Thursday, July 11, 2013

Case law updates from NACBA

Creditor Must Return Repossessed Vehicle upon Bankruptcy Filing
The Second Circuit upheld sanctions against vehicle loan creditor, SEFCU, for refusing to return debtor’s repossessed vehicle without a court order and adequate protection.Weber v. SEFCU, No. 12-1632 (May 8, 2013). SEFCU had lawfully repossessed the debtor’s pick-up truck pursuant to the loan agreement but when the debtor filed for bankruptcy SEFCU refused to return the car. The bankruptcy court determined that SEFCU’s actions did not violate the automatic stay. The district court reversed. Weber v. SEFCU, 477 B.R. 308 (N.D.N.Y. 2012).

On appeal, the Second Circuit walked through the relevant statutory provisions beginning with section 541(a)(1) which provides that upon the filing of the petition, the bankruptcy estate consists of “all [debtor’s] legal or equitable interests in property.” Under New York law, a debtor retains an equitable interest in repossessed property due to his right to redeem, and “under United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), the filing of Weber’s bankruptcy petition transformed the equitable interest into a possessory interest held by Weber’s estate.” Section 542’s mandatory turnover obligation, in conjunction with section 1306(b)’s provision that the debtor retains possession of chapter 13 estate property, required SEFCU to return the vehicle to the debtor without further action.

The court rejected SEFCU’s argument that it did not “exercise control” over the vehicle in violation of section 362. In so holding, the court found that Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D. N.Y. 2001), which held that the repossessed property did not become part of the estate until such affirmative step was taken, was erroneously decided. Additionally, SEFCU’s reliance on Alberto did not make its actions any less “willful” within the meaning of section 362. Willfulness requires only knowledge of the bankruptcy and intentional actions that amount to an unlawful exercise of control.

NCBRC filed an amicus brief on behalf of NACBA.

Inherited IRA Exemption Issue Unsettled by Seventh Circuit
In a departure from the majority of courts, the Seventh Circuit found that debtors cannot exempt inherited IRAs. In re Clark, No. 12-1241 & 12-1255 (April 23, 2013). Section 522(b)(3)(C) permits debtors to exempt“[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” In Clark, the debtor’s mother had an IRA which, upon her death, was transferred to the debtor into one of the tax exempt accounts specified by the Code. As the Fifth Circuit, the BAPs for the Eighth and Ninth Circuits, and many lower courts have found, such accounts may be exempted in bankruptcy. See, e.g., Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012); Mullen v. Hamlin, 465 B.R 863 (B.A.P. 9th Cir. 2012); Doeling v. Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010).

The Seventh Circuit, however, found otherwise. The court’s decision turned on its interpretation of “retirement funds” which it found were no longer “retirement” once they transferred to the debtor’s account. In so holding, the court noted that the debtor did not contribute the funds in contemplation of retirement and that inherited IRAs receive different treatment under the Tax Code. The court expressed its distaste for the outcome that would have resulted from permitting the exemption, saying: “To treat this account as exempt under § 522(b)(3)(C) would be to shelter from creditors a pot of money that can be freely used for current consumption.”

NCBRC filed an amicus brief in this case on behalf of the NACBA membership arguing that the plain language of the Code sets forth only two requirements for the exemption to apply: 1) that the funds in the account represent retirement funds when contributed, and 2) that upon the death of the owner the funds be transferred to a tax exempt account specified in the exemption statute. The majority of appellate courts have agreed with this analysis.

On May 6, 2013, the debtor filed a petition for rehearing en banc.

Fourth Circuit Permits Chapter 20 Lien Strip
The Fourth Circuit is the first circuit court to find that a debtor may strip a wholly unsecured lien in chapter 13 where no discharge is available. In re Davis, No. 12-1184 (May 10, 2013).

Applying the standards applicable in any chapter 13 bankruptcy, both the bankruptcy and district courts held that strip-off was appropriate. The Fourth Circuit agreed finding that the unavailability of discharge does not alter the analysis used when considering whether the debtor is entitled to a lien strip and that, where a lien is deemed valueless under section 506, it may be stripped through the mechanism provided by section 1322(b). Section 1325(a)(5), which provides that a lien survives until it is either paid in full or the debtor is discharged, does not alter this analysis because that section applies only to allowed secured claims, and wholly unsecured liens are not “secured.” The court found that the strip-off becomes permanent upon completion of the plan.

One judge dissented on the grounds that the definition of “allowed secured claim” in section 1325(a)(5), applies to liens that are valueless under section 506(a), and, further, that allowing strip-off in chapter 20 treats the secured creditor less favorably than unsecured creditors. However, as noted by the majority, the difference in treatment between secured and unsecured creditors is a function of the different treatment of in rem and in personam claims in bankruptcy and is, therefore, incidental to the question of lien stripping in chapter 20.

This issue is currently under consideration in the Ninth, Litton Loan v. Blendheim, No. 13-35354, and Eleventh Circuits, Wells Fargo v. Scantling, No. 13-10558, where the lower courts each found that the lien strip was not contingent on the availability of discharge. While NACBA did not participate in this case, NACBA has been involved in this issue at the lower court levels raising the same arguments that were relied on by the Fourth Circuit.See, e.g., In re Fair, No. 10-1128 (E.D. Wisc. April 19, 2011).

Ninth Circuit Denies Petition for Rehearing en Banc
The Ninth Circuit has denied the trustee’s request for en banc rehearing in In re Welsh, No. 12-60009 (9th Cir.). On March 25, 2013, the court affirmed the district court’s finding that social security income may not be considered in PDI nor may a court assess the necessity of items securing debts for which payments have been deducted from PDI. The trustee sought a rehearing on April 8, and the court denied the petition on May 13, 2013. With respect to the decision on the merits of the appeal NCBRC filed an amicus brief on behalf of NACBA.

In re Schieffer, No. 12-1974 (C.D. Cal.)
Issue: Whether court erred in dismissing chapter 13 case after it granted Wells Fargo's motion for loan modification but the trustee never sought plan modification and debtor defaulted on modified mortgage but was compliant with unmodified plan terms.
Argument date: April 15, 2013
NCBRC assisted with the debtor’s brief.
To make a request for assistance from the amicus committee contact Lisa Sharon at

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