E.D.N.C.: Spoor v. Barth- Denial of Sanctions and Vexatious Multiplication of Litigation

Summary:

Mr. Barth commenced an adversary proceeding seeking a declaratory judgment that various state court actions by Mr. Spoor could have been brought by the bankruptcy trustee, who had previously signed a release of such actions, and that Mr. Spoor should be required to dismiss those actions. The bankruptcy court instead dismissed Mr. Barth’s adversary proceeding on the grounds that such relief was prohibited by the Anti-Injunction Act, 28 U.S.C. § 2283. The bankruptcy court declined, however, to award the sanctions sought by Mr. Spoor pursuant to North Carolina Rule of Civil Procedure 11, 28 U.S.C. § 1927, 11 U.S.C. § 105, and Bankruptcy Rule 9011, against Mr. Barth, holding that none of his filings were frivolous, vexatious or in bad faith.

Finding that it was not “clearly erroneous” for the bankruptcy court to have held that Mr. Barth’s arguments were, while not persuasive, also not frivolous, the district court affirmed.

Commentary:

This case is somewhat unusual as it is an affirmation by the Eastern District of North Carolina of a decision by a Middle District bankruptcy judge, sitting by designation in an Eastern District bankruptcy case.

For a copy of the opinion, please see:

Spoor v. Barth- Denial of Sanctions and Vexatious Multiplication of Litigation

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Law Review: Darolia, Rajeev & Ritter, Dubravka – Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform

Abstract:

Bankruptcy reform in 2005 restricted debtors’ ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a national sample of credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior in response to the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of private student loan debtors prior to the policy.

Commentary:

As the authors conclude that, absent any evidence of moral hazard by allowing borrowers to discharge private student loans, “policymakers are faced with the challenge of weighing the burden placed by restrictions to bankruptcy protection on struggling nonopportunistic debtors against the benefits of expanded credit availability.”

While certainly a valuable corrective to the prevailing belief that borrowers are the parties that game the system, this study is only partially accurate or complete. The authors do not conclude that private student lenders (and the universities, both private, public and for-profit that work hand-in-glove with the private student lenders) are without their own moral hazards in making loans with no liability themselves.

For a copy of the paper, please see:

Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform

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Bankr. E.D.N.C.: In re Spirakis – Subrogation of Creditors Rights to Third Party Payee

Summary:

Through a complicated series of transactions and guarantees, Georgia Spiliotis sought to subrogate to the rights of Bank of North Carolina against the debtors, Nicolas & Mary Spirakis.

The bankruptcy court first differentiated between conventional subrogation, “is founded upon the
agreement of the parties.” Joyner v. Reflector Co., 176 N.C. 274, 276, 97 S.E. 44, 46 (1918), and legal subrogation which “is an equitable remedy applied as a “means to substitute, to put one
person in the place of another; and is usually exercised where one person has become liable for, or
has been compelled to pay money for, another.” Vaughan v. Jeffreys, 119 N.C. 135, 141, 26 S.E. 94,
96 (1896). Here Ms. Spiliotis sought legal Subrogation.

For legal subrogation to applied, the court applied a five part test:

(1) a payment was made by the subrogee to protect [her] own interest;
(2) the subrogee must not have acted as a volunteer;
(3) the debt paid must have been one for which the subrogee was not primarily liable;
(4) the entire debt must have been paid; and
(5) subrogation must not work any injustice to others.

See Frederick v. Southern Fidelity Mut. Ins. Co., 221 Case 14-00095-8-SWH Doc 148 Filed 10/30/17 Entered 10/30/17 17:20:45 Page 9 of 19 N.C. 409, 410 (1942) (applying South Carolina law and citing Dunn v. Chapman, 149 S.C. 163, 170, 146 S.E. 818, 820 (1929)).

Applying these factors, the bankruptcy court held that Ms. Spiliotis would be unlikely to be able to satisfy all requirements for subrogation and, even if she did, the collection rights of BNC would no longer likely exist.

Commentary:

Bankruptcy estates and their Trustees, as third parties, would be neither volunteers nor primarily liable and would likely be able to assert the collection right for creditors that were paid in full in a bankruptcy. While this would most obviously include seeking contribution from other debtors, it is not impossible to imagine that could also include guarantors, including perhaps even the federal government, for VA and Fannie Mae/Freddie Mac mortgages. It could also include pursuing claims against mortgage servicers on behalf of the underlying note holders.

While Chapter 7 Trustees rarely pay such secured creditors in full, it is not unheard of for Chapter 13 estates to pay the entire claim of a mortgage. (QUERY: Would payment of a crammed down debt suffice?) As such, they could potentially seek contribution from the government or mortgage servicers for the benefit of other creditors.

For a copy of the opinion, please see:

Spirakis – Subrogation of Creditors Rights to Third Party Payee

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W.D.N.C.: Morgen v.  Student Loan Finance Corporation- Forum Selection ClauseW.D.N.C.: Morgen v.  Student Loan Finance Corporation- Forum Selection Clause

Summary:

Ms.  Morgen brought suit alleging violations of the Fair Credit Reporting Act and Student Loan Finance (“SLF”) moved for a change of venue to South Dakota based on a forum selection clause in the contract.
Ms.  Morgen’s initial objection that the loan applications and promissory notes proffered by SLF  had no affidavits from record keepers   denied as the court held that such would be precluded as evidence in a consideration of a motion for summary judgment, but, in part because “there is no plausible contention that these documents are inauthentic,”  allowed them for determination of venue.

In evaluating the forum selection clause,   the  court  first determined  whether it was  mandatory or permissive, with only mandatory forum selection being binding.  Finding that the specific language in the contract both used “shall”, rather than “may”, and referenced South Dakota’s long arm jurisdiction, the district court held that the forum selection was mandatory.
Turning then to evaluate whether the provision was valid and enforceable, the district court examined whether the it was unreasonable based on the following test:

(1) whether its formation was induced by fraud or overreaching;

(2) whether the complaining party will be deprived of their day in court because of grave inconvenience or unfairness of the selected forum;

(3) whether there is fundamental unfairness of the chosen law in depriving the plaintiff of a remedy; or

(4) whether its enforcement would contravene a strong public policy of the forum state.
See Allen v. Lloyd’s of London, 94 F.3d 923, 928 (4th Cir. 1996).

With no evidence of fraud or overreach, the district court held that since the loans were taken out when Ms.  Morgen lived in Minnesota, South Dakota was not a great distance at that time.  Further, since the claims were based solely on federal law, Ms.  Morgen would not face unfairness by being subject to South Dakota, rather than North Carolina law.  Additionally, while N.C.G.S. § 22B-3 holds that forum selection provisions are void as against public policy, the contract was not entered into while Ms.  Morgen lived in North Carolina.

Lastly, the court evaluated whether transfer of venue was proper under 28 U.S.C. § 1404(a), finding that pursuant to Atlantic Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. of Texas, 134 S. Ct. 568 (2013), where forum selection clauses should be enforced unless “extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer” and that consideration convenience or fairness to the parties was not appropriate, instead, looking to the factors, including:

(1) the comparative administrative difficulties flowing from court congestion;
(2) the local interest in having localized interests decided at home;
(3) the familiarity of the forum with the law that will govern the case; and
(4) avoidance of unnecessary problems of conflict of laws or in the application of foreign law.

Finding nothing under these factors in the present case that disfavored transfer, the district court ordered the case be sent to South Dakota.

Commentary: 

It is somewhat surprising that court did not evaluate whether the forum selection clause was valid under Minnesota law, which was where the “last act necessary to make the it binding”.  An abbreviated search indicates that there following factors in determining whether a form contract is a “contract of adhesion” such that a forum selection clause should not be enforced:

(1)  the bargaining power of the parties;

(2)  whether they negotiated the contract;

(3)  the business sophistication of the parties; and

(4) the need for the subject of the agreement.

See Valspar Refinish, Inc. v. Gaylord’s, Inc., 2006 Minn. App. Unpub. LEXIS 578, at *5 (Minn. Ct. App. 2006)

For a copy of the opinion, please see:

Morgen v. Student Loan Finance Corporation- Forum Selection Clause

 

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E.D.N.C.: In re Clark- In Rem Relief; Stay Pending Appeal

Summary:

The bankruptcy court granted the Motion for in rem relief sought by Wells Fargo pursuant to 11 U.S.C. § 362(d)(4), as to Mr. Clark and his wife, further barring Mr. Clark from filing any bankruptcy in the Eastern District of North Carolina for one year.

In denying the Mr. Clark’s motion for stay pending appeal and for a writ of supersedes, the district denied such finding the Mr. Clark had not made a clear showing that he had a likelihood of success in the appeal and agreeing with the bankruptcy court that Mr. Clark would not suffer irreparable harm in the absence of a stay, as he had been in default on the mortgage for 4.5 years.

Commentary:

The five previous bankruptcies filed by Mr. Clark and his wife, while probably a significant factor in granting the relief from stay in this case,  did seem to provide Mr.  Clark a wealth of pleadings to re-use in this case.

For a copy of the opinion, please see:

Clark- In Rem Relief; Stay Pending Appeal

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Bankr. E.D.N.C.: Mouhtadi v. Sheikh- Failure to Respond to Discovery and Summary Judgment

Summary:

After initially filing Chapter 13, Mr. Sheikh converted to Chapter 7 and Mssrs. Mouhtadi and Khalioui commenced an adversary proceeding asserting claims of common-law fraud, violations of the North Carolina Unfair and Deceptive Trade Practices Act (the “UDTPA”), N.C. Gen. Stat.
§§ 75-1.1 to 75-145, and eeking a determination that the debts related to the case were excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(2) or (a)(4). Mr. Shaikh filed an answer to the complaint, but then failed to respond to numerous discovery requests, including admissions. When Mr. Shaikh still failed to comply with discovery following the entry of an order to compel, Mouhtadi and Khalioui moved for summary judgment. Mr. Shaikh neither responded to that motion nor attended the hearing, at which time summary judgment was granted from the bench.

Prior to entry of a written summary judgment, Mr. Shaikh then filed a Motion to Reconsider, based on his assertion that he was in state district court at the same time. At the hearing on the Motion to Reconsider, Mr. Shaikh appeared , “albeit 43 minutes late”), still having failed to respond to discovery. Despite being mindful that admission are “not intended to be used as a technical weapon to defeat the rights of pro se litigants to have their cases fairly judged on the merits,” Citibank v. Savage (In re Savage), 303 B.R. 766, 772 (Bankr. D. Md. 2003), the bankruptcy court found that Mr. Shaikh had been provided specific details regarding the failure to respond to the motion for Summary Judgment, repeatedly failed to respond to discovery and “habitually declined to appear or participate” in the case. This was sufficient to proceed to summary judgment, with the verified complaints and still undisputed requests for admissions being sufficient to satisfy all claims.

Commentary:

While Mr. Shaikh was represented in the underlying bankruptcy, that representation does not, appear to have persisted into this Adversary Proceeding (or the other three filed), as such can be excluded from representation. The docket also does not indicate whether Mr. Shaikh was referred to the EDNC Pro Bono Program.

For a copy of the opinion, please see:

Mouhtadi v. Sheikh- Failure to Respond to Discovery and Summary Judgment

 

 

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Bankr. W.D.N.C.: In re Moe’s Rx Clinic, Inc.- Dismissal of Pharmaceutical Asset Case

Summary:

A pharmacy filed Ch. 7, with its primary asset being $40-50,000 in drug inventory. Upon the motion of the Trustee, the court found that the FDA and NC Pharmacy Board had specific procedures regarding the proper handling and disposal of prescription drugs that those entities were better able to follow than the Trustee. Accordingly, as there were no other assets, dismissal was proper to allow the Pharmacy Board to dispose of the drugs. (This case was subsequently appealed, but that was dismissed with the agreement of the debtor.)

Commentary:

It does not appear that either abandonment of these drugs by the bankruptcy estate pursuant to 11 U.S.C. § 554 or retention of the Pharmacy Board as a professional pursuant to 11 U.S.C. § 327 was considered. The likely administrative burden from handling the medical records and appointment of a patient care ombudsmen under 11 U.S.C. § 333 may also have been factors in seeking dismissal of this case.

This issue, however, is likely to arise elsewhere with increasing frequency in regards to marijuana bankruptcies and a determination of whether and how a Trustee can dispose of assets that are illegal under federal law.

For a copy of the opinion, please see:

Moe’s Rx Clinic, Inc.- Dismissal of Pharmaceutical Asset Case

Moe’s Rx Clinic, Inc.- Dismissal of Pharmaceutical Asset Case Appeal

 

Image result for moe szyslak broke

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Law Review: Pardo, Rafael I.- Bankrupt Slaves

Abstract:

Responsible societies reckon with the pernicious and ugly chapters in their histories. Wherever we look around, there exist ever-present reminders of how we failed as a society in permitting the enslavement of millions of black men, women, and children in the first century of this nation’s history. No corner of society remains unstained. As such, it is incumbent on institutions to confront their involvement in this horrific past so as to fully comprehend the kaleidoscopic nature of institutional complicity in legitimating and entrenching slavery. Only by doing so can we properly continue the march of progress, finding ways to improve society, not letting the errors of our way define us, yet at the same time never forgetting them.

This Article represents a contribution toward this progress, by telling what has been, until now, an untold story about institutional complicity in antebellum slavery—that is, the story of how the federal government in the 1840s became the owner of hundreds, if not thousands, of slaves belonging to financially distressed slaveowners who sought forgiveness of debt through the federal bankruptcy process. Relying on archival court records that have not been systematically analyzed by any published scholarship, this Article tells the story of how the Bankruptcy Act of 1841 and the domestic slave trade inevitably collided to create the bankruptcy slave trade, focusing on a case study of the Eastern District of Louisiana, home to New Orleans, which was antebellum America’s largest slave market. Knowing the story of bankrupt slaves is a crucial step toward recognizing how yet another aspect of our legal system—one that has brought in its modern incarnation financial relief to millions upon millions of debtors—had deep roots in antebellum slavery.

Commentary:

Please read this paper for:
“Martha aged 4 years.”
“Slave Mortimer aged about 60 years.”
“Robert and his son William.”
“Slave Louisa aged 24 years and her daughter Marcelain aged about 8 years.”
“Rosalie negress aged about 40 years sickly & subject to Rheumatism.”
“Julia the runaway slave.”
and the other four hundred eighty souls sold (and then some): young, old, father and son, mother and daughter, infirm, and escaped. pp. 48-49.

For a copy of the paper, please see:

Bankrupt Slaves

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Bankr. M.D.N.C.: In re Calloway- Domestic Support Obligations and Good Faith in Chapter 13

Summary:

Ms. Calloway divorced Mr. Bowles and shortly before a final judgment was entered in their equitable distribution proceeding, she filed Chapter 13. Just prior to Ms. Calloway’s bankruptcy filing, the state court judge circulated a preliminary ruling to the parties via email, stating that he believed an unequal distribution of the marital assets in favor of Mr. Bowles would be equitable and that Ms. Calloway would be required was to pay a total of $50,514 by means of monthly payments of $300, due to the her liquidation of two retirement accounts, which had a total value of roughly $31,000. Additionally, since their separation, Ms. Calloway alone made all payments on the former marital home, with the mortgage against which being reduced by approximately $23,000.

Ms. Calloway’s Chapter 13 plan was proposed for 36 month with priority claims to be paid in full and an estimated 0% dividend to general unsecured creditors, with Mr. Bowles as the only listed such creditor. He, unsurprisingly, objected to confirmation of her plan asserting that the $50,514.52 owed to him was a priority claim as a domestic support obligation pursuant to §507(a)(1)(A) and that Ms. Calloway’s plan must provide for its full payment over the life of the plan pursuant to §1322(a)(2). The court found that Ms. Calloway’s plan appropriately provided for payment in full of priority claims, which, unless and until an objection determined otherwise, included Mr. Bowles claim as filed.

Mr. Bowles additionally objected on good faith grounds to confirmation, asserting that Ms. Calloway filed the case in bad faith to avoid repayment of his debt. The bankruptcy court rejected this characterization both because Ms. Calloway had steadfastly paid the mortgage against the jointly owned real property, without seeking to overstate her interest, and had no other means to repay the $50,514.52 on her fixed income other than over the course of a Chapter 13 plan.

Commentary:

While $1,111/mo. payment would satisfy Mr. Bowles’ priority claim in full in 60 months,  this does look an awful lot like a property settlement and not a domestic support obligation, so there may be an objection to claim pending questioning its priority status.  If successful,  the $1,111 a month plan would, in the 36 month Applicable Commitment Period required  here, only pay  a dividend of approximately 50% to Mr.  Bowles (or even less if there was an substantial and unanticipated  change in circumstance sufficient to justify a modification later.)

For a copy of the opinion, please see:

Calloway- Domestic Support Obligations and Good Faith in Chapter 13

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Bankr.  M.D.N.C.: In re Price- Separate Classification of Student Loans in Chapter 13Bankr.  M.D.N.C.: In re Price- Separate Classification of Student Loans in Chapter 13

Summary:

The Prices, who are above median income debtors, but nonetheless have negative projected disposable monthly and no non-exempt assets, proposed an estimated 15% dividend to the class of dischargeable general unsecured creditors, which totaled $11,728.38.  They also proposed to separately classify the  $10,463.48 claim by Navient for non-dischargeable student loans.  The Chapter 13 Trustee supported confirmation, but the Bankruptcy Administrator filed a limited objection to such treatment.
The bankruptcy court first addressed whether the prohibition in  §1322(b)(1) against “unfair discrimination” in favor of one class of unsecured creditors was applicable as  §1322(b)(5) allows the a plan to cure and maintain payments on “any unsecured claim … on which the last payment is due after the date on which the final payment under the plan is due.”  While recognizing a split in opinions on this question, the court held that since §1322(b)(5) specifically applies despite the limitations in §1322(b)(2), it does not similarly explicitly override the “unfair discrimination” restrictions in §1322(b)(1).  Instead, the two can be read in a consistent manner by applying both.

Turning to whether the separate classification was not unfair, the bankruptcy court held that the burden was on the debtor.   Without direct precedent from the 4th Circuit, the bankruptcy court considered the factors from In re Wolff, 22 B.R. 510, 512 (B.A.P. 9th Cir. 1982) and In re Husted, 142 B.R. 72, 74 (Bankr. W.D.N.Y. 1992), but found such to be inadequate for the specific inquiry required under §1322(b)(1), preferring a consideration of the “totality of the circumstances.”  See In re Crawford, 324 F.3d 539 (7th Cir. 2003).  This would then include:

(1) Whether the discrimination has a reasonable basis;

(2) Whether the debtor can carry out a plan without the discrimination;

(3) Whether the discrimination is proposed in good faith;

(4) Whether the degree of discrimination is directly related to the basis or rationale for the discrimination;

(5) The difference between what the creditors being discriminated against will receive as the plan is proposed, and the amount they would receive if there was no separate classification;

(6) The importance of the “fresh start” to the honest but unfortunate debtor; and

(7) The importance of allowing creditors to equitably share in a distribution of the debtor’s assets.

Even though the Prices proposed to pay Navient not with “disposable income”, as defined by the Bankruptcy Code, but through “discretionary income”, resulting from belt-tightening, they had not provided “any extenuating factors justifying the separate classification of the student loan debt.”  The frugality necessary to pay the student loan actually dissuaded the bankruptcy court as  “ they might otherwise use that income for food and other necessary living expenses”, increasing the feasibility of the plan.

Commentary:  

At the time of writing this, the Chapter 13 Trustee is holding $11,424.49.  If the Prices were to convert their case prior to confirmation to Chapter 7, this amount would be refunded to them and they would, with no disposable income or non-exempt assets, very quickly receive a discharge of all of the other unsecured debts.  The Prices could then immediately pay the student loan in full and file a second Chapter 13 plan to deal with secured and priority claims.  The payment to Navient would not be preferential as it would not have received more than it would had the second case been  a Chapter 7, since there would be no other remaining  unsecured claims with which to share those funds.  This shows some of the absurdity of refusing to allow separate classification of unsecured student loans, as every Chapter 7 case separately classifies non-dischargeable student loans.

For a copy of the opinion, please see:

Price- Separate Classification of Student Loans in Chapter 13

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