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I Guess Bankrutpcy Attorneys Are Debt Relief Agencies Again -- But How Much Does It Matter?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 started requiring certain people and entities to disclose to consumers in looking to file bankruptcy that they are a "Debt Relief Agency", and to instruct potential bankruptcy filers not do to do things such as not to incur more debt before filing.  See, 11 U.S.C. §§ 526(a)(4) and 528(a)(4) and (b)(2).  Since this time bankruptcy attorneys across the nation have been contesting the fact that they classified as a "debt relief agency" under the these code provisions, because these provisions do not necessarily include the direct application of "lawyer" or "attorney".  They have also, been disputing that the law can constitutionally restrict them from advising their clients to incure new debt, because in some situaitons involving the mortgage crises, this might be benefical.

The matter is important to consumer bankruptcy attorneys on an emotional, practical, and legal level.  On an emotional level, most attorneys do not believe they competed to get into law school, lived through that grind, and pass an impossible bar exam just to have bare the mark that compares it to other fly by night organizations.

On a practical matter, debt relief agencies have a duty to provide certain disclosures to debtors within a short period after meeting with them.  This does not sound onerous on its face, but most consumer bankruptcy attorneys are kind enough to offer most people free evaluations when the new law places terrible restrictions on them already concerning these services.  It literally takes hours of their time, already discouraging attorneys to practice in the area.  Also, many attorneys are nice enough to talk to consumers over the telephone.  This puts the attorney at risk of not being able to provide these disclosures.

On a legal level, bankruptcy attorneys do not believe that Congress should be allowed to prohibit them from advising their clients in ways that might be financially beneficial to the client, as the new Code provisions do.

Then, of course, there is the whole issue of the question itself.  If an attorney does not know if the provision applies to him or her, how does he or she know to try and comply with it.  So, attorneys have been racing around the country trying to get this issue before bankruptcy courts and district courts to get some degree of clarification.  Needless, to say these decisions have been mixed, at best, leaving some attorneys practicing in a particular court, not having to comply, and those in another court having to comply.

This whole discussion is predicate to a decision of first impression being handed down by one of the United States Courts of Appeal, which states that attorneys are debt relief agencies and must comply with those disclosure provisions, but striking down that part of the law as unconstitutional to prohibits attorneys from advising their client as to incurring debt.  In effect, the 8th Circuit splits the baby.

In Milavetz v. United States of America, the 8th Circuit Court of Appeals found that the new term, "debt relief agency" as defined in 11 U.S.C. § 101(12A), is not ambiguous.  Holding with a majority of the courts that have ruled on this matter, including the Texas case, Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006), "constitutional avoidance" does not apply in this as to the "debt relief agency".  The Court of Appeals defined constitutional avoidance as "where an otherwise acceptable construction of a statute would raises serious constitutional problems, the Cour will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress".  Thus, if interpreting "debt relief agency" to include attorneys would raise constitutional problems, the Court would look for another interpretation.

Ultimately, the Court found that "debt relief agency" includes attorneys because they were not expressly excluded from this group under 11 U.S.C. § 526(d)(2), and because the limited congressional history specifically discussed this provision in terms of "professional standards for attorneys".  The Court also found that providing this disclaimer is does not violate the constitution guarnatees of free speech.

This being the case, the 8th Circuit had to determine if the prohibition restricting attorneys from discussing with clients the possibility of incurring new debt was overly broad and thus unconstitutional.  The 8th Circuit found it was.

The Court ruled that § 526(a)(4)'s plain language an attorney is prohibited from providing this beneficial advice—even if the advice could help the assisted person avoid filing for bankruptcy altogether. For instance, it may be in the assisted person's best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy all together.  The Court found that Incurring these types of additional secured debt, which would often survive or could be reaffirmed by the debtor, may be in the debtor's best interest without harming the creditors.

The end result is that, at least in the 8th Circuit, and probably around the country, bankruptcy attorneys are going to have to use the "debt relief agency" moniker and provide certain minimal disclosures, but § 526(a)(4) is no more, and the government cannot tell you not to provide beneficial information to your clients.

(Pictured is the Hon. Lavenski R. Smith who wrote the opinion).

10th Circuits Adopts Objective-Coercion Principle In Discharge Injunction Violations

The United States Court of Appeals, Tenth Circuit opened the door to the Objective-Coercion Principle in discharge injunction violations.  In doing so, however, it distinguished the facts of the case at hand and ruled against the debtors because neither the Bankruptcy Court findings, nor the Debtor's testimony met the guidelines set out by the 10th Circuit.

In the case In re Paul, Circuit Judge Stephen H. Anderson issued the opinion that states that the Objective-Coercion Principle "operates as an overarching exception" to the rule that actions that do not directly violate the 11 U.S.C. §524 discharge injunction may still be a violation of §524(a)(2) if it can be shown that a "creditor acted in such a way as to 'coerce' or "harass' the debtor improperly so as to theoretically force them to pay a discharged debt.

The 10th Circuit, therefore, adopts the theory first established by the 1st Circuit Court of Appeals in its decision In re Pratt in 2006, except that the 10th Circuit did not find that the facts before it in In re Paul met the standard set.

NACBA / Debtors Fail To Win Interpretation Battle In 10th Circuit Over Interest On 910 Vehicles

The National Association of Consumer Bankruptcy Attorneys (NACBA) along with a number of Debtors (and their bankruptcy attorneys) took their argument over whether secured claims, which cannot be crammed down under the 910-day period preceding the filing of a bankruptcy, are "allowed secured claims" under 11 U.S.C. § 1325(a)(B)(ii) entitling the creditor to interest pursuant to the Supreme Court's prior opinion in Till v. SCS Credit Corp, 541 U.S. 465, 469 (2004).

In the consolidated cases before the United States Court of Appeals, 10th Circuit the Debtors has argued before the Bankruptcy Court, the BAP and the 10th Circuit that as a result BAPCPA a creditor who has a claim secured by a 910 vehicle is not entitled to interest at all because a 910 car claim is not an "allowed secured claim" within the meaning of 11 U.S.C. § 1325(a)(5).  Alternatively, they argued that the requirement to pay interest is not mandatory with the Bankruptcy Court in this regard.

The Debtors prevailed in the Bankruptcy Court, but they did not prevail before the 10th Circuit.

The 10th Circuit ruled that although 11 U.S.C. § 506(a) bifurcation of a claim into secured and unsecured portions is no longer available if the property was purchased or financed within 910 of the bankruptcy filing, the full amount owed is an "allowed secured claim" for purposes of 11 U.S.C. § 1325(a)(5), and the Bankruptcy Court must provide the creditors involved the present value of the claim, which includes interest.  The 10th Circuit also ruled that interest is required on the entire claim, and not just that portion that would be secured except for the 910 day limitation.

Although the 10th Circuit referred to some prior collateral decisions on its part, this really was a case of first impression for the Court.  It represented a gallant effort on the part of these Debtors, their bankruptcy attorneys and NACBA, but in the end the argument did not work.  Where the case goes from here is unclear.

Damned If You Do, Damned If You Do Not

You have really got to feel for Tenny Zahn, whether you agree or not with the outcome of her confirmed plan.

Essentially, Ms. Zahn found herself in the strange situation where she was aggrieved by her own proposed plan.  This is so because she was left with the Hopson's choice of proposing a Chapter 13 plan that she herself did not want, or risk having her Chapter 13 case dismissed.  So she chose to file the plan required of her and then file an objection to her own plan.  Neither the Bankruptcy Court of the BAP seemed to appreciate such ingenuity, but the Court of Appeals did.

In Tenny Shikaro Zahn vs. Richard Fink the Eighth Circuit Court of Appeals found that Tenny Zahn was an aggrieved party allowing the appeal of the confirmation of her proposed Chapter 13 plan to go forward.

Initially the Bankruptcy Court denied confirmation of Ms. Zahn's Chapter 13 plan because she had failed to include distributions from her non-filing husband's individual retirement account (IRA).  She then appealed that denial of confirmation to the Bankruptcy Appellate Panel (BAP).  The BAP dismissed her appeal as being interlocutory.  Having little choice, Ms. Zahn then proposed a new plan that included the IRA distributions, but filed an objection to her own plan.  The Bankruptcy Court approved this plan over Ms. Zahn's objection.  So, then she appealed the confirmation of that plan in that the decision was not now interlocutory.  The BAP dismissed this appeal as well stating Ms. Zahn lacked standing to appeal the order granting confirmation of her own amended plan because she was not an aggrieved party.  The BAP stated, "a party cannot prosecute an appeal from a judgment in its favor", reasoning that "[w]hen the court confirmed her plan, [Zahn] got all of the relief for which she asked".

The Eighth Circuit stated simply "there is a flaw in the BAP's reasoning".

The Circuit court stated that Ms. Zahn "was forced, over her express objection, to propose an amended plan" and "amended her plan with provisions she believed were erroneous and not required by the Bankruptcy Code, in order to avoid dismissal".  As a result Ms. Zahn can appeal a judgment that was not in her favor and which was prejudicial toward her.  Given these facts, Ms. Zahn was an aggrieved party.  "Not to allow a debtor to appeal confirmation of her own plan would require a debtor to comply with a plan that contains provisions the debtor does not believe are required by the Bankruptcy Code, while losing her right to appeal those provisions".

To me this is much like coercing a confession out of some criminal defendant, and then telling him he cannot appeal his conviction because of the confession.

5th Circuit Establishes Interest Rate In 13 Plans As Prime Plus And Not Contract Rate

This has been much consternation about how to calculate the effective interest to creditors to be paid through Chapter 13 plans since BAPCPA passed in 2005.  Some creditors have continued to demand higher interest rates and have argued that BAPCPA had some way abrogated the Supreme Court's decision in Till v SCS Credit Corp., 541 U.S. 465 (2004) given the anti-cramdown provision in the new Bankruptcy Code.  Some bankruptcy judges have even argued against Till by looking at the decision personally and stating that not even bankruptcy judges can get such an interest rate.  Well, the issue is closer to be resolved.

I guess we all owe bankruptcy attorney William (Bill) Lively of Tyler, Texas a debt of gratitude in sticking with this matter, because the 5th Circuit now seems to have leveled the playing field in a decision that benefits the debtors and consumers.

In a ruling upholding the decision of the Bankruptcy Judge Bill Parker for the Eastern District of Texas, the 5th Circuit Court of Appeals in New Orleans ruled in the soon to be published decision of Drive Financial Services v. Bobby and Freda Jordan (here) (5th Cir. March 12, 2008), that the "hanging paragraph" following 11 U.S.C. § 1325(a)(9), which would limit the stripping down of a purchase money security interest of collateral purchased within 910 days of the bankruptcy filing, did not prevent a cram down of the interest rate consistent with the Supreme Court's decision in Till.

Drive Financial argued the hanging paragraph of § 1325(a)(9) made 11 U.S.C. § 506 inapplicable, and that the Supreme Court's decision in Till should not apply because (1) it was decided for the hanging paragraph was enacted into law, and (2) Till was a fragmented court decision in which no narrow ground was established as to how interest in a Chapter 13 plan was to be determined .  Therefore, Drive Financial argued that the Court should mandate its prior "presumptive contract rate approach" in Green Tree Fin. Servicing Corp. v Smithwick, 121 F.3d 211, 214-15 (5th Cir. 1997), which basically said that the plan should require the rate of interest required in the contract unless the debtor could prove that the lender would now loan the money at a lesser rate.

This would make a big difference in the feasibility of of plans proposed by debtors, especially those debtors that took out the infamous subprime loans with lenders like Drive Financial.  Whether defined as predatory lending or not, the combination of high interest rates and high collateral value is a recipe for a failed bankruptcy plan. In this case Mr. and Mrs. Jordan had an outrageous interest rate of 17.95%.  Mr. and Mrs. Jordan had proposed a more reasonable rate of 7.5%, or a few points over the prime rate at the time.  If they had been required to pay the full amount owed on the vehicle they financed through Drive Financial, and pay the contract interest, it could have seriously jeopardized not only their plan or reorganization, but the plans of most debtors who have been forced to deal with subprime automobile lenders before filing.  In short, there might not be much relieve afforded by the filing of a bankruptcy.

The 5th Circuit found Drive Financial's argument to be "unpersuasive" because Till did not rely upon the fact that the creditor's claim had be bifurcated using 11 U.S.C. § 506, and the purpose of bifurcation is to determine how much of the claim is secured and not how much interest must be paid in a plan.  Further, the hanging paragraph only prevents the bifurcation of the purchase money secured claims that are less than 910 days old at the time of the filing of the bankruptcy case.  The Court found that the only difference in Till and the case at hand is that in Till only part of the claim under the pre-BAPCPA Bankruptcy Code was secured while the full claim under the Post-BAPCPA claim is secured.  As such, Till was not superseded by BAPCPA.

The 5th Circuit also disagreed that the decision in Till was so fragmented that it did not state precedent that had to be followed in regard to plan interest rate calculations.  In fact, the 5th Circuit found that although the Justices of the Supreme Court might have been divided on issues, that a plurality of them, joined by Justice Thomas, concurred in judgment to specifically overturn the 7th Circuit the applied essentially the same standard that the 5th Circuit had applied in Smithwick, above.  To reapply Smithwick, the holding of which had been specifically overturned by the Supreme Court by five currently active justices of the Supreme Court, "would be untenable at best".

The common denominator of Till stated that creditors being paid through a plan are entitled to apply a standard of prime plus rate and not the contract rate.  Justice Thomas argued against a risk premium being added to prime, but otherwise agreed with the other 4 justices in the majority.

(Picture of Tyler Bankruptcy Court Building).

The "Computer Did It" Is Not A Defense

On March 6, 2008 Bankruptcy Judge Jeffery A. Deller  of the Western District of Pennsylvania in Pittsburgh, had to find again that the "Computer Did It" defense often raised by creditors and collectors is not a defense at all.

In Wingard vs. Altona Regional Health Systems and Credit Control Collections the creditor argued that it did not willfully violate the stay because of a computer error the notices and at least one phone call was made to the debtors.

The Court found first that the automatic stay was willfully violated because in the 2nd Circuit, as in all circuits, the standard for determining a willful violation is only that Defendant had notice of the bankruptcy and intended the act which violated the stay.  There was no real discussion as to whether collection letters and phone calls constituted a violation because that is obvious.

For whatever reason creditors and collectors continue to believe that a mistake on their part seems to constitute a legitimate defense, which is completely opposite of the law.  The continuation of this argument continues to run up damages in the way of legal fees and costs, which make these practices particularily regrettable.

The Court first responding to Credit Control Collections comment that the letters went out because the matter "fell through the cracks" when the computer was not properly coded, and the agencies automatic system of sending letter was the culprit.  A notice having been send to creditor's counsel after one letter was sent, the Court asks, "How many times can a bankruptcy file 'fall through the cracks'"?

As to the "Computer Did It" defense in general, the Court quoting another opinion stated the defense is a "nonstarter ... since intelligent beings still control the computer and are thus responsible for their error ... having a clear obligation to adjust their programming and procedures and their instructions to employees to handle complex matters correctly".

The decision by Judge Deller is troubling in that he did not award damages for the attorneys' fees in this case.  The matter is silent, and so it is unknown if the debtor's properly requested or proved such damages.

There Is A Problem With Emails To And From Your Client Of Which You Should Be Aware

As is common these days, bankruptcy attorneys and clients communicate via email.  You think the emails are privileged communications between the attorneys and the clients.  Certainly they are privileged as to the copy maintained by the attorneys.  However, many of these emails are being sent to the clients using general email boxes accessed by many or to their email address maintained by their employer or company.  This might be a mistake because unless these emails are encrypted (and let us face the fact that they are not) then these emails, and the content in these emails, might not be protected.

An example is the decision by New York State Judge Charles W. Ramos (here) which found that a Beth Israel doctor who sent emails to his lawyer from the Beth Israel email server did not have an expectation of privacy.

And, this argument is not limited to New York State courts either.  The New York Bankruptcy Court ruled the same same way in In re Asia Global Crossing, Ltd., 324 B.R. 503 (Bankr. S.D.N.Y. 2005), where the Court found that emails between an attorney and the client left on the corporate email system waived the privilege.  This Court found that four factors should be taken into consideration when making a determination on this issue:

1.  Does the corporation maintain a policy banning personal or other objectionable use;
2.  Does the company monitor the use of the employee's computer or e-mail;
3.  Do third parties have a right of access to the computer or emails; and,
4.  Did the corporation notify the employee, or was the employee aware, of the use and monitoring       policies?

Especially in consumer bankruptcy cases these days attorneys often encourage clients to direct their questions to the law firm via email.  The law firms often collect email addresses from clients, without regard for these four factors, and send emails to the clients.  Now often the attorneys' emails are pretty mundane.  They remind someone of a hearing, give directions to the Court, inform them of the need to receive back signed paperwork.  Most of this is controllable as to content.  The problem is on the emails sent to the attorney.  Emails that might later suggest that the attorney knew of property not scheduled, or which might indicate a fraudulent transfer, or an uncorrected inaccurate answer to the Trustee during a creditor's meeting, or instructing a client how to answer a question at trial.  I do not know, but it would seem that this road is filled with potholes, and the attorney and client need to be mindful of this fact and act accordingly.

It might also open the door in future litigation for opposing counsel to subpoena the emails of your clients from their employer just so they can see what might be happening.

Judge Stacy Jernigan's Fight Against The New Bottom Feeders

In In re White Stacy Jernigan, the United States Bankruptcy Judge for the Northern District of Texas in Dallas took steps to expose and reel in those that she called "A New Cottage Industry of Bottom Feeders" who try to make a buck off down and out debtors who are about to lose their home after they seek bankruptcy relief.

Earlier in the Debtor's bankruptcy, Judge Jernigan believed she had to lift the automatic stay protecting the Debtor's home.  Given that a bankruptcy already existed it was unlikely that the Debtors could stop the foreclosure from taking place.  The Debtor's bankruptcy attorney insisted that there was little they could do to stop the foreclosure given that the automatic stay had been lifted.

But, with foreclosure comes lots of mail solicitations promising help.  Of the approximately 40 mailings that the Debtors received based on the posting of their home for foreclosure, the Debtors chose a company that represented itself as North American Foreclosure.  It what that company and its representatives called "a completely legal procedure" they convinced the Debtors to transfer a 1% ownership of their home to an individual who would file bankruptcy to stop the foreclosure.  The the Debtors would pay North American $650 per month until the 1% was paid back (whenever that would happen).

The paperwork selling the 1% of the house to an individual in California was apparently backdated.  Then the mortgage company, which was in the process of foreclosing the home, receive notification from the representatives of American Foreclosure that the property was included in the bankruptcy of a Debtor who had then filed bankruptcy in California.  The problem, as it turns out, is that the property was not listed on the California Debtor's bankruptcy case, and the Debtor claims she knew nothing of the transaction.  She was apparently duped as well.

The Debtors paid a gentleman by the name of David Curtis, North American Foreclosure's local representative, $650.00 for the first payment to begin the process.  The Debtors eventually made one payment to the company before their bankruptcy counsel contacted the Debtor's about Judge Jernigan's show cause order.

The Bankruptcy Court, upon learning of the fraud, took immediate action, finding that those associated with North American Foreclosure likely violated various bankruptcy laws, she found that the Debtors were likely innocent parties which were duped, and she order North American Foreclosure, and its representatives, David Curtis and his company, Jireh Capital Services, to appear and show cause why they did not violate the automatic stay provisions of 11 U.S.C. § 362 and are not liable pursuant to § 362(k).  The Court confirmed in its Order pursuant to 11 U.S.C. § 362(j) that the automatic stay was terminated in the Debtors' bankruptcy and, in case it was not, she annulled the stay retroactively pursuant to 11 U.S.C. § 362(d).  The Court voided the transfer of the 1% to the California bankruptcy filer.  The Court reported the actions as possible bankruptcy crimes pursuant to 18 U.S.C. §§ 3057, 152 and 157.  The Court provided a courtesy copy of her decision to the Chief Bankruptcy Judge in California and the Texas Attorney General, and the Judge issued a plea to the consumer debtors bankruptcy bar to be mindful of these actions and to warn their client's accordingly.

To date nobody has appeared before Judge Jernigan to show cause as ordered.

Aside From Non-Collection Letters Required By Law You Cannot Lift The Stay To Foreclose On A Home And Continue To Call The Debtor

Mortgage lenders continue to push the envelope in bankruptcy case.  They believe they can imagine exceptions for their conduct, even though not supported by law, and make them so.  There seems to be a disconnect in the thought of mortgage lenders in what they can and cannot do in a bankruptcy process, and that if they cannot adapt their technologies that they should not be held responsible for their conduct.  No doubt this is aggravated by the sub-prime and mortgage default situation, which, unlike before BABCPA, they are wanting to avoid the specter of foreclosure (in this case, even though the stay was lifted).

In what is a simple decision from Bankruptcy Judge Thomas L. Saladino of District of Nebraska, the Court distinguishes from letters sent to borrowers facing foreclosures as required by non-bankruptcy law and the attempt to continue harassing the Debtors as to their house debt by the use of telephone calls in which the stay is lifted to foreclose.

Credit Union Will Not Quit Contacting Debtor And Is Sanctioned Over $13,000

Wendelin I. Lipp, the United States Bankruptcy Judge for the District of Maryland sanctioned Navy Federal Credit Union $3,464.50 in actual damages for attorneys' fees and $10,000.00 in punitive damages for continuing to call and send correspondence to the debtor once being informed of the debtor's Chapter 7 bankruptcy filing.  (You can find the Order Awarding Damages by clicking here).  The debtor's bankruptcy attorney contacted Navy Federal both before and after the debtor filed her Chapter 7 case.  Despite this the Credit Union contacted Ms. Price by phone 10 times, by mail twice and they came to her house once.  Judge Lipp considered it a blatant disregard of the automatic stay.