WESTERN DISTRICT OF PENNSYLVANIA

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1 WESTERN DISTRICT OF PENNSYLVANIA Klaas v. Shovlin (In re Klaas), 858 F.2d 820 (3d Cir. 2017) End of plan term shortfall, dismissal, discharge Paul and Beth Ann Klaas filed for Chapter 13 Bankruptcy in At the end of their 60-month plan, the Klaases were $1123 short of their plan goal, and the Trustee brought a Motion to Dismiss based on that shortfall. However, the Trustee s Motion also specified that if the shortfall were to be paid by the Debtors she would withdraw the Motion and allow the case to proceed to Discharge. The Debtors responded by paying the entire shortfall amount within two weeks, and the Trustee withdrew the Motion. Significantly, the Motion to Dismiss had been joined by Elizabeth Shovlin, a successor in interest to several unsecured claims. Ms. Shovlin argued that the late payment was invalid because it exceeded the 60-month time frame for Chapter 13 plans, and that the case should be dismissed. The Bankruptcy and District courts both held that it was not improper for the Trustee to accept a final payment outside of the 60-month time frame. An appeal was taken to the Third Circuit, and the opportunity for oral argument was granted. Staff Attorney Owen Katz presented the oral argument to Judges Fisher, Vanaskie and Krause. Judge Krause authored the opinion, which was designated as having precedential value. On appeal, Ms. Shovlin argued that under the plain language of 1322 a Court cannot approve a plan longer than 60 months. However, the Circuit Court agreed with the Trustee that 1307 s power to grant dismissal has no limitation on term length. Rather, upon material default, the Court may dismiss for cause. Also, 1328 directs the Bankruptcy Court to issue completion discharge if the debtor has completed all payments. There is no requirement that this be done within five years. Citing In re Brown, 296 B.R. 20 (Bankr. N.D. Cal. 2003), the Court elaborated on Brown s list of factors which would justify a grace period for plan completion: Due diligence throughout the plan Feasibility of rapid completion Whether grace period would prejudice creditors Whether Debtor was innocent or culpable in creating the shortfall Other remedies, including hardship discharge and conversion. Applying this standard, the Court concluded that it was proper for the Bankruptcy Court to allow Debtors to complete their claim and receive a discharge. Ocwen Loan Servicing, LLC v. Randolph, 2018 U.S. Dist. LEXIS W.D. Pa. Mar.2, 2018) Rule to Show Cause not final and appealable order This appeal originated when Chapter 13 Trustee Ronda Winnecour observed a pattern of conduct by Appellant Ocwen Loan Servicing. In several cases where mortgages were serviced by Appellant, postpetition fee notices were brought for fees that seemed boilerplate, and excessive in comparison to the work involved. Appellant conceded that the fees were improper and offered to remove them from the loans. In order to verify that this had been done, the Bankruptcy Court on July 26, 2017 ordered Appellant to produce complete loan histories. In response to this request, Appellant produced only partial loan histories, resulting in a second order and a hearing on August 31, At that time the Court ordered Appellant to produce complete loan 1

2 histories and also raised the possibility of sanctions for noncompliance. As of December 1, 2017, Appellant had still not complied. The Court entered an order on December 21, 2017, for Appellant to show cause for its noncompliance with prior orders. A hearing was scheduled for January 30, That hearing never occurred, however, because Appellant filed an appeal to the District Court on January 4, The appeal was heard by Chief District Judge Joy Flowers Conti. At the outset, the Judge ruled that since appeals to the District Court must be taken within fourteen days of the order being appealed, the only order at issue was the Bankruptcy Court s December 21, 2017 order issuing a rule to show cause. Appellees argued that the rule to show cause order was not appealable because it was not a final order. A final and appealable order is one that ends the litigation on its merits and leaves nothing for the court to do but enter judgement. The December 21, 2017 order, by contrast, simply scheduled a hearing and required Appellant to explain why it did not comply with previous orders. Appellant also contended with regard to one underlying case that the Court lacked jurisdiction because the Debtor had completed the plan and exited the Chapter 13 process. The Court rejected this argument on the basis that the actions taken by a court to enforce its prior orders are within its ancillary jurisdiction, even post dismissal. The Motion to Dismiss the appeal was granted, and the case remanded to the Bankruptcy Court for further proceedings. NOTE: Cases involving Notices of Post-Petition Fees continue to appear regularly in Chapter 13 cases in Pennsylvania s Western District. These result in frequent objections by the Chapter 13 Trustee. In an effort to increase transparency and to streamline these disputes generally, Judge Thomas Agresti has drafted a form order which he first used in the case of Elmer and Teresa Reitz, Case No Judge Agresti s order requires that a party requesting post-petition fees must make a reasonable effort to present: A computation of mortgage fees expenses and charges, A complete and accurate loan payment history, For attorney or other professional fees, a description of services and the fees charged, For all other expenses, a receipt or other documentation, In the event that these cannot be produced following due diligence, an identification of the reasons for nonproduction, and a description of the efforts made, A declaration affirming the veracity and accuracy of the foregoing. In re Maya Rests., 2018 Bankr. LEXIS 968 (Bankr. W.D. Pa. Mar. 29, 2018) Bad faith, sanctions Chapter 7 Trustee Rosemary Crawford was nearly arrested on criminal charges while conducting a site visit at the Maya Restaurant in McKeesport. The restaurant s owner, Prasad Marabandhu lodged a complaint for trespass and burglary, but failed to tell the police that Ms. Crawford was the Trustee in his Chapter 7 bankruptcy action. Ms. Crawford s site visit was not spontaneous, but rather followed a long history of misinformation and false claims by the Debtor. Although the criminal charges were withdrawn, the Bankruptcy Court 2

3 nonetheless awarded sanctions against Debtor on the basis that his actions were an attempt to impede the Trustee s administration of the Bankruptcy estate. Spero v. Cmty. Chevrolet, Inc. (In re Grooms), 572 B.R. 559 (Bankr. W.D. Pa. 2017) Avoidance of property transfer Debtor was employed as a manager at Community Chevrolet in Meadville, where over a course of several years he embezzled approximately $485,000. When Debtor was fired for unrelated misconduct in 2014, the company discovered the extent of his misdeeds, and alerted the authorities. Eventually, Robert Kongelka, the owner of Community Chevrolet, was informed that Debtor had admitted to embezzlement and intended to make a full restitution. An initial payment was made in the amount of $100,000 on November 18, Debtor filed for Chapter 7 bankruptcy protection on January 15, The Trustee made a demand on Community Chevrolet for the return of the $100,000 payment on the basis that it constituted an avoidable preference. Notwithstanding the provisions of the Mandatory Victims Restitution Act, the Court concluded that this case was governed by the provisions of 11 U.S.C. 547(b) which provides for the avoidance of a property transfer where the transfer is: For the benefit of a creditor, For a prior debt owed by the debtor before the transfer was made, Made while the debtor was insolvent, Made o 1) within 90 days of the filing of the petition, or o 2) between 90 days and one year before the filing of the petition, if the creditor is an insider, Enables the creditor to receive more than he/she would if o 1) the case was a Chapter 7 liquidation, o 2) the transfer had not been made, and o 3) the creditor received the payment to the extent provided by this title. All of the elements of 547(b) being met, the Judge concluded that Bankruptcy Code should prevail, particularly when the criminal restitution judgement was not entered until after Debtor had made the payment and after the bankruptcy petition had been filed. Thus the $100,000 payment was not made pursuant to a criminal restitution order. Wells Fargo Bank, N.A. v. Heyden (In re Heyden), 570 B.R. 489 (Bankr. W.D. Pa. 2017) Late claims, loss mitigation Ms. Lilla Heyden filed for Chapter 13 Bankruptcy in July of Within two weeks she filed a plan which showed Movant Wells Fargo as having a secured claim of $115,000, listed as long term debt to be continued and reinstated. Debtor filed a motion for loss mitigation as to the Wells Fargo loan and the program progressed with minor hiccups and delays until March 9, 2016, when Debtor s counsel remarked that he could not calculate the arrears on the claim since Wells Fargo had never filed a formal Proof of Claim. On March 17, 2016, Wells filed a proof of claim in the amount of $213,588.48, with arrears of $123, Wells acknowledged the lateness of the filing but argued that there could be no prejudice since Debtor had 3

4 included the Wells claim in her plan. On April 4, 2016, Debtor filed a Response to Wells motion, objecting on the basis that Wells had not stated a case for excusable neglect under Rule 9006(b)(1), and that she would be severely prejudiced if the claim were allowed. Meanwhile, the loss mitigation process continued through many delays and extensions. Ultimately, loss mitigation was terminated on February 8, 2017, and a hearing on Wells late filed claim was held on May 31, Wells argued that it inadvertently missed the December 7, 2015 bar date due to a systems glitch as the result of the conversion of its loan to another platform base. Wells argued that the systems glitch constitutes excusable neglect under Rule 9006(b)(1). However, the Court found that the governing standard was Rule 9006(b0(3) which provides, the court may enlarge the time for taking action under Rules 3002(c) only to the extent and under the conditions stated in those rules. Because none of the six exceptions set forth in Rule 3002(c) are presented here, the Court declined to entertain the late filed claim. The Court did note, however, that the mortgage claim was likely to survive the bankruptcy action, and in that sense Wells may receive some future relief. Doernte v. Educ. Credit Mgmt. Corp. (In re Dorernte), 2017 Bankr. LEXIS 1407 (Bankr. W.D. Pa. May 25, 2017) Student loans, hardship discharge Debtor Beverly Doernte requested that her student loans be discharged on the basis of undue hardship. The court noted that the Bankruptcy Code s provisions regarding the non-dischargeability of student loans are clear. According to the legislative history of the student loan program, in the early days nondischargeability was seen as a way to shore up a possibly shaky loan program. The standard for undue hardship, therefore, was narrowly drawn. The Court applied the analysis of Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). Under the Brunner test, the debtor must meet all of three requirements: Based on current income and expenses, the debtor cannot maintain a minimal standard of living, Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period, The debtor has made a good faith effort to repay the loan. As a result of a 2003 student loan consolidation, Debtor is burdened with $126, of student loan debt. Debtor s employment has ranged from salaries of $47,000 to her current salary of $63,000. As to whether Debtor can maintain a minimal standard of living, the Court noted that Brunner requires more than a showing of tight finances, but does not require the debtor to live in poverty. Debtor has a job with Carnegie Library of Pittsburgh as a database administer. This position pays $63,000 annually, and offers benefits. The Court calculated Debtor s monthly income as above $3,500 per month, significantly exceeding Defendant s lowest income contingent repayment plan, and also more than sufficient to meet Debtor s monthly living expenses. Other significant expenses such as a 401(k) plan, payments to a non-resident spouse who lives apart for medical reasons, and the desire for a new car did not alter the outcome of the case. The court held that the Debtor could not gerrymander her expenses to the detriment of her student loan creditor. 4

5 In re Sandlin, 565 B.R. 337 (Bankr. W.D. Pa, 2017) Loss mitigation program, Family Transfer Package. Debtor Nedra Lynn Sandlin was engaged to be married to William Burda, who executed a note and Mortgage in favor of Quality Mortgage USA, Inc. in The mortgage was assigned several times, ultimately to BNY Mellon, with Ocwen servicing the loan. Mr. Burda passed away in 2015, deeding the Property to Ms. Sandlin. Ms. Sandlin filed for bankruptcy protection, and also sought to participate in the Loan Modification Program. Ocwen provided Debtor with a Family Transfer Package to determine her eligibility for loan modification. Ultimately Ocwen concluded that a fiancé does not qualify for loan modification under the Family Transfer Package, nor was Debtor eligible for a formal assumption. Debtor charged that Ocwen had acted in bad faith. LMP is a structural process to facilitate consensual resolutions when residential property is at risk of foreclosure. The program requires good faith on the part of all participants. Based on Ocwen s conduct in reviewing Debtor s initial packet, requesting additional information and promptly informing her of her ineligibility, the Court concluded that Ocwen was not guilty of bad faith. United States Tr. v. Sivaram (In re Sivaram), 564 B.R. 270 (Bankr. W.D. Pa. 2017) Bad faith, abuse The US Trustee brought a Motion for Dismissal based on the fact that Debtors had a significant increase in their income immediately following the filing of their bankruptcy petition. The Court declined to grant the motion on this basis alone, but found that such the case was so permeated with bad faith that the Trustee s motion was appropriate under a totality of the circumstances analysis. Mathoor and June Sivaram were both unemployed when they filed for Chapter 7 bankruptcy on January 4, However, on January 5, 2015, Debtor husband began working at Oragenics, a Florida corporation, at an annual salary of $109, When the Debtors filed their schedules on February 3, 2015, they reflected that both Debtors were unemployed, and also omitted the fact that their unemployed adult son was living with them without contributing to the household s income. The Debtors eventually amended their Schedules to reflect the husband s new employment, but argued that their financial status should be evaluated based solely on their status as of the date of filing, one day before Mr. Sivaram began working at Oragenics. The Court disagreed, under a totality of the circumstances analysis: The Debtors could repay their creditors. There was no evidence of sudden unforeseen circumstances. Debtors incurred debts in excess of their ability to repay. There was no evidence that Debtors budget was excessive. The Schedules did not initially reflect Debtors true financial condition. Moreover, the Debtors indicated in their Schedules that they did not anticipate a material change in their financial circumstances in the coming year clearly a misrepresentation as Debtor husband became employed the day after the filing. Taking into account the totality of the circumstances, the Court dismissed the case. 5

FOR THE SECOND CIRCUIT. August Term, (Argued: August 22, 2012 Decided: August 30, 2012)

FOR THE SECOND CIRCUIT. August Term, (Argued: August 22, 2012 Decided: August 30, 2012) 11-3209 Easterling v. Collecto, Inc. UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2012 (Argued: August 22, 2012 Decided: August 30, 2012) BERLINCIA EASTERLING, on behalf of herself