Lender Beware – Judge Hoffman provides guidance on the meaning of Bankruptcy Rule 3002.1 and the consequences of failing to comply.

Case Summary by Donald R. Lassman, Law Office of Donald R. Lassman

Infrequently the subject of court review, Judge Hoffman recently had the opportunity to consider Rule 3002.1 and, in particular, the penalties that may be imposed upon a creditor that fails to comply with requirements of the Rule relating to the timely filing of notice of post-petition fees, expenses and charges. 

Rule 3002.1 applies in Chapter 13 cases (1) to claims that are secured by the debtor’s principal residence and (2) where the plan provides for payment of the claim by contractual installment payments.  Rule 3002.1(c) provides as follows:

“The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence.  The notice shall be served within 180 days after the date on which the fees, expenses, or charges are incurred.”

In the Chapter 13 case of In re Lescinskas, 2021 Bankr. LEXIS 360, 2021 WL 623698 (Bankr. D. Mass. Feb. 17, 2021), the mortgage lender filed a Notice on March 11, 2020 that included unpaid legal fees, costs and expenses incurred by the lender since case commencement in 2015.  The Debtor objected to the Notice on the grounds that it violated Rule 3002.1(c) because it included fees, expenses and charges that were incurred more than 180 days before March 11, 2020, the date that the claim was filed, and requested that the Court allow only those fees and expenses incurred after September 13, 2019 (i.e. the date that is 180 days before the filing date of the Notice). 

The Court explained that the purpose of the rule was to prevent lenders from accumulating fees and charges during the pendency of a bankruptcy case and then springing the charges on the debtor at the conclusion of a case when the debtor may have no ability to pay.   Requiring notification of fees and charges during a case provides debtors with the opportunity to review and contest fees and charges and, if appropriate, adjust plan payments to address the post-petition charges.  Concluding that the mortgage lender’s “kitchen sink defenses were unavailing”, the Court ruled that the mortgage lender’s fees and charges would be limited to those incurred within 180 days of the filing of the Notice, thereby reducing the amount recoverable from the debtor by over 90% from $11,278 to $1,207.34.  The lesson of the case is clear – creditors holding claims secured by a debtor’s residence should file Notices of Charges every 180 days in order to preserve their ability to collect those charges from the Debtor. 

BBA Virtual Event: Young Bar Meets Bankruptcy Bench Thurs., Feb. 25th 5:30-6:30pm Online

Description:

The BBA presents live webinars and virtual events via Zoom and Remo. Please register for this program through your BBA account at least two hours before the start time of the program to receive the link.

Are you a young lawyer who is tired of never having your day in virtual Court? Today is your lucky day!

Back by popular demand for the second time, the BBA’s Bankruptcy Law Section is hosting the Young Bar Meets Bankruptcy Bench program to give new lawyers their day in Court (virtually, this year!). Participating attendees will have the great opportunity to argue a “mock” motion before esteemed Bankruptcy Judges and an audience of fellow New Lawyers in a virtual courtroom.  Those attendees who don’t argue a motion will have the great opportunity to observe their peers, learn tips and strategies about oral advocacy, ask the Judges questions during the Q&A segment, and make new connections during the Program’s networking segment. 

If you would like to argue a motion, please email Michael Jusczyk at MJusczyk@seyfarth.com. Please reach out to the BBA staff contact listed below with any questions.

BBA Webinars & Virtual Events are supported by the Joan B. DiCola Fund. To learn more or support this fund, click here.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

BBA Webinar: Enhancing Your Bankruptcy Practice: Advising Veterans and Servicemembers Facing Bankruptcy Wed., Feb. 17th 3-4pm online

Description:

The BBA presents live webinars and virtual events via Zoom. Please register for this program through your BBA account at least two hours before the start time of the program to receive the Zoom webinar link.

This program will provide an overview for Bankruptcy attorneys on how to work with veteran and servicemember clients. 

Topics covered will include:

  • Military Culture: Overview of military structure and tips for working well with servicemembers and veterans.
  • Determining when Bankruptcy Can or Should be Avoided: Financial resources to avoid bankruptcy and special considerations that may make bankruptcy a bad choice for some servicemembers.
  • Special Protections for Servicemembers: Bankruptcy Code and SCRA provisions that practitioners can leverage to benefit servicemember clients.

Please reach out to the BBA staff contact listed below with any questions.

BBA Webinars & Virtual Events are supported by the Joan B. DiCola Fund. To learn more or support this fund, click here.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

Need Anticipated for Pro Bono Chapter 7 Bankruptcy Attorneys

During these challenging economic times, it is anticipated that there will be an increased need for pro bono Chapter 7 Bankruptcy attorneys. As protections for vulnerable groups expire, more volunteer attorneys will be sought to assist those facing Chapter 7 bankruptcy.

To this end, the BBA has hosted two virtual training programs to educate interested volunteers on the basics of Chapter 7 bankruptcy. Each training provided attendees with the building blocks of Chapter 7 Bankruptcy laws and procedures. The first training was held in July of 2020, and the recording for this program can be accessed here. The second training took place in November of 2020, and the recording of this training can be accessed here. Both programs covered identical materials, though the November training was geared more towards western Massachusetts.

If you have any questions about either program, please contact Doug Newton at dnewton@bostonbar.org.

“Dude, Where’s My Car?”*: What City of Chicago v. Fulton means for Debtors attempting to retrieve their motor vehicle upon filing a Chapter 13 Bankruptcy.

Case Summary By: Alex R. Hess, of Alex R. Hess Law Group

On January 14, 2021, the Supreme Court issued an 8-0** decision that changes when a debtor can expect to receive his or her car back upon filing a Chapter 13 bankruptcy.  It also provides a new standard when determining automatic stay violations for creditors in the possession of collateral/Debtor’s personal property.  In short, Fulton provides a new interpretation as to the “status quo” positions of debtor and creditor, in addition to altering a motor vehicle custodian’s obligations to the estate upon the filing of a Chapter 13 bankruptcy.  Practically speaking, this decision is a major change for consumer debtor’s practitioners and changes the answer to the often-asked question from a Debtor client: Once my bankruptcy case is filed, how soon do I have to wait until they release my car back to me?

I. New Automatic Stay Violation Standard.

The Bankruptcy Court found that the City’s refusal to turn over the Debtor’s vehicle once a Chapter 13 petition was filed was a willful violation of the automatic stay.  The Seventh Circuit Court of Appeals affirmed.  The Supreme Court in Fulton reversed, and in doing so, altered the stay violation standard: [T]he language of §362(a)(3) implies that something more than merely retaining power is required to violate the disputed provision.  Id. at p. 4.  By application of this proposition, the Court’s holding issues a new standard for an automatic stay violation:

We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.

II. Facts and Concurrence Analysis.

Fulton is an easily readable decision and concurrence that highlights good policy reasons to help debtors, but unfortunately the holding provides little to no help for debtors.  The respondent finds himself with his motor vehicle in City of Chicago impound for unpaid parking and red-light tickets.  Though respondent lived in Chicago, he relied upon his vehicle in order to get to and from work in Joliet, Illinois, a 45-mile trip each way.  Justice Sotomayor points out in her concurrence two important points: (1) having a car is essential to maintaining employment in this case; and (2) not releasing the car to Debtor upon the bankruptcy filing put his Chapter 13 in jeopardy because he could not get to and from work, may then be unable to earn income and, consequently, ineligible to be a Chapter 13 debtor.  Justice Sotomayor recognizes the importance of a Chapter 13 debtor maintaining employment, retaining possession of his property and thus being able to fund a Chapter 13 repayment plan.  Lastly, Justice Sotomayor couches her policy goals in a fundamental principal of Bankruptcy: all creditors are to be treated equally.  As the Justice reasons: “By denying [Respondent] access to the vehicle he needed to commute to work, the City jeopardized his ability to make payments to all his creditors, the City included.”  Concur. p. 2 (Sotomayor, J.) (emphasis on all appears in Justice Sotomayor’s concurrence).

Despite these reasons and general policies that support immediately releasing a vehicle to the Debtor upon filing a Chapter 13 petition, Justice Sotomayor recognizes the importance of creditor’s interests that condition return upon adequate protection needed to protect all creditors, similar to the policy of allowing the Debtor to work to pay back all creditors.  By way of demonstrating that a creditor has “adequate protection” before turnover, Justice Sotomayor suggests that perhaps a “debtor may need to demonstrate that her car is sufficiently insured.”  Concur. p. 4.  Proving adequate insurance on secured property or important estate assets (property and casualty insurance for a home, or motor vehicle insurance) is already a requirement in the U.S. Bankruptcy Court District of Massachusetts for each Chapter 13 case.  However, given this suggestion by Justice Sotomayor, it may now be considered good practice to file evidence of motor vehicle insurance immediately upon the filing if debtor’s counsel is then tasked with turnover of the Debtor’s motor vehicle as part of the need for filing.

III. The 8-0 Majority Decision and Analysis.

Unlike Justice Sotomayor’s concurrence, the majority decision provides a much more sterile and straightforward analysis of the bankruptcy code verbiage relying on the plain meaning rule and legislative intent in determining what will be the new “status quo.”  Both the Bankruptcy trial court and Circuit Court held that the City’s refusal to release the Debtor’s car was, in fact, a violation of the automatic stay.  Prior to Fulton, most bankruptcy practitioners might also take that position, that a refusal to release property of the estate upon the filing of a Chapter 13 filing was a willful violation of the automatic stay provision.  But that’s not the case anymore.

At the filing of the Fulton Chapter 13 bankruptcy, Debtor’s car was in Chicago impound for $5,393.27 in tickets and fees.  Fulton, 592 U.S. at p. 2 (Sotomayor, J. concurring).  According to Justice Alito writing for the majority, the automatic stay provision prohibits “any act” to “exercise control” over the property of the estate.  Id. at p. 2.  “Taken together, the most natural reading of these terms” prohibits affirmative acts that would disturb the status quo of estate property as of the petition date.  Id.  When the Court breaks down the words to their plain meaning, it finds the following:

An “act” is something done or performed citing Black’s Law Dictionary;

To “exercise” means “to bring into play” or “make effective in action” citing Webster’s Dictionary.

With these definitions, the Court finds that the automatic stay “halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.”  Fulton, 592 U.S. at p. 4. 

IV. Potential Future Litigation and Conclusion.

Fulton’s immediate effect will embolden creditors that possess motor vehicles, or perhaps even more broadly, collateral, to refuse turnover absent proof of insurance, demanding adequate protection, or perhaps simply take the position that holding onto the collateral it possessed prior to the bankruptcy filing is simply the status quo of the case and not an automatic stay violation.  The practical effect is a pitfall for debtors that seek a fresh start and file a bankruptcy in order to get their property back in order to carry out the terms of a Chapter 13 reorganization plan.  While Fulton may provide additional protection to creditors, it provides a burden to a Debtor bar as it may require debtor’s counsel to provide additional documents, negotiate with an obstinate creditor, and work harder for turnover at the beginning of a case.  Where a creditor refuses to turnover Debtor’s car at the beginning of a Chapter 13 filing, the proceeding is facing the prospect of failure.  As Justice Sotomayor reasons, debtors may require a vehicle to commute to and from work, not to mention family obligations (e.g. drop off and pick the kids up from school, grocery shopping, taking care of an elderly parent, etc.).  Without a car, a debtor may face the prospect of missing work, losing hours at work, and ultimately being fired for lack of reliable transportation.  The effects of this may be felt disproportionally in “at will” employment states like Massachusetts, where low-income and hourly-wage workers are most at risk for being replaced and/or fired. 

What does the future of bankruptcy litigation hold after FultonFulton involves a municipal impound lot, and fines/fees for unpaid parking and red-light tickets.  Municipalities are permitted to ticket, tow, and impound vehicles for statutory and ordinance violations.  The same is not true for private tow companies, non-municipal entities, or secured creditors (companies) simply holding collateral.  Possession is not nine-tenths of the law, despite the adage.  Property belongs to the estate upon the filing of a bankruptcy petition and creation of the estate.  The opening line of Fulton emphasizes this: The filing of a petition under the Bankruptcy Code automatically “creates an estate” that, with some exceptions, comprises “all legal or equitable interests of the debtor in property as of the commencements of the case.”  Fulton, 592 U.S. ____ (2021), (Syllabus).

Fulton may unintentionally increase the amount of turnover litigation, whether it be Debtor filing a motion for turnover or a Trustee filing an adversary proceeding to recover estate property from an unrelenting creditor.  While the Court addresses these potential consequences, Justice Sotomayor, in an example of judicial restraint, identifies the parties responsible to remedy this:

Ultimately, however, any gap left by the Court’s ruling today is best addressed by rule drafters and policymakers, not bankruptcy judges. It is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned. Congress, too, could offer a statutory fix, either by ensuring that expedited review is available for §542(a) proceedings seeking turnover of a vehicle or by enacting entirely new statutory mechanisms that require creditors to return cars to debtors in a timely manner.

Fulton, 592 U.S. at pp. 3-4 (Sotomayor, J. concurring).

The Bankruptcy Courts are already operating at capacity, and we have yet to truly see the fallout from COVID-19 business closures and individual petitions once CARES Act, unemployment and other assistance programs dry up or are discontinued.  Beginning some Chapter 13 filings with turnover litigation is not ideal for the court, Trustee or debtor’s counsel.  Moreover, it would be doubly disappointing to see Debtors being fired from gainful employment simply because an impound lot refuses to return the Debtor’s vehicle in reliance upon Fulton.  Holding hostage a debtor’s vehicle could have considerable consequences on the outcome of a debtor’s Chapter 13 case.  Whether we see an increase in litigation from the debtors’ side or the Trustee’s side, it still leaves the debtor asking “Dude, where’s my car?”



*“Dude, Where’s My Car?” is a 2000 film starring Ashton Kutcher and Seann William Scott on an adventure to find their lost car.

**Concurrence written by Sonia Sotomayor.  Justice Amy Coney Barrett did not assume her seat until October 27, 2020, after oral arguments in this case were heard on October 13, 2020, and thus did not participate in this decision.

BBA Webinar: Virtual Lunch Bunch with the Honorable Janet Bostwick & Melvin Hoffman Thurs, Jan. 21st 2:30-3:30pm Online

Description:

Please join the Consumer Bankruptcy Committee for an interactive discussion with the Honorable Janet Bostwick & Melvin Hoffman. The discussion will largely focus on grants of relief from stay in a post-COVID-19 “bankruptcy world,” but will also touch on various other topics and areas of focus of the Consumer Bankruptcy Bar pertinent to the start of the new year and the projected surge in bankruptcy filings resulting from the pandemic.

This event will be held virtually via Zoom. A link to join the program will be provided to registrants prior to the date of the event. Please reach out to the BBA staff contact listed below with any questions.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

BBA Webinar: Speed Networking with Bankruptcy Attorneys Online Wed., 12/16 5:30-7pm

Description:

The BBA presents live webinars and virtual events via Zoom. Please register for this program through your BBA account at least two hours before the start time of the program to receive the Zoom webinar link. 

This event gives law students and new lawyers a unique opportunity to meet with several Boston-area bankruptcy attorneys in just one evening. Those who attend this event will have the chance to meet all of our guest attorneys in small groups to learn about lawyering in a pandemic, career paths, and legal opportunities available in Boston. An introduction will be provided by The Honorable Janet E. Bostwick, U.S. Bankruptcy Court for the District of Massachusetts.

This is a virtual event that will be held via Zoom.

BBA Webinars & Virtual Events are supported by the Joan B. DiCola Fund. To learn more or support this fund, click here.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

BBA Webinar: Fundamentals, Insights and Tips from Chapter 7 Panel Trustees for the Bankruptcy Practitioner Tues., Dec. 1st 1-2pm online

Description:

Please join the Consumer Bankruptcy Committee for an interactive discussion with the members of the Chapter 7 Trustee Panel for the District of Massachusetts. Panelists will include Chapter 7 Trustees Jonathan Goldsmith, Donald Lassman, and Anne White, who will present their best suggestions and observations about the representation of bankruptcy clients.  Topics will include pre-bankruptcy filing considerations, the types of debtor documentation that must be furnished to a Chapter 7 Trustee, an explanation of the telephonic Section 341 meeting process, and post-Section 341 meeting topics of concern.  The Trustees will also conduct a mock Section 341 meeting to illustrate the Trustees’ typical examination process and to identify potential practitioner pitfalls. 

This event will be held virtually via the Zoom platform. A link to log onto the virtual discussion will be provided by the BBA to all registrants prior to the event.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

BBA Webinar: Chapter 7 Bankruptcy Basics Training Thurs. 11/19 9am-1pm Online

Description:

During these unprecedented times, your skills as an attorney are needed more than ever.  Although COVID-19 has wreaked havoc on the lives of all, those who live below the poverty level have been hit the hardest. This is particularly true for those who have suffered a loss of income and increased debt.  It is anticipated by experts that the number of bankruptcy filings will substantially increase in the wake of the pandemic, so your volunteerism is especially crucial now.

To help meet this need, the Boston Bar Association (BBA) is offering a Chapter 7 Bankruptcy Basics Training for volunteer attorneys.  This training will provide you with the building blocks of Chapter 7 Bankruptcy laws and procedures, and allow you to deepen your skills for your private practice and pro bono cases. Attendees will also learn about the different legal aid organizations that provide pro bono services and are looking for attorney volunteers. Please join us and become part of the response effort to help lessen the financial impact of the pandemic on our most vulnerable community members.  This experienced panel for the training includes a former federal bankruptcy judge.

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!

BBA Webinar: Virtual Lunch Bunch with the Honorable Janet Bostwick & Frank Bailey Thurs., 11-5-20 @ 2:30 – 3:30 pm On-Line

Description:

Please join the Consumer Bankruptcy Committee for an interactive discussion with the Honorable Janet Bostwick & Frank Bailey. The discussion will largely focus on mortgage forbearances in accordance with state and federal legislation enacted during the COVID-19 pandemic. The judges also intend to discuss and seek comments from the Bar concerning Chapter 13-day court procedures and protocols under the new telephonic model necessitated by the current public health climate.

This event will be held virtually via Zoom. A link to join the program will be provided to all registrants by the program date. Please reach out to the BBA staff contact listed below with any questions.

Sponsoring Section/Committee(s):

Speakers:

Contact:

Douglas Newton
dnewton@bostonbar.org

REGISTER HERE!