Illinois Bankruptcy Lawyer Blog

The SEC filed a complaint. The court appointed a receiver to handle defendants' assets for distribution among victims of the $31 million fraud. Assets included oil and gas leases. SonCo filed a claim. The parties came to terms; the court entered an agreed order that required SonCo to pay $580,000 for assignment of the leases. The wells were unproductive, because of freeze orders entered to prevent dissipation of assets; the lease operator, ALCO, had posted a $250,000 bond with the Texas Railroad Commission. The bond was, in part, from defrauded investors. SonCo was ordered to replace ALCO as operator and to obtain a bond. More than a year later, SonCo had not posted the bond or obtained Commission authorization to operate the wells, but had paid for the assignment. The judge held SonCo in contempt and ordered it to return the leases, allowing the receiver to keep $600,000 that SonCo had paid. SonCo returned the leases. The Seventh Circuit affirmed that SonCo willfully violated the order, but vacated the sanction. The judge on remand may: reimpose the sanction, upon demonstrating that it is a compensatory remedy for civil contempt; impose a different, or no sanction; or proceed under rules governing criminal contempt.

Download the Opinion in .pdf format.

The economy continues to gasp for air. You eye the want ads nervously. Are you one paycheck away from selling the family silver?

You bet! Cruise over to Inforuptcy.com to check out how a lifetime's worth of heirlooms can be bought and sold by bankruptcy trustees, investors, and guys with too much time on their hands.

And you thought there were no new ideas...

The New York Times reports that the debate over whether to reduce the principle on mortgages is raging again in Washington. On one side of the debate is the White House and Democrats in Congress pushing for principle reduction. On the other side is the Director of the Federal Housing Finance Agency who has traditionally been opposed to reducing principle. One of the main issues is which course of action is cheaper for the taxpayers?

Another issue is what about properties with multiple lines or mortgages? If the principle were reduced on the first mortgage, that would be a huge benefit to the bank holding the second mortgage. If the principle were reduced on the first mortgage should the second automatically be wiped out? For those of you reading this blog, you already know that a second mortgage can be stripped in a Chapter 13 in some circumstances. However that process is both painful for the Debtor and takes 5 years for the 2nd to truly be stripped - and does nothing about the principle on the first mortgage.

Both sides agree that the housing market is a drag on the economic recovery. The question remains, what to do about it?

In re Leventhal - 11-A-1467 (ND IL ED, 2012)

On its face this case is an adversary where the Debtor is moving to disqualify the Plaintiff's attorney because the Plaintiff's attorney may be called as a witness in the case. The court cites the "Advocate Witness" rule which comes from the Model Rules of Professional Responsibility 3.7. There are 2 elements to the analysis to determine whether to disqualify an attorney-witness. The first is to determine the likelihood of the attorney being a necessary witness. The second is if the attorney is a necessary witness would the disqualification be a substantial hardship on the client.
The analysis of the first prong - the likelihood of the attorney acting as a witness, is where the case was interesting. The Plaintiff filed the adversary on the basis that he did not receive notice of the Debtor's bankruptcy until after the discharge so he was unable to charge the dischargeability of the debt owed to him under 523(a). The Debtor had only listed the Plaintiff's name and city on the bankruptcy petition, so notice was not mailed to him.

The Debtor attempted to impute knowledge to the Plaintiff based on two theories: (1) the creditors meeting was continued five times and this information was publically available on the bankruptcy docket (presumably CM/ECF). The court noted that all creditors are not routinely given notice of all events on the bankruptcy docket and that the Bankruptcy Noticing Center (BNC) does not send out notice of continued creditor meetings. In fact if the BNC does send out notice, there will be a separate docket entry for the BNC certificate of service. Since there was no record of notice sent out, simply being listed on the docket was not enough to impute knowledge of the bankruptcy to the plaintiff.

The second theory was given more weight by the court (although the issue was not decided by the court, this opinion was just a ruling on the motion to disqualify counsel). This theory was that the Debtor had emailed Plaintiff's attorney 2 weeks post-petition that had filed a personal bk. There is a presumption that a properly addressed item mailed to someone was received by that person. Laouini v. CLM Freight, 586 F.3d 473, 476-7 (7th Cir. 2009). That presumption has been extended to include email. American Boat v. Unknown Sunken Barge, 418 F.3d 910, 914 (8th Cir. 2005). Therefore if the Debtor were to testify that he emailed the Plaintiff's attorney, there would be a presumption that the Plaintiff's attorney received it. That knowledge can then be imputed to the Plaintiff. Based on this logic, the court concluded that the Plaintiff attorney would likely be a necessary witness.

This is the interesting part of the case - is a docket entry in CM/ECF sufficient for notice and is an email to a creditor's attorney sufficient for notice of the bankruptcy? From this case, clearly a docket entry alone in not sufficient; however, if there is a corresponding BNC certificate of service entry it could be. And while the court did not rule of the sufficiency of email notice from the debtor to a creditor, the court did cite enough case law to indicate that it could be.

In re Pigg - 10-10168 (Middle District of TN)

It is common knowledge to readers of this blog that post-filing HOA fees are not discharged in a chapter 7 due to the BAPCPA changes. A little history lesson for all you new practitioners out there. Before BAPCPA came along, HOA fees could not be charged to Debtors in a Chapter 7 who surrendered their property and moved out. Unfortunately, this changed with BAPCPA, and now debtors are on the hook for post-petition HOA fees until the lender finally gets around to foreclosing.

This is the problem - Debtors are at the mercy of lenders who are in no hurry to foreclose. The whole concept of the fresh start for the honest debtor is jeopardized. The HOA fees just keep adding up. It used to be that the HOA wouldn't go after the owners, they would just wait for the property to sell and then force the new buyer to pony up. Flash forward to today - and properties aren't selling. HOAs are going after the owner of record - the Debtor.

One judge in Tennessee came up with an interesting solution. He forced the Trustee to sell the property, even though there was not any equity in it for the estate. In this case, the debtor owned property in a section of Nashville that was completed flooded. The property was uninhabitable, the HOA kept charging fees, and the bank would not foreclose. Unfortunately, under 523(a)(16), the post-petition HOA fees are not discharged, they just kept racking up. Also, since the property was uninhabitable (due to the flooding), the Bank wasn't in any hurry to foreclose.

An adversary action was filed by the Debtor seeking to force the lender to accept a deed in lieu or begin foreclosure proceedings. The court did not grant either of these items, but fashioned its own remedy. Under 105(a) the bankruptcy court is vested with equitable powers. The court ordered the Trustee to sell the property and to distribute the proceeds under 363(f). Under 363(f) one of 5 factors must be satisfied in order for the sale to proceed under 363(f). One of the factors is consent by the party. Here the judge determined that "the bank and the HOA consented to the sale by their inaction." The Trustee sold the property to a 3rd party and distributed the proceeds to: administrative expenses, the HOA fees and then the Bank.

Finally the Debtor got out from under the HOA and received her fresh start.

In re O'Neill - 10-06832
Adv. 10-01084

In this case and adversary was brought to object to the discharge of certain debts. There were 2 counts in this case. The first count was brought under 11 USC 727(a) 4 and 5. The second count was brought under 11 USC 523(a)(2)(A).

Under 727(a)(4) the plaintiff has the burden of establishing 5 elements:
1. The debtor made a statement under oath
2. The statement was material
3. The statement was false
4. The Debtor knew the statement was false
5. The statement was made with intent to deceive. (In re Hansen, 325 BR 746, 757).

Under 727(a)(5), if the plaintiff demonstrates all 5 elements then the burden shifts to the Debtor to satisfactorily explain the loss or deficiency of assets to meet the Debtor's liabilities.

Here there was an issue of certain ownership interests in a company that were not disclosed and of another interest in property that had lost prior to the filing of the bankruptcy. In the initial petitions and schedules this information was not included; however, the petition and schedules were amended to include the omitted information. Importantly, this information was given to the bankruptcy attorney but included in the initial petition; however, the amendments were filed in a relatively timely manner. The plaintiff in the adversary attempted to use this omission to fulfill elements 1, 2 and 4. However, the court was not persuaded by this argument. Additionally the court noted that in order for the omission to be material it would have had to interfere with the administration of the estate. Here the omission were timely corrected and they had no value to the estate (both omissions had negative values). The court ruled for the Debtors on Count 1.

Under 523(a)(2) a debt is not discharged if it is for a monetary debt obtained by false pretenses or representations or actual fraud. Here the plaintiff asserted the loan they gave to the Debtor was obtained via false pretenses or actual fraud. The Plaintiff must demonstrate 3 elements:
1. The defendant obtained the funds through representation they knew to be false or with reckless disregard for the truth
2. The defendant intended to deceive the plaintiff
3. The plaintiff must have relied on the misrepresentations.

Here there was an issue with all three elements. The plaintiff never asked for any specific representations, the debtors made very few representations and those representations that were made did not show reliance or intent to deceive. The court also ruled for the Debtors on Count 2.

April is upon us. Time for spring flowers, warmer weather, and taxes. Yeah taxes, no one likes taxes, but you have to file them. For those of you reading this blog, you already know that if you haven't filed your taxes, you can file for bankruptcy. So just get them filed and move on.

In the off chance that you do get audited this graphic can help dispel some of the common misconceptions:

This early 2012 case delves into the question of when debt based on fraudulent behavior of the Debtor dischargeable. In this case there was a real estate developer and a custom home buyer. The developer is the Debtor in this case. Unbeknownst to the buyer, the developer was engaged in a lengthy court battle of the right to build houses on a certain parcel of land. The developer took the buyer's down payment and then later convinced the buyer to make another down payment in order to 'obtain better financing'. What the developer did not disclose to the buyer is that there was no possible way the house could be built in the buyer's timeframe because of the court battle. This was fraudulent concealment and in violation of 523(a)(2)(A) of the bankruptcy code.

However there were also multiple settlement agreements in this case. The first settlement agreement was reached between the parties as a result of the original fraud. The developer did not pay the settlement amount, so the matter went to litigation and a new settlement agreement was reached. This is where it gets interesting. The 2nd settlement agreement is not based on fraudulent actions and would therefore be dischargeable based on 7th circuit precedent (See In re West, 22F.3d 775 (1994)). What saved the buyer in this case was that the 2nd settlement agreement contained language that the original obligation was not released until the full settlement amount was paid. Since that amount was not paid, there was no release of the original agreement, and therefore the debt was not dischargeable.

Original case available here.

Credit Report Information Graphic

In U.S. v. Robertson the 7th Circuit weighed in on the factors that should be taken into account when sentencing the perpetrators of non-criminal fraud - in this case, bankruptcy and mortgage fraud. Here the Defendants, a husband and wife, appeared to have reformed themselves and were contributing to their community when the matter came to a head.

Facts: The defendants bought up residential properties then sold them to straw men at inflated prices. The inflated bank loans were justified using false information about the buyers' finances, down payment resources, and intentions about remaining in the properties. Before it collapsed, the scheme had resulted in 37 transactions that cost the lenders involved more than $700,000.

Once their scheme collapsed the Defendants declared bankruptcy. They were questioned in the process about their business, but not immediately prosecuted by the U.S. Attorney. Once they received their discharge, the Debtors settled down, got regular jobs, and raised 3 children. The Court even determined that they had become, essentially, upstanding citizens "fully engaged" in their community.

Legal Theory: One day before the statute of limitations would have expired, the U.S. Attorney charged the couple with a single count of wire fraud under 18 U.S.C. 1343 and 2 counts of bank fraud under 18 U.S.C. 1344. The Defendants quickly plead guilty. Using prevailing sentencing guidelines the wife was sentences to 41 and the husband to 63 months in prison; and both were ordered to pay more than $700,000 in restitution.

Opinion: On appeal, the Seventh Circuit vacated the sentences handed out by the District Court and remanded the case with the admonition that the sentencing Judge take the unusually strong evidence of the couple's self-motivated rehabilitation into account.

The Upshot: Hard not to read too much into this case. At first blush it looks like the 7th Circuit was trying to balance the unilateral and inflexible nature of the Sentencing Guidelines imposed on the courts by Congress in response to the mortgage debacle. Read more narrowly however, the truly self-motivated rehabilitation of the Defendant/Debtors seemed to be the key. In other words, this was an exception, not a crack in the rules.

Recent changes made to the Home Affordable Refinancing Program (HARP) by the O'Bama Administration will allow some, but by no means all, homeowners to refinance to a lower interest rate and save on their monthly payments - even if they would not ordinarily qualify for refinancing from their lender.

Those changes to HARP cut fees for borrowers who want to refinance into short-term loans and pay off their loans faster. The changes also permit borrowers who owe more than 125% of their home's value - i.e. that are underwater - from accessing the program.

To qualify borrowers must have a mortgage that

1. Is now owned or guaranteed by Fannie Mae or Freddie Mac
2. Was sold to one of the agencies on or before May 31, 2009
3. Is now worth between 80% and 125% of your home's value
4. Has never been refinanced under the HAR program before
   

Step #1: Find out if your mortgage is owned by Fannie Mae or Freddie Mac

Step #2: Contact a HARP-approved lender to discuss your refinance options

Have any feedback? E-mail me to share your thoughts or leave a reply to this post.

The old saying is that you can't escape death and taxes. This is especially true in terms of bankruptcy. In this case the Debtor's mother passed away and the Debtor failed to disclose his inheritance to the Trustee. During the Debtor's 341 meeting, the typical question of whether or not the Debtor expected any inheritances came up. The Debtor told the Trustee that his mother was very ill. The Trustee told him that he was under an obligation to report any inheritance within the next 6 months. The mother dies 2 days after the 341 meeting. The Debtor disclaimed some of the inheritance, took some of it, and received 'gifts' from his brother. During the subsequent investigation, it was found that the Debtor also failed to list a few bank accounts in addition to failing to notify the Trustee of the inheritance. Not surprisingly, the Debtor and his brother were charged with and found guilty of bankruptcy fraud.

According to this press release from the American Bankruptcy Institute, total consumer bankruptcy filings in the first 9 months of 2011 totaled 1,044,722: a 10% decrease from the 1,165,172 filings recorded during the same period a year ago. The statistic is based on data from the National Bankruptcy Research Center (NBKRC).

September consumer bankruptcies decreased 17% from September 2010. Data showed that consumer filings in September reached 108,517 - down from the 130,329 recorded in September 2010.

"The trend of declining filings has been consistent with consumers continuing to reign in their spending, household debt, and an overall pull back in consumer credit," said ABI Executive Director Samuel J. Gerdano. "Total consumer filings for 2011 will be less than 2010."

The September 2011 filings also represented a 4 percent decrease from the August 2011 consumer bankruptcy total of 113,432 filings, a slight change that could be the result of one less day in the month. The percentage of chapter 13 filings for September was 30 percent, a one percent increase from August.

I harbor no love for The New York Times, which I consider to be arrogant, liberal, and self-satisfied. But I have to give credit where credit is due. The Old Grey lady has managed to capture the dramatic story of America's post-war economic rise and fall in these chilling graphics.

 I would have thought the Wall Street Journal or The Economist might have done it instead, but there you go. 

And the numbers tell us we've gotten ourselves into a real mess. Although naturally the Baby Boomers - America's spoiled children - rode the fat part of the curve in the 50's and 60's,  leaving ensuing generations to foot the bill. How typical.

Welcome to the 21st century's Lost Generation.

Follow this link to see the interactive Job Loss Heat Map pictured below that chronicles the state of U.S. employment from 2004 to the Present. Prepare to be disappointed and maybe a bit shocked. I know I was.