LVNV v. Crawford, the FDCPA, and the End of a Circuit Split?

LVNV v. Crawford: Are Bankruptcy Debtors Limited to Bankruptcy Remedies?

For years, the courts have struggled over consumers’ remedies when creditors continue collection attempts in violation of the automatic stay. Under the Bankruptcy Code, consumers can bring a contempt of court action. Also, the Fair Debt Collection Practices Act (FDCPA) enables consumers to sue when creditors attempt to collect on invalid debts, which would seem to hold true even during the course of a bankruptcy case. Previously, the Ninth Circuit (which includes California), had limited consumers to the former remedy, while (presently) the Eleventh Circuit allowed for both.

On April 20, 2015, the Supreme Court denied certiorari (i.e. it declined to hear) LVNV v. Crawford, the aforementioned Eleventh Circuit case, seemingly resolving the split & allowing consumers to pursue both contempt & FDCPA actions.

Crawford’s History

Stanley Crawford filed a Chapter 13 case, during the course of which LVNV filed a proof of claim with the court, which all parties agreed was an attempt to collect on the debt. However, the since debt was past the statute of limitations, LVNV had no right to make such a collection attempt. Mr. Crawford brought an action for an FDCPA violation, but the Bankruptcy Court held that he was limited relief provided by the Bankruptcy Code. The Eleventh Circuit reversed.

Apparent Circuit Split

The Ninth Circuit had ruled in Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (9th Cir. 2002) that the Bankruptcy Code was the only source of relief for people in Crawford’s position. Once a bankruptcy court had jurisdiction over a debt, and even after a discharge, the FDCPA was not an option for consumers.

Since the Eleventh Circuit had found consumers could bring an FDCPA claim even if there was a bankruptcy, most observers felt that a circuit split had been created and an appeal to the Supreme Court was all but certain. However, the Supreme Court declined to hear an appeal of Crawford, denying cert. and allowing the Eleventh Circuit decision to stay in place.

Where Does that Leave Us?

While the Supreme Court did not issue a ruling on the merits of LVNV v. Crawford, by declining to take the case it seems to be give the Eleventh Circuit’s ruling the seal of approval. It is unclear what the courts in the Ninth Circuit will do in light if the cert denial, but it seems clear that the Supreme Court sees no reason to not allow consumers in bankruptcy access to relief from improper creditor actions under both the Bankruptcy Code and the FDCPA.

This is potentially good news for people who file bankruptcy cases in California, as this decision opens the door to cases challenging the legitimacy of Walls.

Bank of America v Caulkett: No Chapter 7 Lien Strips – Supreme Court

On June 1, 2015, the U.S. Supreme Court decided the case of Bank of America v. Caulkett and held unanimously that a debtor in a Chapter 7 bankruptcy can not “strip” a junior lien.  “Lien stripping,” a topic we have address previously, is this: When there is more than one lien on a piece of property, and the amount owned on the senior lien is greater than the value of that property, there is no equity present to secure the junior lien.  Therefore, in a Chapter 13 case, the property owner can “strip” the junior lien, causing it to be treated as unsecured debt.

Prior to today’s decision, all of the Circuit Courts to have addressed this issue (besides the Eleventh Circuit) had held that the Bankruptcy Code does not permit such lien stripping in Chapter 7 cases.  They relied (as did the decision today) on the Supreme Court’s holding in 1992’s Dewsnup v. Timm; Section 506(d) of the Code allows a lien to be voided when it secures a claim that is not an allowed, secured claim.  And while no equity was present here to secure the claim, Dewsnup says that the existence of the lien categorizes it a secured.  Case closed.

Interesting thing though: While the decision was unanimous, a single footnote in the middle of the opinion acknowledges that Dewsnup has been harshly criticized, but points out that the Debtors insisted that they were not asking it to be overruled.  Kennedy, Breyer, & Sotomayor did not join in this footnote, which raises an interesting question: what would happen if a debtor did expressly ask Dewsnup be overruled?

SB308, Increasing Homestead Exemption to $300,000, Passes CA Senate, Goes to Assembly

On Friday, May 22, 2015, the California Senate passed SB308 (proposed by Senator Bob Wieckowski), which would make changes to the exemption rules for bankruptcy cases filed in California. The bill now heads to the Assembly.

When a person files a bankruptcy case, the law puts all of that person’s assets into different categories, and then places caps on those categories. Those caps are the “exemption limits.”   If the value of the person’s assets exceed those caps, a trustee in a Chapter 7 case can liquidate that excess, while a trustee in a Chapter 13 case can demand that unsecured creditors receive at least that amount through the Chapter 13 Plan.

California has two sets of exemptions for bankruptcy debtors; one for people with equity in their home, and another for everybody else. Currently, the home equity exemption in the former category is $75,000 for unmarried people, $100,000 for married people, and $175,000 seniors, disabled people or people who are 55 or older with a limited income. SB308, if it becomes law, would increase this “homestead” exemption to $300,000.

This is very big news for Californians considering filing bankruptcy cases. Currently, because of the volatile residential real estate market in the Bay Area, many homeowners are essentially precluded from filing Chapter 7 cases: Even if they’re not clearly over the limit, there’s uncertainty over whether an aggressive Chapter 7 trustee will attempt to pursue the house.  Moreover, Chapter 13 is a less appealing option because the amount they would have to repay their unsecured creditors impairs the “fresh start” a bankruptcy case is meant to provide. Increasing the homestead exemption to $300,000 will go a long way toward improving this state of affairs, and is good policy.

An additional provision of SB308 is that it creates a $5,000 “wild card” exemption for self-employed people. (The home equity exemption scheme currently has no wild card exemption whatsoever.)

If you are a California resident considering filing a bankruptcy case, please contact your Assemblyperson and urge passage of SB308; you may wind up making things easier for yourself.

SCOTUS: At Conversion, Undistributed Funds Go to the Debtor (Harris v. Viegelahn)

When someone converts from a Chapter 13 bankruptcy case to a Chapter 7 case when the Chapter 13 Trustee is in possession of funds that haven’t been distributed to creditors, what happens to that money? Does it go to the debtor (as the 3rd Circuit held), or does it go to the creditors (as the 5th Circuit held)? That was the issue decided today by the Supreme Court in Harris v. Viegelahn.

Charles Harris filed a Chapter 13 case in February 2010, largely to get caught up on arrears on the mortgage to his house. Unfortunately, Mr. Harris continued to fall behind on his mortgage payments during his Chapter 13 plan, and in November 2010, the mortgage holder received permission to proceed with the foreclosure. Mr. Harris then exercised his right to voluntarily convert his case to Chapter 7. After the conversion, the Chapter 13 trustee (Viegelahn) distributed $5,519 of accumulated funds to Mr. Harris’s lawyer, herself, and to unsecured creditors. The Bankruptcy Court ordered the trustee to return the funds, but the Fifth Circuit revered, holding that “considerations of policy and equity” dictated that the funds go to the creditors.

Writing for a unanimous court, Justice Ginsberg looked to the reasoning in the 2012 3rd Circuit case of In re Michael, which had gone in the opposite direction on the same issue. The Court held that, pursuant to Section 348(e) of the Code, the Chapter 13 trustee had been stripped of authority to distribute assets at the moment of conversion. Additionally, no provision of the Code provides that any property (including post-petition assets) as belonging to creditors. Thirdly, the Court rejected the 5th Circuit’s concern that such a hold would result in a windfall for the debtor; the money being returned to the debtor was money that the debtor would have kept had he filed a Chapter 7 case.

Local practice here in the Northern District of California was already in keeping with the law as laid out here, but it is nice to see the Supreme Court holding unanimously in favor of the debtor in a consumer case like this. A PDF of the opinion can be found here.

New York Bankruptcy Court: Wells Fargo’s “Administrative Freezes” Violate the Automatic Stay

When I conduct an initial consultation with a client, I’m always careful when I hear that client has a bank account with Wells Fargo.  That’s because if a person files a Chapter 7 case, and if they have more than $5,000 in Wells Fargo bank accounts at the time of filing, Wells Fargo “freezes“ those bank accounts until otherwise instructed by the Chapter 7 trustee.

Needless to say, these freezes are very frustrating to deal with, and a nuisance to have to avoid by such methods as cashing out the accounts prior to filing.  Unfortunately, in California the practice is likely to continue for the time being:  In October, the Ninth Circuit Court of Appeals (in the case of In re Mwangi, 764 F.3d 1168, 1179 (9th Cir. 2014)) affirmed its earlier holding that only the Chapter 7 Trustee has the standing to assert an injury based on such freezes.

However, in a more recent case (In re Weidenbenner, No. 14-35443, 2014 Bankr. LEXIS 5009 (Bankr. S.D. N.Y. Dec. 12, 2014)), the Bankruptcy Court for the Southern District of New York has reached the opposite conclusion.  There, the Court held that such freezes are indeed an “exercise of control over property of the estate”; they are not “mandated by the Bankruptcy Code, ordered by the Court, or requested by the chapter 7 trustee.”  It also rejected Wells Fargo’s argument that the freezes were required under § 452(b) as a misreading of prior caselaw (specifically, Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)).  Finally, as to the standing issue, the Court held that the holdings in cases such as Mwangi are “not consistent with the Code and the practical realities of debtors’ lives.”

It is probably wishful thinking to hope that because the practice is now outlawed in New York, Wells Fargo will voluntarily abandon it in other parts of the country.  Perhaps the opinion will persuade other courts to come to the same conclusion, until the Ninth Circuit sees its mistake and changes its mind.  In the meantime, Chapter 7 debtors in California will just have to continue moving their money out of Wells Fargo accounts before filing.

NY Appellate Court: Rent Control Laws Are a “Public Benefit”

On November 20, 2014, the New York Court of Appeals decided the matter of Santiago-Monteverdi v. Pereira (In re Santiago-Monteverdi), 2014 NY Slip Op. 8051 (N.Y. Nov. 20, 2014).  Ms Santiago-Monteverdi had lived in her New York City rent-controlled apartment for 40 years.  In 2011, she filed a Chapter 7 case, seeking to discharge approximately $23,000 in credit card debt.  Section 365(a) of the Bankruptcy Code empowers bankruptcy trustees to assume unexpired leases, and the owner of Ms Santiago-Monteverdi’s building offered the Chapter 7 trustee that, if he assumed Ms. Santiago-Monteverdi’s lease, the owner would buy him out for an undisclosed sum.  Ms Santiago-Monteverdi then sought to exempt the asset as a “Public Assistance Benefit,” as provided for by New York law.  The Bankruptcy Court sided with the trustee, and the District court affirmed.  On appeal, the Second Circuit certified the question to the New York Court of Appeals for this interpretation of state law.

The Court looked to the legislative history, finding that the rent control system had been created to allow lower-income residents to retain their housing as the cost of housing increased.  The Court also found that the law bore the hallmarks of a public assistance benefit: its continued application depended on local need, it was implements at the local and state level, and it provided assistance to a segment of population who could not otherwise afford housing.  The Court further held that direct payments are not necessary for a program to constitute public assistance, and noted that while the benefit was not paid by the government, it was conferred by the government.

The case is significant for residents of San Francisco, Oakland, and Berkeley where rent control laws are in place.  I have not heard of a local instance where a Chapter 7 trustee has pursued an rent-controlled lease as an asset, but if this case had gone the other way, doubtless we would start to hear of it happening.  Indeed, attorneys should be on their guard for this issue in case some trustee attempts to test the interpretative waters regarding the California public assistance benefit exemption.

Supreme Court Agrees to Hear Chapter 7 Lien Strip Case

On November 17, 2014, the U.S. Supreme Court granted the petition to have the case of Bank of America, N.A. v. Caulkett heard.  The case comes out of Florida and deals with ‘lien strips” of second mortgages in the Chapter 7 context.

Lien stripping is a fairly common occurrence in Chapter 13 cases; the principle is that if there is more than one mortgage (or “lien”) against a piece of property, and the property is worth less than the first (i.e. it is “under water”), then there is no equity to secure the junior mortgages.  The security interest is stripped from those mortgages, and they are treated like unsecured debt.

The general trend among the Circuit Courts has been to hold that such junior liens cannot be stripped in Chapter 7 cases, largely based on analogy to the 1992 Supreme Court decision Dewsnup v. Timm, (502 U.S. 410), which held that partially unsecured junior liens cannot be “crammed down” in Chapter 7 cases.

The Eleventh Circuit, in which Florida resides, was the only Circuit to make the distinction between cramdowns of partially secured junior liens and strips of wholly secured junior liens, allowing the latter in the case of McNeal v. GMAC Mortg., 735 F.3d 1263 (11th Cir. 2012).  Caulkett is a challenge to that decision.

Oral argument is likely to take place in Spring 2015, with a decision by June.

“When Non-Bankruptcy Clients Need Bankruptcy Advice” – Thursday, Nov. 20 Attorney Action Club Presentation

Calling all Bay Area lawyers and legal professionals:  Come to my Thursday, November 20 presentation entitled “When Non-Bankruptcy Clients Need Bankruptcy Advice.”  It’s part of the “Attorney Action Club” and will take place at 11:30 AM at the offices of City National Bank at 150 California Street, 12th Floor, in downtown San Francisco.  0.5 hours MCLE will be offered, as well as free lunch and networking opportunities.  Registration is here.

Topics to be covered:

  •  A brief overview of bankruptcy law for attorneys who represent individuals
  • Information for divorce lawyers on discharging community debt
  • Information for tenant lawyers on treatment of rent arrears
  • Estate planning in anticipation of bankruptcy
  • Civil defendants and post-litigation bankruptcy

I’m looking forward to seeing you and sharing information with you!

NPR Story Perpetuates Myth of Debt Repayment

This past Sunday morning, I was listening to the radio, making breakfast for my family, when I heard NPR feature a story about credit card debt. Claire Shrout is a nurse and a mother of two who, after her husband had a second bout with cancer, found herself $48,000 in credit card debt. It wasn’t due to some profligate lifestyle, but to simple necessities like a new transmission and pediatric emergency room visits. She told of how her family then proceeded to spend four years struggling to climb out of the hole.

It’s a heartbreaking story. Claire speaks eloquently about the guilt and shame she felt. Listening to her, I felt like she could have been any one of my clients. It’s usually not the doctor bills that bring people to my office; more often it’s the debt accrued from the resulting loss of income.

Toward the end of the interview, the interviewer asked her if she had considered filing a bankruptcy case. She said no; they had gotten themselves into this debt and so they felt they could get themselves out.

That was a frustrating thing to hear. I know there’s a lot of pride in that statement, but it perpetuates the myth that there’s some kind of heroism in contributing to the profits of the big banks. There isn’t. When Claire’s creditors extended credit to her, the likelihood that she would default was already calculated into the interest rate she was charged.

I wanted to ask her: Why put yourself through that? Why put yourself through that when the banks have already accounted for that money’s possible loss? Why put yourself through that when the law provides you with a clear and fast way out? Why put yourself through that when your family needs that money more?

There’s no heroism in contributing to the profits of the big banks, but there is heroism in holding onto that $48,000 to provide for your kids and their future.

Earlier in the interview, Claire had said that at a certain point, “you realize there’s nothing coming along to bail you out.” Sadly, there was something there all along that could have bailed her out: the helping hand offered by the Bankruptcy Court, if only she’d been willing to take it.

If you’re in a situation similar to Claire’s, I urge you: Swallow your pride. Put out of your mind negative connotations you have with the word bankruptcy. The bankruptcy court is there to help you. Schedule an initial consultation with a lawyer, and really seriously look into the possibility of hanging on to your money, for your family’s sake.

100% Chapter 13 Plans: What Are They?

What is a 100% Chapter 13 Plan? When you file a Chapter 13 Bankruptcy case, you present the court with a plan. That plan in most cases is 5 years long, and it essentially says: “For the next 60 months, I’m going to pay X dollars per month to a trustee, and here are the instructions on how that money is to be distributed.” While you’re in your plan, you are under the court’s protection, and no one can attempt to collect on a debt from you without getting special permission.

There are certain parties that need to be paid in full through your Chapter 13 Plan. Your attorney may be getting part of his or her fees paid through the plan. The trustee takes a portion for administering the plan. Car loans are usually paid in full through the plan, as are recent income taxes. Most importantly, if you’re behind on your mortgage and want to keep the house, those arrears are usually paid in full through the plan, too.

All your other creditors (your general unsecured creditors, such as credit cards, personal loans, and medical bills) get paid something somewhere between 0% and 100% of what they’re owed. How much they get is largely based on two factors: your income and your assets.

On the income side, there’s a document called the Chapter 13 Means Test. It’s a complicated calculation that basically comes down to: Based on your last 6 months’ income, minus necessary expenses, how much can you afford to pay your unsecured creditors per month? Whatever that number is, your unsecured creditors have to get at least that much per month from your plan.

As to assets, the question is: Are your assets so valuable that, if you were in a Chapter 7 case, some of those assets would be subject to liquidation? If so, your unsecured creditors need to get at least as much through your Chapter 13 Plan as they would in that hypothetical Chapter 7 case.

Which brings me to the point of this post: A 100% Chapter 13 Plan is one where, based on income or assets, you have to pay back to your unsecured creditors 100% of what they’re owed.

I’m seeing more and more 100% Chapter 13 Plans these days, and they’re almost always due to one thing: assets. From 2008 through 2012, it was very rare to see 100% Chapter 13 Plans. That was because, due to the housing market crash, hardly anybody had any equity in their homes during that time.

These days however, are an entirely different matter: I practice in the San Francisco Bay Area, where the housing market is very hot. Home values are higher now than their pre-bubble peaks. As a result, almost everyone I see now who owns a home has equity in their home. That’s good, right? Absolutely. But the consequence is that if you have to file a Chapter 13 case, you’re going to have to pay more to your unsecured creditors. And most of the time, we’re talking about amounts that are high enough to trigger 100% Plans.

Here’s the common situation: Married couple own a home. For whatever reason (everyone’s exact situation is unique), they’ve fallen behind on their mortgage, and now there’s a foreclosure date. To stop the foreclosure, they file a Chapter 13 case to enjoy the court’s protection while they catch up on the arrears over 5 years. But because their house is so valuable now, they have to pay off 100% of their other debts through the plan, too.

So that’s the upshot: In the current market, your house is worth a lot more than it was worth 2 years ago. While that’s great, it also means that if you have to file a Chapter 13 case, you’re going to have to pay back a lot more to your unsecured creditors. However, you can’t let the prospect of being in a 100% plan stop you from filing a Chapter 13 case if you need to. Foreclosures are still happening, and if you’re being threatened with one, a Chapter 13 case remains one of the best legal tools for keeping your home.