Bankr. M.D.N.C.: NC & VA Warranty v. Fidelity Bank- Judicial Notice and Judicial Estoppel


The bankruptcy court in this opinion begins by distinguishing between the judicial notice that a court may take of pleadings and proceedings in other courts and judicial estoppel. The bankruptcy court held that while a court cannot take judicial notice of the truth of facts alleged in those pleadings, it can nonetheless take judicial notice that such allegations were made. From the fact that such allegations had been made, the bankruptcy court then turned to determine whether such allegations judicially estopped a party in later proceedings. The requirements for judicial estoppel are:

1. The party sought to be estopped must be seeking to adopt a factual (opposed to legal) position that is inconsistent with a stance taken in prior litigation;
2. The prior inconsistent position must have been accepted by the court; and
3. As the determinative factor, the party against whom judicial estoppel is to be applied must have intentionally misled the court to gain unfair advantage.
Zinkand v. Brown, 478 F.3d 634, 638 (4th Cir. 2007).

Further, because judicial estoppel “exists to protect the integrity of the courts, rather than any interest of the litigants”, Lowery v. Stoval, 92 F.3d 219, 223, n.3 (4th Cir. 1996), it would not “not impose the harsh systemic remedy of judicial estoppel as a tactical litigation windfall….”

The opinion also addresses questions of breach of contract, breach of fiduciary duty, negligence, constructive and actual fraud, aiding and abetting conversion, and unjust enrichment under Ohio law (which as such are outside the immediate interests of this summary) and also for unfair and deceptive trade practices under North Carolina law, which the bankruptcy court disposed as Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 334-35 (4th Cir. 1998), “admonished trial courts against allowing breach of contract claims to masquerade as Chapter 75 claims.”

For a copy of the opinion, please see:

NC & VA Warranty v. Fidelity Bank- Judicial Notice and Judicial Estoppel

Posted in Middle District, North Carolina Bankruptcy Cases Tagged with: ,

E.D.N.C.: Engell v. Sheetz – Appeal of Discharge or Dischargeability


Mr. Sheetz filed a Chapter 7 bankruptcy on June 1, 2015, listing, among other creditors, Mr. Engell. The last day to oppose a discharge was August 31, 2015. On August 26, 2015, Mr. Engell filed an pleading titled as “Creditor’s Objection to Debtor’s Exemption” (“the objection”), but which, in fact, asserted that judgment held against Mr. Sheetz was nondischargeable due to fraud and unfair and deceptive trade practices. Subsequently, on October 27, 2015, Mr. Engell filed a motion to amend. On December 31, 2015, the bankruptcy court overruled the objection and denied the motion to amend, holding that Mr. Engell had been required to bring an Adversary Proceeding to oppose discharge and the objection was insufficient. The bankruptcy court further held that the motion to amend was actually a tardy motion to extend time. On January 20, 2016, the bankruptcy court granted Mr. Engell a discharge, to which Mr. Sheetz filed an appeal on February 3, 2016.

The district court distinguished between the general discharge granted to a debtor and a determination of the nondischargeability of a specific debt. As such, Mr. Sheetz’ appeal of the January 20th discharge was not a timely appeal of the December 31st order overruling the objection to discharge of his specific claim. Accordingly, the appeal was dismissed as untimely.


This case is a warning that non-bankruptcy attorneys enter our world at their peril, as small pleading and service issues can be fatal. Perhaps if the North Carolina Bar Examiners would include bankruptcy on the bar exam occasionally, attorneys would pay more attention.

For a copy of the opinion, please see:

Engell v. Sheetz – Appeal of Discharge or Dischargeability

Posted in District Courts Tagged with: , , ,

N.C. Ct. of Appeals: HSBC Bank v. PRMC, Inc.- Representation of Corporation by Non-Attorney


In 2004, PRMC, through its president and sole shareholder, Zulfiquar M. Khan, borrowed $1,950,000 from Business Loan Center, L.L.C. (“BLC”), with the note including an “Unconditional Guarantee” from Mr. Khan and a Deed of Trust against a hotel and all personal property. In September 2007, Mr. Khan, PRMC and BLC agreed to a four month reduced payment on the note, with the allonge including a release (in bold and all capitals) by both parties of all claims against each other. This same language was again included in a July 2008 payment deferral agreement. BLC filed a Chapter 11 bankruptcy in September 2008, with its reorganization being confirmed on November 12, 2010. PRMC itself filed bankruptcy on November 1, 2010, during which HSBC, as the successor to BLC, sought relief from the automatic stay to foreclose on the hotel and personal property. Relief from stay was granted on in July 2011 and the PRMC bankruptcy was subsequently dismissed in October 2011, whereupon HSBC brought suit against both PRMC and Mr. Khan and also seeking to foreclose. As that suit progressed, the attorney for PRMC and Mr. Khan eventually withdrew and Khan sought a continuance of the matter both on his behalf personally and for PRMC.

The Court of Appeals began by dismissing the appeal of PRMC as Mr. Khan, who is not a licensed attorney, was prohibited from representing PRMC, a corporation. That it was only an appearance to request a continuance was not material.


The trial court could, upon granting a continuance for Mr. Khan personally, have sua sponte granted a continuance for PRMC, and perhaps should have shown greater care by holding as such. Similarly, it would seem a reasonable degree of courtesy and professionalism for counsel for HSBC to have agreed or even suggested such a continuance, although the case was already several years old and Mr. Khan had only very vague plans for obtaining a replacement attorney and had five previous lawyers. That notwithstanding, all courts should bear that on appeal, the assistance and patience that is often shown to corporate parties “represented” by non-attorney owners will not be as apparent or sustained on appeal. Whether the attempted appearance of a non-attorney owner in court for a corporation would be evidence that the corporation was a sham, allowing piercing of the corporate veil, was not addressed.

For a copy of the opinion, please see:

HSBC Bank v. PRMC, Inc.

Posted in NC Court of Appeals, NC Courts Tagged with: ,

Bankr. W.D.N.C.: In re Banner- Unauthorized Practice of Law by National Bankruptcy Law Firm


Ms. Banner filed a ‘bare bones’ Chapter 13 petition signed by her attorney, Joseph Kosko, who was a local partner in the law firm of Volks Anwalt, which solicited Banner as a client through direct mail. After missing numerous deadlines for filing the completed petition, ultimately the bankruptcy court held multiple contempt hearing regarding the representation by Kosko, Volks Anwalt, and its sole owner and managing partner, Jessica McClean. The bankruptcy was actually filed after the 10-day upset period for the sale of Banner’s home, such that the property was not protected nor the foreclosure halted.

The bankruptcy court found that Volks Anwalt’s business plan was developed by McClean and included a marketing plan that used direct mailings targeting individuals subject to foreclosure proceedings. Volks Anwalt operates in 43 states and, as of February 2016, had handled approximately 400 bankruptcy cases since its inception in May 2015. Its local partners, including Kosko, were found through internet recruiting and with minimal due diligence in researching that attorney. The local attorneys have have no authority, control, or input over the operations and management of the firm and, while they have some control over the management of their assigned cases, were not even expected to appear at all §341 Meeting of Creditors. Instead a “coverage attorney,” obtained through an attorney temp service, would appear at the majority.

In this specific case, Kosko and Volks Anwalt not only failed to file the bankruptcy in time to save Banner’s home, but also failed to redact her Social Security number in pleadings, did not provide Banner with any of the disclosures required by 11 U.S.C. §§ 342 and 527, nor even intended to appear at her §341 Meeting of Creditors.

The bankruptcy court found that Kosko violated the North Carolina Rules of Professional Conduct in terms of competence, diligence and his failure to communicate with Banner. Further, Kosko, McClean and Volks Anwalt had engaged in the unauthorized practice of law, as McClean is only licensed in Florida and New York.

Due to this misconduct, the court disbarred Kosko from practicing in the bankruptcy court for one year, McClean for five years, ordered all fees received be disgorged and both Kosko and Volks Anwalt to pay Banner $5,000.00.
For a copy of the opinion, please see:

Banner- Unauthorized Practice of Law by National Bankruptcy Law Firm

Posted in North Carolina Bankruptcy Cases, Western District Tagged with: ,

Nerd Wallet: Do Debt Management Plans Work?

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Bankr. E.D.N.C.: In re Alvarez- Mortgage Servicing Claims


The Alvarezes purchased their home in 2007 and refinanced in 2009 with PNC Mortgage servicing the loan for Fannie Mae. At that time the mortgage documents provided that the Alvarezes would maintain homeowner’s insurance and property taxes directly, without an escrow account. The Alvarezes began to have financial difficulties in 2012, but were denied mortgage assistance by PNC. Starting in August 2012, the Alvarezes alleged that PNC began misapplying their payments, holding funds in a suspense account and paying taxes and insurance from that account, violating numerous protections under the deed of trust, 12 C.F.R. § 1024.17 and N.C.G.S. § 45-93. Following correspondence from the Alvarezes’ attorney, in July and August of 2014, PNC took corrective action to remove the account from foreclosure and waive various fees and charges. The Alvarezes, however, maintained that such was insufficient and remained inaccurate. Further, PNC sent a loan modification to the Alvarezes, but it was left by FedEx, without signature, at a unused side entrance and not discovered until the loan modification offer had expired. The Alvarezes brought suit in Brunswick Superior Court, alleging numerous mortgage violations. This suit was removed to the U.S. District Court, which, after the Alvarezes filed Ch. 13 to prevent the on-going foreclosure, referred the matter to the bankruptcy court. PNC moved to dismiss for failure to state a claim.

Breach of Contract: The Alvarezes alleged that PNC committed a breach of contract by applying funds to insurance and taxes without notice in violation of the escrow waiver signed with the mortgage note, resulting in improper fees and misapplication of payments. PNC contended that the escrow account was authorized when the Alvarezes sought mortgage assistance and signed a Uniform Borrower Assistance Form. The Alvarezes countered that this only allowed an escrow account if they entered into a loan modification, which did not occur. Accordingly, the court allowed this cause of action to go forward.

Negligence: The Alvarezes asserted that PNC owed a duty of care in servicing their mortgage and failed in that regard in not imposing a proper accounting system that resulted in repeated errors. The bankruptcy court held that as a “general rule, referred to as the economic loss rule, is that a breach of contract does not give rise to a cause of action in tort.” For most of the alleged violations of the note, the contract would supply remedies and “[a]n action in tort is therefore improper.” As to the alleged failure to maintain proper accounting systems, this alleged “duty and breach stems not from the defendants’ contractual promises, but from their duty to use reasonable care in affirmatively performing those promises.”

Violation of N.C.G.S. § 45-90 et seq.: The Alverezes next contended that PNC violated N.C.G.S. § 45-91(2) by failing to accept and credit each full payment within one business day of receipt and were entitled to compensation for actual damages under N.C.G.S. § 45-94, which provides a 30-day “safe harbor” following notice of alleged errors. PNC argued that it corrected the alleged errors and there was no subsequent notice from the Alvarezes. The bankruptcy court found such argument to be nonsense as ” [l]iability is not extinguished for servicers that fail to correct or only partially correct or compensate the injured borrower….”

Breach of Duty of Good Faith and Fair Dealing: The Alvarezes contended that PNC breached both its common law duty of good faith and fair dealing and also its statutory obligations under the Secure and Fair Enforcement Mortgage Licensing Act (“SAFE Act”) and N.C.G.S. §§ 25-1-304, 53-244.110 and 53-244.111. PNC argued that this cause of action was indistinguishable from a breach of contract. While there may be conflicting opinions on whether a private right of action can be derived from the SAFE Act, the bankruptcy court held that there is an implied covenant in every contract under the common law of a duty of good faith and fair dealing.

Violations of N.C.G.S. § 75-50 et seq.: An a unfair and deceptive trade practices claim based on a breach of contract must allege aggravating circumstances. Rutledge v. Wells Fargo Bank, N.A. (In re Rutledge), 510 B.R. 491, 500 (Bankr. M.D.N.C. 2014). Here the allegations of unilateral abuses over a period of years was sufficient to state a claim.

Conversion: Conversion of funds is “an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or the exclusion of an owner’s rights.” Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000) (quoting Spinks v. Taylor, 303 N.C. 256, 264, 278 S.E.2d 501, 506 (1981)) and has two essential elements:
(1) ownership in the subject chattel by the plaintiff, and
(2) wrongful possession or conversion.

Relying on a series of cases from Ohio, See e.g., Moore v. Caliber Home Loans, Inc., 2015 WL 516482 (S.D. Ohio Sept. 3, 2015), the bankruptcy court found that the Alvarezes satisfied the first element as even though they had “tendered monthly payments to the loan servicer, and that ownership was not relinquished until the payments were turned over to the holder of the loan.” The alleged alleged failure by PNC to correctly apply funds to an account “amounts to an act of dominion . . . that is wrongfully asserted, even though [it]  came into lawful possession” of the funds. Johnson v. Citimortgage, Inc., 351 F. Supp. 2d 1368, 1372 (N.D. Ga. 2004).


It is very apt that the loan servicing arrangement, which seems designed to insulate the holder of a note and the servicer from responsibility, was reversed and used to show that improper conversion might arise due to that relationship.

Taken together with the recognition by the North Carolina Business Court opinion in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, of a duty to negotiate in good faith, this case with its finding of a potential obligation to maintain proper mortgage accounting systems, greatly increases the obligation of a mortgage servicer to both properly and fairly address loan modification requests and account for payments. This is in addition to the requirements in bankruptcy, including under 11 U.S.C. § 524(i) , Rule 3002.1, the confirmation order, etc.

For a copy of the opinion, please see:

Alvarez- Mortgage Servicing Claims

Posted in Eastern District, North Carolina Bankruptcy Cases Tagged with: , , ,

Law Review: Twomey, Tara & Maynes, Todd- Protecting Nest Eggs and Other Retirement Benefits in Bankruptcy

For debtors facing financial distress in the twilight of their working years or beyond, bankruptcy’s promised fresh start may depend more on preserving retirement assets and benefits than returning to economic productivity. Even for those in the prime of their working years, losing retirement assets can represent a major lifelong setback. As a result, the question of whether consumer debtors can keep all or part of their retirement assets and benefits is a critical consideration. This paper surveys the intersection between the Bankruptcy Code and the preservation of retirement assets and benefits before and after the 2005 amendments to the Code. It highlights the changes that broadened protection for such assets, and it considers questions that still remain unanswered ten years after BAPCPA’s enactment.


Included in this paper are discussions of not only the exclusion or exemption of retirement funds, but also the treatment for disposable income purposes of Social Security as well as retirement contributions and loan repayments.

For a copy of the opinion, please see:

Protecting Nest Eggs and Other Retirement Benefits in Bankruptcy

Posted in Law Reviews & Studies Tagged with: , , , ,

Bankr. E.D.N.C.: In re Phillips- Conversion from Chapter 13 to Chapter 7 does not Preclude Second Avoidance of Judgment Lien


The Phillips filed a Chapter 13 bankruptcy and successfully avoided the judgment lien held by McInnis. The Order allowing the avoidance provided that:

3. The Judgment lien of the McInnises is declared to be void and shall be removed of record upon the completion of the Chapter 13 Plan of the Debtors and entry of the discharge in this case pursuant to Section 506 of the Bankruptcy Code.
4. In the event the Debtors fail to complete their Chapter 13 Plan and receive their discharge, the McInnises’ lien shall remain unaffected as to Section 506(a) and (d) of the Bankruptcy Code by this order. (“Provision C”).

The Phillips later converted to Chapter 7 and filed a second Motion to Avoid Judgment Lien and McInnis objected, arguing that res judicata precluded such avoidance as the original order required that the Phillips complete their Chapter 13 plan.

Analyzing the claim preclusion argument the bankruptcy court found the following requirements:
1) the prior judgment was final and on the merits and rendered by a court of competent jurisdiction in accordance with the requirements of due process;
2) the parties are identical, or in privity, in the two actions; and
3) the claims in the second matter are based upon the same cause of action involved in the earlier proceeding.

As the parties and the causes of action are identical in the two Motions to Avoid Judgment Lien, the bankruptcy court turned to whether the prior order was a final judgment on the merits. As 11 U.S.C. § 348(f)(1)(B) provides that “valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7 . . . “, the bankruptcy court had previously assumed that previous valuations in Chapter 13 were invalidated and so too was the Order Avoiding Judgment lien. Looking at this further, however, the bankruptcy court found that the restriction on revaluation of property by § 348(f) following conversion “more appropriately to modifications of secured claims … than to avoidances of liens….” As such, the original Order was binding and re-litigation barred by res judicata, but only, as specified in the Order, as to § 506(a) and (d). Since avoidance under § 522(f) is not included in Provision C, the second Motion to Avoid Judgment Lien could be granted on that basis.


It is important to note that the Form Order avoiding judgment liens in the M.D.N.C. provides that:

ORDERED that this Order is to be of no force and effect outside of this Chapter 13 bankruptcy proceeding unless, and until, the Debtor obtains a discharge in this case following the completion of all payments under the Debtor’s Chapter 13 plan. A copy of the Order of Discharge is to accompany any recordation of this Order;

Accordingly, Middle District conversions would require a second Motion to Avoid Judgment lien and presents the same issue. There does not seem to be a posted standard form order for the W.D.N.C., so this would remain an open question there.

To best preserve all parties rights,  perhaps the standard orders in all districts  should also provide that:

ORDERED that this Order shall have no preclusive affect on any party should the Debtor convert this case to another chapter and subsequently seek avoidance of the Judgment Lien at such time.

For a copy of the opinion, please see:

Phillips- Conversion from Chapter 13 to Chapter 7 does not Preclude Second Avoidance of Judgment Lien

Posted in Eastern District, North Carolina Bankruptcy Cases Tagged with: , , ,

Bankr. M.D.N.C.: In re Dean- Laches and Avoidance of Judgment Lien


Ferguson obtained a judgment in 2008 against the Robert Dean, who, with his then wife, Lisa Dean, subsequently filed a Chapter 7 bankruptcy in 2010. Believing that the real property was held as Tenants by the Entireties, the judgment lien was not avoided and the Deans received a discharge. Subsequently, the Deans divorced with Mr. Dean transferring his interest in the real property to Lisa and her new husband. When Lisa sought to refinance the real property in 2015, the judgment lien was discovered. The Debtors then sought to re-open the bankruptcy and to avoid the lien, with Ferguson objecting.

While finding that there was no time limitation for avoiding a lien or reopening a case under 11 U.S.C. §§ 350 (b) or 522(f) nor Fed. R. Bankr. P. 4003(d), 5010 or 9024, the bankruptcy court held that “such motions are subject to equitable limitations and may be denied for reasons such as prejudice, laches, reliance, estoppel, or fraud.” Ferguson asserted the defense of laches which requires:
(1) lack of diligence by the party against whom the defense is asserted; and
(2) prejudice to the party asserting the defense.” Costello v. U.S., 365 U.S. 265, 283 (1961)

The mere passage of time does not constitute prejudice unless combined with other factors, particularly “if parties have incurred costs in executing on a judgment lien in state court in reliance upon a debtor’s previous inaction in bankruptcy.” As Ferguson had taken no such actions, avoidance was not barred by laches.


Without citation, this is largely the same analysis as in the recent E.D.N.C. opinion of In re Abuharb, except there the judgment creditor had expended time and incurred costs in multiple multiple actions to avoid the lien and was allowed reimbursement for such expenses.

For a copy of the opinion, please see:

Dean- Laches and Avoidance of Judgment Lien

Posted in Middle District, North Carolina Bankruptcy Cases Tagged with: , ,

N.C. Court of Appeals: In re Foreclosure of Cain- Appeal of Oral Orders and Substitute Trustee Fiduciary Duty to Borrower

Ms. Cain granted a Deed of Trust against her home securing a mortgage note to Household Realty Corporation (“HRC”), which was first specially endorsed to Household Bank, but HRC later specially endorsed the not to Beal Bank, which, following Cain’s default, appointed Rogers, Townsend & Thomas (“RTT”) as substitute trustee to commence foreclosure. After the Cumberland County Clerk of Court allowed the foreclosure sale to proceed, Cain appealed to Superior Court and sent a Request for Admissions to RTT. RTT then was relieved as substitute trustee and commenced representing Beal Bank in the foreclosure suit. At that hearing, Cain presented an unfiled motion to dismiss the foreclosure due to a purported failure by RTT to respond to the Request for Admissions. The trial judge orally denied this motion and ultimately allowed the foreclosure to proceed with Cain appealing.

As to the Motion to Dismiss for failing to respond to the Request for Admissions, the Court of Appeals held that pursuant to N.C. Gen. Stat. § 1A-1, Rule 58 “an order rendered in open court is not enforceable until it is ‘entered,’ i.e., until it is reduced to writing, signed by the judge, and filed with the clerk of court.” West v. Marko, 130 N.C. App. 751, 756, 504 S.E.2d 571, 574 (1998).

Cain also argued that the trial court should not have allowed RTT to represent Beal Bank and argue against her interests, asserting the RTT owed her a fiduciary duty. While recognizing that “in a typical foreclosure proceeding, trustees have a long-recognized fiduciary duty to both the debtor and the creditor”, the Court of Appeals followed the North Carolina State Bar in allowing that “former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust ”, N.C. RPC 82 (1990) , “as long as no prior conflict of interest existed because of some prior obligation to the opposing party.” N.C. CPR 220 (1979). This has been further defined to preclude a substitute trustee from later representation if the homeowner is an unrepresented and unsophisticated consumer of legal services that actually discloses material and confidential information. See N.C. Formal Opinion 5 (2013). As Cain was represented at all times during this foreclosure and did not disclose any material and confidential information, RTT was not precluded from representation, particularly as it had notified Cain of its intention to withdraw as substitute trustee and represent Beal Bank.


The apparent key to disqualifying a substitute trustee would be for a borrower to reveal “material and confidential information” to that law firm. As mortgage servicers and their trustees are often required, either by state laws such as N.C.G.S. § 45-100 et seq., or various consent judgments to offer and attempt pre-foreclosure resolutions, it would seem rather likely that there would be such disclosures. Foreclosure firms would be advised to screen for such conflicts, as a borrower could provide such information unilaterally, precluding future representation, including in bankruptcy.

Or foreclosure firms could just take their roles as disinterested substitute trustees serious and not represent the bank in later matters.

For a copy of the opinion, please see:

Cain- Appeal of Oral Orders and Substitute Trustee Fiduciary Duty to Borrower

Posted in NC Court of Appeals, NC Courts Tagged with: , , , , ,

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