Friday, April 3, 2015

SCOTUS Considers Overturning 1992 Pro-Creditor Bankruptcy Opinion

By Michael Fuller, The Underdog Lawyer ®

Last week, the U.S. Supreme Court heard oral argument in companion cases arising under Section 506 of the Bankruptcy Code.


The issue in both cases was whether consumers may wipe out underwater second mortgage liens in chapter 7 bankruptcy.


What is Lien Stripping?

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 Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights generally survive chapter 7 bankruptcy.


How Was the Dewsnup Opinion Reached?

The Dewsnup case was decided 6-2.

Justice Thomas took no part in the decision, and Justices Scalia and Souter dissented. Of the six justices that supported the Dewsnup opinion, only one (Kennedy) remains on the Supreme Court.

Commentary

Before oral argument last week, I commented that the case seemed like a no-brainer based on Dewsnup and its progeny.


However, after oral argument, some legal experts now predict the SCOTUS could effectively overturn Dewsnup.


After reviewing the oral argument transcript, I'm updating my prediction to 6-3 in favor of Bank of America, while keeping my fingers crossed.

Thursday, March 5, 2015

Contract Claim Against FDIC Not Preempted by FIRREA, Ninth Circuit Rules

By Michael Fuller, The Underdog Lawyer ®

Yesterday, a Ninth Circuit Court of Appeals panel ruled in favor of a bank on a breach of contract claim against the FDIC.


Click here to read yesterday's opinion in Bank of Manhattan v FDIC.

FDIC Breaches Contract

The bank claimed that the FDIC took receivership of a loan participation agreement, then breached the agreement by selling the loan interest without the bank's consent.

The FDIC argued the bank's breach of contract claim was entirely preempted by federal banking law (the FIRREA).

The district court rejected the FDIC's argument and held the FIRREA doesn't permit the FDIC to breach contracts without consequence.

In a 2-1 opinion, the Ninth Circuit panel affirmed the district court's ruling.

FIRREA Preemption

The panel distinguished a prior case where the Ninth Circuit had held that the FIRREA preempted a California statute regulating asset transfers.


The court reasoned that the prior case's holding was limited to preemption of statutory regulations, as opposed to contractual entitlements to compensation.

The opinion limited its preemption analysis in part because the text of the FIRREA "allows the FDIC to disaffirm or repudiate any contract it deems burdensome and pay only compensatory damages."

Judge Rawlinson wrote a dissent, arguing that there was no principled distinction between preemption analysis of state statute and of state common law.

Sunday, March 1, 2015

Creditor Lacks Standing to Bring Automatic Stay Claim, Bankruptcy Panel Rules


On Friday, the Ninth Circuit Bankruptcy Appellate Panel affirmed an order denying a creditor's claim for damages resulting from an automatic stay violation.



The case, In re Yan, involved a creditor who sought fee reimbursement and punitive damages against a consumer who previously filed bankruptcy.

The bankruptcy judge determined that the consumer had willfully violated the automatic stay by suing the creditor in state court.

However, the creditor's motion was ultimately denied because the judge determined the creditor lacked standing to bring a claim under the automatic stay.

On appeal, the panel agreed with the bankruptcy judge that the creditor lacked standing to sue the debtor. 


The panel recognized that Congress intended the automatic stay to protect debtors and trustees, not creditors. The panel was also persuaded by the fact that the creditor's claim had already been paid in full by the trustee. 

The panel also ruled that the bankruptcy judge had no inherent authority to sanction the debtor for conduct that took place in state court.

Thursday, February 26, 2015

'Bad Faith' Costs Consumer Automatic Stay Protection, Bankruptcy Panel Rules

By Michael Fuller, The Underdog Lawyer ®

Last week, the Bankruptcy Appellate Panel for the Ninth Circuit affirmed an order annulling the automatic stay in a consumer bankruptcy case.


The consumer, Jamshid Sazegar, filed an emergency chapter 13 petition, in hopes of stopping the sale of his Beverly Hills property to a potential buyer.

However, Sazegar never notified the buyer he filed bankruptcy.

The chapter 13 case was ultimately dismissed because Sazegar didn't file the necessary paperwork and failed to appear at his meeting of creditors.

Almost three years later, after the Beverly Hills property was sold to the buyer, Sazegar argued that the automatic stay in his prior case voided the sale.


Section 362(a) of the Bankruptcy Code triggers an automatic stay that generally protects consumers from losing their property to sale or foreclosure while in bankruptcy. However, section 362(d) allows the automatic stay to be annulled in the interests of fairness.

The appellate panel affirmed the bankruptcy court's order granting the buyer's motion to annual the automatic stay.

The panel determined that the equities favored granting the buyer's motion because the consumer failed to fulfill his duties under the Code and never provided notice of his case to the buyer.

Monday, February 9, 2015

"Technical" Bankruptcy Violation Constitutes Contempt, Panel Rules

By Michael Fuller, The Underdog Lawyer ®

The Ninth Circuit Bankruptcy Appellate Panel recently affirmed a contempt order entered against an attorney who prosecuted consumers in violation of the discharge order.


The January 29 opinion, In re Segal, involved a married California couple whose debts were discharged in bankruptcy.

Lawsuit Violated Discharge Injunction

After the attorney was sent a copy of the discharge order, the attorney filed claims against the couple in state court. The claims were based in part on a civil judgment debt discharged in bankruptcy.


The Panel rejected the attorney's argument that his violation was "technical" in nature and thus not contemptuous.

"Mailbox Rule" Applies to Bankruptcy Notices

The Panel also rejected the attorney's argument that he didn't have sufficient knowledge of the discharge order.

The Panel held that under the mailbox rule, proof that the order was mailed to the attorney was sufficient to satisfy the knowledge requirement.


The Panel affirmed the bankruptcy court's determination that the attorney's failure to promptly dismiss his claims violated the discharge order. 

At trial, the evidence showed the attorney waited over three months to eventually dismiss his claims.

Sternberg Not Applicable to Contempt

The Panel also rejected the attorney's argument that he wasn't liable to pay litigation expenses incurred by the debtors after his contempt was remedied.



The Panel held that Sternberg v Johnston, which limits fee recovery in automatic stay litigation, was not applicable to a contempt proceeding under the discharge injunction.

Commentary (Nerd Alert)

The Panel's analysis of punitive damages exposure under sections 105 and 524 was inconsistent with well-established treatises and recent Ninth Circuit dicta by former Chief Judge Kozinski.

See Espinosa v. United Student Aid Funds, 553 F.3d 1193, fn.7 (9th Cir. 2008) (Willful discharge violations entitle aggrieved debtors to actual damages, punitive damages, and attorney fees).

See also 2 Collier Bankruptcy Manual (3d rev. ed.) ¶ 524.02[2][c]) (same).

Even if In re Dyer is still controlling in the Ninth Circuit, the Panel failed to adjust its dollar amount threshold analysis for inflation.

The Hanshaw opinion, cited by In re Dyer, implied that any fine above $5,000 "at least in 1989 dollars" may not be allowable without a jury trial.

The Panel incorrectly interpreted this passage to mean, "Under no circumstances should the relatively mild non-compensatory fine exceed several thousand dollars."

Thursday, February 5, 2015

Green Tree Mortgage Changes Position on Gay Marriage

By Jason Reynolds, Oregon Consumer League

A Portland widower is claiming victory today after a four-month legal battle with one of the country's largest mortgage servicers.


See related article: Mortgage Company Denies Gay Portland Widower Equal Protection

Last November, Green Tree Mortgage LLC filed a motion asking a federal judge to deny equal protection under the Bankruptcy Code's automatic stay to a gay homeowner.

Green Tree argued that the homeowner had no legally recognizable interest in his property, in part because his gay marriage certificate from 1982 was never recognized under Oregon law.

The mortgage servicer's position drew immediate criticism from the Oregon Consumer League, and prompted a team of pro bono attorneys to help the homeowner fight back.



The case took an unexpected twist yesterday, when Green Tree suddenly agreed to withdraw its motion, rather than testify under oath at its corporate deposition.

Court documents show Green Tree settled the matter after the homeowner sought sanctions against it in bankruptcy court for making frivolous legal arguments.

As part of its settlement in the case, Green Tree also agreed to reimburse the homeowner's pro bono team $2,000 in litigation expenses.


Representatives for Green Tree had no comment.

"I'm just glad Green Tree eventually did the right thing, even if it was just to avoid being sanctioned," says the homeowner's pro bono attorney Michael Fuller, partner at Portland law firm OlsenDaines.

Thursday, January 22, 2015

SCOTUS to Decide if Bankruptcy Courts Are (Still) Unconstitutional

By Michael Fuller, The Underdog Lawyer ®

Last Wednesday, in Wellness International Network v. Sharif, the Supreme Court heard arguments that called into question the authority of bankruptcy courts to enter final judgments in certain matters.


Three Constitutional provisions are relevant to the Wellness International case.

See related post from June 9, 2014: Supreme Court Clarifies "Stern Claim" Treatment in Bankruptcy Litigation

What Does the Constitution Say About Bankruptcy?

Article I of the Constitution assigned Congress to establish bankruptcy laws.

Article III of the Constitution assigned the federal court system to resolve legal disputes. The Constitution makes clear that federal court judges are entitled to serve for life with guaranteed pay that can never be reduced.


See related post: Portland federal judges earn $174,000 per year

The Seventh Amendment to the Constitution entitles parties to jury trials in most civil cases. Courts have held that jury trials under the Seventh Amendment must be conducted by Article III judges. Courts have also held that a party may waive its right to a jury trial under the Seventh Amendment.

How Are Bankruptcy Judges Created?

Rather than give all federal judges lifetime tenure and guaranteed pay, Congress decided to create a second tier of "Non-Article III" judges.

This second tier of judges includes magistrates, bankruptcy judges, administrative law judges, etc.

What is the Bankruptcy Code?

In 1978, Congress passed the Bankruptcy Code, pursuant to its Article I authority. Congress envisioned that non-Article III bankruptcy judges would decide all core bankruptcy matters.


However, in its 2011 opinion Stern v. Marshall, the Supreme Court ruled that the Constitution did not permit a bankruptcy judge to enter final judgment in a core bankruptcy matter because the state law counterclaim at issue wouldn't necessarily be resolved in the bankruptcy claims process.

The Wellness International Case

The Supreme Court's decision in Wellness International may finally require Congress to re-tool the Bankruptcy Code.

The case involves a bankrupt businessman who objected to the entry of final judgment against him by the bankruptcy judge on a certain state law claims involving his family trust.

Commentary

Absent consent of all the parties involved, the Constitution simply doesn't allow a non-Article III judge to exercise the power of the federal judicial system.

In 1982, the Supreme Court warned Congress that the Bankruptcy Code and Bankruptcy Reform Act was unconstitutional. Rather than fix the problem, Congress passed the similarly unconstitutional Bankruptcy Amendments and Federal Judgeship Act of 1984, which was held unconstitutional by the Supreme Court in 2011.

It may be possible to maintain the current system on a case-by-case basis where all parties consent to entry of final judgments by a bankruptcy judge. However, this "consent" option will often defeat the very purpose of using specialized bankruptcy judges by creating uncertainty, and drawn out, expensive, bifurcated litigation.

Congress should either (1) authorize bankruptcy judges under Article III, or (2) withdraw the reference of bankruptcy matters to bankruptcy judges all together, and let the judiciary decide how to handle cases under Title 11.