Law Review: Schwartz, Alec, The Practical Consequences of Metaphysics: Who Owns a Fraudulent Transfer Claim in Bankruptcy? (July 31, 2024) Ed Boltz Mon, 11/11/2024 - 15:35 Available at:    https://ssrn.com/abstract=4912213 or http://dx.doi.org/10.2139/ssrn.4912213 Abstract: This article seeks to answer the deceptively complex question: in bankruptcy, who "owns" a fraudulent transfer cause of action? Termed the "metaphysical issue" by the Second Circuit, courts and practitioners have reached a variety of conclusions to this question, mostly rooted in statute taken out of context and oblivious to both the history and purpose underlying such text and the immense practical consequences of getting it wrong.  Though the text of the Bankruptcy Code makes it clear that the trustee can bring certain fraudulent transfer claims, the Code does not address what happens to the state law causes of action which, prior to bankruptcy, belong to the creditors and which, after bankruptcy, shape the claims brought by the trustee pursuant to 11 U.S.C. § 544(b). This leaves the question of whether the bankruptcy trustee, upon the filing of a bankruptcy petition, fully owns the fraudulent transfer claims or whether the creditors retain some rights to these claims---rights which, if not fully disposed of by the trustee due to practical or statutory limitations, may rear their head once more.  The article evaluates four possible outcomes of ownership:  The trustee owning nothing,  The trustee holding a duplicate claim,  Partial ownership vesting in the trustee with a remainder interest for creditors, and  Full preemption of state law claims by the federal Bankruptcy Code (with full ownership by the trustee).  By delving into the history of both bankruptcy and fraudulent transfer law, the purpose of bankruptcy law, and the various ways in which the Bankruptcy Code modifies fraudulent transfer claims, the article provides fresh arguments that anything less than the trustee's full and preempting ownership of federal fraudulent transfer claims would undermine Congressional intent. In addition to legal analysis, the article highlights the practical implications of determining claim ownership, emphasizing the trustee's need for clarity to maximize the value of the bankruptcy estate and the role a coherent understanding of fraudulent transfer claims plays in courts' determination of what constitutes property of the estate. The conclusion offers insights for practitioners, including strategies to mitigate risks associated with creditors using tort claims to bypass the bankruptcy process. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document the_practical_consequences_of_metaphysics_who_owns_a_fraudulent_transfer_claim_in_bankruptcy.pdf (861.34 KB) Category Law Reviews & Studies

W.D.N.C.: Herlihy v. DBMP- Relief from the Automatic Stay Requires both Bad Faith and Objective Futility Ed Boltz Mon, 11/11/2024 - 15:33 Summary: The District Court affirmed a Bankruptcy Court decision denying appellants' request to lift the automatic stay on their asbestos-related claims against DBMP LLC. The appellants, representing asbestos claimants, sought to pursue claims in state court, but the Bankruptcy Court denied the motion, applying the In re Robbins factors to assess whether to lift the stay. The Bankruptcy Court determined that lifting the stay would likely harm the bankruptcy estate, hinder reorganization, and disrupt judicial economy by potentially leading thousands of similar claims back to state court. The District Court reviewed the Bankruptcy Court’s analysis and agreed there was no abuse of discretion. Appellants argued that DBMP’s bankruptcy filing was in bad faith, necessitating a lift of the stay under Carolin v. Miller. However, the court found Carolin did not compel the Bankruptcy Court to lift the stay based on bad faith alone and that both subjective bad faith and objective futility were required for such a finding, which the Bankruptcy Court did not establish. The District Court concluded that the Bankruptcy Court had correctly balanced the Robbins factors and committed no error of law, thereby denying the appeal and affirming the stay. Commentary: This same Carolin standard  for dismissal/lifting of the stay,  which requires both bad faith and objective futility,  applies in not just Chapter 11 cases,  but also Chapter 13. Objective futility is more than mere infeasibility. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document herlihy_v._dpmp.pdf (207.54 KB) Category Western District

Law Review: Pang, Belisa, Invisible Mortgages in Bankruptcy (June 05, 2024) Ed Boltz Mon, 11/11/2024 - 15:27 Available at:   https://ssrn.com/abstract=4939831 Abstract: This paper identifies a previously unexplored channel through which bankruptcy affects consumer welfare: the presence of retained mortgages and their invisibility in post-bankruptcy credit reports. Using credit bureau data, this paper reveals that approximately 70% of mortgagors in Chapter 7 bankruptcy and 56% of those in Chapter 13 bankruptcy had mortgages in good standing when they first filed. Similarly, court records show that 74% of mortgagors in Chapter 7 bankruptcy intended to retain their mortgages, and only 7% of properties intended for retention were foreclosed within three years, compared to 69% of those intended for surrender. This demonstrates that, surprisingly, most homeowners who filed for bankruptcy nevertheless did not default on their mortgages. However, once the homeowners filed, nearly 79% of their mortgages disappeared from their credit reports or stopped being updated. In other words, the homeowners stopped getting credit for keeping their mortgages current; their mortgages became invisible. Using event studies, this paper shows that this mortgage invisibility harms these homeowners, leading to a 15 to 30-point reduction in their credit scores, a $1,500 decrease in their credit card limits, and a 1 percentage point increase in their auto loan interest rates. Therefore, this paper advocates for reporting practice changes to better reflect the financial realities of retained mortgages in bankruptcy. Commentary: This is a recurring problem for Chapter 7 debtors since by not reaffirming a secured debt, that creditor isn’t reporting their on-going payments to the credit bureaus, depriving them of those payments to help rebuild  their credit score.  This is less of an  issue  with car loans, since those are more often reaffirmed and also because clients more easily grasp the risk of a repossession deficiency.  It  continues,  however,  to be an issue with mortgages, since ride-through is still the preferred option and often the only one allowed by bankruptcy courts.  The first thing when explaining this to a client is to make sure they understand the difference between the liability that the Deed of Trust creates against the house (i.e., if the mortgage isn’t paid the house will be sold at foreclosure) and the client’s personal liability (i.e., that they would owe any deficiency.)  It is also important that paperwork clearly disclose the options regarding reaffirmation and ride-through, but that the bankruptcy judge generally won’t approve reaffirmations for real property.  This is to counteract the invariable statement (which is likely the Unauthorized Practice of Law)  made by the mortgage servicers that "your lawyer screwed up" as the debtor should have  signed a reaffirmation.  The reason that a mortgage company might not report on-going payments is both out of spite on their part, but also out of an over-abundance of caution. If, instead of making all of their post-discharge payments on time, the client had been delinquent, there is case law holding that reporting such delinquency to a credit bureau is a violation of a debtor’s discharge, since the debtor wasn’t personally delinquent. Since they can get burned for reporting bad information, mortgage companies often take the safe route and choose to not report any information.  One of the key facts of the credit reporting laws is that creditors can only report accurate information. They are not, however, required to report any  information,  instead choosing  to remain silent.  It is possible, nonetheless, for a client to still get their payment history included in their credit report., as follows:  The client should request a payment history from the mortgage servicer.  The client should then file a dispute with the three credit bureaus, attaching a copy of the payment history from the mortgage servicer.  The credit bureaus are  required to verify the accuracy of the debt and dispute with the mortgage servicer within 30 days.  At that point, the mortgage company can either:  Remain silent, in which case  the credit bureau must accept the nonfrivolous information provided by the client;  Accurately report information.  The mortgage company would be hard pressed to explain how a payment history it prepared was inaccurate.  The client will need to repeat this process on a regular basis, to update the information.  Additionally, the client should keep the payment history, since that can be provided to anyone they’re applying to for new credit.  This process, while a headache for debtors, at least gives them a route to accomplish their goals, whether they follow through or not is a different question.   With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document credit_reporting_and_mortgage.pdf (70.5 KB) Document invisible_mortgages_in_bankruptcy_compressed.pdf (414.78 KB) Category Law Reviews & Studies

M.D.N.C.: Vaughn v. Navy FCU- Dismissal of Pro Se Consumer Rights Lawsuit Ed Boltz Mon, 11/11/2024 - 15:18 Summary: Vaughn, who represented himself, filed a complex, convoluted and confusing complaint against Navy Federal with numerous claims, including violations of various U.S. and foreign statutes, breach of contract, breach of fiduciary duty, and allegations of discrimination.  The court dismissed each claim due to a lack of factual support, failure to specify how Navy Federal violated particular statutes, or because the statutes did not provide a private cause of action. Vaughn also failed to establish the existence of a fiduciary duty or contract with Navy Federal. Additionally, his motion for default judgment was denied as Navy Federal had responded appropriately to the case. The court found Vaughn’s remaining motions moot and dismissed the case. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document vaughn_v._navy_federal_credit_union.pdf (140.29 KB) Category Middle District

Bankr. E.D.N.C.: In re Celebration Cottage AB- Single Asset Real Estate Entity Ed Boltz Mon, 11/11/2024 - 15:16 Summary: In Celebration Cottage AB, LLC, the bankruptcy court denied the motion by BIP Canton, LLC to designate Celebration Cottage AB, LLC as a Single Asset Real Estate (SARE) entity,  despite assertions that the real property constituted a single project that generated most of the debtor’s income.  Designation as a SARE  would require expedited creditor protections and alter the debtor's Chapter 11 restructuring process. Celebration Cottage owns four properties: a cottage, two adjacent vacant lots in Atlantic Beach, NC, and a property in Morehead City, NC. The court found that these properties did not function as a single economic project since only the three Atlantic Beach properties were occasionally used together for events, while the Morehead City property was used separately for short-term rentals and as a residence. As a result, the court concluded that the properties did not meet the criteria for SARE designation and could proceed under subchapter V of Chapter 11, which is designed for small business reorganization. The court also noted that Celebration Cottage’s listing of the Atlantic Beach properties for sale and continued use of the Morehead City property as a rental showed that the properties were not being held solely as passive real estate investments. Consequently, the court denied the motion to designate Celebration Cottage as a SARE entity and held BIP’s motion for relief from the automatic stay in abeyance for further hearing. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_celebration_cottage_ab.pdf (144.23 KB) Category Eastern District

Law Review: Pang, Belisa, The Bankruptcy Revolving Door (January 31, 2024) Ed Boltz Sat, 11/09/2024 - 21:39 Available at:   https://ssrn.com/abstract=4911339 Abstract: Using credit report data dating back to 1997, this study unveils that nearly 46% of consumer bankruptcy filings in 2023 came from people with a prior bankruptcy record. This percentage has increased at an average rate of 61 basis points per year since 2016. The majority of repeat filings occur after a discharged case rather than a dismissed one, and nearly half of refilers have previously filed under Chapter 7, challenging conventional beliefs about repeated filings. Moreover, the temporal gap between successive filings is substantial, with most refilings occurring over 7 years after the initial filing. This paper then reveals that a person's past filings are strongly correlated with increased future filings after 7 years, even after controlling for a wide range of variables including debt levels and demographic characteristics. Therefore, this paper contends that the prevalence of refiling can be attributed to two main reasons: first, individuals with a prior bankruptcy frequently face new financial distress, and second, they are more predisposed to file for bankruptcy compared to those with no bankruptcy record. Commentary: While this study does reveal that individuals are more likely  to file subsequent bankruptcies  if they have previously successfully filed bankruptcy,  the results do not indicate that filing  bankruptcy,  particularly Chapter 13,  is used as a stalling technique.  Only 7.6% of all refilers,  despite their notoriety, filed two dismissed Chapter  13 cases within a year, and not all of these individuals engage in abuse. (In fact,  extension of the automatic stay §362(c) for more than 30 days and subsequent confirmation of their plan both require a demonstration of good faith.) That  this research shows that many borrowers  need to file subsequent Chapter 7 bankruptcies,  particularly when the borrower continues to have non-dischargeable debts (whether student loans or reaffirmed personal liability for secured debts)  does also open the question about  whether or how much Chapter 13 bankruptcy,  with its less frequent discharges,  is truly worse than the quicker and more certain Chapter 7 discharge,  if those also lead to repeat filings.  Both may instead be traceable as much to continued lack of income or other subsequent financial distress as  to deficiencies in the debt relief provided under either regime.   While this paper does find that the amount of non-dischargeable student loan debt increases the likelihood of a subsequent bankruptcy,  but it is not clear that the author similarly examined  the amount of reaffirmed debt,  which is essentially not discharged either,  to determine the extent to which Chapter 7 debtors,  attempting to holding onto cars and houses,  similar to most Chapter 13 debtors,  are successful.  A repossession of foreclosure following a reaffirmation, resulting in a deficiency balance,  would seem likely to increase the odds of another bankruptcy. On a more venal note for consumer debtor attorneys,  this research does point to past clients as a potential source  for future clients,  especially as the earlier relationship allows for direct contact For additional commentary,  see: Credit Slips:  Bob Lawless- Revisiting How Many People Have Filed Bankruptcy     With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document the_bankruptcy_revolving_door_compressed.pdf (579.31 KB) Category Law Reviews & Studies

4th Cir.: Paxton v. LVNV- Statute of Limitations for FCRA not Tolled by Fraudulent Concealment Ed Boltz Sat, 11/09/2024 - 21:37 Summary: The Fourth Circuit Court of Appeals affirmed the dismissal of  Paxton’s claims against LVNV Funding, LLC, and Jacob Law Group, PLLC. Paxton had alleged violations of the Fair Debt Collection Practices Act (FDCPA) and state law. The district court dismissed her FDCPA claims as time-barred, as the last alleged FDCPA violation occurred on May 7, 2020, but Paxton did not file her complaint until July 2021, exceeding the one-year statute of limitations. Paxton argued for tolling based on fraudulent concealment, claiming improper service and pursuit of judgment in a state where she no longer lived, but the court found her allegations insufficient. Consequently, the court also declined to exercise supplemental jurisdiction over her state claims. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document paxton_v._lvnv.pdf (122.99 KB) Category 4th Circuit Court of Appeals

Love and Marriage. Fries and Catsup. Chips and Dip. Like these famous pairings, divorce and bankruptcy are frequent companions. When a couple goes their separate ways, often the most substantial marital accumulation is debt. The questions we get as bankruptcy practitioners usually revolve around whether to file a bankruptcy case before or after the divorce.  […] The post Navigate The Marital Debt Thicket In Bankruptcy appeared first on Bankruptcy Mastery.

Bankr. MD: In re Klemkowski- Online Access to Mortgage Account during Chapter 13 Ed Boltz Fri, 11/08/2024 - 17:20 Summary: Judge Harner of the Maryland bankruptcy Court  evaluated whether CitiMortgage Inc. and its servicer Cenlar FSB violated the automatic stay under 11 U.S.C. § 362(a)(3) by denying debtor Ms.  Klemkowski access to her online payment portal after she filed for bankruptcy. Before the bankruptcy filing, Klemkowski had used this portal to make mortgage payments, but her access was revoked upon her filing. She argued this change impeded her ability to comply with her repayment obligations. The court ruled that the right to use the online portal (just another twig in the bundle of sticks), as per the prepetition agreements, became part of Klemkowski's bankruptcy estate, and that the servicer’s unilateral denial of access post-filing effectively violated the automatic stay by altering her contractual rights. However, the court found no sufficient evidence to award monetary damages since Klemkowski continued to make payments through other means, though less conveniently. The stay violation was deemed void ab initio, and the court allowed further proceedings to determine appropriate remedies, potentially including restoring portal access to uphold the debtor’s contractual rights within the bankruptcy framework. Commentary: It would seem that,  again coupled with  Trantham,  a debtor could propose a nonstandard plan provision  that required mortgage servicers to allow online access, because not only does nothing in the Bankruptcy Code prohibit such a provision,  but the refusal by mortgage servicers is,  in Judge Harner's words,  "troubling and inconsistent with the general policies underlying the Code and consumer protection laws." As an example,  the MDNC Local Form Plan at 8.2d  already  provides that: The Holder shall continue to send monthly statements to the Debtor in the same manner as existed pre-petition and such statements will not be deemed a violation of the automatic stay. Recognizing that in 2024  online access is essential and essentially the same as periodic monthly statements  seems only a modest step further,  with a such a nonstandard  provision perhaps being: The Holder shall continue to send monthly statements to the Debtor and to allow the Debtor online access to their account in the same manner as existed pre-petition and neither such statements nor information provided through the online access will not  be deemed a violation of the automatic stay. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_klemkowski.pdf (302.95 KB) Document mdnc_loop_1-1-2020.docx (162.43 KB) Category Middle District

Bankr. MD: In re Klemkowski- Online Access to Mortgage Account during Chapter 13 Ed Boltz Fri, 11/08/2024 - 17:20 Summary:   Judge Harner of the Maryland bankruptcy Court  evaluated whether CitiMortgage Inc. and its servicer Cenlar FSB violated the automatic stay under 11 U.S.C. § 362(a)(3) by denying debtor Ms.  Klemkowski access to her online payment portal after she filed for bankruptcy. Before the bankruptcy filing, Klemkowski had used this portal to make mortgage payments, but her access was revoked upon her filing. She argued this change impeded her ability to comply with her repayment obligations. The court ruled that the right to use the online portal (just another twig in the bundle of sticks), as per the prepetition agreements, became part of Klemkowski's bankruptcy estate, and that the servicer’s unilateral denial of access post-filing effectively violated the automatic stay by altering her contractual rights. However, the court found no sufficient evidence to award monetary damages since Klemkowski continued to make payments through other means, though less conveniently. The stay violation was deemed void ab initio, and the court allowed further proceedings to determine appropriate remedies, potentially including restoring portal access to uphold the debtor’s contractual rights within the bankruptcy framework. To read a copy of the transcript, please see:   Commentary:   It would seem that,  again coupled with  Trantham,  a debtor could propose a nonstandard plan provision  that required mortgage servicers to allow online access, because not only does nothing in the Bankruptcy Code prohibit such a provision,  but the refusal by mortgage servicers is,  in Judge Harner's words,  "troubling and inconsistent with the general policies underlying the Code and consumer protection laws."   As an example,  the MDNC Local Form Plan at 8.2d  already  provides that:   The Holder shall continue to send monthly statements to the Debtor in the same manner as existed pre-petition and such statements will not be deemed a violation of the automatic stay.   Recognizing that in 2024  online access is essential and essentially the same as periodic monthly statements  seems only a modest step further,  with a such a nonstandard  provision perhaps being:   The Holder shall continue to send monthly statements to the Debtor and to allow the Debtor online access to their account in the same manner as existed pre-petition and neither such statements nor information provided through the online access will not  be deemed a violation of the automatic stay.   With proper attribution,  please share this post. Blog comments Attachment Document in_re_klemkowski.pdf (302.95 KB) Document mdnc_loop_1-1-2020.docx (162.43 KB) Category Middle District