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

Thursday, July 14, 2016

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

Wednesday, July 13, 2016

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

Tuesday, July 12, 2016

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

Monday, July 11, 2016

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

Friday, July 1, 2016

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.