Tag Archives: bankruptcy

Be Very Careful If You Argue Your Deed Of Trust Or Loan Are Invalid So You Do Not Owe Anything On Your Home

By

Over and over again during the mortgage meltdown and now even years after the mortgage meltdown I have potential clients still wanting to argue that they owe nothing on their primary residence because of some issue with the loan, recording or assignment of the loan. Do not get me wrong. There is an exception to every statement anyone makes like this, but it is rare. What I can prove to you is state court lawsuit after state court lawsuit getting dismissed after you the homeowner were lied to about your chances of actually being successful at arguing you owe nothing even though you did not pay the loan off in full. I can also prove to you relief from stay after relief from stay granted by bankruptcy courts when someone files for bankruptcy protection and is behind on their mortgage payments then tries to argue I owe nothing. Since there still seems to be some confusion let me be clear.

If you do not pay your mortgage payment each month at some point your mortgage company will seek foreclosure and if you have filed for bankruptcy protection and do not pay your mortgage on time your mortgage or loan company will get relief from stay to start the foreclosure process in the real world. Hopefully the following provides some more detailed information about why to not argue you do not owe any money on your house. I do not think bankruptcy attorneys mislead potential bankruptcy clients about this topic but state court litigation attorneys still do.

A recent Ninth Circuit Bankruptcy Appellate Panel case from the Central District really highlights the issues with this argument and applicable law in the bankruptcy world. See BAP CC-18-1015-FLS.

Mortgage Company Can Assign or Transfer the Right of Collection of the Note Secured by the Recorded Deed of Trust

In this particular case here is the list of secured creditors for the bankruptcy filer regarding his deed of trust for his house in chronological order.
1. November 2014: GMAC Mortgage Corporation DBA ditech.com is the original loan company with recorded deed of trust for $315,000 and provides Mortgage Electronic Registration Systems, Inc. (“MERS”), as “nominee” for GMAC and its successors and assigns, was the beneficiary under the Deed of Trust;
2. June 2010: Through nominee MERS GMAC assigns deed of trust to GMAC Mortgage, LLC;
3. January 2011: The borrower and bankruptcy filer entered into a loan modification with MERS, nominee for the then-current holder of the Note, GMAC Mortgage, LLC;
4. May 2013: GMAC Mortgage, LLC assigned the Deed of Trust to Green Tree Servicing, LLC;
5. February 2016: Green Tree Servicing, LLC (which was then known as Ditech Financial LL) recorded the notice of default when mortgage payments were not made;
6. December 2017: Ditech Financial assigned the deed of trust to U.S. Bank Trust, N.A., as Trustee for LSF9 Master Participation Trust 13801; Servicer Caliber Home Loans, Inc. as its attorney in fact.
The assignments continued even after the borrower defaulted on payments and filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Ditech Financial filed the proof of claim in the bankruptcy case but U.S. Bank and Caliber as the servicer filed the motion for relief from the bankruptcy automatic stay for permission to continue to enforce their state court rights outside of bankruptcy. The bankruptcy filer and/or borrower unfortunately argued U.S. Bank/Caliber had no standing or no right to request relief from stay and that he was current with all post-bankruptcy filing mortgage payments.

The Motion For Relief From Stay

U.S. Bank/Caliber sought relief from the automatic stay under Section 362(d)(1) for cause alleging the borrower and bankruptcy filer failed to make over $19,000 in mortgage payments after the chapter 13 bankruptcy case was filed. First the borrower/bankruptcy filer argued that U.S. Bank/Caliber was not the “real party in interest.” Second that the Deed of Trust was defective at its inception given the original lender was listed as “GMAC Mortgage Corporation dba ditech.com,” but only “GMAC Mortgage Corporation” is registered in the state of Pennsylvania, while the fictional name “ditech.com” is not. Third, the borrower/bankruptcy filer claimed that the January 2011 modification agreement was invalid.

1. Real Party In Interest

In the bankruptcy world the key term regarding this issue “colorable claim” to enforce an alleged debt/claim. A claim is extremely broadly defined and I have written about this issue in a prior article. But a mere colorable claim is all that is required in the bankruptcy world.
See Arkinson v. Griffin (In re Griffin), 719 F.3d 1126, 1128 (9th Cir. 2013) (citing In re Veal, 450 B.R. at 915); see Edwards v. Wells Fargo Bank, N.A. (In re Edwards), 454 B.R. 100, 105 (9th Cir. BAP 2011)
“A party seeking stay relief need only establish that it has a colorable claim to the property at issue.” A party filing a motion for relief from stay or movant must have a colorable claim sufficient to bestow upon it standing to prosecute a motion under § 362 if the party/movant either: (a) owns or has another form of property interest in a note secured by the debtor’s (or the estate’s) property; or (b) is a ‘person entitled to enforce’ . . . such a note under applicable state law”). The borrower and bankruptcy filer argues that the stamp signature on one of the loan documents invalidates the documents. There does not need to be a lengthy discussion about this issue given an endorsement of a negotiable instrument does not require a “live” or “wet” signature. See U.C.C. § 3-204(a) and U.C.C. § 1-201 providing “signed” includes any symbol executed or adopted with present intention to adopt or accept a writing. Or more commonly known as “make your mark” for a valid signature or endorsement of a document. The alleged “stamp” signature argument fails.

2. Failure to Registered a Fictitious Business Name

This is an interesting argument. The borrower and bankruptcy filer also argues that GMAC Mortgage Corporation dba ditech.com did not register or fill out and file a fictitious business for ditech.com. The problem is that cannot invalidate a lender’s ability to make and enforce thousands upon thousands of dollars of loans…..
The borrower and bankruptcy filer then attempts to argue the various assignments between the parties listed above are invalid. This issue has been analyzed before, see: Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th Cir. BAP 2011). The Ninth Circuit provides a service has standing to seek relief from the automatic stay when the borrower files for bankruptcy protection.

3. I Did Pay All The Alleged Missed Mortgage Payments

Finally the borrower and bankruptcy filer argues he made all of the post-petition mortgage payments in a declaration but failed to provide any proof the mortgage payments were paid. As a bankruptcy attorney trying to help someone prevent relief from stay being granted this has to be the most frustrating thing to deal with. If mortgage payments are paid there has to be proof of the payment readily available. If you are behind on your mortgage payments most likely the only thing that can prevent relief from stay being granted is a plan the mortgage company will accept to pay back the missed mortgage payments and that means ALL of the missed mortgage payments up to when the motion for relief from stay is filed within a reasonable time. As a side note; most motions for relief from stay are filed for cause or missed mortgage payments regardless of the amount of equity a property has. Cause exists for relief from stay is you missed mortgage payments and cannot pay them back within a reasonable amount of time there is not much anyone can do for you.

How Much Time Do I Get If I Am Being Evicted Then File Bankruptcy?

By

What a question. It depends upon many things and if you want a guarantee of time before you must leave the home or apartment for nonpayment of rent when you are behind on the rent or lease payments someone would have to lie to you. Since that will not happen around here the answer to this question requires asking a few questions to know what is possible or not when a bankruptcy petition is filed and staying in a rental unit. There are just too many moving parts to make some sort of blanket statement about how much time you will get before you have to move out. So I will do my best to answer the question, “What happens if I am being evicted then file bankruptcy? How much time will I get in my place?”

So some guy calls me and says, “I got this form here from the internet that says I get thirty days.” Okay, what form? Response: I do not know. Does your landlord have an unlawful detainer judgment against you already? Response: I do not know. Okay, well, that is almost nothing to go on so here is what is possible if you file for bankruptcy protection and your landlord is trying to get you evicted.

Filing Motion For Relief From Automatic Stay

Once a bankruptcy petition if filed the automatic stay takes effect, is self-executing, and stops/enjoins any and all collection activity against you including evictions. A creditor/landlord can ask the Bankruptcy Court for relief from the automatic stay to continue the eviction though. In the Northern District of California Bankruptcy Court the local rules provide a hearing can be scheduled by creditor/landlord for a motion for relief from the automatic stay on 14 day’s notice. A creditor/landlord could also file a motion for shortened notice and try and get a hearing scheduled on their motion for relief from the automatic stay on less than 14 day’s notice. The notice procedure for hearing is different in different jurisdictions though so this timing may or may not apply in your jurisdiction. Also, this is assuming the landlord/creditor filed the motion for relief from stay as soon as possible after the bankruptcy case is filed. Generally notice of any bankruptcy case takes 4 – 7 days given notice to creditors is mailed via United States First Class Mail by the Bankruptcy Noticing Center. So a landlord/creditor would not even find out about the bankruptcy case until days after your bankruptcy attorney files the bankruptcy petition unless notice was faxed to the landlord/creditor given you are worried about eviction …. FRBP 4001(a)(3) also stops the enforcement of an order grating relief from the automatic stay unless FRBP 4001(a)(3) is waived. So if this rule is not waived you get another 14 days to stay before the order granting relief from stay is signed/entered.

But again does the landlord/creditor already have a judgment in the unlawful detainer lawsuit or have they even filed an unlawful detainer lawsuit against you?

Your Landlord Already Obtained An Unlawful Detainer Judgment For Right of Possession

If your landlord has already obtained an unlawful detainer judgment for right of possession then there is no automatic stay pursuant to Bankruptcy Code Section 362(b)(22). Section 362(b)(22) provides the automatic stay pursuant to Bankruptcy Code Section 362(a)(3) does not apply if: subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.

I will get to subsection (l) in a moment. For now our facts are your landlord sued you in an unlawful detainer action and has a judgment for possession before you filed your bankruptcy case. If so there is no automatic stay and as an experienced bankruptcy attorney I do know of attorneys out there that have had sheriff departments evict people within days of the filing of a bankruptcy case. The attorney for the landlord was good and knew what there were doing. Along with the other documents it takes to have someone evicted the landlord attorney also sent Section 362(b)(22) of the Bankruptcy Code and the sheriff followed the law. You get evicted in a matter of days of the filing for bankruptcy protection.

What Is This 30-Days I Get After Filing Bankruptcy If I Am Facing Eviction?

So finally we get to what this caller was actually talking about, Subsection (l) of 362 of the Bankruptcy Code. Subsection (l) provides: (1) Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, IF the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that— (A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and (B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition. This is now Official Form 101A: “Initial Statement About an Eviction Judgment Against You.” You must also deposit with the Clerk of the Court the rent amount for that 30 day period. That 30 days you get is not free. For the automatic stay to continue after the 30 days you must also then pay the entire amount due in the unlawful detainer judgment against you and fill out and file Official Form 101B: Statement About Payment of an Eviction Judgment Against You.
Are there other circumstances that this article may not address the could change what I just wrote above? Yes. Generally speaking if facing eviction you either do not have an unlawful detainer judgment entered against you or you do.

What Happens When A Cotenant In A Tenant In Common Ownership Agreement Does Not Pay

By

In many large cities like San Francisco the only way to afford purchasing a home is to purchase a property in which you are tenants in common with other owners of the property. Sadly some of the same issues described here can occur with condominium associations also. In San Francisco there many multi-floor homes that have been separated into individual beautiful homes for purchase. The circumstances I will be discussing in this article arise when there is a single mortgage for the entire property and the tenants in common are all responsible for paying the entire mortgage.

Unfortunately this is a long one given how much took place and the litigation is still ongoing. This will last for over a decade most likely.

Hopefully your tenant in common property has separate mortgages for each separate livable part of the property and there are a few small shared expenses. Yes, all tenants in common are usually responsible for the entire mortgage payment each month regardless of who is paying or not by agreement upon purchase if there is only one mortgage for the entire building. That means your agreement to purchase your portion or percentage of the property will include language that the other owners and you are responsible for paying the entire mortgage each month even if one of the other tenant in common does not pay their portion. The following is how thousands of dollars in mortgage payments and attorneys’ fees and costs will result from one tenant in common not paying their percentage of the monthly mortgage payment then arguably following the law to protect their rights. This case is still actually ongoing and the attorneys’ fees and costs are still piling up. At this point the attorneys’ fees and costs are around three times the real world actual damages …… Something you should think about before retaining an attorney.

Tenants In Common Agreements

A tenant in common agreement is like owning a unit in a condominium building and is a great way to get into a real estate market for less than purchasing a free standing single-family home. You must consider that you will never have complete control over your property though and the other owners or tenants in common can always affect your property and mess with your life. Under California law, co-owners of real property holding undivided interests, such as tenants in common, are considered “cotenants.” In re Fazzio, 180 B.R. 263, 268 (Bankr. E.D. Cal. 1995); Harry D. Miller & Marvin B. Starr, California Real Estate § 11.1 (4th ed. 2017) (“Miller & Starr”). While tenants in common generally each have an equal right to occupy the property, tenants in common in multi-unit residential buildings may agree to give each owner an exclusive right of occupancy in particular dwelling units pursuant to which each may respectively exclude the others from their private residential unit. Tom v. City & Cty. of S.F., 120 Cal. App. 4th 674, 676 (2004). The issue is when there is a single mortgage for the entire property and not each undivided interest.

The tenants in common agreement I will be discussing provided that the three tenants in common agreed to pay a certain percentage of the mortgage for the entire property depending upon their portion of the building occupied. The three original cotenants entered into this agreement in 2003. The property was split up into not equal square footage so the mortgage payments were apportioned by percentage occupied. Fair enough. The original tenant in common agreement of 2003 also provided that if one cotenant did not pay their share of the mortgage the other cotenants were required to pay the non-paying cotenant’s share in addition to their own share. In the case I am discussing one of the original three co-tenants sold their share in 2004 and an amended tenant in common agreement was entered into by the two remaining original cotenants and the new 2004 purchasing cotenant with the same terms as the original three cotenants had. Begs the question why one of the original 2003 cotenants decided to sell in a year or less after original purchase and entering into the 2003 tenants in common agreement? Did the original cotenants all know each other? Was there problems brewing already? Did the value increase that much that selling resulted in walking away with a lot of money? Now an unknown third party purchased one of the original cotenants’ interest a year later. That is life though and how it works. To muddy the waters a little more another of the remaining two original cotenants sold their interest in 2007 for cash. Luckily the purchaser paid with cash, so this resulted in the other two cotenants receiving cash distributions from the sale proceeds and that eliminated the new purchaser’s obligation to pay any part of the remaining mortgage. No doubt the value of this San Francisco property increased significantly allowing the selling cotenant to make this happen and walk away with a great profit. What about the remaining two cotenants still responsible for the mortgage? This left one cotenant, the 2004 purchaser responsible for 25.765% of the monthly mortgage payment and the other cotenant, the last remaining original cotenant responsible for 74.23% of the monthly mortgage payment.

A Cotenant Does Not Pay Their Share As Agreed

So finally we get to the problems. The cotenant discussed with the obligation to pay 25.765% of the mortgage stopped making their share payment of the mortgage in 2011, or four years after the other cotenant sold their interest for cash and 7 years after their original purchase.

In 2011 the 2004 purchaser that ended up with the percentage of 25.765% ($1,215.15 a month) after the cash buyout stopped making their monthly payment. The 74.23% ($3,489.50 a month) cotenant was forced to pay the nonpaying cotenants share pursuant to the amended tenants in common agreement and more importantly to avoid potential foreclosure proceedings. It is unclear whether the total monthly mortgage payment of approximately $4,704.65 includes property tax and insurance. It most likely does include property tax and insurance given there is no additional litigation over direct payment of property tax and insurance in the various court filings.

What Do If A Cotenant Stops Paying?

In the case I am discussing the 74.23% cotenant decided to seek arbitration first. By the way, the 25.765% cotenant’s portion of the mortgage payment is $1,215.15 each month if that was not clear above and the 74.23% cotenant has to pay $3,489.50 each month. It is not clear what happened in this case before the paying cotenant took the not paying cotenant to arbitration. It is possible, since they live in the same building; the cotenants spoke directly to resolve this. Maybe a letter was sent first? It is unclear the steps taken in this case leading up to the “lawyering up,” but ultimately arbitration was chosen as the means to enforce the breached amended tenant in common agreement. It is possible the amended tenant in common agreement required arbitration to resolve disputes.

The arbitrator found in favor of the paying 74.23% interest cotenant. What defense did the 25.765% not paying cotenant have? Did you sign the amended tenant in common agreement upon purchase? Yes. Did you stop making your percentage payment as required by the amended tenants in common agreement? Yes. The arbitrator awarded and ordered the nonpaying cotenant to pay the paying 74.23% cotenant $9,136.26 for the payments they made on the mortgage on behalf of the not paying 25.765% cotenant, that the 25.765% cotenant start paying their portion of the mortgage again and awarded the paying 74.23% cotenant attorneys’ fees and costs of $58,369.29. So we have an amended tenant in common agreement and proof of payments made by the 74.23% cotenant to prove there is a problem here and this resulted in $58,369.29 attorneys’ fees and costs to get to, “you are right and have been wronged in the principal sum of $9,136.26.” The point here is that when things go wrong it gets expensive quickly to arbitrate or litigate the problem. As this issue continues it only gets more expensive also.

What Happened After The Arbitration Award?

After an arbitration award the arbitration award can be entered as a judgment by order. The 74.23% now with their arbitration award did in fact request the Superior Court for the State of California to enter judgment. The judgment entered against the not paying 25.765% cotenant was $68,656.07 ($9,136.26 + $58,369.29 + interest) plus the attorneys’ fees and costs totaling $4,214.50 for having the Superior Court for the State of California enter the judgment on the arbitration award. The proper procedure under the law to enforce a judgment when the defendant owns real property is to record the abstract of judgment with the county the defendant owns real property so the judgment attaches as a judgment lien to the property. The 74.23% owner did just that and recorded an “Abstract of Judgment” totaling $72,870.57 with San Francisco County. After the cost of arbitration, entering of the arbitration award as a judgment and then recording the abstract of judgment nothing become simple as you will read below….

The 25.765% Cotenant Fought the Judgment and Sale of the Property in State Court

The not paying 25.765% cotenant spent the next two years fighting the 74.23% cotenants attempts to enforce the judgment and avoid paying the share of the monthly mortgage payment. The 74.23% continued to follow the law and procedure to enforce their rights and eventually obtained a California Superior Court order to sell the nonpaying 25.765% cotenant’s share of the property to satisfy the judgment lien. Of course the continued litigation costs money and the 74.23% cotenant’s attorneys added more missed payments by the not paying 25.765% cotenant and requested the Superior Court of California add an additional $35,074.40 in attorneys’ fees and costs to the judgment. The Superior Court of California said no, the arbitration award and the judgment you drafted and provided the Court to enter does not include a provision for post-judgment attorneys’ fees and costs. The paying 74.23% cotenant’s attorneys now have to amend the judgment to include post-judgment attorneys’ fees and costs…… In the meantime the 74.23% cotenant is still enforcing their rights and a sheriff’s sale of the 25.765% cotenant’s interest was scheduled. The 25.765% owner filed a motion to quash the sale and then appealed the Superior Court for the State of California’s denial of the motion to quash or stop the sale. The California Court of Appeals denied the not paying cotenant’s 25.765% appeal.

In the meantime on June 9, 2014, a day before the June 10, 2014, sheriff’s sale the not paying 25.765% cotenant filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code.

The 25.765% Cotenant’s Bankruptcy Case Under Chapter 7 of the Bankruptcy Code

So at some point the not paying 25.765% cotenant consulted a bankruptcy attorney. To keep the story as short as possible I will summarize the events of the Chapter 7 bankruptcy case as best I can without leaving out important information. The not paying 25.765% cotenant filed their own bankruptcy case, then hired one bankruptcy attorney, then substituted in another bankruptcy attorney and then ended up representing themselves in the Chapter 7 bankruptcy case. The Chapter 7 case progressed and eventually the Chapter 7 Trustee filed the notice of no distribution which provides the trustee does not believe there are any assets to be disbursed to creditors. The not paying 25.765% chapter 7 bankruptcy is therefore progressing as a no asset chapter 7 bankruptcy case. At some point the 74.23% cotenant decided to file a motion for relief from stay to continue to enforce their state court law rights to sell the 25.765% interest in the building to satisfy their judgment/arbitration award. An order was entered by the Bankruptcy Court confirming the automatic stay was terminated was entered on June 5, 2015. More attorneys’ fees and costs are added to the 74.23% cotenant’s enforcement of their rights.

After the Chapter 7 bankruptcy case was discharged and closed on October 3, 2016, the 25.765% cotenant/debtor requested the Chapter 7 case be reopened to seek sanctions against the 74.23% cotenant under Section 524 of the Bankruptcy Code for violating the order of discharge they received. The 25.765% cotenant/debtor also filed an adversary proceeding lawsuit, a bankruptcy court lawsuit, against the 74.23% cotenant alleging the abstract of judgment for their arbitration award/judgment from the California Superior State Court is deficient and therefore the 74.23% cotenant has no secured debt or valid lien that passes through the Chapter 7 bankruptcy case. Now this is extremely interesting given valid liens recorded against real property will survive the order of discharge in a Chapter 7 case. The 25.765% cotenant/debtor is trying to discharge all that took place previously by the 74.23% cotenant to enforce their rights. In the bankruptcy adversary proceeding lawsuit the Bankruptcy Court held that the abstract of judgment did not comply with the requirements of California Civil Procedure Section 674(a) and therefore there is no valid judgment lien securing the arbitration award regarding the unpaid mortgage payments or attorneys’ fees and costs. This is a huge development and could have enormous implications to the 74.23% cotenant’s ability to collect for all that took place previously leading up to the filing of the Chapter 7 bankruptcy case. The 74.23% paying cotenant appealed this decision by the Bankruptcy Court and the appeal is still pending.

So after 7 plus years, over $80,000 is attorneys’ fees and costs incurred by the paying 74.23% cotenant the not paying 25.675% cotenant may erase all that took place previously by obtaining the Chapter 7 bankruptcy discharge. It will be interesting to see what takes place moving forward in this case. What is fascinating if the vigorous enforcement of rights by both sides in this case. Arguably both are merely following the law as it exists under the circumstances. What is unfortunate is how much time and money has been spent as a result of a tenant in common agreement going bad for whatever reason.

This is what can happen when you put your lot it with others and you can never completely control their choices. It is something to consider long and hard before purchasing a condominium or entering into a tenant in common agreement.

What Can I Do If I Cannot Afford My Monthly Vehicle Loan Anymore?

By

What can I do if I cannot afford my monthly vehicle loan payment anymore? The problem is you have a vehicle loan payment that is too high and causing you problems each month with your bills. What can you do about it? There are any numbers of options to try and reduce the payment or get rid of the vehicle in the real world. Most of them end with the vehicle loan company sending you a bill once the vehicle is gone. This article focuses on forcing a set of terms, more favorable loan terms, on loan companies by filing for bankruptcy protection.

Depending upon the circumstances bankruptcy can reduce the principal amount owed on a loan and reduce the loan percentage rate thereby reducing your vehicle loan payment amount each month. The entire point of filing for bankruptcy protection is to eliminate, reorganize and reduce debts. Here we are talking about redeeming a vehicle for its fair market value in a Chapter 7 bankruptcy or cramming down on a vehicle loan in a reorganization case under Chapter 13, 9, or 12 by filing a motion to value the collateral of the secured loan.

So What Are The Savings To You?

The simplest answer is the savings will be the difference between what your vehicles is worth and what is owed on the vehicle loan, plus any reduction in the loan percentage rate. The larger the gap between the value and loan balance the larger the savings. If you vehicle is only worth $10,000 and the balance on your loan is $18,000 filing bankruptcy can reduce the amount you have to pay back to what your vehicle is worth ($10,000), not what is owed on the vehicle loan. So in our example the difference or savings is potentially $8,000. See below for issues that could make the savings less though.

Redeeming A Vehicle For Its Retail Value or Fair Market Value In Chapter 7 Bankruptcy

In a Chapter 7 the result is substantially the same as in a Chapter 13 reorganization case, but the law is different in reducing the vehicle loan. In Chapter 7 liquidation cases vehicle loans are reduced by redeeming the vehicle for its fair market value with new financing. A new loan is obtained for the retail or fair market value of the vehicle, as in our example $10,000, and the old loan company is forced to take the $10,000 in satisfaction of the original $18,000 vehicle loan. This is a 722 redemption. A motion has to be filed with the court and depending upon the jurisdiction a hearing may have to be held. In the Northern District of California we can notice motions on scream or die notice and seek a default if no opposition or request for hearing is filed with the court. The motion should cost anywhere from $500 – $1,400 depending upon your bankruptcy attorneys. The catch here is usually the new financing, new loan to pay off old loan, has a high percentage rate and there are process and origination fees usually. I have to say I am not a fan of redeeming vehicles for their fair market value under 722 of the Bankruptcy Code.

Courts have previously articulated its general approach to redemption under § 722 in the case of In re Lopez, 224 B.R. 439 (Bankr. C.D. Cal. 1998). Under that approach, the proper date for valuation of property under Bankruptcy Code §722 is the date of the hearing on the redemption motion. In re Lopez, 224 B.R. at 444. But see In re Eagle, 51 B.R. 959, 962 (Bankr. N.D. Ohio 1985) (date of valuation is petition date).

Cramming Down A Vehicle Loan In A Reorganization Case

In a Chapter 13 or some other reorganization case a motion to value the collateral, the vehicle, is filed and the value of the collateral is determined. This is the amount that has to be paid through the chapter 13 plan to the original vehicle loan company. Again, in our example a motion to value the vehicle would be filed valuing the vehicle at $10,000. What many bankruptcy attorneys do not tell you is you have to add in the attorneys’ fees and the chapter 13 trustee fee to truly calculate the savings via a chapter 13 case and chapter 13 plan. In our example I will use attorneys’ fees of $4,000 [$67 of the monthly chapter 13 plan payment] and the chapter 13 trustee gets a percentage of the monthly plan payment. I will use $67 a month for the chapter 13 trustee too, or $4,000 over the life of the chapter 13 plan. Even if the savings is not huge, no matter what, the monthly payment will decrease significantly since the chapter 13 plan will re-amortize the loan in the three to five year chapter 13 plan. For example the original loan in our example has a principal balance owed of $18,000 at 17% interest. The total amount financed is $28,841 and the monthly vehicle loan payment is $447 a month for five years. After filing for chapter 13 bankruptcy and valuing the vehicle/collateral at $10,000 with percentage rate of only 5% the total payoff is reduced to $11,323 and the monthly vehicle loan payment is reduced to $189, a reduction of $258 each month. For many people this reduction allows them to keep the car and pay their other living expenses on time each month without stress.

How To Value The Vehicle Under The Bankruptcy Code?

There is no absolute formula when determining the value of a vehicle. Courts will generally begin with determining the retail value figure based upon the year, make, model and mileage for the vehicle.

As a general principle, absent unusual circumstances, the retail value of a vehicle should be calculated by adjusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors. See In re Coleman, 373 B.R. 907, 912-13 (Bankr. W.D. Mo. 2007); In re Carlson, No. 06-40402, 2006 WL 4811331, at *2 (Bankr. W.D. Wash., Dec. 8, 2006); In re Eddins, 355 B.R. 849, 852 (Bankr. W.D. Okla. 2006).

There are usually competing appraisals provided to the bankruptcy court. One from N.A.D.A. or another from KBB. Or two different valuations from KBB. Regardless the court has to make a determination of what value to start at. After that the bankruptcy court should look at the specific condition of the vehicle as of the date the petition for bankruptcy protection was filed. If the vehicle in excellent (less than 5% of vehicles) good or fair condition. The will then make a reasonable adjustment to the starting point valuation discussed above.

What Evidence Should I Present To Prove Value?

I am of the opinion that more is more and not more is less under these circumstances. A picture does speak a thousand words. Take a picture of each scratch in the pain and each dent. That could result in 30 pictures of every little scratch or dent. So be it. Take pictures of the interior of the vehicle and each and every discoloration or stain on the upholstery. Every crack in windows and even measure what is left on the tire tread. Does the timing belt need to be changed? When was the last oil change? Are the windshield wipers new or in need of replacement? You can sure assume the vehicle loan company will provide value of the vehicle as if everything is perfect on the vehicle. Declarations describing the condition of the vehicle and pictures showing the condition of the vehicle is essential. Then there are the vehicles currently being sold and advertised prices. There is what KBB and N.A.D.A. says about value and then there is the real world. Just because KBB says the retail value is one number does not mean the real world market agrees. Review advertisements for the sale of vehicles similar to your own. Are the retail advertisements higher or lower than what KBB or N.A.D.A. says your vehicle is worth? The bottom line here is to leave nothing out for the Bankruptcy Court to consider in determining the value of your vehicle.

A debtor may also wish to submit photographs of the vehicle and evidence as to the retail values of other like vehicles for sale by retail merchants in the debtor’s geographic area. Evidence of this nature will assist the court in determining whether an adjustment to the guide retail value is warranted.

At the very minimum include the following basic information:

(1) a description of the vehicle, including any options installed and special features;
(2) a description of the condition of the vehicle as of the petition date, including any damage, general deterioration, and past or necessary repairs;
(3) the vehicle’s mileage as of the petition date; and
(4) the age of the vehicle as of the petition date.

Was The Chapter 13 Petition and Plan Filed in Good Faith?

Leave a reply

By

In a Chapter 13 reorganization case there are a number of requirements that a Chapter 13 Plan must meet to be confirmed or approved by the bankruptcy court. Section 1325, Confirmation of Plan, of the Bankruptcy Code provides the requirements that must be met. Section 1325(a)(3) and 1325(a)(7) provide the bankruptcy petition and chapter 13 plan must be proposed in good faith. This issue has been framed as a petition or plan is in bad faith. What you are trying to prove though is lack of “good faith.” Prove that the petition or plan were not filed in good faith. The word bad faith does not appear anywhere. The term “good faith” is not defined by the Bankruptcy Code so case law is all we have to go on.

Good Faith Pursuant to Section 1325 of the Bankruptcy Code

Again, the debtor will argue the petition and plan were filed in good faith. Lack of good faith can be shown by considering: (1) whether the debtor misrepresented facts in his/her petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his/her chapter 13 petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor only intended to defeat state court litigation; and (4) whether egregious behavior is present. See Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999) (internal quotation marks and citations omitted); see also Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1132 (9th Cir. 2013).

Mendez, Appellant v. Harwood, Appellee

In a recent decision by the Ninth Circuit Bankruptcy Appellate Panel the issue of good faith based upon an objection to confirmation filed by judgment creditor Ronald Mendez. According the court records, Mr. Mendez was a former client of the bankruptcy filer Sterling V. Harwood. Mr. Mendez paid Mr. Harwood a total of $18,000. At some point Mr. Mendez was dissatisfied with Mr. Harwood’s services and requested his money back. Mr. Harwood refused and from prison Mr. Mendez sued Mr. Harwood in Santa Clara Superior Court for breach of contract and fraud. Mr. Harwood did not respond to the lawsuit and a default judgment was entered against him for approximately $26,000. After five months Harwood tried to have the default judgment vacated for improper service of the summons and complaint. The Superior Court of California ruled Harwood’s motion to vacate the default judgment was not timely and that personal service of Harwood was proper. The default judgment stood.

Harwood’s Chapter 13 Bankruptcy Cases

Mr. Harwood filed a skeleton Chapter 13 bankruptcy petition to stop garnishment of his wages to satisfy the state court judgment of Mr. Mendez. A skeleton petition describes the filing of the basic documents to start a Chapter 13 bankruptcy case. The rest of the petition must be filed within 14 days or the case will be dismissed. There are almost no successful Chapter 13 reorganizations without the assistance of bankruptcy lawyers. Mr. Harwood’s first case was dismissed.

Harwood’s Second Chapter 13 Bankruptcy Filing

This first case was dismissed for failing to complete the credit counseling course or complete the bankruptcy petition. After retaining a bankruptcy attorney Mr. Harwood filed a second Chapter 13 bankruptcy case. To be fair Mr. Harwood has plenty of reasons to reorganize his debts. In addition to the Mendez judgment for $29,000, Mr. Harwood was behind on this mortgage payments and needs to obtain a loan modification to keep the his home, he is also behind on his property taxes, he has another judgment entered against him in San Mateo Superior Court totaling $5,837.90 owed to another attorney, Donald S. Tasto, Esq. Attorney Tasto unfortunately passed away while Mr. Harwood’s second bankruptcy filing was pending. Mr. Harwood also has $112,219.87 in general unsecured debts. Mr. Harwood listed his income from employment as a professor as $3,336 a month and business income of $25,362 a month in Schedule I (total monthly gross income after deductions is $26,452.84) and monthly expenses of $26,286 in Schedule J. With a gross income of over $26,000 a month there is only $166 to make the Chapter 13 Plan payment. Most of Mr. Harwood’s expenses are business related. Mr. Harwood’s wife does not work or have income.

The first filed Chapter 13 Plan proposed to pay $165 a month for 60 months. The only debt being paid through the Chapter 13 Plan are attorneys’ fees of $7,400 and the trustee fee to administer the plan. No actual creditors received any distribution through the first chapter 13 plan filed. There is authority to support an argument that filing a Chapter 13 Plan that pays nothing to creditors was not filed in good faith. This is a litigated issue though. An argument is how can someone reorganize their debts when they are not paying any of their debts back? What debts are reorganized? A Chapter 13 plan that pays nothing to creditors is more or less a Chapter 7 then, a complete discharge of eligible general unsecured debts. So the argument goes the actual reason a Chapter 13 plan like this is filed must be for some improper purpose or unfair manipulation of the Bankruptcy Code.

The First Amended Chapter 13 Plan proposed to pay $165 for 24 months then $365 for the remaining 36 months of the 60 month plan. Total plan payments would equal approximately $17,100 over the life of the plan. Mr. Harwood’s attorneys also increased their attorney fees to $8,800 or about half of the proposed plan payments. The second filed Chapter 13 Plan also proposed to reject an advertising contract with a radio station, avoid the judgment lien of deceased attorney Donald Tasto, Esq., and provide language about seeking modification of their first mortgage on his primary residence. Mr. Mendez objected to confirmation of this plan arguing it was not filed in good faith.

The Third Amended Chapter 13 Plan filed by Mr. Harwood proposed to reduce the plan payments to $165 for 24 months then $360 for the remaining 36 months. The Second Amended Chapter 13 Plan also included the following special provisions: “By April 30th of each year during the pendency of the case, the debtor shall provide the Trustee with a copy of all Federal income tax returns required to be filed; or, if an extension has been obtained, a copy of the extension and the tax return within ten (10) days of filing the return but no later than ten (10) days after the expiration of the extension date The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of his law office in Vietnam and outlines the average monthly income and expenses for the business. The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of the malpractice case against his spouse’s former bankruptcy attorney.”

Mr. Mendez’s Argument For Lack of Good Faith

Mr. Mendez argues the petition was not filed in good faith given Harwood misrepresented the nature of the debt owed to Mr. Mendez. Harwoods’s Amended Schedule F describes Mr. Mendez’s judgment claim as: “Incurred: 2013 Consideration: Alleged breach of contract Debtor disputes any liability to this individual. A default was taken based on improper service.” Mr. Mendez argues that the Santa Clara Superior Court ruled that service was proper and there is no alleged debt, Mr. Mendez obtained a valid judgment against Mr. Harwood. Whether true of not the description of the nature of a debt is a minor issue in the big scheme of things and does not really change the treatment of Mr. Mendez’s claim under the Bankruptcy Code. Minor discrepancies in the petition will not rise to the level of not having good faith. While the description of the claim owed to Mr. Mendez in Schedule F is arguably not correct, the bankruptcy court found that the description was adequate under the circumstances and the description is not evidence of trying to mislead the court or manipulate the Bankruptcy Code.

Mr. Mendez next argues the first filed case and Chapter 13 Plan were not filed in good faith given it was filed for the stated purpose of avoiding wage garnishment and frustrate the enforcement of the state court judgment of Mr. Mendez. This argument is not a good one absent some additional facts. A very high percentage of bankruptcy cases filed involve some sort of state court lawsuit. Filing bankruptcy to stop a wage garnishment, bank levy or foreclosure of a home is perfectly normal. If the state court case was at the eve of trial or some other additional circumstance this argument could work.

The bankruptcy court agreed and held that Mr. Harwood was well within his rights to file for bankruptcy protection under Chapter 13.

Mr. Mendez next argues that Mr. Harwood is seeking to discharge in Chapter 13 his judgment that would not be discharged in Chapter 7 and therefore Mr. Harwood has unclean hands. This is a tough argument given that Mr. Mendez’s judgment for fraud against Mr. Harwood is arguably not dischargeable in both Chapter 7 and Chapter 13 if proven pursuant to Section 523(a) of the Bankruptcy Code. The exceptions to discharge set forth in §523(a)(2), (4) and (6) of the Bankruptcy Code are not self-executing. See Mohsen v. Wu (In re Mohsen), 2010 WL 6259979 at *6 (9th Cir. BAP Dec. 21, 2010). Rather, § 523(c)(1) provides, with exceptions not applicable here, that a creditor must request and receive a judgment that the debt owed is not dischargeable. To have certain types of debts deemed not discharged pursuant to Sections 523(a)(2),(4) and (6) an adversary lawsuit must be filed and a judgment received. Then the debt can be enforced again under state law.

9th Circuit BAP Agrees With Bankruptcy Court

Mr. Mendez lost the appeal given the Ninth Circuit Bankruptcy Appellate Panel could not find error in the bankruptcy courts overruling of Mr. Mendez’s objection to confirmation of Harwood’s Chapter 13 Plan. Based upon these facts anyway the petition and plan were found to be filed in good faith.