In Howell v. U.S. Foods, Inc., Ch. 7 Case No. 11-13160, Adv. Proc. No. 13-1054, 2014 Bankr. LEXIS 681 (Bankr. N.D. Ga. Feb. 5, 2014) (click here for .pdf of Order), the individual debtor owned and managed a restaurant incorporated as Bilbo’s Bar-B-Que, Inc. However, the Trustee alleged that the Debtor operated the business as a sole proprietorship known as “Bilbo’s BBQ.” During the 90 day preference period, payments were made to U.S. Foods by checks which identified the drawer as “Bilbo’s BBQ.” The account agreement states that the account is owned by a “Corporation-For Profit,” with another individual identified as the “Owner/Signer” and Debtor as the “Non-Individual Owner.” The Trustee filed a complaint against U.S. Foods to recover the alleged preferential transfers, contending that because Debtor operated the business as a sole proprietorship rather than a corporate entity, the payments were a transfer of an “interest in the debtor” in property and on account of an antecedent debt owed by the Debtor. U.S. Foods filed a motion to dismiss for failure to state a claim, contending “that the corporation is distinct and separate from the Debtor and that the complaint is ‘devoid’ of any justification for attributing the corporation’s debts and asset transfers to the Debtor.” Judge Drake granted the Motion. Continue Reading
In In re Mooney, Ch. 7 Case No. 13-10835, 503 B.R. 916, 2014 Bankr. LEXIS 29 (Bankr. M.D. Ga. January 3, 2014), the issue before the Court was whether a health savings account (“HSA”) is exempt. Judge Walker held that an HSA is not exempt under Georgia state exemptions, even though Georgia has enacted legislation to encourage the establishment of HSAs (O.C.G.A. §33-51-02). The Debtor argued that her HSA was exempt pursuant to O.C.G.A. §44-13-100(a)(2)(C) & (E), which provides for the exemption of:
(2) The debtor’s right to receive: … (C) A disability, illness, or unemployment benefit; … (E) A payment under a pension, annuity, or similar plan or contract on account of illness … to the extent reasonably necessary for the support of the debtor and any dependent of the debtor[.]
The Court did not agree with the Debtor’s argument that the legislature must have intended on exempting HSAs and that the accounts fall within the exemption for “illness benefit.”
Despite Debtor’s argument that HSAs are clearly exempt, nothing in O.C.G.A. § 44-13-100(a)(2) expressly exempts HSAs. The Georgia Assembly has amended the exemption statute three times since the development of HSAs; none of the amendments included any direct or indirect references to HSAs. By contrast, at least six states–Florida, Mississippi, Oregon, Tennessee, Texas, and Virginia–expressly provide for the exemption of HSAs. Absent such an unequivocal expression of legislative intent, the Court must consider whether HSAs fall within one of the more general categories of property exempted by state law… Continue Reading
In In re Kulakowski, No. 12-15294, 2013 U.S. App. LEXIS 23110 (11th Cir. Nov. 15, 2013) (click here for .pdf of opinion), the issue was the extent to the Court could consider the income and expenses of the non-filing spouse in determining whether a Chapter 7 case could be dismissed for “substantial abuse” under 11 U.S.C. 707(b)(3)(B). The basic facts are as follows: Debtor and her spouse have been married for over 20 years. Debtor is unemployed, and they use her spouse’s income for their household expenses. They have always operated as one “financial unit,” with joint checking, joint tax returns and pooling their income and expenses. The spouse’s monthly take-home pay is $5,491, or $1,100 more than their household expenses. Most of the debtor’s debt was credit card debt, much of which was incurred for household expenses or the sole benefit of the spouse. The U.S. Trustee sought dismissal of the Chapter 7 case based on “substantial abuse.” The Bankruptcy Court dismissed the case, and the District Court affirmed. On appeal, the question before the 11th Circuit was the statutory interpretation of Section 707(b)(3)(B).
The Eleventh Circuit agreed with the dismissal of the case and analysis of the Bankruptcy Court. The court rejected the debtor’s argument that her spouse’s income could only be considered to the extent he contributed to household expenses in determining “current monthly income” under §101(10A). Continue Reading
In the case of In re Conner, Ch. 7 Case No. 09-42532, 2013 Bankr. LEXIS 4481 (Bankr. S.D. Ga. October 25, 2013), the issue was whether the Debtors could reopen their Chapter 7 case about three years after it was closed in order to enter into a reaffirmation agreement with Wells Fargo Home Mortgage. Debtors argued that Wells Fargo had offered to enter into a reaffirmation agreement in order to assist Debtors with a modification of their home loan. The Court declined to reopen the case, as any reaffirmation would be unenforceable pursuant to 11 U.S.C. §524(c)(1).
Reaffirmation agreements are unenforceable unless the “agreement was made before the granting of the discharge . . . .”11 U.S.C. § 524(c)(1).. “[B]ecause reaffirmation agreements are not favored, strict compliance with § 524(c) is mandated.” … For the purposes of § 524(c)(1), “a reaffirmation agreement is ‘made’ no earlier than the time when the requisite writing which embodies it has been fully executed by the debtor…”
No evidence has been produced establishing that a reaffirmation agreement was made prior to discharge, and indeed, Debtors’ counsel expressly stated that no agreement was made either in principle or in writing before the discharge. Therefore, as the reaffirmation agreement was not made prior to discharge, it cannot be enforceable under § 524(c). Because the reaffirmation agreement is unenforceable, reopening Debtors’ case would be futile. Accordingly, the Court finds that Debtors’ case may not be reopened.
In In re Brown, Ch. 13 Case No. 12-12316, 2013 Bankr. LEXIS 3696 (Bankr. S.D. Ga. Sept. 6, 2013), the Chapter 13 debtor deducted, on Line 57 of the Means Test, monthly student loan payments of $500 as a “deduction for special circumstances.” In her Chapter 13 plan, she proposed to make direct payments of $500 on her student loans and make a 1% distribution to unsecured creditors. The Chapter 13 Trustee objected to the plan on the grounds that the debtor was not contributing all of her disposable income to the plan. The Court sustained the objection.
Section 707(b)(2) states:
(B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
Section 1325(b)(3) incorporates §707(b)(2) in Chapter 13 cases. The Court reviewed the split of authority in cases that addressed the issue of whether student loans could be deducted as special circumstances and held that such payments did not qualify for deduction on the Means Test.
While it is commendable to try and advance one’s education for career and personal advancement, the issue is whether these educational costs constitute “special circumstances” under the parameters established by Congress in §707(b)(2). There may be instances where a student loan constitutes a “special circumstance.” See In re Pageau, 383 B.R. 221 (Bankr. D.N.H. 2008) (“special circumstances” may be found where the student loan was necessitated by permanent injury, disability, or an employer closing or layoffs); see also In re Cribbs, 387 B.R. 324, 329 (Bankr. S.D. Ga. 2008) (finding that “special circumstances” must be similar to the examples set out in the statute, and finding special circumstances in the repayment of a 401(k) loan). However, under the facts of this case, the student loans do not qualify as a “special circumstance” warranting a deduction on her means test. There is nothing unique or special about Debtor’s student loans. She obtained her loans to better herself and to obtain promotions, but that does not make the loans special or unique. She was never layed off from work or forced to get an education in order to maintain her job. The fact that a bachelor’s degree may have later become a requirement does not make her loan a special circumstance. For these reasons, while Debtor’s pursuit of higher education is admirable, it is not a special circumstance under §707(b)(2)
The Court then addressed whether the debtor could make student loan payments outside the plan pursuant to §1322(b)(5), which allows a debtor to cure defaults and maintain payments on long term debts, or whether such a plan unfairly discriminates against other creditors under §1322(b)(1). Continue Reading
In the case of Hope v. Acorn Financial, Inc., Case No. 12-10709, 2013 U.S. App. LEXIS 19661 (11th Cir. September 26, 2013) (click here for .pdf of opinion) the Court addressed whether 11 U.S.C. §1327(a) binds the Chapter 13 Trustee to the terms of the plan, even though the Trustee is not mentioned in the statute. Section 1327(a) provides the following:
The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.
The specific question before the Court was “whether a confirmed Chapter 13 plan which gives a creditor a secured position is binding on a trustee who, aware of defects in that creditor’s security interest, does not assert any objections to, and affirmatively recommends confirmation of, the plan.” In June 2010, the debtor had purchased a vehicle and financed it through Acorn, but Acorn failed to properly perfect its security interest when it delivered its application for certificate of title to the Georgia Department of Revenue. A few weeks later the debtor filed a Chapter 13 petition, and Acorn subsequently perfected its security interest in the vehicle six days after the Bankruptcy petition was filed. The Bankruptcy Court found that the Trustee was aware of the defect more than 30 days before the confirmation hearing, but took action on Acorn’s claim. Meanwhile, the debtor proposed a Chapter 13 plan that treated Acorn as a secured creditor. The Chapter 13 Trustee recommended confirmation, and the plan was confirmed in September 2010. A few days later, the Trustee filed an adversary proceeding to avoid Acorn’s lien as a preferential transfer. The Bankruptcy Court granted summary judgement to Acorn, the District Court affirmed and the Trustee appealed to the Eleventh Circuit.
The Trustee argued that she was not bound by the plan because §1327(a) does not specifically include trustees as being bound. Continue Reading
Last week I was at a final hearing on fee applications on behalf of a Chapter 7 Trustee, in a case in which the debtor had failed to disclose a pre-petition personal injury case pending in another state. The defendants in that case ultimately founds out about the Bankruptcy case about a year after it was closed and the debtor received her discharge. They contacted the Trustee and the case was reopened more than a year after debtor’s discharge to administer the asset (the proceeds of the personal injury case settled by the Trustee). The Judge questioned why we had not pursued revocation of the debtor’s discharge based on the obvious failure to disclose the lawsuit, false schedules and other issues in the case. It was a good question and one that the Chapter 7 Trustee and United States Trustee had considered. Unfortunately, no matter how egregious or fraudulent the debtor’s conduct, the Bankruptcy Code has strict time limits for seeking revocation of a discharge. The case below is an example of the strict limitations periods.
In Underwood v. Brit & Sons Electrical Wholesale, Inc., Adv. P. No. 1305138, 2013 Bankr. LEXIS 3630 (Bankr. N.G.Ga. August 15, 2013) (click here for .pdf of opinion), the debtor filed a motion to reopen his no-asset Chapter 7 case to add a creditor. When the case was reopened, almost two years after it was initially closed, the debtor filed an adversary proceeding seeking a declaration that the debt to the defendant was discharged. The defendant/creditor filed a counterclaim to deny debtor’s discharge pursuant to 11 U.S.C. §727(d)(1) (discharge granted through fraud; creditor had no knowledge of fraud until after discharge). The debtor sought dismissal of the counterclaim as untimely under §727(e)(1) as it was brought after one year after the debtor was granted a discharge. In turn, the defendant argued that because it was not listed as a creditor in the schedules and had no notice of the bankruptcy case, the time in which to object to, or seek revocation of, the debtor’s discharge was equitably tolled.
The Court held that equitable tolling did not apply to toll the statute of limitations and the counterclaim was dismissed. Section 727(e) provides -
It is not uncommon for Bankruptcy lawyers to get requests from individuals to just help them fill out the Bankruptcy paperwork, or act as the occasional sounding board behind the scenes, without actually representing the debtor in the Bankruptcy Court. This often happens when the client either does not have the money for fees or simply does not believe they need to pay the full fee for a lawyer. Most reputable lawyers decline to act in this capacity. In the Northern District of Georgia, which is one of the busiest districts in the country, scores of petition preparers have also popped up. This case shows the dangers of acting as behind-the-scenes” lawyers for a debtor, not having procedures and safeguards in place to confirm the scope of employment, and not having clear confirmation from the debtor that he/she approves the filing of a case.
In In re Hood, No. 12-15925, 2013 US App. LEXIS 18088 (11th Cir. August 29, 2013) (click here for .pdf of opinion), the Debtor purportedly retained the Law Firm for “foreclosure defense” work in order to avoid a foreclosure. The facts surrounding the events are disputed, but a pro se Chapter 13 petition was filed for the Debtor via a courier on February 21, 2012, the same day that Debtor paid a $1,000 retainer to the Law Firm for foreclosure defense services. The Debtor claimed that he had no knowledge of the filing, and the Law Firm claimed that its administrative employee acted only as a scrivener in filling out the petition for the Debtor based on Debtor’s oral responses.
The Debtor, in what the Bankruptcy Court called “buyer’s remorse,” claimed he had no knowledge of the Bankruptcy filing and, through o0ther counsel, filed a motion for order to show cause against the Law Firm.
The [Bankruptcy Court] noted that despite Hood’s remorse, he “signed several documents containing the word bankruptcy in multiple places.” Regardless, on June 7, 2012, the bankruptcy court held that Appellants violated 11 U.S.C. §§ 527 and 528(a)(1), Florida Rules of Professional Conduct 4-3.3(a)(1) and 4-8.4(c), and “appear[ed] to have violated 18 U.S.C. § 157(3).” The bankruptcy court found that Appellants acted as ghostwriters by failing to sign the Chapter 13 petition, and thus perpetrated fraud on the court. The bankruptcy court suspended Torrens from practice before the United States Bankruptcy Court for the Southern District of Florida for six months, barred Reyes from applying for admission to practice before the United States Bankruptcy Court for the Southern District of Florida before December 31, 2012, prohibited both Torrens and Reyes from filing any papers in bankruptcy court during their period of suspension, and held that all employees, associates and business affiliates of the firm were enjoined from acting as bankruptcy petition preparers under 11 U.S.C. § 110 or as a “debt relief agency” as defined by 11 U.S.C. § 101(12A). The court also referred the matter to the office of the United States Attorney for possible criminal prosecution and to the Florida Bar for further disciplinary proceedings. The district court affirmed the bankruptcy court’s decision, concluding that the surrounding circumstances revealed at the evidentiary hearing supported the bankruptcy court’s findings.
The District Court affirmed and the Law Firm appealed only the holding that they perpetrated fraud on the Court by ghostwriting the petition. The 11th Circuit reversed the Bankruptcy and District Courts.
Here, the bankruptcy court held that [Law Firm] violated Florida Rules of Professional Conduct 4-3.3(a)(1) and 4-8.4(c) by perpetrating fraud on the court through a ghostwritten pro se Chapter 13 petition. Yet, the bankruptcy court failed to cite Rule 4-1.2(c), the specific Florida Rule of Professional Conduct regulating the practice of ghostwriting… We first note that while this court has not addressed the propriety of ghostwriting,
we do so today only as ghostwriting applies to the factual circumstances of the present case… Rule 4-1.2(c) explains that when an attorney assists “by drafting” a pro se document to be submitted to the court, the attorney must identify the document as “[p]repared with the assistance of counsel.” … It is apparent to us that under the plain language of the rule, [Law Firm] did not “draft” a document for [Debtor]. See R. Regulating Fla. Bar 4-1.2(c) cmt. They did not “write or compose” the pre-formatted Chapter 13 petition… To the contrary, [Law Firm] recorded answers on a standard fill-in-the-blank Chapter 13 petition based on [Debtor]’s verbal responses. Moreover, [Debtor] personally signed the petition. That [Debtor] attempted to attain the best of both worlds by claiming that he had no knowledge of the petition only after the bankruptcy proceeding effectively stalled the foreclosure on his property is patent…
[W]e see no fraudulent intent in this record by [Law Firm]. Rather, they were attempting to assist [Debtor] with the completion of a straightforward pro se Chapter 13 petition for which there was no unfair advantage to be gained. Who, within the firm, filled out the petition is a distinction without a difference. A Chapter 13 petition is a publicly available form that is designed in a manner that lends itself to a pro se litigant. [Debtor] could have personally completed the petition at issue in the exact same manner and likely obtained the same result… Furthermore, there was no finding of fact by the bankruptcy court that any information placed on the Chapter 13 petition was false. Appellants’ conduct was not fraudulent. See R. Regulating Fla. Bar 4-3.3(a)(1), 4-8.4(c)… At bottom, we conclude that Appellants did not “draft” a document within the scope of Rule 4-1.2(c) and did not commit fraud in violation of the Florida Rules of Professional Conduct or 18 U.S.C. § 157(3).
Hindsight is 20/20, but the Law Firm could have had several procedures in place to avoid the consequences (even though they prevailed on some claims on appeal): 1) have the client sign a fee agreement that clearly sets forth the scope of representation (and what is excluded); 2) Have the client confirm that they consent to the filing of a petition; 3) Follow all ethical rules to the letter, and; 4) Avoid handling only part of a debtor’s case, whether it is filling in forms or acting as unofficial Bankruptcy counsel.
Bankruptcy lawyers regularly caution debtors to avoid unusual financial transactions, including credit card charges, cash withdrawals, and the like, prior to filing their case. This is a case in which a pro se debtor withdrew several thousand dollars in the week before filing and got caught. In addition, Debtor also requested, and initially received, approval for a waiver of her filing fee because she appeared destitute. In re Ricks, Ch. 7 Case No. 13-60100, 2013 Bankr. LEXIS 3355 (Bankr. S.D. Ga. July 15, 2013) (click here for opinion). Based upon her testimony at the 341 meeting, and bank statements, it appeared Debtor omitted material information from her schedules, gave her mother a $1,000 gift within 90 days prior to filing, and withdrew $8854 from her accounts in the week before filing. A hearing on the Trustee’s Motion for Turnover was held, and Judge Dalis found the Debtor’s testimony that she spent the money on living expenses “evasive.” Not surprisingly, the docket reflects that an objection to the Debtor’s discharge has been filed. This case is a lesson – Trustees usually find out.
In In re Chastagner, Ch. 7 Case No. 12-11488, 2013 Bankr. LEXIS 3240,(Bankr. S.D. Ga. August 8, 2013) (click here for .pdf of opinion), Judge Barrett, in a thorough discussion of Georgia title pawn law, held that a Chapter 7 debtor cannot avoid a lien on a vehicle pursuant to 11 U.S.C. §522(f). Further, because the Debtor did not timely redeem the vehicle post-petition, his rights in the vehicle were extinguished and ownership of the vehicle vested in TitleMax, the pawn broker.
Prior to filing his Chapter 7 petition, the Debtor entered into an agreement with TitleMax in which he pledged his vehicle in exchange for $4,934.82. The original maturity date was January 24, 2012 but was extended several times, with a final maturity date of September 2, 2012. Debtor filed his Chapter 7 petition on August 20, 2012, prior to redeeming the vehicle. Debtor subsequently filed a motion to avoid TitleMax’s lien pursuant to §522(f) to the extent the lien impaired his exemption in the vehicle.
The title pawn agreement provided the following:
You hereby grant to us a security interest in your motor vehicle. In consideration of your payment of $5,427.81 (which is the cost to the seller or pledgor to redeem the merchandise in this period of the transaction), delivery to us of the motor vehicle’s certificate of title, and agreement to pay all the fees, sums, interest, charges and amounts pursuant to O.C.G.A. §44-12-130 et seq. and disclosed herein, we agree to lend you $4,934.82. . . . [I]f you choose to redeem or repurchase the pledged goods, then you must pay us in cash the Total of Payments listed below on the specified maturity date of the pawn transaction, which is 09/05/2012….
The pledged goods may be redeemed for thirty days after the Specific Maturity Date or the extended maturity date . . . . You may redeem the motor vehicle within the grace period by the payment of any unpaid accrued fees and charges, the re-payment of the principal, and the payment of an additional interest charge . . . [i]f the motor vehicle is not redeemed within the grace period it shall be automatically forfeited to us by operation of O.C.G.A. §44-14-403, and any of your ownership interest in the motor vehicle shall automatically be extinguished. After the grace period the pledged goods become the property of the pawn broker. . . . If you are in default, we have the right to take possession of the motor vehicle…Security: You are giving a security interest in the motor vehicle…[W]e have a lien on the motor vehicle pawned for the money advanced, interest, and pawnshop charge owed but not for other debts due to us. We may retain possession of the pledged goods until the lien is satisfied and may have a right of action against anyone interfering therewith.
Debtor argued that the language in the pawn agreement created a security interest, and because he was in possession of the vehicle and the pawn had no matured as of the petition date, the lien could be avoided pursuant to §522(f). Judge Barrett disagreed.
Pursuant to the agreement, the nature and extent of Debtor and Titlemax’s rights in the Truck must be deter-mined under Georgia law respecting pawn transactions…In a Georgia pawn transaction involving a motor vehicle, the title lender receives a statutory lien on the vehicle, and the lender’s possession of the certificate of title is ‘conclusively deemed to be [legal] possession of the motor vehicle’ . . . After a thirty-day ‘grace period,’ the pledgor’s ownership interest in the vehicle is automatically forfeited to the title lender, the ownership interest in the vehicle is automatically extinguished, and the title lender may dispose of the vehicle. This provision for the automatic extinguishing of the pledgor’s ownership rights eliminates the need for action on the part of the title lender to acquire title to the vehicle…Unlike the typical secured transaction, where a lender must take affirmative steps in order to obtain title, in Georgia a pawnbroker’s rights accrue automatically by operation of law. O.C.G.A. §44-14-403(b)…Section 108(b) [11 U.S.C. §108] extends this time up to 60 days following the petition date. Debtor failed to redeem within this time period, therefore title to the Truck was automatically forfeited to Titlemax.
Accordingly, in the case sub judice, the rights of Titlemax “are different from the rights that the holder of a security interest or other lien has in encumbered property to secure a debt,” and they receive different treatment under the Bankruptcy Code…Section 108(b) of the Bankruptcy Code protects the bankruptcy estate from the automatic operation of state law, as for redemption periods by extending the time to redeem…Georgia law provides that all pawn transactions shall mature in 30 days unless extended, and that subsequently, a 30 day, post-maturity redemption period runs during which additional interest may be charged. O.C.G.A. §44-12-131(a) (1) (“All pawn transactions shall be for 30 day periods but may be extended or continued for additional 30 day periods”); O.C.G.A. §44-14-403(b)(1) (“There shall be a grace period on all pawn transactions. On pawn transactions involving motor vehicles or motor vehicle certificates of title, the grace period shall be 30 calendar days.”). During these two successive redemption periods, Titlemax had a statutory lien against the Truck “for the money advanced, interest, and pawnshop charge owed” under O.C.G.A. §44-14-403(a). However, it also had a right to obtain automatic, full ownership in the Truck upon Debtor’s failure to pay the redemption price…Because Debtor did not redeem the Truck within the time allowed under 11 U.S.C. §108, title to the Truck vested in Titlemax. Section 522(f) cannot be utilized by Debtor as it only avoids “the fixing of lien of the interest of a debtor in property” . . . if the lien is a nonpossessory, nonpurchase money lien.