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October 2010 Archives

Debtor's exemption surcharged for failure to list an asset: Seres

In re Seres; WDNY Bk 08-12185; Ford Credit v. Seres & Wallach; AP 09-01289 (Judge Bucki; Decision dated October 1, 2010). If a debtor fails to list an ongoing personal injury lawsuit on his bankruptcy petition, or report it to the trustee at the 341 hearing, that debtor's personal injury exemption will be surcharged for the trustee's costs and expenses caused by the failure to disclose, so says Judge Bucki. I would predict that Rochester Judge Ninfo, rather than surcharging the exemption, would have denied it outright, in a similar situation.In 2001, the debtor was involved in a car accident in Lackawana NY. Two years later, he filed a personal injury lawsuit against the other driver. In 2004, Ford Tilting Credit Trust was added as a defendant in the lawsuit Apparently Ford Credit was the actual owner of the vehicle. It must have been a lease; in New York, car owners are liable for accidents caused by drivers of their car. Since then New York law has changed regarding liability of businesses that lease cars.

Defendant Attorneys now entitled to attorney fees in successful foreclosure defense

New York Governor Patterson signed a new law on October 20, the "Access to Justice in Lending Act" (Chapter 550 of the Laws of 2010), which allows defendants who are successful in defending against foreclosures to have the bank pay their attorney fees. Bill A01239 (also known as S2614b), passed the New York State Assembly and Senate in June.

Buffalo foreclosure firm, Steven J. Baum, Attracts Scrutiny for Relationship with Private Equity Firm

Back in the day, law offices actually employed their own staff to do the office work in foreclosures. But in the past half decade, several high-volume foreclosure law firms (called by some "foreclosure mills") have taken a new tactic: spinning off their back-office work into a separate entity, selling the entity to a private equity firm for millions of dollars, and then leasing back these same employees to process their foreclosure paperwork.

Proving who owns the mortgage note: links to three Credit Slips Blogs

As we all know, the mortgage funding world changed dramatically in the past few decades. Back in the 'day', the bank which provided the mortgage used its own funds to finance the mortgage, collected on it directly, and held the note as its own mortgage. Over time, mortgages were sold off after the bank originally issued them, so that banks, which paid depositors volatile short-term interest rates, were not stuck receiving fixed long-term interest on mortgages. Groups of mortgages were bundled together and sold as a package. More recently, these packages of mortgages were "securitized": sliced up and the right to receive the income from the slices in order of priority was sold to investors world wide.With the housing bubble collapse of the past few years, foreclosures zoomed, although not in western New York, where housing prices were stable. A legal issue in foreclosures is ownership of the mortgage. We see a similar issue in bankruptcy cases, where the purported mortgage owner files a claim for its mortgage. In Chapter 13 cases, if a debtor falls behind on post-petition mortgage payments, the mortgage owner will make a "lift stay" motion in bankruptcy court asking permission to start or resume a foreclosure.In all three of these legal situations - foreclosures, bankruptcy claims, and lift stay motions, the mortgage holder must prove it actually owns the mortgage. Foreclosure and bankruptcy law has not been updated in relation to the securitization of mortgages, and property owners have sometimes challenged ownership issues in bankruptcy and foreclosure courts. Recent newspaper articles have highlighted the paper-trail issues now facing foreclosure attorneys.I would like to highlight three blogs from "Credit Slips", a thoughtful blog on "credit, finance, and bankruptcy." These three blogs were written over a year ago (August 2009) by O. Max Gardner III, but there are a very thoughtful analysis of the evidentiary complications mortgage securitization presents to mortgage holders:The Alphabet Problem and the Pooling and Servicing Agreements (August 14, 2009)Show Me the Original Note and I Will Show You the Money (August 17, 2010)The Lack of Evidentiary Foundations Fosters Fraud (August 18, 2009)

Steven J. Baum Foreclosure Law Office Subject to Countersuits

The Amherst, NY law office of Steven J. Baum, the biggest foreclosure law firm in New York, has been getting some heat recently. I will be posting a separate blog about the complicated relationship between the Baum office and Pillar processing LLC. But independent of Pillar problems, Baum has been on the receiving end of some homeowner counter-suits in the New York City area.According to The Buffalo News (October 17, 2010 article by Jonathan P. Epstein), an attorney in New York City, representing two homeowners there, has sued Baum for "knowingly and fraudulently filing foreclosures, paperwork and false notarizations statewide on behalf of lenders that don't hold the actual mortgages, including HSBC Bank USA and its mortgage subsidiary." The Buffalo News reports that the Baum law firm was founded in 1972 by Marvin Baum. Steven Baum, his son, took over in 1999, after Marvin Baum's death. The New York Post reported on July 6 that Judge Arthur M. Schanck of Brooklyn dismissed a foreclosure there in part because of alleged conflict-of-interest by an attorney in the Baum office. According to The Post. "a Baum lawyer. . . signed papers claiming to be an executive of Mortgage Electronic Registration System, or MERS, which was given certain rights to the mortgages by the broker, Fremont Investment and Loan, while simultaneously representing Fremont and US Bank, which filed the foreclosure in July 2009. 'The Court is concerned that the concurrent representation by [the Baum firm] of both assignor MERS, as nominee for Fremont, and assignee plaintiff US Bank is a conflict of interest,' Schack wrote." The New York Times (Article October 3, 2010 by Gretchen Morgenson) reported that the United States Trustee in New York City supported the application of a Bronx bankruptcy debtor to sanction JP Morgan Chase for dubious foreclosure documentation in the Chapter 7 bankruptcy case of Sylvia Nuer (SDNY Bk 08-14106).

Debt Settlement Companies to be subject to FTC Regulation, Effective Oct. 27 -- Eight Years after the Capoccia Collapse)

The Federal Trade Commission (FTC) has issued a final rule amending the Telemarketing Sales Rule, restricting many of the most egregious abuses of the debt settlement industry. Some of these changes went into effect September 27, 2010; the rest will go in effect a month later.Debt settlement companies offer to negotiate with creditors a discount in the amount owed on debts. The settlements are negotiated after the debtor accumulates sufficient funds to offer a discounted cash settlement to the creditor. The debt settlement company usually earns its fee as a portion of the money "saved" by the negotiated reduction. Despite widespread complaints, (see New York Times, June 19, 2010),the industry has previously been mostly unregulated on the federal level, although it has increasingly come under the scrutiny of various state attorneys general, including the New York State Attorney General (see New York Times, May 20, 2009). As listed in July 29, 2010 press release from the FTC, there are two major and several additional changes to debt settlement company practices. The first, and most important, bans advance payment of fees. In theory, debt settlement companies 'work on a commission basis, earning their fees after they negotiate a settlement and 'save' the client money; in practice, most companies actually got paid well in advance of earning any money, usually keeping the first monthly payments for themselves. If the client, unable to keep up the payments, dropped out of the program before any debts are actually settled, the company keeps its payments, even though it hadn't actually accomplished anything. The new rule only allows the settlement company to collect fees after they actually negotiate a settlement.

Bankruptcies down in Rochester, Buffalo, through September 2010

Bankruptcy filings in both the Rochester and Buffalo Divisions of the United States Bankruptcy Court for the Western New York are down, compared to the past two years. Bankruptcy cases are numbered consecutively when filed, and on October 5, 2010, the 2,438th case of the year was filed in Rochester. Case 2,438 was filed on September 17 in both 2009 and 2008 in Rochester, while in 2007 that case number was filed September 28. In Buffalo, the 4,298th case of 2010 was filed October 5. Buffalo Case 4,298 was filed September 15 in 2009 and September 29 in 2008. In 2007, that case number was filed October 19. Of course, bankruptcy filings are still way down from 2004, the last 'normal' year before the bankruptcy code was substantially changed in 2005. Rochester case 2,438 was filed June 18 in 2004, while Buffalo case 4,298 was filed June 8 of that year. The last year in which Rochester case 2,438 was filed later than October 5 was in 1995 (October 18). That same year, Buffalo case 4,298 was filed December 12.36.2% of Western District of New York bankruptcy cases filed in 2010 through October 5 have been Rochester cases, and 63.8% have been Buffalo cases. This is approximately the same percentage as in previous years: in 2007 38.0% of WDNY cases were filed in Rochester; in 2008 37.1% were Rochester cases and in 2009 36.1% were filed in Rochester. In 2004, Rochester constituted 37.0% of all WDNY filings.

Secured Creditor, Corporate Owner not liable for Corporate Wages: Lyons Equipment

In re: Lyons Equipment Company, Inc. Bk 09-21419; AP 09-1059 (Judge Bucki; decision September 8, 2010)Buffalo Bankruptcy Judge Carl Bucki has ruled that a secured creditor which took over management of a corporation is not liable for unpaid wages that were incurred prior to the take-over. Lyons Equipment owed Greystone Business Credit $2.4 million dollars, which was secured by the corporate assets. In September 2008, Greystone took over operation of Lyons, installing their own 'chief restructuring officer.' Under Greystone's management, Lyons repaid the secured creditor almost all of the money owed to it.Meanwhile a former commissioned employee sued Lyons for unpaid commissions. The employee also sued Greystone and its restructuring officer. State Court was on the verge of ruling in favor of Greystone when Lyons filed Chapter 11. All parties agreed to allow the Bankruptcy Court to make the final ruling on Greystone's liability.Judge Bucki ruled in favor of the secured creditor and its restructuring officer. Greystone was under no obligation to look after the interest of any creditors other than itself (absent collusion or breach of a statutory obligation.) While there are penalties for failure to pay employees (New York Labor Law Sect. 191-c, regarding commissioned employees, Labor Law Sect. 198-a, regarding criminal penalties for failure to pay wages, and Business Corporation law sect. 630, regarding shareholder liability for unpaid wages), they did not apply to a creditor of the corporation. The restructuring officer owed an independent duty of sound management to Lyons as an officer of the corporation, but paying off a secured creditor of Lyons, to avoid a catastrophic repossession of corporate assets, was within the scope of that duty. Furthermore, as a matter of 'realistic expectations", it would not be proper to find a restructuring officer personally liable for payment of wages incurred before he or she was installed into that position.The Court also found that the former principal of the business, who was replaced by the restructuring officer, was also not financially liable to the former employer. Only the corporation, not its management or creditors, had a contractual relationship with the employee.

Debtor not liable for depreciated loss in value of car when case converted from 13 to 7: Lang

In re Lang Bk 05-16767 (Judge Bucki, decision September 17, 2010.) When this debtor filed Chapter 13 in 2005, she filed a five year plan to cure the arrears on her residence. At the time, she owned a car, free and clear, with $7,250 unexempt equity (value in excess of New York's $2,400 auto exemption.) Four years later, the arrears had been paid off and the debtor converted to Chapter 7. The car had significantly depreciated, of course, so the Chapter 7 trustee wanted from the debtor the equivalent of the unexempt value of the car when the case was originally filed, not on the conversion date. Buffalo Judge Carl Bucki ruled against the trustee, stating that, upon conversion, the asset of the bankruptcy estate is the asset as it exists when the case is converted. The court stated on page 3 of the decision as follows: Section 348(f)(1)(A) of the Bankruptcy Code states generally that when a case under chapter 13 is converted to another chapter, "property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion." For purposes of administration, therefore, the chapter 7 trustee may treat an asset as property of the estate if it satisfies two conditions.2 First, it must have been property of the estate as of the date of filing. Second, it must remain in the debtor's possession or control on the date of conversion.Therefore, the Chapter 7 trustee was only entitled to the unexempt equity in the vehicle, if any, as of the time of conversion.

Debtor's truck can be his homestead, at least in part: Tullar

In re: Tullar; Bk 10-11214 (Judge Kaplan; August 18, 2010). It would be an understatement to say this was a case of first impression. The debtor's sole residence was the sleeper cab in his Peterbilt truck. Did the truck qualify for New York's homestead exemption? Judge Kaplan in Buffalo concluded that it did, at least in part.The judge observed that there was no other sleeper-cab-as-homestead case anywhere in the country, and analogous cases concerning house boats or motor homes in other states were of no help, given the different text of other state's homestead exemption laws. New York's exemption statute was amended to include "a mobile home" in 1980. The purpose of the amendment was to clearly exempt manufactured homes on rented lots like trailer parks. Reflecting on the interpretation requirements of New York Statutes, Sections 111 and 127, one provision (Sect. 127) states a statute should be interpreted considering the circumstances surrounding the enactment, while the other (Sect. 111) states that statutes should reflect legislative intent. Here, Judge Kaplan assumed that the legislature, when it added mobile homes to the homestead exemption, was only thinking of non-moving residences. On the other hand, the over-all legislative intent of the homestead exemption is to protect a debtor's dwelling, whatever it is.The judge finally concluded that in equity the debtor's residence was his residence, however unusual, and should be exemptible. As the debtor drove the truck 1/3 of the time for work, he only used it 2/3 of the time as his residence and, therefore, only 2/3 of the equity could be exempted as a homestead (he could claim the $600 tools of the trade exemption for the 1/3 non-residential equity.)

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