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Amendments to Pennsylvania’s Law on Powers of Attorney

By Keri P. Ebeck, Attorney

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On July 2, 2014, Governor Tom Corbett signed into law as part of Act 95 of 2014, House Bill 1429, which provides for the amendments of Title 20 Chapter 56 (20 Pa. C.S. §§5601-5612). Title 20, Chapter 56 provides for the laws that govern all power of attorneys (hereinafter “POA”) used in financial and property transactions.

The amendments of Title 20 specifically change the law involving third party acceptance, reliance and civil liability of POA(s). This amendment was established to legislatively overturn a prior Pennsylvania Supreme Court case of Commonwealth v. Vine, 9 A. 3d 1150 (2010). The Vine case held that a third party is not reasonable to rely upon a power of attorney submitted by an agent where the POA may be defective or void, even in cases where the third party had no knowledge of such.[1]

The amendments of Title 20 were partially enacted to correct the Vine case decision by amending §5608 to state as follows:

5608(c) Genuineness.–A person who in good faith accepts a power of attorney without actual knowledge that a signature or mark of any of the following are not genuine may, without liability, rely upon the genuineness of the signature or mark of:

(1) The principal
(2) A person who signed the power of attorney on behalf of the principal and at the direction of the principal
(3) A witness
(4) A notary public or other person authorized by law to take acknowledgments [2]

By this amendment, a third party may accept in good faith (without specific knowledge) the POA that an agent submits without consequences and civil liability. Additionally, the amendments went on to state in §5608(d) that “A person who in good faith accepts a power of attorney without actual knowledge of any of the following may, without liability, rely upon the power of attorney as if the power of attorney and agent’s authority were genuine, valid and still in effect…”[3] This amendment specifically changed the law in PA, as previously a rejection or refusal of a POA may have resulted in civil liability.  The POA law now states that “A person who is asked to accept a power of attorney may request and, without liability, rely upon without further investigation…(1) an agent’s certification under penalty of perjury; (2) an English translation of the POA; (3) an opinion of counsel as to the POA.”[4]

These amendments to Title 20 directly affect all banks and their employees, who accept POA(s) for their customers on a daily basis to conduct business. The amendments allow for a greater protection from liability for accepting the POA(s) in question. The legislation of Act 95 of 2014 also incorporates the standing Pennsylvania law as part of the Uniform Power of Attorney Act, which is effective and law in fifteen (15) other states.[5]  Should a lender or third party have a question on a particular POA, it is recommended to contact legal counsel for interpretation of the current standing law and amendments recently enacted.

The amendments of Title 20, Section 56; §§ 5601(f), 5608, 5608.1, 5808.2, 5611 and 5611 are effective as of July 2, 2014. All other parts of Act 95 of 2014 are effective as of January 1, 2015.

If you have any questions on this matter, please contact Ms. Keri P. Ebeck, Esq. Keri is an attorney who practices in bankruptcy and is based in the Pittsburgh office. She can be reached at 412.338.7102 and

[1] Commonwealth v. Vine, 9 A. 3d 1150 (2010)
[2] House Bill 1429 (Act 95 of 2014)
[3] Id.
[4] Id.
[5] Important Changes Enacted to Pennsylvania’s Power of Attorney Law, Pepe, Raymond, June 26, 2014;…/Important_Changes_to_Pennsylvania’s_Power_of_ Attorney_Law_Take_Effect_Jan2015


Lien Stripping: Should a debtor’s eligibility for a discharge be a factor?

By Keri P. Ebeck, Attorney

Anyone who practices bankruptcy is familiar with Chapter 7, Chapter 13 and most likely Chapter 11, but what about a Chapter 20? To some, the question is whether a Chapter 20 bankruptcy is part of the bankruptcy code? The answer is – not technically, but a Chapter 20 bankruptcy does exist. A Chapter 20 is when a debtor files a Chapter 7, receives a discharge and then proceeds to file a Chapter 13 in an effort to strip a wholly unsecured mortgage lien. The question that courts, lawyers and judges are dealing with in many jurisdictions is whether those debtors who are ineligible for a Chapter 13 discharge are able to strip a wholly unsecured mortgage lien?

In a majority of the courts, most jurisdictions are holding that wholly unsecured mortgage liens can be stripped off and treated as unsecured mortgages without the benefit of a Chapter 13 discharge. The courts are grappling with various arguments and issues to determine if debtors are to accomplish such under §1325, 1322 and 506. Pursuant to §1325(a)(5), a holder of a secured claim provided for by the plan shall retain the lien securing such claim until the earlier of “the payment of the underlying debt determined under non-bankruptcy law; or discharge under section 1328.”[1]  On its face, §1325 appears to deal with secured claims only – the question is, what about wholly unsecured mortgage claims? Additionally, §1322 (b)(2) states that “the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”[2]  A majority of the courts are relying upon §506(d) to determine the value of the collateral in question. If under 506(d) the value determined leaves a mortgage lien completely unsecured, the court will then look to §1322(b)(2), which allows rights of unsecured creditors to be modified.[3]  By valuing the collateral at zero, the debtors are able to modify the rights of the creditor under §1322 and strip the wholly unsecured mortgage lien. The argument is that under §1325(a)(5), the holder of a secured lien retains its lien until discharge, but if the debtor is not eligible for a discharge, there can be no effective lien strip. The parties in In Re Davis argued, to which the Court agreed with, that “Congress did not intend to alter the ability of the bankruptcy courts to enter lien-stripping orders in Chapter 13 cases. And this is so regardless of the availability of a discharge. A discharge, the debtors say, extinguishes only in personam liability…Because the debtors here have already discharged their in personam liability in the prior Chapter 7 proceedings, they have no need for a discharge with respect to the liens.”[4]   Once the lien strip order becomes effective and the plan is confirmed and completed, a discharge is not needed to strip the lien. The lien becomes stripped upon plan confirmation and completion.

Of the courts that dissent and do not allow Chapter 20 lien strips, view §1325 as a protection from the Chapter 20 case, by stating in the section itself that a secured creditor retains its lien until discharge. The term “allowed secured claim” in Section 1325 (a)(5) is not defined by, or predicated on, an application of Section 506(a)… “Section 506(a) provides for the judicial valuation of an allowed secured claim, without altering the secured status of a creditor.”[5]  The other argument is that Chapter 20 lien strips can be viewed as an end run around the Dewsnup case which held that a mortgage lien (secured or wholly unsecured) cannot be stripped in a Chapter 7.[6]  But those who argue against this believe that if Congress had intended not to continue allowing lien strips in a Chapter 13 after a Chapter 7 discharge, they would have specifically “fixed” the problem with the BAPCPA Amendments of 2005.

As it stands now, more and more jurisdictions are continuing to follow Dewsnup and not allow Chapter 7 lien strips, but at the same time, allowing the debtor to proceed and file a Chapter 13 (i.e. Chapter 20 case) and ultimately strip the mortgage lien without a discharge of the debtor.

If a creditor reviews a plan with a lien strip or the creditor receives an adversary to strip a lien, immediate review of the jurisdiction and law is needed to determine what rights the creditor may have.

Keri’s bio:

[1] 11 U.S.C. §1325(a)(5)(B)(i)
[2] 11 U.S.C.§1322(b)(2)
[3] In Re Davis, 716 F.3d. 331 at 335
[4] In Re Davis,  at 337. In Re Johnson, 501 U.S. at 84.
[5] In Re Davis, at 340 (dissent) [6] Dewsnup v. Timm, 502 U.S. 410

Bankruptcy Filing Trends in the Northern District of Ohio

by Stephen R. Franks, Attorney

It’s no secret…bankruptcy filings have been on the decline over the past few years.  Debtor’s attorneys are scrambling to make ends meet.  With fewer filings, there is less revenue to go around.  The shortage of filings is forcing debtor’s attorneys to accept questionable or bad cases for filing.  Normally, these attorneys would pass on a bad case and the debtor might not normally file or would then file a pro-se case.  Pro-se bankruptcy filings have an extremely small chance of success, so the cases would ultimately be dismissed.  As a result of the decreased filings, we are actually seeing that many cases are having significant delays in obtaining a Chapter 7 discharge or Chapter 13 confirmation order which significantly impacts a creditor’s rights or income stream.

Chapter 7 Trustees are also feeling the pinch from lower filings.  Chapter 7 Trustees make their money through the administration of cases.  For each case assigned, the Trustee receives a referral fee.  With less cases being filed, the Trustees are receiving less referral fees which is forcing trustees to more aggressively seek debtor assets and property of the estate.  However, Chapter 7 Trustees in Ohio have received another blow to their income stream when Ohio’s homestead exemption was increased a few years ago.  The increased exemption has effectively eliminated any real estate equity the Trustee’s may have traditionally sought to recover.  Trustees are now forced to look for assets in other places than the real estate.  They are actively seeking recovery of assets under $1,000 whereas Trustees would not have bothered with such small amounts historically.

So, how are things looking for 2014?  In 2010, the total bankruptcy filings for the Northern District of Ohio were 38,119.  Filings have steadily declined over the next three years.  In 2013, only 26,142 total cases were filed in the Northern District of Ohio which is nearly a one-third reduction in filings over the course of the three year period.

Through April, there were 7,584 total cases filed in the Northern District of Ohio.  When projected over the entire year, this only estimates to be 22,752 cases filed for the entire year.  This amount is roughly a 40% decrease since 2010.

There are many theories as to why filings have decreased.  The most likely theory is that creditors are not collecting on debt with the same aggressiveness that they once were.  Part of the reason could be the formation of the CFPB and their implementation of new guidelines that have impacted creditors.  Many creditors are leery to run afoul of the CFPB and face possible enforcement actions.

Regardless of the reason, history has shown that the market will correct itself.  Our economy cannot continue to allow excessive ‘bad’ debt to exist.  Bankruptcy filings will increase at some point.  The real questions, is when?

The Tide Towards Tightening Regulations of Educational Loans

By Monette W. Cope, Junior Partner

Legislators and regulators are proposing remedies to rising defaults on educational loans in the so-called “student loan bubble”.

In an attempt to hold educational institutions partly responsible for defaults, a bill was introduced in the Senate which would impose “risk-sharing payments” on certain institutions that participate in direct federal student loan programs.[1]  Those institutions where 25% or more of the fiscal year’s students borrowed under those programs will be subject to the payments if they have high default rates.  The payments would be from five to twenty percent of the total of the institution’s defaulted loans, including interest and collection costs.  The payments would be waived or reduced if the institution has a “student loan management plan” approved by the Secretary of Education.  To be approved, the plan must contain an analysis of the defaults and an action plan to address them.  It must also include individual financial aid counseling and strategies to reduce defaults and delinquencies.  This would at the very least impose an underwriting responsibility on educational institutions that are usually born by financial institutions.

A pair of bills currently pending would amend the Truth in Lending Act to require private lenders obtain a certification from the school of the student’s enrollment, the cost of attendance, and the difference between the cost of attendance and the student’s financial assistance.[2]  A second set would require the institutions provide the Secretary of Education with data on its student loans and post the data online, including the average amount of the loans, and the percentage of students who have loans and obtained their degrees, and the median earning of graduates for each specific degree.[3]

The Dodd-Frank Act created a student loan ombudsman within the Consumer Financial Protection Bureau (CFPB) to oversee complaints about private student loans. According to the most recent report,[4] the complaints mirror those made in the mortgage industry after the housing collapse. They include violations of the Servicemembers Civil Relief Act, payment processing errors, and inability to modify or refinance the loans.   Most of the complaints are about failed attempts to modify loans.  The CFPB opines that more flexible modification options would improve collections and add to borrowers’ spending power, thereby spurring more mortgage and automobile loans. It cites in approval a joint statement by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System that they “will not criticize financial institutions for engaging in prudent workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in adverse credit classifications or troubled debt restructurings in accordance with accounting requirements.”[5]  The unstated hope is that without these worries, student loan lenders and servicers will be more likely to modify loans.

Finding many of the same issues in student loan servicing as were found in the mortgage servicing industry, the ombudsman suggests a study to determine if regulations recently imposed by RESPA on mortgage servicers could be applied to student loan servicers.  RESPA Regulations that were cited included regulating the transfer of loan servicers, improving borrowers’ access to accurate payoff statements and loan histories, and requiring servicers designate customer representatives who have the authority to address borrowers’ issues.

Likewise, it proposes to study whether some provisions in the Credit CARD Act of 2009 should be applied to servicers.  Specifically mentioned were the timing of statements and disclosure of the amount the borrower would pay if only the minimum payment is made. The ombudsman found the biggest problem, however, was the application of extra payments and underpayments. Because it will result in the most savings to borrowers, the ombudsman believes extra payments should be applied to the loan with the highest interest rate, not divided evenly or pro-rated with other loans.  When an underpayment is made, the ombudsman found that it was often pro-rated between all loans, resulting in late fees on all of a student’s loans. The better practice is to progressively apply it starting with the lowest loan balance to prevent a default and late fees on at least one of the loans, if possible.

The CFPB stated that action must be taken unless student loan lenders and servicers voluntarily make the suggested changes.  This should serve as a warning and policies should be reviewed.  The tide is moving towards more regulation of the student loan industry.


[1]  S.1873 by Sen. Reed, Jack D-RI, currently referred to the Committee on Health, Education, Labor, and Pensions.
[2]  S.133 by Sen. Durbin, Richard D-IL, currently referred to the Committee on Health, Education, Labor, and Pensions and H.R.3612 by Rep. Polis, Jared D-CO-2, currently Referred to House Financial Services.
[3]  S.915 Sen. Wyden, Ron D-OR, currently referred to the Committee on Health, Education, Labor, and Pensions and H.R.1937 by Rep. Hunter, Duncan D. R-CA-50 currently referred to the Subcommittee on Higher Education and Workforce Training.
[4]  October 2013 Annual Report of the CFPB Student Loan Ombudsman
[5]  Citing Banking Agencies Encourage Financial Institutions to Work with Student Loan Borrowers Experiencing Financial Difficulties, available at (July 2013).


Hanging Paragraph of §1325: What Is Not Included?

By Keri P. Ebeck, Attorney

If a debtor purchases a new vehicle and thirty days later files a Chapter 13 bankruptcy, should the debtor get the benefit of the substantial depreciation of the vehicle’s value? No, the addition of the Hanging Paragraph of §1325 was designed to prevent this type of perceived abuse by debtors.

The Hanging Paragraph of §1325 provides that:

For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-days preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle  (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing. §1325(a)(*)

The question stemming from this section of the Bankruptcy Code that is not clear and have Courts grappling with how to handle is: what is included or what is not included in the “purchase money security interest”?  For purposes of this article, it will focus on the popular, negative equity of a vehicle purchase and GAP insurance.

Negative equity exists when a debtor purchases a new vehicle and the dealer agrees to finance the negative equity of the trade-in vehicle as part of the new loan. The problem exists when the debtor turns around and files a Chapter 13 bankruptcy. Should the negative equity of the trade-in vehicle be classified as part of the purchase money security interest? There is no definition of “purchase money security interest” in the Bankruptcy Code; therefore the Courts are in agreement that it requires a look to state law to determine the meaning of the term.  Some states actually include in the state law definition of “cash sales price” that negative equity is included, such as New York, Georgia and California.[1]  For those states that do not explicitly define what is included in the sale, the Courts must review the states’ Uniformed Commercial Code, state law statutes,  and its legislative intent to determine if negative equity is part of the purchase money security interest.  “A purchase-money security interest exists if the collateral is the item purchased and it secures its own price.”[2]  The Court in In Re Mancini, concluded that “the payoff concerns a different vehicle and, usually, a different lender. Nothing in the UCC or its comments leads me to believe that the payment of an antecedent debt, such as negative equity, should be included as part of the creditor’s purchase money security interest.”[3]  In review of most cases, unless the States specifically have included or amended their state law statutes or UCC to include negative equity in the definition of a purchase money security interest, it is not included. “A majority of reported decisions conclude that a loan to payoff “negative equity” is not included in a purchase money security interest in a new car for purposes of the hanging sentence.[4]

The Courts have also looked to the addition available to debtors at the time of the vehicle purchase of GAP Insurance. GAP Insurance is defined as insurance to cover the difference between the vehicle’s value and the amount owed to the creditor.  Like its counter part, negative equity, the Courts once again look to the State specific UCC and statutes to determine if it is included. As GAP insurance was not part of the purchase price as it was “neither mandatory, a component of the loan agreement, nor a value-enhancing add-on”[5] , it is determined in most jurisdictions as not being a part of the purchase money security interest. The Court in In Re Mancini concluded, “Gap insurance is not part of the ‘price’ of the collateral, nor is it part of the value ‘given to enable the debtor to acquire rights in or use of the collateral.’” [6]  Therefore, it is clear that most Courts are making the determination that if it is not specifically authorized under State law, both negative equity and GAP Insurance are not included in the purchase money security interest.

What happens once the Court determines that the negative equity or GAP insurance is not included? Is the entire claim subject to the cramdown or is it only a certain amount? The Courts have adopted two rules on the above issue. The first is known as the “transformation rule”: “if an item of collateral protections to secure not only its own purchase price but also that of other items, the security interest that existed before the ‘add on’ procedures is transformed into non-purchase-money status.”[7]  Therefore, the lien would now be subject to cramdown outside of the purview of the Hanging Paragraph of §1325.  The second rule is known as “dual status”, which by definition states that the existence of the nonpurchase money interest does not defeat or destroy the entire claims’ status under the 910 rule. “A purchase- money security interest in a quantity of goods can remain such ‘to the extent’ it secures the price of the item, even through it may also secure the payment of other articles.”[8]  Most jurisdictions have adopted the “dual status” rule as it is more in line of how the Hanging Paragraph of §1325 was designed to protect creditors against cramdown of their claims. The Court in In Re Johnson concluded that “applying the dual purpose rule is more consistent with congressional intent…”[9]  The Court went on to state that “simply, application of the transformation rule is too severe.”[10]  The all or nothing of the transformation rule leaves little protection for creditors, while the dual status rule implements what Congress had intended with §1325.

While creditors may allow consumers/debtors to finance more than the actual collateral, whether or not it creates a purchase money security interest and how it will be treated in the bankruptcy is really a determination for the Court. Creditors should be aware of such issues, but it should not deter them from lending or exercising their rights in a bankruptcy.


[1] In Re Johnson, 380 B.R. 236
[2] Pristas v. Landaus of Plymouth, Inc., 742 F.2d. 797 (1984)
[3] In Re Mancini, MDPA Case No. 07-02236
[4] In Re Hayes, 376 B.R. 655
[5] In Re Honcoop, 377 B.R. 719
[6] In Re Mancini, MDPA Case No. 07-02236
[7] Pristas v. Landaus of Plymouth, Inc., 742 F.2d. 797 (1984)
[8] Id.
[9] In Re Johnson, 380 B.R. 236
[10] Id.