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Bankruptcy Case Law Highlights: A Look Back at 2017

Posted By USFN, Monday, November 6, 2017
Updated: Friday, October 20, 2017

November 6, 2017

by Robert J. Shefferly
and Marcy J. Ford
Trott Law, P.C.
USFN Member (Michigan)

Proofs of Claim and Time-Barred Debt
The U.S. Supreme Court reversed the U.S. Court of Appeals for the Eleventh Circuit and issued an opinion in the case of Midland Funding, LLC v. Johnson, 581 U.S. __ (May 15, 2017). In Midland, the Supreme Court held that filing a time-barred proof of claim (POC) under Chapter 13 of the Bankruptcy Code is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692, et seq.). This is an important case that mortgage creditors should pay attention to (including the 11-page dissenting opinion, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan).

In Midland, the debtor filed a Chapter 13 petition in March 2014 (in Alabama). Midland Funding, LLC was the holder of a credit card debt and filed a POC in the amount of $1,879.71. The POC stated that the last charge on the account was over ten years prior to the debtor’s bankruptcy filing. The relevant statute of limitations in Alabama is six years. The debtor objected to the POC, which was sustained by the bankruptcy court and the claim was disallowed.

Subsequent to the bankruptcy court ruling, the debtor commenced a lawsuit claiming that Midland violated the FDCPA by filing the POC on time-barred debt. The district court found that the FDCPA did not apply and dismissed the action. The Court of Appeals for the Eleventh Circuit reversed the district court’s decision, and Midland filed a petition for certiorari, noting a division among the courts of appeals on the question of whether the filing of a time-barred POC is false, deceptive, misleading, unconscionable, or unfair under the meaning of the FDCPA. The Supreme Court accepted certiorari and reversed the Eleventh Circuit, holding that the FDCPA does not apply under the facts of this case.

In support of its reasoning, the Supreme Court points out that the word “unenforceable” does not appear in the Bankruptcy Code’s definition of “claim.” Section 502(b)(1) of the Code states that if a claim is unenforceable it will be disallowed; it does not say that an unenforceable claim is not a claim. Further, observed the Court, section 101(5)(A) clearly states that even an unenforceable claim is still a right to payment under the Code. Additionally, the Supreme Court emphasizes that other provisions of the Code show that the running of a limitations period constitutes an affirmative defense — a defense that the debtor is to assert after a creditor makes a claim. The Court states that there is nothing misleading or deceptive in the filing of a POC that follows the Code’s similar system.

Finally, the Supreme Court delineated a number of added protections for Chapter 13 debtors, which they would not otherwise have in a state court collections proceeding. First, the debtor initiates the Chapter 13 proceedings and is unlikely to pay a stale claim in order to avoid a court action. Second, the Chapter 13 trustee is available to review claims and object if necessary. Third, there are procedural rules in a Chapter 13 bankruptcy case that guide the evolution of claims. Fourth, the claims resolution process in a Chapter 13 case is generally more streamlined and a less unnerving prospect for a debtor than facing a collection lawsuit. The Court points out that these features of a Chapter 13 bankruptcy proceeding make it more likely that a POC filed on a stale claim will be met with objection or resistance from the debtor and/or the trustee.

This case is particularly important to creditors because the decision provides authority and direction to bankruptcy courts on addressing the applicability of the FDCPA to the filing of an initial proof of claim, in the context of a Chapter 13 bankruptcy proceeding.

Surrendered Property/Forced Vesting
The U.S. District Court for the District of Massachusetts issued an opinion for publication in In re Sagendorph, 562 B.R. 545 (Jan. 23, 2017). In this case, the district court held that the bankruptcy court could not confirm, over a secured creditor’s objection, a Chapter 13 plan that provided for forced vesting of collateral in the creditor in satisfaction of its claim. Forced vesting refers to when a Chapter 13 debtor uses the plan confirmation process to transfer ownership of property to a secured creditor without the creditor’s consent.

In Sagendorph, the debtor had an income-producing property that was secured by a mortgage held by Wells Fargo Bank (Bank). The debtor’s amended plan sought to surrender the real property and vest title to the property in Bank. Bank objected to this treatment but its objection was overruled, and the bankruptcy court confirmed the debtor’s plan. Bank appealed the confirmation order to the district court.

Bank contended that confirmation of a plan that allows forced vesting of real property is contrary to the plain language of section 1325(a)(5)(C) that deals with surrender of property. Further, Bank asserted that the “plain meaning” of the statutory language does not allow a debtor to simultaneously surrender property under section 1325(a)(5)(C) and vest title in a secured creditor under section 1322(b)(9).

The debtor countered that the “plain meaning” of section 1322(b)(9) does allow the vesting of property of the estate and, when read in combination with section 1325(a)(5)(C), allows vesting of real property over a creditor’s objection. The debtor specifically argued that there is ample case law providing that a court must confirm a plan over a creditor’s objection if the plan provides for surrender of the property, the surrender is a preliminary step in the transfer of title, and that sections 1325(a)(5)(C) and 1322(b)(9) are meant to work in tandem with each other.

The district court’s analysis looked at the plain meaning of the words “surrender” and “vest” as they are used in sections 1325(a)(5)(C) and 1322(b)(9). The district court found that “surrender” is defined as making property available to be taken and that “vesting” is the acceptance of an offer to transfer ownership. Therefore, a debtor cannot vest property in a creditor without the creditor consenting to that treatment. Thus, the district court held that the plain language of sections 1325(a)(5)(C) and 1322(b)(9) preclude forced vesting.

In a comparable case the following month, the U.S. District Court for the District of Massachusetts issued a similar opinion for publication in In re Brown, 563 B.R. 451 (Feb. 3, 2017). In Brown, the district court notes that the surrender of property in a Chapter 13 plan leaves the mortgagee free to exercise its rights in the collateral, while vesting threatens to impair those same rights. The court states that “by shifting the debtor’s interest to the mortgagee, vesting prevents the mortgagee from exercising its most important state-law right — foreclosure — as a method of eliminating junior liens.” Id at 457.

The court further observed that forced vesting in the plan confirmation process has consequences and compels a mortgagee to assume risks and obligations that the mortgagee did not bargain for. These risks and obligations include environmental remediation, maintenance, and taxes that they would not otherwise be required to bear absent the vesting of the property. Additionally, the court pointed out that the overwhelming run of recent cases has rejected forced vesting and that the debtor’s assertion of needing a fresh start must give way to “the Code’s obvious goal of preserving the well-settled property rights of secured lenders.” [Quoting HSBC Bank USA v. Zair, 550 B.R. 188 at 204 (E.D.N.Y. 2016).]

The Brown court concluded, as in Sagendorph, that the Chapter 13 plan (which forced vesting of property in the creditor) did not treat the mortgagee’s secured claim in a manner permitted by section 1325(a)(5). The confirmed plan was vacated, and the case was remanded back to the bankruptcy court for further proceedings.

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