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The mortgage industry is under tremendous scrutiny from the Attorney General and the States’ Attorney Generals, as well as the new Consumer Financial Protection Bureau which just announced it will be drafting rules to regulate all servicers. In response, most in the industry are stepping up and being more transparent in their communications with borrowers. A lesser thought of, but important way to do this is in Notices of Default in Chapter 13 bankruptcies.
In Chapter 13, motions for relief from stay are commonly resolved by a provisional order for relief. Essentially, the debtor agrees to repay a post-petition default in a manner and by a date certain, and simultaneously maintain current payments to a secured creditor. If the debtor defaults on any of the terms, the stay is automatically lifted should the debtor fail to cure the default within a certain period of time after a Notice of Default is sent.
In some jurisdictions, it is acceptable to give a lump sum for the default in the Notice with no other details. Going forward, the best practice will be for lenders and servicers to provide their attorneys with a detailed payment history showing the default. Attorneys, in turn, should then provide detailed information in the Notice as to the dates, amounts and nature of the default.
If the default is not cured, and the court requires an Affidavit of Default or Notice of Default to be filed to spring the relief from stay, the best practice is to include the same detail as in the Notice.
This detail in the Notice will show good faith towards the borrower and alleviate any challenge to the Notice for lack of detail and disclosure, while putting the lender or servicer in a good light.
If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 and .
Recent holdings in the Southern Bankruptcy District of Florida[1] and elsewhere demonstrate that debtors are seeking to expand their ability to strip off junior liens on real property in a Chapter 13 reorganization after having received a prior Chapter 7 discharge, and the Courts are beginning to step out of the way.
Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005, most courts have ruled that debtors in so-called “Chapter 20″ cases (in which a debtor who has received a discharge in a Chapter 7 bankruptcy files a subsequent Chapter 13 petition for relief within the ensuing 4 years) cannot strip off a wholly undersecured junior lien on real property. BAPCPA was enacted in part to reform the eligibility for personal bankruptcy and prevent abuse of the bankruptcy process.
“Lien stripping” is a process authorized by the Bankruptcy Code that permits a debtor to extinguish a junior lien on real property when the equity in the property is less than the amount of the first mortgage. In brief, because there is no equity to secure the junior lien, the Code permits the Court to extinguish the lien upon the debtor receiving a discharge through the bankruptcy process, leaving the junior lien holder with only an unsecured claim. Thus, the second mortgage holder must aggressively defend an attempted lien strip, or it risks a near complete loss.
“Chapter 20″ is a term for a debtor who has already availed himself of relief under Chapter 7, which allows him to liquidate his assets to satisfy his debts to the greatest extent possible, upon which he receives a discharge canceling his personal liability for his debts. The debtor then files another bankruptcy petition under Chapter 13, which allows him to reorganize and repay his remaining debts through a 3- or 5-year plan. However, under the revisions enacted in BAPCPA, if the debtor files a Chapter 13 within four years of receiving a Chapter 7 discharge, he/she is not eligible for another discharge.
Courts have not allowed Chapter 20 debtors to strip off junior liens because such a debtor is ineligible for a discharge in the Chapter 13 case. Previously, Florida Bankruptcy Courts have held that the plan confirmation requirements of the Bankruptcy Code do not allow confirmation of any plan that does not provide for secured claimants to retain their lien until the debtor receives a discharge. This requirement was applied to attempts to strip off junior liens in Chapter 20 cases because if a secured claimant must retain its lien through discharge, and the debtor was ineligible, then the secured claimant cannot be stripped and must retain its lien and survive the completion of the Chapter 13 plan.
However, recent decisions in several other circuits outside of Florida cast doubt on this precedent. These decisions hold that there is no specific requirement in the Bankruptcy Code conditioning the right to lien strip on the debtor’s eligibility for discharge. Additionally, as argued in In re Vigo in the Southern District of Florida, where a debtor’s personal liability on an undersecured junior mortgage has been discharged in a Chapter 7, eligibility for discharge in the subsequent Chapter 13 would place a redundant and unnecessary requirement on the debtor’s ability to lien strip.
Although the Courts appear more willing to entertain these novel arguments for lien stripping in Chapter 20 cases, In re Vigo is the first case in the Southern District of Florida that we are aware of where the Court has allowed such a lien strip. It is not clear whether the granting of such a motion was due to the absence of opposition from the secured creditor, or because the Court agreed with the novel argument presented, but it remains as important as ever that junior lien holders continue to assert their rights and oppose such attempts. Recent prior cases in the Southern District of Florida have held the opposite of Vigo, that ineligibility for discharge is a threshold consideration that precludes avoidance of wholly unsecured junior liens. Under this and other similar decisions, the wholly unsecured junior lien holder retains its lien until the debtor pays off the underlying debt pursuant to nonbankruptcy law, a much better result for the secured creditor.
Secured creditors’ rights are being threatened by this expansion of a debtor’s rights. The economic realities of underwater properties and wholly unsecured junior mortgages and equity lines are being exacerbated by unopposed efforts of debtors’ attorneys making novel arguments to extinguish secured debt. The vigilant secured creditor can stem this debtors’ rights boom by relying on precedent and challenging the Chapter 20 debtor’s lien stripping efforts.
If you would like more information on Chapter 20 bankruptcies, the lien-stripping process and your rights as a secured creditor under the Bankruptcy Code, please contact Mr. Mark E. Steiner, Esq. Mark is an associate who practices in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA located in the Ft. Lauderdale, FL office. He can be reached at 954.740.5276 and .
[1] In re Vigo, Case No. 11-32092-EPK (Bankr. S.D.Fla. January 18, 2012)
There has been a new and important development in bankruptcies in the Southern District of Florida on the subject of objections to creditors’ Proofs of Claims. Responding to what he perceived to be a pervasive practice among debtors’ attorneys, last week Judge John K. Olson of the Fort Lauderdale Division, issued an order in which he imposed sanctions on several attorneys representing individual bankruptcy debtors for filing and prosecuting unwarranted or overzealous claim objections. In summary, the Court found that objections filed to dispute timely filed creditors’ proofs of claims which matched or nearly matched the amount of debts listed on the debtor’s schedules were in violation of Rule 9011(b) of the Federal Rules of Bankruptcy Procedure.
In most of the cases cited by the Court in its decision, the claims were scheduled by the debtors as non-contingent, liquidated and undisputed in amounts either identical or substantially identical to the filed Proofs of Claim. The Court held that the objections to claims of creditors which sought to strike claims in their entirety, most often based on “lack of documentation to support claim,” or “Debtor disputes amount owed,” constituted objective bad faith by the debtors’ attorneys, “in a manner designed to avoid reasonable review of the claims register” as required by Local Rule. Importantly, the Court states unequivocally that objections based on “lack of documentation” or “disputed amount owed” are not grounds to strike and disallow a claim, as the exclusive grounds for doing so are enumerated in section 502(b) of the Bankruptcy Code.
Going forward, this ruling will have a great effect on the Chapter 13 bankruptcy practice in the Southern District of Florida. We believe that this ruling highlights the importance of filing Proofs of Claim in individual Chapter 13 cases, including principal balance proofs of claims where the debtor is current in his/her payments, and cases where the property is surrendered in the debtor’s Chapter 13 Plan. There is no basis in section 502(b) to disallow such claims, and the filing of such a claim will help to protect your interests regardless of the treatment of the property in the Chapter 13 Plan. We also believe that this ruling will reduce the number of frivolous claim objections we face on a regular basis. It further provides ample grounds to seek reimbursement of attorneys’ fees when forced to defend a frivolous claim objection, and we therefore recommend including a prayer for attorneys’ fees in each litigated claim objection. In the case where the same debtor’s attorney repeatedly goes forward with claim objections, like those described by the Court which we believe will be rare going forward in light of this ruling, we can seek more serious sanctions.
If you have any questions on this matter, please contact Damian A. Valladares, Esq. Damian is an associate focused on bankruptcy services in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA based in the Ft. Lauderdale office. He can be reached at 954.740.5234 or .
Recently debtors in chapter 13 cases in the Western District of Michigan have reported receiving phone calls from a person claiming to represent the trustee. The person then instructs the debtor to make trustee payments to a different P.O. Box which is not the correct payment address. The person also requests personal information from the debtors such as social security numbers. The court has requested that all debtors’ counsel notify their clients that the trustee has not changed payment procedures. The United States Trustee has also advised that if a debtor receives such a call to notify the office of the United States Trustee at (616) 456-2002.
This raises several potential problems in chapter 13 cases. If the debtor makes a payment to the false address these payments will not be applied to the debtor’s chapter 13 plan. This may create a delinquency with the trustee and stop disbursements to creditors receiving payments from the 13 trustee. In turn, the delinquency may cause creditors to file for relief from stay due to the lack of payments. The trustee may also even file to dismiss the chapter 13 case. Typically, trustees are slow to file motions to dismiss cases when payments are not made. The scam may lend trustees in Michigan to become more cautious which would create undue delay for creditors waiting for a case to dismiss for lack of payments.
If you have any questions, please contact Mr. David Yunghans, Esq. David is an associate in the bankruptcy group located in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. You can reach him at 513.723-2211 or .
Hope was extinguished for creditors who would seek to overturn illegal provisions in confirmed Chapter 13 plans by the Supreme Court’s recent decision in Espinosa.[1] There, the Court upheld an order confirming a plan that stated all student loans would be discharged upon the debtor’s Chapter 13 discharge even though the provision was illegal – student loans are nondischargeable under bankruptcy law.
The best defense to illegal provisions is to timely review and object to Chapter 13 plans so that creditors do not lose rights upon confirmation that they would otherwise enjoy under the Bankruptcy Code. Confirmation orders may still be revoked for fraud under the Bankruptcy Code.[2] However, such cases are extremely rare. It is important to know that inserting illegal provisions in plans is not considered fraud under the law, so creditors cannot rely on this Code section as grounds to undo confirmation orders.
But if a plan is confirmed with an illegal provision, Espinosa does not entirely shut the door on challenging the confirmation order. That case honored the importance of the finality of orders more than the undoing of illegal provisions in Chapter 13 plans. However, a fundamental underpinning of the decision was the fact that the creditor did have notice of the bankruptcy and plan in time to object, but failed to do so.
If a creditor’s due process rights are violated, the confirmation order is void, at least as to that creditor’s treatment.[3] Due process requires that the creditor get notice in time to object. If a creditor is omitted from the service list, or an obsolete or incorrect address is scheduled so that the creditor does not receive actual notice of the bankruptcy in time to object to confirmation, then it has a due process argument to challenge the confirmation order.
Many districts now have model plans that debtors are required to use, but allow special provisions or additional treatment than what the model plan provides. Often, these model plans incorporate the Bankruptcy Code’s requirements for confirmation. An example is the lien retention provision – a creditor has the right to retain its lien until the earlier of a Chapter 13 discharge or payment in full under non-bankruptcy law.[4] The Erdmann court found that when a debtor tried to override this provision in a model plan, by inserting a special provision that a creditor’s lien was void upon confirmation, the attempt failed, and the model plan language and the Bankruptcy Code prevailed.[5] Accordingly, the lien was not avoided at confirmation as the plan had provided. While it is important to note that in the Erdmann case, the creditor did not receive notice of the plan in time to object, rendering the confirmation order void as to that creditor’s treatment, this argument may be successful on its own. If a special plan provision conflicts with model plan language that echoes the Bankruptcy Code, the model plan language should prevail.
Prompt and diligent review of Chapter 13 plans is the best and most dependable protection against any negative plan treatment. However, if a plan is confirmed with an illegal provision, your bankruptcy attorney may be able to mount a challenge to the order if the facts are favorable, even after the Espinosa decision.
If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312.253.9614 or via email at .
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[1] United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367(U.S. 2010)
[2] 11 U.S.C. § 1330(a)
[3] Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)
[4] 11 U.S.C. § 1325(a)(5)(B)(i)(I)
[5] Erdmann v. Charter One Bank (In re Erdmann), infra.
