Archives for August 2015

Bankruptcy courts: foreclosure is not time-barred until 6 years after last payment due date specified in the mortgage or note

Last year, one of our bankruptcy judges ruled that once a mortgage lender waited more than 6 years from declaring a default and demanding the entire balance due (“accelerating the loan”) the statute of limitations specified in the Fair Foreclosure Act barred any later foreclosure suit. At the time, many of us thought the result, contrary to the adage that “no one gets a free house”, was surprising.

Many thought this would provide a windfall as they escaped foreclosure. Alas, that ruling, in Specialized Loan Servicing LLC v Washington, was reversed on appeal. 2015 US LEXIS 105794. The District Court, in a persuasive and well-thought out opinion, showed that the statute setting 6 years to foreclose actually stated that the time began to run on the maturity date set out in the loan documents. Acceleration of the loan is not mentioned there or elsewhere in the Fair Foreclosure Act. Moreover, another statute, governing the time to sue on negotiable instruments, did specify that the time ran from default. From this, the District Court concluded that, since the New Jersey Legislature knew how to make a time period run from default, its choice not to do so in setting 6 years to sue under the Fair Foreclosure Act was deliberate.

More recently, another bankruptcy judge, newly-appointed Jack Sherwood, came to the same conclusion in another well-reasoned decision. Hartman v Wells Fargo Bank NA, 2015 Bankr. LEXIS 2783 (Bankr DNJ 2015)

Oh well, for those hoping for a free house it was nice while it lasted.

Third Circuit Court of Appeals: Reckless disregard for truth may be enough to keep a debt from being discharged

When an individual debtor files a bankruptcy, creditors who were duped into extending credit based on a false statement, fraud or false pretenses can sue to keep that debt from being discharged, based on 11 USC 523(a)(2)(A). On July 23, 2015, the Third Circuit held in In re Bocchino that the creditor does not have to prove the debtor making the statement knew it was false. Instead it is enough if the statement was made with reckless diregard of its truth.

Mr. Bocchino was a stockbroker who recommended that his clients invest in two private placement stock purchases. He recommended both based on rumors and little or no actual investigation into what they were about, even though he was aware of facts that should have raised questions about their legitimacy. Both investments turned out to be fraudulent ventures. The principals of both companies were convicted. The investors lost their money. The SEC sued Bocchino and others for various violations of securities laws and got judgments against Bocchino for almost $179,000.00.

Mr. Bocchino then filed a Chapter 13 bankruptcy, and the SEC filed suit in the bankruptcy court asking it to find that the judgments were non-dischargeable. The Bankruptcy Court recognized that Bocchino believed his statements to investors were true, but held that his gross recklessness in not pursuing an independent investigation into the quality of the product he was selling was enough to prevent a discharge of the resulting liability. It was enough that as “an experienced stockbroker, he knew or should have known, that an independent investigation…was imperative”. On appeal, the Third Circuit agreed.

The Court also agreed that Bocchino could not rely on the fraud of the company principals to escape liability. Bocchino claimed that it was this fraud and not his lack of due diligence that caused his clients losses. The Third Circuit disagreed. Instead, the collapse of the investments was “neither abnormal nor extraordinary given Bocchino’s lack of due diligence” and that the “woeful state of the entities when Bocchino solicited the investments…the losses were manifestly foreseeable”. In other words, Bocchino was a substantial cause of the losses, which would not have occurred had he done his job.

This case addresses what had previously been an unsettled question in the Third Circuit. It eases the way for victims of fraud to preserve the collectibility of their judgments.

However, prompt action is critical. The ability to keep such debts from being discharged requires the filing of a bankruptcy lawsuit (called an adversary proceeding) within a relatively short time (usually about 90 days after the bankruptcy filing). Anyone in this situation should retain experienced bankrutpcy counsel right away.

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