Tuesday, July 29, 2008

New Homestead Decision

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.

Wednesday, July 23, 2008

Housing "Rescue" Bill to Pass Soon

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.

Tuesday, July 1, 2008

New SJC Case on 93A Injury Requirement

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.

Monday, June 16, 2008

Decision Addressing Two Controversial Means Testing Issues

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.

Friday, May 9, 2008

New First Circuit Case on Claiming Exemptions

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.