There has been so much written about BAPCPA and the creditors who practically wrote the law and got it passed. While I cannot doubt that creditors – such as the good folks at MBNA (which was bought out by Bank of America), paid their lobbyists millions of dollars for years to get the Bankruptcy Code changed, a recent case perhaps rightly suggested that lenders had good reason to seek a change in the law. The case, decided in February, came out of the Northern District of Alabama.
The husband and wife debtors filed their case in October 2006. It was the wife’s seventh bankruptcy case (no that’s not a typo….that’s 7) and the husband’s fifth (and again, not a typo….that’s 5). As the October filing was their second case within a year, they filed a motion to seek an extension of the automatic stay. Since 2005, if a debtor has had a case pending within the year prior to the case being filed, the stay expires 30 days unless the court orders otherwise. The hearing of the motion must be held within the 30 day period. The debtors needed the stay to prevent a foreclosure on their home.
The Motion to Extend the Stay
At the hearing, the debtors’ mortgage company Ameriquest, filed an objection. They argued that the debtors’ successive bankruptcy filings in 2004 and in 2005 had thwarted its attempt to foreclose. The original amount of the mortgage was approximately $56,000, but as of the date of the hearing, that amount had jumped to over $80,000. The property itself was only valued at $62,000, so there was no equity in the real estate. The debtors then admitted that despite their chapter 13 plan which proposed to pay the arrears, along with the regular monthly payment over 36 months, the debtors had understated the arrearage on the mortgage. In their plan, unsecured creditors would get nothing, and the only other secured claim was for a $500 vacuum cleaner which they expressed a desire to keep..
Based on the evidence, the Bankruptcy Court found that the debtors did not prove they could afford the mortgage – or the arrears. However, the Court gave the debtors the benefit of the doubt, found that the case had been filed in good faith, and extended the automatic stay except to Ameriquest. On November 30, 2006 the order extinguished the stay as to Ameriquest only effective January 30, 2007. The debtors had a partial victory, but the court presumed that the debtors might be able to convince Ameriquest that they could save the home.
And Then This Happened…
The debtors then amended their chapter 13 plan, which was confirmed by order of January 26, 2007. The confirmation order made no mention of the November 30, 2006 order, however, the debtors’ chapter 13 plan provided for payments to be made to Ameriquest on the mortgage arrears. Ameriquest did not file a proof of claim (a document that declares to the court and to all parties what it is owed), but the debtors filed a claim on its behalf. With a filed proof of claim, the chapter 13 trustee could commence payments to the creditor under the confirmed plan.
On March 28, 2007 Ameriquest served the debtors with a notice of foreclosure. The debtors responded by filing an Adversary Proceeding where they alleged that the notice of foreclosure was in violation of the confirmation order. Instead of stopping there, they also claimed mental anguish, damages for harassment as well as punitive damages.
It Didn’t Get Better
Ameriquest had relief from the stay (in that the stay did not apply) and was proceeding with foreclosure. In June of 2007, the chapter 13 trustee filed an objection to the claim of Ameriquest (which was filed by the debtors) because Ameriquest had returned to the trustee the payments it received.
“Predictably,” the court wrote “matters finally came to a head…when the trustee filed a Motion to Dismiss Case for failure to make the plan payments.” By then, they were $5,240 behind in plan payments (an amount which increased by the time of the hearing). The debtors seemingly had no means or wherewithal to successfully adhere to their confirmed chapter 13 plan.
The case presented an interested legal issue, which does not require much extrapolation here since the issue is not the point of this blog entry (however, for the record, the issue is whether a confirmation order that implies the existence of the stay “usurps” a prior order denying the extension of the stay). But the case also presented an opportunity for the court to suggest another reason that BAPCPA was enacted:
Lawyers who routinely represent debtors in bankruptcy cases and some bankruptcy judges protest that the Bankruptcy Abuse Preventing and Consumer Protection Act of 2005….was written almost entirely to benefit creditors. Whether or not those protestations have merit, cases like this one become a poster child for bankruptcy reform legislation. Attorneys who represent debtors on a regular basis should discourage this type of hyperbole by their colleagues because it provides their opponents with examples of why additional amendments to the Code are needed to further restrict abusive conduct by debtors and their counsel. As a consequence of such restrictions, it becomes more difficult and expensive for unfortunate and honest debtors who are not gaming the system to go through the bankruptcy process and achieve a much needed and deserved fresh start.
It’s important to remember, this is case where people were taxing the resources of the court as well as that of the chapter 13 trustee and the creditor while, at the same time, unable to propose a workable chapter 13 plan – and in fact, were not even making payments. The end result: the debtors’ case was dismissed and they are barred from refiling for 180 days. The Adversary Proceeding was dismissed, but the debtors and their counsel avoided being sanctioned. The court found that “the claims made by the debtors and their counsel in the complaint was unreasonable and excessive…” however in light of local case law, sanctions and attorneys fees were not considered appropriate.
The case illustrates the fine line that we bankruptcy lawyers sometimes find ourselves dancing on: the line between zealous advocacy and the facts of real life. In this case, there was a unique legal argument to support the debtor’s claims that Ameriquest had to accept the payments and the confirmed plan. Yet the debtors (who each filed petitions repeatedly) did not make their plan payments, and were unable to save their home. They didn’t make mortgage payments for over 3 years and they make few plan payments. It cannot be understated: all of the legal savvy, creativity and expertise in the world will be wasted if the plan and/or mortgage payments go unpaid, or a plan cannot (or will not) be lived up to.
In re Cline, US Bankruptcy Court, Northern District of Alabama, Docket no. 06-41597-JJR13; Adversary Proceeding No. 07-40030.
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