U.S. Supreme Court: Stale Claims, Attorneys and Trustees in Chapter 13 & Dissent’s Call for Congress to Overrule (Midland Funding v. Johnson)

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Chapter 13 of the Bankruptcy Code

By Donald L. Swanson

The case is Midland Funding, LLC v. Johnson, Supreme Court Case No. 16-348 (decided May 15, 2017).   It’s about creditors filing proofs of stale claims (i.e., claims barred by statute of limitations) in Chapter 13 cases.

The Facts

Aleida Johnson files Chapter 13 bankruptcy.  Then, Midland files a proof of claim for a credit-card debt of $1,879.71,  specifying that the debt is more than 10 years old and beyond the 6 year statute of limitations.  Johnson’s bankruptcy attorney objects to the claim, Midland does not respond, and the Bankruptcy Court disallows Midland’s claim.

Then, Johnson sues Midland for violating the Fair Debt Collection Practices Act (the “Act”).  The District Court and the Court of Appeals disagree on whether the Act applies to Midland’s proof of claim, and the U.S. Supreme Court agrees to hear the case.

On May 15, 2017, the Supreme Court makes this ruling:

Since Midland’s proof of claim “on its face indicates that the limitations period has run,” the proof of claim is neither “false,” “deceptive,” “misleading,” “unconscionable” nor “unfair,” within the meaning of the Act.

The ruling is by a five-Justice majority (Breyer, Roberts, Kennedy, Thomas and Alito), with three Justices dissenting (Sotomayor, Ginsburg and Kagan) and one Justice (Gorsuch) not participating.

The Majority Opinion

The majority says a proof of claim disclosing facts that show the claim to be stale is not “false,” “deceptive” or “misleading” under the Act.  Here’s why:

A “claim” in bankruptcy is a “right to payment” and is to be given “the broadest available definition.”  For example, (i) § 502(b)(1) says an “unenforceable” claim will be disallowed: it does not say that an “unenforceable” claim is not a “claim,” and (ii) §101(5)(A) says a “claim” is a “right to payment,” even if that right proves to be unenforceable.

“The law has long treated” a statute of limitations argument “as an affirmative defense” that a debtor must raise.  The Bankruptcy Code adopts this same view (see §§502, 558).

In Chapter 13, the trustee is sophisticated and “likely to understand” these statute of limitations rules.

The majority also rejects “unconscionable” and “unfair” characterizations under the Act for several reasons.

First, several courts say the knowing assertion of a stale claim, in an ordinary collection lawsuit, is “unfair” because the debtor might pay the stale claim “unwittingly” or to avoid cost or embarrassment.  Such a concern is “significantly diminished” in Chapter 13 because, (i) the consumer initiates the bankruptcy, (ii) a knowledgeable trustee is involved, and (iii) claims review processes are “streamlined.”

One benefit to a Chapter 13 debtor from the filing of a stale claims is this: a debtor can discharge the stale claim and keep it off credit reports.

“More importantly,” an exception to “the simple affirmative defense approach” would require defining the boundaries of the exception.

The Act and the Bankruptcy Code have different purposes: (i) the Act seeks to help consumers “by preventing consumer bankruptcies in the first place,” while (ii) the Bankruptcy Code creates and maintains the “delicate balance of a debtor’s protections and obligations.”  To find the Act applicable here would upset that “delicate balance.”

The Dissenting Opinion

The dissenting Justices find Midland’s actions to be both “unfair” and “unconscionable.”  They decry the efforts of “debt buyers,” who purchase consumer debts from creditors and then attempt to collect what they can from the debtors and keep the profits:

–Such buyers “pay close to eight cents per dollar” for debts under three years old, pay “as little as two cents per dollar” for debts over six years old, and pay “effectively nothing” for debts over 15 years old;

–These buyers knowingly file suit on stale claims, hoping the debtor won’t raise the affirmative defense or won’t respond at all.  And such buyers have won “billions of dollars in default judgments” against consumer debtors on stale claims.

–“Every court to have considered the question,” has found such conduct “unfair” and “unconscionable” under the Act.

–“It does not take a sophisticated attorney to understand why” such practices are “unfair.”  It only takes “common sense” to conclude that “one should not be able to profit on the inadvertent inattention of other” or that “the law should not be a trap for the unwary.”

The dissent concludes with a call for Congress to overrule the majority decision:

“I take comfort only in the knowledge that the Court’s decision today need not be the last word on the matter. If Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.  I respectfully dissent.”

How Chapter 13 Cases Actually Work

Once again, I’m struck by the failure of the U.S. Supreme Court to appreciate how bankruptcy cases actually work.  Here are two examples from the Midland Funding, LLC v. Johnson opinion.

  1.  Debtor Attorneys: Omitted from the discussion!

An important professional in a Chapter 13 case – perhaps, the most important professional – is debtor’s attorney.  Yet, there is nary a substantive reference to the role of a debtor’s attorney in the entire Midland v. Johnson case, other than in the recitation of facts (Debtor’s attorney is the one who objected to Midland’s stale claim).  There’s much talk in the opinion about the Chapter 13 trustee as a sophisticated player [rightly so], but there’s nothing about the debtor’s attorney.

This is a shame.  Why and how an important legal opinion like this can fail to even mention the debtor attorney role is puzzling.

For example, the Dissent seems exercised about the majority opinion and calls on Congress to change the majority ruling because, “most debtors who fail to object to a stale claim will end up worse off than had they never entered bankruptcy at all.” But Congressional involvement is not needed.  There is a simple and easily administered solution.

–Debtor attorneys will add the following item to their Chapter 13 case checklists–if it isn’t already there:

“Review filed claims, after claims deadline expires, and object to stale claims.”

–And, of course, their authorized fees (which are paid through the Chapter 13 plan) will need to increase accordingly.

Here’s why this checklist item is now an added service worthy of additional compensation.  A typical Chapter 13 bankruptcy happens like this:

The debtor files Chapter 13 because a bunch of unsecured debts cannot be paid.  The Chapter 13 plan proposes to pay all disposable earnings over several years to the Chapter 13 trustee, who will then distribute such funds under a confirmed plan.  The distributions go, as required by statute, (i) first, to administrative (e.g., attorney fees), priority (e.g., taxes) and secured (e.g., car loan) claims, and (ii) then, whatever is left over, to unsecured claims pro rata, who often receive only a few cents on each dollar.

So, if an unsecured claim is unenforceable because of a statute of limitations issue but is allowed in the Chapter 13 case anyway:

–the ones injured by the allowance are the other unsecured creditors, whose pro rata shares are diminished by the allowance of a stale claim; and

–the debtor has little reason to care, because the amount debtor must pay under the plan will not be affected by the stale claim’s allowance.

Now, as explained in the Midland v. Johnson dissent, the Chapter 13 debtor must care.  And debtor attorneys need to act accordingly.

  2.  Chapter 13 Trustees: Duties regarding stale claims?

The majority opinion seems to misunderstand what Chapter 13 trustees actually do.  The majority seems to think there is a sophisticated bankruptcy administrator in every Chapter 13 case, called a trustee, [this much is true] who has unlimited capacity to examine every claim filed in every Chapter 13 case for staleness [this part is not true].

Chapter 13 of the Bankruptcy Code places explicit responsibility for examining and objecting to claims upon the trustee.  Here’s how:

–§ 1302(b) says:  “The trustee shall—(1) perform the duties specified in sections . . . 704(a)(5)”; and

–§704(a)(5) says: “The trustee shall— . . . (5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper.”

However, the trustee’s obligation, under such statutes, to examine claims arises only when “a purpose would be served.”  Does the majority ruling now require Chapter 13 trustees to examine all claims for staleness?  Maybe so.  But such an examination would be redundant of the added checklist item for debtor’s attorney mentioned above: i.e., no purpose “would be served” by the trustee’s examination.

And the majority ruling will, undoubtedly, result in a much higher volume of stale claims filings: the dissent refers to a “deluge” of such filings.  Where is the compensation going to come from for any expanded efforts by the Chapter 13 trustee to examine claims?

Conclusion

It will be interesting to see what the fallout and effect will be from the Supreme Court’s majority decision in Midland v. Johnson and the dissent’s call for Congressional action.

Student Loan Crisis: High-Priced Colleges Support Beautiful Campuses (and Other Luxuries) on the Backs of their Students

IMG_0216By:  Donald L. Swanson

“Back when I was in school . . .”

This is a tired-old phrase, usually followed by tales of hardship.

The Olden Days

But here’s an opposite twist:  Back when I was in college (during the 1970s), you could actually pay your way through, with little-to-no debt, by working part-time jobs and summers and getting grants and scholarships; or by taking a semester (or two or three) off from school to make money for finishing.  “Cramming four years into six,” is the common (but not very funny) joke from back then about paying for school.

–For professional schools back then, add in (as in my case) a working spouse to make ends meet: we say that, while I earned my J.D. (“Juris Doctor” degree), she earned her P.H.T. (“Put Hubby Thru” degree).

Those days are gone!

The Student Loan Problem

Because I live in the professional world of bankruptcy, I see every now-and-then the fallout from student loans.  And the fallout is ugly.  It’s a picture of highly-educated people (mostly young) buried under a burden of student loans.  And in many cases it’s a debt they will never be able to repay — ever.  Heck . . . many can’t even keep pace with interest accruals, let alone make a dent in the principal balance!

And student loan debts can’t be discharged in bankruptcy, except for the most difficult of all hardship cases.

What is the culprit causing all this?  It’s the easy availability of student loans for the benefit of high-priced colleges.

Student loan programs developed over time with the best of intentions.  Who can argue with the benefits of making a college education at the best-of-all institutions available to everyone, regardless of financial means?  “No one!” is the unfortunate answer.

But the best of intentions can (and often do) go awry and produce unintended consequences.

A Diagnosis

Here’s what’s gone awry with student loan programs:  the true beneficiaries are high-priced colleges, not students.

The high-priced colleges, who revel in beautiful campuses and other luxuries, create a demand from tuition-paying students for luxuries.  And other colleges must-keep-pace or die.  Who wants to go to a college with low-quality facilities when luxuries can be enjoyed elsewhere?

And then there is the marketing-genius deception.  It seems, in many situations, that neither young college-bound students nor their parents can discern the difference between, (i) a college charging low-prices and offering limited scholarships, and (ii) a college charging outrageously-high prices but giving huge-percentage scholarships that result in a still-outrageously-high actual cost.  Student loans enable students to choose the still-outrageously-high-cost college.  Unfortunately, this marketing-genius deception merely feeds the beast and magnifies the problem.

An Ancient Proverb

Moreover, the following ancient proverb applies in full-force to the student loan crisis:  “The borrower is servant to the lender.”  Here are some real-life examples of how the proverb works for student loan debts:

–How about the young couple who met at a high-priced professional school and have been in the working world for several years.  Both are buried under a mountain of student loans.  One of them really, really wants to pursue a coaching career, instead of the schooled profession—but that’s not possible because student loans require continuation in the higher-paying career.

–How about the graduate from a high-priced school who works at a high-end salary in his/her schooled profession; but even with the high-end salary, the young professional is unable to pay accruing interest on student loans and can’t even begin to pay on principal.

–Or how about the older person who, feeling trapped in a dead-end job, is persuaded to spend large amounts on additional education at a high-priced college, only to learn the hard-way that this additional education provides little-or-no actual improvement in the student’s marketability.

–And what about the graduate who earns a sufficiently-high income to cover monthly student loan obligations but pines: “If I had known what my high-priced education would actually require in servicing student debt, I would never have taken that path!”

An Escalating Problem

But the high-priced schools from which these people graduated continue to charge their students outrageously-high amounts, continue to build gorgeous buildings and provide other luxuries, continue to invest huge sums into athletic teams, scholarships and facilities, and adamantly refuse to pursue an affordable-cost education model.

The upshot is that even traditionally-low-cost colleges (e.g., community colleges) are forced to compete in the luxury realm: are building fabulous campuses, are increasing their visibility, and are raising their tuition.  And the student loan crisis is hitting students even there.  This is a shame!

Dependency

Have you read the book, “The Millionaire Next Door”?  This book argues that adult children need to be economically self-sufficient, and it decries economic dependence of adult children on their parents.  In the student loan crisis, this argument is commonly applied to students and their parents.

I contend, however, that this argument is most-directly applicable to colleges and the providers of student loans.  Student loans have enabled a bent-toward-luxury among colleges—especially among high-priced colleges—and a related dependence of colleges on this economic support.  Most high-priced colleges (and now even low-cost colleges) are utterly dependent on the continued flow of easily-obtained student loans.  Such dependence always has prevented, and continues to impede, the development of affordability-based education models.

The Impact

Easy student loans have enabled and entrenched today’s unaffordable model of higher education.  And today’s higher education schools are dependent on such loans continuing.

Unfortunately, the ones who pay the ultimate price for such dependence are the loan-incurring students—not the dependent colleges.

Any ideas on what can be done about this problem?

Why Don’t Consumer Cases Mediate?

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A wide gap

By: Donald L. Swanson

Mediation is firmly entrenched as a dispute resolution tool in bankruptcy.  Mediation is commonly and regularly used throughout the bankruptcy system.  And mediation’s value in bankruptcy is almost-universally recognized.

A Mediation Gap

But there are wide gaps in bankruptcy where mediation is still under-utilized.  One of the gaps is consumer cases.  Hardly anyone uses mediation to resolve disputes in consumer cases, unless mediation is required by local rule.

I don’t know why or how this gap exists in consumer cases.  But the gap’s existence is a shame because:

–There are mediators in nearly every bankruptcy district who would be more-than-happy to make consumer mediation work.

–Costs and time commitments can be minimized in consumer cases by, for example:

–agreeing to a reduced or flat fee for the mediator;

–eliminating mediation statements (the mediator can get information from the court’s online filings);

–limiting the time commitment for a mediation session to a couple hours or half-day; and

–meeting by telephone when distances are prohibitive.

Attorney Resistance

My experience is that bankruptcy judges would be more-than-happy to approve mediation in consumer-cases.  It’s the attorneys in such cases who are resistant to (or simply don’t think about) mediation.

A 2016 Example

Here’s an example of resistance.

In re Whittick, 547 B.R. 628 (Bankry. N.J. 2016), is an adversary proceeding brought by the Chapter 7 Trustee to recover $13,642 from the Chapter 7 Debtor and his spouse.  The spouse did not file bankruptcy.  Legal wrangling ensues.

New Jersey’s Bankruptcy Court has a local rule mandating mediation.  N.J. LBR 9019-2(a)(1) provides:

–“Every adversary proceeding will be referred to mediation after the filing of the initial answer to the adversary complaint,” unless the parties decline.

The In re Whittick case is teed up for mediation under this local rule.  But the parties decline mediation.

So, the case moves forward on cross-motions, and supporting briefs, for judgment on the pleadings.

A hearing on the cross-motions results in a lengthy opinion from the court (the opinion covers fifteen pages — small type; single space; narrow margins; no pictures).  But the opinion resolves only one issue and sets a trial on remaining issues.  The ruling is as follows:

The Trustee’s “Motion for Judgment on the Pleadings is GRANTED IN PART only to the extent that the court finds that the loan proceeds/funds are property of the estate, but DENIED as to all other matters.

The Defendants’ “Cross Motion for Judgment on the Pleadings is DENIED.”

“A trial will be scheduled on the issue of whether the Debtor transferred the proceeds/funds with the intent to conceal (section 522(g)), and if not, if an exemption applies.”

Several months later, as trial approaches, the parties enter into a “Stipulation of Settlement,” under which the Defendants agree to pay $10,000 to the bankruptcy estate.

A Mystery

This is a mystery.  Why did the parties decline to mediate this dispute?  Declining mediation make no sense here:

–The economics of the case are terrible — who can afford to litigate anything where $13,642 is at stake?

–The parties decide to litigate instead of mediate, and they probably spend more in fees (on each side) than the amount that’s at stake in the dispute.

This is a shame!

 

Mortgage Modification Mediation (“MMM”) . . . A Program Worth Adopting

By: Matthew Gillespie

For many, if not most of us, our homes are our biggest assets. The inverse of this is also true – our mortgages are often our biggest liabilities.

It makes sense, then, that in Chapter 13 consumer bankruptcies, a debtor’s mortgage can have a major impact on the success (or lack thereof) of a plan. For some, the advantages provided to a Chapter 13 debtor are not enough, and meeting the terms of the mortgage itself is untenable. What is a debtor to do?

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Addressing an underwater mortgage in bankruptcy can leave you navigating through the weeds.

A number of bankruptcy courts throughout the country have created a program around one commonsense answer: mortgage modification mediation (called ‘MMM’ for short). This program creates a set of procedures for qualifying debtors to begin a mediation process with their mortgage lenders for loan modification. The lender can also initiate the mediation.  Neither party is obligated to reach an agreement – all that’s required is good faith negotiation.

Now, renegotiation of the terms of a mortgage (‘mortgage modification’) is nothing new. But for many, mortgage modification through procedures established by a lender can be arduous and painful in the best of times – for both sides. The MMM program seeks to ease this process for debtor and lender alike.

While each court has adopted slightly different procedures for its MMM program, the basics are the same:

–First, either the Chapter 13 debtor or the lender petitions the court for MMM. Each district I’ve found that’s adopted such a program requires debtors to dedicate 31% of their gross income to a modified mortgage (or, for some, 75%-100% of the current monthly mortgage payment).

–Second, if and when the motion is approved, each party pays an amount (typically between $200-$400) for the mediation fees, and agrees to split any additional costs evenly.

–Finally, a successful modification agreement is then approved by the court.

That’s it! In the words of the United States Bankruptcy Court for the Northern District of Florida:

The [MMM] program is streamlined to reduce costs, save considerable time, and make it easier for the parties to facilitate a loan modification.

While these courts have taken a bold step to encouraging the efficient and mutually beneficial resolution of Chapter 13 mortgage modifications, both debtors and lenders can take a leaf from these courts’ books by encouraging voluntary mortgage modification mediation in Chapter 13 bankruptcies.

Adopting the MMM program should be considered by every jurisdiction that doesn’t already have it.

To learn more about MMM programs, take a look at a few of the bankruptcy courts that have chosen to support mortgage modification mediation: N.D. Cal., D. Nev.,  E.D.W.I.

Bankruptcy Mediation for the Little Guy – Part 2: Nebraska in the Lead

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By Matthew Gillespie

In my previous post, I discussed the Nebraska’s Federal Practice Fund: a fund based on attorney admission fees that, inter alia, allows parties in bankruptcy proceedings to apply for funds to pay their portion of mediation fees when they’re unable to pay themselves. Nebraska’s District Court adopted this measure under the umbrella of the Guide to Judiciary Policy, Vol. 13, Ch. 12.

To my chagrin, I could not find another federal court fund that will pay for an indigent party’s portion of a bankruptcy mediation tab. Continue reading “Bankruptcy Mediation for the Little Guy – Part 2: Nebraska in the Lead”

Bankruptcy Mediation for the Little Guy – Part 1: Financial Assistance

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No money in the wallet, no mediator?

By Matthew Gillespie

Of all the benefits mediation provides, the perennial favorite is this: it saves money! Not only can a successful mediation conclude a dispute without the rigmarole and expense of a hearing (or worse, trial), but even unsuccessful mediations can bring the parties closer to resolution of the dispute another time.

But what happens when both parties to an adversary proceeding or contested matter are open to mediation, but, perhaps predictably, the consumer debtor doesn’t have the capital to pay for his or her portion of a mediation? Continue reading “Bankruptcy Mediation for the Little Guy – Part 1: Financial Assistance”