72 of arrearages were subtracted from the amount the mortgagee says is owed, $1,564,690.77, a debt of $950,694.05 would still be owed. If the debtor’s property were then sold at the same sales price as that of the nearby property at 1311 Independence Ave., SE, $988,500, factoring in closing costs charged to the debtor that would likely far exceed 4%, the debtor would likely realize less than $950,694.05; thus, there would be no equity in the property. Under 11 U.S.C. § 362(d)(2), relief from the stay would be appropriate because there would be no equity in the property and, in this chapter 7 case, the property obviously is not necessary to achieve an effective reorganization.

Although the time for objecting to the debtor’s exemptions has not expired, the chapter 7 trustee, who represents the interests of the estate and of unsecured creditors in this case, has not seen fit to file a timely opposition to the motion for relief from the automatic stay. If, for some reason, the debtor’s exemption of the property were to be disallowed, the trustee would still be entitled to seek to sell the property, and could seek injunctive relief against any foreclosure sale so that the trustee, using a real estate broker, could realize a higher sales price then might be realized at a foreclosure sale.

The debtor does not represent the interests of the estate and creditors, and having claimed that the property in its entirety is exempt, the debtor is not in a position to contend that the interests of the estate and of unsecured creditors warrants denying relief from the automatic stay. The Bankruptcy Code does not provide to a debtor in a chapter 7 case any tools to modify the rights of a creditor holding a consensual lien on real property. The automatic stay comes into effect when the petition is filed and it maintains the status quo while the parties and the court evaluate whether there is any bankruptcy-related reason to keep the automatic stay in place for the duration of the bankruptcy proceedings. When, as here, no such reason has been articulated, the automatic stay should be lifted.

In any event, the automatic stay has expired in this case.

As the debtor’s petition acknowledges, she filed a prior case in this court, Case Number 16-00333. That case was dismissed in September 2016, and the petition in this case was filed in December 2016. With exceptions of no relevance, 11 U.S.C. § 362(c)(3) provides:

[I]f a single or joint case is filed by . . . a debtor who is an individual in a case under chapter 7 . . . and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, .

. . —

(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt . . . shall terminate with respect to the debtor on the 30th day after the filing of the later case[.]

Although 11 U.S.C. § 362(c)(3)(B) permits a party in interest to request a continuation of the automatic stay beyond the 30-day period, § 362(c)(3)(B) provides that any hearing on such a request must be “completed before the expiration of the 30-day period . . . .” More than 30 days have elapsed since the filing of the petition in this case, and therefore the automatic stay has terminated.

It makes no sense to continue the hearing on a motion for relief from the automatic stay when (1) the debtor has failed to articulate any bankruptcy reason why the automatic stay ought to stay in place, and (2) the automatic stay has already terminated by reason of 11 U.S.C. § 362(c)(3)(B). It is thus ORDERED that the debtor’s motion (Dkt. No. 39) seeking to continue the hearing on the pending motion for relief the automatic stay is DENIED.

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

 

 

Debtor loses real estate after missing a critical bankruptcy deadline

From the Bankruptcy Court for the District of Washington DC comes a case stating that Mortgage Servicer did not have to file Motion for Relief from Stay since Debtor had prior case Dismissed within 12 months and did not move to extend Stay.

The debtor does not represent the interests of the estate and creditors, and having claimed that the property in its entirety is exempt, the debtor is not in a position to contend that the interests of the estate and of unsecured creditors warrants denying relief from the automatic stay. The Bankruptcy Code does not provide to a debtor in a chapter 7 case any tools to modify the rights of a creditor holding a consensual lien on real property. The automatic stay comes into effect when the petition is filed and it maintains the status quo while the parties and the court evaluate whether there is any bankruptcy-related reason to keep the automatic stay in place for the duration of the bankruptcy proceedings. When, as here, no such reason has been articulated, the automatic stay should be lifted.

In any event, the automatic stay has expired in this case.

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. This case shows that a debtor cannot sit on his rights, a skilled bankruptcy attorney will have the implements in place to avoid critical deadlines!

 

Click here to read the entire opinion.

 

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

I forgot to list an asset! Is my bankruptcy case doomed?

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, and pay particular attention to cases close to home!

I posted the Opinion in Gargula v. Brown (16-70699, Adv. # 16-7036) from the Central District of Illinois (the area includes Springfield, Peoria, Champaign, etc.) about whether a Debtor either forgot or intentionally left out savings bonds in her statement of assets.

Everyone forgets: the junk car in your back yard that still has a title and is still in the Secretary of State Database; your name is on your daughter’s bank account; the credit union savings account they made you open when they financed your car; the little bit of retirement you had from that job back in 2012; that hospital bill; the loan you co-signed with your grandson …

But honestly forgetting something in your bankruptcy schedules does not spell doom for you or your bankruptcy. If you and your attorney made an exhaustive effort to list all of your assets, income, expenses, debts, and so forth, in your bankruptcy schedules – and make swift efforts to correct the schedules – you should have no problem (you might have to turn in the car or the cash or incur more money to list the debt, but as far as being in “trouble” with the court, you should be fine).

When people do get into trouble, it is because they INTENTIONALLY hid an asset. They put money into someone else’s bank account, they transferred title to a vehicle to someone else, everything from funds to furniture seem to disappear overnight, etc.

In this case, the Debtor forgot that some of her tax refund money automatically goes to purchase savings bonds. Judge Gorman analyzed the demeanor of the Debtor and her actions upon the discovery of the missing asset (that is, quickly amending her schedules and handing the funds over to the Trustee). The intent, it was ruled, was not there.

This is why, it seems, some attorneys badger you about the information required in the bankruptcy schedules.

You will be asked about stocks and bonds and savings bonds.

Do you have any personal injury claims or worker’s compensation claims? Have you seen an attorney or talked to an attorney about any personal injury claims or worker’s compensation claims? Isn’t that the same question? Not really.

So let your attorney ask silly questions Let him or her repeat silly questions. It’s to help you remember – and don’t keep anything back! Your attorney should thank you for bringing up even the smallest matter – because it might make a difference!

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Centralia, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Ex-wife’s interest in former marital property is a non-avoidable mortgage in bankruptcy – the full Sarazin/Sternat case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. Here is a case from Wisconsin, which is part of the same circuit that southern Illinois is in. That means if the same issue happens here, this case will be closely reviewed!

This involved marital debt, which is a constant concern in many bankruptcy cases.

Read the summary of the case here.

 

REBECCA SARAZIN, Appellant, v. SHAWN STERNAT, Appellee.

Case No. 16-CV-1117-JPS, Bankruptcy Case No. 15-21681.

United States District Court, E.D. Wisconsin.

January 18, 2017.

Rebecca Sarazin, Appellant, represented by Christopher T. Kolb, Halling & Cayo SC.

ORDER

J.P. STADTMUELLER, District Judge.

On August 19, 2016, this appeal was taken by the appellant Rebecca Sarazin (“Sarazin”) from an August 5, 2016 order of the bankruptcy court in bankruptcy case number 15-21681. (Docket #1). The order overruled Sarazin’s objection to appellee Shawn Sternat’s (“Sternat”) homestead exemption and granted Sternat’s motion to avoid Sarazin’s judicial lien. (Docket #1-2). The appeal is now fully briefed. (Docket #5, #6, and #7). For the reasons explained below, the Court will reverse and remand this matter to the bankruptcy court for further proceedings.

  1. JURISDICTION AND STANDARD OF REVIEW

Sarazin timely filed her Notice of Appeal on August 19, 2016, fourteen days after the bankruptcy court’s order (Docket #1-2). Bankr. R. 8002(a)(1). This Court has jurisdiction of this appeal because the underlying order conclusively determined the status of Sarazin’s claim. Schaumburg Bank & Trust Co., N.A. v. Alsterda, 815 F.3d 306, 313 (7th Cir. 2016). The Court reviews the bankruptcy court’s findings of fact for clear error and its legal conclusions de novo. In re Marcus-Rehtmeyer, 784 F.3d 430, 436 (7th Cir. 2015).

  1. FACTS

The relevant facts are brief and undisputed.[1] Sternat and Sarazin filed for divorce in state court in 2012. In September 2014 the circuit court, inter alia, divided the marital assets and liabilities via a judgment of divorce (the “Divorce Judgment”). (Docket #5-1 at 64-77). The Divorce Judgment granted Sternat the marital home (the “Home”), the primary asset of value between them, and assigned most of the marital debts to Sarazin. Id. at 75-76. To remedy this imbalance, the court ordered that Sternat make an equalization payment to Sarazin. Id. at 76. The Divorce Judgment described the payment as follows:

Equalization. Based on the above division, the court orders that to equalize the division of assets and debts, [Sternat] is to pay to [Sarazin] an equalization payment of $178,923.00, which judgment is hereby granted in favor of [Sarazin] and against [Sternat].

The court finds that the IRS, WI Dept. of Revenue, and Loans from Shirley Wiedemeier debts [sic] described above are all marital debts.

Because the marital residence is the only remaining asset of value, it is hereby ordered to be sold to pay these debts as an equalizing payment from [Sternat] to [Sarazin], as soon as reasonably practical. Id.

Sternat did not sell the Home or make the equalization payment. He instead filed for Chapter 13 bankruptcy protection. Sarazin filed a claim for the equalization payment. She objected to Sternat’s attempt to apply the homestead exception to the Home, and Sternat filed a motion to avoid Sarazin’s lien. The bankruptcy court order under review resolved both issues simultaneously. (Docket #1-2).

  1. ANALYSIS

Before the bankruptcy court, Sarazin argued that the Divorce Judgment had awarded her a mortgage lien, rather than a judicial lien. (Docket #5-1 at 47-49). The bankruptcy court found that Divorce Judgment was merely a judicial lien, concluding that Sarazin had conceded the point. Id. at 55.[2] This is a question of law, which the Court reviews de novo, and it concludes that this finding was erroneous. The Divorce Judgment awarded Sarazin a mortgage under Wisconsin law.

This result is dictated by the Wisconsin Court of Appeals opinion in Klemme. There, a husband (Robert) and wife (Patricia) were granted a judgment of divorce. Klemme v. Schoneman, 477 N.W.2d 77, 77 (Wis. Ct. App. 1991). The judgment incorporated a stipulation concerning division of marital property. Id. at 78. With respect to the marital home, it provided as follows:

[Robert] shall be awarded all right, title and interest in the real property located at 2716 Michigan Avenue, Sheboygan, Wisconsin, [legal description omitted] and [Patricia] shall be divested of all right, title and interest therein subject to the following cash settlement which shall remain as a lien against said property until paid:

[Robert] shall pay [Patricia] the sum of Five Thousand Eight Hundred ($5,800.00) Dollars payable in the following manner: $1,500.00 to be paid within thirty (30) days of the divorce hearing; $1,500.00 bearing interest at 12% per annum from the date of the divorce hearing to be paid nine (9) months from the date of the hearing; $1,500.00 bearing interest at 12% per annum from the date of the divorce hearing to be paid twelve (12) months from the date of the hearing; $1,300.00 bearing interest at 12% per annum from the date of the divorce hearing to be paid fifteen (15) months from the date of the divorce hearing. Upon payment of the final installment [Patricia] shall execute such documents of title as necessary to terminate her lien against the real estate. Id. at 78 n.2.

Robert failed to pay the entire settlement amount and filed for bankruptcy, listing Patricia’s lien as a debt to be discharged. Id. He obtained discharge. Id. After some further filings in the family court, Patricia attempted to foreclose her lien on the marital home. Id. Robert argued that the lien was non-existent as it had been discharged in bankruptcy. The trial court ruled in Patricia’s favor, finding that the lien was a mortgage which could not have been discharged. Id.

The appellate court upheld that ruling. Id. at 81. It relied heavily on the Wisconsin Supreme Court’s Wozniak decision. Wozniak held that divorce judgments could create mortgage, rather than judicial, liens, depending on the characteristics of the judgment. Wozniak v. Wozniak, 359 N.W.2d 147, 150 (Wis. 1984). The characteristics to be considered include: 1) whether the subject interest is expressed as a lien, 2) whether the lien is attached to a particular piece of property, 3) whether the lien is meant to guarantee payment of a particular sum of money, 4) whether the underlying debt accrues interest, and 5) whether the debt is due on a particular date. Klemme, 477 N.W.2d at 80. Wozniak further observed that no particular characteristic is essential, but that the critical inquiry is the intention behind the lien:

“Whatever be the form of the transaction, if intended as a security for money, it is a mortgage and the right of redemption attaches to it. . . . The purpose of the instrument is the controlling feature under all circumstances. If that is security . . . the instrument is treated as a mortgage and nothing else.” Id. at 80-81 (quoting Wozniak, 359 N.W.2d at 150).

Applying the Wozniak factors, Klemme found that the divorce judgment constituted a mortgage lien. Id. at 80. Although it did not include language permitting Patricia to foreclose her lien, the omission was not dispositive. Id. Instead, Klemme noted that “the purpose of Patricia’s lien was security for the future payment of Robert’s balancing payment of the property division. It is this [intent] aspect of Wozniak that truly controls this case.” Id. at 81. Finally, Robert argued that Klemme’s holding would convert every divorce judgment into a mortgage lien. Id. The court rejected the notion, holding that a factual, case-by-case analysis is required by Wozniak. Id. It closed by stating that “[w]hile [the Wozniak analysis] may in most cases result in a declaration of a mortgage lien, neither Wozniak nor this case create an ironclad rule.” Id.

While not identical to Klemme, this matter shares more than enough common features for this Court to follow Klemme’s guidance. The Wozniak factors are present to at least some degree. Though the Divorce Judgment does not use the words “lien” or “mortgage,” Sarazin argues that Wisconsin courts emphasize substance over form, citing Klemme as a prime example. The Divorce Judgment attaches the lien only to the Home, and no other marital property, thereby distinguishing it from a judicial lien. Id. at 80 (“[A] mortgage serves as security for a particular piece of property, while a judgment lien ordinarily is not a lien on any specific real estate of the judgment debtor but is a general lien on all of the debtor’s real property.”). Further, the lien is specifically intended to ensure that Sternat sells the home to procure funds for the equalization payment. Though the equalization payment does not accrue interest, the “as soon as reasonably practical” language provides a timeliness component. (Docket #5-1 at 76). Sternat maintains that the Divorce Judgment lacked key mortgage characteristics, namely rights of redemption and/or foreclosure. As noted above, Klemme found that such language would favor finding a mortgage lien, but its absence is not conclusive in that regard. Klemme, 477 N.W.2d at 80.

The Court finds that these factors weigh in favor of finding a mortgage lien, albeit to a lesser extent than they did in Klemme. This case appears to be a few steps removed from Klemme; the word “lien” is not used and there is no precise payment date or specific payment arrangements. Nevertheless, this Court concludes, as did Klemme, that beyond an analysis of the Wozniak characteristics, the intent question determines the outcome. The Divorce Judgment gave the Home to Sternat. It then ordered Sternat to make the equalization payment, and in the same breath directed that the Home be sold to create the funds necessary to effectuate the payment. The intent was that the Home be transferred to Sternat and immediately liquidated to fund the payment. This intention to use the Home as security for the equalization payment controls, and dictates that the Divorce Judgment created a mortgage lien. Id. at 80-81.[3],[4]

  1. CONCLUSION

Sarazin has a mortgage lien on the Home by virtue of the Divorce Judgment. The bankruptcy court’s finding to the contrary was erroneous. The bankruptcy court’s decision will, therefore, be reversed, and the matter remanded to it for further proceedings consistent with this opinion. Sarazin suggests that her mortgage lien is nondischargeable, but this Court will leave that and any other bankruptcy-specific determinations to the bankruptcy court.

Accordingly,

IT IS ORDERED that the order of the bankruptcy court under review (Docket #1-2) be and the same is hereby REVERSED; and

IT IS FURTHER ORDERED that this matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion.

[1] These facts are drawn from the bankruptcy court’s memorandum opinion (Docket #5-1 at 53-60) unless otherwise noted.

[2] Sarazin’s position is admittedly unclear in her brief submitted to the bankruptcy court. The bankruptcy court cited her “concession” in the first page of her brief, where she argued in favor of a “judicial and equitable lien,” without mentioning a mortgage lien. (Docket #5-1 at 38, 55). The vast majority of the brief, and the conclusion, are also silent on the mortgage issue. See id. at 38-46, 49-52. Nevertheless, the mortgage issue is mentioned and appears to be properly before the Court (Sternat has not argued, for instance, that the point was waived).

[3] Sternat may lament, as did Robert, that this ruling will convert all divorce judgment liens into mortgage liens. As noted above, even assuming that many such liens would be viewed as mortgages, Klemme foresaw no problems with that result so long as the Wozniak analysis was undertaken. Klemme, 477 N.W.2d at 81. This Court is not at liberty to disagree with Klemme’s interpretation of Wisconsin law.

[4] The Court need not reach the parties’ arguments about whether Sternat can avoid any supposed judicial lien. Klemme, 477 N.W.2d at 79-80; see Farrey v. Sanderfoot, 500 U.S. 291 (1991).

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, McLeansboro, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

 

Ex-wife’s lien on former marital home is not avoidable in bankruptcy – a summary.

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. Here is a case from Wisconsin, which is part of the same circuit that southern Illinois is in. That means if the same issue happens here, this case will be closely reviewed!

It involves marital debt … a constant concern in bankruptcy.  This involved a debtor failing to sell a piece of marital property as ordered in a divorce decree…

From January 18, 2017.

Eastern District of Wisconsin: Ex-wife Creditor had a Non-avoidable Mortgage Lien on former couple’s marital home, which ex-husband Debtor Failed to Sell as Required by Divorce Decree

The Court finds that these factors weigh in favor of finding a mortgage lien.

This case appears to be a few steps removed from Klemme; the word “lien” is not used and there is no precise payment date or specific payment arrangements. Nevertheless, this Court concludes, as did Klemme, that beyond an analysis of the Wozniak characteristics, the intent question determines the outcome. The Divorce Judgment gave the home to Sternat. It then ordered Sternat to make the equalization payment, and in the same breath directed that the home be sold to create the funds necessary to effectuate the payment. The intent was that the home be transferred to Sternat and immediately liquidated to fund the payment. This intention to use the home as security for the equalization payment controls, and dictates that the Divorce Judgment created a mortgage lien.

A couple’s divorce judgment granted a non-avoidable mortgage lien in favor of the ex-wife against the marital home, which the ex-husband failed to sell as required before he entered bankruptcy, a Wisconsin federal judge has concluded in reversing a bankruptcy court ruling.
Read the entire case here.

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Flora, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

Supreme Court: late-filed claims in Bankruptcy do not violate Fair Debt Collection Practices Act

I will not rend my garments over this “victory for the debt collectors” as one commentator put it. If only because, under the bankruptcy rules, the victory is pyrrhic.

***

Midland Funding, LLC v. Johnson: On May 15, 2017, the US Supreme Court held, in a 5-3 decision, that the filing of a proof of claim filed past the time to do so and otherwise time barred is not a false, deceptive, misleading, unfair or unconscionable debt-collection practice within the meaning of the Fair Debt Collection Practices Act (“FDCPA”).

Therefore, debt collectors do not violate the FDCPA when they file a claim in a bankruptcy proceeding for a debt that has become otherwise uncollectible because the statute of limitations has expired.

***

The decision by the Supreme Court is well thought out and a good interpretation of what a “claim” is as to the Bankruptcy Code:

The FDCPA punishes conduct by debt collectors that are “false,” “deceptive,” “misleading,” “unconscionable” or “unfair,” the Court said that filing a stale claim is none of the above:

It is not misleading to file a time-barred claim in a bankruptcy proceeding because that obligation remains a “claim” for purposes of bankruptcy law, the Court said. When it passed the Bankruptcy Code, “Congress intended to adopt the broadest available definition of ‘claim.’” The Court then said the statutory text directly recognizes the possibility that an obligation would be a “claim” even if it were unenforceable; specifically, the statute “says that, if a ‘claim’ is ‘unenforceable,’ it will be disallowed. It does not say that an ‘unenforceable’ claim is not a ‘claim.’”

***

The FDCPA allows for hefty attorney’s fees. Now that SCOTUS has ruled filing a late claim does NOT violate FDCPA, debtor’s attorneys have lost out on a healthy amount of potential income. Not that the attorneys for the Debtor were not being altruistic – they were. But good compensation for a good fight would be nice, too.

So the claims will have to be eliminated the old fashioned way without the extra income.

***

I concentrate on Chapter 7 and Chapter 13 bankruptcies. Here is how a claim can be filed by a Creditor in either case:

Chapter 13: a creditor gets notice to file a claim by a certain deadline. They will then receive a percentage of their debt (sometimes, but rarely, 100% with no interest or penalties) over the three-to-five-year period of the claim. If they do not file a claim, they get no money and their debt is discharged at the end of the case. With no claim, they will have received no money whatsoever.  If they file after the deadline and neither the Trustee nor the Debtor object, they will start receiving money during the life of the Chapter 13.

This is pretty rare though. 13 Trustees object to late claims. And it is the duty of the Debtor’s attorney to review all claims after the bar date and object, if he or she believes it is necessary, to either its contents or its timeliness. When it comes to timeliness (late filing), the Trustee usually files the objection before the attorney does.

Objecting to a late claim is usually a “gimme”. Only under very rare circumstances is it denied.

***

Chapter 7s are a different matter: if a Chapter 7 Trustee wants to liquidate an asset (a tax refund, a piece of land or unexempt personal property), he or she notifies the creditors to file a claim within a certain time period.

The Trustee objects to any late claims filed. If he does NOT, there is precious little the Debtor can do! The Debtor has no standing to object to claims filed in a Chapter 7 asset case. BUT if the Debtor informs the Trustee about the debt and its controversy (past limitations, etc.), he or she MIGHT be convinced to object. That will leave more funds for the legitimate creditors.

If not, the bankruptcy attorney may have to convince the Debtor to accept it and move on.

***

A good bankruptcy attorney keeps track of deadlines on claims as well as notices from the court as to late claims and object. If the objection is sustained, the creditor receives no funds. It is also wise for the attorney to note in the schedules that the debt is in controversy from the outset: it is disputed and/or contingent, etc. There is plenty of room on the schedules to explain why the Creditor believes the debt is owed, but the Debtor does not…

So while the ruling in Midland v Johnson seems to favor the creditor, the other options available to Trustees and Debtor’s attorneys do not make it much of a victory.

So let them steal second, you’ll tag them at third.

 

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Centralia, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally

What is property of the estate: current case law

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, and pay particular attention to cases close to home!

It is brought to you by Consumer Bankruptcy Abstracts & Research (www.cbar.pro) and the National Consumer Bankruptcy Rights Center (www.ncbrc.org).

***

Property of the estate: Because, on the petition date, a cause of action by the Chapter 7 debtor was barred by the statute of limitations, neither the cause of action nor a payment offered to the debtor in connection to the personal injury he suffered were property of the estate, and the Chapter 7 trustee had no authority to administer the payment on behalf of the debtor’s creditors. In re Cibella, 560 B.R. 494 (Bankr. N.D. Ohio Nov. 18, 2016) (case no. 4:08-bk-41807).

Property of the estate—Avoidance of lien impairing exemption: Reversing In re O’Sullivan, 544 B.R. 407 (8th Cir. B.A.P., Jan. 19, 2016), the Eighth Circuit Court of Appeals emphasized that there is a distinction between an extant but unenforceable lien and a non-existent lien for the purpose of avoidance of the lien under Code § 522(f)(1). When state law does not allow a lien to attach to exempt property, § 522(f) is superfluous and without application. In re O’Sullivan, 841 F.3d 786 (8th Cir. Nov. 14, 2016) (case no. 16-1526).

Reopening of case: The bankruptcy court abused its discretion in denying the debtor’s motion to reopen a Chapter 7 case that had been closed for nearly four years. While the debtor sought relief—avoidance of judicial liens on his residence—that he could have pursued while the case was open, delay alone did not necessarily constitute prejudice. There had been no objection by the creditors holding the judicial liens, and the bankruptcy court did not find that any prejudice would result from the reopening of the case. In re McCoy, 560 B.R. 684 (6th Cir. B.A.P., Nov. 29, 2016) (case no. 15-8056).

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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 Salem, Centralia, Nashville, Fairfield, Cisne, Carmi or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

A primer on Willfull and Malicious: the final review of the James vs. West case

The James vs. West case, part ten: Willful and Malicious

 

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.

 

What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.

This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!

Click on the links to read Part One, Two, Three, Four, Five, Six, Seven, Eight and Nine for statements of the facts and other issues in this case. Read all of the blogs – the case is that good.

 

Count III: § 523(a)(6)

The Jameses allege in a cursory manner that certain representations made by the Debtor or her agent were false and fraudulent and that they caused willful and malicious injury to the Jameses or their property. The Jameses rely on the same representations alleged in Count I, with the exception of the alleged representation regarding the possession date. In response to the Debtor’s oral motion for judgment as a matter of law, the Jameses argued that the underlying debt is compensatory, and not sanction-based. In their closing, the Jameses argued that the Debtor’s willfulness and maliciousness were evidenced by her acts of signing the Contract, sending the Letter, and sending the Check when she knew she did not have the funds to purchase the Property. Based on the evidence, the Court disagrees.

Section 523(a)(6) provides in pertinent part that a “discharge under section 727. . . of this title does not discharge an individual debtor from any debt for willful and malicious injury by the debtor to another entity or to the property of another entity.” To prevent discharge of a debt under § 523(a)(6), the movant must show by a preponderance of the evidence both elements: that (1) the debt is for “willful injury,” and (2) the debt is for “malicious injury.” In re Patch, 526 F.3d 1176, 1180 (8th Cir. 2008). “Willful,” as used in the statute, modifies the word “injury,” so that nondischargeability requires a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). As with any exception to discharge, nondischargeability under § 523(a)(6) is to be strictly construed in accord with the fresh start aim of the Bankruptcy Code. Geiger v. Kawaauhau (In re Geiger), 113 F.3d 848, 853 (8th Cir. 1997), aff’d sub nom., Kawaauhau v. Geiger, 523 U.S. 57 (1998).

The first requirement, that the injury is “willful,” requires a “deliberate or intentional invasion of the legal rights of another.” Roussel v. Clear Sky Properties, LLC, 829 F.3d 1043, 1047–48 (8th Cir. 2016) (citation omitted). More specifically, the injury must be an intentional tort, which requires that the tortfeasor “desire to cause consequences of his act” or “believes that the consequences are substantially certain to result from it.” Geiger, 113 F.3d at 852 (citing RESTATEMENT (SECOND) OF TORTS § 8A at 15 (1965)); see also Patch, 526 F.3d at 1180.

The second requirement, that the injury is “malicious,” requires conduct that is “targeted at the creditor . . . at least in the sense that the conduct is certain or almost certain to cause financial harm.” Roussel, 829 F.3d at 1047 (citation omitted). “If the debtor’s conduct was inexcusable and resulted in an inevitable injury to the plaintiff, it is malicious.” In re Jeffries, 378 B.R. 248, 256 (Bankr. W.D. Mo. 2007) (citation omitted). As made clear after Geiger, conduct that is merely negligent or reckless is insufficient for nondischargeability under §523(a)(6). Geiger, 523 U.S. at 64.

Section 523(a)(6) “sounds in tort, not breach of contract.” Jeffries, 378 B.R. at 256 (citation omitted); see also 4 COLLIER ON BANKRUPTCY ¶ 523.12[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“Section 523(a)(6) generally relates to torts and not to contracts.”).

In Geiger, the Eighth Circuit was called upon to decide whether § 523(a)(6) requires a willful injury or “an intentional act that results in injury.” The Court chose the former, and cited breach of contract as evidence that the latter approach proves too much. Geiger, 113 F.3d at 852 (“[W]e see no reason that a knowing breach of contract would not result in a judgment that would be exempt from discharge under this legal principle. Surely this proves too much.”). The Supreme Court agreed, and compared a knowing breach of contract to an intentional vehicle maneuver that causes unforeseen injury – both would violate the maxim that exceptions to discharge should be narrowly construed. Geiger, 523 U.S. at 62.

Thus, as a general rule, debts resulting from breach of contract, even debts resulting from intentional breach of contract, are not excepted from discharge under § 523(a)(6). In re Johnson, Adv. No. 07-3115, 2007 WL 5065545, at *3 (Bankr. D. Minn. Nov. 14, 2007) (citing In re Glatt, 315 B.R. 501, 511 (Bankr. D.N.D. 2004)); see also In re McDowell, 299 B.R. 552, 555 (Bankr. N.D. Iowa 2003) (“Simple breach of contract . . . is not included in the limited exceptions to discharge in bankruptcy.”).

The Jameses Failed to Prove Willful Injury

Here, the Jameses have failed to prove willful injury. The Court rejects the Jameses’ allegations that the Debtor caused willful injury by signing the Contract, sending the Letter, and sending the Check knowing that she did not have the funds on hand for either the purchase price or earnest money. As discussed above, there is no evidence the Debtor sent, or caused to be sent, the Letter or the Check. Although the law allows imputation of fraudulent acts or representations under § 523(a)(2), imputation of willful and malicious actions is not authorized by the plain language of § 523(a)(6). See, e.g., In re Nolan, 220 B.R. 727, 731–32 (Bankr. D.D.C. 1998) (“[T]he debtor must have been the one who caused the willful and malicious injury. Imputed liability is insufficient.”) (citation omitted).

With respect to the Debtor’s signing the Contract without having the funds on hand, the Court finds the Debtor credible in her assertion that she believed Knowles had the funding to consummate the transaction. In addition, the Court believes it was the Debtor’s intention to purchase the property to open a B&B, however dubious a business decision that may have been at the time. There is no evidence to support the Jameses’ argument that the Debtor devised a scheme to get a free house, hoping the title company would somehow transfer the deed before receiving the funds. That theory is not supported by common sense, let alone the plain terms of the Contract.

The failed transaction was not a “deliberate or intentional invasion of the legal rights” of the Jameses. Roussel, 829 F.3d at 1047–48. Nor was it an intentional tort, where the Debtor “desire[d] to cause consequences of [her] act” or “believe[d] that the consequences [were] substantially certain to result from it.” Geiger, 113 F.3d at 852. The Jameses failed to produce any evidence of the Debtor’s intent to cause willful injury. To the contrary, the Debtor displayed genuine remorse for the transaction falling through. For these reasons, the Court finds the Jameses have failed to prove willful injury.

The Jameses Failed to Prove Malicious Injury

The Jameses have also failed to prove malicious injury. The Court rejects the Jameses’ allegations that not producing the money and sending the fake Letter and Check amount to malicious injury. Again, there is no evidence that the Debtor sent, or caused to be sent, the Letter or the Check.

The Court finds the Debtor credible in that she believed the funding was in place to purchase the Property. While the Debtor was naïve in her belief that Knowles had the funding to purchase the Property, conduct that is merely negligent or reckless is insufficient for nondischargeability under § 523(a)(6). Geiger, 523 U.S. at 64. Moreover, the Debtor did not target the Jameses “in the sense that [her] conduct [was] certain or almost certain to cause financial harm” to them. There is no evidence that the Debtor intentionally set out to cause the Jameses financial harm.

Conclusion as to Count II

For these reasons, the Court finds the Jameses have failed to prove willful and malicious injury. Judgment against the Jameses should be entered on Count III.

The Debtor’s Oral Motion Regarding Rule 7054 and § 523(d)

In her closing argument, the Debtor for the first time requested that the Court reserve jurisdiction after any judgment under Fed. R. Civ. P. 54 as incorporated by Rule 7054 to allow her to request attorney fees and other costs under § 523(d). The Court denies the oral motion.

First, Fed. R. Civ. P. 54 does not create an independent basis to impose fees. Under the American Rule, each party bears its own attorney fees. Fed. R. Civ. P. 54(d)(2), however, allows the prevailing party to recover attorney fees where it is authorized by some independent basis.

Here, the only independent basis the Debtor raised is § 523(d), which provides:

If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

The Court denies the Debtor’s request for fees under this section, for several reasons.

First, the Debtor argues that § 523(d) applies when a creditor argues that a debt is consumer debt but loses on that argument. The Debtor’s interpretation of § 523(d) is not supported by the plain language of the statute, which applies only when “a creditor requests a determination of dischargeability of a consumer debt.” Since the debt here is not a consumer debt, § 523(d) does not apply.

Second, even if the Court is incorrect in its interpretation of § 523(d) (and the Debtor cited no authority one way or the other and the Court found none), the Court would nonetheless find that the Debtor is judicially estopped from arguing that the debt is a consumer debt; her consistent position throughout this case has been that the Jameses’ debt was not a consumer debt, and to change her position now would prejudice the Jameses.

Third, the Court finds that the Jameses’ complaint was substantially justified, as evidenced by the length of this opinion and the number and complexity of the legal and factual issues.

Fourth and finally, even if the debt is a consumer debt and the complaint was not substantially justified, this Court may still refuse to award attorney fees where special circumstances would make the award unjust. Courts are to make this determination by referencing equitable principles. In re Dizinno, 559 B.R. 400, 412 (Bankr. M.D. Pa. 2016). Here, the Debtor did not request fees in her answer, at any of the many status conferences, in her brief, or even in her opening statement. The first time she indicated she would be requesting reimbursement of her fees from the Jameses was in her motion for judgment and closing arguments. To allow her to request fees at this late juncture prejudices the Jameses and would make an award of fees unjust.

Conclusion

In conclusion, judgment on each count of the adversary complaint and motion to dismiss or convert in the alternative is entered in favor of the Debtor and against the Jameses. The parties are to bear their own costs and attorney fees. A separate judgment will issue.

Dated: February 24, 2017

/s/ Cynthia A. Norton

United States Bankruptcy Judge

 

 

Bravo, Judge Norton, on an excellent opinion!

 

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Centralia, Flora  and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

 

 

The James vs. West case, part nine: More analysis on the Elements of Fraud

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.

 

What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.

This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!

Click on the links to read Part One, Two, Three, Four, Five, Six, Seven and Eight for a statement of the facts and other bankruptcy issues.

 

Count II: § 523(A)(2)(B)

The Court turns to Count II, analyzing nondischargeability under § 523(a)(2)(B). As explained previously, the Court will analyze only those four of the six alleged representations that arguably relate to the Debtor’s financial condition.

Section 523(a)(2)(B) provides in relevant part that a discharge under section 727:

does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by use of a statement in writing

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

Put another way, § 523(a)(2)(B) requires a creditor to show, by a preponderance of the evidence, these elements:

(1) the debtor [or agent] made

(2) a statement in writing

(3) respecting the debtor’s financial condition

(4) that was materially false and

(5) that was made with the intent to deceive; and

(6) that was reasonably relied upon by the [creditors].

In re Bohr, 271 B.R. 162, 167 (Bankr. W.D. Mo. 2001); Grogan v. Garner, 498 U.S. 279, 286–87 (1991) (preponderance of the evidence standard).

At the threshold, § 523(a)(2)(B) requires the same legal analysis as to whether the debt was for money, property or services “obtained” by the misrepresentation. The Court incorporates its analysis from Count I and concludes that the Debtor obtained a property interest such that her motion for judgment should be denied.

Turning to the elements (and assuming the first element):

Second Element (Statement in Writing)

The second element requires a statement in writing, which “must have been either signed by the debtor, written or produced by the debtor, or have been adopted and used by the debtor.” Kerbaugh, 162 B.R. at 261 (citing In re Mutschler, 45 B.R. 482, 490 (Bankr. D.N.D. 1984)); see also 4 COLLIER ON BANKRUPTCY ¶ 523.08[2][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).

Courts generally construe this requirement rather broadly, and focus their real analysis on whether the written statement relates to the “debtor’s financial condition.” For this reason, a debtor signing a contract can be said to have made misrepresentations based on the content of the contract. See, e.g., In re Whitenack, 235 B.R. 819, 825–27 (Bankr. D.S.C. 1998) (real estate sale contract, general warranty deed, and closing statement found to be “statement[s] in writing” for purposes of § 523(a)(2)(B)); In re Aman, 492 B.R. 550 (Bankr. M.D. Fla. 2010) (collection of closing documents, such as the HUD-1, found to be “statement[s] in writing” sufficient to satisfy the “writing” requirement); but see In re Chew, 182 B.R. 341, 347 (Bankr. N.D. Ala. 1995) (“Without further evidence, this Court is unable to find that the signing of the lease in question was ‘use of a statement in writing’ under [§ 523(a)(2)(B)].”).

Third Element: Respecting the Debtor’s Financial Condition

The third requirement, that the statement is about the debtor’s financial condition, means that the statement “concern[s] the debtor’s or insider’s overall financial health, net worth, or ability to generate income, as opposed to a statement concerning the status or quality of a single asset or liability.” Kloven, 1993 WL 181309, at *2 (emphasis added); see also In re Mulder, 306 B.R. 265, 271 (Bankr. N.D. Iowa 2004) (“The purpose of the statement must be to indicate the debtor’s overall financial condition.”).

Fourth Element: Material Falsity

Regarding the fourth requirement, “[a] financial statement is materially false if it paints a substantially untruthful picture of a financial condition by a misrepresentation of the type which would normally affect the decision to grant credit.” In re Asbury, 441 B.R. 629, 634 (Bankr. W.D. Mo. 2010) (citation and internal quotations omitted). In a broader sense, “[a] financial statement is also materially false if it falsely represents the overall financial condition of the Debtor or has major omissions.” Bohr, 271 B.R. at 167 (citing Capital City Bank & Trust v. Kroh (In re Kroh), 88 B.R. 987, 994 (Bankr. W.D. Mo. 1988)).

Fifth Element: Intent to Deceive

As far as intent to deceive, “[k]nowledge of the falsity of the information or reckless disregard for the truth satisfies the intent element of § 523(a)(2)(B)” – a “malignant heart” is not required. Asbury, 441 B.R. at 634 (citing Agribank v. Webb (In re Webb), 256 B.R. 292, 297 (Bankr. E.D. Ark. 2000)); see also Bohr, 271 B.R. at 169.

Sixth Element: Reasonable Reliance

As far as the sixth and final requirement:

The determination of the reasonableness of a creditor’s reliance is to be made ‘in light of the totality of the circumstances.’ Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir.1993) (en banc). Among other things, a Court may consider ‘whether there were any ‘red flags’ that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.’

First Nat. Bank of Olathe, Kan. v. Pontow, 111 F.3d 604, 610 (8th Cir. 1997). “Reasonable reliance” is more demanding that “justifiable reliance” under subsection (a)(2)(A). Field v. Mans, 516 U.S. at 61. Reasonable reliance is an objective standard. See In re Braathen, 364 B.R. 688, 701 (Bankr. D.N.D. 2006).

With these elements in mind, the Court addresses each of the alleged written statements regarding financial condition in turn:

As previously explained, only four of the nine representations arguably relate to the Debtor’s financial condition – not the six the complaint alleges. The four relevant representations from the Jameses’ complaint are: (1) the Debtor’s representation that she had $999,500 in cash to purchase the property; (2) the Debtor’s representation that she was approved by Tailwind Funding for $999,500; (3) the Debtor’s representation that she had $989,500 available from Banner Bank to purchase the Property; and (4) the Debtor’s representation that she had a large estate sufficient to pay the purchase price. To the extent the elements are the same, the Court incorporates any relevant findings from its § 523(a)(2)(A) analysis. Taking each in turn:

The Debtor’s Representation That She had $999,500 in Cash to Purchase the Property

This representation, if made, comes solely from the Debtor’s act of signing the Contract. This Court finds that this representation was made in writing, and that it arguably relates to the Debtor’s financial condition. Assuming also that this statement was materially false, the Court finds the Debtor had no intent to deceive the Jameses. As already described in the context of the other representations, the Jameses have failed to produce evidence creating an inference that the Debtor intended to deceive them. At most, the Debtor was careless in signing an all-cash contract based upon Knowles’ representations that he would secure financing. Carelessness, however, does not rise to the level of reckless disregard. For this reason, this Court declines to find nondischargeability based on this representation.

The Debtor’s Representation That She Was Approved by Tailwind Funding for $999,500

Assuming this representation can be imputed to the Debtor, this Court finds that the requisite reasonable reliance is not present. The Contract’s only mechanism for ensuring that the Debtor had available funds to close the cash sale was the proof of funds provision. It required that she provide “written verification from a depository of funds on deposit” within five days.

Although the Jameses describe the Letter as a “proof of funds” representation, the Letter is from “Tailwind Funding, LLC,” not a depository of funds.

The Letter also states that Tailwind is willing to “provide funding” on behalf of the Debtor; it does not state that the Debtor has funds available. The Letter also reserves the right to impose “loan conditions,” a reservation not consistent with the cash terms of the Contract. Strong testified that the Letter did not raise any red flags, and Randy James testified to the same effect.

This Court finds such testimony credible, but notes that reasonable reliance is an objective standard, and not a subjective one. The Jameses’ actual reliance may suffice for the subjective justifiable reliance required under § 523(a)(2)(A), but does not suffice for the objective “reasonable reliance” required by § 523(a)(2)(B). For these reasons, the Jameses have failed to meet their burden to show reasonable reliance on the Letter.

The Debtor’s Representation That She Had $989,500 Available from Banner Bank to Purchase the Property

This representation suffers the same fatal flaw that it suffered under the Court’s alternative analysis under § 523(a)(2)(A): there was no actual reliance, and thus there cannot be reasonable reliance. The evidence shows that both the Jameses and Strong knew the Check was a fake almost immediately and that they did not rely on it for that reason. Nondischargeability based on this representation is denied.

The Debtor’s Representation That She Had a Large Estate Sufficient to Pay the Purchase Price

Assuming that the Debtor represented that she had a large estate or fund to purchase the Property, this statement is not actionable under § 523(a)(2)(B). Although this statement relates to the Debtor’s financial condition, there is no evidence that the statement was ever made in writing. For this reason, the Jameses have not met their burden of proof based on this alleged representation.

Conclusion as to Count II

In sum, on Count II, the Court concludes that the Jameses have failed to meet their burden of proof and that judgment should be entered in favor of the Debtor.

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Wayne City, Carmi, Grayville  and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

 

 

A primer on the elements of fraud

 

The James vs. West case, part eight: The Elements of Fraud

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.

What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.

This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!

Click on the links to read Part One, Two, Three, Four, Five, Six and Seven for a statement of the facts and other bankruptcy issues in this wonderfully written case!

 

Count I: Section 523(a)(2)(A)

Turning finally to the requirements of § 523(a)(2)(A), the plaintiff must show by a preponderance of the evidence the following five elements:

(1) The debtor [or agent] made a representation;

(2) The debtor [or agent] knew the representation was false at the time it was made;

(3) The representation was deliberately made for the purpose of deceiving the creditor;

(4) The creditor justifiably relied on the representation; [and]

(5) The creditor sustained the alleged loss as the proximate result of the representation having been made.

In re Freier, 604 F.3d 583, 587 (8th Cir. 2010) (citing In re Mauer, 256 B.R. 495, 500 (B.A.P. 8th Cir. 2000)).

First Element: Representation

The first requirement is that the debtor or her agent made a representation. Silence regarding a material fact may suffice for a representation. In re Moen, 238 B.R. 785, 791 (B.A.P. 8th Cir. 1999). Also, “representation” is not confined to spoken or written words, but also encompasses other conduct that amounts to an assertion inconsistent with the truth. Id. (citation omitted). A statement in a contract may constitute a representation for purposes of section 523(a)(2)(A). See, e.g., In re Smith, 281 B.R. 613 (Bankr. W.D. Penn. 2002).

Second Element: Knowledge of Falsity or Reckless Disregard of the Truth

As to the second requirement, that the debtor or her agent knew the representation was false when she made it, it is sufficient if the declarant made the statement not knowing of its falsity but with a reckless disregard for the truth of the statement. Moen, 238 B.R. at 791. In determining whether the declarant knew the representation was false when it was made, the court may consider the knowledge and experience of the declarant. Id.

Third Element: Intent to Deceive

The third requirement is intent to deceive. Because direct evidence of intent is rare, a court may accept surrounding circumstances that create an inference of an intent to deceive the creditor. In re Schnuelle, 441 B.R. 616, 622 (B.A.P. 8th Cir. 2011). When the creditor introduces this circumstantial evidence of intent, the declarant’s self-serving statement of honest intent is not enough to overcome the inference of intent. Id.

Fourth Element: Justifiable Reliance

The fourth requirement is justifiable reliance. In Field v. Mans, 516 US 59, 73–74 (1995), the Supreme Court held that § 523(a)(2)(A) requires justifiable reliance, but not necessarily the reasonable reliance required under (a)(2)(B). The Court noted that “reasonable reliance” is a more stringent standard than “justifiable reliance.” Id. at 77. Justifiable reliance is a subjective standard. In re Schmank, 535 B.R. 243, 258 (Bankr. E.D. Tenn. 2015) (citation omitted).

Justifiable reliance falls somewhere between actual reliance and reasonable reliance; even if an investigation would have revealed the falsity of the representation, reliance can still be justifiable. Schnuelle, 441 B.R. at 622–23. What is not justifiable is blind reliance where a cursory examination would have revealed the falsity of the representation. Id.

Fifth Element: Proximate Cause

The fifth requirement is proximate cause. Proximate cause requires that the creditor would not have suffered the loss at issue but for the debtor’s (or her agent’s) actions. In re Maier, 38 B.R. 231, 233 (Bankr. D. Minn. 1984). It also requires the creditors to prove that their loss was a foreseeable result of the misrepresentation. In re Smithson, 372 B.R. 913, 922 (Bankr. E.D. Mo. 2007) (citing In re Creta, 271 B.R. 214, 219 (B.A.P. 1st Cir. 2002)).

Addressing each alleged representation in turn:

The Debtor’s Alleged Representation No. 1 That She Intended to Purchase the Property

The Court assumes in the absence of any authority to the contrary that making an offer to purchase in a written contract is a representation that the Debtor intended to purchase the property – the first element of § 523(a)(2)(A). The question is whether the Debtor knew that the representation was false or had reckless disregard for its truth.

The Court believes the Debtor’s credible testimony that she thought at the time she made the offer to purchase the Property that Knowles was going to procure the funds for the Contract, and therefore concludes this representation was not overtly false. That does not, however, end the inquiry; it is a closer question about whether signing the Contract in reliance on her boyfriend was made in reckless disregard of the truth. Certainly, with the benefit of hindsight, her reliance on her boyfriend – now known to be an untrustworthy person – to procure $1.0 million of funds from a rich brother and friend whom she had not met seems far-fetched. It is unclear to the Court whether there was ever valid interest by the brother to help with the funding, or whether Knowles invented the brother’s interest and lied to the Debtor from the inception.

But the Court believes that the Debtor honestly believed and trusted her boyfriend, and likewise believes it is unfair to judge her intent and reliance with the benefit of 20/20 hindsight.

The Court believes she would not have signed the Contract if she had known Knowles’ brother intended not to advance the funds to purchase the B&B. The Court thus finds that the Jameses have failed to meet their burden to prove that the Debtor knew when she signed the Contract that the representation that she was willing to close was made with reckless disregard of the truth.

The third element is whether the representation was deliberately made with the intent to deceive. Again, the Court does not believe that the Debtor engaged a buyer’s agent, looked at several houses, and then deliberately picked the Jameses, whom she did not know, to make an offer to buy their house with the intent not to perform. The Court believes her credible testimony that she would not have made the offer if she had known that Knowles could not procure the funds to close, and that she reasonably believed Strong when he said that if the earnest money was not paid timely the Contract was void in any event.

The fourth element is whether the creditor justifiably relied on the representation. The Court finds that the Jameses justifiably relied on an offer to buy their home. Strong, an otherwise reputable real estate agent, used a standard real estate contract and passed the offer to the Jameses’ own agent.

The fifth element is whether the creditor sustained the loss as the proximate cause of the representation being made. The Court confesses to some difficulty with the proximate cause element here. It is true that the default clause of the contract in Paragraph 14 states that: “Seller or Buyer will be in default under this contract if either fails to comply with any material covenant, agreement or obligation with any time limits required by this contract,” and that if the Buyer defaults, the Seller may either retain the earnest money or “pursue any other remedy and damages available at law or in equity.”

The effective date of the Contract according to its terms was April 9, 2013, when the Jameses signed it. Under the Contract’s plain terms, the Debtor defaulted on the Contract when she failed to comply with the first material obligation in Paragraph 7 “to provide written verification from a depository of funds on deposit within 5 calendar days which are sufficient to complete the closing the contract” – in other words, by April 14, 2013. Although the Jameses have argued that they relied on the Letter as the proof of funds, they admitted they relied on the Letter before they signed the Contract – meaning that the Letter could not have served as the “written verification from a depository of funds.”

More importantly, the Letter is not from a “depository of funds on deposit,” but from an entity evidencing an intent to make a loan. Even if the Letter could be stretched to constitute “written verification from a depository of funds on deposit,” the Contract also provided in Paragraph 19, “that upon acceptance of this Contract, unless otherwise agreed, any Earnest Money will be deposited within . . . 10 banking days (if MO property).” Here, ten banking days would have been April 23, 2013.

So, at the earliest, the Debtor was in default of the Contract as early as April 14 and no later than April 23. Although the Court is bound to accept the state court’s final judgment as to the amount of damages, the Court has exclusive jurisdiction over whether a debt is nondischargeable, and must therefore question how damages incurred after the April 14 default were proximately caused by any actual representations of the Debtor.

Had the Jameses met their burden of proof with respect to all five elements, the Court might have felt the need to apportion the damages proximately caused by the representation based on the evidence, but since the Court concludes that the Jameses failed to meet their burden of proof with respect to the second and third elements of § 523(a)(2)(A), there is no need to apportion. The Court denies judgment under § 523(a)(2)(A) with respect to the representation that the Debtor would close.

The Debtor’s Alleged Representation No. 2 That She Would Comply With the Entirety of the Contract

The Court believes that the same analysis and findings apply to this element. Debtor did make a representation that she would comply with all the terms of the Contract; the representation was not false or made with reckless disregard for the truth at the time it was made based on her credible testimony; she did not intend to deliberately deceive the Jameses; the Jameses justifiably relied on the representation she would comply; not all the damages were proximately caused by the reliance, but the Court need not apportion which damages were caused by the reliance since the Jameses did not meet their burden of proof on all five elements with respect to this representation.

The Debtor’s Alleged Representation No. 3 That She Had $999,500 in Cash to Purchase the Property

The first element is whether the Debtor made a representation that she had $999,500 in cash to purchase the Property. The Court finds no credible evidence that the Debtor made a representation to the Jameses that she had $999,500 in cash.

First, the Contract does not contain such a representation. The Contract states in Paragraph 7 that the sale is a cash sale and that the buyer must provide written verification from a depository of funds on deposit and that the purchase price must be paid in certified funds on or before closing. Neither of those clauses constitutes a representation that the Debtor had $999,500 in cash. The Jameses allege that she told Strong she had a large estate or fund, but that is the subject of a separate alleged misrepresentation and not a representation that she had $999,500 in cash when she signed the Contract. There is no other evidence that the Debtor herself or through Knowles or otherwise represented that she had $999,500 in cash.

Moreover, it is generally accepted that buyers may choose the cash sale option when buying real estate even though they intend to secure outside financing. The choice of the cash sale option simply means that the buyer does not have the out of a financing contingency. Cash buyers cannot be said to represent, at the moment of signing the contract, that they have cash equal to the purchase price. Instead, in those transactions, as is the case here, the buyers may be seeking outside financing, some type of gift, or another means of obtaining cash by the closing date. The closing date is the date that the buyer must have the funds available to close under the contract. The Contract at issue does not contain a provision that the Debtor must have cash on the date of signing, and establishes the closing date as the date she must pay the balance of the purchase price.

Furthermore, construing the Debtor’s signature on the Contract as a representation that she had $999,500 in cash would render superfluous the proof of funds provision in the Contract.

The proof of funds provision requires the Debtor to provide proof of funds for the contract price within five days of signing the Contract.

Alternatively, even assuming the Debtor represented that she had $999,500 in cash by signing the Contract, for the reasons already discussed, the Court does not find that the Debtor’s representation that she could procure the funds was false or was intended to deceive the Jameses.

Likewise, the Court cannot find justifiable reliance or proximate cause on the part of the Jameses. The purpose of the proof of funds provision was to ensure the Debtor had sufficient cash to close. Thus, the Jameses were not entitled to rely on the Contract as a representation that the Debtor had sufficient funds – that was the purpose of the proof of funds provision.

In conclusion, as to the representation that the Debtor had $999,500 in cash, the Jameses have failed to show that the Debtor made a representation, that the Jameses justifiably relied on the representation, and that the alleged representation was the proximate cause of their loss. The Court denies judgment under § 523(a)(2)(A) with respect to the alleged representation that the Debtor had $999,500 in cash.

The Debtor’s Alleged Representation No. 4: That the Debtor Would Close on the Dates in the Contract

The Court incorporates its findings with respect to the previous representations, and finds as follows. First, by signing the Contract, the Debtor represented that she would close. Second, the Debtor’s representation was not false or made with reckless disregard for the truth, because she reasonably relied on Knowles to provide the financing to close. Third, the Debtor did not make the representation with the deliberate intent to deceive the Jameses. In particular, the Debtor credibly testified that she believed based on what Strong told her that the Contract would be void if she did not pay the earnest money. Fourth, the Jameses justifiably relied on the Debtor’s representation in signing the Contract that she would close. But fifth, the intervening defaults for the failure to provide verification from a depository of funds and payment of the earnest money mean that the Jameses’ damages were not all proximately caused by the representation. The Court therefore need not apportion the damages caused by the representation since the Jameses failed to meet their burden of proof with respect to all five elements.

Debtor’s Alleged Representation No. 5: That She Would Take Possession of the Property on May 3, 2013

The Court incorporates its findings from the previous representations, and finds that the Jameses have failed to meet their burden of proof with respect to all but the reliance element.

Debtor’s Alleged Representation No. 6: That She Was Approved by the Letter for $999,500

The Letter representation is somewhat different from the other alleged representations. It was obviously (1) a representation; (2) that was false; and (3) that was deliberately made with the purpose of deceiving the Jameses. This representation could be a representation under §523(a)(2)(A) or a representation regarding financial condition under § 523(a)(2)(B). But since the first three elements of both sections are essentially the same, the Court will address those elements first before deciding which Count this representation falls under (and therefore which standard of reliance applies.) The first issue with this allegation is whether the Debtor made the representation or whether the representation should be imputed to her.

The Court does not believe that the Debtor was responsible for creating and sending the Letter. She testified credibly that she had no knowledge of the Letter at the time it was provided to Strong, who provided it to the Jameses through their real estate agent. Her testimony was buttressed by Strong’s and by Knowles.’ Strong ultimately admitted he had no knowledge of who sent him the Letter. Knowles testified he created the Letter with Strong’s knowledge and that the Debtor had no knowledge of the Letter. The Court concludes that the Debtor herself did not represent through the Letter that she had the funds to close the loan. But that leaves the question about whether the misrepresentation evidenced by the Letter should be imputed to her.

To recapitulate, to impute Knowles’ or Strong’s misrepresentation to the Debtor, the Court must find both agency and actual or constructive knowledge of the fraud. Having found agency on the part of Knowles and limited agency on the part of Strong, the Court turns to the Debtor’s actual or constructive knowledge of the fraud.

The Court finds that the evidence does not show that the Debtor had actual or constructive knowledge of Knowles’ fraud through the Letter. The Court again believes her credible testimony that she was in good faith and based on a long-time relationship of trust and love reasonably relying on her boyfriend to procure the funding for the purchase of the Jameses’ home.

But what about Strong? Knowles testified that Strong assisted him in creating the fraudulent Letter. The Court tends to believe that was true, notwithstanding Knowles’ otherwise untrustworthy nature, given that Knowles appeared to lack the knowledge or sophistication for creating such a letter. (Knowles admittedly had computer and internet sophistication, but there was no evidence he was financially sophisticated.) But whether Knowles acting alone or Strong and Knowles together created the Letter, the bottom line is that there is no evidence the Debtor had actual or constructive knowledge of the Letter. The third element is thus not met.

With respect to the fourth element, justifiable reliance, the Court again is faced with a difficult question. The Jameses each credibly testified that they had no reason to question the validity of the Letter as providing proof that the Debtor had funds sufficient to close the contract, which they assert is what caused them to accept her offer and to sign the Contract to begin with.

Although the Court does not doubt their sincere belief, the Court must still question whether their belief was, in some respects, as naive and unrealistic as the Debtor’s was.

First, the Letter is not, as the Court has already mentioned, a letter from a depository institution of proof of available funds as the Contract required. It is also not from a standard or recognized funder of residential mortgages. Second, it was not accompanied with the earnest money deposit. Third, it bears no logo or professional letterhead such as would typically be seen of letters of commitment or letters of intent from reputable and well-known funding entities.

Fourth, the Letter does not contain any of the standard terms a reasonable person would expect to see, such as conditions, interest rates, date of closing, expiration, requirements of title, a deed of trust or mortgage, etc. Fifth, assuming the Debtor had represented to the Jameses that she had a fund or estate to finance the purchase, the Letter does not even state it is written on behalf of a fund or estate. Finally, the last sentence discussing terms of a loan are expressly contradictory to the nature of a cash deal.

In short, the fact that the Letter did not comply with the requirements of the Contract and contained no objective indicia of a proof of funds letter should have raised concerns not only from the real estate agents but from a seller who also happened to be an experienced lawyer.

That being said, it is not difficult for the Court to believe that real estate agents on both sides – with motivation to close a deal with a lucrative commission – did not have the incentive to fly-speck the Letter or to raise concerns about its patent red flags. That being said, it is also not difficult for the Court to believe that the Jameses – who were separated, trying to down-size, and who faced the ongoing upkeep of a very expensive home – likewise had no incentive to flyspeck the Letter or raise concerns. The Property had been on the market for several months, and the Jameses were presumably as anxious, as are all home sellers, to find a buyer and to close.

So, given that the standard under § 523(a)(2)(A) is “justifiable” and not reasonable, as under § (a)(2)(B), to the extent the Letter constitutes a representation under § (a)(2)(A), the Court concludes that the Jameses’ reliance on the Letter was justifiable.

With respect to the fifth element, proximate cause, the Court again incorporates its findings that not all of the damages were proximately caused by the representation but that since the Jameses did not meet their burden of proof with respect to all of the elements, the Court need not apportion the damages.

Alleged Representation No. 7: That The Debtor had $989,500 available from Banner Bank to purchase the Property

The evidence is undisputed that an image of a check from Banner Bank in the amount of $989,500 was sent to the Jameses through their agent by someone at Chartwell Realty. The Court finds and concludes that the Check was a representation; that the representation was false; and that the representation was made with intent to deceive. The issues with this representation are whether the Debtor made the representation or whether it should be imputed to her; whether the Jameses relied on it; and whether the representation proximately caused their loss.

The Court finds based on the credible testimony of the Debtor that she did not create or send the Banner Bank check. The Court’s finding is supported by Strong’s testimony that at this point in the transaction he was dealing with Knowles and had no personal knowledge that the Debtor sent the check, and Knowles’ testimony that he sent the check to Strong. With respect to whether knowledge of the false representation in the form of the check should be imputed to the Debtor either through Knowles or Strong, the Court incorporates its earlier findings. Knowles was in a joint venture with the Debtor to buy the home, but there is no evidence that she knew or had constructive knowledge of the false check either created by or found on the internet by Knowles, or that he was sending it to Strong and through Strong to the Jameses through their agent.

Strong testified he recognized immediately that the check was false since it had no routing numbers. He (or someone at Chartwell Realty acting on his behalf) therefore did not send it to the Jameses with the intent of deceiving them. Thus the Court concludes that the misrepresentation and intent to deceive of the false check should not be imputed to the Debtor.

More importantly, both the Jameses credibly testified that they immediately recognized the check as being false. It therefore cannot be said that they justifiably relied on the false check or that any of their damages were caused by it.

Alleged Representation No. 8: That the Debtor was married to Knowles

The first element is whether the Debtor made a representation that she was married. The evidence shows that the Debtor did not represent that she was married. The Court believes the Debtor’s credible testimony that she did not represent to Strong that she was married. More importantly, the Contract states on page 1 that “This contract is made between: PRINT Names and indicate marital status.” The Buyer’s name on the Contract is the Debtor’s, not the Debtor as a married person. There is likewise no other evidence that the Debtor represented to the Jameses that she was married.

Strong testified that the Debtor and Knowles represented to him that they were married, but the Court cannot believe that was true; if this experienced agent had believed so, he would have made sure that the Contract stated “Sharon West, a married person” – in the same way he testified that if he had known the purchase was for a B&B he would have made sure he checked the “other” box on his buyer’s agency form (indicating he was not merely representing her for the purchase of residential property).

More importantly, assuming the Debtor misrepresented to Strong her marital status, there is no evidence that the Jameses knew the Debtor was married or even relied on that representation. Plus, there is no evidence that the fact she was unmarried was the proximate cause of any of the Jameses’ damages.

Alleged Representation No. 9: That Debtor had a Large Estate or Fund Sufficient to Pay the Purchase Price

The final alleged representation is that the Debtor represented that she had a large estate or fund sufficient to pay for the purchase price of the Jameses’ home. The first element is whether the Debtor made this representation.

The Court believes the Debtor’s credible testimony that she did not represent she had a fund or estate worth $1.0 million. The next issue is whether Knowles or Strong as her agent made the representation such that the representation should be imputed to her. The Court need not reach that issue, however, since there is no evidence that anyone: (1) told the Jameses that the Debtor had access to $1.0 million through an estate or fund or (2) that the Jameses relied on that representation in accepting her offer to buy the Property. Rather, the Jameses’ testimony was that they relied on the Letter in accepting the Debtor’s offer, not on any representation of the Debtor that she had $1.0 million from an estate or fund.

Conclusion as to Count I

In sum, assuming all nine representations fall within § 523(a)(2)(A), the Court concludes that the Jameses have failed to meet their burden of proving by a preponderance of the evidence that their debt should be nondischargeable under § 523(a)(2)A) based on any of the nine alleged representations. Judgment will be entered against the Jameses on Count I of their complaint.

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) 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, Nashville, Fairfield, Cisne and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!