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.