Schuh
& Goldberg, LLP has represented the interests of bank creditors
and other financial institutions in retail bankruptcy cases for
decades. We know what we're talking about. We can tailor our services
to fit your needs and can act as an outsource for a continuing relationship
under which we can:
Ch. 7 - Attend 341 meeting and report information
Ch. 7 - Attend 341 meeting / obtain abandonment and agreed relief
from stay order
Ch. 7 - Attend 341 meeting / obtain abandonment and reaffirmation
agreement
Ch. 7 - Relief from stay and Abandonment
Ch. 13 - Relief from stay proceedings after confirmation
Ch. 13 - Objections to Confirmation
Ch. 13 - Plan review and analysis / proof of claims
We are also available to handle and consult with
financial institutions on special issue situations.
John A. Schuh has lectured frequently on these commonly
encountered issues:
The Ch. 13 serial filer; repeat filer abuses
11 U.S.C. sec. 109(g)(1) is an interesting section
that was designed to inhibit the serial bankruptcy filer. A debtor
is not qualified to be a debtor if, at any time within the preceding
180 days, the debtor was in bankruptcy and had that earlier bankruptcy
case "dismissed by the court for willful failure of
the debtor to abide by orders of the court, or to appear before
the court in proper prosecution of the case."
The way that the issue develops is that a debtor
files a Ch. 13, usually to hold on to some secured property. He
obtains plan confirmation and then doesn't pay the plan payments
to the Trustee. The Trustee will eventually dismiss the Ch. 13 case
but 6 to 9 months can easily go by during which the debtor will
be using the creditor's collateral without any adequate protection
payments going to the creditor. After the 1st case is dismissed
the creditor starts to close in on the collateral to which the debtor
responds with the 2nd Ch. 13 filing.
The creditor can challenge the debtor's 2nd case, usually by a motion
to dismiss. Whether it will be granted or not will frequently depend
on the facts surrounding the dismissal of the first case. The normal
routine is to see the debtor respond to the motion to dismiss indicating
that the dismissal of the first case was not due to a "wilful
failure" to abide by the court's order to make the plan payments,
i.e. the debtor wanted to pay but couldn't pay because of an uninsured
illness, a loss of a job, etc. Whether you prevail on the motion
to dismiss will greatly depend on the philosophy of the judge to
whom you're trying the case.
If you lose a motion to dismiss in a Ch. 13 case prior to confirmation
and are considering an appeal, be very careful and aware of what
is the final and appealable order that you are appealing. It is
probably not the order denying your motion to dismiss. It is more
likely the order confirming the Ch. 13 plan.
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The so-called Chapter 20 - a Debtor Ch. 13 following
a Ch. 7 filing
So called a "Ch. 20" because it factually
involves a Ch. 13 filing immediately after a Ch. 7 discharge; this
is not a sec. 109 issue. The factual patterns will be a Ch. 7 filing
with the Debtor obtaining a discharge. Thereafter, the debtor will
file a Ch. 13 case usually to hold on to some secured property or
to pay some nondischargeable debt over a period of time. Many years
ago the secured creditor would object to the Ch. 13 plan on the
basis that the debtor didn't owe the creditor any money because
the liability on the debt had been discharged in the Ch. 7 bankruptcy
- not any more. The U.S. Supreme Court has determined that a "claim",
i.e. "right to payment" can exist when there is no personal
liability but there is "an obligation enforceable against the
debtor's property." Johnson v. Home State Bank, 501
U.S. 78, 85, 115 L. Ed. 2d 66, 75, 111 S. Ct. 2150, 2155, (1991)
specifically validated a Ch. 20 situation.
Confirmation of the 2nd Ch. 13 case still requires
a finding of "good faith" pursuant to 11 U.S.C. sec. 1325(a)(3)
and there is a heightened scrutiny of the issue in a Ch. 20 situation.
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Debtor demands for the return of property repossessed
prepetition
The issue pertains to a prepetition repossession
of property followed by a bankruptcy filing. Is the creditor required
to return the property to the debtor and under what circumstances?
A. No obligation to return a leased vehicle
If you are dealing with a motor vehicle governed by a "true
lease" you probably do not have to return the vehicle to the
debtor. This is because a true lease is governed by 11 U.S.C. sec.
365 which gives the debtor the right to assume an unexpired lease.
The majority of cases have been holding that if a lease is in default
and there has been a prepetition repossession of the leased vehicle,
the lease has expired or terminated prepetition and cannot be resurrected
in a bankruptcy case.
"A lease that has been terminated pursuant
to a contractual provision or nonbankruptcy law prior to the date
of the petition because of a default is not an unexpired lease."
H.R.Doc. No. 137, 93rd Cong. 1st Sess. 156 (1973)
In re Estep, 173 B.R. 126 (Bkrtcy.N.D.Oh.
1984) - Citing to In re Celeryvale, supra, Judge Krasniewski
determined that Fifth Third Bank's lease is a "true lease"
as opposed to a "security agreement" and then went on
to find that the debtor's rights under the motor vehicle lease had
terminated and expired prior to the debtor's Ch. 13 filing under
circumstances where the vehicle had been repossessed and the debtor
had failed to "redeem" the vehicle prior to the bankruptcy
filing date. The Bank was exonerated from a contempt motion. Prepetition
termination of the lease is jurisdictional in the sense that there
are no debtor rights which are "property of the estate"
to be treated under Ch. 13 plan.
Cases cited in In re Estep - In re Hickory
Point Indus., Inc., 83 B.R. 805 (M.D.Fla. 1988) (debtor could
not assume lease which had been terminated prepetition); In re
Seven Stars Restaurant, Inc., 122 B.R. 213 (Bankr.S.D.N.Y. 1990)
(debtor could not "resurrect" lease which had previously
terminated after debtor's default); In re Comp. III, Inc.,
136 B.R. 636 (Bankr.S.D.N.Y. 1992) (stating "where an executory
contract has been terminated in accordance with its terms prior
to bankruptcy, section 365(e)(1) does not authorize the bankruptcy
court to reach beyond the veil of the petition to reinstate the
contract"); In re Fidelity American Mortgage, 19 B.R.
568 (Bkrtcy.E.D.Pa. 1982) (debtor retained no interest in lease
which had terminated prepetition as a result of debtor's default)
B. Obligation to return the vehicle which the
debtor was purchasing under a contract of sale
1. In Chapter 13
Continued possession of a motor vehicle, legally
repossessed prepetition, violates the automatic stay provision at
sec. 362(a)(3) as an act "to exercise control over property
of the estate". In re Sharon, 234 B.R. 676 (6th Cir.
BAP 1999).
In re Sharon makes it clear that at least in the 6th Circuit the debtor
is not required to obtain any court order requiring the creditor
to turnover the vehicle and contains some scary dicta about whether
or not the prior tender of "adequate protection" to the
creditor is a prerequisite to the creditor's obligation to return
the vehicle.
What constitutes "adequate protection"
under these circumstances?
- Insurance?
- Proof of a valid driver's license?
- Other matters?
There is a split of authority on whether the creditor
is within its rights to require the debtor to first provide adequate
protection as a condition to the return of the vehicle.
Frequently cited cases holding that the creditor
may retain the vehicle until the debtor provides adequate protection:
Matter of Brown, 210 B.R. 878 (Bankr.S.D.Ga
1997)
In re Young, 193 B.R. 620, 629 (Bankr.D.C. 1996)
In re Deiss, 166 B.R. 92, (Bankr.S.D.Tex. 1994)
In re Richardson, 135 B.R. 256, (Bankr.E.D.Tex. 1992)
In re Massey, 210 B.R. 693, 694 (Bankr.D.Md. 1997).
Frequently cited cases that support a finding that
the creditor violates the automatic stay by not immediately returning
the vehicle and thereafter filing a motion for adequate protection.
In re Knaus, 889 F 2d 773 (8th Cir. 1989)
In re Del Mission, 98 F3d 1147 (9th Cir. 1996)
In re Ryan, 183 B.R. 288 (Bankr.M.D.Fla 1995)
Our Cincinnati judges would likely agree that tendering
proof of insurance is required before the creditor must return the
vehicle to the debtor. Judge Clark in Dayton has an older decision,
In re Sutton, 87 B.R. 46, (Bankr.S.D.Ohio 1988) which favors
the decisions that the creditor may retain the vehicle until the
debtor provides proof of insurance. Judge Waldron, on the other
hand, who was the trial judge in In re Sharon, 200 B.R. 181
(Bankr.S.D.Ohio 1996) might well require the vehicle's return without
the prior tender of proof of insurance. ("Creditor must file
motion seeking relief as condition precedent to obtaining adequate
protection", at In re Sharon, 200 B.R. at 182, Headnote
5)
2. In Chapter 7
I know of no cases on the subject of whether a
creditor must return a vehicle repossessed prepetition to a Ch.
7 debtor after a bankruptcy filing. This is a very difficult issue.
The reasoning of In re Sharon could certainly
apply in a Ch. 7 case. 11 U.S.C. sec. 541 which defines "property
of the estate" is equally applicable in Ch. 7 as it is in Ch.
13 as is the sec. 362(a)(3) prohibition against any act "to
exercise control over property of the estate".
I approach the issue cautiously questioning the
legitimacy of the debtor's request for the return of the vehicle.
If the debtor has proposed in the statement of intention to redeem
the property under 11 U.S.C. sec. 722 or to reaffirm the debt under
11 U.S.C. sec. 524, then I might well counsel the client to return
the vehicle although I would likely start immediate negotiations
with debtor's counsel to effectuate those intentions.
If however the debtor states an intention to surrender
the property but is nevertheless demanding the return of the vehicle
so he can have a free ride for 30 to 60 days while we jump through
the hoops of relief from stay and a Trustee's abandonment, this
is not legitimate. Nevertheless with In re Sharon hanging
over the creditor's head, the creditor cannot lightly refuse to
return the vehicle. Use of an expedited hearing is appropriate if
you're concerned that a stay violation will be brought against the
creditor.
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The expedited hearing
At some point in time you may find it necessary
to obtain an expedited hearing before the Bankruptcy Court. While
the necessity for an expedited hearing more frequently arises in
commercial bankruptcy cases, one such example would be a situation
where the creditor is fearful that a contempt of stay action will
be brought against it. If the creditor is unsure about whether it
will be held in contempt for taking a certain action, we recommend
that you get into court on an expedited basis to get a speedy decision
to the controversy so that any damages to the debtor are kept to
a minimum. This also shows respect for the Court and the bankruptcy
process in general. In the Southern District of Ohio, there is a
local bankruptcy rule at LBR 9073-1 which governs how counsel should
approach the Court with a request for an expedited hearing.
It is done through the filing of a motion for an
expedited hearing which contains the following:
- Description of the relief requested
- Reasons for an expedited hearing or expedited
disposition
- Identity of parties
- Statement of the suggested method of notification
of interested parties
- A summary of authority for the relief requested.
Submitted with the motion is a proposed form of
notice and a proposed order setting the expedited hearing.
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The Ch. 13 relief motion - drop dead clauses
The motion for relief from stay in a Ch. 13 case
is essentially the same as in a Ch. 7 case except the basis for
relief are rarely grounded in 11 U.S.C. sec. 362(d)(2) because it
is almost a given that the secured property is necessary for an
effective reorganization, i.e. the debtor needs his house and his
car in order to make a living to fund the plan payments. Therefore
the focus is on "cause, including the lack of adequate protection".
The Ch. 13 relief motion is almost always filed as the result of
a debtor default in payments either to the Ch. 13 Trustee or to
the creditor if payments are being directly disbursed to the creditor.
The Ch. 13 relief motion is almost never granted if taken to hearing
as the debtor will proffer future adequate protection and the Court
will generally accept it, conditioning relief from stay upon future
defaults. The better practice is to be resigned to this, do an agreed
order with a drop dead clause, and give the debtor a little rope
to hang themselves - they'll frequently default in the future.
The agreed order for adequate protection should have the following
elements:
1. Be specific and provide detail as to the exact dollar amounts
of the debtor's default giving rise to the filing of the motion
2. Be specific and provide detail as to exactly what the Debtor's
obligations are to cure the default
3. The Ch. 13 Trustee will frequently require that the source of
money which will be used by the debtor to cure the arrearage be
stated in the order, i.e. debtor working overtime, assistance in
the form of a gift from the debtor's parents, etc.
4. Trigger relief from stay upon the Debtor's default in the terms
of the agreed order. This usually contemplates a notice to the debtor
and the debtor's counsel of a default under the terms of the order
with a short opportunity, 10 days or so, to cure the default.
5. Sometimes the Debtor's counsel will want a "sunset"
provision, i.e. if the Debtor is able to successfully cure the default,
debtor's counsel doesn't want a short relief trigger hanging out
there so they may ask for a sunset provision such as "Provided
that the Debtor honors the terms of this agreed order, this order
shall expire 12 months after the final payment curing the Arrearage
Amount stated herein." If they don't ask, we don't give it
because its a pain to have to file a relief motion twice in the
same case. If we do give it, we make the expiration period as long
as we can after the final payment curing the arrearage so you'll
have the relief trigger as long as possible.
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Late claims / Creditor has missed the bar date to file
A. In Ch. 7
Fed.R.Bank.Pro. 9006(b)(1) provides a court with discretion to
allow a late filing of a POC upon a showing of excusable neglect.
In Pioneer Investment v. Brunswick Associates, 507 U.S. 380, 113
S. Ct. 1489, 123 L Ed 2d 74 the Supreme Court was very kind in allowing
a late claim in a Ch. 11 case. Pioneer is the leading case on what
constitutes "excusable neglect". Prior to Pioneer, a number
of courts interpreted "excusable neglect" as requiring
proof of circumstances beyond the party's control. The Supreme Court
rejected this narrow interpretation, holding that "excusable
neglect" could include attorney inadvertence or negligence,
provided certain mitigating circumstances were present.
Upheaval in an attorney's office has rarely been held to constitute
excusable neglect, although the 6th Circuit BAP recently held that
an attorney's neglect was excusable under circumstances where he
was the sole caregiver to his wife who had been hospitalized with
ovarian cancer. In re Schultz, 254 B.R. 149 (B.A.P. 6th Cir. 2000)
B. In Ch. 13
1. Late unsecured claims are time barred
Unfortunately for creditors there is generally no remedy for a
late unsecured claim in a Ch. 13 case. In re Chavis, 47 F.3d 818
(6th Cir. 1995). Fed.R.Bank.Pro. 3002(a) states that "an unsecured
creditor ... must file a proof of claim" and the time for filing
is fixed by Rule 3002(c). The Ch. 13 Trustee cannot disburse on
a claim unless it is allowed and 11 U.S.C. sec. 502(b)(9) provides
for the disallowance of a late filed Ch. 13 claim.
The only possible exception to permitting a late filed unsecured
claim in Ch. 13 would be grounded in constitutional due process
arguments where the creditor had no actual or formal notice of the
bankruptcy in time to permit a timely POC. IRS v. Hildebrand, Trustee,
254 B.R. 287 (Bankr. M.D. Tenn 2000). U.S. v. Cardinal Mine Supply,
Inc., 916 F 2d 1087 (6th Cir. 1990)
2. Late secured claims in Ch. 13
Some court cases and Ch. 13 Trustees take the position that there
is no such thing as a late secured claim, i.e. a secured claim can
be filed at any time. This is based upon reading Fed.R.Bank.Pro.
3002(a) "an unsecured creditor ... must file a proof of claim"
with 11 U.S.C. sec. 501(a) "a creditor ... may file a proof
of claim ..." The implication thus arising is that a secured
creditor is not required to file a proof of claim. In the Southern
District of Ohio at Dayton and Cincinnati, the creditor may simply
file a late proof of claim for the secured portion of the claim
only and the Ch. 13 Trustees will pay it.
As a practical matter in almost all circumstances the Ch. 13 debtor
wants to keep his secured property, usually a car, and therefore
will be a party to an agreed order allowing the late filing of a
claim for the secured portion only if the Ch. 13 Trustee has not
established a policy of disallowing a late secured claim.
3. The informal proof of claim subsequently amended
One method of getting around the bar date for late proofs of claims
(if you have the facts to support it) is to take the position that
some document filed by the creditor in the bankruptcy case prior
to the bar date constituted an informal proof of claim which the
creditor can amend into a formal proof of claim with a relation
back in time. See In re Washington, 158 Bankr. 722 (Bkrtcy. S.D.
Ohio 1993) (Judge Perlman: objection to confirmation which was later
withdrawn constituted an informal proof of claim)
The Tenth Circuit in In re Reliance Equities, Inc., 966 F.2d 1338
(10th Cir. 1992) developed a five-prong test to identify an informal
proof of claim and to permit its amendment:
"1. The proof of claim must be in writing;
2. The writing must contain a demand by the creditor on the debtor's
estate;
3. The writing must express an intent to hold the debtor liable
on the debt;
4. The proof of claim must be filed with the bankruptcy court; and
5. Based on the facts of the case, it would be equitable to allow
the amendment."
If a creditor holds two claims but timely filed a POC for only
one, the creditor cannot "amend" his timely filed claim
to include the untimely second claim. United States v. International
Horizons, Inc., 751 F.2d 1213 (11th Cir. 1985); In re Commonwealth
Corp., 617 F.2d 415 (5th Cir. 1980)
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Compelling the Debtor to perform statutory duties
11 U.S.C. sec. 521(2)(a) requires the Debtor to file the statement
of intention with respect to secured property within 30 days of
the order for relief and then to perform those intentions within
45 days thereafter.
Secured creditors take the position that pursuant to 11 U.S.C.
sec. 521(2) there are only 3 options available to a Ch. 7 Debtor
with respect to secured property:
- Surrender
- Retain by Redemption under sec. 722 (if applicable)
- Retain by Reaffirmation under sec. 524
4 Circuits hold that a debtor wishing to retain collateral must
either redeem the property or reaffirm the debt: In re Burr, 160
F. 3d 842 (1st Cir. 1998), In re Johnson, 89 F.3d 249 (5th Cir.
1996), In re Edwards, 901 F.2d 1383 (7th Cir. 1990), and In re Taylor,
3 F.3d 1512 (11th Cir. 1993).
4 other Circuits hold the exact opposite, i.e. that there is a
4th option to retain possession of secured collateral by maintaining
payments without a reaffirmation agreement: In re: Parker, 139 F
3d 668 (9th Cir.), cert. denied, 119 S. Ct. 592 (1998); In re Boodrow,
126 F.3rd 43 (2d Cir. 1997), cert. denied, 118 S. Ct. 1055 (1998),
In re Belanger, 962 F.2d 345 (4th Cir. 1992), In re Lowry Federal
Credit Union, 882 F.2d 1543 (10th Cir. 1989)
We have won this case before S.D. of Ohio Bankruptcy Judge Aug
who has an unreported decision, In re: Lock which supports the creditor
position that the Debtor who wishes to retain secured property must
either reaffirm or redeem (if the collateral is personal property).
The 6th Circuit case of In re Bell, 700 F. 2d 1053 (1983) supports
this conclusion in dicta.
We have filed a fair amount of Motions for Sanctions against Debtors
as a tool to compel the debtor's compliance with the obligations
of sec. 521 to perform the stated intention.
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Value of secured property / allowance of the secured claim
11 U.S.C. sec. 506(a) provides that a claim is secured "to
the extent of the value of such creditor's interest in the estate's
interest in such property."
It also provides that "value shall be determined in light
of the purpose of the valuation and of the proposed disposition
or use of such property."
Valuation of the "creditor's interest in the estate's interest
in such property" seemed to imply that a low, liquidation value
should be used, i.e. one that considered all of the creditor's expenses
of sale to arrive at a net recovery from the collateral. On the
other hand, "the purpose of the valuation and of the proposed
disposition or use" implied that if the Debtor were keeping
the collateral a higher value should be used.
Associates Commercial v Rash, 520 U.S. 953, 117 S. Ct. 1879, 138
L Ed 2d 148 (1997) interpreted sec. 506(a) to focus on "such
value shall be determined in light of the purpose of the valuation
and of the proposed disposition or use of such property." In
doing so it held that in a Ch. 13 bankruptcy case, because the Debtor
is retaining the collateral, a replacement value standard should
be used.
If you believe that the Debtor is "low-balling" you on
the value of your collateral, Schuh & Goldberg, LLP will contest
the proposed valuation but you are advised to retain our services
very expeditiously as there are local rules of Court which allow
for a very shortened period of time to object to value.
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The 20 day lien avoidance game on motor vehicles
As we all know, a lien must be noted on the face of a motor vehicle
to be valid. A voidable preference under 11 U.S.C. sec. 547 may
exist however if the lien date is more than 20 days after the contract
date and a bankruptcy is filed within 90 days of the lien date.
Watch for the following fact pattern:
1. Motor vehicle loan contract signed by debtor and debtor drives
off with the vehicle
2. Lien of creditor is noted on the face of the certificate of
title more than 20 days after the event described in # 1 above
3. Debtor files a bankruptcy case within 90 days of the date the
lien is noted on the face of the certificate of title
The creditor is at risk of having its lien avoided by a Ch. 7 Trustee
as a preference. The lien notation done more than 20 days after
the contract is signed is not considered to be a contemporaneous
exchange of value and you will lose your lien to the Ch. 7 Trustee.
In re Arnett, 731 F 2d 358 (6th Cir. 1984). In re Phillips, 103
B.R. 893 (Bkrtcy.S.D. Ohio 1989), In re Petrewsky, 147 B.R. 27 (Bkrtcy.S.D.Ohio
1992).
This is an issue which can adversely affect a debtor as well as
a creditor because in most circumstances the debtor would prefer
to have the creditor's lien validated so the debtor can reaffirm
the debt and keep his transportation after Ch. 7.
If you find that this situation exists, contact us to discuss a
strategy.
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Issue preclusion; confirmation of the plan as res adjudicata
There is a substantial body of law which indicates that if an issue
is proposed to be resolved in a Ch. 13 plan, notice is given to
the creditor who does not object, and the plan is thereafter confirmed,
then the issue is res adjudicata and the creditor cannot later complain.
Creditor vigilance is thus required in Ch. 13 plan reviews.
In some instances the res adjudicata effect of plan confirmation
has been taken to new heights where plans proposing issue resolution
contrary to applicable law are nevertheless given res adjudicata
effect. Consider:
"If a creditor fails to protect its interest by timely objecting
to a plan or appealing the confirmation order, it cannot later complain
about a certain provision contained in a confirmed plan, even if
such a provision is inconsistent with the Code." In re Pardee,
193 F.3d 1083, (9th Cir. 1999), see also In re Andersen, 179 F.3d
1253 (10th Cir. 1999)
Creditors must be vigilant but Debtor's counsel must also be wary
that there can be Rule 11 violations for proposing plan provisions
that have no basis in law. In re Evans, 242 B.R. 407 (Bankr.S.D.
OH - Judge Hopkins - 1999).
Creditors can also sometimes find a way out of the res adjudicata
effect of plan confirmation if the plan proposed to do something
that could only be done by the filing of an adversary proceeding.
In re Mammel, 221 B.R. 238 (Bankr.N.D. Iowa 1998); 128 B.R. 742
(Bankr. S.D. OH - Judge Aug - 1991); Cen-Pen Corporation v. Hanson,
58 F.3d 89 (4th Cir. 1995) (plan confirmation was insufficient to
avoid a creditor's lien; an adversary proceeding was required under
Fed.R.Bank.Pro. Rule 7001)
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Improperly executed real estate mortgage
"A . . . mortgage . . . shall be signed by the . . . mortgagors
. . . . The signing shall be acknowledged by the . . . mortgagors
. . . in the presence of two witnesses, who shall attest the signing
and subscribe their names to the attestation." Ohio Rev. Code
' 5301.01
There has been a tremendous amount of litigation in the N.D. of
Ohio Bankruptcy Court on this subject. In In re Zaptocky, 232 B.R.
76 (B.A.P. 6th Cir. 1999), the trial court determined that the 2nd
witness's signature was improperly added after the fact and that
the 2nd witness had not actually witnessed the mortgagor's signing
and acknowledgement. The BAP affirmed a decision which avoided the
lending institution's mortgage under the Trustee's sec. 544 strong
arm powers.
In reaction to the decision the Ohio legislature enacted:
Ohio Rev. Code sec. 5301.234
Real Property
Chapter 5301: Conveyances and Encumbrances
Effective Date: 06/30/1999
(A) Any recorded mortgage is irrebuttably presumed to be properly
executed, regardless of any actual or alleged defect in the witnessing
or acknowledgment on the mortgage, unless one of the following applies:
(1) The mortgagor, under oath, denies signing the mortgage.
(2) The mortgagor is not available, but there is other sworn evidence
of a fraud upon the mortgagor.
(B) Evidence of an actual or alleged defect in the witnessing or
acknowledgment on the mortgage is not evidence of fraud upon the
mortgagor and does not rebut the presumption that a recorded mortgage
is properly executed.
(C) The recording of a mortgage is constructive notice of the mortgage
to all persons, including without limitation, a subsequent bona
fide purchaser or any other subsequent holder of an interest in
the property. An actual or alleged defect in the witnessing or acknowledgment
on the recorded mortgage does not render the mortgage ineffective
for purposes of constructive notice.
The legislation in effect states that defects in the execution
of mortgages do not invalidate the mortgage even as to a Ch. 7 Trustee
having the status of a bona fide purchaser unless real fraud can
be proven.
Cases in the Northern District of Ohio since the enactment of the
statute have adjudicated that it is prospective only and not applicable
to mortgages executed prior to 06/30/1999. See In re Priest, 2000
Bankr LEXIS 669 (Bankr. N.D. Ohio 5/25/2000)
There is also a recent decision from the Northern District of Ohio
which has ruled the legislation unconstitutional. If you have an
issue pertaining to a defective real estate mortgage, call us for
a consult.
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Ch. 13 plan modifications
One of the most frustrating issues which creditor counsel faces
is the Ch. 13 plan modification that is filed in response to a motion
for relief from stay. For example the creditor files a relief from
stay motion because the Debtor is delinquent in direct disbursement
of mortgage payments. The Debtor then responds with the filing of
a plan modification proposing to pay the mortgage, including the
postpetition arrearage, inside the plan with the Trustee disbursing.
A. Sec. 1329 - Modification of plan after confirmation
The plain meaning of this statutory provision provides the 3 limited
circumstances under which a debtor may modify a plan after confirmation:
1. Sec. 1329(a)(1) permits the debtor to increase or decrease the
amount of payments on claims of a particular class provided for
by the plan. It does not provide the debtor with an ability to reclassify
the claims.
2. Sec. 1329(a)(2) permits the debtor to extend or reduce the time
for such payments.
3. Sec. 1329(a)(3) permits the debtor to alter the amount of distribution
to a particular creditor "to take account of any payment of
such claim other than under the plan."
Challenges to post confirmation plan modifications have the greatest
chance of success if the plan modification can be proven to be an
improper re-classification of the debt. In an important 6th Circuit
decision, In re Nolan, 232 F.3d 528, (6th Cir. 2000) denied
a debtor's attempt through a plan modification to surrender collateral
to a secured creditor and to have any deficiency balance treated
as an unsecured claim. The decision may have a more general impact
on debtor plan modifications however. The Court states:
"Section 1329(a) only permits modification of the amount and
timing of payment, not the total amount of the claim. This principle
holds true as to the portion of a claim that is secured, where the
claim is partially instead of fully secured."
B. Sec. 1327(a) - Effect of Confirmation
Creditor opposition to plan modifications will also stress the
Sec. 1327(a) effects of confirmation:
"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 ..."
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Leases in Ch. 13
Almost every motor vehicle lease that you will encounter in a consumer
bankruptcy is going to be a "true lease" as opposed to
one that is merely intended to document a sale and secured transaction.
Many equipment leases however will actually be secured transactions.
Such transactions usually have the feature that the Lessee will
own the property at the end of the lease upon payment of $1.00 to
the Lessor. If it is a secured transaction then it is subject to
all the cram down things that can be done to secured claims in a
Ch. 13.
Whether it is a lease or a security interest "is determined
by the facts of each case" but the key factor continues to
be whether the debtor can purchase the leased property at the end
of the lease for only a nominal consideration. In re Celeryvale
Transport, Inc., 822 F.2d 16 (6th Cir., 1987); In re Caulfield,
82 B.R. 55, (Bkrtcy.S.D.Oh, Judge Waldron, 1988); In re Bailey,
103 B.R. 886, (Bkrtcy.S.D.Oh.E.D. Judge Sellers, 1988)
If it is a "true lease" the provisions of 11 U.S.C. sec.
365 are applicable in Ch. 13 under sec. 1322(b)(7) and sec. 1325(a)(1).
A. Trustee disbursement vs. Debtor disbursement
Motor vehicle lease payments are to be disbursed by the Ch. 13
Trustee "unless otherwise authorized by the court". LBR
3015-1(c)(2)
The timing of lease payments to the creditor has always been an
important issue. Prior to the most recent amendment to LBR 3015(c)(1)
there was always a problem with gap payments, i.e. the lease payments
that would come due after the filing date of the Ch. 13 but before
confirmation. The Trustee could not disburse prior to confirmation
so when confirmation finally occurred and the Trustee started to
make the monthly lease payment, the lease account would always be
a couple of months delinquent for the entire life of the lease.
In the current version of LBR 3015(c)(1) the plan is required to
clearly detail the treatment of the lease and to make specific provision
for the gap payments by specifying "for what month the trustee's
regular monthly disbursements on the lease or executory contract
shall begin" and then obligating the debtor to directly disburse
the gap payments due to the creditor. This is a good and effective
rule; the challenge for the creditor's counsel is to get the debtor
bar to follow it.
B. Sec. 365 Treatment
11 U.S.C. Sec. 365(d)(2) is applicable in Ch. 13 pursuant to Sec.
1322(b)(7) and Sec. 1325(a)(1) and provides for the trustee [debtor]
to either assume or reject unexpired leases of personal property
at any time before the confirmation of the plan unless ordered to
do so earlier on request of a party in interest
1. Rejection of the Lease - If the debtor rejects the lease then
the creditor is entitled to possession of the property and any claim
of the creditor for rejection damages is to be handled as a prepetition
unsecured claim under 11 U.S.C. Sec. 502(g). PLANS WHICH PROPOSE
THAT THE LEASED PROPERTY WILL BE SURRENDERED IN FULL SATISFACTION
OF THE DEBT ARE HIGHLY OBJECTIONABLE.
2. Assumption of the Lease - If the debtor assumes the lease, the
Lessor is entitled to treatment pursuant to 11 U.S.C. sec. 365(b).
This contemplates:
a. Assumption of the lease in its entirety; modification of the
lease is not permitted.
11 U.S.C. Sec. 365(b)(1)(C) requires the debtor to "provide
adequate assurance of future performance" under the lease.
The creditor is entitled to postpetition payments in the contract
amount.
Once the lease is assumed, it is assumed in its entirety.
In re Chicago, Rock Island and Pacific Railroad, 860 F.2d 267 (7th
Cir. 1988) ("A trustee in bankruptcy takes the debtor's contracts
cum onere, that is, subject to existing burdens.' [A] trustee cannot
accept the benefits of an executory contract without accepting the
burdens as well.' citing Schokbeton Indus. v. Schokbeton Prods.,
466 F. 2d 171, 175 (5th Cir. 1972)").
Many true leases have options to purchase the leased property at
lease end (for fair market or other estimated residual value). Attempts
to require the lessor to finance the purchase option have been rejected.
"The assumption of an unexpired lease pursuant to 11 U.S.C.
Sec. 365 and 1322(b)(7) does not augment a debtor's rights under the
contractual agreement other than to permit a debtor to cure defaults,
ignore ipso facto clauses, and resume payments if the statutory
tests are met... Although assumption of the unexpired lease carries
with it the right to determine whether or not to exercise the purchase
option at the time such right arises, the debtors may not require
GE to finance that purchase if such arrangement was not contemplated
by the lease or other agreements between the parties." In re
Jackson, 105 B.R. 418, (Bkrtcy.S.D.Oh.E.D. 1989) (Judge Sellers
so finding in the context of a motor vehicle lease)
b. A cure of the prepetition arrearage or adequate assurance that
the trustee will promptly cure, such default. 11 U.S.C. Sec. 365(b)(1)(A)
What is a "prompt" cure?
This is a very big issue for creditors.
The residual value in a lease is a big number. It is actually a
number which is projected at the time of making the lease to exist
in the future, i.e. at the time that the lease will end. Because it is usually
a big number, sometimes financial institution will buy insurance
that the number will be there -- for many reasons it is highly important
that the vehicle come back to the creditor on the scheduled date
and that the lease is current at that time.
There is quite a bit of authority that a prompt cure of a prepetition
default under a motor vehicle lease should be cured in about 6 months,
but all of the cases seem to say that what is prompt is to be determined
on a case by case basis. Some cases of interest on what is "prompt":
In re Lawrence, 11 B.R. 44 (Bkrtcy.N.D.Ga. 1981) dealt with the
lease of a 1979 Buick Riviera, and held that "'promptly' may
vary in accordance with the circumstances on a case by case basis,
as the terms 'within a reasonable time' used in Section 1322(b)(5)
... 'promptly' demands a more immediate payment than 'within a reasonable
time'" The Court there directed the Trustee to cure as soon
as possible, within 10 months.
In re Allison, 1995 Bankr. LEXIS 2161, 1995 WL 930889 (Bkrtcy.
E.D. Va. 1995) and In re Daugherty, 102 B.R. 167 (Bkrtcy. E.D. Mo.
1989) both rejected proposed cure periods of more than 12 months
also using a case by case method.
11 U.S.C. sec. 365(b)(1) requires a "cure" to be effectuated
in a far shorter period of time than that contemplated by the provisions
of 11 U.S.C. sec. 1322(b)(5) which governs cures of arrearage on
long term debt See generally Matter of DiCamillo, 206 B.R. 64 (Bkrtcy.
D. N.J. 1997); Lundin, Chapter 13 Bankruptcy, 4-91 (1997).
"... in cases involving consumer auto leases, this Court concurs
with the decision of the Bankruptcy Court in In re Morgan, 181 B.R.
579 (Bkrtcy. N.D. Ala. 1994) where the Court held that absent evidence
to the contrary, six months in consumer cases would be considered
the maximum permissible period of time in which to cure a lease
arrearage under 11 U.S.C. Sec. 365(b)(1)." In re Reed, 226
B.R. 1 (Bankr.W.D.KY 1998)
A "prompt" cure is one that would provide that the prepetition
arrearage would be cured within the remaining life of the lease.
See, e.g. In re Gold Standard at Penn, Inc., 75 B.R. 669, 673 (Bankr.
E.D. Pa. 1987) [finding proposal to cure over 5 year period unacceptable
since only six years remaining on the lease]; accord, In re R/P
International Technologies, 57 B.R. 869 (Bankr. S.D. Ohio 1985);
In re Berkshire Chemical Haulers, Inc., 20 B.R. 454, 458 (Bankr.
D. Mass. 1982).
c. Administrative expense priority
The post petition act of the debtor assuming the unexpired lease
which was approved by the order of the court was the administrative
act of a new juridical entity creating an obligation of the
estate which is legally distinct from the obligations that existed
prior to an assumption of the contract. In re Mammoth Mart,
Inc., 536 F 2.d 950, 955 (1st Cir. 1976).
In re Pearson, 90 B.R. 638, (Bkrtcy, D.N.J. 1988) (evident purpose
of Sec. 365(g) is to distinguish between prepetition claims of general
creditors from those assumed contracts which are to be treated as
administrative expenses)
In re Monroe, 83 B.R. 317 (Bkrtcy.E.D.Pa. 1988) (If executory contract
is assumed, estate is liable for full performance of contract and
any subsequent postpetition breach or rejection creates administrative
expense claim).
In re N-Ren Corp., 68 B.R. 404, (Bkrtcy. S.D.Ohio 1986) (In a Ch.
11 context Judge Perlman has ruled that the debtor is obligated
as an administrative expense for the reasonable value of the use
of leased property while assumption or rejection is considered by
the debtor)
We have successfully
obtained an order of the bankruptcy
court that all obligations of the debtor
to a creditor under an assumed lease
are elevated to administrative expense
priorities. This includes the obligation
of the debtor to pay the creditor money
owed for "excess mileage". Hit this
link if you wish to read the order: In re Kittel.
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