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State law conversion claim allowed for improper disposition of attorney's fees

In Deborah K. Ebner, as Chapter 7 Trustee for the Bankruptcy Estate of Santilli Law Group, Ltd.Plaintiff, v. Alfred Vano, Case 17-00293, (Bankr. N.D. Ill. 06/15/18), Judge Cox of the Northern District of Illinois held that an attorney that improperly deposited a settlement check from his former law firm, was liable to the former law firm (through its bankruptcy trustee) for the value of the check under a state law conversion theory. Trustee, Deborah Ebner, was appointed trustee for the bankruptcy estate of Frank Santilli, after Mr. Santilli filed a chapter 7 proceeding. Mr. Santilli’s firm specialized in personal injury and wrongful death cases, as well as Worker’s Compensation matters. The defendant, Alfred Vano, was an employee of the law firm. The Trustee sued Mr. Vano, after he deposited a settlement check for $333,000 into his own IOLTA account. The settlement check was for a case that belonged to the law firm (the wrongful death lawsuit stemming from the deadly 2003 stampede at Chicago’s E2 night club), and thus Judge Cox held that Mr. Vano exercised unauthorized and wrongful control over the debtor’s personal property. The case is notable because the Court held that typically a conversion claim does not exist for intangible rights, but that the property converted was the settlement check, which was a form of commercial paper and thus subject to a claim. Read More
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Serial bankruptcy filings initiated to delay creditor action can lead to criminal charges

In United States v. Williams, Case No. 17-2244 (7th Cir., June 6, 2018), the Seventh Circuit upheld jury trial verdict against Charlise Williams on five counts of bankruptcy fraud, resulting in 46 month prison sentence. Read More
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Student loans discharged even when Debtor was not required to make payments on loans

In Murphy v. United States, 15-11240-j7 (Bankr. D. N.M. June 1, 2018), the Bankruptcy Court in New Mexico held that a debtor who was not obligated to make payments on student loans because she qualified for a -0- payment under an Income Based Repayment Plan (“IBR”), could still discharge the loans in bankruptcy under the Brunner test.  According to the Bankruptcy Court: Even though Ms. Murphy is eligible for an IBR plan that will likely require a payment of zero dollars per month during the periods of loan repayment, and would stay on IBR plans if her student loan debt is not discharged, the Court is persuaded that her student loans represent an undue hardship under the Brunner test. In reaching this decision, the Court is relying on the unique circumstances of this case including but not limited to: (1) Ms. Murphy’s age and physical condition; (2) Mr. Joseph Murphy’s severe disability and Son A’s mental illness and suicidality and Ms. Murphy’s substantial role in caring for them; (3) Ms. Murphy’s limited prospects for future employment given the flexible work hours Ms. Murphy needs to care for Son A; (4) Ms. Murphy’s income and frugal expenses; (5) Ms. Murphy’s eligibility to pay zero under IBR plans, which likely would never change; and (6) Ms. Murphy’s previous efforts to use repayment plans, consolidate her loans, and enter deferments or forbearances. The Court is also taking into account the tax law under which debt forgiveness results in taxable income. The Court will therefore discharge her student loans under 11 U.S.C. § 523(a)(8). The Bankruptcy Court also rejected the argument that “a debtor’s eligibility for an IBR plan automatically renders a debtor ineligible to receive a student loan debt discharge under § 523(a)(8)”, instead reasoning that the eligibility for an IBR was one factor to consider, albeit an “important factor.”  According to the Court, [A] debtor’s ability to participate in an IBR plan does not prevent a debtor from obtaining a hardship discharge of her student loan debt at least when: (a) the debtor has demonstrated a willingness to participate in an IBR plan or alternate repayment option prior to bankruptcy; (b) the debtor has made reasonable efforts to maximize her income and minimize her expenses; (c) there is no realistic prospect the debtor would ever be required to make any payment on the student loan debt under an IRB plan as those plans are currently designed; (d) there are negative consequences to the debtor by denying the student loan hardship discharge; and (e) the debtor otherwise has demonstrated good faith. No purpose would be served by denying a student loan discharge when the debtor meets these conditions even though the debtor is eligible to participate in an IBR plan. Read More
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Supreme Court Sets a Trap for the Unwary Debtor

“One of the ‘main purpose[s]’ of the federal bankruptcy system is ‘to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character.’” Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. ___ (2018)(citing Stellwagen v. Clum, 245 U. S. 605, 617 (1918)). “To that end, the Bankruptcy Code contains broad provisions for the discharge of debts, subject to exceptions.” Id. One such exception is found in 11 U. S. C. §523(a)(2), which provides that a discharge under Chapter 7, 11, 12, or 13 of the Bankruptcy Code ‘does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by’ fraud.” Id. “This exception is in keeping with the ‘basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’” Id. (citing Cohen v. de la Cruz, 523 U. S. 213, 217 (1998)). “More specifically, §523(a)(2) excepts from discharge debts arising from various forms of fraud.” Id. Subparagraph (A) bars discharge of debts arising from ‘false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition.’” Id.  “Subparagraph (B), in turn, bars discharge of debts arising from a materially false ‘statement…respecting the debtor’s . . . financial condition’ if that statement is ‘in writing.’” Id. On June 4, 2018, the Supreme Court issued an opinion in the matter of Lamar, Archer & Cofrin, LLP v. Appling (“Lamar”) providing additional guidance as to whether a statement regarding a single asset is a “statement respecting the debtor’s financial condition” such that it must be written in order to be determined non-dischargeable. Although, in the end, the debtor prevails in this case, the take away message for all debtors is to be very careful about what you say (and put in writing) when communicating with those you owe. The underlying facts of Lamar are not unusual.  Lamar, a law firm, represented Appling in connection with business litigation. Appling failed to pay Lamar’s invoices and ultimately owed Lamar over $60,000. When Lamar threatened to withdraw from the representation, “Appling told his attorneys that he was expecting a tax refund of approximately $100,000, enough to cover his owed and future legal fees.” Id.  Relying upon Appling’s statement, Lamar continued in the representation. Id. However, Appling’s tax refund ended up being substantially less than represented (approximately $60,000) and when received, Appling used the refund for business expenses rather than paying Lamar. Id. After receiving the refund, Appling falsely to Lamar the refund had not yet been received. Id. Five years later, after concluding its representation of Appling, Lamar obtained a judgment against Appling in the amount of $104,179.60. Id. Shortly thereafter, Appling filed for relief under Chapter 7 of the Bankruptcy Code. Id. Lamar filed a complaint against Appling seeking a determination that the debt for unpaid legal fees that Appling owed to “Lamar was nondischargeable pursuant to 11 U. S. C. §523(a)(2)(A), which governs debts arising from ‘false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition’” based on Appling’s false statements regarding the tax refund. Id. “Appling, in turn, moved to dismiss, contending that his alleged misrepresentations were “statement[s] . . . respecting [his] financial condition” and were therefore governed by §523(a)(2)(B), such that Lamar could not block discharge of the debt because the statements were not in writing as required for nondischargeability under that provision.” Id. “The Bankruptcy Court held that a statement regarding a single asset is not a ‘statement respecting the debtor’s financial condition’ and denied Appling’s motion to dismiss.” Id. (citing Lamar, Archer & Cofrin, LLP v. Appling, 500 B. R. 246, 252 (M.D Ga. 2013)). “After a trial, the Bankruptcy Court found that Appling knowingly made two false representations on which Lamar justifiably relied and that Lamar incurred damages as a result…[and] concluded that Appling’s debt to Lamar was nondischargeable under §523(a)(2)(A).” Id. (citing Lamar, Archer & Cofrin, LLP v. Appling, 527 B. R. 545, 550–556 (M.D Ga. 2015)). “The District Court affirmed.” Id. (citing Appling v. Lamar, Archer & Cofrin, LLP, 2016 WL 1183128 (M.D Ga., Mar. 28, 2016)). “The Court of Appeals for the Eleventh Circuit reversed…[holding] that ‘statement[s] respecting the debtor’s . . . financial condition’ may include a statement about a single asset.” Id. (citing In re Appling, 848 F. 3d 953, 960 (2017)). “Because Appling’s statements about his expected tax refund were not in writing, the Court of Appeals held that … Read More
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Millions of U.S. homeowners still underwater on mortgages, with Chicago being one of the hardest hit markets

According to the American Bankruptcy Institute:  A staggering number of American homeowners remain underwater on their mortgages a decade after the housing bubble burst, Bloomberg News reported. Almost 4.5 million households — or 9.1 percent — owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property’s value. While the percentage is declining, families in communities with stagnant property values are “trapped in their homes with no easy options to regain equity other than waiting,” said Aaron Terrazas, a senior economist at Zillow. Virginia Beach, Va., Baltimore and Chicago are the hardest hit metropolitan areas, based on effective negative interest rates, according to Zillow. Read More
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Chicago Court orders City to surrender vehicle to Debtor notwithstanding asserted possessory lien to secure traffic tickets

In a recent case, Judge Schmetterer held in In re Cross, Adversary No. 18 AP 00154, that the City of Chicago did not have the right to retain a chapter 13 debtor’s vehicle to protect its possessory lien on the car that allegedly secured payment of 30 traffic tickets.  According to the Court: The Seventh Circuit opinion in Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699 (7th Cir. 2009) placed the burden squarely upon creditors to initiate a showing as to why they should be allowed to retain vehicles of bankruptcy debtors that were seized prepetition. Unless such showing is initiated, creditors must tender the vehicle because of the automatic stay. The City of Chicago has completely disregarded this obligation, choosing instead to continue holding vehicles of debtors post-petition and waiting many months until proceedings are brought by debtor against it in bankruptcy and then assert a response that its purported possessory lien grants it an exception to the automatic stay. The City has taken this tactical delay position to coerce debtors to pay traffic fines quickly and fully in their bankruptcy plan and also to avoid paying filing fees required for the filing of motions for relief from the automatic stay. In this way, the City is circumventing entirely the procedural burden imposed on it by Thompson and the protections provided to debtors by the automatic stay. The City must comply with the requirements of Thompson so that debtors may, unless some cause is shown, recover their vehicles in bankruptcy, allowing them to continue working and making payments under their Chapter 13 plans. Read More
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Illinois among top 10 states for credit card debt.

According to a May 30, 2018 article in Illinois Patch, Illinois is among the top 10 states where residents have the most credit card debt. That’s according to a report released Tuesday by New York Comptroller Thomas DiNapoli. According to the study, Illinois residents had racked up a whopping $32.2 billion in credit card debt by the end of 2017. But that pales in comparison to California — the state where you’ll need to earn the most to be considered “rich” — where the total was $106.8 billion. These were the top 10 states with the most credit card debt, according to DiNapoli: California $106.8 billion Texas $67.3 billion Florida 59.2 billion New York $58.1 billion Pennsylvania $33.2 billion Illinois $32.2 billion New Jersey $29.6 billion Ohio $26.7 billion Virginia $26.5 billion Georgia $26.3 billion The report offered some sobering statistics about credit card balances nationwide, which declined between 2008 and 2013 but began climbing again in 2014, DiNapoli said. In 2017, there were nearly 470 million credit card accounts with available balances totaling $3.5 trillion nationwide, with credit cards being the most common method for consumer borrowing, the report notes. Read More
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Parties to a Civil Union Held Eligible to File a Joint Petition

As reported by Rochelle’s Daily Wire on May 23, 2018, Bankruptcy judges in California and Chicago disagree on whether parties to a civil union or domestic partnership are “spouses” eligible to file a joint bankruptcy petition. In the Chicago case, a same-sex couple filed a joint chapter 13 petition, but the chapter 13 trustee objected to confirmation, contending that the two were not spouses because they did not have a marriage certificate. Arguing that they were not eligible to file a joint petition, the trustee wanted Bankruptcy Judge Deborah L. Thorne to dismiss one of the debtors from the case. Judge Thorne concluded that the couple’s certificate of civil union put them “substantively in a state of marriage with one another under Illinois law” and were therefore eligible to file a joint plan. The governing federal statute is Section 109(e) of the Bankruptcy Code, which provides that a joint case is commenced by the filing of a petition by a debtor “and such debtor’s spouse.” Similarly, Section 302(a) says that a joint case is commended by a debtor “and such individual’s spouse.” In her May 17 opinion, Judge Thorne noted that the Bankruptcy Code does not define “‘spouse’ nor is there a comprehensive federal definition to be found elsewhere.” Citing a 1930 Supreme Court decision, she said that someone “is in a state of marriage” based on that person’s status under state law. Judge Thorne therefore consulted Illinois law to determine the status of the debtors to one another. The Illinois Religious Freedom Protection and Civil Union Act provides that the parties to a civil union have “the same legal obligations, responsibilities, protections, and benefits” as those given to spouses. Since the couple’s status was “substantively identical” to that of married persons, Judge Thorne concluded that they are “spouses within the meaning of that term as used in Sections 109(e) and 302(a),” making them eligible to file jointly. Judge Thorne cited contrary bankruptcy court authority from California in 2015, noting that the two states’ statutes are “largely similar,” although not entirely identical. The 2015 case in turn was based on a 2005 California appellate court decision saying that the federal government treats civil unions differently from marriages. “This is still true today,” Judge Thorne said. Judge Thorne said, however, that different treatment by the federal government is not “relevant to the substantive nature of the two debtors’ status under Illinois law.” Likewise, she said it was not relevant that other states might not recognize or give validity to an Illinois civil union. Unlike some other courts, Judge Thorne also declined to make any determination as to whether a civil union has the “same social meaning as marriage or is culturally inferior to marriage.” Notwithstanding the California decision, Judge Thorne held that whether two people are “in a state of marriage . . . such that they are spouses . . . under federal bankruptcy law depends on the substance” of their status to one another under state law. She said that “state law labels and classifications are not controlling in and of themselves.” Because the couple’s legal status is “substantively identical” to a marriage, Judge Thorne decided that they were spouses eligible to file a joint chapter 13 case. Read More
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Bankruptcy Costs Limit Access

According to an article published in Pro Publica, a consumer’s inability to pay attorneys’ fees prevents many consumers from filing for bankruptcy.  This phenomenon has spawned considerable debate about the appropriate “fix”, but no good solution stands out.  Some argue for changes to the law to facilitate post-petition installment payments in chapter 7 and/or to streamline the filing process and thus reduce the cost, while others argue debtors should not be able to file until they have saved enough for the fees.  Most would agree a legislative solution is not feasible at this time (how about a tax credit so that consumers could use tax savings to pay the fee), and thus debtors and bankruptcy lawyers will continue to work together to find acceptable alternatives in the meantime. Read More
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According to new case NACBA reported, a Chapter 13 Debtor could not defer surrender of her home until her son graduated High School

In re Thompson, from the District of Massachusetts (17-11318-MSH), the court rejected a plan that delayed the surrender of a house so the debtor’s child could finish high school without moving.  The court reasoned, among other things, that “if a secured creditor is legally foreclosed from immediately obtaining the property that a debtor proposes to surrender and the debtor does not in fact voluntarily relinquish all rights in the property, including the right to possession, to the secured creditor, then the debtor can in no way be said to have “surrendered” any of his rights in the property. Read More
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