Trustee Lacks Standing to Assert Legal Malpractice Claims on Behalf of Debtors

The Massachusetts Bankruptcy Court (Panos, J.) dismissed an adversarial proceeding complaint brought against debtor’s counsel which alleged legal malpractice. The trustee alleged that debtor’s counsel committed malpractice and asserted that the legal malpractice claims are assets of the bankruptcy estate. Debtor’s counsel moved to dismiss. After a hearing, the Court granted the motion to dismiss, ruling that the alleged malpractice claims were not property of the bankruptcy estate and that the trustee therefore lacked standing to assert them.

In the adversarial complaint, the trustee alleged that because debtor’s counsel failed to instruct his client to record a declaration of homestead, the debtor was only able to claim a Massachusetts homestead exemption in the amount of $125,000. Had a declaration of homestead been recorded prepetition, the debtor would have been able to claim a $500,000 exemption, which would have immunized him from a judgment obtained by the bankruptcy trustee. The trustee further claimed that by converting the case from a chapter 13 to a chapter 7 bankruptcy rather than having the matter dismissed and re-filed, the debtor missed an opportunity to have additional debt discharged.

In addressing the issue of the homestead claim, the Court ruled that the trustee lacked standing to bring his claim where the claims are not property of the estate but rather post-petition property. The Court noted that Section 541(a)(1) provides that commencing a bankruptcy case “creates an estate [that includes] all legal or equitable interests of the debtor in property as of the commencement of the case." Therefore, until the debtor filed his chapter 13 petition, no purported malpractice had yet accrued where no harm had yet been suffered by the failure to record the declaration of homestead. Accordingly, the claim did not exist until after the estate was created and therefore was post-petition property belonging to the debtor.

Moving on to the claim arising from the conversion of the case from a chapter 13 to a chapter 7 bankruptcy case, the Court similarly held that the claim was also not the property of the estate. Here, the Court found that the negligence which occurred during the pendency of the bankruptcy case logically could not have existed before the bankruptcy case commenced. Therefore, the earliest this claim could have accrued was upon conversion. Consequently, the Court held that “this was not a claim rooted in any way in the pre-bankruptcy past” and that the harmed caused by the malpractice “is entangled with [the debtor’s] ability to make a fresh start.” The Court therefore concluded that the trustee lacked standing to pursue the legal malpractice claim.

This case should remind practitioners to carefully consider the issue of standing whenever analyzing an adversarial proceeding claim. It also serves as a good reminder to all counsel that homeowners should record a declaration of homestead to be eligible take advantage of the heightened exemption amount available under Massachusetts law if things go south.

Matthew Libby is an associate in Preti Flaherty's Litigation Group, practicing from the firm's Boston office. He represents clients in commercial litigation and bankruptcy matters.

Changes to Bankruptcy Rule 3002.1 Affect Mortgage Lenders

Almost every year, changes are implemented to the Federal Rules of Bankruptcy Procedure. On December 1, 2016, this year’s changes to the Bankruptcy Rules went into effect. The changes include revisions to Bankruptcy Rule 3002.1.

Bankruptcy Rule 3002.1 requires secured creditors with an interest in the debtor’s principal residence, such as mortgage lenders, to periodically file notices of payment change in Chapter 13 cases. The changes to Bankruptcy Rule 3002.1 clarify when a secured creditor must file a payment change notice. The amended rule requires that a secured creditor file a payment change notice on all claims secured by the debtor’s primary residence for which a debtor or Chapter 13 Trustee is making post-petition payments during the bankruptcy, regardless of whether the debtor is curing a pre-petition mortgage.

Additionally, the amendments to Bankruptcy Rule 3002.1 clarify that the obligation to file a payment change notice ceases once the creditor obtains relief from the automatic stay.

Preti Flaherty frequently represents creditors in bankruptcy cases in Maine, Massachusetts and New Hampshire. For assistance with claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights & Business Restructuring Practice Group.

Bodie B. Colwell practices as an associate with Preti's Bankruptcy, Creditors’ Rights and Business Restructuring group from the Portland office. She focuses on supporting bankruptcy, insolvency, and creditors’ rights clients.

Eleventh Circuit Decides Surrender Means Just That

In the recent opinion of In re Failla, the Eleventh Circuit ruled that when a debtor indicates in a Chapter 7 bankruptcy schedules case that she or he intends to “surrender” property subject to a secured claim, the debtor can’t renege on that commitment. The Court of Appeals therefore affirmed the bankruptcy court’s order requiring the debtors to cease opposition to a secured creditor’s subsequent foreclosure of the surrendered property.

The Faillas indicated in their Chapter 7 Statement of Intention that they intended to surrender their residence, which was worth less than the mortgage loan it secured. The Chapter 7 trustee then abandoned the property, and the mortgage lender commenced foreclosure proceedings. The Faillas, who were still living in the house, filed state court pleadings contesting the foreclosure. Rather than simply seeking bankruptcy stay relief and proceeding in state court, the mortgage lender sought relief in the bankruptcy court, asserting that the debtors had surrendered their rights to the property, and had no right to contest the foreclosure. The bankruptcy court agreed and entered an order directing the Faillas to cease opposition to the foreclosure, failing which the court would revoke their Chapter 7 discharge.

The district court affirmed the bankruptcy court’s ruling, as did the Court of Appeals. Taking a dim view of the Debtors’ behavior, the Court reasoned that a § 521 “surrender” was a relinquishment of the debtor’s rights in the property to the bankruptcy trustee and the creditor, and that if the trustee then abandons the property, the surrendering debtor must “get out of the creditor’s way.” Noting that a debtor should not be able to “undo his surrender” by opposing the foreclosure in state court after having obtained a discharge in bankruptcy, the Court stated that “[i]n bankruptcy, as in life, a person does not get to have his cake and eat it too.”

For any assistance with secured claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

Supreme Court to Rule on Stale Claims and FDCPA

As reported on our blog, the Eleventh Circuit ruled that filing a time barred proof of claim does not violate the Fair Debt Collection Practices Act, an issue which has divided courts and Courts of Appeals. The Supreme Court has granted certiorari in the case of Midland Funding LLC v. Johnson. (See here.)  Presumably, this will resolve the circuit split on the issue and provide guidance for creditors and debtors on this tough issue.

Stay tuned. We will report back after the Supreme Court rules.

For any assistance with filing claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

Bankruptcy is Romantic: Maine Bankruptcy Court Holds That a Debtor’s Interest in Her Engagement Ring is Exempt

Recently, the Bankruptcy Court for the District of Maine held that a debtor’s interest in an engagement ring is exempt under Maine law. In re Cynthia A. Chaney, Case No. 15-20725. In that case, the debtor claimed the full value of her wedding and engagement rings, valued at $5,200, as exempt under Maine law. The Chapter 7 Trustee in the case objected, arguing that Maine law allows an exemption in jewelry up to a maximum value of $750. 

In Maine, a debtor may claim an exemption in the debtor’s “aggregate interest, not to exceed $750 in value, in jewelry primarily for personal family, or household use of the debtor or a dependent of the debtor and the debtor’s interest in a wedding ring and an engagement ring.” 14 M.R.S. §4422(4). The Trustee argued, based on legislative history and his reading of the surrounding provisions, that this language limited any exemption in any jewelry to $750 total, including wedding and engagement rings. The debtor argued that the statute created two categories of jewelry: personal jewelry with an aggregate value of $750, and a wedding ring and an engagement ring of unlimited value. 

The Bankruptcy Court found the language of the statute to be unambiguous: 

It allows debtors to protect two separate types of jewelry: (1) personal jewelry and (2) two rings connected to the institution of marriage. . . . The first category has a limit: debtors can exempt up to $750 of jewelry held primarily for personal family or household use. The second group has no limit: debtors are permitted to protect their full interest in a wedding ring and an engagement ring.

From the opinion, it is clear that in Maine a debtor can claim an exemption in two marital rings of unlimited value. Other New England states have different exemption limits for jewelry. For example, Massachusetts allows the debtor to elect either the Massachusetts state exemptions or the federal exemptions. Only the federal exemption has an exemption for jewelry—up to $1,600 in value (value adjusted on April 1, 2016). In New Hampshire, a debtor may exempt jewelry up to a value of $500. NH RSA 511:2. In New Hampshire, a debtor can also apply his or her “wildcard” exemption to protect jewelry with value above the $500 exemption.

Court Finds that Parents Convicted of Ponzi Scheme Received Value from Tuition Payments

Do parents receive something of value when they pay for their child to attend college? The Massachusetts Bankruptcy Court (Hoffman, J.) recently considered this exact question in DeGiamcomo v. Sacred Heart University, Inc., AP No. 15-01126 (August 10, 2016). In this case, after the debtor’s parents were convicted of investment fraud for operating a Ponzi scheme, a Chapter 7 trustee attempted to avoid and recover over $60,0000 in tuition payments made to an area college as fraudulent transfers under Bankruptcy Code § 548(a)(1)(B) and the Massachusetts Uniform Fraudulent Transfer Act, Mass. Gen. Laws ch. 109A. 

The trustee asserted that the “Ponzi scheme presumption” should have been applied, where, as the trustee claimed, the parents were insolvent at the time of the transfers and “received no reasonably equivalent value” from the college. The Ponzi scheme presumption is applicable where “the existence of a Ponzi scheme establishes that transfers were made with the intent to hinder, delay and defraud creditors.” Picard v. Merkin (In re Bernard L. Madoff Inv. Sec., LLC), 440 B.R. 243, 255 (Bankr. S.D.N.Y. 2010). The Court, however, rejected the trustee’s argument and applied a more narrow view of the presumption. The Court held that only transfers made in furtherance of the Ponzi scheme are subject to the presumption of fraudulent intent. Otherwise, the Court reasoned, funds spent buying groceries, payment medical bills, or supporting children would be subject to a trustee’s claw back.

Turning to the question of whether or not the debtor parents received any “value” for making tuition payments on behalf of their child, the Court noted that other jurisdictions have split on the issue: some holding that there is a “societal expectation that parents will assist” with college payments and denying attempts at a claw back, while other jurisdictions have held that tuition payments were avoidable where the parents had no legal obligation to pay the tuition. Here, the Court determined that the debtor parents did indeed receive something of value for the tuition payments other than mere “ethereal or emotional rewards.” The Court held that “[a] parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child, which in turn will confer an economic benefit on the parent.” This “quid pro quo” was enough for the Court to deny the trustee’s attempt to claw back the tuition payments and enter summary judgment in favor of the college. 

As an interesting side note to the case, after the trustee appealed the ruling, the Bankruptcy Court Judge Hoffman filed a statement requesting direct appeal to the First Circuit. Assuming the First Circuit takes the appeal, we will see if the First Circuit agrees with the Bankruptcy Court’s analysis.

Divided Court Rules Proof of Claim for Stale Debt Does Not Violate FDCPA

With its recent opinion in In re Eric Dubois, Case No. 15-1945, the Fourth Circuit has joined Second, Third, and Seventh Circuits in ruling that proofs of claim filed for stale debt does not violate the Fair Debt Collection Practices Act.

Two debtors in separate bankruptcy cases filed Adversary Proceeding complaints against Atlas Acquisitions LLC, which had bought claims from pay-day lenders and filed proofs of claim in the bankruptcy cases. The adversary complaints asserted that Atlas had violated the FDCPA because the underlying claims were not enforceable under applicable state law because the statute of limitations had expired. The bankruptcy court concluded that Atlas’s filing of proofs of claims did not constitute debt collection activity proscribed by the FDCPA and granted Atlas’s s motions to dismiss the Adversary Proceedings. The debtors appealed.

The Fourth Circuit analyzed both the Bankruptcy Code provisions relating to claims and the FDCPA. Disagreeing with the bankruptcy court, the Fourth Circuit found that filing a proof of claim in a bankruptcy case does constitute collections activity regulated by the FDCPA. Digging deeper, and noting in particular that under applicable (Maryland) state law, the running of the statute of limitations did not completely “extinguish” a claim, the Court of Appeals also ruled that the Atlas claims were also properly asserted as claims under the Bankruptcy Code. 

Having found that the debt in this case was not extinguished, the court then analyzed whether filing a proof of claim for a time-barred debt violated the FDCPA and concluded that it did not. First, the court stated that if the bankruptcy system worked as it is statutorily written, there are safeguards against such claims being allowed, such as an objection by a trustee, the debtor or even other creditors. Second, the court noted that asserted claims can be discharged with finality in a properly-administered bankruptcy. The court posited that the harm to the debtor in a bankruptcy case was less than the harm to a consumer outside the bankruptcy context because of all of the protections and benefits available to a debtor under the Bankruptcy Code. Ultimately, the Court majority concluded that the filing of a proof of claim on a debt that is time-barred does not violate the FDCPA where the statute of limitations does not extinguish the debt.

Judge Diaz dissented, arguing that companies such as Atlas are gaming the bankruptcy system to try to obtain payments for unenforceable claims due to inattention of other parties in interest.

Thus far, only the Eleventh Circuit has found that filing a proof of claim for a stale debt violates the FDCPA. The issue is on appeal in other jurisdictions. As with much of law in bankruptcy, a creditor should have a firm grasp of the law in the jurisdiction where the bankruptcy case is pending before asserting claims. For any assistance with claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

Ch. 7 Trustee Avoids Maine Mortgage Due to Incomplete Acknowledgment

Chapter 7 trustees’ success in avoiding mortgages with defective certificates of acknowledgement occurs with some regularity in Massachusetts.  See e.g. In re Giroux, 2009 WL 1458173 (D. Ma. Bankr. Jul. 27, 2011).  But it has not been that common in Maine.  Last month, however, a Chapter 7 trustee successfully avoided a Maine mortgage because of a defective acknowledgment and obtained the right to sell the property.  In re Bishop, No. 15-10554 (D. Me. Bankr. Jul. 28, 2016).  The Debtor’s mortgage included a certificate of acknowledgment which failed to state the location of the notary (Aroostook County, Maine) when he acknowledged the mortgage.

Pursuant to the Chapter 7 trustee’s strong-arm powers, 11 U.S.C. § 544(a)(3), the trustee argued that he could avoid the mortgage as a hypothetical bona fide purchaser for value.  As in other defective acknowledgment cases, the trustee argued that a defective mortgage or a mortgage which fails to meet recording requirements under applicable state law does not provide constructive notice, at least with respect to attaching lien creditors.  The Court rejected the bank’s argument that the acknowledgment was sufficient because it was clear the property and notary were located in Maine.  The Court noted that it is critical for an acknowledgement to state the location of the notary at the time of execution.  Without that statement, one cannot determine whether the notary had the authority required by the statute to acknowledge the mortgage.

Maine practitioners facing a certificate of acknowledgment issue should closely review 33 M.R.S. § 352, which governs defective acknowledgments.  § 352 offers protection to mortgagees against defects like this for mortgages made prior to January 1, 2013, and with respect to bankruptcies filed on or after October 15, 2015.

New Article Discusses whether a Late-Filed Tax Return Is a “Return”

As part of the American Bankruptcy Institute Northeast Bankruptcy Conference and Consumer Forum, Tony Manhart presented an article, which I co-wrote with him, on whether a late-filed tax return is a “return” under section 523(a) of the Bankruptcy Code. Courts are divided on whether the definition of “return” added by the Bankruptcy Abuse and Consumer Protection Act makes tax debt associated with all late-filed returns non-dischargeable. Courts in the First Circuit have found that late-filed returns are not “returns” and the associated tax debt cannot be discharged in bankruptcy.

The article discusses recent cases including: In re Fahey, 779 F.3d 1 (1st Cir. 2015), In re Nilsen, 542 B.R. 640 (Bankr. D. Mass. 2015) and Berry v. Massachusetts Department of Revenue, Case No. 15-41218-CJP (Bankr. D. Mass. June 30, 2016).

The full article is available for download on Preti Flaherty's website.

Debtors’ Lien-Stripping Attempt Likely Would Have Succeeded in New Hampshire

A North Carolina bankruptcy court recently denied a Debtors’ attempt to “strip off” a junior lien on their primary residence by rejecting the argument that the property should be valued near the time of plan confirmation.  In re Cooper, No. 11-02804-8 (Bankr. E.D. N.C. Jun. 8, 2016). § 506(a) provides that for purposes of determining the secured status of a creditor “value should be determined in light of the purpose of the valuation and of the proposed distribution or use of such property…or use or on a plan affecting such creditor’s interest.”   

The question before the Court was whether the home should be assigned a value as of the petition date or a date closer to plan confirmation for purposes of § 506(a).  In 2011, Debtors filed a Chapter 13 petition reporting two liens on their home a first lien of $90,000 and a second lien of $160,000.  If the Court used the value as of the petition date there would be enough equity to protect the second lien through plan confirmation.  If the Court used the value as of the confirmation date (less than $90,000), then the Debtors would succeed in stripping the second and wholly unsecured lien.  The North Carolina court invoked the majority rule which applies the petition date for valuing collateral, and therefore ruled that the second mortgage lien could not be “stripped” and remained in place, at least to the extent of the property’s value as of the petition date.

A Massachusetts bankruptcy court would have reached the same result.  In re Landry, 479 B.R. 1 (D. Mass. 2011).  But in New Hampshire bankruptcy court, the outcome would have been more favorable for the debtors, and the lien would have been stripped.  In 2013, Chief Judge Harwood adopted the “flexible approach” and ordered a valuation date for residential property near confirmation in the context of an individual Chapter 11.  In re Cahill, 503 B.R. 535 (Bankr. D. N.H. 2013).  Judge Harwood explained using the petition date for valuation fails to take into account the language in § 506(a) that value should be determined in conjunction with the purposes of the plan and the attendant valuation. 

Had the Debtors resided in New Hampshire they most likely would have succeeded in stripping the second lien.  At some point, the First Circuit Court of Appeals and/or the Bankruptcy Appellate Court will have to determine which approach should be the prevailing rule.  We think Judge Harwood has it right.     

This Week: Join Us at the ABI Northeast Bankruptcy Conference

The 23rd annual Northeast Bankruptcy Conference takes place this week, from July 14-17, at the Omni Mount Washington Resort in Bretton Woods, New Hampshire. This conference provides a great opportunity to gain insight into our industry. It also offers a forum to discuss current topics and network with knowledgeable colleagues.

On Friday, from 11:00 a.m. to 12:15 p.m., I will be moderating a consumer track panel session entitled, "Many Unhappy Returns - Another Hanging Paragraph Creates a Trap for Consumer Bankruptcy Lawyers."

The session's panelists include: Carl D. Aframe (Aframe & Barnhill, P.A.; Worcester, Mass.), Hon. Mildred Caban (U.S. Bankruptcy Court (D.P.R.); San Juan), and Celine E. de la Foscade-Condon (Department of Revenue (D. Mass.); Boston).

Here is a brief overview of the our session's focus:

"When is a tax return not a tax return? Bankruptcy can be very useful when seeking to discharge personal income tax obligations, but if the return has not been filed on time, dischargeability may be in jeopardy. Many courts have addressed this issue and have issued widely divergent views, including the First Circuit’s strict interpretation of what constitutes a tax return as announced by the majority in In re Fahey. This panel will focus on the development of the case law in the First Circuit, the information you must obtain from the taxing authority to determine when a tax return has been filed, what constitutes a return, and strategies to employ in the event that the tax return your client filed is defective and the taxes reported on that return are nondischargeable."

The Mt. Washington resort, located in the White Mountain National Forest, is a beautiful setting for what will prove to be an impressive collection of speakers and sessions.

For more information about the conference, visit the ABI conference website.

Ex Parte Attachment, and Priority, Reinstated to First in Time Creditor

In Estate of Summers v. Nisbet, the Maine Supreme Judicial Court reinforced the first in time, first in right nature of attachment and trustee process under Maine law.  Attachment and trustee process are powerful enforcement tools with which a plaintiff can place a lien on a defendant’s real or personal property while the case is pending, so that the defendant cannot transfer or abscond with property while being sued.
 
After a tragic fire at an apartment building in Portland, Maine that resulted in five deaths, the probate estate of Steven Summers, one of the victims, obtained a December 2014 ex parte attachment against the property of the building owner.  The probate estates of several other victims subsequently obtained attachments in February 2015 and asked the Superior Court to have the Summers ex parte attachment dissolved, asserting that the Summers estate had failed to demonstrate the “exigent circumstances” necessary for the grant of an attachment without hearing.
 
The Superior Court granted that motion, and dissolved the Summers estate’s original ex parte attachment and reinstated it as of February 2015.  As a consequence of the Court’s ruling, all five of the victims’ probate estates were left with attachments that were deemed to have been granted simultaneously.

The Summers estate appealed.  The Law Court vacated the trial court’s dissolution of the Summer ex parte attachment, ruling that the trial court had erred because no one had asserted or established that the Summers estate had failed to make the basic showing required for an attachment, and ordered the Summers attachment reinstated as of the date it was ordered, in first place.  In doing so the Court confirmed that under Maine attachment law, first in time is first in right, and that creditors in Maine must act expeditiously to protect their rights.

Creditors Benefit from Seventh Circuit’s Interpretation of “Ordinary Course of Business” Defense to Preferences

The Court of Appeals for the Seventh Circuit recently discussed the standard for whether payments made to vendors in the 90 days prior to a bankruptcy filing are within the “ordinary course of business” defense.  In making that determination, courts look at the transactions between the debtor and the creditor prior to the bankruptcy filing to set a baseline for what the parties’ “ordinary course” dealings were.  Typically, courts use one of two methods to create a baseline.  The first—the average age method— calculates the average number of days payments were late to determine which payments were within that “ordinary” range.  The second method creates an “ordinary” range using the minimum and maximum invoice ages during the historical period prior to bankruptcy.   The second approach—the “total range method”—considers any payment made in the 90 days before bankruptcy “ordinary” as long as it was paid anywhere within the minimum and maximum number of days late during the history of the parties’ dealings.  The Bankruptcy Court for the Southern District of New York discussed, and rejected, the total range method in In re Quebecor World (USA), Inc., 491 B.R. 379 (Bankr. S.D.N.Y. 2013)).  Of the two methods, the average-age method is more commonly used by courts. 

Using the average-age method, the Court of Appeals for the Seventh Circuit broadened the window for which payments fall within the “ordinary course.”  In the case, the baseline for payments was between 16 to 28 days from the invoice with an average invoice age of 22 days.  The bankruptcy court below determined that payments more than 6 days from the average were outside the ordinary course.  The Court of Appeals added two days on either side of the window to include all payments within 14 to 30 days as ordinary course.  The bankruptcy court’s approach only took 64% of the historical payments into account.  By broadening the window, the Circuit Court included 88% of the historical payments.  As a result, the ordinary course defense dropped the preference liability from approximately $306,000 to approximately $60,000.  Jason Foods Inc. v. Unsecured Creditors’ Committee, Case No. 15-2356 (7th Cir. June 10, 2016)

Debtor May Still Claim Homestead Exemption Even If He Was Kicked Out

The bankruptcy court for the Eastern District of New York found that a debtor who was ordered to vacate his home could still claim an exemption in the property. In a divorce proceeding several months prior to the bankruptcy filing, the debtor’s spouse had been granted exclusive occupancy of the home and the debtor was barred from entering the property. At the time of the bankruptcy filing, the debtor was prohibited by the state court order from residing at the property.   The chapter 7 trustee objected to the debtor’s homestead exemption and argued that because the debtor’s voter registration, driver’s license, tax returns and bankruptcy petition listed a different address, the debtor could not claim the homestead exemption. The bankruptcy court found that the state court order did not prevent the debtor from claiming a homestead exemption because the debtor had intended to occupy the property and was forced to leave by the state court order. The bankruptcy court also noted that the debtor’s failure to change his address was not sufficient to “undercut the Debtor’s claim of homestead exemption.”  In reaching its conclusion, the bankruptcy court gave weight to the debtor’s intent and his testimony that he considered the property his principal residence. The bankruptcy court stated that “the record reflects that, as is typical in a marriage, the Debtor considered [the marital property], where he resided with his spouse, and which they owned together, to be his principal residence, and only left the [martial property] when forced to do so by the [divorce occupancy order].” (In re Denker-Youngs, Case No. 15-41069 (Bankr. E.D.N.Y June 2, 2016)) Bodie B. Colwell practices as an associate with Preti Flaherty's Bankruptcy, Creditors’ Rights and Business Restructuring group from the Portland office. She focuses on supporting bankruptcy, insolvency, and creditors’ rights clients.

Bankruptcy Court Rules Chapter 13 Debtors Must Assume or Reject Leases in 120 Days

In a recent decision from the Bankruptcy Court for the District of Maine, In re Cho, the Court ruled that 11 U.S.C. § 365(d)(4)(A) applies to debtors in Chapter 13 cases. In this case, the debtors operated a dry cleaning business and had an unexpired lease with a creditor. The creditor moved for relief from the automatic stay. The debtors subsequently filed their Chapter 13 plan, 188 days after filing, and attempted to assume the lease with the creditor. The creditor objected to the debtors’ plan. After a discussion of the issue of assumption/rejection in the context of Chapter 13 case, the Court stated that the language regarding the assumption of nonresidential leases was “clear, unambiguous and commanding,” and held that it applied in Chapter 13 cases. The Court granted relief from stay to the creditor. In dealing with landlords and tenants in the bankruptcy context, counsel should be consulted early on concerning the leasehold rights and responsibilities of both debtors and creditors. (Hyegu & Jen Cho - Chapter 13 - 15-20638 - , Bankr. D. Me. 2016).

Bankruptcy Filings May Be Trending Upward

The latest statistics show bankruptcy filings are down compared to last year. In New Hampshire, filings are off 13%. In Maine, filings have decreased 26%. In Massachusetts, filings are lower by 16%. With a few exceptions, such as Texas and Alaska, bankruptcy filings have been off nationwide.

A closer look at the monthly trends, however, suggests an increase in new filings may be on the horizon. For instance, in Maine, 183 petitions were filed this past March, nearly matching the combined total of 190 filings in January and February. The New Hampshire data is similar, though not as dramatic. A total of approximately 250 petitions were filed in January and February. In March, New Hampshire filings increased to 217.

There is no denying bankruptcy filings are well off the mark compared to a year ago. However, filings over the first quarter of 2016 indicate bankruptcy courts may soon see an increase in traffic.

11th Circuit Finds that Bankruptcy Code and FDCPA Can Coexist

In a recent decision from the Court of Appeals for the 11th Circuit, In re Johnson, the Court found that the Bankruptcy Code and the Fair Debt Collection Practices Act can coexist.  Whether an FDCPA claim may lie against a creditor filing a proof of claim in a bankruptcy case appears to be an open issue around the country.  The debtor in Johnson argued that a creditor has no right to file a proof of claim where the underlying debt may be time-barred. The Court disagreed and held that creditors may file such proofs of claim, but noted also that any unwarranted filing may have consequences under the FDCPA.  The case also closed an apparently open issue in the 11th Circuit as to whether the FDCPA is preempted by the Bankruptcy Code.  It is now clear, at least in the 11^th Circuit, that FDCPA actions may be brought against creditors or debt collectors who file bankruptcy proofs of claim that they know are stale or unenforceable under state or other nonbankruptcy law.  A cautionary tale for creditors, especially for those in the bankruptcy claims trading market.  (Aleida Johnson v. Midland Funding, LLC, 11^th Cir. 2016) 

Bankruptcy Court Finds Student Loan Debt Dischargeable

Student loan debt in the United States continues to mushroom, and according to the Federal Reserve, is approaching the $1 trillion mark.  As bankruptcy practitioners and many in the public well know,, the Bankruptcy Code generally prohibits debtors from discharging student debt.  The Bankruptcy Court for the District of Idaho recently invoked the seldom used exception to this rule when it discharged $83,000 of $93,000 in student loan debt.  In re McDowell, __ B.R. __ (Bankr. D. Id. 2016).

The Court found that the debtor, a 43-year old single mother of two children, was entitled to the undue hardship exception because she was unable to maintain a minimum standard of living, which would continue for a long period of time. The debtor worked 32 hours a week, earning $3,400 per month.  After an extensive analysis, the Court ruled that the $83,000 discharge was appropriate, citing the debtor’s health issues, notwithstanding the fact that the debtor had used credit to purchase a motorcycle and spent thousands on a trip to South America.  The Court explained “while her financial decisions have not been perfect…she would have nonetheless been unable to make any substantial student loans payments while meeting her normal living expenses.”

The increasing prevalence of burdensome student loan debt raises the question of whether the reasoning of In re McDowell will set a trend for other bankruptcy courts across the country.