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December 2009 Archives

Second Mortgage on Long Island voided as unsecured

In re Lavelle; Eastern District of New York Bk 09-72389-478 (Judge Eisenberg 11/19/09). Debtors on Long Island NY got the second mortgage on their house voided by a bankruptcy court as unsecured. The house was valued at $400,000 and the balance on the Bank of America first mortgage was $411,193. Bank of America also held a second mortgage in the amount of $10,127.99. This mortgage was in default, and the bank, by their attorney, Steven Baum, moved to lift the automatic stay of bankruptcy to allow a foreclosure to proceed. Mr. Baum operates a well-known foreclosure law office based in Buffalo. The debtors opposed the lift stay motion on the grounds, among others, that there was no equity in the house securing the second mortgage and so it should be declared void.

Partial Discharge of Student Loans in an erroneous Chapter 13 plan? The Supreme Court to decide.

United Student Aid Funds Inc. V. Francisco Espinoza
United States Supreme Court case 08-1134
Oral arguments December 1, 2009Can a student loan be discharged, even in part, in a Chapter 13 plan without a finding of "undue hardship"? More broadly, how final is a confirmed chapter 13 plan? The United States Supreme Court will be answering these questions in a rare bankruptcy case appeal.The facts of the case are simple. In 1988, Francisco Espinoza borrowed $13,050 in a student loan. In 1992, he filed a Chapter 13 case in Arizona, listing that loan as his only debt. His Chapter 13 plan called for paying off the student loan in full, without interest. The plan specifically stated that the student loan would be fully satisfied at the completion of the plan, and a copy of the plan was mailed to the student loan bank at their payment address. The student loan creditor did not object plan, and the bankruptcy court confirmed it. The creditor filed a claim for $17,832.15, and the Chapter 13 trustee filed an objection to the claim, beyond the principal amount of $13,250. Apparently, the creditor did not oppose the objection to claim. The plan was completed, and the bankruptcy court issued a bankruptcy discharge. The creditor did not oppose the discharge, or appeal any of these bankruptcy decisions.Two years after he received his bankruptcy discharge, the student loan creditor started collecting on the unpaid interest. The debtor moved in bankruptcy court to have the creditor found in contempt of court for violating the discharge order. He argued that the interest on his student loans was fully discharged: the Chapter 13 plan specifically said so, the creditor received copy the plan, the creditor did not object to the plan or appeal the plan confirmation order, and the creditor did not object to the discharge or appeal the discharge order. The bankruptcy court agreed with the debtor that the student loan, including interest, was fully discharged.The creditor appealed to District Court, which reversed the bankruptcy court decision. The debtor then appealed to the United States Court of Appeals for the Ninth Circuit, which upheld in the Bankruptcy Court and reversed the District Court. The United States Supreme Court agreed to hear the case, and oral arguments took place December 1, 2009.The position of the parties is fairly simple. The student loan creditor argues that student loans are never discharged no matter what the plan says and no matter what the bankruptcy court says. The Bankruptcy Code is self-executing on the point and an order to the contrary is void. The bankruptcy court has no power to discharge a student loan absent a finding of "undue hardship" following a bankruptcy adversary proceeding. The debtor's position is that by failing to object to the plan, the confirmation order, or the discharge order, the creditor has waived its rights to object to the discharge of the student loan.Circuit Courts of Appeal are divided on this issue, or, more specifically, the Ninth Circuit's 2008 decision, Espinosa v. United Student Aid Fund, Inc., 530 F.3d 895 differs significantly from two other circuits. The 10th Circuit in In re Mersmann, 505 F.3d 1033 (2007) and the Second Circuit in Whelton v. Educ. Credit Mgmt. Corp., 432 F.3d 150 (2005) both came out the other way.Oral Arguments: The Supreme Court heard the case on December 1, 2009. The justices appeared to believe the bankruptcy court erred in allowing a partial discharge of student loans absent a finding of undo hardship. The question was what should be done with bankruptcy court orders entered in error. The student loan creditor emphasized in its brief that other claims, such as child support or recent income taxes, might be discharged erroneously in a similar chapter 13 plan, absent objection. The debtor's attorney admitted as much to Justice Ginsburg. On the other hand, the creditor's attorney faced skepticism from Justices Ginsburg, Kennedy and Stevens in claiming that the student loan creditor could never waive its rights to an undo hardship hearing. Justices Sotomayor and Breyer questioned whether a court order could be considered void unless the court lacked jurisdiction. Justice Alito raised the prospect that the debtor's attorney might be sanctioned for including a provision like this in a Chapter 13 plan, and Justices Bryer and Scalia were sympathetic to this argument.

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