In yet another blow to the finality of exemptions, the Fifth Circuit has ruled that a chapter 7 debtor who claimed an IRA as exempt but later withdrew the proceeds must pay the funds to the trustee.   Engelhart v. Hawk (Matter of Hawk), No. 16-20641 (5th Cir. 7/19/17).    The decision follows on the Court's ill-conceived Frost opinion and raises the specter that no exemption can ever be final.   (I am abandoning my usual stance of editorial neutrality to come out and say I think this is a terribly bad decision).   What HappenedGregory Hawk filed chapter 7 bankruptcy and Eva Engelhart was appointed trustee.   Hawk claimed an IRA account with over $133,000 in it as exempt.   No party objected to the exemption within the period allowed by the bankruptcy rules.   The Trustee filed a no-asset report.   However, a creditor objected to the Debtor's discharge.   In the course of discovery, the creditor learned that the Debtor had withdrawn most of the funds shortly after filing bankruptcy and had used them to pay living expenses.    The Trustee filed a motion for turnover.   The Bankruptcy Court ordered that all of the funds be turned over to the Trustee on the basis that they lost their exempt status when they were not reinvested into a new IRA.  The District Court affirmed.Expanding Frost The Fifth Circuit's opinion in Hawk started out on a sound framework. “Unless a party in interest objects, the property claimed as exempt on such list is exempt.” 11 U.S.C. § 522(l). “Anything properly exempted passes through bankruptcy; the rest goes to the creditors.”Opinion, p. 4.   The opinion should have ended there.   Indeed, the Debtors argued that under the "snapshot" rule the status of the exempt property was fixed either as of the petition date or the date that the exemption became final.However, the Court was weighed down by its prior opinions in Matter of Frost, 744 F.3d 384 (5th Cir. 2014) and Matter of Zibman, 268 F.3d 298 (5th Cir. 2001) which dealt with proceeds from sales of homesteads.   The court stated that  "there are clear parallels between the Texas statutes governing retirement accounts and those governing homesteads."    Id.   The Court noted that the IRA accounts lose their exempt status if not reinvested in a new IRA within sixty days while proceeds from sale of a homestead remain exempt for six months.   In surveying its prior exemption jurisprudence, the Court stated that the “essential element of the exemption must continue in effect even during the pendency of the bankruptcy case.”   Opinion, p. 8.   Thus, a property is only exempt as long as it keeps its "essential element."   When Frost sold his homestead, his “interest in his homestead changed from an unconditionally exempted interest in the real property itself to a conditionally exempted interest in the monetized proceeds from the sale of that property.” Id. Consequently, we concluded that “[o]nce the conditional exemption expired . . . Frost lost his right to withhold the sale proceeds from the estate.”Opinion, p. 9.     Based on this logic, the Court found that Hawk's exemption in the IRA account lost its protected status when he withdrew the funds and did not reinvest them.   The Court distinguished away the Supreme Court's governing opinion in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) which held that failure to object to an exemption, even one without a colorable basis, forever barred a challenge to the exemption.   The Court wrote:Nonetheless, the Supreme Court’s decision in Taylor is not fatal to the Trustee’s position in the present case. In Frost, we stressed that it was “the land itself—not its monetary value—that [was] protected under Texas law and ‘exempted under [§ 522].’” 744 F.3d at 391 (quoting 11 U.S.C. § 522(c)). In other words, “Frost’s homestead was exempted from the estate . . . by virtue of its character as a homestead.” Id. at 387. But when Frost sold the homestead, the property’s “essential character . . . changed from ‘homestead’ to ‘proceeds,’” permitting the trustee to “challenge[] the exemption of those proceeds from the estate.” Id. Likewise, when the Hawks claimed an exemption and no party in interest objected, the funds held in the IRA were exempted because of their essential character as “assets held in . . . an individual retirement account.” See Tex. Prop. Code § 42.0021(a). The funds would have stayed exempt during the bankruptcy proceeding so long as they remained in the IRA and continued to comply with Section 42.0021(a)’s requirements. However, when the Hawks withdrew the funds, the essential character of the property changed from assets held in a retirement account to “[a]mounts distributed from a [retirement] account,” see § 42.0021(c), which enabled the Trustee to contest the exemption of the distributed amounts.Opinion, pp. 10-11.    Here is that notion of essential character again.   The Court also rejected the argument that Frost could be distinguished because it was a Chapter 13 case while Hawk was a Chapter 7 case.   The Court noted that the only section construed in Frost was section 522 which had the same meaning in Chapter 7 and Chapter 13.Why the Opinion Is WrongThe Fifth Circuit's exemption jurisprudence took a wrong turn when it adopted the requirement that an exemption retain its "essential element" throughout the pendency of the case.    This requirement does not exist in the Bankruptcy Code.   It slipped into the Fifth Circuit's  Zibman opinion as a way to explain how bankruptcy law interacted with the Texas Property Code in a very specific situation.   However, it was completely unnecessary to the holding.     Here's why.Zibman involved a debtor who sold his homestead prior to bankruptcy.   Thus, the asset he held on the petition date was proceeds, not the homestead itself.   Prior to the deadline for objecting to exemptions, the six month period expired.   The Trustee made a timely objection to the exemption on the basis that the proceeds had not been exempted within six months.  The result in Zibman was consistent with both Texas law and Taylor v. Freeland & Kronz.  The case was consistent with the U.S. Supreme Court holding because the Trustee filed a timely objection to the exemption.  It was consistent with Texas law because the exemption in proceeds had a temporal limitation.   Thus, because there was a timely objection and the proceeds had lost their exempt status by the time of the objection, the result was correct.   There was no reason to resort to the "essential element" argle-bargle to get to the result.    (Argle-bargle was coined by Justice Scalia in his dissent in the same-sex marriage case).   To reiterate, the Zibman case was correct because:  1)  the asset sought to be exempted on the petition date was the proceeds and not the homestead; and 2) there was a timely objection filed.   By reading out the timely objection requirement, the Fifth Circuit has effectively overruled Taylor v. Freeland & Kronz.   However, the "essential character" language was not correct.Frost took the Court further down the rabbit hole.  The Court ruled that when a chapter 13 debtor sold his homestead during a chapter 13 proceeding, the proceeds lost their exempt status when they were not re-invested within six months.    According to the Court, after the sale of the homestead, Frost's “interest in his homestead changed from an unconditionally exempted interest in the real property itself to a conditionally exempted interest in the monetized proceeds from the sale of that property.”   Frost, at 389.   Thus, in Frost, the Fifth Circuit created the possibility that an unconditional exemption could be transformed into a conditional one.   This is more argle-bargle.The Court in Frost cited Zibman.   However, Zibman did not apply to an unobjected to exemption of the homestead itself.   The only way that Frost made sense was because it was a chapter 13 case and under section 1306, assets received post-petition are added to the property of the estate. (The Bankruptcy Judge who tried the case has indicated that this was the basis for his ruling).    However, the Fifth Circuit did not cite the only reason that would cause its ruling to make sense.  Why the Opinion is DangerousIn Taylor v. Freeland & Kronz, the Supreme Court announced a black letter rule that once property is claimed as exempt and no one objects, it leaves the estate never to return.   Zibman, Frost and Hawk have obliterated that rule.   Instead, the new rule is that an exemption is but a temporary respite that lasts so long as the asset in question retains its "essential character"The problem is that the Courts have confused an enhancement with a limitation.   The general rule for exempt property is that the thing is exempt and its proceeds are not.   However, once the property leaves the estate, the debtor can do whatever he or she wants to with that asset.  Consider an exemption of household goods.   There is no exemption for proceeds of clothing and household furnishings. If the debtor decides to have a yard sale, can the trustee grab those proceeds?   Or consider this:  under Texas law, current wages are exempt.   Once wages are received, they cease to be current.    If the debtor claims the exemption for current wages, can the trustee grab them once they are received?   This may sound absurd, but Texas had to amend its turnover statute to prevent just this practice. The court has also confused how exemptions work outside of bankruptcy with how they work inside of bankruptcy.    Outside of bankruptcy, a debtor's exempt property is constantly changing.   A debtor may sell a pickup truck and buy a shotgun.  Whether property is exempt is always determined at the particular moment that a creditor seeks to levy upon it.   Bankruptcy exemptions serve an altogether different purpose.   They seek to define what is property of the estate and what is not.  Once property leaves the estate, whether through exemption or abandonment, the debtor may exercise sole dominion over it as against his bankruptcy estate.   The property may lose its exempt status outside of bankruptcy but that does not bring it back into the bankruptcy estate.   For example, if a debtor sells his home and does not reinvest the proceeds, those proceeds are not exempt as to any post-petition creditors.  However, they are not property of the estate.      The current line of exemption cases destroy the finality of exemptions and create the opportunity for gamesmanship.   Under Taylor v. Freeland & Kronz, property claimed under a nonexistent exemption has more protection than a homestead that is sold post-petition.   While Taylor demanded a timely objection and proclaimed that deadlines have consequences, under the Fifth Circuit cases, a trustee can seek turnover of proceeds from once exempt property months or even years later without ever having objected.   This encourages trustees to leave cases open indefinitely in the hopes that a debtor will slip up and forfeit his exemption.   A Plea to the Fifth CircuitThe Court's decisions have gone badly off the rails.   Each new decision takes the Court further from the law drafted by Congress and announced by the Supreme Court and deeper into a thicket of unintended consequences.    The Court needs to re-examine these precedents on an en banc basis and thoroughly repudiate the concept that "unconditional" exemptions can morph into "conditional" exemptions well after the property has left the estate.   The Court needs to recognize that when it comes to property of the estate, in is in and out is out.

A group of Democratic lawmakers in New Jersey are pushing for a measure to protect Atlantic City’s casinos and racetracks should the state government ever face another shutdown, something lawmakers say they hope doesn’t happen again, but they want to be forthright in protecting the state’s economy in case it does. An article on NJ.com explains that during the recent state government shutdown, the city’s casinos may have been forced to close if the impasse had lasted longer than a week. Read more: Bankruptcy Attorneys, New Jersey “But just days after the shutdown ended — without the gambling halls shuttering — a group of Democratic lawmakers from South Jersey are pushing a measure to make sure the state’s casinos and racetracks never face that threat again.” The bill (S3421/A5126) would ensure that casinos and tracks keep their doors open indefinitely if a shutdown does occur. “That would amend the current law — signed in the wake of the last shutdown, in 2006 — that says casinos and tracks are required to stay open, but only for the first seven days of a shutdown,” the article reads. “A 2008 law was designed to prevent that from happening during a state government shutdown. But there is a catch as New Jersey faces another budget impasse.” State Sen. Jim Whelan commented saying that Atlantic City is once again becoming a popular destination and if the casinos close now, or at any time in the near future, it would be destructive to the lives of all of the people and families who are dependent on them to make a living – creating an economic riptide throughout the city and state that would end with negative consequences for everyone. “The bill would have to be approved by both the Senate and Assembly and then signed by Gov. Chris Christie before becoming law,” the article reads. “Even though the city has lost five casinos in recent years thanks partly to increasing competition from neighboring states, Atlantic City’s seven casinos still employ about 50,000 workers and generate $1.3 million in state taxes each day. Plus, experts say the city is on the rebound lately after facing the threat of bankruptcy last year.” During a 2006 shutdown 12 casinos in Atlantic City were forced to close their doors for three days, which cost the state about $4 million in casino tax revenue due to regulators and inspectors being unable to work. The post Bill to ensure casinos keep doors open despite Atlantic City shutdowns appeared first on .

By Allie HowellIn 2015, IRS agents strode into a Dallas wedding boutique, shut it down, and sold the entire inventory in just four hours to recoup alleged unpaid taxes. Now, the former owners are seeking financial compensation. They have filed a $2 million lawsuit, alleging multiple IRS rule violations and acts of impropriety. Tony and Somnuek Thangsongcharoen opened their store, Mii's Bridal Salon, in Dallas, Texas, in 1983. The elderly Thai immigrants sunk their life savings into designer wedding dresses and were left penniless when the IRS sold them all, according to the couple's attorney. "They've really been destitute," Jason Freeman, their attorney, tells Reason. "This really completely wiped them out financially." In the lawsuit, the couple claims that the IRS conducted the entire seizure illegally, broke multiple statutes, and ultimately conspired to shut Mii's down. According to the legal filing, the IRS believed Mii's owed $31,422.46 (which the couple disputes) and internally documented their 1,600 dress inventory as being worth $615,000. The legal filing claims that the agent on the case originally recognized that the entire inventory would not need to be sold to satisfy the debt. However, Freeman obtained internal IRS communications through a Freedom of Information Act Request and found that IRS higher-ups decided that the agency should "shut down this failing business." The lawsuit contends that the IRS violated its own rules in the process. On the day of reckoning, March 4, 2015, 20 armed agents and members of the Dallas Police arrived at Mii's and told the Thangsongcharoens that they had two hours to write a $10,000 check or forfeit the entire inventory. It was "totally improper to come in and demand a check like that within a matter of hours," Freeman says. The couple didn't fill out a check, so four hours later, the IRS had sold the entire inventory and additional items through auction for $17,000. In conducting the sale so quickly and from within the store, the plaintiffs believe the IRS failed to comply with notice of sale and public sale requirements. The auction took place under the IRS perishable goods sale procedures. Invoking it allows the IRS to seize and sell goods immediately instead of waiting 10 days and posting public notice of a sale, as is typically required. According to Freeman, such a quick sale "really circumvents statutorily prescribed safe guards" and is only meant to be used for perishable goods, not wedding dresses. But the procedures also allow the IRS to sell goods immediately if it claims it would cost more to store them than they would gain from waiting to sell them. And that's how the IRS justified the immediate auction. Freeman's internal documents show that the IRS internally devalued Mii's inventory in order to justify the perishable goods sale. They arrived at a valuation of $6,000—about $4 for a designer wedding dress. The IRS then claimed that storing the dresses would cost the agency more than they could sell them for. Freeman also argues that the IRS overstated the costs that would be necessary to store the dresses, making the entire scheme "a bad faith engineered valuation designed to get what they wanted". The IRS had decided that a perishable goods sale would be the "resolution where the government will benefit the most," as stated in internal communications. Mii's was never able to reopen after the seizure. Tony Thangsongcharoen claims the stress of the ordeal caused him to have a heart attack and undergo quadruple bypass surgery. The $1.8 million lawsuit was filed in the United States District Court for the Northern District of Texas Dallas Division earlier this year. It is meant to cover "damages resulting from the reckless, intentional, and/or negligent disregard of the Internal Revenue Code (I.R.C.) and governing Regulations by officers, agents and/or employees of the Internal Revenue Service ('IRS')". Freeman says he hopes this lawsuit will help prevent future IRS misconduct. "I don't think this is how citizens and taxpayers should be treated, ever … ," Freeman says. "While most government acts are performed with unquestionable integrity and good faith there are unfortunately exceptions to the rule. … When it happens they need to be held accountable. That's the only way to prevent it from becoming the rule." So far, the government has moved to keep this case from getting a jury, requested the amount requested in the lawsuit to be trimmed, and commented that the Thangsongcharoens lack legal standing. According to the government, only Mii's, the bridal shop itself, should remain as a plaintiff.Copyright 2017 Reason Foundation.  All rights reserved.

By Jeff Jacoby. It made headlines in 2011 when two New York City taxi medallions changed hands for $1 million apiece. At the time, it was the highest price ever recorded for one of the numbered metal tags that are required to lawfully operate a cab on the city’s streets. It was also a vivid demonstration of how a government-created monopoly can send prices rocketing to stratospheric heights — even the price of something with almost no intrinsic value, like a little aluminum medallion issued by the NYC Taxi & Limousine Commission.A million bucks for a taxicab medallion? That may have come as a shock in 2011, but the price kept climbing. By 2014, medallions were going for $1.3 million apiece.And all anyone got for forking over that astronomical sum was the government’s permission to operate a vehicle as a taxi for hire. They didn’t get a list of established customers. They didn’t get the right to ply a popular route. They didn’t even get a car.The only reason anyone would pay a fortune for something so insubstantial is that the supply was capped by the government. New York allowed just 13,587 taxis on its streets, far below the actual demand for cab ownership. With the quantity of medallions sharply limited, their value soared. Would-be cabbies were forced to go deeply into debt to buy a medallion, or pay staggering rates to lease a cab from somebody who owned one.No longer. View StorySince 2014, the cost of a New York City taxi medallion has plunged. As CNBC reported the other day, some medallions sold in 2017 have gone for prices in the $200,000s. Three credit unions that specialize in financing the purchase of medallions are facing bankruptcy; a growing number of medallion owners now owe more on their loans than the medallions are worth.Thanks to Uber and Lyft, the government’s extortion racket — that’s what the medallion system amounts to — has been beaten. With the rise of ride-hailing apps, tens of thousands of additional vehicles in New York are now providing millions of rides annually. For every medallion-affixed yellow cab working the city’s neighborhoods, there are now four Uber and Lyft cars.In November 2010, traditional cabs made an average of 464,000 trips each day. By November 2016, that was down to 337,000. It is doubtless even lower today. The results of innovation and competition have been what they usually are: better service, lower prices, happier consumers.What happened in New York is happening in every other city that turned its taxi market into an oligopoly. In Boston, where the number of taxis was arbitrarily capped at 1,825, the pre-Uber price of a medallion climbed to more than $700,000. You can buy one today for one-tenth that amount. In Chicago, traditional taxis face so much competition that as of March, 40 percent of the taxi fleet was deemed “inactive” after not having picked up a fare in a month.The medallion system was always an outrage. There was never a legitimate reason for government to limit the number of taxis. Regulators have no business determining how many cabbies belong on the road; just as they have no business determining how many appetizers should be offered on menus or how many homes real-estate agencies should list. Or, to allude to current headlines, how many benefits a health-insurance policy must cover.When government tries to manage supply and demand, it inevitably generates shortages, poor service, and corruption. Even with good intentions, regulators cannot yield fairer and more flexible outcomes than a market made up of millions of autonomous buyers and sellers. The collapse of the medallion shakedown was a long time in coming. It should never have been allowed in the first place.Copyright 2017 Boston Globe Media Partners LLC.  All rights reserved.

Here at Shenwick & Associates, we pay close attention to new developments that may affect our bankruptcy practice. At the beginning of this year, we sent out an e-mail regarding student loans and bankruptcy.  Since then, we’ve been continuing to explore the topic, including reviewing this article on the “undue hardship” standard and the Brunner test.  Judges are criticizing the existing standards, and Congress continues to consider changing the Bankruptcy Code to make student loans easier to discharge.  We’re excited to announce that we’ve partnered with an experienced litigator to analyze student loan debt and, based on our analysis, seek a partial or full discharge of the student loan debt (principally “non – qualified” private loans, but other loans may be partially or fully dischargeable depending on your circumstances).  If you’ve previously filed for bankruptcy and have student loan debt that wasn’t discharged, your case can be reopened (with no filing fee), even if it was filed by another attorney.  Please contact Jim Shenwick to discuss if you’re interested. 

By STACY COWLEY and JESSICA SILVER-GREENBERG Tens of thousands of people who took out private loans to pay for college but havenot been able to keep up payments may get their debts wiped away because criticalpaperwork is missing.The troubled loans, which total at least $5 billion, are at the center of aprotracted legal dispute between the student borrowers and a group of creditors whohave aggressively pursued them in court after they fell behind on payments.Judges have already dismissed dozens of lawsuits against former students,essentially wiping out their debt, because documents proving who owns the loans aremissing. A review of court records by The New York Times shows that many othercollection cases are deeply flawed, with incomplete ownership records and massproduceddocumentation.Some of the problems playing out now in the $108 billion private student loanmarket are reminiscent of those that arose from the subprime mortgage crisis adecade ago, when billions of dollars in subprime mortgage loans were ruleduncollectible by courts because of missing or fake documentation. And like thosetroubled mortgages, private student loans — which come with higher interest ratesand fewer consumer protections than federal loans — are often targeted at the mostvulnerable borrowers, like those attending for-profit schools.At the center of the storm is one of the nation’s largest owners of private studentloans, the National Collegiate Student Loan Trusts. It is struggling to prove in courtthat it has the legal paperwork showing ownership of its loans, which were originallymade by banks and then sold to investors. National Collegiate’s lawyers warned in arecent legal filing, “As news of the servicing issues and the trusts’ inability to producethe documents needed to foreclose on loans spreads, the likelihood of more defaultsrises.”National Collegiate is an umbrella name for 15 trusts that hold 800,000 privatestudent loans, totaling $12 billion. More than $5 billion of that debt is in default,according to court filings. The trusts aggressively pursue borrowers who fall behindon their bills. Across the country, they have brought at least four new collection caseseach day, on average — more than 800 so far this year — and tens of thousands oflawsuits in the past five years.Last year, National Collegiate unleashed a fusillade of litigation againstSamantha Watson, a 33-year-old mother of three who graduated from LehmanCollege in the Bronx in 2013 with a degree in psychology.Ms. Watson, the first in her family to go to college, took out private loans tofinance her studies. But she said she had trouble following the fine print. “I didn’treally understand about things like interest rates,” she said. “Everybody tells you togo to college, get an education, and everything will be O.K. So that’s what I did.”Ms. Watson made some payments on her loans but fell behind when herdaughter got sick and she had to quit her job as an executive assistant. She nowworks as a nurse’s aide, with more flexible hours but a smaller paycheck that barelycovers her family’s expenses.When National Collegiate sued her, the paperwork it submitted was a mess,according to her lawyer, Kevin Thomas of the New York Legal Assistance Group. Atone point, National Collegiate presented documents saying that Ms. Watson hadenrolled at a school she never attended, Mr. Thomas said.“I tried to be honest,” Ms. Watson said of her court appearance. “I said, ‘Some ofthese loans I took out, and I’ll be responsible for them, but some I didn’t take.’”In her defense, Ms. Watson’s lawyer seized upon what he saw as the flaws inNational Collegiate’s paperwork. Judge Eddie McShan of New York City’s Civil Courtin the Bronx agreed and dismissed four lawsuits against Ms. Watson. The trusts“failed to establish the chain of title” on Ms. Watson’s loans, he wrote in one ruling.When the judge’s rulings wiped out $31,000 in debt, “it was such a relief,” Ms.Watson said. “You just feel this whole weight lifted. My mom started to cry.”Joel Leiderman, a lawyer at Forster and Garbus, the law firm that representedNational Collegiate in its litigation against Ms. Watson, declined to comment on thelawsuits.Lawsuits Tossed OutJudges throughout the country, including recently in cases in New Hampshire,Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it didnot prove it owned the debt on which it was trying to collect.The trusts win many of the lawsuits they file automatically, because borrowersoften do not show up to fight. Those court victories, which can be used to garnishpaychecks and federal benefits like Social Security, can haunt borrowers for decades.The loans that National Collegiate holds were made to college students morethan a decade ago by dozens of different banks, then bundled together by a financingcompany and sold to investors through a process known as securitization. Theseprivate loans were not guaranteed by the federal government, which is the nation’slargest student loan lender.But as the debt passed through many hands before landing in NationalCollegiate’s trusts, critical paperwork documenting the loans’ ownershipdisappeared, according to documents that have surfaced in a little-noticed legalbattle involving the trusts in state and federal courts in Delaware and Pennsylvania.National Collegiate’s legal problems have hinged on its inability to prove it ownsthe student loans, not on any falsification of documents.Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofitadvocacy group, has seen shoddy and inaccurate paperwork in dozens of casesinvolving private student loans from a variety of lenders and debt buyers, which shedetailed in a 2014 report.But National Collegiate’s problems are especially acute, she said. Over and over,she said, the company drops lawsuits — often on the eve of a trial or deposition —when borrowers contest them. “I question whether they actually possess thedocuments necessary to show that they own loans,” Ms. Smith said.In an unusual situation, one of the financiers behind National Collegiate’s trustsagrees with some of the criticism. He is Donald Uderitz, the founder of VantageCapital Group, a private equity firm in Delray Beach, Fla., that is the beneficialowner of National Collegiate’s trusts. (Mr. Uderitz’s company keeps whatever moneyis left after the trusts’ noteholders are paid off.)He said he was appalled by National Collegiate’s collection lawsuits and wantedthem to stop, but an internal struggle between Vantage Capital and others involvedin operating the trusts has prevented him from ordering a halt, he said.“We don’t like what’s going on,” Mr. Uderitz said in a recent interview.“We don’t want National Collegiate to be the poster boy of bad practices instudent loan collections, but we have no ability to affect it except through thislitigation,” he said, referring to a lawsuit that he initiated last year against the trusts’loan servicer in Delaware’s Chancery Court, a popular battleground for corporatelegal fights.Ballooning BalancesLike those who took on subprime mortgages, many people with private studentloans end up shouldering debt that they never earn enough to repay. Borrowing tofinance higher education is an economic decision that often pays off, but federalstudent loans — a much larger market, totaling $1.3 trillion — are directly funded bythe government and come with consumer protections like income-based repaymentoptions.Private loans lack that flexibility, and they often carry interest rates that canreach double digits. Because of those steep rates, the size of the loans can quicklyballoon, leaving borrowers to pay hundreds and, in some cases, thousands of dollarseach month.Others are left with debt for degrees they never completed, because the forprofitcolleges they enrolled in closed amid allegations of fraud. Federal studentborrowers can apply for a discharge in those circumstances, but private borrowerscannot.Other large student lenders, like Sallie Mae, also pursue delinquent borrowers incourt, but National Collegiate stands apart for its size and aggressiveness, borrowers’lawyers say.Lawsuits against borrowers who have fallen behind on their consumer loans aretypically filed in state or local courts, where records are often hard to search. Thismeans that there is no national tally of just how often National Collegiate’s trustshave gone to court.Very few cases ever make it to trial, according to court records and borrowers’lawyers. Once borrowers are sued, most either choose to settle or ignore thesummons, which allows the trusts to obtain a default judgment.“It’s a numbers game,” said Richard D. Gaudreau, a lawyer in New Hampshirewho has defended against several National Collegiate lawsuits. “My experience isthey try to bully you at first, and then if you’re not susceptible to that, they back off,because they don’t really want to litigate these cases.”Transworld Systems, a debt collector, brings most of the lawsuits for NationalCollegiate against delinquent borrowers. And in legal filings, it is usually aTransworld representative who swears to the accuracy of the records backing up theloan. Transworld did not respond to a request for comment.Hundreds of cases have been dismissed when borrowers challenge them,according to lawyers, often because the trusts do not produce the paperwork neededto proceed.‘We Need Answers’Jason Mason, 35, was sued over $11,243 in student loans he took out to financehis freshman year at California State University, Dominguez Hills. His lawyer, JoeVillaseñor of the Legal Aid Society of San Diego, got the case dismissed in 2013, afterthe trust’s representative did not show up for a court-ordered deposition. It isunclear if the trusts had the paperwork they would have needed to prove their case,Mr. Villaseñor said.“It was a scary time,” Mr. Mason said of being taken to court. “I didn’t knowhow they would come after me, or seize whatever I had, to get the money.”Nancy Thompson, a lawyer in Des Moines, represented students in at least 30cases brought by National Collegiate in the past few years. All were dismissed beforetrial except three. Of those, Ms. Thompson won two and lost one, according to herrecords. In every case, the paperwork Transworld submitted to the court had criticalomissions or flaws, she said.National Collegiate’s beneficial owner, Mr. Uderitz, hired a contractor in 2015 toaudit the servicing company that bills National Collegiate’s borrowers each monthand is supposed to maintain custody of many loan documents critical for collectioncases.A random sample of nearly 400 National Collegiate loans found not a single onehad assignment paperwork documenting the chain of ownership, according to areport they had prepared.While Mr. Uderitz wants to collect money from students behind on their bills,he says he wants the lawsuits against borrowers to stop, at least until he can getmore information about the documentation that underpins the loans.“It’s fraud to try to collect on loans that you don’t own,” Mr. Uderitz said. “Wewant no part of that. If it’s a loan we’re owed fairly, we want to collect. We needanswers on this.”Keith New, a spokesman for the servicer, the Pennsylvania Higher EducationAssistance Agency (known to borrowers as American Education Services), said, “Webelieve that the auditors were misinformed about the scope of P.H.E.A.A.’scontractual obligations. We are confident that the litigation will reveal that theagency has acted properly and in accordance with its agreements.”The legal wrangling — now playing out in three separate court cases inPennsylvania and Delaware — has dragged on for more than a year, with noimminent resolution in sight. Borrowers are caught in the turmoil. Thousands ofthem are unable to get answers about critical aspects of their loans because none ofthe parties involved can agree on who has the authority to make decisions. Some2,000 borrower requests for forbearance and other help have gone unanswered,according to a court filing late last year.Susan C. Beachy contributed research.Copyright 2017 The New York Times Company.  All rights reserved.

   A debtor was permitted to modify a confirmed plan to surrender a vehicle that was initially provided to be paid in full through the plan in In re: TABITHA J. FAYSON, Debtor., No. 16-10013 (BLS), 2017 WL 2992474 (Bankr. D. Del. July 13, 2017).  Debtor decided six months post-confirmation to surrender the vehicle to the creditor based on mechanical issues and an allegedly undelivered warranty.  The court noted the majority of courts allow modification of plans to surrender vehicles.  Debtor's motion to modify the plan sought to surrender the vehicle to the creditor and to convert any deficiency claim to an unsecured claim.  While §506(a) provides that a claim is secured only to the extent of the value of the property on which the claim is fixed, BAPCPA added a provision limiting debtors' ability to reduce the debts on vehicles to their value when the vehicle was purchased within 910 day of the filing of the bankruptcy petition.  Debtor's vehicle fell within this limitation.  Since she was unable to strip down the value of the vehicle, the original plan provided for a cramdown, paying the debt in full through the chapter 13 plan.    §1329(a) provides that debtors may modify plans post-confirmation, until payments are completed.  There are three requirements for such modifications.  1) The plan must comply with one of the provisions of §1329(a): ie it must either i) increase or reduce the amount of payments on claims of a particular class provided for by the plan; ii) extend or reduce the time for such payments; or iii) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.  2) Such modification must comply with the requirements for plan confirmation as set out in §1322(a) and §1325(a), and may treat claims as permitted by §§1322(b)(2) and 1323(c).  3)  modification cannot extend the payment period beyond five years after the first plan payment was due, and cannot extend the original commitment period of the debtor's disposable income except for cause  11 U.S.C. 1329(b)(2).   The court noted that §1329)(a)(1) does not prohibit anything, but rather permits certain types of modifications.  The court rejected the creditors assertions that surrender are reclassification are prohibited under §1325(a).  The creditor asserted five reasons for its argument. 1) §1329(a) does not expressly allow a debtor to reclassify the claim.  However, it allows for a modification that alters payments made to a whole class of claims.  Under chapter 13 secured 910 claims are in a class by themselves, therefore any modification to alter payments made to such a claim is in fact a modification of treatment of a class.  Further, §1329(a)(3) provides that distributions to a creditor being provided for in the plan may be modified to account for payments made outside the plan.  The surrender of collateral is a form of payment.  Finally, §502(j) allows the court to reconsider an allowed claim for cause, and reconsider a claim according to the equities in the case. 2) The secured lienholder alleged that the proposed modification would violate §1325(a)(5)(B).  However, §1329(a) only requires that modifications meet the standards for plan confirmation as set forth in §1325(a).  Under §1325(a) a debtor is given three choices i) have the creditor accept the plan (§1325(a)(5)(A), ii) retain the collateral so long as certain conditions are met (§1325(a)(5)(B), iii) or surrender the collateral to the secured creditor (§1325(a)(5)(C)).  There is no prohibition against changing which of the options debtor chooses when modifying a confirmed plan so long as such option would have been available at the time the original plan was confirmed. 3) The secured creditor alleged that the proposed modification would contravene §1327(a).  This provision provides that the provisions of a confirmed plan bind the debtor and each creditor, whether or not the creditor has accepted the plan.  This principle does not mean a debtor cannot modify a confirmed plan.  To the contrary, such modifications are expressly permitted by §1329 and does not do violence to the Code's structure.   4) The creditor asserts that allowing this type of modification would create an inequitable situation because creditors are not allowed to proposed modifications under §1329.  The code protects secured creditors by limiting debtor's choices as to 910 claims.  The debtor must either pay the full amount of the claim regardless of the value of the collateral, or surrender the vehicle.  If the secured creditor incurs a loss due to the normal depreciation of the vehicle, the creditor is harmed not because of the inequities of the bankruptcy code, but because it failed to object to a plan that did not adequately protect against depreciation.  If there is excess depreciation due to some fault of the debtor (ie failure to maintain the vehicle) then the creditor may object to the modification on the grounds that it was not proposed in good faith. 5)  The secured creditor's final argument was that the plain language of §1329 allows modifications to payments, not to claims.  This argument was rejected for the reasons described under the first argument of the creditor.    The Court went on to set an evidentiary hearing on whether the modification was proposed in good faith.Michael Barnett www.tampabankruptcy.com    

If you have a special needs child who receives Medicaid, now is a good time to reassess your long-term plans. CNBC recently reported that about 11.2 million children in the U.S. have special needs — and of those – nearly 5 million rely on coverage from Medicaid and its Children’s Health Insurance Program. Read more: Long Term Disability Attorneys, New Jersey  “Now, funding to those programs is imperiled as the House and Senate debate their health-care bills,” the CNBC article reads. “The House proposal, the American Health Care Act, would reduce Medicaid spending by $834 billion from 2017 to 2026, according to the Congressional Budget Office.” Under a Senate bill called the Better Care Reconciliation Act, federal spending on Medicaid is expected to decrease by $772 billion from 2017 to 2026. Medicaid doesn’t just cover doctor’s visits and lab work. The benefits also include physical, occupational and speech therapy, nurses for people with chronic conditions, and in-home care. “More than likely, parents of children with special needs may come to the conclusion that they can’t rely on benefits, and they will have to be proactive,” Russell J. Fishkind, an estate planning attorney and partner at Saul Ewing in Princeton, New Jersey is quoted as saying in the article. “If you have a special needs child, now might be the time to reassess your long-term plan and secure additional funding in the event the Medicaid income you needed is no longer there.” Many people who have children with special needs are dependent on Medicaid and Supplemental Security Income, but they are required to qualify for the benefits. “Individuals with more than $2,000 in assets and couples with more than $3,000 won’t qualify for the SSI program,” the article reads. “This year, the monthly maximum for SSI benefits is $735 for an eligible individual and $1,103 for a couple. In most states, a child eligible for SSI can also obtain Medicaid to cover medical services and special health care needs.” In order to maximize available resources, family members can set up a third-party special needs trust and fund it with assets not owned by the child, such as life insurance policies. By doing this, the child will still be eligible for SSI and Medicaid benefits and upon his or her death; those assets in the trust can go to other family members or to charity. “A benefit of the third-party special needs trust — which is also known as a supplemental needs trust — is that assets that remain after the demise of the disabled individual do not have to be paid back to Medicaid,” the article reads. “This is because the assets never belonged to the beneficiary in the first place.” The post Now’s a good time to reassess your child’s long-term care plan appeared first on .

  An attorney who volunteered to prepare an order for a state court judge was not entitled to quasi-judicial immunity from sanctions for violation of the automatic stay.  This issue arose in Burton v. Infinity Capital Mgmt., No. 12-15618, 2017 WL 2960021 (9th Cir. July 10, 2017).   A detailed summary of the facts is helpful in understanding the decision.   Here Burton was involved in a bicycle accident prepetition, and incurred over $270,000 in medical expenses and loans.  He retained attorney Koch to represent him regarding the injuries, who settled the matter for $185,000.  Koch granted certain creditors, including Valley Hospital, liens on the personal injury claim.  Valley Hospital sold the claim to Infinity.  Koch initially put the funds in his trust account and, after paying his fee, retaining a bankruptcy attorney, and after his personal injury exemption, had $104,000 of the settlement left in his trust account.  Infinity filed an interpleader lawsuit in state court against the lienholders to determine the relative rights of the lienholders in the fund.  Neither the debtor nor attorney Koch was a named party to such suit.  Judge Israel was assigned the interpleader case.  A bankruptcy was filed prior to any hearings in the state court.  At an initial status conference in the state court case Koch appeared along with Attorney Gugino representing Infinity.  Upon inquiry by Judge Israel why Koch had not interpled the funds, Koch advised that the debtor had filed bankruptcy and that the funds would be deposited with the bankruptcy clerk.  Gugino expressed concern at the hearing with the case moving forward despite the bankruptcy.  Judge Israel set another status conference two months out.     Three days prior to such continued hearing, Gugino sent a letter to the parties noting the minutes of the prior hearing and confirming that Koch had deposited the settlement funds with the bankruptcy trustee.  Koch did not appear at the continued hearing.  Judge Israel stated that he had ordered Koch to deposit the funds in the state court, and that he would issue an order to show cause against Koch to explain why he did not deposit the funds in the state court.  Gugino filed to object to such order in light of the bankruptcy.  In response to the Court's inquiry, Gugino offered to prepare the order.  This was submitted to the parties with a cover letter the same day.  Koch responded by indicating that Gugino was violating the automatic stay of 11 U.S.C. 362. The next day Koch sent a fax threatening sanctions against the Infinity, Gugino, and the Judge if any action was taken in the Infinity litigation, and noting that the litigation constituted an attempt to proceed against property of the bankruptcy estate in violation of the automatic stay.  The order was not filed, instead the Court faxed a minute order (an oral court order as recorded in the minutes of the court reporter) and ordered Koch to appear to explain why the bankruptcy affects the proceedings since the debtor was not a party to the interpleader action, and why Koch should not interplead the proceeds into the state court immediately.  The next day Koch sent Gugino a memorandum of jurisdiction and asked why he did not seek the funds from the bankruptcy trustee instead of pursuing the state court action.  After receiving no response for 30 days, he filed a complaint in federal court alleging violation of the automatic stay.    The federal district court dismissed the action as to Judge Israel, finding that he was entitled to absolute judicial immunity.  Gugino asserted he was entitled to quasi-judicial immunity as they were taken under the direction of Judge Israel.  The court denied this request, noting Gugino volunteered to prepare the order, and that he violated his affirmative duty to inform Judge Israel that as to the conflict between the proposed order and the automatic stay.    The matter then was heard by the 9th Circuit Court of Appeals on an interlocutory basis.  The 9th Circuit first noted the broad scope of the automatic stay, and that actions taken in violation of the stay are void.  It then went on to discuss judicial immunity.  Absolute immunity insulates judges from charges of erroneous acts or irregular actions, and extends to nonjudicial officers for all claims relating to the exercise of judicial functions.  It is only when the judgment of an official other than a judge involves the exercise of discretionary judgment that judicial immunity may be extended to that nonjudicial officer.    Quasi-judicial immunity has been extended to bankruptcy trustees and US Trustees because they were exercising judgments while performing acts closely related to the judicial process.  It has also been extended to attorneys performing the duties of a prosecutor when they take action that only a legal representative of the government could take.      However, the Supreme Court has not extended the immunity beyond the prosecutorial function. Even court-appointed defense attorneys do not enjoy immunity because, despite being “officers” of the court, attorneys are not in the same category as marshals, bailiffs, court clerks or judges.  Such attorneys owe their duty to their client rather than to the public.    The functional approach, looking beyond Gugino's identity as an attorney and focusing on the function he performed further supports denying immunity.  Since the order was never drafted or formalized, it is improper to focus on his volunteering to draft such order.   Any actions that he took independently of drafting the order to attempt to collect the debt were not adjudicatory acts “involving the exercise of discretion in resolving disputes.  In short, quasi-judicial immunity does not extend to acts of private advocacy or attempted debt collection because such acts are distinct from the judicial function.  Michael Barnett.  www.tampabankruptcy.com

A new documentary recently released follows the lives of coal miners after they are laid off from their jobs, leaving them without insurance or a pension. “We knew it was coming, we just didn’t know how hard it was gonna be. We’re losin’ everything,” Regina Lilly, wife of a West Virginia coal miner who was laid off after their child was born, said in a new National Geographic documentary about coal mining,” an article by the Business Insider reads. Read more: Bankruptcy Attorneys, Pennsylvania The documentary is called “From the Ashes,” and it explores the past, present, and future of coal mining. The documentary is currently on YouTube.  When mining companies move to new locations with cheaper coal, local residents have said they believe that the coal companies have “failed” them. “In one example portrayed in the documentary, Alpha Natural Resources sent letters to 100 workers about upcoming layoffs. These ‘WARN notices’ are generally sent to workers two months before a round of layoffs, giving them time to find new jobs,” the article reads. “However, some coal workers still face unexpected layoffs …” A wife of one of the workers said it’s heartbreaking for a community and the workers because not only have they lost their livelihood, they’ve also lost their worker’s pension, retirement plans, their savings – any finances they had in the company – but the company just then files for bankruptcy and so long as they get money in their pockets, they don’t care about the workers who have lost everything. “In the documentary, Mary Anne Hitt, director of Sierra Club’s Beyond Coal campaign and a West Virginia resident, described the aftermath of a mine layoff as a ‘life and death struggle’ for local communities. She described the scene as one she’s seen time and again, where coal companies ‘want to shed their obligations to workers, that includes pensions and healthcare commitments,’” the article reads. Hitt goes on to say that not just one worker loses their livelihood when coal mining jobs go, but entire communities do, which makes it harder to bounce back from. She said that it’s happening across the U.S. on an unprecedented scale.  The post New documentary explores the collapse of coal mining appeared first on .