Unfair Loan Modification Practices Rejected By 9th Circuit

bank lies


Promising a loan modification and failing to deliver, after pocketing trial mod payments, isn’t fair, said the 9th Circuit in Oskoui.

And if it isn’t fair, it can be actionable under California’s Unfair Competition Law (B&P 17200). Not to mention constituting a breach of contract.

Thus, there do seem to be some limits on the shenanigans a lender or mortgage servicer can engage in with impunity.

Bravo ‘Niners.

Just the facts

Ms. Oskoui was a 68 year old single registered nurse.  She refinanced her house in 2007 with Washington Mutual, acquired after its collapse by J.P. Morgan Chase.

When she missed a payment in 2008, Chase sent her a letter proposing trial loan modification payments.  If she made the payments, she would be sent a permanent loan modification for signature.

She made the payments and the bank didn’t send the loan mod.  And it didn’t tell her that she was ineligible for a HAMP modification and had been ineligible since the beginning, by reason of the size of the loan balance and the debt to income ratios in the program regs.

Instead, Chase sent another “offer” of a modification, conditioned on further trial payments, which Oskoui made, bringing the total of “trial payments” to nearly $34,000 before she was turned down for a modification and served with a foreclosure sale notice.

Amazingly, Chase sent another solicitation for a modification within days of the scheduled foreclosure sale.

Facts are familiar

What happened to Mahin Oskoui sounds just like the lender behavior Bill Purdy outlined in his expose of mortgage lender practices:  send conflicting instructions, promise the moon, and blame the borrower.

Hundreds of thousands of homeowners have lived through this nightmare, and courts have too often given lenders a pass on their behavior or swallowed the line that the borrower failed in some critical task.

As Bill points out, the servicers make it almost impossible to build a paper trail of what’s happening until it’s too late.

The good news in Oskoui

Good news from the courts for homeowners since the mortgage meltdown has been slow in coming.  But it’s coming.

What buoys me is that the 9th Circuit’s decision is grounded in California’s unfair and deceptive practices act.  Nearly every state has UDAP laws.

Just as encouraging, the appeals court found that the homeowner had a viable cause of action for breach of contract.  And there’s a contract at the heart of every one of this loan modification farces.

To top it off, Ms. Oskoui filed her complaint with the district court pro se.

What’s needed now

attorneys neededHomeowners can’t count on bringing these actions themselves.

Those abused by unfair and deceptive loan modification practices need a corp of attorneys ready to take on these cases.

Ready to enlist?



Shadow Players May Have Support Claims In Bankruptcy

shadow peopleWhat we know so far about domestic support obligations in bankruptcy is that they are non dischargeable and the bankruptcy court has the last word as to what is and is not support.

But we just scratched the surface in looking at support when we considered obligations from one spouse to another.

Debts owed to an extended cast of supporting characters may be “support” as well, non dischargeable and carrying a priority for payment.

Supported party’s professionals

While support to a former spouse may be a monthly obligation, don’t overlook family court orders that one spouse pay a fixed sum to the other party’s lawyer.  If based on need or disparity between the financial capacity of the spouses, that award of the other party’s attorneys fees  may be in the nature of support as well.  Anderson, 300 B.R. 831 (WD NY).

You can expect that attorneys fees incurred to establish, modify, or collect support will themselves be found to be in the nature of support.

Professionals appointed to represent the interests of minor children may have claims that are in the nature of support.  In Chang, the 9th Circuit held that the state court order requiring payment by the debtor to the child’s guardian ad litem was non dischargeable support, despite the fact that the statute on its face speaks of debts owed “to” a spouse or child.  The nature and purpose of the fees here were held to be a debt to the child.  Chang, 163 F.3d 1138 (9th Cir. 1998).

Payments to other third parties

Bankruptcy courts have found that judgments requiring payment by the debtor of obligations to third parties whose claim arose quite outside the divorce proceeding to be support:

Mortgage payments:  debt service on the house the ex spouse lives in may be support.  Maitlen, 658 F.2d 466 (7th Cir. 1981).

Payment of spouse’s debts:  obligation may be support despite label as “property settlement”.  Williams, 703 F.2d 1055 (8th Cir. 1983)

Educational expenses of children: such obligation may be support even if the expenses will be incurred after the offspring reaches the age of majority.  Boyle, 724 F.2d 681 (8th Cir. 19840

Public benefits provided children  State’s claim to recover overpayment in aid to children held to be DSO; Anderson 439 BR 206.  watch also for govermental expenses for children in protective or punitive custody.

Why the determination may not matter

Having spent all this time working out whether a debt is support, and therefore non dischargeable, in many of your cases for a debtor in a no asset  Chapter 7 case, it doesn’t matter.

Enter Section 523(a)(15), making non dischargeable debts

 to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;

So, if the debt is incurred to (or “for the benefit of”  we can add in light of the case law) a spouse or child in the course of a separation or divorce, it isn’t dischargeable, regardless of its characterization.

But, wait! wait!  There’s more:

Section 523(a)(15) isn’t included in the debts not dischargeable in Chapter 13!

So, the issue of whether an obligation is a domestic support obligation is chiefly important in Chapter 13, where it would be dischargeable without necessarily being paid in full, or, in a Chapter 7 asset case, where the non dischargeable support obligation might be paid in full or in part.

With that, we’ll call it quits, and take up more about family law in bankruptcy cases another time.

The Bankruptcy Family Law Series:  ♦ Spouses as source of Conflicts   ♦ Starting with support

Image courtesy of Wikimedia.

Getting Means Test Tax Projections Right

tax calculator-flickr-salfalkoMention tax calculations to a bankruptcy attorney and 7 out of 10 freeze on the spot.

I’m not a tax attorney, they retort.

That’s right, but, if you are a bankruptcy attorney, that doesn’t relieve you  from knowing enough tax to get the means test right.

Not to mention not giving up your client’s tax refund to the Chapter 13 trustee.

Mistakes made simple

It’s so easy to go wrong, when it comes to taxes.

Your petition preparation software has you input the deductions from the debtor’s wages.  By default, those withheld taxes are carried over from the CMI look-back income to the projected future taxes incurred.

Great, no thinking required.

But wait!  Have you verified the connection between the taxes withheld and the actual tax liability?

If not, you’re courting a mistake.

Taxing questions

To figure out whether the withheld taxes are right, or close to right, going forward, you need to ask questions of the documents in your possession and of the client sitting across the table from you.

For the purposes of this exercise, let’s assume that the client tells you that things are essentially unchanged from the situation in the last tax year.

Did client get a refund last year?

A refund indicates that more money is being withheld from the client’s paycheck that he will owe in taxes.  Using the paycheck withholding for projected taxes incurred will overstate the allowable deduction for taxes.

Since we have determined that things are essentially unchanged from the prior year, you need to reduce the tax deduction by 1/12th of the refund received.

If this is a Chapter 13 and your local practice requires the debtor to turn over the tax refund to the trustee, you also need to advise the client to reduce the amount withheld to match the expected tax.  Otherwise, he’ll be living without the amount overwithheld during the year, and handing it to the trustee when the refund arrives.  Not smart.

Because Schedules I and J and the means test are both projections, your  means test income tax number should match the amount withheld for taxes on Schedule I.

Did client owe money last tax year?

If the client wrote a check with his last tax return, or worse yet, owed money and couldn’t write the check, you need to make changes to the tax projections on B-22.

The amount withheld on the pay stubs understates the taxes to be incurred post petition.

Getting a number good for the year as a whole simply requires that you add 1/12th of the amount owing in excess of withholding at the end of the tax year to the “taxes withheld” number from the pay stubs on B-22.

But the problem is a bit stickier.

Suppose it’s July 1 when you’re doing your calculation, and the client is $500 a month underwithheld.  You can add $500/month to his taxes, and going forward, that keeps him from falling any further behind.

But when April comes around, if the client has only added $500/month to withholding for the last half of the year, he’s still facing a $3000 shortfall representing January through June’s underwithholding.

It’s not clear to me whether you can add that amount to the means test deduction, but you certainly want to budget on Schedule J for a “current year income tax catch up” amount.

Otherwise the debtor faces a tax bill for which he has made no provision.

When things change

As we know, not all of our clients live lives without substantial changes.

Another time, we’ll walk through how to approximate the tax numbers when the current year and/or the years to come are not the same as the year represented in the prior year’s income tax return.

More on the means test

Means test and health insurance

Business income and the means test

Escaping the means test altogether

Image courtesy of Flickr and SalFalko. 



The Hazards Of Self Employment In Chapter 7

896429958_6b49a68f2d_zWhy would a Chapter 7 trustee shut down a proprietorship business with no value?

That question comes up again and again from newish bankruptcy lawyers who can’t imagine that a trustee would demand the closing of the debtor’s business.

After all, goes the argument, the debtor needs to make a living and the business has no non-exempt value.

The trustee’s  insistance on closing the business is more understandable when you hear this nightmare.

The postman, the pit bull and the priority claim

Our Chapter 11 debtor had a rental property leased to a tenant with a pair of large dogs.  During the pendency of the case, the dogs bit the postman.

The postman sued the debtor in possession along with the tenant on the grounds that the owner was liable for injury incurred on the property.

Assuming a verdict in favor of the postman, not only is the bankruptcy estate liable, but the claim is a cost of administration, payable ahead of the prepetition creditors.

Not a good state of affairs for the debtor in possession who is supposed to be operating as a fiduciary for his creditors.

Granted, I don’t know if the estate was adequately insured nor how liability was allocated among the defendants in the dog bite case.

I do know, from representing a creditor in the case upon conversion to Chapter 7, that there was far too little money in the estate to make a dent in the claims of prepetition creditors, even before an administrative tort claim.

Proprietorships in Chapter 7

Apply the lessons of that premises liability case to your typical, self employed debtor.

Let’s assume the debtor is a hairdresser whose only business assets is a market rate lease on a beauty shop, and her tools of the trade.

Consider the liability of the estate should the trustee permit continued operation of the shop.  A customer trips over the debtor’s pet Chihuahua, who accompanies the debtor to work each day, and cracks her head in the fall.

Or, the customer suffers an adverse reaction to hair products.

One can well imagine that the bankruptcy trustee, the nominal owner of the business and its assets upon filing of the Chapter 7, will be named as a defendant in the resulting suit.

And if the suit is successful, the judgment becomes an expense of administration, with priority equal to the trustee’s commission, and ahead of the prepetition creditors.

No Chapter 7 trustee wants to have to explain that state of affairs to his boss or to the creditors.

Incorporate or file Chapter 13

My rule in situations where the prospective debtor has a proprietorship that she wants to continue to operate is simple:

Either incorporate the business in advance of filing Chapter 7 or file Chapter 13.

In Chapter 13, the continued operation of the debtor’s business is expressly authorized.  The debtor can continue to make a living and get a discharge of debts at plan completion.

 Image courtesy Flickr and Darwin Bell

When Chapter 13 Debtors Run Amok

8632883494_62b7ddd71f_zWe’ve had a string of them….

[Hint: in a small practice, a “string” means “three. ” ]

But three clients in the past month with confirmed Chapter 13 plans have contracted to sell their homes without mentioning it to us, their attorneys.

The degree of chaos varied:  inadequate time to get approval of the sale from the trustee within the contractual closing date;  mortgage stripping issues when the plan is paid off early; and taxing authorities who decided to claim the post petition appreciation.

But the bigger problem is clear:  operating successfully in Chapter 13 requires debtors to absorb a bunch of information about how bankruptcy works.

  • What can they, and can’t they, do without prior consent?
  • What does the vesting option mean in the real world?
  • What are their disclosure obligations?

When is the best time to learn?

When we first meet prospective debtors, we’re dealing with people experiencing stress, shame, and overload.

Clients are overwhelmed with the information they must process on bankruptcy choices, procedure, and consequences.

When the case is confirmed, and all the client has to do (they think) is make the plan payments, they relax and tune out.

Yet we find clients borrowing money without the trustee’s consent; signing car contracts without considering their Chapter 13 plan; and selling stock to make ends meet.

If the only issue is covering our behinds, as professionals, we can write all the do’s and don’ts down, hand the client the tome, and get a receipt for its delivery.

That solves my problem, but isn’t likely to assure that the client reads, absorbs and recalls the admonitions when an issue arises a couple of years down the road.  The client who screws up is unlikely to be comforted by the fact I clearly told him what the rules were.

And the client who is injured by transgressing is likely to be resentful, at best, and vocal at worst, about the quality of the representation that he got.

Let’s trade fixes

What I learned from this string of fiascoes is that I need to deliver the “living in Chapter 13” commandments, in writing, after confirmation of the plan.  That doesn’t assure they get read or followed, but it ups the odds.

I can see a web page on the firm’s site, reciting the rules.

Maybe an instruction in our Chapter 13 representation agreement should reinforce the “ask first” directive.

How do you deliver this kind of information to clients?  What works better than others?

I’ve shared my train wrecks- it’s your turn to share solutions.

Image courtesy of Flickr and Shoji.k

Proofs of Claim, Res Judicata, And A Good Night’s Sleep

bankruptcy worries

Trouble shared is trouble halved.

Brainy Quotes attributes that bit of wisdom to writer Dorothy Sayers.  (Also to Lee Iacocca; take your pick).

One of the things that keeps me troubled at night is the preclusive effect of a filed proof of claim.

So, I’ll share my worries, and you can worry too.

Filed claims deemed allowed

Bankruptcy Code 502(a) is the source of the trouble:

(a)A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.

Nothing obviously troubling there until you read and consider the case of Siegel.  This 9th Circuit case is nearly 20 years old and the issue is remarkably fresh: a dispute with a mortgage lender.

Siegel and a partner borrowed money to buy a couple of apartment buildings.  They subsequently defaulted and Siegel filed Chapter 7. Freddie Mac, who then held the note, filed a proof of claim in the no-asset Chapter 7.  Not surprisingly, no one objected to the filed claim.

The absence of an objection wasn’t significant until Siegel returned to the fray, post discharge, and sued Freddie Mac in state court alleging that Freddie Mac violated its duties under the note.  Freddie Mac responded with a motion for summary judgment, contending that the issue was res judicata because of the unchallenged proof of claim in the no asset Chapter 7.

And the Court of Appeals agreed.

…allowance or disallowance of a claim in bankruptcy is binding and conclusive on all parties or their privies, and being in the nature of a final judgment, furnishes a basis for a plea of res judicata. 143 F.3d 525, 529.

What bankruptcy lawyers know

In the real world, bankruptcy lawyers know that there is no reason for anyone to review or assess claims filed in a no asset bankruptcy case.  While the 341 meeting notice may suggest that creditors not file claims where no dividend is expected, if a claim is presented to the clerk’s office, it will be filed.

The opportunities for mischief abound.  Sneaky creditors can establish their claims for all time by filing a proof of claim that no one will read.

And I can just hear the colloquy with bench should I object to a claim in a no asset case.  “What’s your point, Ms. Moran?”

Just what has been adjudicated

That is the heart of what worries me about Siegel and similar cases:  just what has been adjudicated?

 [A]”claim could have been asserted at the time of the proceeding confirming sale [in bankruptcy] . . . this opportunity is sufficient to satisfy [the] requirements of the doctrine of res judicata.”

That’s pretty broad and could effectively bar any challenge to any legal issues existing as of the filing.  The lender here got a pass on all of its prepetition actions by virtue of filing a claim in a no asset case.

Siegel went on to allow Freddie Mac its attorney’s fees in the post bankruptcy litigation under the provisions of the pre petition contract between the parties or their predecessors.  So, the contract lived on and presumably the duties of the parties to the contract to each other.

No presumption of validity for post petition lender claims

By contrast to § 502, Bankruptcy Rule 3002.1 explicitly denies the presumption to lender claims arising post petition.  Rule 3002.1(d) and (g).

Remember that Rule 3002.1 applies only in Chapter 13 and only to debts secured by the debtor’s principal residence.

Worried yet?

In the absence of contrary circuit authority, the charge to debtor’s lawyers seems clear and enormous:  permitting the allowance of a filed proof of claim in a bankruptcy case waives all challenges to the claim that then exist.

Does this preclude a challenge to mortgage accounting? For just this servicer? or for all prior servicers?

Does this require a discrete disclosure to the client of the issue and a waiver of any duty on the part of debtor’s counsel to examine the claim and the history behind it?  Can you ethically bow out of such review?  Does your representation agreement bind you to do so?  For what price?

Sweet dreams…..



Bankruptcy as Means to Keep the House


Homeowners  resort to finally seeing a bankruptcy lawyer as the road to keeping a house that’s in foreclosure.

They are often not sure just how bankruptcy will accomplish this, but they are resolute that keeping the house is the centerpiece of their bankruptcy.

A capable lawyer can tell the client how that might be done through bankruptcy;  a standout bankruptcy lawyer challenges the premise altogether.

Often these days, the fixation on keeping the house is irrational and uneconomic.

Own vs. rent

I start by walking the client through the analysis of the mortgage payment and property taxes compared to the cost of renting.

The difference between the two is the investment aspect of home ownership:  you are paying more than just the price of housing in the expectation of owning something with value.

Not to be overlooked is ownership as a hedge against inflation in the cost of housing.

Is there equity?

Then, we look at the difference between the current value of the house and the total mortgage debt.

Don’t forget that the mortgage debt includes the arrearages.  Too often, asked what he owes on the house, the client will tell you what the principal balance on the loan is, not what the payoff totals.

The further underwater the house is, presumably the longer the client will have to pay that “investment premium” before his investment is worth even what is owed.

Funding old age

Finally, I ask the client about what he has saved for retirement.  The smaller the savings and the older the client, the stronger the case that the “investment premium” in the current mortgage payment is better spent in diversified investment in something other than real estate.

The challenge of being a consumer bankruptcy lawyer is that this analysis may be strikingly different for each client and doesn’t always lead to the same conclusion.

But it is a conversation you need to have with the client.