Massachusetts Bankruptcy and Consumer Law Blog

New Massachusetts Medium Income Figures for 2009

2009-04-12T12:32:00.002-05:00

The new Massachusetts medium income figures for 2009 are posted on my web site here.

New Homestead Decision

2008-07-29T11:28:00.002-05:00

Judge Rosenthal in the recent case in re Zmijewski, 2008 WL 2705508 (Bankr.D.Mass.2008), added a decision to the many dealing with trusts and homesteads in Massachusetts. The Chapter 7 debtors, before their case was filed, conveyed real estate to a self-settled trust. The debtors were sole trustees and beneficiaries. However, they only conveyed a remainder interest to the trust and retained life estates in their own names. They then sought to exempt all equity in the real estate with a homestead. The trustee objected and judge sustained with the objection.

The judge held that even if there were no trust involved, the debtors could not exempt two estates (the life estate being one and the remainder interest being the other) with a homestead. No individual can claim more than one homestead. Moreover, since the remainder interest was in trust, the debtors did not own real estate with respect to the remainder interest--they owned personal property. The debtors relied on the recent cases allowing debtors to exempt real estate held in trust. However, these cases relied on the doctrine of merger--an equitable doctrine that can impute ownership of trust property to a sole trustee and beneficiary. The judge stated that this was not argued by the parties. The debtors now may try to raise the issue on a motion for reconsideration. Whether the judge will consider this argument waived or will entertain it is an interesting practice question for those of us in the trenches.

Housing "Rescue" Bill to Pass Soon

2008-07-23T11:07:00.002-05:00

President Bush today withdrew his threat to veto the pending housing bill. This makes it likely that it will pass soon. The bill includes provisions to buttress Fannie Mae and Freddie Mac and a controversial measure giving money to blighted communities to buy and rehabilitate abandoned homes. So taxpayers will be spending money which will largely accrue to the benefit of banks and other lenders. This may help improve the health of the overall financial system, which benefits us all. However, some taxpayers may receive some direct benefit via the "foreclosure rescue" portion of the bill. It is difficult to get specifics on these provisions, but here is the best article that I have found explaining them.

There are a couple of points that threaten to make these provisions of the bill difficult for consumers. First, lenders must agree to refinance on a case-by-case basis. One can expect that there will be at least some inclination on their part to do so. However, standards that they set may make a refinancing available to only a very few. Ironically, it may be homeowners who are the most likely to default and who can take advantage of the refinancing. That's because the FHA is guaranteeing the new loans made under the new program. So lenders could theoretically pass the risk of lost causes to the government. I wonder how many lenders are going to agree to forgive loan balances and re-write guaranteed loans for 90 percent of the current appraised value.

The other problem is that many people have second and third mortgages (HELOCs for example). It is very unlikely that these lenders will agree to cooperate in a deal between the homeowner and first mortgage lender. Unless the first mortgage lender agrees to cut them in out of their own pocket, they would end up with nothing at all under a new FHA loan. One is unlikely to get voluntary compliance by offering nothing. If the value of a home has fallen significantly and junior mortgages are wholly unsecured, a Chapter 13 case to strip the junior mortgages followed by a negotiated FHA-backed refinancing with the first mortgage lender might be worth a look under these circumstances.

We'll have to wait to see what real impact this housing bill has on our foreclosure problem.

New SJC Case on 93A Injury Requirement

2008-07-01T13:36:00.001-05:00

The Massachusetts Supreme Judicial Court again took on a case addressing the injury requirement under the Massachusetts Consumer Protection Act ("93A"). In Iannacchino v. Ford Motor Co., 451 Mass. 623 (2008) the Court found against the plaintiff on narrow, pleading-based grounds and in the course of doing so addressed the vexing issue of the harm required to state a claim under 93A. In Iannacchino , the putative class had purchased Ford vehicles with door latches that allegedly failed to meet federal safety standards. The defendants argued that even if the door latches were faulty, there could be no legally cognizable injury under 93A because the plaintiffs did not allege that any of the latches had actually malfunctioned--only that they had a higher propensity to do so. The plaintiff's argued that the vehicles were inherently less valuable than ones with compliant door latches. This is an argument with which the SJC agreed, stating: "If Ford knowingly sold noncompliant (and therefore potentially unsafe) vehicles or if Ford, after learning of noncompliance, failed to initiate a recall and to pay for the condition to be remedied, the plaintiffs would have paid for more (viz., safety regulation-compliant vehicles) than they received. Such an overpayment would represent an economic loss-measurable by the cost to bring the vehicles into compliance-for which the plaintiffs could seek redress under G.L. c. 93A, § 9." The SJC went on the impose a pleading requirement that plaintiffs allege noncomplicance with government standards to state a claim for diminution-of-value injury--at least in the vehicle context.

I do not see this holding providing much clarity for the muddled 93A injury jurisprudence outside of the context of products and warranties. I participated in the amicus brief committee supporting the plaintiffs in this case. It was interesting to see how many fact scenarios could be affected by the injury concept. Some plaintiffs--such as those with lead paint cases--are likely vindicated by the Iannacchino holding because it recognizes a diminution of value injury. However, in the debt collection context the situation is far more murky. For example, Massachusetts regulations prohibit creditors from calling consumers at home to collect a debt more often than twice in a seven day period. This requirement is routinely violated. However, if a plaintiff can not prove emotional distress or other damages with sufficient evidence, can a plaintiff or class of plaintiffs state a claim under 93A? If not, unlawful business practices are left undisturbed. If they can, the notion of injury must accommodate something along the lines of the "invasion of a right as injury". This is where many thought the law was under old case law (Leardi). However, it is hard to reconcile this idea with the SJC's Hershenow decision.

I believe that a debt collection case like the one above needs to be brought to better define the injury standard under 93A.

Decision Addressing Two Controversial Means Testing Issues

2008-06-16T23:03:00.001-05:00

Massachusetts Bankruptcy Judge Feeney recently decided in re Mati, 2008 WL 2389234 (Bkrtcy.D.Mass.2008) in which she addressed two important means testing/disposable income issues for above-median-income Chapter 13 debtors. This case is one of many now revealing how substantial the changes are to Chapter 13 practice after BAPCPA, many of which are only now emerging after almost three years since the 2005 amendments.

First, the Court examined whether the debtor could exclude his 401(k) contributions from his disposable income and consequently exclude this income from his Chapter 13 plan payment. The Court put it this way: “The Court finds that the Debtor’s 401(k) contributions do not evidence bad faith under the totality of the circumstances in this case. The Debtor is merely taking advantage of what the law allows. Indeed, by excluding 401(k) contributions from property of the estate and expressly removing them from the definition of disposable income under section 1325(b), see 11 U.S.C. § 541(b)(7), Congress has implemented a policy of protecting and encouraging retirement savings.” Mati at 5.

The trustee had argued that doing what the statute allowed exhibited the debtor's bad faith. The Court recognized that doing what the law allows cannot be the sole basis for a bad faith finding, even if it yields what it deems as an inequitable result. Some courts have stated or implied that they would use “bad faith” to achieve a result consistent with pre-amendment practice. Mati lends important support to the contention that one is not acting in bad faith if they are doing no more or less than the law allows.

Next, the Court addressed the dispute over whether the debtor was entitled to the car “ownership” deduction on his B22C “mean test” form despite owning his car outright. The trustee argued that the allowance should only available to debtors who have a car loan or lease payment. The Court disagreed noting that the car ownership allowance appears in “applicable” and not the “actual” expense part of Section 707. The Court stated (quoting another court) that: “The use of fixed expense allowances levels the playing field for debtors. It is far less defensible from a policy perspective for a debtor with one car payment remaining at the time of filing to get the full standard deduction for the 60-month term of the Chapter 13 plan, while a debtor who paid off the secured debt before filing gets no deduction whatsoever.”

There is a split of authority throughout the nation on this BAPCPA provision. I believe the Court applied the law according to its terms. Some other courts appear to have strained to reach a desired result. Courts when faced with a statutory mandate to equalize certain expenses for consumer debtors should apply the law -–even when these provisions actually benefit debtors.

The bottom line is that going forward debtors in Judge Feeney’s session will be permitted to take the car ownership allowance even if they own their car outright.

New First Circuit Case on Claiming Exemptions

2008-05-09T22:31:00.001-05:00

The U.S. Court of Appeals for the First Circuit recently issued an important opinion concerning the claiming of exemptions in bankruptcy cases. In re Barroso-Herrans, 2008 WL 1960365 (1st. Cir 2008) the Court heard the appeal of a Chapter 7 debtor who had attempted to exempt proceeds from two collection lawsuits by listing their value as $4,000 and claiming an exemption for this same $4,000. The trustee did not object to the exemption. The trustee subsequently reached a settlement with the third-party for $100,000 and sought the bankruptcy court's approval. The debtor claimed that he had effectively exempted the entire suits and their proceeds, and was re-vested with the lawsuit assets upon expiration of the period for objections to exemptions. The First Circuit disagreed an provided useful guidance for a debtor wishing to exempt an entire asset, regardless of its ultimate value, from his bankruptcy estate. The Court endorsed the use of terms such as "100% [of the property's value]," "unknown," "to be determined," "tba" and "$1.00" when expressing an asset's value to achieve this end. The Court stated that these terms are "red flags" to trustees and creditors that "put them on notice that if they do not object, the whole value of the asset-whatever it might later turn out to be-will be exempt."

The Court cited but disagreed with the view that simply listing the value of an asset in the same amount as its exemption is enough to bring the asset itself outside of the bankruptcy estate after expiration of the objection period.

NCLC Student Loan Resource Page

2007-12-06T10:43:00.001-05:00

The National Consumer Law Center recently launched a new web site designed to help people facing student loan problems. Both student loan collection law (such as the availability of non-judicial garnishment) and the general non-dischargeability of student loans in bankruptcy make these loans some of the most difficult to deal with. The NCLC site is a good resource for people looking recover from student loan default.

Unemployment Income and the Means Test

2007-07-24T21:14:00.001-05:00

Judge Rosenthal recently held In re Munger, --- B.R. ----, 2007 WL 1810701 (Bkrtcy.D.Mass. 2007) that unemployment income is not included in the "current monthly income" for purposes of the means test.  The Court stated that the "way in which Congress chose to phrase the references in the sections supports the view that 'a benefit received under the Social Security Act' in § 101(10A)(B) was purposefully intended to be broader than 'a social security benefit.' 'Unemployment compensation' is included in this broader definition."

Bankruptcy and Trusts Decision

2007-03-21T17:34:00.001-05:00

In the recent Massachusetts case of In re Grassa,--- B.R. ----, 2007 WL 756321 (Bkrtcy.D.Mass. 2007) Judge Somma held that the true owner of a house held in trust (and then transfered) was the bankruptcy debtor and trustee of the trust. The result of this will be that the house (which was transfered to the debtor's husband) will be recovered and sold by the trustee. This type of result can be avoided with the aid of legal counsel and careful planning. Real estate trusts and bankruptcy are often a toxic mix. The key in this case was that the debtor as trustee held the right to terminate the trust and transfer the trust asset (the house) to anyone she wanted -- including herself. This is what is known as a general power of appointment. Such a power makes the trust property subject to claims of the trustee's creditors because the trustee is considered the true owner under Massachusetts law.

Cadle Company Denied Debt Collection License in Massachusetts

2007-03-16T08:01:00.001-05:00

The Cadle Company, a debt collection company well-known for hardball tactics, was recently denied a license to operate as a debt collection agency in Massachusetts. Cadle sued the Massachusetts Division of Banks in state superior court seeking to overturn the decision to deny it a license, but the superior court took the Division's side citing, among other things, the substantial evidence of complaints and outstanding litigation against Cadle.

First Circuit B.A.P. Issues Disposable Income Decision

2007-02-25T21:26:00.001-05:00

The First Circuit Bankruptcy Appellate Panel has issued its decision in re Kibbe affirming the bankruptcy court's determination that actual anticipated income instead of the historically income found on the B22C form shall be used to determine disposable income in Chapter 13 cases.

Judge Hillman Rules No Fraudulent Conveyance in Divorce Transfer

2007-02-15T19:00:00.001-05:00

In the recent case of In re Prichard, 2007 WL 458021 (Bankr.D.Mass., Feb 12, 2007) Massachusetts bankruptcy judge William C Hillman found in favor of the debtor in a fraudulent conveyance action brought by the trustee. Mr. Prichard had owned a house with his ex-wife which he transfered to her alone pursuant to a separation agreement incorporated into a judgment of divorce. The case was brought under the old Massachusetts version of the Uniform Fraudulent Conveyance Act which was repealed in favor of the Uniform Fraudulent Transfer Act in 1996. However, much of the reasoning in the case applies under both laws. In the actual-fraud prong of the trustee's case, he alleged that the debtor had an actual intent to hinder, delay or defraud creditors when he made the transfer. This sort of allegation requires an examination of the indicia or so-called "badges" of fraud. My guess is that the trustee brought this case because after the divorce the debtor moved back in with his ex-wife. His wife testified that this was not a "normal situation" but it also appears from the testimony that the couple did not resume a married lifestyle but merely carried on a civil co-existence. The judge stated: "I could conclude that the Trustee met his initial burden of demonstrating actual fraud under § 7 of the UFCA simply because Thomas conveyed his property in favor of a family member over his creditors." The court then went on to find additional badges of fraud that solidified its conclusion that the trustee had met his initial burden. The issue then became whether there was "sufficient evidence of a legitimate supervening purpose for the transfer of the Property, such as to rebut the indication that [the debtor] effected the transfer of the Property with fraudulent intent." The judge declined to find that the marital difficulties leading to the transfer were a sham, stating that at "at the time of the transfer, Thomas did not retain any interest in the Property, but transferred his interest in it to [his ex-wife] who assumed complete responsibility for the Property and household's upkeep. To conclude now that this transaction was some sort of sham would require that I find that [the debtor and his ex-wife] staged their marital difficulties, while Thomas set up separate residences in 1989 and for the five years following, with the full intention of eventually returning to live in the Property in 1994. The evidence does not so prove and I do not so conclude."

The New Two Year Exemption Rule

2007-02-13T20:16:00.001-05:00

I recently posted something about the new two-year bankruptcy exemption rule on the Bankruptcy Law Network site. The provision is found at 11 U.S.C. 522(b)(3)(A). Here's an example of how that rule works as applied to a hypothetical Massachusetts bankruptcy debtor. Let's say the hypothetical debtor has lived in Massachusetts for the past year, lived in Vermont for the year before that, and before that lived in Florida for five years. The Massachusetts resident files bankruptcy. Because the debtor did not live in the same state for the entire two-year period before the filing it is necessary to go back and look at the 180 day period before the two-year look-back period. During that time the debtor lived in Florida. So Florida's state exemption law applies. This means that the debtor has Florida state law exemptions to utilize; but it also means that Florida's opt out provision applies, rendering the federal exemptions unavailable. These federal exemptions would normally be available in Massachusetts, but here the only exemption law available would be what exists under the state law of Florida and under federal nonbankruptcy law.

New Bankruptcy IRA Exemption

2007-02-08T14:31:00.001-05:00

I have written a brief description of the new bankruptcy IRA exemption on the Bankruptcy Law Network site. The entry pertains to the one million dollar IRA exemption under the federal bankruptcy exemptions. Here in Massachusetts we are fortunate enough to be able to choose between the Massachusetts and federal exemption scheme in bankruptcy. The new bankruptcy IRA exemption will impact those choosing the federal exemptions, but those who must chose our state exemptions (because of a valuable homestead, for example) the state law IRA exemption is still available. Mass.Gen.L. ch. 235, § 34A exempts IRA account to the extent that the balance of the account does not exceed seven percent of the individual's total income within the five years preceding bankruptcy.

Communicating with Debt Collectors -- Cease and Desist Letters

2007-02-07T15:14:00.001-05:00

You do not have to talk to debt collectors. Unfortunately, this is something of a secret. Many consumers, when contacted by pushy, aggressive debt collectors, believe that they have no choice but to talk to them. This is at least partly because communicating with a debt collectors often involves a barrage of threats -- of arrest, wage garnishment, property seizure, lawsuits, etc. Many of these threats are false and unlawful (you can read more about false threats here). However, regardless of the tenor of the conversation, you have the ability to end it and block further ones. The Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq., ("FDCPA") contains the following provision:

If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt....

15 U.S.C. 1692c(c).

There are three exceptions. After receipt of a cease and desist letter, a debt collector can advise you that further collection efforts are being terminated, notify you that it will invoke specified remedies which it ordinarily invokes, or notify you that it intends to invoke a specified remedy.

Those legalistic exceptions aside, cease and desist letters can be quite useful. However, you must send the letter directly to the debt collector certified mail return receipt requested. Cease and desist letters are only effective upon receipt and the only practical way to prove receipt is with that U.S. Postal Service green return receipt card. If you are contacted again by a debt collector who has received your cease and desist letter, you have the right to sue under the FDCPA and recover statutory damages, actual damages, reasonable attorney's fees, and the costs of suit.

Judge Hillman Declines to Approve Settlement of Objection to Discharge Case

2007-02-03T11:54:00.001-05:00

In the case of In re Streck, In re Streck, Slip Copy, 2007 WL 268552 (Bankr.D.Mass., Jan 25, 2007)(NO. 03-11241-WCH, 03-1103), a creditor objected to the discharge of the debtor under Section 727 of the Bankruptcy Code. The court does not specify which subsections of Section 727 were invoked by the creditor but stated that the case had been "extremely contentious and more than slightly uncivil." An objection under Section 727 aims at the denial of a debtor's entire discharge whereas an objection under Section 523 seeks the more limited remedy of an order declaring a certain debt nondischargeable. The parties had proposed that the 727 action be dismissed in exchange for the debtor paying money to the objecting creditor. The issue in this case is whether the Court would approve the settlement where the whole benefit would go to the objecting creditor instead of the bankruptcy estate. The Court stated: "I will adopt the standards set out in Judge Brown's decision, Wolinsky v. Maynard (In re Maynard ), 273 B.R. 369 (Bankr D. Vt. 20002). In applying those factors, I conclude that the proposed settlement does not satisfy the last factor, 'that principles of equity and fairness would be furthered by approval of the proposed settlement,' Id. at 372. I so hold because all of the consideration being paid by Debtor (and his spouse) goes directly to Plaintiff and not to the estate." One lesson here is that a creditor should think twice before pleading a Section 727 count when their real goal (which is almost always the case) is to obtain a settlement only to their own benefit. Creditors like to plead under both Sections 523 and 727 when filing objections to discharge and dischargeability because they believe it gives them leverage (they can bargain away the 727 count in exchange for a favorable settlement on the 523 count). This decision should give them pause.

No Rescission Class Cases in The First Circuit

2007-01-29T18:53:00.001-05:00

The First Circuit Court of Appeals in McKENNA, v. FIRST HORIZON HOME LOAN CORP., 2007 WL 210850 (1st Cir. January 29, 2007) recently held that there is no right for a class of consumers to sue for rescission under the Truth in Lending Act ("TILA") and Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"). Consumers may, of course, still bring individual cases for rescission and both individual and class cases for damages. However, class cases for rescission and corresponding declaratory relief is off-the-table in the First Circuit.

Judge Somma Holds that Claim by Mortgage Lender for Post-Petition Legal Fees Barred by Laches

2007-01-29T13:12:00.001-05:00

In a significant local opinion, Judge Somma held in the case of In re Sanders, 2007 WL 188676 (Bankr.D.Mass., Jan 23, 2007)(NO. 00-11842-RS) that a mortgage lender's claim for post-petition fees was barred by laches. Laches is an equitable doctrine that bars a party from asserting a right when he has delayed too long and this delay hurts others. In the Sanders case, the bankruptcy debtor fully satisfied the obligations under her confirmed Chapter 13 plan, including curing her pre-petition mortgage arrears. Ms. Sanders' attorney brought a motion to declare the mortgage current and the mortgage lender objected based on fees it claimed had accrued during the case. However, the mortgage lender was not able to consistently state the amount of its purported claim (which the Judge called "ever-morphing"). More significantly, however, for future cases, the Judge held that the mortgage lender's failure to raise its claim for almost four years was unreasonable. The reasoning of this case offers a remedy to the common problem of a debtor emerging from a Chapter 13 plan with burdensome, new mortgage arrears (based on post-petition charges) despite having satisfied all the requirements of their Chapter 13 plan.

Judge Somma Orders Continuation of Preliminary Injunction of Mortgage Foreclosure

2007-01-26T21:22:00.001-05:00

Massachusetts Bankruptcy Judge Robert Somma in the case of In re Strayton, --- B.R. ----, 2007 WL 150192 (Bankr.D.Mass., Jan 17, 2007)(NO. 06-13703-RS, 06-1394) enjoined Champion mortgage from completing a mortgage foreclosure sale that had occurred prior to the filing of the homeowners’ Chapter 13 bankruptcy case. After commencing the case, counsel for the debtor filed an adversary proceeding seeking to invalidate the foreclosure sale and to prevent the completion of the acts necessary to finalize it. The memorandum of sale had been signed but an actual closing had not yet occurred. It is highly unusual for foreclosure sale to be reversed in these circumstances and I think that this case is significant because it draws our attention to some basic principles of mortgage foreclosures. According to the opinion, the house had a fair market value of $325,000 but had been sold at the foreclosure sale for only $130,000. Judge Somma, citing cases, stated that a "foreclosing mortgagee must also act in good faith and use reasonable diligence in conducting the foreclosure sale" and not merely "comply with the procedure prescribed by statute." The judge found fault with the procedures leading up to the foreclosure sale. "[T]he diligence not done is persuasive on the question of success on the merits: no marketing, no appraisal, no real estate broker contact, no inquiry into the market regarding either value or prospective buyers; no inspection effort. Moreover, if the foreclosure sale is completed, significant value will be lost to the estate."

Judge Votolato Holds that Means Test form must be filed in cases converted to Chapter 7

2007-01-26T20:57:00.003-05:00

Long-time Rhode Island Bankruptcy Judge Arthur N. Votolato held recently in the case of In re Perfetto, --- B.R. ----, 2007 WL 172190 (Bankr.D.R.I., Jan 19, 2007)(NO. 06-10509) that upon conversion from Chapter 13 to Chapter 7 a debtor must file the B22A (means test) form. The import of this is that above median-income debtors in converted cases will have to run the means test gauntlet just like those who start out in Chapter 7. The judge called the issue one that raised "an issue of first impression in the Nation."

Welcome

2007-01-26T20:57:00.001-05:00

Welcome to my new blog!

I am going to post information about new cases and trends in bankruptcy, consumer, and class action law periodically. Thanks for visiting.