California Bankruptcy Attorney Blog

Vincent Howard and our Riverside County foreclosure defense attorneys were interested to see a case out of Nevada that resulted in sanctions for a lender that misbehaved during loan modification proceedings. Nevada's foreclosure mediation program, put into place during the housing downturn, requires mediation in every foreclosure case. Most importantly, the state law provides penalties for lenders who negotiate in bad faith, as evinced by failure to show up prepared or failure to send someone with authority to negotiate in the first place. Both flaws were apparently present in the foreclosure mediation at issue in Jacinto v. PennyMac Corp., a Nevada Supreme Court case. Miguel Jacinto has the right to appeal, the high court ruled, but his request for a loan modification as sanctions did not succeed.

Jacinto's first mediation was with Citimortgage, which agreed to try a HAMP loan modification. Jacinto then sent documents as requested, which led Citimortgage to deny the modification. He requested court sanctions against Citimortage for failure to negotiate in good faith, and the district court ordered another mediation. In the meantime, PennyMac acquired the interest in the mortgage and stepped into Citimortgage's shoes for the second mediation. However, it failed to bring needed documents to the mortgage or send an official with the authority to negotiate. Jacinto again filed for judicial sanctions, requesting financial penalties, attorney fees and a court order for a loan modification. The court declined to impose anything but the attorney fees, and Jacinto appealed to the Nevada Supreme Court.

That court affirmed the order, after first establishing that a homeowner like Jacinto has the right to appeal at all. PennyMac argued that Jacinto is not an aggrieved party because the lower court did hear his case. The high court disagreed, saying the denial of his request for a judicially imposed loan modification adversely and substantially affected his property rights. Moving on to the sanctions themselves, Jacinto argued that the attorney fee order was insufficient and re-requested a judicially imposed loan modification. Nevada courts have discretion to choose which sanctions to order, other than the bare-minimum sanction of withholding a certificate saying the mediation was completed. The high court found that the trial court imposed more than the bare minimum because it also ordered attorney fees. Thus, it upheld the trial court's order.

The attorney fees in this case were $3,500. This is not insubstantial, especially to someone who is having trouble making mortgage payments, but Vincent Howard and our Santa Ana foreclosure defense lawyers suspect that the costs to Jacinto of PennyMac's bad faith were substantially higher. Assuming he was still trying to hold on to his home, every month without a final answer on a loan modification was a month when he either had to make an unaffordable payment or go deeper into arrears--and closer to foreclosure. Indeed, this may be the reason why so many loan servicers tried to drag out their loan modification decisions as long as possible--because if they can foreclose instead, they stand to earn a lot more money. Vincent Howard and our Colton foreclosure defense attorneys believe this behavior is illegal as well as in bad faith, and we help clients seek redress through the courts.

Continue reading "Sanctions for Failure to Negotiate Loan Mod in Good Faith Were Appropriate, High Court Rules - Jacinto v. PennyMac Corp." »

At Howard Law, P.C., we focus on consumer debt and predatory lending issues, which includes litigation when appropriate. So our Corona foreclosure defense lawyers were interested to see a case from our neighbors in Nevada about the use of binding arbitration required by a mortgage contract. Binding arbitration is a type of private-sector "judging" that has become popular among large corporations. Consumer advocates don't always like it, because the system permits the party with more power (usually a corporation selling services to the consumer) to force the issue out of public courtrooms. And in private arbitration, there's a danger that the arbitrator will attempt to make the decision desired by the company paying his or her salary. Marshall Sylver made similar allegations in Sylver v. Regents Bank, a recent Nevada Supreme Court decision that upheld the arbitrator's decisions.

Sylver took out two loans in 2008: one to buy a house and another for commercial property. Unfortunately, financing never appeared for the commercial property and Sylver was unable to sell the prior home that was supposed to provide the financing for the new home. Regents filed a foreclosure complaint; Sylver's cross-complaint accused Regents of breach of fiduciary duty, false representations and mortgage lending without the proper Nevada credentials. The district court compelled arbitration, as the loan documents required. Regents told the arbitrator that a key witness was unavailable, but Sylver later claimed the witness had said he was available but was never asked to testify. Nonetheless, Sylver didn't ask for a continuance and the arbitrator ruled for Regents. On the bank's motion to confirm the award, Sylver argued that Regents had procured the award with undue means, and the judgment was against the manifest weight of the law. The district court confirmed the award.

On appeal, Sylver renewed both arguments. The Nevada Supreme Court started by defining "undue means" as intentional misconduct similar to fraud or corruption. It then found that Sylver hadn't met the burden of providing undue means influenced this award. The conduct he alleges--intentionally misrepresenting the availability of a witness--does not rise to the level of intentional bad faith equivalent in seriousness to fraud, it said. Sylver never offered evidence showing that the misrepresentation of the witness's availability was intentional, and due diligence could have turned up the information. Nor had Sylver shown a causal connection between the alleged misconduct and the award, the court noted. The high court also found that the award was not a manifest disregard of the law, a claim that was based on Regents's lack of proper credentials to make home loans in Nevada. The arbitrator concluded that this was illegal, but said the error was unintentional and not material to the issue at hand. The high court ruled that this was not a clear disregard of the law, and upheld the confirmation of the award.

Vincent Howard and our Garden Grove foreclosure defense attorneys suspect the outcome could have been different under another court. The Nevada high court reasoned that the public policy good of enforcing the loan outweighed the public policy good of enforcing the licensing law. It also noted that the goal of the licensing law was to prevent predatory lending by out-of-state lenders. This is precisely the allegation Silver was making about Regents, and a sympathetic court might have decided he had made a strong enough case. It's also worth wondering whether a Nevada trial court would have treated the misrepresentation about the witness as lightly as the Supreme Court seemed to. Discovery violations are sometimes the basis for sanctions, and rightly so--they undermine the goal of basic fairness. Vincent Howard and our Rubidoux foreclosure defense lawyers strongly advise clients not to sign onto an arbitration contract to get a mortgage.

Continue reading "Nevada High Court Declines to Overturn Arbitration Award in Mortgage Case - Sylver v Regents Bank" »

Vincent Howard and our Ontario personal bankruptcy attorneys were pleased to see a ruling on the scope of the 2005 changes to the bankruptcy law. In Branigan v. Davis, the issue was whether a portion of mortgages may be "stripped" from underwater properties in a Chapter 13 bankruptcy filed within four years of a successful Chapter 7. The trustee argued that the Bankruptcy Abuse Prevention and Consumer Protection Act forbade lien-stripping per se in these so-called "Chapter 20" cases. The bankruptcy court disagreed, and permitted Bryan Davis and Carla Bracey-Davis, and Marquita Moore, to bifurcate their home loans into secured and unsecured claims. The trustee appealed this to the district court and then to the Fourth U.S. Circuit Court of Appeals, but all of the courts affirmed.

Both the Davises and Moore, who filed two separate bankruptcies, had originally filed Chapter 7 bankruptcies that resulted in discharges, but re-filed in Chapter 13 so they could strip liens on real estate that had too little value to secure the liens. The Davises waited nearly a year between bankruptcy cases, during which time they had hoped for a loan modification and Bracey-Davis found a new job. Moore waited a week. In both cases, trustee Timothy Branigan challenged orders confirming their motions to strip the liens, and confirming their plans, but the bankruptcy judges ruled that BAPCPA does not create a per se rule against lien stripping in "Chapter 20" cases. The district court consolidated the two appeals and affirmed the rulings without comment.

The Fourth Circuit also affirmed the rulings. It first noted that previous unpublished rulings, and rulings from sister circuits, support the practice of stripping off now-valueless liens from encumbered property. Thus, a lien with no value--such as a second mortgage made during the real estate bubble--can be turned from a secured debt into an unsecured one by the bankruptcy court, then have the lienholder's rights modified in any way the court pleases. Bankruptcy courts are more split on lien stripping in "Chapter 20" cases, because BAPCPA forbids Chapter 13 debtors from receiving a discharge within four years of a Chapter 7 discharge. The trustee argued that lien-stripping depends on the availability of a discharge. However, the Fourth ultimately disagreed. The provision the trustee (and some courts) relied on applies only to a claim that has been valued, and thus does not apply to worthless liens, the court said. Congress had an opportunity to stop lien-stripping with BAPCPA, the court noted, and did not take it.

Vincent Howard and our Orange consumer bankruptcy lawyers are pleased by this result. Lien stripping has become common in the aftermath of the housing downturn, as many, many homeowners have found their mortgages underwater and been driven to bankruptcy. Stripping a lien doesn't necessarily benefit the bankruptcy filer in the short run--because the money freed up typically just goes to other creditors--but in the long run, it can mean fewer mortgage payments. And the ability to pay off other creditors is important, as anyone with a non-dischargeable tax or child support debt knows. Vincent Howard and our Norco individual bankruptcy attorneys hope this ruling, and others like it, will give access to that remedy to people who end up in "Chapter 20."

Continue reading "Fourth Circuit Rules Liens Can Be Stripped in Repeat Bankruptcies Under BAPCPA - Branigan v. Davis" »

Vincent Howard and our Corona consumer bankruptcy lawyers frequently write about bankruptcy mortgage disputes involving a bank or loan servicer. But in In re Rader, the Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals ruled that a married couple who held the mortgage on another couple's property in Arizona should be permitted to pursue an unsecured claim for the "underwater" portion of the home debt. Robert and Sandra Carson held a mortgage on the real estate, which was purchased by Marshall and Barbara Rader. The claim was bifurcated and the home foreclosed. But more than a year later, the trustee argued that the Carsons should have pursued state-law remedies to collect the unsecured portion of that debt. The bankruptcy court disagreed, and the BAP for the Ninth U.S. Circuit Court of Appeals affirmed.

The Raders filed for Chapter 13 bankruptcy in 2010, and the case was converted a few months later to Chapter 7. Later that year, the Carsons moved for relief from the automatic stay so they could foreclose on the property, because the Raders were in default on their payment obligations. The motion indicated that the Carsons, Raders and trustee all agreed that the stay should be lifted. The motion was granted, and the Carsons filed a proof of claim for $739,100.61 for the debt. The bankruptcy court bifurcated this into a secured claim for $370,000--the contemporary appraised value of the property--and an unsecured claim of $369,100.61. A foreclosure sale was held at the end of 2010 and the Raders received a discharge the next month. More than a year later, in March of 2012, the trustee filed an objection arguing that the Carsons' claim should be disallowed because they should have been required to pursue the deficiency claim process laid out by Arizona law. The bankruptcy court overruled this, saying it would be impossible to file an adversary proceeding or a deficiency action without lifting the automatic stay.

On appeal, the trustee maintained that the Carsons could have pursued the unsecured portion of the claim without violating the automatic stay or the discharge injunction. The Carsons disagreed and noted that requiring them to pursue separate actions for the deficiency would be burdensome and a waste of resources. After consideration, the BAP found that the Arizona law at issue--which requires creditors to pursue a deficiency judgment within 90 days of a foreclosure sale--is preempted by the bankruptcy code because they conflict. The automatic stay and discharge injunction made compliance with Arizona law impossible, the panel said; the order lifting the stay didn't expressly address the issue and an order lifting a stay is strictly construed. And a post-discharge case would have violated the discharge injunction, because the Carsons could not have pursued it without naming the Raders. Finally, the panel said, this claim is a "core bankruptcy matter," and permitting another court to get involved would be inefficient and cumbersome. Thus, it affirmed the bankruptcy court.

Vincent Howard and our Anaheim personal bankruptcy attorneys believe this decision was in everyone's best interests. Though the debtor may benefit when the bankruptcy trustee excludes certain claims from the bankruptcy, it's not at all clear that the Raders would have benefited by having to defend an extra case against them brought in state court while also managing their bankruptcy. Bankruptcy exists as a way for debtors like the Raders to sort out their debts and pay what they can. As the BAP noted, Congress intended bankruptcy to be orderly and efficient. Going outside that process to create a new case is neither of those things, and in fact it might hurt the debtors because the second court would not be considering all of their financial circumstances with its decision. Given the large deficiencies faced by many people who bought homes during the real estate bubble, Vincent Howard and our Claremont individual bankruptcy lawyers believe it's better for debtors to have these debts considered as a whole.

Continue reading "Bankruptcy Panel Approves Unsecured Claim by Private Parties Who Hold Mortgage - In re Rader" »

Vincent Howard and our Chino consumer bankruptcy attorneys have written several recent posts about discharging student loans in bankruptcy. Though the "undue hardship" standard debtors must meet is considered strict, several recent cases have concluded that the debtor met that standard. This may be an outgrowth of the growing outcry over the undue hardship rule itself, which was extended to private student lenders fairly recently and gives them a protection enjoyed by few other unsecured debtors. In In re Janet Rose Roth, the Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals ruled in favor of Roth, permitting a discharge of her student loan debt even though the bankruptcy court had denied it. Judge Pappas wrote a relatively long concurrence arguing that the current undue hardship test is too old and narrow and should be changed.

Roth took out 13 federally guaranteed student loans and five direct loans administered by the federal Department of Education. Unfortunately, a family issue not specified kept her from graduating. Her employment history is "long and varied," including many stints of having more than one job at the same time to make ends meet, while also raising four children. She has never made voluntary payments on the guaranteed loans and has defaulted on them; she says she once applied for a forebearance but never heard back. Her wages had been garnished and her tax refunds offset, though Roth was not sure for which lender. She has multiple chronic medical conditions and serious injuries that interfere with work, but applied for hundreds of jobs during a stint of unemployment between 2008 and 2011. She was 62 when she filed for bankruptcy, representing herself, and subsisted on $774 a month in Social Security.

After Roth filed an adversary proceeding seeking to have the loans dismissed, the Department of Education loans were administratively discharged and the others were assigned to Educational Credit Management Services. The bankruptcy court ultimately ruled against the discharge, saying it was constrained by Ninth Circuit precedent requiring consideration of Roth's scant past efforts to address the loans.

Roth appealed, still representing herself. The Ninth Circuit case at issue requires courts to analyze whether the debtor made good faith efforts to repay the loans. After spending rather a lot of time determining the standard of review, the panel found the bankruptcy court made clear error when it decided Roth hadn't made enough good-faith efforts. Its analysis of the factual situation found fault with Roth for not making payments during her "good earning years," but said those payments would still have been modest considering her expenses, and she may have believed the wage garnishment was making payments. Perhaps most importantly, the panel said, Roth didn't enroll in a loan repayment and forgiveness program. This is often enough for a finding of bad faith, the court said, but here, it's likely that she would never have made a payment but faced "disastrous" tax consequences after the loan was forgiven. Finding Congress could not have intended to require a lengthy but empty commitment like this, the panel granted the discharge.

Vincent Howard and our Irvine personal bankruptcy lawyers are pleased with this result. The panel said this was a close case, but we agree with the concurrence that the "good faith" analysis applied here is so old that it no longer reflects the reality courts are dealing with. In fact, the concurrence is an excellent guide to the changes in the student loan discharge landscape since the 1980s: today, nearly all students borrow, and they borrow much larger amounts because education has become much more expensive. At the same time, Congress has taken away a time limit for the exemption from discharge and applied this protection to private student loans, not just government-backed loans. As a result, the "good faith efforts" test pushes many borrowers into a lifetime of debt, the concurrence says. Vincent Howard and our Rubidoux individual bankruptcy attorneys agree that this is too high a standard, particularly given the limited usefulness of certain types of education.

Continue reading "Ninth Circuit BAP Reverses Denial of Student Loan Debt Discharge for Pro Se Filer - In re Janet Rose Roth" »

Vincent Howard and our San Bernardino County personal bankruptcy lawyers occasionally represent someone who files for bankruptcy with a lawsuit pending against them. This is understandable--financial trouble often leads to conflict. But if you're being sued, it's important to fully disclose this to the bankruptcy court so you can avoid the appearance of misconduct during your bankruptcy case. Hiding it and hoping nobody notices generally won't work; trustees can even reopen the bankruptcy after the fact to account for it and seek penalties against you for being dishonest. In Hathorn v. Petty, however, both sides apparently made mistakes with the process. In this case from the Bankruptcy Appellate Panel of the Eighth Circuit, the Hathorns sued the Pettys, who later filed for bankruptcy.

Corwin and Rachel Petty filed for Chapter 7 bankruptcy in 2012. At the time, there was a lawsuit pending against them by Michael and Michele Hathorn, alleging intentional torts among other things. The case was listed as a pending legal proceeding in the Pettys' statement of financial affairs, but the claims weren't listed on the bankruptcy schedules and the Hathorns were not included in a list of interested parties to mail. Thus, they didn't receive notice of the filing and the deadline for filing dischargeability claims. Their attorney learned of the bankruptcy case six days before the deadline to file such a claim, but they didn't file their adversary proceeding until two months later, which was one month after the Pettys added them to the bankruptcy schedules. The Pettys moved to dismiss the adversary proceeding for untimeliness and the bankruptcy court agreed.

The BAP for the Eighth U.S. Circuit Court of Appeals reversed and remanded the case, saying the Hathorns can bring their case under a different standard that has no deadline. Their adversary proceeding was originally brought as an argument that the Pettys' prospective debt was caused by their willful and malicious injury. Claiming this type of debt required the Hathorns to file a dischargeability complaint by a certain deadline. It's undisputed that the complaint was filed after that time, the BAP said. And while there may have been a good reason, the panel noted that it was unable to consider an extension because they didn't file a request for one before the deadline. However, the panel also noted that the bankruptcy code creates another exemption from discharge for debts that are otherwise exemptable and were not properly scheduled. The panel said it's undisputed that the Hathornes' claim meets those requirements. The bankruptcy court itself conceded that six days of actual notice is insufficient notice to file a claim. Thus, it reversed and remanded.

This case underscores the importance of making your filings timely--an issue that affects anyone involved in a legal case. The Hathornes' claim may or may not have merit, but the bankruptcy court didn't investigate that; it simply dismissed because they didn't meet the deadline. This can happen to the bankruptcy filer too, which is one reason Vincent Howard and our Costa Mesa consumer bankruptcy attorneys request clear disclosures of all important information and cooperation from our clients. Without disclosure and cooperation, it's easy to have setbacks in your case for avoidable reasons like missed deadlines. And here, the initial failure to list the claim against them didn't truly help the Pettys; the claim will still be tried, but their case is now longer and more expensive. At Howard Law, P.C., our Moreno Valley individual bankruptcy lawyers prefer to help our clients get through bankruptcy smoothly and quickly whenever possible.

Continue reading "Eighth Circuit BAP Permits Claim Against Bankruptcy Filers to Proceed - Hathorn v. Petty " »

Vincent Howard and our Riverside County predatory lending attorneys were interested to see a case alleging Massachusetts state law causes of action against a mortgage. The case, Frykberg v. JP Morgan Chase, arose out of the bankruptcy of Jon Frykberg of Massachusetts. After filing his Chapter 13 bankruptcy, Frykberg alleged in his adversary complaint that during his 2004 mortgage, the originator failed to provide documents required by Massachusetts law, provided incorrect information on another document and did not provide credit counseling as required by state law for high-cost loans. The bankruptcy judge dismissed, agreeing with a variety of Chase arguments centering on federal preemption and failure to state a claim. On appeal, the Bankruptcy Appellate Panel of the First U.S. Circuit Court of Appeals upheld that ruling.

Frykenberg and his wife took out the $269,500 loan in 2004, and Frykenberg alone filed the bankruptcy in 2010. The originator was Washington Mutual, which later went into FDIC receivership and whose assets were ultimately purchased by Chase. In his original adversary complaint, Frykenberg alleged that WaMu never provided the notice of right to cancel required by Massachusetts law and provided an inaccurate Truth in Lending Act statement. He also alleged that the loan was a high-cost loan as defined by Massachusetts law, and that he did not receive the required credit counseling. He asked for an order declaring the loan unenforceable and that he and his wife owned the home free of the mortgage. Chase amended its summary judgment motion later to include arguments that the Massachusetts laws were preempted by state laws; that Frykenberg failed to state a claim; and that the FDIC retained liability for WaMu loans.

The bankruptcy court granted summary judgment to Chase, agreeing with every argument but one saying TILA violations are "technical." On appeal, both sides renewed their arguments. The BAP for the First Circuit started by reviewing the Home Owners Loan Act, one of the federal laws at issue, and concluded that it expressly preempts the Massachusetts laws named by Frykenberg. It then reviewed the Truth in Lending Act preemption caselaw, and found that both Massachusetts laws at issue are also preempted by TILA. And the transaction at issue here is not exempt from TILA, it noted. Because these preemption decisions affect all of Frykenberg's claims, the BAP found that it didn't need to address the arguments about failure to state a claim or FDIC liability. Thus, it upheld the bankruptcy court.

It's disappointing that this homeowner won't have his day in court. Vincent Howard and our Santa Ana predatory lending lawyers represent many clients in Frykenberg's position, who took out expensive loans during the "bubble" and often didn't get full disclosure of the terms of the loan. Some loans made in the last decade even involved outright deception. When that's the case, federal laws like TILA and some state laws here in California should apply. TILA allows borrowers to rescind the predatory loan; other laws might do the same, require repayment of loan payments created by fraud, or allow you to seek financial damages. Vincent Howard and our Rancho Cucamonga predatory lending attorneys review each new case as it comes in to see whether any of these laws could apply.

Continue reading "First Circuit BAP Upholds Dismissal of Adversary Complaint Alleging Predatory Lending - Frykberg v. JP Morgan Chase" »

The bankruptcy code forbids bankruptcy filers from discharging debts created by their own fraud. In some cases, however, whether a debt was created by fraud is hotly contested, as it was in Heide v. Juve, a decision of the Bankruptcy Appellate Panel of the Eighth Circuit. Vincent Howard and our Riverside personal bankruptcy lawyers wrote about a previous incarnation of this case, in which the BAP found genuine issues of material fact precluded summary judgment on the debt's dischargeability. In this case, the bankruptcy court's final order was on appeal. The Eighth Circuit BAP found that the record didn't support findings that all of the debt was created by fraud. It reversed as to a larger portion of the $350,490 debt, but upheld nondischargeability of $50,490 loaned separately.

Heide and Juve were friends and co-workers who sold cars at a dealership. Juve became a wholesaler of cars at a different dealership, traveling to purchase them. They agreed orally that Heide would led Juve money to buy vehicles; Heide would be repaid plus interest when the vehicle sold, plus a small fee and, if he sold the car, a commission. Heide didn't secure the loans with the vehicles, but thought there was enough equity in Juve's business to secure the loans. He did not realize Juve had other lenders with a security interest in the cars. Around 2001, they agreed that Heide would start receiving monthly interest payments, but didn't discuss repayment of principal. This agreement worked out fine until Juve started having financial problems; by 2008, there was not enough equity in the cars to secure Juve's $300,000 debt to Heide. That year, he borrowed $50,490 from Heide, ostensibly for six vehicles, but didn't buy the cars. He later admitted that he used some of the money for business expenses.

Juve was ultimately found out and his business failed. On remand from the first appellate case, the bankruptcy court found that the parties' oral agreements constituted re-extensions of credit and an assertion by Juve that the inventory could secure the loans. But on appeal, the BAP for the Eighth Circuit found that the record didn't support this. No testimony established it, and Heide acknowledged that Juve never promised he could repay the loans all at once. Furthermore, the BAP said, there's nothing in the record showing that Juve couldn't pay it back at the time the loans were made. Indeed, both parties testified that they thought there was enough equity on the car lot when Heide made a 2004 loan. And Heide didn't establish to what extent Juve was using funds for purposes other than buying more inventory, or that this was more than a breach of contract. This is insufficient to show fraud for the first $300,000 in loans, the panel said. The story is different for the $50,490 Las Vegas loan, however, and the panel upheld that nondischargeability finding.

Vincent Howard and our Costa Mesa individual bankruptcy attorneys appreciate the careful attention the BAP paid in this case to exactly which representations were fraudulent. This is important because only debts created by fraud are not dischargeable, and whether a debt is dischargeable can have a huge effect on the debtor's bankruptcy and future financial health. If Juve had to repay all $350,490, he would likely be under that obligation for a very long time, and it could affect his chances of building a new business or getting credit. At Howard Law, P.C., our Rancho Cucamonga consumer bankruptcy lawyers believe that only debts created by fraud should create that kind of burden.

Continue reading "BAP Partially Reverses Nondischargeability Finding for Personal Loan - Heide v. Juve" »

Vincent Howard and our Moreno Valley personal bankruptcy attorneys have not often had nice things to say about the 2005 changes to the bankruptcy laws. Formally known as the Bankruptcy Abuse Prevention and Consumer Protection Act, BAPCPA has limited bankruptcy filers' options by imposing a financial means test to qualify for Chapter 7 bankruptcy , the quicker but more financially disruptive type of consumer bankruptcy. It has also been criticized by judges as unhelpfully vague. But in In re Welsh, the Ninth U.S. Circuit Court of Appeals held that BAPCPA does benefit a bankruptcy filer in at least one way: it does not permit courts to look into debtors' Social Security incomes or payments to secured creditors--such as mortgage holders--when considering whether a plan was proposed in good faith. In this case, the decision benefited David and Sharon Welsh of Missoula, Mont.

The Welshes filed for Chapter 13 bankruptcy in 2010. Their secured claims included payments on a $400,000 home, three vehicles, a trailer and two ATVs, all recent models. They also had large unsecured claims for a line of credit and their daughter's student loans. When they listed their current monthly income, they subtracted $1,165 a month in David Welsh's Social Security income, because by law, it is not counted. After deducting expected future payments on the secured claims, they calculated they had $218 a month in disposable income and proposed a plan providing $125 a month to unsecured creditors until vehicle loans were paid off. This would have paid off less than 10% of their unsecured debt. Their trustee argued that this plan was not proposed in good faith, pointing out that it called for tiny payments while the Welshes lived in an expensive home and kept luxury items.

The bankruptcy court disagreed, noting that payments to secured creditors are authorized by BAPCPA's means test and not examined for reasonableness when the payments are current. Similarly, it found that Social Security income, by law, cannot be included in disposable income and therefore should not be considered in the good faith analysis. A divided BAP for the Ninth Circuit affirmed, and the trustee appealed to the full Ninth Circuit.

The Ninth Circuit first noted that the question is whether Social Security income and secured creditor payments should be included in the good-faith analysis; there is no dispute that they were properly analyzed in the disposable income calculations. This has been a matter of debate in the appellate courts. BAPCPA consciously sought to limit judges' discretion by making the means test. By expressly excluding Social Security payments, the court said, Congress signaled an intention to depart from bankruptcy courts' prior willingness to include it. Indeed, the Ninth said, to agree with the trustee would be to allow bankruptcy judges to use their judgment, undermining Congress's language and purpose. Joining all of its sister circuits to consider the issue, it ruled that excluding Social Security from a plan cannot create a lack of good faith. Using the same reasoning, it ruled that BAPCPA's disposable income calculations foreclose consideration of secured creditor payments. Thus, it affirmed all the prior rulings.

Vincent Howard and our Santa Ana consumer bankruptcy lawyers are pleased to see a debtor-friendly ruling on BAPCPA. Some of the basis for this ruling rests on aspects of BAPCPA we didn't care for--particularly the Congressional intention to deprive bankruptcy judges of discretion in individual cases. But depriving them of discretion can be to the advantage of either the debtor or the creditors, and in this case, it appears that it benefits the debtors most by giving them an opportunity to hold onto luxury goods they might otherwise have been forced to surrender. Unfortunately, just as often, depriving judges of discretion robs them of an opportunity to do something that might help the debtor--for example, lifting the burden of student loan payments without meeting the difficult standard of "undue hardship." Vincent Howard and our Ontario individual bankruptcy attorneys would ultimately still prefer a return to the pre-BAPCPA system.

Continue reading "Courts May Not Consider Social Security Income or Secured Creditor Payments Under BAPCPA - In re Welsh" »

Vincent Howard and our Redlands consumer bankruptcy lawyers were interested to see a case involving blatant violations of debt collection and bankruptcy laws. In Radcliffe v. Experian Information Solutions, the Ninth U.S. Circuit Court of Appeals reversed approval of a settlement of a class-action lawsuit against multiple credit reporting agencies, saying the settlement split the interests of lead plaintiffs too drastically from those of the class members. The lawsuit was filed by a class of people who had debts reported on their credit reports even though the debts had been discharged in bankruptcy, which violated the Fair Credit Reporting Act. The Ninth disapproved the settlement because it created large incentive awards to class representatives, conditioned on their support for the settlement.

Many lawsuits underlying this litigation alleged that the three major credit reporting agencies--Experian, TransUnion and Equifax--issued reports showing delinquencies on debts that had already been discharged in bankruptcy. Some of the plaintiffs added that the agencies had failed to investigate despite notification of the errors. This was a violation of the Fair Credit Reporting Act and California's equivalent state law. The many lawsuits were consolidated and ordered into mediation, which first produced an injunction and later an agreement for financial damages. The financial settlement provided "actual damages" to all class members, though the actual awards were set amounts that depended on the type of problem created by the incorrect reports. Class counsel had the right to petition for attorney fees. And class representatives could petition for an award no greater than $5,000, conditioned on their support of the settlement. A group of class representatives and objectors objected to the settlement but were overruled.

On appeal, the objecting plaintiffs argued that the settlement creates a conflict of interests between class representatives and the class, making representation by class representatives and class counsel inadequate. The Ninth Circuit agreed after review. The Ninth has approved incentive awards for class representatives, but not when they are so large that they create conflicts of interests. Here, the language of the settlement conditions the $5,000 incentive awards on support for the settlement, the court said, despite settling plaintiffs' arguments to the contrary. This could bias the judgment of the class representatives, the court said, because they would receive nothing if they opposed it, even if they thought that was the best choice for the class as a whole. The conditioning of the awards is not at all typical, the court added. And because the settlement created this problem, the Ninth found that both the class representatives and the class counsel did not adequately represent the class. It remanded for a new settlement.

Vincent Howard and our Anaheim personal bankruptcy attorneys are sorry to see that this settlement will have to be re-negotiated--but we are pleased that the issue was raised in the first place. Wrong information on credit reports has serious consequences. Anyone who has ever been harassed by a debt collector knows that they often don't listen to explanations; their job is to get paid, sometimes using emotional manipulation and outright lies. The "actual damage" awards proposed in this case were not adequate to cover the likely costs of having incorrect debts reported. For example, the award for having credit denied was $150, which is likely a fraction of the actual cost difference between a good credit card rate and a bad one. That's why Vincent Howard and our Chino individual bankruptcy lawyers strongly advise victims of mistakes by debt collectors or credit reporting agencies to talk to us about a FCRA or FDCPA lawsuit.

Continue reading "Ninth Circuit Reverses Approval of Settlement for Debt Collection Violations After Bankruptcy - Radcliffe v. Experian Info. Solutions" »

Vincent Howard and our Rancho Cucamonga foreclosure defense attorneys were disappointed to see a ruling throwing out a foreclosure lawsuit in part because the defendants, two banks, are exempted from consumer protection laws in Louisiana. In Truong v. Bank of America et al., Glory Truong sued Bank of America, her loan servicer, and Wells Fargo, the trustee for the security her home loan had been bundled into. Truong alleged that Bank of America had misled her about issues related to a loan modification, and that Wells Fargo could not foreclose on her because the note for her home hadn't been endorsed properly. The district court dismissed some of her claims using the Rooker-Feldman doctrine, which prevents federal courts from relitigating issues decided in state courts. Disturbingly, it also held that the servicer is exempted by law from Louisiana's consumer protection law.

Wells Fargo filed a petition to foreclose on Truong's Marrero, Louisiana home in June of 2010. The petition submitted to the court contained an affidavit by Kathy Repka, who testified that Truong had defaulted. In the summer of 2011, Truong applied for a HAMP loan modification with Bank of America. She claims the bank told her the foreclosure process would be stopped while her application was considered, but less than two months later, Truong followed up and discovered that the bank had no record of receiving her application. She submitted a second application and received the same assurance, on whose strength she declined to challenge the state foreclosure proceeding. Less than a month later, her home was sold at a foreclosure sale she claims she was not notified about.

Her December 2011 lawsuit alleged that Wells Fargo could not foreclose because of a missing endorsement; that BofA made false representations to her about the HAMP process; and that Repka's affidavit was robo-signed and thus false. She alleged violations of Louisiana's consumer protection law. The district court dismissed most of her claims under the Rooker-Feldman doctrine, reasoning that they were inextricably entwined with the foreclosure proceeding. On the HAMP-related claim, it also held that BofA was exempted by statute from the Louisiana consumer protection law.

The Fifth Circuit affirmed, but only on the Louisiana statutory grounds. The Rooker-Feldman doctrine is intended to be narrow, it said, and precludes "state-court losers" from attempting to get district court review of their judgments. In this case, the appeals court found that Truong's federal claims were not attempts to overturn the state-court judgment and was not asking for damages arising from that judgment. Although her claims were "inextricable intertwined" with the foreclosure case, the Fifth said, they were sufficiently independent to survive summary judgment. Nonetheless, the Fifth went on to dismiss all of her claims for failure to state a claim under the Louisiana Unfair Trade Practices Act (LUPTA). That law includes a section exempting "any federally insured financial institution," which describes both banks. Truong failed to address this in her opening brief, the court noted, so arguments later raised in her reply brief were deemed waived, although it was also unpersuaded by their merits.

Vincent Howard and our Westminster foreclosure defense lawyers wonder why Louisiana felt it was wise to create this statutory exemption for foreclosing banks (which was enacted in 2006 to negate an appeals court ruling). A lot of predatory lending behavior happened during the real estate downturn. Borrowers are frequently far less well educated on consumer lending than their lenders, and have no power to control important issues like who owns their loans. While this issue ends consumer protection-based foreclosure lawsuits in Louisiana, we do appreciate that the Fifth declined to find that the foreclosure lawsuit precluded any further litigation of the issue. That finding is in line with numerous federal foreclosure decisions. Vincent Howard and our Riverside County foreclosure defense attorneys hope it's useful to future victims of predatory lending.

Continue reading "Fifth Dismisses Foreclosure Lawsuit, Saying Banks Exempted From Consumer Protection Law - Truong v. Bank of America" »

Vincent Howard and our Rancho Cucamonga foreclosure defense lawyers have followed with great interest lawsuits alleging damages related to HAMP. The federal government's Home Affordable Modification Program was not a success, but extensive experience with the issues involved and representing people who attempted to use HAMP has helped us conclude that the lack of an enforcement mechanism (inadvertent or intentional) was the source of many of its problems, since lenders had no incentive to do anything that would have hurt them financially. So we were interested to see Spaulding v. Wells Fargo Bank, in which a Maryland couple unsuccessfully made six state-law claims against their mortgage servicer after it denied their HAMP application. Josephine Spaulding and Dale Haylett's case was dismissed for failure to state a claim, and the Fourth U.S. Circuit Court of Appeals upheld that ruling.

Under HAMP, borrowers who met the qualifications would have a three-month trial modification; if the borrowers made all their payments on time and nothing else changed, the servicer was required to offer a permanent modification. Spaulding and Haylett refinanced their mortgage in 2006 with a 30-year adjustable-rate loan. In early 2010, they ran into financial problems because Spaulding had a chronic illness that kept her from working and Haylett's work hours had been cut. They asked Wells Fargo for a loan modification. When Wells Fargo requested more information within 10 days, they sent it 11 days late without explanation. They went into default the following month and did make some payments, but stayed delinquent for four months before receiving a denial of their HAMP application in August. They continued applying and were denied each time.

They filed suit in July of 2011, alleging breach of implied contract, negligence, violations of Maryland's Consumer Protection Act, negligent misrepresentation and fraud. The district court dismissed, finding there was no contract, no tort duty owed and no false representation by Wells Fargo.

On appeal, the Fourth Circuit agreed. On the contract count, it found no implied-in-fact contract between the bank and the parties; they are not a party to Wells Fargo's contract with the federal government and thus cannot enforce it. The negligence claim failed because Wells Fargo didn't have a duty to Spaulding and Haylett and thus could not have breached it. Maryland law requires a closer connection, often established by contract, to establish a case for financial damages only--and, the Fourth said, there was no contract here. On the Maryland Consumer Protection Act claim, the couple alleged that Wells Fargo made a false statement when it said it needed more information to process their application because they had already sent the documents, but the Fourth said the extra pay stubs requested were part of evaluating whether they had financial hardship. The same was true on the fraud and negligent misrepresentation claims; the allegedly false statements were not false. For those and other reasons, the Fourth upheld the dismissal of their claim.

Vincent Howard and our Laguna Beach foreclosure defense attorneys wonder how many more HAMP lawsuits we would see if the program had included some serious "teeth" in the form of an enforcement mechanism. As this case shows, HAMP left loan servicers free to require reams and reams of paperwork and use other delaying tactics intended to drive borrowers into foreclosure. This would actually allow the loan servicer to make money; it gets extra money from late fees and interest, but takes none of the losses of the lender itself. As a result, servicers had every incentive to arbitrarily ask for more pay stubs or other documentation, "lose" it, and avoid giving clear answers when the borrower tried to get in touch. Since then, we've seen that this can only be the basis of a lawsuit when the facts and state laws are right; there is no federal right of action at all under HAMP, as even sympathetic courts have found. Vincent Howard and our San Bernardino County foreclosure defense lawyers believe this kind of misbehavior should not be rewarded with immunity from lawsuits.

Continue reading "Fourth Circuit Rejects HAMP Loan Modification Fraud Lawsuit - Spaulding v. Wells Fargo Bank" »

Vincent Howard and our Riverside County predatory lending attorneys were pleased to see a partial victory for a former homeowner who alleged he was the victim of a bait-and-switch loan and an inflated appraisal. The Sixth U.S. Circuit Court of Appeals ruled in Wallace v. Midwest Financial & Mortgage Services that Harold Wallace of Kentucky had adequately shown that the appraisal fraud caused his extensive financial problems. Wallace refinanced his home in 2006 to do some improvements, but did not realize he was getting an option adjustable-rate mortgage with very high interest. The appraiser for his lender also set the value of the home too high and likely didn't visit. After declaring bankruptcy and surrendering the home, Wallace sued, alleging racketeering, state-law conspiracy and more.

Wallace's second refinance, the loan at issue, was to consolidate his first two loans and build out the basement. He sought a refinance loan of around $422,500 from Midwest, a loan broker. Midwest retained Accupraise, a now-defunct company run by a de-licensed appraiser named Andrew Brock, a party to the litigation. A former employee testified that Midwest told Brock how much it would like the appraisal to come to, and Brock would appraise it for that amount, forging the signature of a licensed appraiser and rarely visiting the properties. This appraisal came to $500,000, but Wallace didn't want to borrow more than he needed, so they agreed to $425,000, in a conversation Wallace alleges misrepresented the payment schedule. He later learned the true value of the home at the time was closer to $375,000.

At closing, Wallace claims, he unwittingly signed papers for an option ARM that permitted him to skip the principal payment for a time, creating huge minimum payments later. Midwest received a $14,000 "yield-spread premium" payment from MortgageIT, the lender, for selling Wallace a more expensive loan than he could have qualified for. Wallace received negative home equity and snowballing financial problems, lost the home and declared bankruptcy. In 2007, he sued, alleging Midwest, Accupraise and others conspired to inflate appraisals in order to sell expensive loans to victims, which MortgageIT then sold as securities to avoid the risk of default. The district court granted summary judgment on some of Wallace's claims and ordered mediation on the rest, which gave Wallace a victory only on his RESPA claim.

Wallace's appeal challenged summary judgment on his state-law conspiracy, RICO conspiracy and RICO claims. Summary judgment by the district court rested on the court's belief that the unfavorable loan terms, rather than the inflated appraisal, were the reason for Wallace's financial problems. The Sixth Circuit disagreed. The appraisal, if false, created a belief that Wallace had more home equity than he really did, the court said. This permitted Midwest to convince Wallace to take out a large loan that got him into financial trouble. From the record, the Sixth said, it's clear that the inflated appraisal was important in Wallace's decision; he told Midwest he needed to know if he had enough equity to borrow. Indeed, the court said, an honest appraisal would have prevented him from taking out any loan because he had no equity. This is adequate to survive summary judgment on the RICO claims and part of his state-law conspiracy claim, the Sixth said, although it agreed that the state conspiracy claims against MortgageIT were not adequate.

Vincent Howard and our Santa Ana predatory lending lawyers are glad that Wallace will get a day in court on these claims, because they allege a type of serious wrongdoing that took place in many states during the mortgage bubble. Home equity was rising so fast that high appraisals didn't raise many eyebrows--even when they should have--and some people saw opportunities to make more money by deceiving borrowers. This case was not about the Truth in Lending Act, but people who got an unexpectedly expensive loan, as Wallace did, frequently find there were TILA violations because they were promised a different loan orally and in writing than the one they were presented with at closing. That's one law Vincent Howard and our Ontario predatory lending attorneys use to fight predatory lending, along with RESPA and a variety of state laws.

Continue reading "Sixth Circuit Partly Reinstates Appraisal Fraud Predatory Lending Lawsuit - Wallace v. Midwest Fin. & Mort. Svcs." »

Vincent Howard and our San Bernardino individual bankruptcy lawyers have written before about IRAs in bankruptcy. Congress has exempted IRAs and many other retirement vehicles from bankruptcies, which is uncontroversial when the IRA belongs to the bankruptcy debtor or was inherited from a deceased spouse. But there's a split among the federal appeals courts about whether an IRA inherited from another source is exempted from creditors' claims during bankruptcy, and a recent Seventh U.S. Circuit Court of Appeals ruling widened that split. In Rameker v. Clark, bankruptcy trustee William Rameker wanted to tap into an IRA left to Heidi Heffron-Clark by her mother, Ruth Heffron. The bankruptcy court permitted it, but the district court reversed that. The Seventh Circuit reversed again, permitting the trustee access to the money.

Bankruptcy law exempts retirement funds from bankruptcy to the extent that they are exempt from taxation under certain sections of the tax code. An IRA inherited by a spouse meets this requirement. However, Heffron-Clark inherited her IRA from her mother, which subjects it to different rules: no new contributions can be made; the balance cannot be rolled over or combined with other accounts; and it must start paying discharges within a year of the original owner's death. However, the money is still tax-exempt until withdrawn. The bankruptcy judge handling the bankruptcy of Heffron-Clark and her husband ruled that the IRA is not "retirement funds" because Heffron-Clark may not save it for her own retirement. The Clarks appealed to the district court, which reversed. Its ruling said funds that were retirement funds in a deceased person's hands must be retirement funds in the subsequent owner's. In so ruling, the district court sided with the Eighth U.S. Circuit Court of Appeals BAP; the Fifth Circuit later agreed.

The Seventh Circuit, however, disagreed in this case. It looked at how the funds would be used in Heffron-Clark's hands, not at their legal designation. For example, the court said, if Heffron-Clark were a trustee for someone else's funds, her creditors could not reach those funds even though she would be the legal owner. The Seventh then concluded that this IRA could not be used as retirement funds because of the requirement that the money be distributed before Heffron-Clark's retirement. In disagreeing with the other courts, the Seventh said the word "retirement" alone should not be given too much weight. Drawing an analogy, it said Heffron-Clark could not claim a homestead exemption for a house that was her mother's homestead, but that she had inherited and rented out. The exemption in both cases depends on how Heffron-Clark is using the property, the Seventh said, and this IRA is not reserved for use after she stops working. Thus, it reversed the case.

The Seventh Circuit panel noted that because it was creating a split with the Fifth Circuit, it asked all of its active judges if they would like an en banc rehearing (another case before a larger panel of judges). Apparently, a rehearing was not requested--but Vincent Howard and our Irvine personal bankruptcy attorneys suspect the issue will arise again. A split between the circuits often means the issue is controversial or the question is close, so the issue may be watched among bankruptcy attorneys. Our own home circuit is the Ninth Circuit, where this issue was addressed in the Bankruptcy Appellate Panel, which agreed with the Fifth that the accounts should be protected. At Howard Law, P.C., our Corona consumer bankruptcy lawyers prefer this interpretation, which gives our clients the maximum chance at a fresh financial start.

Continue reading "Seventh Restores Ruling That Inherited IRA Cannot Be Exempted in Bankruptcy -Rameker v. Clark" »

Vincent Howard and our Rubidoux personal bankruptcy attorneys have written recently about the difficulties faced by bankruptcy filers who are seeking an "undue hardship" discharge of their student loans. The relatively new practice of requiring a show of undue hardship has attracted criticism, because it expands a protection for the federal government to private companies that consider risk differently and don't answer to taxpayers. That's why we were interested to see a related issue in the First U.S. Circuit Court of Appeals with Hann v. Educational Credit Management Corp.. ECMC filed a proof of claim in Barbara Hann's Chapter 13 bankruptcy, and she objected because she believed the loans were paid off. The bankruptcy court sustained the objection, but ECMC retried to collect after her bankruptcy was closed, leading the bankruptcy court to sanction it. The First Circuit upheld that ruling.

As a law student, Hann, of New Hampshire, took out three federal Stafford loans totaling $22,500, which debt was later assigned to ECMC. She contends that she has paid off these loans, and in the time leading up to her 2004 bankruptcy, tried unsuccessfully to get ECMC to acknowledge this. After her bankruptcy filing, ECMC filed a proof of claim with an incorrect principal amount, supported by documents showing the correct amount. Hann objected. ECMC did not show up to the hearing on Hann's objection, and the bankruptcy court ultimately allowed the claim in the amount of $0. ECMC didn't respond, but after her bankruptcy ended, it resumed attempts to collect on the loans. Hann then reopened her bankruptcy case in order to file an adversary complaint against ECMC. ECMC attended this hearing, arguing that the previous order disallowing its claim had not settled what Hann owed or discharge it. The bankruptcy court agreed with Hann that the previous order established that the debt was paid, and awarded her costs and fees.

ECMC appealed unsuccessfully to the Bankruptcy Appellate Panel of the First Circuit, then appealed that order to the First Circuit. That court also affirmed. After reviewing prior arguments about dischargeability, the First concluded that the issue is whether the bankruptcy court's original order disallowed ECMC's claim on the ground that Hann had already paid her loans. If so, arguments about the dischargeability of the "debt" were irrelevant, the court said. ECMC insists that the order didn't make a factual determination about whether the loans were paid, but simply ruled the ECMC couldn't collect anything by saying the claim was allowed in the amount of $0. The First agreed with ECMC that bankruptcy courts ought to plainly state the reasons for disallowing claims, but disagreed that it couldn't look into the reasons without such clarity. Scrutinizing the record, it agreed with Hann that the order was based on the bankruptcy court's belief that the loans had been repaid. It then upheld sanctions for abuse of the bankruptcy process.

Vincent Howard and our Westminster consumer bankruptcy lawyers are pleased to see this victory for the debtor, who apparently spent well over a decade attempting to get ECMC to recognize that her loans were paid off. As a general rule, creditors that attempt to collect debts already handled during a bankruptcy can expect sanctions. In fact, bankruptcy affords a certain amount of protection from creditors as soon as the person files--which is one reason bankruptcy is attractive to people with a lot of credit card or other unsecured debt. If a debt collection agency attempts to collect after the bankruptcy is filed and the automatic stay is in place, you can sue and often collect a settlement. The money is useful to the bankruptcy estate--and it gets the debt collector off your back, and hopefully stops future abuses. That's why Vincent Howard and our Claremont individual bankruptcy attorneys advise our clients to pursue debt collection violations.

Continue reading "First Circuit Upholds Sanctions Against Student Loan Company for Collecting on Paid Off Debt - Hann v. Educational Credit Mgmt Corp." »