California Bankruptcy Attorney Blog

Led by partner Vincent Howard, our San Bernardino consumer bankruptcy attorneys frequently represent people who are seeking a bankruptcy in part because they have oppressive student loan debt. This is a major issue for bankruptcy filers and younger people, who have been denied the opportunity to discharge this debt even when it's private -- where the interest rates are high -- by the 2005 changes to the bankruptcy laws. Against that backdrop, the Sixth U.S. Circuit Court of Appeals decided in In re Gourlay that Sallie Mae, the student loan organization, is not permitted to set aside a default judgment obtained by filer Kristin Gourlay after Sallie Mae failed to respond to adversary proceeding seeking to find the debt dischargeable. The bankruptcy court was within its rights to find that the failure was not excusable neglect, the court said; service was proper and the appropriate person simply failed to respond.

After Gourlay, of Kentucky, filed for Chapter 7 bankruptcy, she filed the adversary proceeding seeking to determine the dischargeability of her student loans owed to Sallie Mae. When she filed, she owed Sallie Mae about $25,500. Her bankruptcy attorney sent Sallie Mae a timely summons by certified mail, and the return card was signed by someone believed to be a part time employee at the company's Virginia headquarters. The deadline for a response came and went, and Gourlay filed for a default judgment about a week later. This was rejected for improper service, so Gourlay served the summons again. When there was still no response, the bankruptcy court granted her second motion for default judgment. Eighteen days after that was final, Sallie Mae moved to set it aside for excusable neglect. The court ultimately rejected this, finding that internal breakdowns are not excusable neglect, and Sallie Mae appealed.

On appeal, Sallie Mae argued that its failure to respond was not culpable; that Gourlay's complaint was insufficient in any case; that she failed to follow local notice rules; and that service was not proper. The Sixth U.S. Circuit Court of Appeals rejected all of these arguments. On the sufficiency of Gourlay's complaint, the court found that Sallie Mae can no longer make this argument, having waited past the deadline for appeal of a purported legal error. On the excusable neglect issue, the Sixth simply disagreed. Sallie Mae said the office that the summons was mailed to was in the process of moving, with only one employee present; it argued that the resulting delays and chaos amount to excusable neglect However, there was no evidence that the organization took steps to safeguard important mail, the court noted, and the lost notice appeared to be the result of its own decisions. On the notice issue, the court said, Sallie Mae was entitled to no further notice in any case because of its non-response. Finally, the Sixth found that service was not improper just because the executive named did not work at that office; Gourlay had an obligation to serve the principal office, and she did.

Vincent Howard and our Irvine personal bankruptcy lawyers are pleased to see a win in a case involving a defendant that so clearly did not follow the rules. In general, this kind of default judgment is more often won against individual defendants, who miss notices because they don't have the resources of a large organization like Sallie Mae. (In rare cases -- though less rare in debt collection lawsuits -- the notice is actually served incorrectly.) This ruling helps establish that the same rules apply even when the losing party is powerful and can afford many lawyers. It's also, of course, a win for Gourlay, who may be able to clear the encumbrance of her student loans because of this mistake. Vincent Howard and our Carlsbad individual bankruptcy attorneys routinely work with people who are suffering from heavy student loan debts and have limited options for clearing it.

Continue reading "Sixth Circuit Upholds Default Judgment Against Student Loan Company in Bankruptcy - In re Gourlay" »

Vincent Howard and our Moreno Valley consumer bankruptcy lawyers were interested to see a recent ruling applying well-understood bankruptcy law to a legal judgment for fraudulent transfer of property. It's long been true that bankruptcy does not discharge debts created by litigation for certain things, including a lawsuit over "willful and malicious injury" to someone else or someone else's property. In Maxfield v. Jennings, the Eleventh U.S. Circuit Court of Appeals applied this rule to a judgment against Janice Jennings for transferring property to exempt it from an underlying product liability suit. The Eleventh Circuit found that this was enough to constitute willful and malicious injury and upheld the non-dischargeability finding.

Brandon James Maxfield was seven when he was shot accidentally and rendered a quadriplegic. He sued Bruce Jennings, Janice's ex-husband, and his two firearms companies for negligence, and later named Janice and a real estate company that the two ex-spouses still held in common, as well as Bruce's third ex-wife, Anna Leah Jennings. Shortly after the amended complaint, Bruce asked Janice to transfer the real estate to Anna. When Maxfield found out, he filed a separate lawsuit against Janice and the real estate entities for conspiracy and fraudulent transfer. A jury eventually awarded Maxfield $24.7 million in his negligence case, prompting Janice and others to file for bankruptcy and the court to join their bankruptcy cases with the fraudulent transfer action. There, the court found Janice jointly and severally liable for the main judgment as well as the fraudulent transfer ($3.9 million in total liability).

Maxfield later filed an adversary proceeding in bankruptcy court, seeking a determination that Janice's debt to him from the fraudulent transfer judgment is not dischargeable. The bankruptcy court dismissed, finding that a conspiracy claim does not qualify as "willful and malicious injury," but the district court reversed. On remand, the bankruptcy court granted summary judgment to Janice, finding that the debt -- which it thought was from the negligence suit -- was not from willful and malicious injury, and that the fraudulent transfer was not guaranteed to harm Maxfield in any case. The district court again reversed, finding that Janice lied about transferring the real estate to satisfy a divorce obligation owed to Anna; knew the real estate was likely to be encumbered by the transfer; and that Bruce was trying to transfer it to keep it away from creditors. This satisfied the requirement that Janice's conduct be "willful and malicious injury," the district court said. The bankruptcy court entered judgment for Maxfield and this appeal followed.

Without oral argument, the Eleventh Circuit affirmed. Janice argued that there was no injury to Maxfield or his property from her actions because the actions took place before the judgment in his personal injury case. The Eleventh rejected this argument, finding that Janice's actions did take place after she and the real estate company were found liable in the fraudulent transfer case. The lower courts found that this was done knowingly. The Eleventh also agreed that it was done willfully and maliciously, not just recklessly. Janice knew there was a personal injury claim against the property because she was a defendant too, the court said; she even admitted this on the record before testifying otherwise. She knew this would prevent Maxfield from collecting on any judgment and also knew Anna had no claim on the property. Thus, the Eleventh upheld the lower courts.

Vincent Howard and our Placentia personal bankruptcy attorneys are particularly interested in the procedural history of this case, because it's clear that the bankruptcy judge must have strongly disagreed with the district judge. Even after a reversal, the bankruptcy judge persisted in finding for Janice, requiring the district judge to order the outcome he or she wanted the second time around. To the Los Angeles County individual bankruptcy lawyers at Howard Law, P.C. this suggests some sympathy from the lower court. Though we can't ascertain why from the record, we do note that Janice was only very indirectly involved in the underlying injury to Maxfield -- she was once married to an owner of the companies that made the gun. Without the fraudulent transfer, she may have had more luck arguing that this was a very tenuous connection.

Continue reading "Eleventh Circuit Rules Debt Created by Judgment for Fraudulent Property Transfer Is Not Dischargeable - Maxfield v. Jennings" »

Vincent Howard and our team of Rancho Cucamonga personal bankruptcy attorneys were interested to see a ruling that establishes new rights -- at least for now -- for California bankruptcy filers. In In re Hamlin, the Ninth U.S. Circuit Court of Appeals Bankruptcy Appellate Panel ruled that Chapter 13 filer Brittany Hamlin may exempt an IRA she inherited from her grandmother. While retirement funds are generally privileged in bankruptcy, the issue of whether an IRA can be exempted when it is inherited from a non-spouse was one of first impression for the panel. Hamlin and her husband, Travis Hamlin, filed for Chapter 7 bankruptcy in Arizona several years after the 2004 death of Brittany's grandmother. The bankruptcy court allowed this to be exempted over the trustee's objections, and the BAP affirmed.

The inherited IRA was held in trust for Brittany between her inheritance and the bankruptcy filing, and was worth nearly $32,000 on filing. The Chapter 7 trustee objected to the exemption, arguing that inherited IRAs are not treated like traditional IRAs funded by the debtors. After an initial hearing and supplemental briefing, the bankruptcy court determined that the IRA would be exempt under a section of the 2005 bankruptcy law amendments that exempts tax-exempt retirement funds. However, because there was some question about whether Brittany had maintained the account's tax-exempt status, the court signaled willingness to hear further motions. The trustee continued to object after the Hamlins filed an amended Schedule C, arguing that they should not be permitted to use federal exemptions after initially claiming state exemptions for this purpose. This too was rejected after a hearing, and the trustee appealed.

The Ninth Circuit BAP affirmed. Under the 2005 law, debtors may take federal exemptions for retirement funds even if, like Arizona, their states don't allow them to use federal exemptions otherwise. This exemption exists for funds that are retirement funds and are in an account exempt from federal taxation. Nearly all courts that have decided whether this applies to inherited non-spouse IRAs have agreed that it does. The BAP rejected arguments that the funds in such an IRA are not "retirement funds" under the law, saying the statute's plain language says they are. And while an inherited IRA is treated differently from a self-funded one, the BAP found that it was nonetheless exempt from taxation under the federal tax code. The court also found support in a provision that continues the exemption for accounts transferred from trustee to trustee, precisely the situation of an inherited IRA.

Vincent Howard and our Yorba Linda individual bankruptcy lawyers are pleased to see a decision that allows debtors to keep more of their IRA funds when they file for bankruptcy. Though this decision applies only in the Ninth Circuit, and may be reviewed by the Ninth itself, it comes with a great deal of backing from other courts around the United States. All of these decisions must necessarily have come within the last six and a half years, since the bankruptcy provision in question was adopted with BAPCPA in October of 2005. An inherited IRA is subject to a lot of federal rules that make it difficult to use with the flexibility of an ordinary account -- something the Hamlins may have found out firsthand -- but it can still be valuable for people struggling to keep up with their financial obligations after an event like bankruptcy. That's why the Vista consumer bankruptcy attorneys at Howard Law, P.C., work to exempt every asset that makes sense to exempt for our clients.

Continue reading "Chapter 7 Filer May Exempt IRA Inherited From Grandmother, BAP Rules - In re Hamlin" »

Vincent Howard and our team of Lake Elsinore consumer bankruptcy attorneys were interested to see a case addressing the issue of when bankruptcy debtors may resume paying into 401(k) retirement accounts. This issue arises because the bankruptcy code, like the tax code, gives these accounts a special protected status that many other financial instruments don't enjoy. In Seafort v. Burden, the Chapter 13 trustee for Deborah Seafort and Frederick and Carrie Schuler challenged their two bankruptcy plans. Both plans would have permitted debtors to start paying into their 401(k)s as soon as loans from those accounts were paid back, even though unsecured creditors would not be fully paid at that time. The bankruptcy court permitted this, but the Bankruptcy Appellate Panel of the Sixth U.S. Circuit Court of Appeals and the Sixth Circuit itself ruled against it.

Seafort and the Schulers filed separate bankruptcy petitions in 2008. Both estates were eligible for 401(k) accounts under ERISA and were in the process of paying back loans they had taken out from those accounts. Both estates' plans proposed to repay the loans before the end of the bankruptcy period, then start paying into their retirement accounts. In both cases, the trustee (the same person) objected, arguing that payments to 401(k)s are only excludable if they are being made at the time of the petition; the debtors' newly freed income should be used to repay unsecured creditors first. In a consolidated case, the bankruptcy court disagreed, finding loan repayments and plan contributions were equivalent. The BAP for the Sixth Circuit, however, reversed in a divided opinion, agreeing that post-petition income that becomes available after repaying a loan from a retirement account is not excluded. The debtors appealed.

The Sixth Circuit framed the question as whether income available after repayment of 401(k) loans is "projected disposable income" within the meaning of the bankruptcy code. The 2005 bankruptcy law, BAPCPA, is less than clear about the status of 401(k) contributions that start post-petition, the Sixth said, and no circuit court has addressed the issue, though lower courts have come up with at least three interpretations. It ultimately agreed with those finding that a Chapter 13 debtor may not make voluntary post-petition retirement account contributions in any amount. Because retirement contributions are expressly described as not disposable income, the court found that they must enjoy some protection; but it also presumed that Congress deliberately left them out of Chapter 13 itself. Though BAPCPA created new privileges for retirement funds, the court said, its purpose and legislative history say it should be construed to give creditors the maximum protection. Thus, the Sixth upheld its BAP and declined to allow post-petition 401(k) contributions.

Vincent Howard and our Mission Viejo personal bankruptcy lawyers may follow this issue, because it's likely to come up again. This was an issue of first impression for the Sixth Circuit and indeed, for all the federal appeals courts. It's unclear whether other federal appeals courts might find room in the law to rule differently, but the three-way split in the lower courts suggests that they might. Any ruling following a different school of thought in that split would be more favorable for debtors than the current ruling was. As things stand, BAPCPA makes 401(k) loans easier to pay back -- a boon to creditors -- but is unlikely to help the debtor free up money for future voluntary contributions. Vincent Howard and our entire team of Torrance individual bankruptcy attorneys make it a goal to help clients get the most out of bankruptcy by prioritizing in this way.

Continue reading "Sixth Circuit Rules Chapter 13 Debtors May Not Pay Into 401(k)s Before Paying Creditors - Seafort v. Burden" »

Vincent Howard and our team of Ontario consumer bankruptcy lawyers have written several warnings on this blog about the fact that debts are not dischargeable when they are acquired through fraud. This includes legal judgments against the debtor that stem from fraud. Because most of these legal judgments make the debtor quite unsympathetic, however, we rarely see a case like Bullock v. BankChampaign NA, in which Randy Curtis Bullock lost the original lawsuit on what could be called a technical violation. Bullock, as a former trustee, violated the terms of his father's trust by lending money to his mother and taking out business loans; all were repaid. However, his brothers successfully sued him for self-dealing as trustee, leading to the bankruptcy. The Eleventh Circuit affirmed that this debt was not dischargeable.

Starting in 1978, Bullock was trustee of a trust holding only his father's life insurance policy, with Bullock and his four siblings as beneficiaries. The terms of the trust allowed him as trustee to withdraw money only to pay premiums on the policy or make payments to a beneficiary. Nonetheless, Bullock borrowed from it, first at his father's request, to lend money to his mother. He later borrowed to make investments leading to the purchase of a business and to allow him and his mother to buy real estate. All three debts were repaid. However, when his brothers learned of the trust, they sued Bullock for breach of fiduciary duty. In a 2002 ruling, the Illinois state court found Bullock liable despite lack of apparent malfeasance and awarded $285,000 in combined damages and attorney fees.

It also put constructive trusts on the property he had purchased and on his interest in the trust, and awarded them to BankChampaign. That bank has not allowed Bullock to sell his property to satisfy the judgment debt, Bullock said. Thus, he filed for Chapter 7 bankruptcy in an attempt to discharge the debt. The bank filed an adversary proceeding to find the debt non-dischargeable, and the bankruptcy court agreed. In an appeal, the district court said it was "convinced" that the bank was abusing its position of authority, but advised Bullock that an Illinois state court, rather than bankruptcy court, is the proper venue to argue trustee malfeasance.

Bullock's appeal to the Eleventh U.S. Circuit Court of Appeals argued that the bankruptcy court should have found the debt dischargeable, and that the bank had acted wrongfully. The court ultimately rejected both arguments. Under the bankruptcy code, it said, Bullock's actions do indeed constitute defalcation that would make the debt non-dischargeable. There is a split in the circuits on whether an innocent act can constitute defalcation; the Eleventh sided with those circuits requiring a show of recklessness. It then found that Bullock was reckless because he knew the loans were self-dealing. Thus, it upheld the finding of non-dischargeability. It also declined Bullock's argument that the bank had unclean hands due to its wrongful conduct with his property, and thus should not benefit from a non-dischargeability finding. Though it agreed with the district court that the bank's conduct was wrongful, it also agreed that Illinois state court is the correct forum. Thus, it upheld the lower courts.

The Fountain Valley personal bankruptcy attorneys at Howard Law, P.C., see cases of banks abusing their power quite often. Normally, however, this is in the context of a foreclosure, where a loan servicer does everything it can to confuse and delay any loan modification in order to drive the borrower into a lucrative-for-it foreclosure. Given that experience, and given the strong words used by the district court in this case, we suspect that this bank stands to profit more from holding up the judgment indefinitely than it does from allowing Bullock to pay the judgment and move on. In general, many types of legal judgments can be discharged in bankruptcy. As this case shows, there are exceptions, including judgments created by wrongdoing as well as judgments for things like income taxes and child support. To get the best possible advice on your situation, you should talk to Vincent Howard and our Vista individual bankruptcy lawyers for help.

Continue reading "Eleventh Circuit Affirms That Judgment Against Trustee for Malfeasance Is Not Dischargeable - Bullock v. BankChampaign NA" »

Vincent Howard and our team of Norco foreclosure defense attorneys frequently handle bankruptcies in which the homestead exemption is a major factor. The homestead exemption allows a significant portion of the home's value to be exempted from bankruptcy, which in turn prevents filers from losing their homes under many circumstances. In fact, since the housing bubble burst a few years ago, bankruptcy has been an important strategic tool for homeowners who are determined to keep their homes (though it's not smart or possible in every circumstance). So we were interested to see an unusual decision of the Massachusetts Supreme Judicial Court in a case where the beneficiary of a trust was attempting to claim a homestead exemption. In Boyle v. Weiss, the court ultimately found no exemption where the filer did not control the trust or own more than 50 percent.

The debtor is Roberta Boyle, who lives in the disputed homestead in Lowell, Mass. The home was conveyed to a trust in 1990, and Roberta Boyle holds 50 percent of the beneficial interest of the trust; the other 50 percent is held by her father, Robert Boyle. Roberta is a tenant to the trust. In 2010, she filed a declaration of homestead in the property, then filed for Chapter 7 bankruptcy, claiming an exemption for her beneficial interest in the trust. The bankruptcy trustee objected, saying Massachusetts law does not allow a beneficiary to acquire a homestead estate. The bankruptcy court certified a question to the Supreme Judicial Court of Massachusetts: "May the holder of a beneficial interest in a trust which holds title to real estate and attendant dwelling in which such beneficiary resides acquire an estate of homestead in said land and building under [Massachusetts law]?"

The high court ultimately said no, declining to allow Boyle the homestead exemption. Boyle argued that caselaw requires the homestead statute to be interpreted liberally, and she is both an owner and a tenant on the property. However, the court said, Boyle is not an owner within the meaning of the homestead statute because that statute allows only for ownership by a sole owner, joint tenant, tenant in common or tenant by the entirety. The trustee could serve her notice to quit within 14 to 30 days. Furthermore, the terms of the trust do not make Boyle even an indirect owner, because she doesn't have a controlling interest, the court found. She also argued that if not an owner, she still possesses the property "by lease or otherwise," as state law provides -- but this argument was also rejected as incompatible with an 1863 ruling (and a later 1990s ruling). In a footnote, the court noted that Boyle's homestead registration was invalid in any case, since the trustee would have to register the homestead.

Led by partner Vincent Howard, our Garden Grove foreclosure defense lawyers help clients unravel tricky legal ownership issues like this all the time. Most people don't put their homes in a trust, of course, but this may be done by older people who are trying to avoid the probate process, or in other situations where they want to be clear on how assets should be transferred. This strategy can complicate what might otherwise be a simple part of a bankruptcy, because the owner of the trust must be the one involved in the bankruptcy. For debtors like Boyle, this situation is also less than perfect because it denies them a large bankruptcy exemption. That's why Vincent Howard and our Downey foreclosure defense attorneys prefer to discuss complications and legal strategies from the beginning of a case.

Continue reading "Massachusetts High Court Rules Debtor May Not Claim Homestead Exemption for Home Held in Trust - Boyle v. Weiss" »

Vincent Howard and our team of Redlands foreclosure defense lawyers were pleased to see another appeals court ruling penalizing the mortgage industry for sloppy paperwork. In McCormick v. Northen, the Fourth U.S. Circuit Court of Appeals upheld a ruling allowing a trustee to avoid a lien on a North Carolina property whose deed of trust was never properly recorded. Debtor John McCormick owned two tracts of land in Orange County, N.C., called Tract I and Tract II, and borrowed against them from SunTrust Bank. When the deed of trust for that loan was submitted, it included the county's Parcel Identification Number only for Tract II, effectively leaving the other tract out of the loan. SunTrust argued that the trustee had constructive knowledge of the lien, but the bankruptcy court, district court and Fourth Circuit all ruled that this was insufficient.

The original deed for both tracts was properly recorded, with a separate PIN for each tract. Orange County also maintains an unofficial registry that does not use PINs. In 1999, when McCormick borrowed from SunTrust, the deed was officially recorded only as to Tract II. In 2004, McCormick borrowed money from Marc and Maryann Macky, using parts of Tract I as collateral, and this was properly recorded with the county. When McCormick was placed under involuntary bankruptcy in 2006, the trustee sold all lots within Tract I and made the proceeds available for repayment of liens. He then moved to avoid SunTrust's lien as improperly recorded, which would benefit the Mackys. All parties agreed that a searcher of the Orange County PIN index would have found no SunTrust lien on Tract I, but SunTrust argued that the deed of trust for Tract II and the unofficial index would have led such a person to Tract I. The bankruptcy court rejected this, finding that North Carolina law gives priority to the first person to record an interest. The district court affirmed.

The Fourth Circuit affirmed that judgment again. It started by noting that the trustee stands in the shoes of a bona fide purchaser, who would not have found SunTrust's lien on Tract I in a search made at the time of the bankruptcy. The trustee further argued that his actual knowledge of the lien is irrelevant under bankruptcy law, because the code gives him the rights of a bona fide purchaser. And under North Carolina law, he said, a bona fide purchaser would not have taken Tract I subject to the lien. The Fourth agreed. State law does not permit lienholders who did not properly record their liens to jump ahead of those who did, even when they had the earlier liens. Actual or constructive knowledge of the unrecorded lien is irrelevant, the court said. Furthermore, the court said, a bona fide purchaser would have no reason to review the paperwork for Tract II and thus discover that the loan should have included Tract I. Thus, it upheld the lower courts.

Vincent Howard and our Santa Ana foreclosure defense attorneys frequently handle cases in which sloppy paperwork by banks works against borrowers, including cases involving lost paperwork, bureaucratic mix-ups and many other factors that can lead to incorrect denial of a loan modification. Very often, nobody but the borrower notices or cares until the borrower wises up and files some kind of action in court, allowing a judge to examine the evidence. That's why it's refreshing to see SunTrust penalized in this case. Since the 1990s, large mortgage lenders have increasingly ignored county land recording systems in favor of a system of their own devising called MERS, which is a proprietary database held by a private company and is not open to the public. MERS has been convenient to banks that wish to freely trade mortgages, but Vincent Howard and our San Diego foreclosure defense lawyers are starting to see more and more cases in which over-reliance comes back to haunt banks.

Continue reading "Fourth Circuit Permits Trustee to Avoid Lien on Property Without Recorded Deed of Trust - McCormick v. Northen" »

Vincent Howard and our Corona consumer bankruptcy lawyers warn every bankruptcy client about the penalties for lies in bankruptcy -- including lies that become relevant in a later bankruptcy as well as lies during the bankruptcy itself. So we were interested to read about such a case in our own home Ninth U.S. Circuit Court of Appeal's Bankruptcy Appellate Panel. In In re Belice, the panel overturned a bankruptcy court decision from San Diego in which Jason Belice's debt to Michael Barnes was not exempted from discharge. The panel found that Belice's alleged lies were outside of the "statements... respecting the debtor's financial condition" contemplated by the Bankruptcy Code. Because that was not how the lower court ruled, it reversed and remanded for more consideration.

Belice and his wife filed for Chapter 7 bankruptcy in 2009 and were classified as a "no asset" bankruptcy case because most of their assets were exempt. Barnes filed a nondischargeability complaint two months later, saying Belice had borrowed a total of $25,000 over two loans, secured by an interest in a business. That interest later turned out to be worthless, and Barnes alleged Belice knew it. He alleged Belice never repaid any amount and claimed interest as well as the principal. The court dismissed this claim, finding it was not pleaded specifically enough and also that any lie about the value of the security was an allowable "statement regarding a debtor's financial condition." His first and second amended complaints cited false statements Belice allegedly made about his income and business, as well as his failure to disclose that he was being sued. The bankruptcy court ultimately dismissed these as well, repeating that these were allowable statements and adding there was no duty to disclose the lawsuit.

Debts are exempted from discharge when they were incurred by fraud, false pretenses or other forms of deceit, the panel said -- unless they were oral lies about the debtor's financial condition. Courts have differed over what "the debtor's financial condition" means. After a lengthy review of the caselaw, the BAP decided that the phrase should be interpreted narrowly, to mean statements that "purport to present a picture of the debtor's overall financial health." The bankruptcy court appears to have chosen a broader interpretation, the panel said, particularly in light of its rejection of certain caselaw -- but this was an error. Under a narrow interpretation, some of Belice's allegedly false comments cannot be considered statements of income or expenses; others may relate to his assets but don't reveal anything meaningful on their own. Thus, the bankruptcy court was wrong to find Barnes had no claim, the panel said. However, the BAP agreed that there was no duty to disclose the lawsuit.

At Howard Law, P.C., our Laguna Beach personal bankruptcy attorneys prefer to have as much information as possible about our clients' financial situations, even if that information is less than flattering. That's because it's vital for us to make sure we understand the client's finances. This doesn't just help us get the best possible situation for our clients after discharge, although it's an important job. It also helps us avoid situations in which the client is accused of withholding assets or lying. Clients sometimes misunderstand this as a situation for "surprises" or are confused or embarrassed, but these innocent mistakes can lead to serious penalties in court, including cancellation of the bankruptcy or cancellation of discharge. Vincent Howard and our Paramount individual bankruptcy lawyers can do our best job when we're given the full picture, even if it's not so pretty.

Continue reading "Debtor Who Obtained Loan Through Fraud Has Debt Exempted From Discharge - In re Belice" »

Led by Vincent Howard, our team of Rancho Cucamonga foreclosure defense attorneys regularly reads about "show me the note" cases, in which borrowers challenge their lenders to produce the paperwork giving them the legal right to foreclose. The success of these cases frequently depends on the specific facts of the case, state law and even the sympathies of the judge. So we were very interested to read about a bankruptcy case out of Mammoth Lakes in which a couple attempted to argue that their mortgage debt was unsecured due to the invalidity of the debt. Berenice and Pierre Thoreau de la Salle argued that U.S. Bank had no standing to foreclose on their home and listed the debt as unsecured, causing their plan to be rejected and the bank to move to convert their case from Chapter 13 to Chapter 7. The Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals agreed in In re de la Salle.

Berenice de la Salle took out a $668,000 loan from Countrywide Home Loans in 2005, secured by the couple's home in Mammoth Lakes. In 2008, when she defaulted, she actually owed $840,000 on the note and another $29,000 in arrears (suggesting a subprime loan). A trustee's sale was scheduled for March 2010, and after a federal lawsuit failed to stop it, the couple filed for Chapter 13 bankruptcy. Their amended Schedule F listed the entire amount owed on the mortgage as a disputed unsecured claim, saying three possible creditors could come forward to enforce the note and deed, but U.S. Bank was not among them. After numerous proceedings, the bankruptcy court denied confirmation of their plan, finding no reason to doubt the bank's standing until proven. It also granted the bank's motion to convert to Chapter 7, finding that listing the mortgage as unsecured gave them too much debt for Chapter 13.

On appeal, the BAP affirmed both decisions. Starting with the denial of confirmation of the plan, the panel ruled that debtors may not avoid the bank's claims by simply confirming a plan that ignores those claims. Pending the outcome of a dispute over the claim, the couple was required to follow statutory requirements as to the amount and classification of the debt. Thus, the plan was not confirmable. Nor was it prejudicial to the couple that the court granted the conversion before resolving their standing claim, the BAP found. Bankruptcy law favors speed; confirmation does not impose an amount; and delays were created in this case by the couple's own adversary proceeding. Furthermore, the BAP ruled, the bank had standing as a party in interest to participate in the bankruptcy. A creditor does not need an allowed claim at all to be a party in interest, the panel said, and even a disputed claim qualifies. Finally, the panel ruled that the bankruptcy court did not err in converting the case, finding the couple delayed filing a confirmable plan so long as to constitute bad faith.

Vincent Howard and our Orange foreclosure defense lawyers sympathize with this couple's attempts to get to the bottom of who owns their mortgage debt. It doesn't look like the bankruptcy court ever managed to rule on the merits of their claim; this entire decision focuses on whether they followed the rules of bankruptcy court. If their federal lawsuit also didn't get to the merits, it's possible that all this arguing has failed to get to the most important part of the matter. Standing to foreclose may sound technical, but it's very important; if a bank forecloses without standing, it is essentially getting free property at the expense of a homeowner with a limited ability to fight back. Led by Vincent Howard, our Fallbrook foreclosure defense attorneys fight this kind of slapdash debt collection whenever our clients are victims.

Continue reading "Bankruptcy Panel Upholds Involuntary Conversion to Chapter 7 in Show Me the Note Case - In re de la Salle" »

Vincent Howard and our team of Moreno Valley foreclosure defense lawyers were interested to see a recent case in which the Ninth U.S. Circuit Court of Appeals took on the statute of repose in Truth in Lending Act cases. This is a perennial issue in TILA cases, because the lender stands to lose so much and the borrower to gain so much if the borrower can prove he or she met all of the deadlines: TILA allows outright cancellation of predatory loans. That was what Kathryn McOmie-Gray sought in McOmie-Gray v. Bank of America Home Loans, originating out of the Eastern District of California. McOmie-Gray alleged that her original lender did not meet TILA's disclosure requirements and that because her notice of rescission was timely, she was not required to bring suit within the three-year statute of repose. The Ninth Circuit disagreed, in a case of first impression.

McOmie-Gray took out a mortgage from Paramount Equity Mortgage in April of 2006. At closing, she signed two TILA notice of right to cancel forms, but she alleges that neither specified when her right to cancel would expire. The loan was soon assigned to Countrywide, which was acquired by BofA after its collapse. In January of 2008, through an attorney, McOmie-Gray notified the bank of her intention to rescind the loan on the basis that there was no specified cancellation date. She alleges that the bank then negotiated with her for more than a year, expressly agreeing to toll the statute of limitations on her TILA claim until Aug. 30, 2009. She filed suit on Aug. 28, 2009. When the court ultimately ruled on her amended complaint, it found that the TILA statute of repose had expired after the statutory three years, in April of 2009, and thus the lawsuit was time-barred. It did not mention the alleged tolling agreement. McOmie-Gray appealed.

Ultimately, her luck was no better in the Ninth Circuit. Federal regulations on TILA permit a borrower to notify the lender in writing of her intention to rescind within three years, if there was a deficiency in the notice. Though McOmie-Gray's notice met that burden, the Ninth said, rescission is not automatic upon the giving of notice. Instead, it found that borrowers must file suit to determine whether rescission is proper (if the lender does not comply). The statute is silent on when such a suit should be filed. But under caselaw from both the Ninth Circuit and the U.S. Supreme Court, the majority wrote, suits must be brought within the three years. The plaintiff in that case and McOmie-Gray both argued that the notice triggers an additional one-year deadline for filing suit, under a provision for TILA litigation, but the Ninth rejected this as contrary to the plain language calling for the three-year repose period. Thus, it affirmed dismissal of the case.

Vincent Howard and all of our Tustin foreclosure defense attorneys would be pleased to see this case in an en banc rehearing. The cases cited by the Ninth Circuit to support its position are not precisely on point; one involved no notice to the lender at all, and the other involved timely notice, but to the wrong party. Thus, it's not unreasonable to say that the issue of when suit must be filed is not settled. This is particularly important in cases like McOmie-Gray's, in which she apparently reasonably relied on a promise to toll the statute of limitations that was broken as soon as she filed suit. At Howard Law, P.C., our Norwalk foreclosure defense lawyers feel strongly that lenders' promises cannot be relied on -- most of our clients come to us after multiple broken promises -- and thus, it's best to take quick action when a deadline is running out.

Continue reading "Ninth Circuit Upholds Dismissal of TILA Claim Despite Timely Rescission Notice - McOmie-Gray v. Bank of America" »

Vincent Howard and our team of San Bernardino foreclosure defense attorneys were closely tracking the 16-month negotiations between the state attorneys general and the five largest mortgage lenders. So we were eager to read about the settlement that was finally reached Feb. 9 between 49 states and the lenders. The settlement involves a total of $25 billion in commitments from the lenders, to be paid to the states participating (every state but Oklahoma). Though the purposes of the money have not been completely determined, officials estimated that $17 billion will go to principal reductions for current homeowners, while those who have lost their homes to improper foreclosures, or without being offered an alternative, can make claims for $1,500 to $2,000. Borrowers who want to know more can visit a national mortgage settlement FAQ.

California and a few other states declined to join the settlement until recently, saying it was not adequate to compensate borrowers and could compromise their ability to pursue independent investigations. The settlement as it was reached addressed some of those concerns by allowing state and federal authorities to continue investigating fraud claims, including fraud against borrowers as well as fraud against investors in mortgage-backed securities. They also may bring criminal complaints, and indvidual borrowers and investors' rights to bring claims are not affected. However, the settlement does release the participating lenders from other claims by authorities, such as lawsuits over wrongful foreclosures and duplicity when loans were originated, a problem during the height of the bubble. The settlement also repeats provisions from previous settlements, such as a requirement for lenders to provide a single point of contact for those seeking loan modifications and a ban on dual-track foreclosures.

The settlement was generally perceived as unfavorable to banks, with far less immunity than they originally hoped for. Banks praised it for reducing their uncertainty, but investors driving down stock prices. However, consumer advocates said it was at best only the beginning of accountability for lenders. As the Baltimore Sun reported, homeowners nationwide are underwater by a total of $700 billion, and $25 billion is only a fraction of that. Some advocates noted that the size of the payments is unlikely to hurt the lenders -- which means it may have no real deterrent effect. Housing workers on the ground noted that people with government-owned or government-issued mortgages, including veterans and lower-income people, will not be eligible. And some noted that $1,500 to $2,000 is nothing compared to the financial and personal cost of fighting foreclosure unsuccessfully.

At Howard Law, P.C., we believe that this amount of money, while certainly better than nothing, can't come close to adequately reflecting what our clients go through when they face foreclosure. Leaving aside the personal stress and heartbreak of being foreclosed, homeowners in this position face very real financial costs. They include the cost of any professional help they hire -- including Placentia foreclosure defense lawyers like us or foreclosure defense companies -- as well as the cost of moving, the costs of finding alternative housing and the costs created by the massive hit to their credit reports. For those who could have avoided foreclosure but were bullied into it by robo-signing and other bank tactics, adequate compensation would likely be much, much higher. Fortunately, those who are dissatisfied with the payments retain the option of pursuing their own claims, with help from Vincent Howard and our San Diego County foreclosure defense attorneys.

Continue reading "Attorneys General Announce Settlement of Robo-Signing Investigation With Five Major Lenders" »

An extremely unusual bankruptcy appeal caught the eyes of our Lake Elsinore consumer bankruptcy lawyers. In U.S. v. Carroll et al., the Sixth U.S. Circuit Court of Appeals was not asked to decide a criminal matter or a lawsuit, but a challenge to bankruptcy court practices in the Eastern District of Michigan as they pertain to tax refunds. Because so few of the bankruptcies in the district had been completed, the court ordered that tax refunds be sent directly to Chapter 13 trustees rather than to the debtors. This created problems for the IRS, which eventually sued the trustees for a declaratory judgment disallowing the practice. The Michigan district court granted the judgment, but the Sixth Circuit vacated and ordered a dismissal, finding that the bankruptcy court was the correct defendant and the judgment against the trustees won't solve the problem.

The beginnings of the tax refund rule came in 2008, when several bankruptcy judges brainstormed a way to improve the rate of successful completion of Chapter 13 cases. These cases require three to five years of repayment according to a plan. In practice, these judges found that debtors often used the unexpected windfall of a tax refund as disposable income rather than to repay their debts. Thus, the bankruptcy judges of the Eastern District of Michigan began entering orders requiring the IRS to send tax refunds directly to bankruptcy trustees rather than the debtors themselves. The IRS originally had no problem with this, but because the agency had to process all such returns by hand, the paperwork became untenable as the number of affected taxpayers grew. Thus, the IRS's Chief Counsel asked the Department of Justice to sue, arguing that the redirection scheme violated the sovereign immunity of the United States. The district court granted a declaratory judgment stopping existing orders and a writ stopping new ones.

In an opinion that noted just how unusual the issues are, the Sixth Circuit reversed those decisions. The United States in this case is acting as a plaintiff defending sovereign immunity, where it usually makes that argument as a defendant. Meanwhile, bankruptcy trustees are not normally sued as a group, particularly not by the federal government. Perhaps because of this, the appeals court found that it lacked jurisdiction, because the government had sued the wrong party to start with. While the government has suffered an injury in fact from the administrative burden of handling the tax refunds, it said, it cannot show causation by the trustees; the harm flows from the orders of the bankruptcy court itself. Similarly, suing the trustees doesn't meet the standards for redressability because other parties may make the refund redirection request. Thanking the IRS for not wanting to sue federal judges, the Sixth suggested that it file one or more appeals of the redirection orders instead.

Underlying this highly unusual case is a problem that's present in every bankruptcy court: debtors who do not turn over all their income. While Vincent Howard and our Santa Ana personal bankruptcy attorneys understand the impulse to keep a tax refund, particularly for people who are in the middle of a bankruptcy repayment plan and feeling squeezed for extra money, debtors should keep in mind that withholding income has consequences. For one thing, withholding income keeps you from paying off your debts and finishing your bankruptcy plan. But it can also get you into trouble in court. Remember, the bankruptcy trustee is not your advocate; he or she advocates for creditors. If you have questions or concerns about how your income should be handled, we strongly recommend that you come to a Long Beach individual bankruptcy lawyer like Vincent Howard to discuss your options and their potential consequences.

Continue reading "Lawsuit Against Chapter 13 Trustees May Not Cancel Redirection of Debtors' Tax Refunds - U.S. v. Carroll et al." »

Vincent Howard and our Riverside County foreclosure defense attorneys were interested to see a case in which a couple representing themselves fought foreclosure all the way to the Tenth U.S. Circuit Court of Appeals, and won. In Miller v. Deutsche Bank National Trust Co., Mark and Jamileh Miller were appealing from a bankruptcy court order granting relief from the automatic stay to the bank seeking to foreclose on their home. They contended that Deutsche Bank, the foreclosing entity, had not produced and could not produce a copy of the note on their home. Like many others facing foreclosure, the Millers had had their loan sold and securitized via MERS, which made the chain of ownership murky. The bankruptcy court in Colorado and the Tenth Circuit's Bankruptcy Appellate Panel both upheld relief from the stay, but the Tenth Circuit itself reversed.

The Millers bought their home from IndyMac Bank (now OneWest and defunct for a time) in 2006. Their deed of trust named MERS as the beneficiary to IndyMac, and provided that the deed and note could be sold more than once without notice to the Millers. After they fell behind on their payments, Deutsche Bank filed foreclosure proceedings in state court, which the Millers defended by arguing that Colorado law required Deutsche Bank to show an interest recorded in the public record. The state court disagreed, and eventually the Millers filed for Chapter 13 bankruptcy. Deutsche Bank moved for relief from the automatic stay, citing a copy of the note endorsed in blank. The Millers objected, saying Deutsche Bank had no standing because it had not proved it possessed the original note. In a hearing, counsel for the bank assured the court that the original was being sent, which the court found sufficient to grant relief from the stay. The Millers appealed to the BAP, which upheld, finding that they were attempting to relitigate the state court decision improperly. The Millers appealed to the Tenth Circuit.

That court was more favorable to the Millers, finding that Deutsche Bank had not proven its case. It first found that the lower courts were wrong to rule on the basis of whether the Millers were trying to relitigate settled state-court issues. The state-court finding on standing was not a final judgment, it noted, and Deutsche Bank is the party making the request for action (relief from stay) in federal court. Issue preclusion may still apply, the Tenth said, but Colorado law does not preclude issues decided on the motion at issue in this case. Thus, the bankruptcy court was free to reconsider Deutsche Bank's standing. The Tenth then went on to consider that very issue, and found that the bank had not proven its case. A note endorsed in blank is payable to its bearer in Colorado, the court said -- but Deutsche Bank must prove possession of the original note. At no time during the court cases had it done that, the Tenth said; proof it had been assigned is not enough. Thus, it reversed and remanded for further proceedings.

These "show me the note" cases are commonly seen by Vincent Howard and our Costa Mesa foreclosure defense lawyers. Whether they succeed depends partly on state law and partly, as this case shows, on the willingness of the court to actually investigate whether the note exists and is valid. Some cases challenging standing to foreclose end quickly, but they've also been known to lead to cancellation of the foreclosure or long delays while the foreclosing bank is required to prove its standing. The Ninth Circuit's BAP has required a clear chain of ownership in at least one case, and more are likely to trickle up. At Howard Law, P.C., our Lakewood foreclosure defense attorneys look forward to more rulings requiring this -- which is nothing but a basic right for people facing the loss of their home.

Continue reading "Tenth Circuit Finds Mortgage Company May Not Be Entitled to Relief From Bankruptcy Stay - Miller v. Deutsche Bank" »

Vincent Howard and our team of Ontario foreclosure defense attorneys were interested to read about an ambitious lawsuit by the state of New York. The Los Angeles Times reported Feb. 3 that New York's attorney general, Eric Schneiderman, has sued three major lenders for alleged fraud with their use of the Mortgage Electronic Registration System. MERS, as it is better known, is an electronic system and a private company set up by major lenders in the 1990s to facilitate the buying and selling of mortgages among financial institutions. MERS has survived most, though not all, of the challenges filed since to its right to foreclose, making Schneiderman's lawsuit somewhat unusual. Localities have also challenged MERS on the grounds that it allows banks to avoid local land registration fees.

The lawsuit from the mortgage unit of Schneiderman's office alleges that Bank of America, Wells Fargo, JP Morgan Chase and MERSCorp, the MERS parent company, of filing false and misleading foreclosures in New York. In particular, it alleges that the paperwork they submitted in support of the foreclosures misled courts into thinking MERS had authority to foreclose when it did not. It says MERS is full of inaccuracies that MERSCorp and the major banks do not address before filing. It also notes that because MERS is private, homeowners now cannot use public records to track ownership of their loans, which is vital to "show me the note" lawsuits by homeowners seeking to stop foreclosures. And because MERS bypasses land records, the case says, it has saved the major banks $2 billion in land recording fees.

The lawsuit follows similar lawsuits by the states of Massachusetts and Delaware. It also follows an unfavorable court ruling from a New York appellate court last summer, in which a MERS foreclosure was thrown out. In that case, Bank of New York v. Silverberg, the court found that New York law does not allow MERS to own debts through the language used in the Silverbergs' loan documents. Thus, any assignee standing in its shoes, such is a loan servicer, would be unqualified to foreclose under the law. That ruling may provide one road map for Schneiderman's office, but on a grander scale, since he represents all New Yorkers and is alleging systematic fraud rather than contesting an individual set of loan documents. Vincent Howard and our entire team of Fullerton foreclosure defense lawyers look forward to hearing more about the case.

At Howard Law, P.C., we have represented distressed homeowners from the very beginning of the housing crisis. As a result, we understand that "show me the note" issues like this are more than just technicalities -- they go to the heart of individuals' property rights and the problems with major lenders. Observers of the housing market will remember the "robo-signing" scandal, which is still not settled as of early February of 2012. The scandal exposed deep, systematic fraud against courts, motivated by pressure to get foreclosure documents out the door quickly, even if that meant getting them wrong. At least a handful of wrongful foreclosures have been identified as a result; many more were rubber-stamped before courts began to think twice. Vincent Howard and our entire team of Oceanside foreclosure defense attorneys look at each new case to determine whether flaws in the paperwork could delay or stop a foreclosure.

Continue reading "New York AG Sues Major Lenders for Allegedly False and Misleading MERS Foreclosures" »

Vincent Howard and our San Bernardino County foreclosure defense lawyers wrote recently about the president's announcement of a new refinance program. On Feb. 2, President Obama released more details of that program, as the Los Angeles Times reported. Making a political move in an election year, the president proposed to expand the Home Affordable Refinance Program to a wider group of homeowners. The program already helped people who were slightly underwater and might not otherwise qualify for a refinance, but it was limited to those whose loans are backed by Fannie Mae and Freddie Mac. Under the new proposal, homeowners whose loans are owned by any lender or investor would qualify. The plan also includes a "homeowner's bill of rights," a set of federal standards intended to fight abuses and deceit by lenders.

According to a breakdown by Time magazine, borrowers would need to have a credit score of at least 580 to qualify. Their loans could be no larger than the FHA loan limits for the area; in southern California, this is $729,750. The residence must be a single-family home occupied by its owner -- likely an attempt to exclude investment homes -- and the borrowers must owe no more than 140 percent of the loan's value. Thus, for a home now valued at $100,000, the borrowers could not owe more than $140,000. And borrowers must have missed no payments in the last six months and only one payment in the six months before. Those who are further underwater than 140 percent may still be able to qualify, but only if their lenders are willing to write off some principal. The loans would likely be shorter-term loans that allow quicker equity-building in exchange for higher monthly payments.

The Federal Housing Administration would back the refinanced loans, with funding from a "financial crisis responsibility fee" of 0.15 percent on some liabilities of larger financial institutions. This is a proposal Obama has made before, and it has already been decried by Congressional Republicans as a tax on banks that could hurt the economy. Republicans also questioned whether it's wise for the FHA to take on more risk. Some financial observers saw irony in the fact that the lending standards for these refinances would be lower than they currently are in the market; borrowers would need to have a job, but not to submit tax returns or have the house reappraised. Unemployed borrowers might even qualify after submitting more detailed information. Political observers expected that the plan wouldn't get through Congress and suggested that it was proposed more as an election issue than a serious plan.

That's unfortunate, because Vincent Howard and our Anaheim foreclosure defense attorneys would be delighted to see more help for homeowners stuck in homes they can't refinance or sell. Thanks to the housing downturn, people who bought their homes at higher points in the market now routinely find themselves underwater; roughly half of all homeowners in the Inland Empire are believed to owe more than their homes are worth. Even when they've done everything "right" by conventional standards, they have no home equity. This is disappointing when the borrowers plan to stay put, but it's devastating for people seeking to move for a job or refinance to get some relief from high interest rates. Vincent Howard and our Murrieta foreclosure defense lawyers routinely represent people put into this position by predatory or otherwise unfair lending practices.

Continue reading "President Releases Details of Refinance Plan for Underwater Homeowners Not Backed by Fannie and Freddie" »

The Corona foreclosure defense lawyers at Howard Law, P.C., have written here several times before about calls for widespread reductions in loan principal for homeowners whose homes are underwater. This solution is strongly opposed by the banking industry and its lobbyists, but economic studies have shown that it's the best, and possibly the only, way to help the housing market recover from its downturn. A Jan. 25 article in the Washington Post reinforced that call, quoting economists from Moody's and other organizations not generally considered political. They say more and more economists believe principal reductions would be most effective, echoing calls fair housing advocates have made for several years. The article contrasted this with the approaches taken by President Obama and the Republicans seeking to replace him, both of whom proposed less drastic solutions.

The president's proposal outlined in the article would allow refinances even for borrowers who are underwater. This would allow them to take advantage of the current very low interest rates, freeing many from the high interest rates they were locked into during the housing bubble. The cost savings to each homeowner is estimated at $3,000 a year, which economists say would allow more consumer spending. Republican presidential candidates are mostly calling on government to avoid interfering with the market, which they say would allow it to "hit bottom" and begin a correction. Some have also called to revoke regulations; former Sen. Rick Santorum called for a tax credit for people who sell at a loss. One expert in the article called this a choice between an Obama plan that won't do much and a Republican plan that would subject individuals to "years and years of grinding your way out."

The economists in the article agreed that neither approach will be sufficient to get the housing market corrected. Rather, they called for widespread forgiveness of principal, because being underwater is a key predictor of whether the homeowner will be forced to default or choose to walk away. Either way, this creates a foreclosure, which causes more problems for the market by creating a backlog of foreclosed homes for sale, pushing prices lower and putting more borrowers underwater. Several studies have concluded that forgiving principal is the fastest way to stop this cycle, but the proposal would be very difficult to get through Congress, as a recent Philadelphia Inquirer article noted. Congress, particularly the Republican-controlled House, has consistently opposed efforts to "cram down" loans, even in limited circumstances such as for Chapter 13 bankruptcy filers.

Led by partner Vincent Howard, our team of Tustin foreclosure defense attorneys continue to be disappointed at the lack of political will to pass this solution, even when it comes paired with concessions to bankers or self-limiting factors such as only being available in bankruptcy. We believe many of the objections raised by the banking industry are red herrings disguising the industry's fear of losing profits, even when those profits come at the expense of individuals and the overall U.S. economy. Indeed, a study by the Cleveland branch of the Federal Reserve Bank found in 2010 that doom-and-gloom predictions made about a cramdown program for family farms in the 1980s had never come true. Fewer than a third of the predicted bankruptcies were filed, and lending interest rates did not increase more than the economy of the time would merit. Vincent Howard and all of our Bellflower foreclosure defense lawyers would prefer to see facts like this used when making decisions now.

Continue reading "Economists Call for Principal Reductions to Solve Persistent Housing Market Problems" »