Chapter 7 Strip Off of " Below Water" Mortgages Issue - US Supreme Court Denies Review

Bank of America, N.A. v. Sinkfield,(U.S.)

Bankruptcy - Ability of Chapter 7 debtor to "strip off" wholly unsecured junior mortgage lien -- Certiorari Denied

Denying certiorari, the United States Supreme Court has let stand an unpublished Eleventh Circuit decision that summarily affirmed a district court order summarily affirming a bankruptcy court order that granted a Chapter 7 debtor's motion to "strip off," or void, a junior lien on the debtor's house where the debt owed to the senior lienholder exceeded the house's current value. <p>According to the junior lienholder's petition for a writ of certiorari, the debtor, who had two mortgages on his house, filed a motion to strip off the junior lien, which was completely underwater. In light of In re McNeal, 735 F.3d 1263 (C.A.11-Ga. 2012), in which the Eleventh Circuit concluded that its decision in Matter of Folendore, 862 F.2d 1537 (C.A.11-Ga. 1989), which permitted a Chapter 7 debtor to strip off a wholly underwater mortgage, remained binding precedent in the circuit, notwithstanding Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), in which the Supreme Court concluded that a Chapter 7 debtor could not "strip down" a partially secured lien under 11 U.S.C.A. 506(d), the parties in the present case agreed to resolve the debtor's motion by stipulated order, while preserving the junior lienholder's right to seek appellate review. On appeal, the parties successfully filed a joint motion for summary affirmance, again expressly preserving the lienholder's right to seek further appellate review. Following the district court's summary affirmance, the parties jointly filed a motion requesting that the Eleventh Circuit panel summarily affirm the district court, so that the junior lienholder could seek en banc review and/or certiorari. Although the Court of Appeals granted the joint motion for summary affirmance, thus upholding the order stripping off the junior lien on the authority of McNeal and Folendore, the court treated the lienholder's petition for rehearing en banc as a motion for reconsideration, which was denied. <p>In its certiorari petition, the junior lienholder noted that the circuits are split over whether a Chapter 7 debtor may strip off a junior lien that is completely underwater. "In holding that a Chapter 7 debtor may strip off a lien in such circumstances, the Eleventh Circuit disregarded the Supreme Court's holding and reasoning in Dewsnup--which should have dictated the opposite conclusion--and expressly rejected the contrary holdings of the Fourth, Sixth, and Seventh Circuits," the petition asserted. <p>The National Association of Consumer Bankruptcy Attorneys (NACBA), as amicus curiae, agreed with the debtor that certiorari should be denied because the Bankruptcy Code plainly allows debtors to void mortgage liens that are unsupported by value in the underlying collateral. Section 506(d) provides, in pertinent part, that "to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." The fact that the junior lienholder had stipulated to judgment against it throughout the lower court proceedings also weighed against granting review in this case, the NACBA argued. (Case below: Bank of America, N.A. v. Sinkfield, No 13-12141 (C.A.11-Ga. July 30, 2013).)

Modify Mortgage During Chapter 13 Bankruptcy

Atty. Jordan E. Bublick - 1221 Brickell Ave., 9th Fl. - Miami, Florida

One possible avenue to save your home from foreclosure may be to file for Chapter 13 bankruptcy relief and then to negotiate with the mortgage servicer for a mortgage modification while the Chapter 13 bankruptcy is pending. The filing of the bankruptcy stops the progress of the foreclosure action and may give the homeowner many months to negotiate a modification. Perhaps the mortgage company may be more willing to allow a mortgage modification if faced with the alternative of a Chapter 13 bankruptcy plan.

Dischargeability of Divorce Debt in Bankruptcy

Although certain types of divorce related debt are non-dischargeable in bankruptcy, certain types of divorce debt are dischargeable in bankruptcy Whether an item is dischargeable depends on

•  the nature of the debt 
• whether the case is filed under chapter 7 or chapter 13

Domestic Support Obligations - Alimony, Maintenance or Support

"Domestic Support Obligations" are not dischargeable in either chapter 7 or chapter 13. Section 523(a)(5) of the Bankruptcy Code excludes from discharge any debt "for a domestic support obligation." A domestic support obligation is a

               "debt...owed to or recoverable by (i) a spouse, former spouse, or child of the debtor or such                        child's parent, legal guardian, or responsible relative...in the nature of alimony, maintenance, or                      support of such spouse, former spouse, or child of the debtor of such child's parent, without regard                to whether such debt is express so designated; ... established ...by reason of (i) a separation                          agreement, divorce decree, or property settlement agreement. 11 USC 101 § 101 (14A) 

The determination of whether a particular divorce-related debt is a "domestic support obligation" is a question of federal law. In making this determination, the court does not solely rely on the label placed on the debt in the divorce judgment but looks beyond the state court label and examines whether the debt is actually in the nature of support or alimony." Cummings. v. Cummings, 244 F.3d 1263, 1265 (11th Cir. 2001). 
Factors in making this determination include the intentions of the parties, whether there is an element of need, and whether there is a disparity of incomes.  Cummings, 244 F.3d at 1266.  In re: Lutzke, 223 B.R. 552, 554 (Bankr. D. Or. 1998). 



Debts from Property Settlements- Chapter 7 vs. Chapter 13

Even if the debt is not for a "domestic support obligation," a debt 

•  to a spouse, former spouse, or child of the debtor 
• that is incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of court

are also not dischargeable in chapter 7, but they are generally dischargeable in a chapter 13 case. Steele v. Heard, 487 B.R. 302, 308 (S.D. Ala. 2013).  

Property Excluded from Bankruptcy Estate - Bare Legal Title

Certain interests in property are not included in a bankruptcy estate. The bankruptcy code provides that property in which the debtor only holds "legal title and not an equitable interest"  becomes part of the estate only to the "extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold."

Generally that would mean that property in which a person only holds bare legal title and no "equitable" interest would not be included in a bankruptcy estate.

Bankruptcy Schedules Must Completely Disclose Assets - The Doctrine of Judicial Estoppel

The recent case of Javier Milian vs. Wells Fargo & Company, et al,, Case 13-CV-22201-KMM (February 18, 2014) illustrates the importance of a person completing his bankruptcy schedules fully and accurately - including as to unfixed and contingent claim. In this case, the doctrine of "judicial estoppel" was applied to bar the debtor from pursuing a claim against his mortgage lender as he failed to list the claim in his bankruptcy schedules.  In this case, the Bankruptcy Court's decision to abstain and also apply the doctrine of judicial estoppel was upheld.

Judicial Estoppel

The District Court upheld the Bankruptcy Court's application of the doctrine of "judicial estoppel" barring the debtor's adversary proceeding.  The District Court explained that the judicial estoppel is an equitable doctrine that "prevents a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding." Barger v. City of Cartersville, GA, 348 F.3d 1289, 1293 (11th Cir. 2003),  Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1284 (11th Cir. 2002).  The District Court noted that bankruptcy petitions are required "under penalty of perjury to disclose in their bankruptcy petitions all fixed and contingent assets, including all causes of action that the debtor knows about or that exist at the time the bankruptcy action being, as well as those that the debtors learn about before the bankruptcy case is closed." 11 U.S.C. § 521.  The two factors in the application of judicial estoppel in a particular case are whether the inconsistent positions were made under oath in the prior proceeding and whether the inconsistencies have been calculated to make a mockery of the judicial system.

Pro Se Litigants

The District Court's ruling is also instructive to pro se litigant - that is, persons who represent themselves in court with the assistance of an attorney.  The District Court noted that  "judges cannot and will not give litigants legal advice" and that a litigant does not have the constitutional right to receive personal instruction from the trial court judge on courtroom procedure. The District Court also stated that the constitution does not require a trial court judge to take over the chores for a pro se litigant that would normally be taken care of by a trained attorney.  McKaske v. Wiggins, 465 U.S. 168, 183-84 (1984).

Stop Mortgage Foreclosure by Filing for Mortgage Modification

In many cases, you can stop a mortgage foreclosure by filing for a mortgage modification under the HAMP program. The application for a mortgage modification can be filed directly with the mortgage lender or was part of a chapter 13 bankruptcy you may file. If you are on the eve of a foreclosure sale, I would probably be best to file a chapter 13 bankruptcy in order to insure the stopping of your foreclosure sale.

If you file the modification as part of a chapter 13 bankruptcy case, the modification request will proceed under the Miami Bankruptcy Court's new "LMM" program (Loss Mitigation Mediation) which has been very successful in helping homeowners achieve a mortgage modification.


Suspension of  Referral or Foreclosure or Foreclosure Sale

Immediately upon a mortgage borrower's application for consideration for a HAMP mortgage modification, a may not refer a mortgage loan for foreclosure or conduct a scheduled foreclosure sale unless

• the borrower has been evaluated for HAMP and determined to be ineligible for the program   
• borrower accepts a Trial Payment Plan and fails to make current trial period payments unless
• the mortgage servicer is evaluating the borrower for a HAMP Tier 2 application until the evaluation for a HAMP Tier 2 is complete and the borrower is determind to be ineligible for HAMP Tier 2
• the borrower or co-borrower states he is not interested in pursuing a HAMP modification
• the remaining non-borrower was unable to assume the note and re-apply for HAMP during the period provided under the rule
• the Loss Mitigation Application is incomplete and i. more than 120 days has passed or ii. more than 30 days has passed since the servicer sent the borrower an "Incomplete Information Notice"
• If the borrower submits an incomplete Loss Mitigation Application the mortgage servicer if the application still remains incomplete after the later of  

• a delinquency for more than  four months 
• 30 days has has passed since the servicer sent the borrower an "Incomplete Information Notice" and the Loss Mitigation Application still is incomplete

Suspension of Foreclosure after Referral for Mortgage Foreclosure 

If the foreclosure has already been filed, the mortgage servicer must suspend the foreclosure process upon the borrower's accept of a Trial Payment Plan upon verified income and for the duration of the trial period

Suspension after Foreclosure Sale Already Set

If a borrower submits a HAMP application at least 7 business days prior to a scheduled foreclosure sale, the mortgage servicer must immediately suspend the foreclosure sale for a period of time as necessary to evaluate the borrower's HAMP application if  the new application under any of the following circumstances:

• If the borrower had made at least one payment under a HAMP Tier 1 Temporary Payment plan
• unless there has been a change in circumstances
• If the borrower had defaulted under a HAMP Permanent Modification  and either i. 12 months has passed since the effective date of the modification or ii. the borrower has experienced a change in circumstances 
• the borrower was previously determined to be ineligible for a HAMP Tier 1 modification