New Laws, New Issues, New Solutions
by: Hilary B. Bonial
Chief Bankruptcy Counsel, Brice, Vander Linden & Wernick, P.C.
August, 2005

The widely anticipated Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will go into effect on October 17, 2005. Although there are aspects of this new law that should help secured creditors, there are other changes that will cause new challenges for lenders, servicers and owners. The experienced bankruptcy professionals of National Bankruptcy Services (NBS) and Brice, Vander Linden & Wernick, P.C. (BVW) have studied the new law, understand the new issues and offer new solutions to prevent secured creditors from getting into new problems. Although the changes in the new law are pervasive, the following list highlights several key areas for your review:

· Chapter 13 Plan Review / Early Plan Confirmation: Section 1324(b) requires that the confirmation hearing be held between 20 to 45 days after the meeting of creditors. This means that confirmation can occur as soon as 40 days after the filing date. This is a significant change for most jurisdictions, and has several consequences to creditors.

o The Issue: The confirmation hearing timing requirement means that all cases will have a confirmation hearing prior to the proof of claims bar date. This means that the Plan will be confirmed before your secured claim must be filed. How often does a debtor proposed Chapter 13 Plan have the correct amount owed? How often do they correctly list the value of your collateral? How often do they contain other objectionable provisions? This “early confirmation” will change all jurisdictions into “Pay Per Plan” jurisdictions. In other words, much of your specific jurisdictional information is now obsolete. Confirmation of a Plan under Section 1328 binds both the debtor and the creditor to the Plan’s provisions. This means that whatever the confirmed Plan contains, you have to live with it. Since Confirmation is happening before the claims must be filed, expect a large number of Objections to Claims.

o The NBS Solution: Timely and thorough plan review. We utilize proactive electronic document gathering to ensure that we receive the Plan as soon or sooner than you do. If our attempts to secure a non-litigated resolution of Plan defects are not successful, we have an established nationwide network of over 300 experienced Bankruptcy Attorneys who can quickly and effectively litigate Plan provisions issues. Our proprietary computer system allows us to capture the specific Plan terms that apply to your loan, thus allowing us to monitor the specific performance of the debtor.

· Post-Discharge Chapter 7 Servicing: New section 524(j) now specifically allows only mortgage creditors to send monthly statements to debtors on discharged Chapter 7 loans to ensure that their periodic payments continue.

o The Issue: Because the new section ONLY allows actions limited to seeking periodic payments, all other options real property creditors have in the post-discharge world are barred. No other creditors are allowed to contact the debtor for any reason. Because of this new provision, many secured creditors have decided to require the execution of a reaffirmation agreement or the repossession of their collateral. All of your post-discharge servicing procedures should be re-vamped and re-certified to ensure compliance with this section.

o The NBS Solution: We can advise and assist in reviewing and redesigning your post-discharge servicing to comply with this new provision. Through the years, NBS has designed many post-discharge servicing procedures for our clients. Our file closing audit and stay relief advice ensures that you are informed of any special requirements for a particular jurisdiction or interpretation of the new law.

· Application of Payments: New section 524(i) of the Bankruptcy Code requires that creditors must apply payments received under a Chapter 13 plan pursuant to the terms of the plan.

o The Issue: This provision applies to both automobile and real property creditors. Very few systems that creditors use to apply payments can comply with this requirement. Under the new Bankruptcy Code, you could be sued on every Chapter 13 case you handle. Debtor’s Attorneys are already excited about this provision and are looking for creditors to sue.

o The NBS Solution: Our highly trained staff, utilizing our proprietary bankruptcy program, performs an audit of payment applications on each file prior to engaging in litigation. This ensures compliance during a case. More importantly, we also perform a pre-discharge audit to ensure that each payment received from the debtor or trustee has been properly applied.

· Reaffirmation Issues: Section 524(k) has been extensively amended to significantly increase the disclosures required to have a valid reaffirmation agreement.

o The Issue: NONE of the reaffirmation agreement forms available comply with the new requirements. Use of an outdated form will precipitate litigation against you.

o The NBS Solution: Our attorneys have been working with other bankruptcy professionals, including judges and trustees, to develop a form that complies with the new requirements. Because of our integration of a “smart document” system, we are able to comply with the smallest of detail in each judicial or jurisdiction based requests for specific documents. This means more valid reaffirmation agreements, and less chance of inciting litigation.

· Acceptance or Rejection of Leases: Section 365(p) now allows new means of assuming a lease in a Chapter 7 case. In Chapter 13 cases, the Code now provides for the lifting of stay if the lease is not specifically assumed.

o The Issue: These provisions change the way that leases are accepted and rejected in both Chapter 13 and Chapter 7 cases. Will clients know when a lease has been accepted; will they know when it has been rejected? Will clients know when the stay has been lifted by operation of law?

o The NBS Solution: First and foremost, we have experience with automobile leasing portfolios. We do not treat leases exactly like purchases, because they are not the same. Even under the current bankruptcy law, there are distinct advantages that lease creditors enjoy. We have developed processes, procedures and documents to deal with leases comprehensively. We can definitively advise if a lease has been accepted or rejected in a Chapter 7 case. We confirm that a lease is noted accurately in Chapter 13 plans, and specifically advise our clients as to if and when the automatic stay is lifted.

· Notice to Creditors: New section 342(f) allows creditors to designate a single address for all bankruptcy notices. Failure of a debtor to use the address bars the debtor from seeking monetary sanctions against the creditor for violation of the stay.

o The Issue: In order to avoid sanctions under the new provision, creditors must have procedures in place, but the Code offers no suggestions on what those procedures might be. This means that most creditors WILL be subject to sanctions for violations of the stay.

o The NBS Solution: We can recommend technology-based solutions to ensure that you know of a bankruptcy within 24 hours of the initial filing. We can consult with you on the proper written procedures to comply with the new section.

The bankruptcy professionals at NBS and BVW welcome the opportunity to discuss the impact of these and other changes to the Code with you. Please contact us soon so we can schedule a time to present our solutions to you.

Reforming the Automatic Stay - The effect of Section 362(b)(22)
by: Hilary B. Bonial
Chief Bankruptcy Counsel, Brice, Vander Linden & Wernick, P.C.
Summer, 2005

Along with the other sweeping changes taking effect on October 17, 2005 is a new addition to Section 362. Those with a background in Bankruptcy know that Section 362 concerns the Automatic Stay. This is the provision that forces all collection activity to cease as of the date of filing. The purpose is to protect the debtor’s estate from further depletion by his creditors, thereby allowing a more orderly distribution of the estate through the means provided in Chapter 7, 11, 12, or 13. To most of us in the Mortgage Banking industry, it means that the foreclosure or eviction proceedings must be stopped until the automatic stay is no longer in place. Although the foreclosure process must at least be halted under the reformed Code, an eviction proceeding can go forward. In states where a foreclosure can take many months to complete, the ability to go forward with an eviction proceeding post-bankruptcy is a large feather in the cap of our industry.

In particular, 362(b)(22) states that the automatic stay does not apply to “…the continuation of any eviction, unlawful detainer action, or similar proceeding…involving residential property in which the debtor resides as a tenant…” In order for this provision to be effective, a creditor must have achieved a judgment for possession of such property against the debtor prior to the filing of the bankruptcy. Therefore, if the foreclosure has completed under the state law requirements of the jurisdiction, it necessarily converts the debtor into a tenant if the continue to occupy the residence. The code now recognizes that if the foreclosure is complete, there is no interest in the property that needs to be protected from creditor action.

In addition, 362(b)(22) has a sister provision, 362(b)(23) that allows an eviction to go forward if the eviction is based upon the “…endangerment of such property or the illegal use of controlled substances on such property.” Here, however, the Movant must file with the Court a certification under penalty of perjury that the illegal use has occurred within 30 days of the bankruptcy filing. If so, then the eviction proceedings may continue unabated. Of course, this section will have limited usefulness to us, but in those few situations where the property is in real danger, or reports of illegal substances have been received, we are free to move forward with all deliberate speed.

As with most of the new rights and duties in the Code, these sections will require that creditors pay attention. While there are advantages being given in comparison to the old bankruptcy code, it will be more important than ever to remain vigilant and protective of the footholds we have gained.

Bankruptcy’s Danger Zone:  Collecting of Fees after the Discharge
By Hilary B. Bonial
Attorney at Law
Dallas, TX
Brice, Vander Linden & Wernick, P.C.

One of the hottest issues in today’s servicing world is the collectability of post-petition attorney fees after the debtor has been discharged in bankruptcy.    Creditors seem to be searching for a simple solution to this problem, with the hope of magically resolving the issue by adding an extra step in the collections manual.  Unfortunately, Bankruptcy Law is not always conducive to providing generalized remedies.

The issue of Post-Petition creditor’s attorney fees came to the national consciousness through the case of In re Tate, 253 B.R. 653 (W.D. N.C. Bankr. 2000).  The Tate case started out as a class-action suit (commonly seen as the scourge of our world), but the court denied the class action certification.  The ruling, however, still holds great significance for our industry.

The creditor in this case, had placed a $200 dollar fee for post-petition attorney work in the Proof of Claim.  As most of us are aware, there has long been a debate about the ability to include “claim preparation” amounts in a Proof of Claim.  The argument for inclusion was that the note provided for fees for the protection of rights for the creditor.  Therefore, the fees, at least for the production of the Claim and initial review of the bankruptcy documents, were incurred concurrent with the filing of the petition.  Since they are concurrent, the fees could be considered part of the debt, and can be included in the Proof of Claim. 

The Court, however, held differently.  Under Bankruptcy Law, the amount stated in the Proof of Claim is the total amount of the debt owed as of the date of the debtor’s petition. Therefore, pursuant to the Bankruptcy Code, one cannot include post-petition fees in the Proof of Claim.  Period.  The claim is to establish only what was owed at the time of filing.  The majority of servicers did not include a Proof of Claim preparation fee in their claims, but for those who are continuing to do so, should definitely stop.

The Tate case went further with its ruling and addressed the collectability of the creditor’s bankruptcy attorney fees and costs after the debtor has been discharged.  The Tate court felt that they should review the reasonableness of the fees and costs amassed during the bankruptcy.  The Court suggested that the servicer should file a “Motion to Approve Attorney Fees, Late Fees, and Costs” under Bankruptcy Rule 2016 in order to collect these fees post-discharge.

While the Court found this to be good in theory, the filing of motions to approve fees and costs would completely overwhelm the courts if put into practice.  Furthermore, the required filing of an additional motion would categorically increase attorney fees due because more litigation would be required.  Are the investors prepared to increase the allowable reimbursement for this type of litigation? 

A second case, out of the Bankruptcy Court for the Southern District of Alabama, In re Slick v. Northwest Mortgage, Inc., 2002, took another approach.  Judge Mahoney ruled that creditors could not collect post-petition fees and costs after the debtor was discharged unless those fees were included in the Proof of Claim filed by the creditor.  The theory of the case was based upon the 11^th Circuit case of Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (2000).  The Telfair case held that a creditor’s Proof of Claim could include post-petition, pre-confirmation accrued fees and costs.  

Judge Mahoney disallowed the collection of all post-petition fees by creditors who failed to disclose it in their claims.  In addition, she required the disgorgment of all fees collected, and sanctions against the creditors.  In this case, as in Tate, the theory behind the Court’s decision was a good one.  How can the debtor know they are incurring fees when the Bankruptcy Law does not allow the Creditor to inform them while the Bankruptcy is active?  How can a debtor challenge the fees posted unless they know the fees exist? Therefore, the simplest mechanism available to allow this disclosure within the Bankruptcy world would be the claim itself.  The creditor could amend its claim to show these fees are outstanding, and through the operation of Bankruptcy Law, the failure of the debtor to object to the claim, or pay the full amount listed allows the amount unpaid to be exempted from the discharge and collectible after the case is closed.  While this seems like the cleanest and easiest solution (there are no court costs for the filing of a Proof of Claim, and they can be amended at any point after they are timely filed), it does not seem so clear in practice.  As with the Tate decision, we are left with some questions.

The questions include, for this author at least, what are creditors to do with post-petition, post-confirmation fees?  Telfair only addressed the small window of time between petition and confirmation.  What happens post-confirmation?  Although Tate was published at the time of the Slick decision, it did not reference the case.  Therefore, one cannot assume that the post-confirmation approval of fees in Alabama should be done via a Motion as suggested under Tate.  Can creditors amend their claims to show these fees incurred?  Are they required to amend their claims each time a fee or cost hits their books?  How often must the claims be amended?  Does the amendment of a claim just prior to discharge satisfy the Court?  Where does the Bankruptcy Code fit in all this?  A reading of the provisions on Proof of Claims states that the amount claimed is set at the date of Petition.  Please note that this particular decision has been appealed, and a ruling on said appeal is pending. (As is the case with the law, the substance of this ruling could change as the Slick case is on appeal.)   

A review of the current state of the law on this issue leads to headaches, and perhaps a stomach ulcer for any nationwide creditor.    However, for right now, let us review: if post-petition fees are place in a Proof of Claim, you have done wrong.  If you do not place post-petition fees in the Proof of Claim, you have done wrong.  Simple.

The most important question now is what can the mortgage creditors do?  I believe the case law is clear that if you have an order entered in a particular case that allows a specific amount of attorney’s fees, they are collectable pursuant to the terms of the order.  As for fees incurred throughout the life of the case, fees not specifically approved by the Court because there was no litigation filed on a case, the question of after bankruptcy collectability is up in the air.

The nature of the legal world is that when there is this much uncertainty as to how to advise our clients, someone will test the theory in court.  What does this mean in English?  Two words: Class Action.  I see a real danger here for any creditor that attempts to collect post-petition attorney fees and costs.  The danger is that the mortgage company will be brought into a class action lawsuit on their collection attempts.  Any time there is not a clear directive from the Courts or the Code on how to handle an issue, it proves ripe grounds for a class action lawsuit.  Does this mean that creditors must now eat all the attorney fees and costs incurred in a bankruptcy case?  No, it does not.  It is not clear, however, what the best advice is at the moment.  The only sure way to avoid the problem is to cease the collection of post-petition attorney fees that are not approved by the Court during a particular case.  Another solution would be to ask your attorneys to file Motions for Approval of Fees in all cases as they near discharge. (Speaking from an attorney’s perspective, we would love this solution – We would get to charge more!  I love this country!)  In any case, we can only wait, and watch to see what is finally decided.  Only after either an amendment to the Bankruptcy Code, or a clearly written Supreme Court decision is issued can attorneys or their clients feel a modicum of safety.  Until then, this author suggests the policy of “smile pretty, and watch your back.”

MEMORANDUM
RE:  Soldiers & Sailors Civil Relief Act of 1940 (50 U.S.C. Section 501 Et. Sec.)
By Hilary B. Bonial
Attorney at Law
Dallas, TX
Brice, Vander Linden & Wernick, P.C.

On September 24, 2001, President Bush called 35,000 – 50,000 Reservists to active duty to defend the United States against the terrorist threats. This activation of U.S. Military might has also activated The Soldiers and Sailors Civil Relief Act of 1940. The Soldiers & Sailors Act (SSCRA) was enacted prior to World War II, and was intended to promote and strengthen the national defense by suspending the enforcement of certain civil liabilities of certain persons serving in the armed forces. The driving force behind the act is to protect persons who are protecting our country.

While the act itself is relatively complicated, the basics of who is protected, what sort of protections they get, and for how long can be answered. The information contained below should answer the basic questions that most attorneys and lenders will have. As always, if you have further questions, please contact your preferred counsel or me at once.

1. Who is covered?
The SSCRA applies to “persons in military service” 50 USC Section 511. Military Service includes the United States Army, Navy, Air Force, Marine Corps, National Guard, Coast Guard, and all reserve units of these forces on active federal duty. In addition, the act covers Public Health Service officers who are attached to these branches. The SSCRA covers individuals whether they volunteer or are drafted into service.

2. What loans and or debts are covered by the act?
Potentially, all of the debts of an individual’s could be covered. However the SSCRA only applies to the transactions entered into PRIOR to being called to active duty. Therefore, a soldier who has always been on active duty is not protected by this act. Conversely, an individual who was in reserve status, or was a civilian on the day they entered the transaction would now be protected under the SSCRA while they are called to active military duty.

3. Does it cover co-signers and spouses?
Yes, if the co-signer is a dependent of the person called to active duty.

4. Does it apply to homes, cars, and credit cards?
Yes, the SSCRA applies to ALL debts of the individual.

5. How does the SSCRA protect individuals called to active duty?
The act can protect in 2 ways:
A) The act requires lenders to charge not more that six percent (6%) interest rate during the term of active military service. (Calculated from the actual date called to service through 60 days after deactivation)
B) The act places a stay on all foreclosure actions, and a general stay on all legal proceedings. (Again, calculated from the date of activation to 60 days after deactivation.)

6. Is the borrower required to notify the lender? Does the lender have to have a crystal ball?
Yes. The borrower should notify the lender. The changes required by the act should take place as soon as possible after notification, and are effective as of the date of activation. (Therefore, if the borrower informs the lender, 4 months after being activated, the lender must go back and re-apply the payments from the date of activation forward.)
No, the lender does not have to have a crystal ball. If the soldier fails to inform the lender, and the lender unknowingly takes legal action that would have been protected under the act, the legal actions are VOIDABLE, not void.
NOTE: There is no time limit as to when the soldier can claim their protection. They could claim it years after they have come off of active military status.

7. What is the minimum that the borrower must do to establish qualification?
A copy of the Orders of Activation is sufficient. The lender could, in the alternative, request a letter from the soldier’s commanding officer.

8. Are loans to “current” active military personnel affected by the Act?
No, the transactions must have been entered prior to the soldier being called to active duty.

9. When a person loses “active duty” status, at what point do they lose the protection of the Act?
The act protects them for the entire term of military service, and for sixty days following their deactivation.

10. What are the consequences for the violation of the SSCRA?
If the creditor moves forward and knowingly violates the SSCRA, they are guilty of a misdemeanor, and the penalties can lead to up to 1 year imprisonment and a $1,000 fine.
In addition, courts have held that the SSCRA contains a private cause of action that can lead to class action liability.
Further, even unknowing violation of the act can lead to violations of the Truth in Lending Act and the Fair Debt Collection Practices Act.

11. Can a lender seek stay relief in an active bankruptcy case?
No, all litigation against a soldier is stayed by the act.
(An unanswered question is “Can a Chapter 13 Trustee dismiss a case for failure of the debtor to may trustee payments? There are no court decisions on this question, as of yet.)

Soldiers & Sailors Civil Relief Act of 1940 - Cheat Sheet:
1) When was the debt made? The debt had to have been entered at a time when the soldier was either a civilian, or inactive.

2) When was the debtor called into active service? This will determine when the interest rate change to 6% went into effect, and, or when the stay against civil proceedings was effective.

3) When in doubt, check it out: You can, as a lender or an attorney, verify a borrower’s military status by calling 1-800-395-4929 with the social security number. They will be able to tell you the status for military benefit eligibility, and whether the borrower is in active or inactive status. If they cannot pull up the social security number, it means the borrower was never in the military.

4) Check your local rules: Several jurisdictions have instituted a requirement for a “non-military affidavit” to be filed with any pleadings (state or federal). The affidavit assures the court that the borrower is not protected by the SSCRA. Failure to file such an affidavit contemporaneous with the pleadings may delay the proceedings, or cause the resulting judgment to be void.