Bankr. MDNC: Hughes v. MTGLQ Ed Boltz Tue, 12/31/2024 - 18:30 Summary: Brenda Hughes asserted that MTGLQ and U.S. Bank violated the discharge injunction under 11 U.S.C. § 524(a) and sought a determination that a state court judgment reforming a deed of trust was void. Prior to bankruptcy,  Ms.  Hughes  had signed a promissory note secured by a deed of trust, which was,  after the completion of her bankruptcy, reformed by a state court to correct errors.    Ms.  Hughes alleged that the Defendants violated the discharge injunction by continuing foreclosure actions and sending communications related to the debt.  She further  sought a declaration that the reformation judgment was void and that Defendants' actions violated the Bankruptcy Code. The bankruptcy court began by finding jurisdiction over the adversary proceeding and ruling that the claims were not barred by the Rooker-Feldman doctrine or issue/claim preclusion, as the claims involved enforcing the discharge injunction rather than challenging the state court's judgment. The bankruptcy court found that the reformation of the deed of trust was a permissible in rem action that did not violate the discharge injunction nor,  since it did not impermissibly seek to reestablish Ms.  Hughes personal liability,  was it void under 11 U.S.C. § 524(a)(1)..  Similarly,  the foreclosure proceeding, which enforced the lien on the property (but not personal liability), was also permissible and did not violate the discharge injunction.  Lastly, the foreclosure letter and Requests for Contact were deemed informational and necessary for pursuing in rem rights, thus not violating the discharge injunction. A demand letter dated  August 13, 2023,  which stated that Shellpoint was a debt collector  seeking to collect a debt,   could, however,  plausibly be interpreted as a demand for payment and allowed this claim to proceed, along with the monthly mortgage statements,  which did not appear to have any bankruptcy discharge disclaimer. Accordingly,  the court granted Defendants’ motion to dismiss claims related to the reformation action, foreclosure action, and specific communications (e.g., requests for contact),  but allow the claims related to  the August 13, 2023 letter and mortgage statements  to proceed.  Commentary: This case may be impacted by Koontz v. SN Servicing,  which was argued at the 4th Circuit Court of Appeals at the beginning of December and raises issues regarding the extent to which the lack of personal liability (in Koontz resulting from the lack of a reaffirmation)  impacts subsequent in rem  collection efforts. See the attached amicus brief.   With proper attribution,  please share this post. To read a copy of the transcript, please see: Blog comments Attachment Document hughes_v._mtglq.pdf (831.58 KB) Document amicus_brief_koontz.docx (197.19 KB) Category Middle District

 SBA EIDL Loans & the Case of the “Missing Guarantee”Many clients have recently contacted us with a similar issue. They claim they never personally guaranteed their SBA loans. However, after their SBA loans defaulted, the SBA is reaching out to them, stating that they did personally guarantee their business's SBA EIDL loan and are requesting payment.For context, federal law requires a personal guarantee when an SBA loan exceeds $200,000.There appear to be two scenarios where the "Missing Guarantee" issue arises. First, the SBA made a loan to a business exceeding $200,000 and failed to require an individual to sign a guarantee. Second, the SBA initially loaned less than $200,000 to a business, then provided an additional amount exceeding $200,000 by amending the loan documents but did not require the borrower to sign a guarantee.According to SBA records, since the loan exceeded $200,000, it should have been guaranteed.What should one do in this situation?Under New York law, a guaranty must be in writing to be enforceable. In Ashkir v. Wilson, No. 98 Civ. 2632, 1999 WL 710788, at *9 (S.D.N.Y. Sept. 13, 1999), it was stated that an agent is not personally liable for the obligations of his principal unless there is a written and signed personal guarantee.In European American Bank & Trust Co. v. Boyd, 516 N.Y.S.2d 714, 716 (2d Dept 1987), it was affirmed that a guarantee is enforceable as long as it is signed by the guarantor.While each state's law regarding guarantees may vary, most states require that a guarantee be in writing and executed to be enforceable.Our advice to individuals in these situations is: 1. Check your SBA loan documentation to ensure you did not sign a guaranty. 2. Request that the SBA send you a copy of an executed guaranty. 3. If the SBA cannot produce the guaranty, your position should be that you are not personally liable to repay the loan upon default. If the SBA were to litigate this position, we believe you would prevail, especially in New York State.We advise all SBA borrowers with a case involving a "Missing Guaranty" to discuss their case with an experienced attorney as soon as possible.Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com Please click the link to schedule a telephone call with me.https://calendly.com/james-shenwick/15minWe help individuals & businesses with too much debt!

Law Review: Antill, Samuel and Bellon, Aymeric, The Real Effects of Bankruptcy Forum Shopping (December 11, 2024). Ed Boltz Wed, 12/25/2024 - 20:36 Available at:    Available at SSRN: https://ssrn.com/abstract=5052176 or http://dx.doi.org/10.2139/ssrn.5052176 Summary: Many non-Delaware firms strategically file for bankruptcy in Delaware. Should this "forum shopping" be allowed? This question has motivated six congressional bill proposals over decades of policy debate. Using a novel natural experiment and Census-Bureau microdata, we inform this debate. Comparing observably similar firms within a Delaware-adjacent state, we show that physical proximity to Delaware predicts forum shopping. Instrumenting with proximity, we find that forum shopping causally: (i) prevents closures and liquidations, (ii) shortens bankruptcies, (iii) boosts creditor recovery, and (iv) increases post-bankruptcy employment by 62%. Proximity to Delaware is uncorrelated with pre-bankruptcy employment trends, validating the exclusion restriction. Commentary: While admitting that this paper "is silent on the implications of forum shopping to courts other than Delaware",  unrecognized  are the disparate responses by courts,  likely including in Delaware,  to corporations that forum shop to find just the right case law or judge and when consumers have the temerity and gall to similarly file in a convenient but improper forum. With proper attribution,  please share this post.    To read a copy of the transcript, please see: Blog comments Attachment Document ssrn-5052176_compressed.pdf (393.23 KB) Category Law Reviews & Studies

Law Review: Nagel, Fabian, Consumer Bankruptcy Audits (October 12, 2024). Ed Boltz Mon, 12/23/2024 - 18:27 Available at:    https://ssrn.com/abstract=4991384 or http://dx.doi.org/10.2139/ssrn.4991384 Abstract: Bankruptcy insures consumers against large and unexpected wealth shocks. However, debtors may abuse this insurance. Indeed, close to 20% of consumer bankruptcy filings contain at least one material misstatement. I exploit the conditionally random assignment of audits to estimate the effect of mandatory audits on debt forgiveness in consumer bankruptcy. I find that audits reduce debt forgiveness, but only when alternative oversight is low (Chapter 7). Audits come at the cost of increased case complexity for filers, deteriorating the long-run financial health of unsophisticated filers. Generally, audits drive a reallocation of debt relief from non-compliers and misreporters to truthful filers. Aggregate calculations show that the reduction in debt forgiveness due to misstatements and deterrence exceeds the direct cost of increasing the audit rate when oversight is low. Reductions in debt relief due to deterrence exceed reductions due to identified misstatements two-fold. Commentary: While the conclusions of this research and analysis about the costs and benefits of random consumer audits is not a clear as studies have been regarding the requirement of pre-filing credit counseling (basically a pointless  filing fee paid to private entities),  this does lead to questioning whether audits in highly scrutinized Chapter 13 cases is warranted. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document consumer_bankruptcy_audits_compressed.pdf (453.88 KB) Category Law Reviews & Studies

4th Cir.: Wesker v. Bank of America- Failure to State Claims following Denial of Mortgage Modification Application Ed Boltz Fri, 12/20/2024 - 15:40 Summary: The Fourth Circuit Court of Appeals affirmed the district court’s dismissal of Mark and Natasha Wesker’s claims against Bank of America. The Weskers alleged the bank mishandled their application for a modification of their home equity line of credit, leading to financial harm and damage to their credit score. The Weskers asserted the following claims against Bank of America: Professional negligence and negligent misrepresentation Detrimental reliance Fair Credit Reporting Act (FCRA) violations (negligent and willful) Maryland Consumer Protection Act (MCPA) violation Tort Claims (Negligence and Misrepresentation): The court held that under Maryland law, a bank owes no duty of care in handling loan modification applications unless there is contractual privity or "special circumstances." Here, the Weskers failed to establish either because neither the line of credit contract imposed  any modification obligations on Bank of America nor did Bank of America  provide any extraordinary services or derive abnormal benefits. As to detrimental reliance, the Weskers failed to allege any "clear and definite" promises made by the bank that could support their claim.  Bank of America's reporting of the Weskers’ delinquency and charge-off to credit agencies was found to be accurate, with  no basis to challenge the completeness or accuracy of the reporting under the FCRA. The Weskers’ allegations also did not meet the heightened pleading standard for fraud under Rule 9(b), which was required for a deceptive practices claim under tort and the MCPA.  Commentary: For other cases related to when a mortgage lender can and cannot be held liable,  see: Bankr. E.D.N.C.: In re Alvarez Bankr. E.D.N.C.: McClendon v. Walter Home Mortgage Bankr. M.D.N.C.: Rutledge v. Wells Fargo Bank, N.A.   With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document wesker_v._bank_of_america.pdf (202.24 KB) Category 4th Circuit Court of Appeals

Law Review: Mary J. (Newborn) Wiggins, The New Rawlsian Theory of Bankruptcy Ethics, 16 CARDOZO L. REV. 111 (1994) Ed Boltz Fri, 12/20/2024 - 15:34 Available at:    https://larc.cardozo.yu.edu/clr/vol16/iss1/5 Abstract: Bankruptcy law was once considered a rather insular subspecialty of commercial and debtor-creditor law. Bankruptcy scholars of an earlier time devoted their main energies to drafting bankruptcy legislation for Congress, mastering the particulars of that legislation, and systematizing the case law. When these scholars attempted to local larger themes in bankruptcy, they labored with great deference to positive expressions of bankruptcy’s purpose. Bankruptcy law’s relative insularity began to fade with the innovative work of Professor Thomas Jackson, who developed what he argued was a comprehensive theoretical explanation for bankruptcy’s existence. His explanation was based on a contractual paradigm called “the creditor’s bargain.” Several bankruptcy scholars, most prominently Elizabeth Warren and David Gray Carlson, have challenged the creditor’s bargain model on several fronts, but a direct theoretical assault was slow to emerge until Professor Donald Korobkin presented a nascent theory based upon what he called a “values-based account” of bankruptcy. Professor Korobkin then buttressed the values-based account with a contractarian model of his own called “the bankruptcy choice model.” In this Article, Professor Newborn explores Professor Korobkin’s theoretical model, distinguishes his model from the creditor’s bargain model, and identifies the significant descriptive and analytical insights Professor Korobkin’s bankruptcy choice model generates. At the same time, Professor Newborn identifies several controversial assumptions that seriously undermine the theory’s explanatory and normative force. Professor Newborn concludes with thoughts on her Article’s implications for the role of highly theoretical claims in bankruptcy scholarship. Commentary: I generally  stick to just blogging about recent cases and law review articles,  but I tend to nerd out about papers that look at the philosophy undergirding bankruptcy and when I stumbled on this about John Rawls and Bankruptcy Ethics,  even though 30 years old,  I couldn't help but share it. Building on even earlier work by  Donald R. Korobkin, including Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 COLUM. L. REV. 717, 721 (1991),  this paper posits two Rawlsian two principles to govern relationships in financial distress:  The Principle of Inclusion"  through which each party- creditors and debtors- affected by financial distress should have the threshold eligibility to press his or her demands in that context; and  The Principle of Rational Planning which First seeks to maximize (i.e., promote most fully and effectively) those diverse demands   by using a rational plan.  Second,  mandates that when it is impossible to promote one aim without frustrating another, protects  those in the worst-off positions in the context of financial distress  over those occupying the better-off positions. Unlike the principle of creditor wealth maximization, promoted by Douglas Baird and Thomas Jackson elsewhere as an ethical or philosophical basis for bankruptcy, the principle of rational planning does not filter all decisions 'through a prism of creditor prosperity. For something more recent about John Rawls' theory of justice (including a little bit about bankruptcy),  I also highly recommend Free and Equal: A Manifesto for a Just Society  by Daniel Chandler. To read a copy of the transcript, please see: Blog comments Attachment Document rawlsian_bankruptcy_ethics_compressed-1-16.pdf (910.03 KB) Document rawlsian_bankruptcy_ethics_compressed-17-37.pdf (746.91 KB) Category Law Reviews & Studies

More than four decades after the Bankruptcy Code was enacted, we are still tripping over the lingering conundrums of Chapter 13. Four decades, and appeals courts haven’t brought clarity and predictability to what should be a simple, well understood process for individuals to reorganize their financial lives. I speak of course about the mysteries of […] The post Still Crazy After All These Years appeared first on Bankruptcy Mastery.

Contributions to an employer-sponsored retirement plan going forward are excluded from disposable income in Chapter 13, says the 9th Circuit in Sadana, 19 years after BAPCPA became law. What took so long? Words in the statute matter Congress, in its BAPCPA-typical awkward fashion, said right there, in 541(b)(7)’s hanging paragraph, that amounts withheld for voluntary […] The post Voluntary Retirement Contributions Not Disposable Income in the 9th appeared first on Bankruptcy Mastery.

Every extra dollar deduction you can wring out on bankruptcy’s means test is important. A dollar doesn’t sound like a lot, but an extra dollar less in DMI saves a Chapter 13 debtor $60 over the life of a 60 month plan. Every $100 saves $6000. You get the picture. Besides lowering the cost of […] The post How to Wring Out Every Last Means Test Deduction appeared first on Bankruptcy Mastery.