Sunday, November 23, 2014

Mortgage Company Denies Gay Portland Widower Equal Protection

By Jason Reynolds, Oregon Consumer League

Brooks married his domestic partner, Jimmy, in 1982. They remained partners for 16 years but their hand-made marriage certificate was never recognized under Oregon law.

See related article: Openly Charitable Judge to Decide Same-Sex Marriage Case

The couple eventually purchased a Portland home together in 1996.

“I made the down payment,” says Brooks, “And we put the title and loan in Jimmy’s name because he was expected to live longer than me.”

When Jimmy died in 1998, Brooks remained in the home and continued to pay the mortgage.

The loan was later transferred to Green Tree Mortgage LLC in 2011. Green Tree eventually initiated foreclosure proceedings in 2013 to sell the home and recover its equity.

On October 29, 2014, Brooks halted the foreclosure by removing it to federal bankruptcy court.

In legal documents filed yesterday, Green Tree argued Brooks has no protections under the bankruptcy automatic stay because he was not on the loan or title.

The mortgage company’s motion to remand states, “It is Green Tree’s position that the real property at issue in this matter is not even property of the estate.” Read Green Tree's Motion and Brooks' Response.

Brooks and his team of pro bono attorneys disagree.

“Green Tree’s trying to deny him equal protection under the Bankruptcy Code,” says pro bono attorney Michael Fuller, with the law firm OlsenDaines.

“If Brooks was a straight widower, this would largely be a non-issue,” says Fuller.

“Oregon law allows married couples to hold property for the benefit of each other, regardless of the record title holder,” Fuller argues.

“We find Green Tree’s position meritless, inequitable, and personally offensive,” he says.

Green Tree’s attorney, Katrina Glowowski, refused to comment.

Brooks says his health is failing and he hopes to spend his final days in the home he made with Jimmy.

“So long as he continues to make the monthly payments, he’s legally entitled to remain in his home,” says Fuller.

“This is a fight we’re prepared to take on appeal if necessary,” he says.

The matter is set for a preliminary hearing in Portland bankruptcy court on December 9.

Monday, November 17, 2014

Supreme Court to Decide Bankruptcy Mortgage Strip Issue

By Michael FullerThe Underdog Lawyer ®

This morning the Supreme Court agreed to resolve a circuit split as to whether consumers can wipe out wholly unsecured second mortgage liens in chapter 7 bankruptcy.

The practice of "lien stripping" is widespread across the country in chapter 13 bankruptcy. The practice is allowed under chapter 7 of the Bankruptcy Code only in the 11th Circuit.

The 11th Circuit relies on its 1989 opinion Folendore to allow chapter 7 debtors to strip Bank of America's unsecured second mortgages. However, the Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights are not altered in chapter 7.

The two 7th Circuit opinions accepted on cert today are:


This joint cert shows good case selection by Bank of America's appellate team.

The Roberts Court's bankruptcy case selection has been very non-controversial. True nerds will recall that recent unanimous SCOTUS bankruptcy opinions include:

Even Ransom v. FIA (2011) and Hamilton v. Lanning (2010) and were unanimous with the exception of Justice Scalia.

I expect the Supreme Court to rule 8-1 in Bank of America's favor. (Scalia wrote the dissent in Dewsnup).

Until Congress changes 11 U.S.C. § 506, consumers across the country must rely solely on the provisions of chapter 13 to wipe out unsecured second mortgage liens.

Wednesday, October 29, 2014

Bankruptcy Court Cannot Award Appellate Fees, Panel Rules

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Bankruptcy Appellate Panel ruled that trial courts cannot reimburse consumers for the litigation expenses they incur defending frivolous appeals of contempt orders.

The case, In re Wallace, involved a family who had filed bankruptcy, in part, to stop a lawsuit against them by a creditor.

Creditors Cannot Continue Lawsuits after Bankruptcy

After the bankruptcy discharge order was entered, the creditor was held in contempt for continuing its lawsuit against the Wallace Family.

The creditor appealed the contempt order twice, but lost on appeal both times. The bankruptcy court affirmed its award of damages against the creditor, but denied the Family's request for reimbursement of attorney fees they incurred on appeal.

In its opinion, the Panel held that bankruptcy courts cannot compensate consumers for the attorney fees they incur defending contempt orders on appeal and remand.

The Panel relied on a prior Ninth Circuit opinion, In re Del Mission, Ltd., to justify its holding.

In the Del Mission case, the opinion held that section 105(a) of the Code does not permit bankruptcy courts to award fees incurred on appeal. The opinion reasoned that Appellate Procedure Rule 38 authorizes only appellate courts, not bankruptcy courts, to award reimbursement for defending a frivolous appeal.

As a result of the Panel's opinion, the Wallace Family is left with a $16,000 bill for successfully defending a sanctions award of just $3,000 damages.


The unfair result in this case highlights the problem with the American Rule, which generally requires parties to pay their own attorney fees, even when they win.

In this case, the Wallace Family was forced to give up their fresh start, despite having done nothing wrong, just to enforce their discharge.

As the Wallace Family now knows, the American Rule gives wealthy parties greater access to justice, and discourages underdogs from fighting for what's right. But God Bless America.

Kudos to Nevada attorney Christopher Burke for continuing to raise meritorious consumer bankruptcy issues before the Ninth Circuit on appeal.

Win, lose, or draw, Burke's hard-fought cases (Schwartz-Tallard, In re Mwangi, etc.) continue to shape the landscape of consumer bankruptcy litigation. With any luck, Congress might review some of the unintended consequences highlighted in his cases (In re Mwangi in particular) before it enacts the next round of Bankruptcy Code amendments.

Respectfully, I agree with the Panel in this case. FRAP 38 provided the Wallace Family the opportunity to petition the appellate court for fee reimbursement on appeal.

Consistent with the Supreme Court's March 2014 holding in Law v. Seigel, the Panel correctly decided that a bankruptcy judge's equitable powers under section 105(a) cannot conflict with remedies provided for elsewhere in the Bankruptcy Code or federal rules.

Monday, October 6, 2014

Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

By Michael FullerThe Underdog Lawyer ®

On Thursday the Supreme Court agreed to hear an appeal from the Fifth Circuit concerning the discretion of judges to award "fees on fees" under section 330 of the Bankruptcy Code.

Click here to read the Supreme Court's Order granting writs for certiorari in Asarco LLC v. Baker Botts.

What are "Fees on Fees"?

After bankruptcy professionals successfully litigate an issue on behalf of the estate, they must apply for fee compensation. Fee applications can be highly contested and cost professionals tens of thousands of dollars to defend.

"Fees on fees" are the fees incurred defending a fee application.

"Fees on fees" are generally not available under the American Rule, which says that each party must bear its own expenses.

However, "fees on fees" are commonly provided for under consumer protection statutes to encourage law enforcement by private litigants with little money or bargaining power.

The Circuits are split as to whether section 330 of the Bankruptcy Code allows judges to award so-called "fees on fees" for successfully defending a fee application.

The Circuit Split

The 11th Circuit (Grant v. George Schumann et al (1990)), and now the 5th Circuit, do not allow "fees for defense of fees" because defending a fee application does not "benefit a debtor’s estate" and is not "necessary to case administration."

The 11th and 5th Circuits acknowledge that "fees on fees" are allowed in the consumer protection context, such as FDCPA, automatic stay, and civil rights litigation. However, these courts feel that unlike consumer protection, Congress did not intend to encourage depletion of the estate under section 330 through "satellite fee litigation".

Other courts, including the 9th Circuit (In re Smith (2002)), allow "fees on fees" under section 330. These courts reason that compensating professionals for defending fee applications is discretionary so long as the work is "reasonable and necessary."

Effect on Consumer Bankruptcy Litigation

The Supreme Court's decision should have little impact on consumer bankruptcy litigation under the automatic stay and discharge injunction for a few reasons.

First, unlike section 330, Congress passed sections 362(k) and 524 to encourage Code enforcement through litigation.

Second, litigation under 362(k) and 524 protects (rather than depletes) the estate and typically serves to reign in overreaching creditors.

Sunday, September 28, 2014

The First Appearance of "Underdog" in a Legal Opinion

By Michael FullerThe Underdog Lawyer ®

The first appearance of the term "underdog" in a published legal opinion occurred on February 13, 1935.

The legal opinion, Leonard v. Houston, was entered after a jury trial in a dispute between two Pennsylvania construction contractors. At trial, the plaintiff and defendant both asserted claims against each other.

After the verdict was entered in favor of the defendant, one juror told the judge that the defendant won because he was quote, an "underdog".

After hearing the remark, the judge ordered a new trial, because "the verdict in the instant case was not a conscionable verdict and certainly not properly arrived at insofar as the juror in question was concerned."

The opinion, Leonard v. Houston, was written by Judge Moore of the Common Pleas Court of Allegheny County, Pennsylvania.

So remember folks, the first rule about jury nullification is -- you do not talk about jury nullification. (especially to the trial judge!)

Tuesday, September 16, 2014

Payday Lender Liable for Expenses Incurred Prosecuting its Bankruptcy Violation

By Michael FullerThe Underdog Lawyer ®

Last week, the Ninth Circuit Court of Appeals held that a bankruptcy violation doesn't "end" until a creditor either admits to liability or loses at trial.

The holding is important because it affects the ability of consumers to recover expenses incurred enforcing the bankruptcy rules.

Ninth Circuit Clarifies Sternberg

Last week's opinion, In re Snowden, clarifies a 2010 opinion called Sternberg v Johnston. In Sternberg, the Ninth Circuit held a consumer may not recover fees incurred solely seeking damages resulting from a stay violation.

The Ninth Circuit already clarified Sternberg once this year in its April opinion, In re Schwartz-Tallard. In Schwartz-Tallard, the court held that a consumer may recover expenses incurred litigating a disputed stay violation on appeal.

What Snowden Means for Consumers

"The Snowden and Schwartz-Tallard opinions both recognize the strong Congressional intent to ensure America's bankruptcy rules are enforced by consumers," says California consumer bankruptcy attorney Austin Houvener.

Snowden involved a payday lender who refused to return money it seized from a consumer in violation of the Bankruptcy Code's automatic stay.

Payday Lender Ordered to Pay

After a trial in bankruptcy court, the judge determined that the payday lender violated the automatic stay. As a result, the payday lender was ordered to return the money it seized from Ms. Snowden.

The bankruptcy court also compensated Ms. Snowden $12,000 for her emotional harm and $12,000 in punitive damages. However, the judge refused to compensate Ms. Snowden for the expenses she incurred proving the payday lender violated the stay.

The Ninth Circuit remanded the case back to bankruptcy court so Ms. Snowden could be compensated for the litigation expenses she incurred bringing the payday lender to justice. While she could not recover compensation pursuing her emotional harm and punitive damages, she was entitled to reimbursement for the attorney fees required to hold the payday lender liable at trial.

In her majority opinion, Judge McKeown appeared careful not to overturn Sternberg. The dissenting opinion in Schwartz-Tallard (substantially amended in a superseding filing in August 2014) raised serious concerns about whether overturning Sternberg required an en banc panel.

In his concurrence in Snowden, Judge Watford raised serious questions about whether Sternberg was correctly decided in the first place.

Wednesday, August 27, 2014

Wells Fargo Gets Free Pass in 9th Cir. Bankruptcy Cases

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Court of Appeals ruled that Wells Fargo was immune from suit, despite the bank's intentional refusal to return bank funds subject to the automatic stay.

The opinion, In re Matter of Mwangi, highlights an exception to the general rule that creditors must promptly turn over bankruptcy estate property.

Wells Fargo Seizes Bank Funds

After the Mwangi Family filed for bankruptcy protection, Wells Fargo seized the funds in their bank accounts.

Wells Fargo's seizure allegedly violated a bankruptcy rule known as the "automatic stay" because the bank funds belonged to the trustee upon commencement of the case. See 11 U.S. Code § 362(a)(3).

After seizing the funds, Wells Fargo refused to turn the money over to the Mwangi Family or the trustee.

Wells Fargo Immune From Suit by Consumers

Despite Wells Fargo's policy, yesterday's opinion effectively immunizes the bank from suit by consumers under certain circumstances.

The opinion reasoned that the Mwangi Family had no technical legal interest in the bank funds when Wells Fargo seized them. Based on this technicality, the Court ruled the Mwangi Family was not "injured", and thus could not sue Wells Fargo for its alleged violation.


Wells Fargo frequently dismisses bankruptcy violations on appeal based on technicality loopholes.


- Walls v. Wells Fargo (9th Cir. 2002) (dismissed on technicality)
- Barrientos v. Wells Fargo (9th Cir. 2011) (dismissed on technicality)

When Wells Fargo can't find loopholes, it often forces consumers into confidential settlements:


- Espinosa v Wells Fargo (Ore. 2014) (Wells Fargo pays $35,000)
Thoma v Wells Fargo (Ore. 2013) (Wells Fargo pays $19,000)
- Culpepper v Wells Fargo (Ore. 2013) (Wells Fargo pays $37,500)

Wells Fargo's remorseless conduct in yesterday's Mwangi case reinforces its reign as bankruptcy's "bad boy" of banking.

The Bankruptcy Appellate Panel ("BAP") initially refused to dismiss the Mwangi lawsuit against Wells Fargo. The BAP is a special panel of appellate justices who are also practicing bankruptcy judges.

The BAP judges likely understood what consumer bankruptcy attorneys know all too well: Wells Fargo regularly disregards bankruptcy rules without consequence due to loopholes.

Loopholes exist, in large part because Congress allowed banking lobbyists to essentially draft their own amendments to the Bankruptcy Code.

Nowhere in the Ninth Circuit's opinion does the Court address the fact that Wells Fargo's nationwide policy seemingly violates federal law. Wells Fargo's own letter in the case admits the funds it seized were property of the estate.

The Ninth Circuit characterizes Wells Fargo's seizure as a "temporary administrative pledge". However, the facts indicate the freeze was far from "temporary", and the bank ultimately refused to "pledge" or otherwise turn over the funds to the trustee.

In practice, trustees commonly allow debtors to eat food, drive cars, and access bank accounts during bankruptcy that constitute "property of the estate." The Court's mechanical approach to "vesting" under section 541, even if correct, doesn't necessarily mean the Mwangi Family was not injured by the bank's seizure.

The Mwangi opinion may open the door to further creditor abuses in consumer bankruptcy. Specifically, the opinion helps immunize aggressive auto lenders that intentionally repossess family vehicles during the automatic stay.