Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

U.S. Supreme Court Rules On Meaning Of “Defalcation” In Section 523(a)(4) in Bullock v. BankChampaign.

By Scott Riddle on Posted in US Supreme Court Cases

In a case appealed from the Eleventh Circuit Court of Appeals, the United States Supreme Court ruled on a case involving the definition of "defalcation" in 11 U.S.C. § 523(a)(4).  The case, decided yesterday, May 13, 2013, is Randy Bullock v. BankChampaign NA, 2013 U.S. LEXIS 3521 (U.S. May 13, 2013) (click here for .pdf of opinion). The issue before the Court was the definition and meaning of the term "defalcation," which is not defined in the Code.  The Court held that  “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

 Section 523(a)(4) provides that:

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

The brief facts of this case are the following.  In 1978, Debtor’s father established a Trust for his five children and made Debtor the trustee.  The sole asset of the Trust was an insurance policy, and the Trust allowed the Debtor to borrow against the policy.  Debtor subsequently borrowed money from the Trust and used the funds to purchase property and a mill for himself and his mother.  Debtor repaid the borrowed funds.

Debtor’s siblings filed suit in state court, and the court held that Debtor breached his fiduciary duties in the self-dealing, albeit without malicious motive.  The court awarded damages of the "benefits he received from his breaches" plus attorneys fees and costs, and appointed BankChampaign as the constructive trustee of the properties and mill.  Debtor was unable to liquidate his interests to pay the judgment, and filed for Bankruptcy.  The Bank sought an exception to the Debtors discharge pursuant to section 523(a)(4) based on the alleged defalcation while acting in a fiduciary capacity. The Bankruptcy Court held in favor of the Bank, and the decision was affirmed by the District Court and the Eleventh Circuit (click here for Eleventh Circuit opinion).  Debtor appealed to the Supreme Court, contending that the debt should not be excepted from discharge absent ill intent or loss of trust principal.  As there was a disagreement on the issue among the lower courts, the Supreme Court granted the petition.

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Judge Diehl In ND Georgia Allows Lien Stripping In Chapter 7, Follows McNeal

By Scott Riddle on Posted in Northern District Cases

In In re Malone, Ch. 7 Case No. 12-61289, 2013 Bankr. LEXIS 1282 (Bankr. N.D. Ga. March 28, 2013) (click here for .pdf), the Debtor filed a  Motion to Determine Status of Wholly Unsecured Second Mortgage on Real Property when Debtor’s case was pending as a Chapter 13, but the court heard the matter only after conversion to Chapter 7.  The Motion raised the issue of whether a debtor may strip a wholly unsecured lien from real property pursuant to § 506 of the Bankruptcy Code.

The relevant facts were undisputed:

Debtor owns real property .. which is subject to two security deeds. JPMorgan Chase Bank, NA purportedly holds or services the first priority security deed. The outstanding balance on its corresponding note is approximately $153,088.37. Citibank holds a valid second priority security deed on the Property and the balance on the corresponding note is approximately $32,197.36. The parties agree that the value of Property was $62,100.00.

The Debtor argued that § 506(a)(1) and (d) allowed them to strip the unsecured second lien pursuant to the 11th Circuit’s opinion in In re McNeal. 

This is not a novel question of statutory interpretation; however, the parties disagree as to what caselaw is binding precedent on this court. The legal issue presented here is complicated by the recent unpublished decision entered by the Eleventh Circuit. In re McNeal, 477 Fed. Appx. 562 (11th Cir. 2012) (per curium). The unpublished nature of McNeal is used by each party in support of its argument for opposite outcomes.

Eleventh Circuit Rule 36-2 provides that an unpublished decision does not serve as binding precedent for lower courts. Of course, the McNeal opinion operates as persuasive authority. Debtor urges the court to adopt McNeal’s rationale, which determined that the control-ling law in this circuit permits a chapter 7 debtor to "strip off" a wholly unsecured lien by relying on the holding in Folendore v. U.S. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989). McNeal, 477 Fed. Appx. at 564-65. In contrast, Citibank asserts that McNeal is wrongly decided and that the intervening Supreme Court decision of Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) prohibits voiding its junior security deed.

Judge Diehl did a very thorough analysis of the three cases and attempted to reconcile their holdings, which will not be repeated here, and concluded that deference should be given to the McNeal decision. 

The application of the prior panel precedent rule in McNeal is assessed with deference by this court. Yet, its application in an unpublished opinion where there is replete persuasive authority holding that Dewnsup is directly on point creates a predicament. As explained above, this court has struggled to reconcile McNeal and Dewsnup in deciding Debtor’s motion. The legal analysis as set forth above and the principles underlying Dewsnup are compelling to this court.

Regarding the underlying principles, this court takes issue with Folendore’s characterization that stripping a lien using § 506(d) — when the value of the property is less than the senior lien–promotes the fresh start policy of bankruptcy. Folendore, 862 F.2d at 1540. In assessing this position, it is important to consider that chapter 7 provides relief for a debtor through liquidation, not reorganization. In a chapter 7, a debtor’s options for treating property are limited to redemption, reaffirmation, or surrender. In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993).

The issues presented by the parties in this action are identical to those arguments presented to the McNeal court. Although this court can not reconcile the Folendore and Dewsnup decisions with respect to the scope and application of § 506(d), deference to the Eleventh Circuit’s McNeal decision ultimately tips the balance in favor of Debtor.

Judge Diehl granted the motion and the second lien was stripped.  In addition, Judge Diehl has provided a form order for use in future cases. 

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

Middle District Bankruptcy Court Approves Lien Stripping In Chapter 7 Case, Although Judge Disagreed With Precedent

By Scott Riddle on Posted in Middle District Cases

In May 2012 the Eleventh Circuit entered its opinion in  In re McNeal and seemingly approved the stripping of wholly unsecured second liens in Chapter 7 cases.  Since this was an unpublished opinion of a panel (and non-binding), and contrary to authority in other Circuits, lawyers have been watching to see what Bankruptcy Courts would do until the issue was decided by the full Circuit or the Supreme Court.  Many Courts in the Circuit, including the Northern District of Georgia, have entered orders allowing the stripping.

In Williams v. Internal Revenue Service (In re Williams), Adv. Proc. No. 12-1027, 2013 Bankr. LEXIS 1107 (Bankr. M.D. Ga. March 15, 2013) (click here for .pdf), the debtors home was worth $210,000.00 and subject to a first-priority lien in the amount of $237,564.00.  The IRS held a second-priority tax lien on the property in the amount of $$77,588.51.  The debtors filed a proceeding to strip the wholly unsecured lien of the IRS.

On summary judgment, Judge Walker ruled in favor of the debtors based on the McNeal case, although he believes it was wrongly decided by the Eleventh Circuit.

Since the McNeal decision, only one bankruptcy judge in the Eleventh Circuit has published a decision on a Chapter 7 debtor’s attempt to strip off a wholly unsecured lien. In re Bertan, No. 11-27057-BKC-AJC, 2013 WL 216231 (Bankr. S.D. Fla. Jan. 18, 2013) (Cristol, J.). In Bertan, the court noted that McNeal is unpublished and thus without precedental value. Id. at *2. It nevertheless followed McNeal … This Court, too, will follow McNeal, even though the Court is persuaded McNeal was wrongly decided. McNeal and Folendore rely on application of § 506(a) prior to application of § 506(d) to void the wholly unsecured lien. However, § 506(a) serves no function in a no-asset Chapter 7 case. Logically, it should only apply when the case provides a distribution to unsecured creditors.  In such circumstances § 506(a) determines the extent to which an undersecured creditor will participate in the distribution. Nevertheless, the Eleventh Circuit has authorized strip off of a wholly unsecured claim pursuant to § 506(d). Although McNeal is not binding, the Court cannot simply ignore a decision of the Eleventh Circuit, especially one that holds that a prior published (and therefore precedental) decision remains good law. Therefore, the status of the IRS’s lien determines whether Dewnsup applies or McNeal applies. If the IRS’s lien is partially secured, Dewsnup prohibits strip down. If the IRS’s lien is fully unsecured, Debtor’s may rely on McNeal to void the lien.

Bankruptcy Rule Establishing Deadline To File Dischargeability Complaint Is Strict, “Hard And Fast” Rule.

By Scott Riddle on Posted in Northern District Cases

In United Community Bank v. Harper (In re Harper), Adv. Proc. No. 12-1080, 2013 Bankr. LEXIS 1080 (Bankr. N.D. Ga. January 29, 2013 (Judge Drake) (click here for .pdf of order), the issue was whether Federal Rule of Bankruptcy Procedure 4007(c)  created a strict deadline for filing adversary complaints to determine dischargeability of debts under §523(c). Judge Drake held that 11th Circuit precedent controlled the issue, and Rule 4007(c) was intended to create a hard and fast deadline.  

In this case, the creditor UCB initiated the electronic filing of the complaint at 11:45 p.m. on the last day of the deadline (which had been previously extended). However, the experienced paralegal uploading the case ran into several difficulties with the computer freezing, leading to the complaint not being filed until 12:02:44 a.m.  The following day UCB’s counsel communicated with the Clerk’s office, but the Clerk declined to enter a "Notice of Technical Difficulties" as the Clerk’s computer system was functioning properly.  UCB did not take any further steps to obtain an order rectifying the untimely filing due to technical failure or to use the alternative method of sending the document by facsimile before the deadline. See  LR, N.D.Ga., Appendix H, Ex. A, § II(H).  Based on these facts, the debtor moved to dismiss the untimely complaint.

Judge Drake granted the Motion and dismissed the case.

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Secured Lender Only Entitled To Secured Claim For Actual Fees, Not Contractual Fees, After Foreclosure

By Scott Riddle on Posted in Northern District Cases

In a key decision in the Northern District of Georgia, Judge Hagenau has ruled that a secured creditor is only entitled to a secured claim, pursuant to § 506(b), to the extent of its actual and reasonable fees rather than contractual and statutory fees after a foreclosure sale where the property has not been abandoned.  Most Promissory Notes and Security Deeds call for contractual attorneys fees and expenses upon default.  The contractual and statutory attorneys fees are up to 15% of the loan amount and may or may not be close to the actual fees incurred by the lender. 

In Trauner v. State Bank and Trust Company (In re Solid Rock Development Corp., Inc.), Ch. 7 Case No. 10-72777, Adv. Proc. No. 12-5238, 481 B.R. 221, 2012 Bankr. LEXIS 4845 (September 27, 2012) (click here for .pdf),  SB&T received relief from the automatic stay to foreclose on the Debtor’s real property.  The Order lifting the stay stated the following:

The automatic stay of 11 U.S.C. § 362 of the Bankruptcy Code is modified to
allow SB&T to exercise its rights and remedies under applicable law, including
foreclosure of its security interest in the Property, promptly accounting to the
Trustee for any proceeds received in excess of the lawful claim of SB&T.

SB&T conducted a foreclosure sale and credit bid the outstanding balance of its debt, $2,025,182.00.  The bid amount included $262,386.87 in statutory attorney’s fees.  The Chapter 7 Trustee sought turnover of the amount of attorneys fees "charged" by  SB&T over and above its "reasonable fees." 

The Trustee argues this case is governed by the Eleventh Circuit decision in [Welzel v. Advocate Realty Invs. (In re Welzel), 275 F.3d 1308 (11th Cir. 2001).] , where the court held that, notwithstanding the provisions of the contract or the provisions of O.C.G.A. § 13-1-11, the creditor was limited under Section 506(b) to the recovery of reasonable attorney’s fees. 275 F.3d at 1315. The Trustee therefore argues that SB&T could not recover statutory attorney’s fees through its foreclosure sale. The Trustee argues further that the credit bid by SB&T of the statutory fees constitutes a cash bid in excess of the allowable claim of SB&T, and SB&T must therefore pay to the Trustee the amount of the credit bid in excess of the allowable claim.

SB&T, conversely, argued that once the stay was lifted the Bankruptcy Court no longer had jurisdiction to determine whether there were excess proceeds to be paid to the Trustee, and it can collect the entire amount of statutory fees allowed by state law. 

The Judge held that the Bankruptcy Court had continued jurisdiction over the issues, including surplus funds received at the foreclosure sale, and that SB&T’s secured claim was limited to "reasonable" fees pursuant to § 506(b).

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There is no “Oops Defense” When Debtor Lies Or Misleads the Court In Schedules And Pleadings

By Scott Riddle on Posted in Southern District Cases

Many debtors arrive in Bankruptcy Court having committed missteps, or even misconduct, in their financial affairs and dealings with others.  Even for these debtors, Bankruptcy is often an opportunity for them to get a "fresh start."  However, one of the requirements of this fresh start is that a debtor must be completely honest in documents and pleadings filed in their Bankruptcy case.  This is a continuing obligation throughout the case, and debtors have a duty to make amendments as needed.  The consequences of not doing so may include the dismissal of the case, a ban on re-filing for a certain period of time, or the denial or revocation of the discharge.  Worse yet, as schedules are filed under oath and penalty of perjury, the failure to properly disclose information on the schedules can lead to criminal prosecution.

In In re Roberts, Ch. 13 Case No. 11-60690, 2013 Bankr. LEXIS 631 (Bankr. S.D. Ga. January 24, 2013) (click here for .pdf), the debtor probably got off light.  The debtor initially filed a Chapter 7 case, but subsequently converted to a Chapter 13.  In his initial Chapter 7 Schedule I, Debtor listed his non-filing spouse’s occupation as a "homemaker" with no income.  Two months after filing, debtor’s spouse got a job as a substitute teacher but the debtor did not amend his schedules.  A few months later the debtor amended his schedules in conjunction with the conversion to Chapter 13, but his amended Schedule I again stated his spouse was a homemaker with no income.  The "error" finally came to light 10 months after the case was filed when the debtor filed a motion for approval to purchase a house (presumably, when it was beneficial to disclose the additional income).  The Chapter 13 Trustee moved to dismiss.

The Court granted the motion and barred the debtor from re-filing for 180 days.

Notwithstanding the number and variety of possibly relevant factors, "the easiest way to fail the good faith test. . . is for a debtor to ‘misrepresent, lie or otherwise mislead the court.’" …That is precisely what has happened here.

Roberts tried to game the system. He failed to disclose his wife’s part-time income at two different junctures: when she first began substitute teaching and when the case was converted. Further, he failed to disclose on his Amended Schedule I the reasonable anticipation of an increase in household income when he knew that chances were good his wife would be working full-time within the next few months.

Roberts, who attended college and is employed as a manager, testified that he was not aware of the requirement to disclose changes in total household income until he filed the motion to incur debt. I find that testimony not credible.

When a debtor misrepresents, lies, or otherwise misleads the court, there is no "Oops defense." …Here, Roberts had an additional $20,000 in household income during the first five months of 2012 that he did not disclose. Failure to disclose $20,000 is not an "oversight," as Roberts’ attorney characterized it. Roberts has therefore failed to meet his burden to prove the Plan was proposed in good faith under § 1325(a)(3).

"Failure to make accurate disclosure in bankruptcy documents, making fraudulent representations to the court, or an unfair manipulation of the Bankruptcy Code is sufficient cause for dismissal." … Here, the Trustee has conclusively shown that Roberts failed to make accurate disclosure in his bankruptcy documents; the Trustee has thus met the burden of proof for dismissal of the case under § 1307(c).

IT IS THEREFORE ORDERED that the chapter 13 case of Aaron S. Roberts is DISMISSED WITH PREJUDICE, barring refiling for a period of 180 days from the date of this Order.

Had the case remained in Chapter 7, it is possible, if not likely, the Chapter 7 Trustee or United States Trustee would have filed an adversary proceeding to deny or revoke the debtor’s discharge, which essentially would have acted as a permanent bar of the discharge of his debts up to that point pursuant to §523(a)(10).  He could also have been prosecuted for the federal crime of bankruptcy fraud.

 

Georgia Supreme Court Issues Significant Opinion That Could Invalidate Many Deeds In Georgia

By Scott Riddle on Posted in Georgia State Cases

On February 18, 2013, the Georgia Supreme Court issued its opinion in Wells Fargo Bank. N.A. v. Gordon, No. S12Q2067, 2013 Ga. LEXIS 158 (Feb 18, 2013).  The case was certified to the Georgia Supreme Court by the Eleventh Circuit Court of Appeals in In re Codrington, 691 F3d 1336 (11th Cir. 2012) (click here for order).

The Court, in short, held that deeds that are not signed by an unofficial witness are not eligible for recording and, if recorded, do not constitute proper notice to put a hypothetical bona fide purchaser (such as a Bankruptcy Trustee) on inquiry notice of the deed.  The effect of this opinion (and the U.S. Bank opinion discussed below) is unclear at this point, but the Georgia Supreme Court has made it clear that the rules regarding deeds are subject to a strict compliance standard and deeds not in compliance are not eligible for recording.  There is little doubt that many Bankruptcy Trustees in Georgia will begin to closely inspect deeds filed with respect to property of bankruptcy estates.  If a security deed is defective, the lien may be avoided and the property sold for the benefit of all creditors.

In this case, the Debtor executed a Security Deed with Wells Fargo in 2006, and it was recorded with the Fulton County Superior Court Clerk on October 13, 2006.  The Security Deed was signed by the Debtor, the co-debtor on the loan and a notary.  However, the line for the official witness was left blank.  Another document, the "Waiver of Borrower’s Rights," which expressly stated that it was incorporated in and made part of the Security Deed, was signed by the Debtor, non-debtor, notary and an unofficial witness.  

In June 2008 the Debtor filed a Chapter 7 Bankruptcy. The Chapter 7 Trustee then sued Wells Fargo to avoid Wells Fargo’s interest in the property pursuant to 11 U.S.C. § 544 based on the Security Deed’s lack of the signature from an unofficial witness.  The Bankruptcy Court, in an opinion discussed here, granted judgment in favor of the Trustee. The District Court affirmed the judgment and the Eleventh Circuit subsequently certified the questions to the Georgia Supreme Court.

The following questions were certified to the Court:

1. Whether a security deed that lacks the signature of an unofficial witness should be considered "duly filed, recorded, and indexed" as required by OCGA §44-14-33, such that a subsequent bona fide purchaser would have constructive notice when the deed incorporates the covenants, terms, and provisions of a rider that contains the attestations required by OCGA §44-14-33 and said rider is filed, recorded, and indexed with the security deed?

2. If the answer to question one (1) is in the negative, whether such a situation would nonetheless put a subsequent hypothetical bona fide purchaser on inquiry notice?

 

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Tort Claim That Arose Before Chapter 7 Case Was Filed, But Not Discovered Until Long After Discharge, Was Property Of Bankruptcy Estate (M.D. Ga.)

By Scott Riddle on Posted in Middle District Cases

In an interesting opinion, Chief Judge Laney of the Middle District of Georgia held that a tort claim that "arose" well before a Chapter 7 filing but was not discovered by the debtor until well after discharge was property of the Chapter 7 case. The case is interesting in that it was before the Court on a motion for reconsideration filed by the Trustee, the Court reversed its prior position on authority not argued by either of the parties, and Judge Laney  criticized the Eleventh Circuit opinion on which he ultimately based his decision.

In In re Webb, 484 B.R. 501,  2012 Bankr. LEXIS 5736 (Bankr. M.D. Ga. Dec. 12, 2012), the Debtor was diagnosed with congestive heart failure in July 2007.  He subsequently filed a Chapter 7 case in January 2009 and was subsequently discharged in June 2009.  The Debtor later became aware of a class action lawsuit from a television commercial over medication he took from 2006-2008, and entered into a confidential settlement.  The Trustee moved to reopen the Chapter 7 case to administer the settlement proceeds as property of the Chapter 7 estate.

In an October 2012 opinion, the Court applied the discovery rule and held that the claim did not accrue until after the Debtor became aware of the claim and, therefore, it was a post-petition asset. See  In re Webb, 482 B.R. 669 (Bankr. M.D. Ga. October 12, 2012).  The Trustee moved for reconsideration of the order. 

The Court granted the motion and reversed its earlier ruling, not based on the Trustee’s arguments but based on the Court’s own research and apparent changed view of Eleventh Circuit authority (after the jump).

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To Increase Chances Of Getting Your Chapter 13 Plan Confirmed, Add An Apology

By Scott Riddle on Posted in News and Comments

According to a new study by Robert Lawless and Jennifer Robbennolt (summarized in the Wall Street Journal), Judges are more likely to approve a Chapter 13 plan that includes an apology.  From the Wall Street Journal article:

In the 29-page study, Lawless and colleague Jennifer Robbennolt said they told participating judges about the Millers, a fictional family of four with a $180,000 home, $25,500 in credit card debt and a $26,000 Ford Explorer SUV. Their credit card debt ranged from $9,000 for the husband’s medical expenses to $270 per month spent on their two daughters, ages 10 and 13, for gymnastics.

At the end of their Chapter 13 payment plan, which paid unsecured creditors 18% of their debt over three years, the Millers wrote, “We have no way of keeping up with our bills and repaying everything. It is all we can do to pay the mortgage and keep food on the table. We know that we are responsible for the mess we are in. We are truly sorry.”

(emphasis added).  The results of the study reflected that 40.6% of judges who had the plan with the apology approved the plan while only 34.4% of judges who received the version without the apology approved the plan.Judges who heard the apology apparently believed the family would me more likely to manage their finances going forward.

With Chapter 13 having so many stringent, if not draconian, requirements for plans, maybe adding an apology at  the end will make a difference. Something tells me it won’t help as much in Chapter 11 plans, but maybe it is worth an extra section in the Disclosure Statement in an individual Chapter 11 case.

Imminent Foreclosure Grounds For Waiver Of Pre-Petition Counseling Certificate

By Scott Riddle on Posted in Northern District Cases

In In re Stanley, 2012 Bankr. LEXIS 6031 (Bankr. N.D. Ga. Nov. 8, 2012), the debtors certified that they tried to obtain credit counseling but were unable to complete it because they needed to file their Chapter 13 petition to stop a foreclosure the same day.  Debtors requested a waiver and deferment of the counseling requirement under Section 109(h)(3)(A), which provides the following:

(A) Subject to subparagraph (B), the requirements of paragraph (1) shall not apply with respect to a debtor who submits to the court a certification that—

(i) describes exigent circumstances that merit a waiver of the requirements of paragraph (1);
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 7-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.

Judge Diehl held that the imminent foreclosure scheduled for the same day constituted exigent circumstances that merited the waiver.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.