Archives for March 2013

What is a “residence” that a debtor can claim as exempt? NJ Bankruptcy judge holds that it must be a place of permanent residence.

Commonly, people in financial difficulty own multiple properties that they could claim as a residence. This is important, because bankruptcy code section 522(d)(1) affords a right to protect from sale an “interest” in real estate or other property that serves as a “residence” for the debtor or a “dependent”. Clever attorneys can try to use this to protect property other than the debtor’s principal residence. That right has been limited in a recent decision in New Jersey.

Very recently, bankruptcy Judge Michael Kaplan held in In re Stoner,  that the exemption only applies to property that the debtor actually intends to use as a “homestead”, and held that the debtor there could not claim as exempt the proceeds of property owned and occupied by his father until a few days before the bankruptcy filing, because he did not have an intention to live there.

Unbeknownst to the debtor, his father had died a few days before his bankruptcy filing. For two years, the debtor claimed another property where he actually lived as his residence. Since he was the executor of his father’s estate, he sold the father’s property, pocketed the proceeds, then changed his mind and claimed his share of his father’s property as exempt. The trustee successfully challenged this claim.

Judge Kaplan first held that because, as of the date of the bankruptcy filing, the debtor held the legal right to sell the property and a partial interest in it as a beneficiary, he held an “interest” in the property that he could exempt. The next question, which was determinative, was whether that interest was in a “residence” to which section 522(d)(1) applied. Bankruptcy courts have taken different approaches to this question. However, Judge Kaplan looked to the law of New Jersey and other states, seeking a definition of the term “residence”. He also looked at what Congress intended in creating the “homestead” exemption. With all this before him, Judge  Kaplan held that  the term “residence”  requires “some measure as the Debtor’s of permanence”  and that “[t]his approach is consistent with the New Jersey state law’s interpretation of the term “homestead,” equating it to a principal residence.”

Applying this standard to the case before him, Judge Kaplan found “no support for any finding that the Debtor considered the decedent’s residence principal residence or that he intended his stay there to be permanent. The Debtor has not submitted any change of mailing address forms, change in driver’s license or indication as to where he was registered to vote at the time of his filing. Further, the fact that the Debtor did not seek to amend his schedules until nearly two years after he filed his Petition lends further support to the Court’s conclusion.”

This will be of significance to anyone with multiple properties. Clearly, anyone who wants to claim an exempt residence a vacation home or property in which parents reside will have a harder time, if other courts follow Judge Kaplan’s lead.  Careful planning and guidance by an experienced bankruptcy attorney is more important than ever.

Mortgage lender sanctioned for violating discharge injunction by repeated calls to discuss alternatives to foreclosure after being told to stop and after debtors locked out of home

An Oregon bankruptcy court slapped Wells Fargo Bank with counsel fees and $4000.00 in damages based on its repeated calls to the borrowers to discuss “alternatives to foreclosure”. (In re Culpepper, 451 B.R. 650 (2012)). The facts of this case are important to understand this result.

The homeowners filed a bankruptcy and initially stated they wanted to surrender their home. Despite this they made three applications for a loan modificatoin, none of which were put into effect. At some point in time they were locked out of the house. Shortly afterwards, they began getting a series of telephone calls. sometimes twice a day to discuss “alternatives to foreclosure”. The savvy homeowner, Ms. Culpepper, recorded these calls (Note: many states make this illegal unless the caller is informed the call is being recorded). The callers were knowledgeable and professional. However, Ms. Culpepper was clearly distressed and repeatedly told them to stop. Each time she was told the calls would stop only if she sent a “cease and desist” letter to a fax number. A total of about 100 such calls continued, even after Ms. Culpepper’s attorney sent a letter to Wells Fargo demanding the calls stop. Fed up, the Culpeppers reopened their case and filea a motion to hold Wells Fargo in contempt of the discharge order.

The court granted that relief, finding that the Culpeppers had met their burden of producing “clear and convincing” evidence that Wells Fargo knowingly persisted after knowledge of the bankruptcy discharge. In awarding damages, the Court had some cogent remarks:

“I find that Wells Fargo knew that the discharge injunction applied with respect to Ms. Culpepper, and I find that Wells Fargo intended to continue to route calls to Ms. Culpepper in an effort to reinstate all of some of a discharged debt, i.e., the Loan, through a loan modification, after Ms. Culpepper had clearly advised knowledgeable, thinking Wells Fargo employees that she was not interested in pursuing a modification of the Loan with Wells Fargo and wanted the calls to stop. Accordingly, I conclude that Ms. Culpepper has established by clear and convincing evidence that Wells Fargo violated the discharge injunction under § 524(a)(2).

 “The question then moves to an appropriate measure of damages. As I indicated in my tentative conclusions communicated at the Hearing, I do not find this case appropriate for the imposition of punitive damages. Ms. Culpepper opened the door to communications with Wells Fargo postpetition and postdischarge through her pursuit of multiple applications to modify the Loan. The specific communications from Wells Fargo representatives consistently and overtly disclaimed any attempt to collect a discharged debt from Ms. Culpepper. If the communications had not persisted in the face of repeated, anguished communications from Ms. Culpepper requesting that the calls stop, the decision could have been different.
 However, the calls did not stop, and there is a fundamental problem with a program of calls where intelligent, knowledgeable Wells Fargo employees cannot take the responsibility to cause such calls to stop in the face of clear communications from a former customer that she has no interest in further pursuing a loan modification and wants such calls to cease. An award of actual damages is appropriate”
Some important lessons apply here. First, borrowers do not have to be subjected to harassment, but they have to develop evidence.  Second, recording the calls, after advising that a recording is taking place, is an excellent gambit. Indeed, such tactics alone may cause the calls to stop. Third, some effort to put into writing a demand to “cease and desist” is important. Fourth, proving damages will require showing how the calls and efforts caused emotional distress. In this case, the Culpepper’s psychologist testified.
At the end of the day, no one should be subjected to this kind of pressure, but if more people call the violators to account, the violations may stop. Assistance of experienced qualified counsel is essential to protect your rights.

After a bankruptcy discharge, what to do when mortgage holders and secured creditors go too far.

A bankruptcy discharge makes most but not all debts legally noncollectable against the person who is discharged. When despite this a creditor tries to collect the discharged debt, the result can be a lawsuit to hold the creditor in contempt for violating the bankruptcy discharge. But not all creditors are prevented from collecting or enforcing their rights.

A bankruptcy discharge does not prevent collection of debts incurred or which arose after the bankruptcy filing. It does not prevent collection of domestic support obligations (eg alimony or child support), most student loans or most taxes. It does not prevent collection of debts which have been voluntarily “reaffirmed” in the bankruptcy (typically car loans and leases)

Those creditors who hold a mortgage or collateral (eg a car loan or lease) are still allowed to enforce their rights as a lien holder. Thus, pursuing foreclosure of a home or repossession of a motor vehicle is allowed. But in these situations, a mortgage lender or other lien-holder can sometimes step over the line if they take action that goes beyond merely enforcing their rights to property, and has the effort of coercing a payment by the individual on the personal debt that was discharged.

This concept that a debt is discharged against the individual, but not against property which is collateral for the debt is difficult from some to grasp. Think of it this way. When we get a mortgage loan or a car loan, we are really making two promises. One is the “IOU” promise to pay back the debt. The other is backing that promise up by giving the lender legal rights to property, eg the home or car. The IOU is what the discharge takes away, but the lender still has the right to get and sell its collateral if the loan is not paid. After a discharge, that is all a mortgage lender has left.

So how far can a mortgage lender go? A creditor violates the discharge injunction when it: (1) intentionally takes action after a discharge, with knowledge that a discharge has been ordered and where (2) the creditor’s action  operates to coerce or harass the debtor  into paying a discharged obligation.  The First Circuit Court of Appeals defined the “objectively coercive” standard in stating that “even legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a ‘fresh start’ and are not unfairly coerced into repaying discharged prepetition debts.”

The line between what is allowed and what is not is not always clear. Here are some recent examples how this might play out:

1. After the debtors had abandoned a home and a foreclosure had proceeded to the point that they no longer had any rights of ownership, a mortgage servicer violated the discharge by sending a letter, entitled “Validation of Debt”, contained information notifying the debtors of the transfer of the loan, the amounts due under the note, and pertinent information for making future mortgage payments, and later letters with additional information about the assignment,
alternatives to foreclosure, and property insurance. . Included in all but one letter was a generic disclaimer stating that  the communications were not attempts to collect debts from customers in pending bankruptcy cases, or those who had already obtained a discharge under the Code. The Maine bankruptcy court found the lender in contempt because at the time these letters were sent, they served no valid purpose served relating to enforcement of the security interest because the lender already had its collateral.

2. In another case, the lender did not violate the discharge when they refused to pursue a foreclosure to completion or to release their mortgage lien, even though this forced the debtors to incure additional expense for insurance and property maintenance.

3. In that same case, the lender did face contempt penalties for demanding payment on the mortgage loan and telling the borrowers their personal obligation to pay on the mortgage loan was not discharged in bankruptcy.

4. In another case, the creditor filed suit against the debtor’s business, naming them individually as nominal parties against whom no judgment was sought individually. Even though the suit looked to be questionable and possibly meant for harassment, this did not rise to a discharge violation. That the debtors had to take time and effort to provide discovey of facts as witnesses in the litigation, that was not enough.

The point is that mortgage lenders and secured creditors do have certain rights, but sometimes they go too far. When that happens it is time to seek legal advice.



Recognized Quality & Experience