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.

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.

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.