Recent Entries

The CFPB changes the rules…again

Profile Imageby Stephen Franks, Attorney

In an effort to level the playing field for consumers, the CFPB released a proposal for expanded foreclosure protections on November 20, 2014. The following are a summary of the topics the CFPB’s proposed rule changes cover:

- Loss mitigation options made available for borrowers who have brought their loans current and already utilized loss mitigation options
- Expanded protections for successor homeowners
- Servicers must promptly notify borrowers when a loss mitigation application is complete
- Protection for borrowers during service transfer if engaged in the loss  mitigation process
- Clarity for protecting a borrower from foreclosure sale while in loss mitigation
- Provide borrowers in bankruptcy with periodic statements containing bankruptcy-tailored information

The proposals are open for public comment for the next 90 days.  For more information, please visit the CFPB’s website.

Does the Bankruptcy Court have the Authority to Surcharge Exemptions?

EbeckBy Keri P. Ebeck, Attorney

Law v. Siegel: The facts of the case are that Mr. Law (Debtor) filed for Chapter 7 bankruptcy protection. He valued his home in California at $363,348 and claimed a $75,000 homestead exemption, as well as listed two mortgage liens on the property in question: (1) to Washington Mutual Bank  for $147,156.52; and (2) to Lin’s Mortgage & Associates for $156,929.04. Due to the alleged amount of the mortgages on Mr. Law’s property and the claimed homestead exemption, there appeared to be no equity for the Bankruptcy Estate. It was determined through an adversary brought by the Chapter 7 Trustee that the alleged second mortgage to Lin’s Mortgage & Associates was fraudulent and did not exist except in the mind of Mr. Law. The adversary litigation to determine such was extensive, lengthy and cost approximately $500,000 in attorney fees for the Trustee. The bankruptcy court ruled that the debtor’s homestead exemption of $75,000 could be surcharged, making those funds available to pay a portion of the Trustee’s legal fees incurred.

The legal issue in question and up on a Writ of Certiorari (meaning to ask the Court to review the lower courts decision) to the U.S. Supreme Court was the surcharge of legal fees by the Bankruptcy Court, and its direct contradiction of a specific provision in the Bankruptcy Code, specifically §522(k). Under §522(k), homestead exemptions are not liable for administrative expenses of the bankruptcy estate and cannot be used for that purpose. As the legal fees incurred by the Chapter 7 Trustee are administrative expenses under §522, the Bankruptcy Court did not have the authority under §105(a) to surcharge the debtor’s homestead exemption as it directly contravened §522(k). Under §105(a), the bankruptcy court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of bankruptcy code. The question was whether §105(a) as previously explained allowed the Court to “surcharge” (meaning to charge the debtor’s homestead exemption for the trustee’s incurred attorney fees.) The Supreme Court stated that “the Bankruptcy Court thus violated §522′s express terms when it ordered that the $75,000 protected by Law’s homestead exemption be made available to pay Siegel’s attorney’s fees, an administrative expense. In doing so, the court exceeded the limits of its authority under §105(a) and its inherent powers.” [1]

The Supreme Court went on to state that its decision did not prevent the Chapter 7 Trustee or Bankruptcy Court from seeking other sanctions imposable against the debtor, such as denial of discharge, sanctions for bad-faith litigation and reimbursement of attorney fees as a result of the debtor’s fraud upon the Court in this matter. Additionally, because any sanctions awarded against the debtor would be post-petition, it would not be subject to the debtor’s discharge (should he receive one). Furthermore, the Court acknowledged that “fraudulent conduct in a bankruptcy case may also subject a debtor to criminal prosecution under 18 U.S.C. §152, which carries a maximum penalty of five years’ imprisonment.” [2]

Although under §522(b), the debtor’s homestead exemption is his, and his only to claim, “a debtor need not invoke an exemption to which the statute entitles him, but if he does, the court may not refuse to honor the exemption absent a valid statutory basis.” [3] In this case, the Bankruptcy Court did not have a valid statutory basis to impair the exemption; rather it directly contradicted another statute under the Bankruptcy Code. The Bankruptcy Court could not order the exemption to pay the Trustee’s fees, but did provide the Bankruptcy Estate and Trustee with other options within the Court’s discretion to sanction the debtor’s fraudulent conduct in this case. Overall, the Supreme Court case ruling places limitations on §105(a) and that bankruptcy courts should not be expanding this section, especially when it specifically contradicts another section under the Bankruptcy Code.

 

[1] Law v. Siegal, 134 S.Ct. 1188 (2014).
[2] Id.
[3] Id.

Trouble in [Gambler's] Paradise

Profile ImageBy Karina Velter, Attorney

Atlantic City is in trouble, with three casinos (Showboat, Revel and Trump Plaza) recently closing in September, over 8,000 people will be out of jobs. The city that began the year with twelve casinos is down to eight.  (Atlantic Club closed its doors in January 2014).

The Trump Taj Mahal may be next. The 24-year-old Boardwalk casino could be headed for a Chapter 11 reorganization within days. The casino has broken certain loan covenants and without a workout with its creditors, may be soon to join their sister casinos in the unemployment line. The Taj is the second largest casino, employing approximately 5,000 people until recently. The closing of this casino will cause Atlantic City’s unemployment rate to soar through the roof.

Analysts attribute the closures to a combination of several factors. Due to the increasing competition from casinos in neighboring states (Pennsylvania, New York, Connecticut and Maryland) gamblers no longer need to travel to Atlantic City. Additionally, there is growing poverty in the area. Atlantic City has a 13% unemployment rate (more than twice the national rate), which is sure to increase in light of recent events.

Casino analysts posit the closings are actually a positive thing. They hypothesize that with less competition the remaining casinos will be more profitable and create more revenue for Atlantic City.

However, in the immediate future, the closing of these casinos will have a tremendous negative impact on the local businesses in Atlantic City as well as the surrounding towns. The significant decline in traffic will affect the retail stores and local restaurants in the area as well.

With the escalating unemployment rate coupled with the potentially doomed local businesses, there is a strong likelihood that New Jersey foreclosures and bankruptcy filings will be on the rise in the not too distant future.

U.S. Bankruptcy Court for the Eastern District of PA Welcomes Newly Appointed Honorable Judge Ashely Chan

By Keri P. Ebeck, Esq.

In June 2014, the United States Bankruptcy Court for the Eastern District of Pennsylvania nominated Ashely Chan as a United States Bankruptcy Judge to succeed the retiring Honorable Bruce I. Fox. Judge Chan has been formally nominated, appointed and confirmed.

Judge Chan started her career as a law clerk for the Honorable Gloria M. Burns of the Unites States Bankruptcy Court of New Jersey and has concentrated her practice primarily in bankruptcy since 1996. Prior to being appointed and sworn in, Judge Chan was an attorney with the firm of Morgan Lewis & Bockius and a shareholder with the firm of Hangley Aronchick, where she co-chaired its bankruptcy practice.

 

Reaffirmation and the Advantages for Credit Unions

By Joe McCandlish, Attorney

For many creditors, when a debtor files a Chapter 7 bankruptcy, getting the debtor to sign and return a reaffirmation agreement is only the first challenge. Depending on the debtor’s financial situation, a hearing may be held, at which the debtor would need to prove he or she can make the payments. In some situations, the court can disallow the reaffirmation agreement.

Credit unions have an advantage – the debtor’s budget should not be a consideration. Although 11 U.S.C. § 524(m)(1) requires courts to review reaffirmation agreements “if the debtor’s monthly income less the debtor’s monthly expenses…is less than the scheduled payments on the reaffirmed debt”, that provision “does not apply to reaffirmation agreements when the creditor is a credit union”.  11 U.S.C. § 524(m)(2). So, if a debtor or debtor’s attorney explains that the debtor’s budget will not allow the debtor to reaffirm, it may be worthwhile to have your credit union’s attorney get involved and explain the applicable law accordingly.

If your credit union’s uniform procedure is to deny a debtor’s membership benefits if a debtor causes a loss to the credit union, this may also be a good time for the credit union’s attorney to explain the additional advantage of reaffirming the debt – that the debtor may enjoy the benefits of being a member of the credit union if the member’s debt is reaffirmed and paid.

For additional questions regarding a credit union’s rights when a member goes bankrupt, feel free to call Joe McCandlish at (614) 801-2619.