FYI: Ill App Ct Holds Deficiency Judgment Not Appealable Until Conclusion of Wage Deduction Proceedings

The Illinois Appellate Court, Third District, recently held that the lower court's denial of a borrower's motion for release and satisfaction of a deficiency judgment was not a final and appealable prior to a wage deduction hearing when the validity of the underlying judgment would be finally decided.  In ruling that the borrower's appeal was merely interlocutory, the Court explained that the denial of the Borrower's motion contesting the validity of the foreclosure deficiency judgment prior to the wage deduction hearing was not final because "the same attack could later be made at the wage deduction hearing."

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/3rdDistrict/3120578.pdf.

 

Defendant ("Borrower") obtained a loan from plaintiff savings bank ("Bank") that was secured by a mortgage on a commercial office building.  Borrower simultaneously executed an assignment of rents in favor of Bank which provided that Bank could use the rents collected to pay Bank's costs and expenses "in connection with the Property," and that rent not applied to such costs and expenses were to be applied to the loan. 

 

Having made no payments on the loan, Borrower defaulted, and Bank accordingly filed a mortgage foreclosure action against Borrower and petitioned for possession of the property as mortgagee in possession.   The lower court entered an order of possession allowing Bank to, among other things, operate the property and collect rents. 

 

Borrower never answered or responded to the foreclosure complaint.  Bank moved for default, which the lower court granted.  The lower court entered a judgment of foreclosure and sale, and, after the foreclosure sale, entered a deficiency judgment against Borrower for just over $40,000.    

 

Bank sought to garnish Borrower's wages in an attempt to satisfy the deficiency judgment.  Arguing in part that the deficiency judgment should be satisfied from the rental payments made from a tenant occupying the property, Borrower filed a motion for entry of release and satisfaction of judgment.   The lower court denied Borrower's motion, and scheduled the wage deduction hearing for several weeks later.  Borrower appealed the denial of his motion for release and satisfaction prior to the wage deduction hearing.

 

The Appellate Court dismissed the appeal for lack of jurisdiction.

 

As you may recall, the Illinois Wage Deduction Act allows for enforcement of a judgment by levying against a judgment debtor's wages.  See 735 ILCS 5/12-801, et seq.  At the wage garnishment hearing, the court, the garnishee or judgment debtor may challenge the amount or validity of the underlying judgment.  See Id.; 735 ILCS 5/12-808.5(4).

 

Pointing out that the lower court's denial of Borrower's motion for release and satisfaction prior to the wage deduction hearing was not final and appealable, because such denial was merely interlocutory, the Appellate Court explained that the validity of the underlying deficiency judgment would be finally decided after the wage deduction hearing, and that the Appellate Court lacked jurisdiction prior to the entry of a final judgment on the merits. 

 

In so ruling, the Court noted that "[w]hen a debtor files a motion contesting the validity of the judgment underlying a wage deduction proceeding prior to a wage deduction hearing, a trial court's denial of such a motion is not final and appealable" because "the same attack could later be made at the wage deduction hearing." See Felton v. Shead, 6 Ill. App. 3d 123, 126 (1972).

 

Concluding that it lacked jurisdiction to consider the lower court's denial of Borrower's motion prior to the wage deduction hearing when the validity of the underlying judgment would be finally decided, the Appellate Court dismissed the appeal.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com

 

 

 

 

FYI: 4th Cir Holds BAPCPA Allows "Chapter 20" Debtors to Strip Off "Completely Valueless Liens"

The U.S. Court of Appeals for the Fourth Circuit recently ruled that BAPCPA permitted so-called "Chapter 20" debtors to "strip off" completely valueless liens, reasoning that, notwithstanding BAPCPA's four-year bar on discharges in a Chapter 13 bankruptcy following a Chapter 7 filing, debtors may still take advantage of other protections under Chapter 13 that do not involve a discharge. 

 

In so ruling, the Court concluded that the Bankruptcy  Code did not create a per se rule against lien-stripping in Chapter 20 cases, as mechanisms existed for preventing abuse of the bankruptcy process, including a good faith requirement and a court's ability to dismiss Chapter 20 cases filed solely to strip off liens.

 

A copy of the opinion is available at:  http://www.ca4.uscourts.gov/Opinions/Published/121184.P.pdf.

 

Debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code ("Code"), which discharged the personal liability on their unsecured debt but left their secured mortgage debt intact.  Almost a year later, Debtors filed a petition under Chapter 13 of the Code to reorganize their debts, repay mortgage arrearages and consumer debt, and to "strip off," i.e., remove, junior liens against their residence and rental property.  Their residence was valued at $270,000, and was encumbered by a first-priority lien with a balance of over $275,000, and second and third priority liens, the balances of which exceeded $230,000. 

 

In this so-called "Chapter 20" bankruptcy, in which debtors file a Chapter 13 bankruptcy within four years of a Chapter 7 bankruptcy that resulted in a discharge, the Bankruptcy Court granted Debtors' motion seeking to strip off the third-priority lien on Debtors' residence.  In so doing, the court found that Debtors had acted in good faith and reasoned that the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") did not create a "per se" rule against lien-stripping in the Chapter 20 context.  The bankruptcy court also entered orders stripping off the second and third liens on Debtors' rental property and confirming their bankruptcy plan.  The bankruptcy trustee ("Trustee") and the holder of the third-priority lien against Debtors' residence appealed to the district court. 

 

In a separate Chapter 20 bankruptcy, consolidated with Debtors' case, an individual debtor filed a Chapter 13 petition just a week after having received a Chapter 7 discharge, seeking to pay a federal tax claim and strip off a valueless second lien against her home.   After the bankruptcy court granted the individual's motion to strip off the second lien, the bankruptcy court confirmed the bankruptcy plan.  Trustee appealed to the district court.

 

The district court affirmed the bankruptcy court's rulings.  Trustee appealed.  The Fourth Circuit affirmed.

 

As you may recall, Chapter 7 of the Code generally results in a discharge of debt, eliminating personal liability for certain debts, but leaves intact in rem claims against secured collateral. A Chapter 13 bankruptcy, on the other hand, permits the debtor to reorganize both unsecured and secured debt and to pay creditors primarily out of income. 

 

In addition, a lien in bankruptcy is either secured or unsecured depending on the value of the collateral.  See 11 U.S.C. § 506(a)(an allowed claim secured by a lien is a secured claim "to the extent of the value of such creditor's interest in the estate's interest . . ." and "is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.")

 

Moreover, a Chapter 13 bankruptcy plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]"  11 U.S.C. § 1322(b)(2).

 

Under BAPCPA's amendments to the Bankruptcy Code, lien creditors retain "allowed secured claims" until either payment of the underlying debt pursuant to nonbankruptcy law or discharge, and, in the event a Chapter 13 case is dismissed or converted without the plan being completed, the holder of an allowed secured claim retains the lien to the extent recognized by applicable nonbankruptcy law.  See 11 U.S.C. § 1325(a)(5)(B).  BAPCPA further provides that a debtor may not receive a Chapter 13 discharge within four years of filing a Chapter 7 that results in a discharge.  11 U.S.C.  § 1328(f)(1).

 

While noting that Section 506(a) operates in conjunction with Section 1322(b)(2) to permit the bankruptcy court to strip off a completely valueless lien against a primary residence in a Chapter 13 case, the Fourth Circuit also observed that section 1322(b)(2) precludes a so-called "strip down" of a partially secured lien against a principal residence in the Chapter 13 context, because partially secured lienholders are considered "holders of secured claims" that are protected by lien modification.  See Nobelman v. American Sav. Bank, 508 U.S. 324, 331-32 (1993); Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002); Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir.  2002).  

 

Next, the Fourth Circuit addressed whether BAPCPA specifically precludes "Chapter 20" debtors from stripping off valueless liens.  In so doing, the Court concluded that, notwithstanding BAPCPA's prohibition on debtors obtaining discharges in a Chapter 13 bankruptcy for four years following a Chapter 7 filing, debtors may still take advantage of other protections under Chapter 13 that do not involve a discharge.  See Branigan v. Bateman (In re Bateman), 515 F.3d 272, 283 (4th Cir. 2008). 

 

Thus, rejecting Trustee's various assertions, including the contention that lien-stripping depends on a debtor's ability to receive a Chapter 13 discharge, and that the liens in this case survived until paid because Debtors were not eligible for a discharge, the Fourth Circuit reasoned that BAPCPA did not alter the ability of bankruptcy courts to allow lien stripping in Chapter 13 proceedings.  In reaching this conclusion, the Court rejected Trustee's argument that Debtors were trying an end run around the prohibition of Chapter 7 lien-stripping on "allowed secured claims," even where there was no equity in the collateral.  See Dewsnup v. Timm, 502 U.S. 410 (1992)(considering whether a Chapter 7 debtor may strip down a lien to the value of the collateral).  Observing that only claims with value may be "allowed secured claims," and that the liens in this case were completely valueless and thus wholly unsecured, the Fourth Circuit specifically pointed out that BAPCPA did not amend Section 506 or Section 1322(b), concluding that the lien-stripping analysis in a Chapter 13 bankruptcy similarly applied in the context of a Chapter 20 bankruptcy.

 

Finally, stressing that in allowing courts to scrutinize bankruptcy filings for bad faith, and to dismiss Chapter 20 cases aimed solely at stripping off liens, the Fourth Circuit also emphasized that a bankruptcy discharge only eliminates personal liability, and that lien-stripping orders only change a debtor's in rem liability where the lien has no value.  The Fourth Circuit thus emphasized that its holding was limited to a bankruptcy court's ability to strip the in rem portion of a valueless lien, and that all in personam claims survive a Chapter 20 proceeding, thereby treating creditors equally in this regard.

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com

 

 

 

 

Accordingly, the Fourth Circuit affirmed the lower court's judgment.

 

 

 

 

FYI: Ill App Ct Dismisses Borrower's Foreclosure Appeal for Failure to Provide Notice to Junior Lienholders and Third-Party Purchasers

The Illinois Appellate Court, First District, recently dismissed a borrower's appeal of an order denying his motion to quash service, concluding that borrower's "blatant, unexplained" violation of appellate rules in failing to provide notice of the appeal to either the parties of record or parties in interest seriously prejudiced those parties with interests connected to the foreclosure sale.  

 

In so ruling, the Court noted that, although the plaintiff bank was not prejudiced by the lack of notice because it was aware of the appeal, the parties who had received surplus funds through the foreclosure sale of the mortgaged property and the third-party purchasers of the property would be adversely affected if the sale were reversed on appeal due to the alleged improper publication service on the borrower.   

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120612.pdf.

 

Defendant ("Borrower") defaulted on a home mortgage loan on property located in Chicago, Illinois.   The lending bank ("Bank") filed a foreclosure action, naming as defendants Borrower's wife ("Wife"), a judgment creditor ("Judgment Creditor"), a junior mortgagee ("Junior Mortgagee"), and others. 

 

After Wife and Junior Mortgagee had been served with process, a special process server executed an affidavit stating among other things that Borrower and Judgment Creditor had not yet been served, and that, after making certain inquiries to find an alternate address for Borrower, his residence remained unknown.   Bank accordingly filed an affidavit for service by publication pursuant to Section 2-206 of the Illinois Code of Civil Procedure.   

 

Bank eventually served Borrower and Judgment Creditor by publication, and the lower court subsequently entered a judgment of foreclosure and sale against Borrower.  Almost a year later, the property was sold to third-party purchasers and yielded a surplus.  Around the same time, however, Borrower's attorney filed an appearance in the foreclosure action, and, on the same date on which Bank moved to approve the sale of the property, Borrower filed a motion to quash service, arguing that service by publication was improper because Bank had made only one attempt to serve him.  To support his motion, Borrower attached an affidavit stating that since he lived at the property at all pertinent times, he could have been found and served there.   In response, Bank argued that service by publication was valid because it complied with all the requirements of Section 2-206(a).

 

The lower court denied Borrower's motion to quash and entered an order approving the sale of the property, and also ordered that the property be turned over to the third party purchasers and the surplus funds given over to the court clerk.  Borrower moved for reconsideration.  Denying the motion for reconsideration, the lower court ordered the court clerk to release the surplus funds to Judgment Creditor and Junior Mortgagee.  

 

Borrower appealed.  The Appellate Court dismissed the appeal, ruling that Borrower violated Rule 303(c) by failing to serve notice of the appeal on any of the parties of record or the parties in interest, especially the third party purchasers of the property, as well as the Judgment Creditor and Junior Mortgagee.

 

As you may recall, Rule 303(c) states in pertinent part "[t]he party filing the notice of appeal . . . shall, within 7 days, file a notice of filing with the reviewing court and serve a copy of the notice of appeal upon every other party and upon any other person or officer entitled by law to notice."  Ill S.Ct.R. 303(c). 

 

In noting that, absent evidence of prejudice to a party, an appeal will not be dismissed for failure to serve the notice of appeal on an opposing party, the Appellate Court stressed that dismissal of an appeal may be proper where, as here, parties may be adversely affected by the appellate court's decision.  See Leyden Fire Protection District v. Township Board of Leyden Township, 26 Ill. App. 3d 569, 572-73(1975).

 

Pointing out that Borrower offered no explanation for his failure to serve any of the parties with the notice of appeal, the Appellate Court also observed that Borrower should have notified all parties in interest, "as best practices would dictate."  Specifically, because Borrower's interests were adverse to the interests of Judgment Creditor and Junior Mortgagee, they were "substantive appellees" who, being officially unaware of the appeal, were significantly prejudiced by Borrower's failure to serve a notice of appeal upon them, as a reversal of the lower court's judgment would force them to repay the surplus funds.  Moreover, the Appellate Court further noted that the purchasers of the property would also be seriously prejudiced by their inability to participate in the appeal to defend their interests in the property. 

 

Accordingly, due to the Borrower's "blatant, unexplained violation of Rule 303(c)," the Appellate Court dismissed the appeal.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com

 

 

 

 

FYI: 2nd Cir Rules Creditor Violated Automatic Stay By Failing to Automatically Return Repossessed Vehicle in BK Filed After Repossession

The U.S. Court of Appeals for the Second Circuit recently ruled that a secured creditor willfully violated the automatic stay in a Chapter 13 bankruptcy that was filed after repossession of a debtor's vehicle, because the creditor failed to return the repossessed vehicle to the debtor.

 

The Court held that the creditor was thus liable for debtor's actual damages during the period when the debtor was without the use of his vehicle, because once the creditor knew of the bankruptcy filing, Bankruptcy Code Sections 541 and 542 required the creditor to surrender the repossessed vehicle back to the debtor as debtor-in-possession, and the debtor was not required to take any additional steps, such as obtaining a court order requiring the creditor to turn over the repossessed vehicle.

 

A copy of the opinion is available at:  Download Link.

Plaintiff ("Debtor") obtained a loan from defendant, a federal credit union ("FCU"), which was secured by a pickup truck that Debtor used to commute to his construction business.  The loan agreement entitled FCU to repossess the truck upon default.

Debtor defaulted several years later, and FCU repossessed the truck, advising Debtor of his rights under New York commercial law to redeem the vehicle.  Shortly after the repossession, Debtor filed for Chapter 13 bankruptcy protection, giving FCU written notice of Debtor's bankruptcy filing, and, invoking the automatic stay imposed by Section 362 of the Bankruptcy Code, demanded return of the vehicle.

A week later, with FCU still in possession of the vehicle, Debtor filed an adversary proceeding against FCU seeking its return.  Over a month later, the Bankruptcy Court entered an order requiring FCU to show cause why it should not return the vehicle, and why an award of damages was not warranted for FCU's violation of the automatic stay.  Following a hearing, FCU finally returned the vehicle to Debtor.

Debtor then sought damages for his inability to use his vehicle while FCU had possession of it, as well as attorneys' fees, and sanctions.  FCU moved for summary judgment, arguing that there was no violation of the automatic stay and that, under a bankruptcy court decision dealing with turnover of property to the bankruptcy estate, it had a reasonable basis for declining the release the vehicle absent a court order.  In response, Debtor argued in part that Section 362 unconditionally required FCU to release the vehicle promptly after the filing of the bankruptcy petition. 

The Bankruptcy Court granted summary judgment in favor of FCU.  Debtor appealed to the District Court, which ruled that FCU was bound to release the vehicle to Debtor upon learning of his Chapter 13 filing and, further, that FCU's violation was "willful," thus making it liable for damages and attorneys' fees.  The Second Circuit affirmed.

As you may recall, under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically effects a stay of "any act to obtain possession of property of the estate . . . or to exercise control over property of the estate."  11 U.S.C. § 362(a)(3).  Moreover, a debtor "injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."  Id. § 362(k)(1).

 

In addition, "all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case" are gathered into the bankruptcy estate, "wherever located and by whomever held" and an entity "in possession, custody, or control" of certain property in the estate "shall deliver" that property to the bankruptcy trustee "unless such property is of inconsequential value or benefit to the estate." 11 U.S.C. §§ 541(a)(1); 542(a).  The property subject to the delivery obligation is "property that the trustee may use, sell or lease."  Id. at § 542(a).

 

Finally, in a Chapter 13 bankruptcy, the debtor "remain[s] in possession of all property of the estate," effectively acting as the trustee under Section 542(a).  11 U.S.C. § 1306(b). 

 

Noting that under New York commercial law, Debtor had a continuing equitable interest in the vehicle, and that the equitable interest thus constituted "property" of the bankruptcy estate, the Second Circuit turned to Debtor's argument that in failing to return the vehicle, FCU "exercise[d] control" over Debtor's equitable interest and thereby violated the automatic stay.    See N.Y. U.C.C. § 9-623(right to redeem vehicle prior to sale by secured creditor) ("UCC").

 

Relying on a Supreme Court decision that addressed a Chapter 11 reorganization, the Second Circuit recognized that the term "property" under Section 541(a) included property repossessed by a secured creditor and that "any other interpretation of § 542(a) would deprive the bankruptcy estate of the assets and property essential to its rehabilitation effort . . . ."  United States v. Whiting Pools, Inc., 462 U.S. 198, 205-06, 208 (1983).  Accordingly, the Court reasoned that FCU's rights in the vehicle were subject to Debtor's equitable interest under the UCC, but also that, once Debtor filed for bankruptcy protection, that equitable interest gave the bankruptcy estate a superior possessory right in the vehicle.  See id. at 207.

 

Next, in rejecting FCU's argument that, as the secured creditor in possession of the vehicle, it was not obligated to surrender the collateral to the estate because Debtor had to take an "affirmative step," such as obtaining a court order requiring it to do so, the Second Circuit reasoned that since Section 541 expressly provides that "property" of the bankruptcy estate includes equitable interests and Section 542 is "self-executing," Debtor did not need to take any further steps beyond the filing of his Chapter 13 petition to compel the turnover of his vehicle.  Cf. Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D.N.Y. 2001)(concluding that secured creditor did not violate the automatic stay when after learning of bankruptcy, it failed to return a debtor's repossessed vehicle immediately). 

 

In so ruling, the Second Circuit, noting that the Alberto decision ran counter to the trend of decisions from sister circuits, stressed that FCU "exercised control" over the vehicle and thus violated both the automatic stay and the plain language in Section 542 directing that those with assets of the estate "shall deliver" them to the trustee.  See, e.g., Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009); Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989).

 

Similarly, the Second Circuit also rejected FCU's assertion that it was entitled to hold onto the vehicle until such time as Debtor provided "adequate protection" for its security interest, ultimately concluding that the requirement that those in possession of estate property "shall deliver" it to the trustee was unambiguous and unqualified.   In so doing, the Court pointed out that a different interpretation would allow creditors to "negotiate[e] a better security package" than other creditors, thereby affording themselves a priority position above other secured creditors.  See Thompson, 566 F.3d at 707.

 

Finally, addressing FCU's argument that it was not obligated to pay damages because any violation of the automatic stay was in good faith and thus not "willful," the Second Circuit concluded that a willful violation merely required the general intent to keep the vehicle and that FCU did not need specific intent to violate the automatic stay.  As the Court explained, "any deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages."  Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1105 (2d Cir. 1990). 

 

Thus, the Court ruled that FCU was liable for Debtor's actual damages for the loss of his vehicle, but offered that good faith may prevent the imposition of punitive damages.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com