Another Victim of the Title Presumption vs. Community Property Presumption

By Ryan C. Wood

While we wait for the California Supreme Court to weigh in on the legal effect of a married couple purchasing real property during marriage but taking title to the property as joint tenants sad cases continue to pile up.  Under California law two parties, whether married or not, may take title to real property as joint tenants.  The main feature or benefit of taking title as a joint tenant is the right of survivorship that comes along with it.  This is particularly beneficial to married couples as it allows them to avoid going through probate upon the death of a spouse.  The real property just passes to the surviving spouse.  California law also provides that when title is as joint tenants the one half interest in the property is the person’s separate property and not community property.  Here is where it gets crazy though.  The real property being separate property is only true under certain circumstances and not all circumstances?  In comes the community property presumption regarding property acquired during marriage.  So far various courts, not the Supreme Court of California, have held in the bankruptcy context the community property presumption wins, not how the actually legal recorded title is taken at the time of purchase.  The actual legal title is not sufficient evidence to show the married couples intent that the real property acquired during marriage be each spouses separate property. 

When married couples get divorced in community property states the community property is supposed to be divided 50/50 unless the spouses agree otherwise or there has been a transmutation of the property from being community property to the separate property of one of the spouses.  Simply put, transmutation laws cannot apply to a piece of real property acquired during marriage.  Spouses are not transferring anything when purchasing a house during marriage.  They are acquiring it and taking title as joint tenants evidencing their intent for the house to be separate property……..  Also, how is a piece of real property titled as joint tenants where each spouse owns a 50 percent interest not consistent with community property law and dividing the community property 50/50 upon divorce?  Seems like it is consistent so what is the problem?  Oh wait, this is only applicable in a divorce and not under other circumstances like filing bankruptcy?       

On November 8, 2018, the Ninth Circuit Court of Appeals entered an order certifying question to the Supreme Court of California as follows:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

In the meantime cases are still being decided that provide the community property presumption is what matters and not the clear and convincing evidence of a recorded title as joint tenants giving each spouse a separate property interest in the purchased home.  In a prior blog article I provide all the different cases regarding this issue.  I have listed them again at the end of this article.  A recent Ninth Circuit Bankruptcy Appellate Panel cases provides some additional feedback on this issue a couple interesting twists.  Unfortunately the same result was found; the legal taking of title as joint tenants was trumped by the community property presumption.

Why Do Bankruptcy Attorneys Care So Much About This Issue?

Each spouse has the right to file for bankruptcy protection even if married.  When one spouse files all community property and the separate property of the filing spouse is part of the bankruptcy estate.  The separate property of the non-filing spouse is not part of the assets that must be listed.  If a house of a married couple has equity of $200,000 and the title is held as joint tenants we should only have to list the filing spouse’s portion or $100,000.  Ignoring the title of the house as joint tenants and calling the house community property requires us to schedule the equity in the house as the entire $200,000 interest even though taking title as joint tenants is supposed to provide each spouse has a separate property interest.  As of right now a married couple is only entitled to a homestead exemption to protect equity in a primary residence of $100,000 pursuant to California law.  So an interpretation of the law that says the community property presumption wins instead of the title presumption creates a bankruptcy estate twice as large, not exemptable/protectable under the example above.  This creates a large obligation to creditors that would not exist if the title presumption was properly followed given title as joint tenants under California law provides the spouses interest is their separate property…

Recent Ninth Circuit Bankruptcy Appellate Panel Case

In an unpublished opinion by the Ninth Circuit Bankruptcy Panel a couple in Southern California seemingly did everything to provide the real property they acquired during marriage be held as joint tenants, separate property and not community property.  They even had a post-nuptial agreement providing additional language to strengthen their intent to have the real property be deemed separate property.  The problem is a bankruptcy case under chapter 7 of the Bankruptcy Code was filed and what a family law attorney or estate planning attorney would believe to be true simply is not the case in the context of filing bankruptcy.  There were also some cracks in the documents of this married couple and that is what makes this particular case interesting.

Facts of the Chapter 7 Bankruptcy Case Appealed

The lower bankruptcy court held regarding the character of real property owned by the debtor at the time the bankruptcy case was filed as; (1) the properties were presumed to be community property despite the fact that they were held by the couple as joint tenants, and (2) Non-filing spouse did not produce evidence sufficient to raise a genuine issue of material fact regarding the character of the ownership of the properties.  The Ninth Circuit Bankruptcy Appellate Panel affirmed the decision and agreed with the lower bankruptcy court.

The specific issues that are part of this current appeal involve a postnuptial agreement between the spouses and evidence of third party family members of the filing spouse providing down payments for the properties acquired during the marriage.  While I believe the taking and recording of title as joint tenants is clear and convincing evidence of a married couples’ intent to take the real property acquired during marriage as separate property that is not the current interpretation. 

In this chapter 7 case there were actually two different properties purchased during marriage that added complications.  The couple also entered into the postnuptial agreement after purchasing one property and not before purchasing both properties.  Unfortunately the postnuptial agreement did not include language addressing the purchase of the first property prior to the postnuptial agreement.  If the postnuptial agreement did say the purchase of the first property was to be held as separate property maybe things would have been different.  The postnuptial agreement provided the amounts paid by third party relatives would be part of the equation to determine the spouses interest in the purchased properties.  Again, there was no mention of the first purchased property though…..  The bankruptcy case was originally filed as a chapter 11 reorganization and later converted to a chapter 7 case.  This also is significant but I will not get into that other than the bankruptcy case becomes a liquidation of not exempt/protectable assets such as the two pieces of real property/houses.

Naturally the chapter 7 trustee assigned to the bankruptcy case properly sought to liquidate the bankruptcy estate and the question arose as to what is part of the bankruptcy estate.  The lower bankruptcy court held that the homes were part of the bankruptcy estate and the evidence presented did not overcome the presumption of the community property.  What is a new wrinkle from most cases like this was the postnuptial agreement.  The lower bankruptcy court held and the Ninth Circuit Bankruptcy Appellate Panel agreed that the postnuptial agreement did not apply given it was not recorded pursuant to California Family Code Section 852(b), transmutation law of assets acquired during marriage, and under California Civil Code Section 1217, that unrecorded instruments are only valid between the parties to the instrument and those have notice of it.  So the chapter 7 trustee was not bound by the postnuptial agreement and the spouses intent to hold property as separate property.  Again I argue this is a misapplication of California transmutation laws given these properties are acquired during marriage and the title is taken as joint tenants, separate property, and the recorded title is clear and convincing evidence of their intent.  This of course is not how the law is being interpreted.  So the recorded title as joint tenants does not provide notice of the spouses intent to third parties and the taking of title as joint tenants is not a valid transmutation……..

As a bankruptcy attorney I hope the Supreme Court of California comes to a different conclusion on this issue soon.  As of right now there is no such thing as taking title to property as joint tenants that creates a separate property interest in the property without creating additional documentation as to the spouses intent.  There are also not clear answers to exactly what the documentation should be for a court to hold the property title as joint tenants is separate property.  Whatever that documentation is should be notarized and recorded so that all third parties have notice of the spouses’ intent the hold the property as joint tenants and be entitled to separate property status under any and all circumstances; including filing for bankruptcy protection.    

Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017)

Valli v. Valli (In re Marriage of Valli), 58 Cal. 4th 1396, 1400 (2014)

In re Obedian, 546 B.R. 409, 422 (Bankr. C.D. Cal. 2016)

Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243 (9th Cir. 2003)

What Is This Request For Special Notice In My Bankruptcy Case?

By Ryan C. Wood

If you recently filed for bankruptcy protection you may have received a document in the mail entitled request for special notice.  This is a creditor requesting that all documents filed in the case be served on them so they know what is going on in the case.  You may be surprised to learn that when a bankruptcy case is filed creditors only receive the two page notice of meeting of creditors.  Creditors do not receive the actual petition, statements or supporting schedules.  If a creditor does nothing further the notice of meeting of creditors will be the ONLY document they receive until the order of discharge or order confirming a plan of reorganization is served on them later on in the case.      

Why Is This?

Quite simply just like in many areas of the law parties are required to enforce their rights.  If you snooze you lose.  Bankruptcy is a very time sensitive process.  There are a number of deadlines and some are absolute.  If you miss certain deadlines you are done for.  Creditors actually have to participate in the bankruptcy case and obtain the petition and supporting documents themselves to know what is going on and enforce their rights.   Again, creditors listed in bankruptcy petitions only receive the notice of meeting of creditors in the mail after the filing of the bankruptcy petition.  There are applicable statutes of limitations for various causes of action like breach of contract or personal injury claims pursuant to state laws.  Creditors are supposed participate in the bankruptcy process and enforce their rights just like they have to under applicable state laws when a claim exists.   Again, if you snooze you lose.

For example there are 60 days from the date of the first scheduled meeting of creditors for a creditor or party in interest to file an adversary proceeding to object to a debtors discharge or dischargeability of the underlying debt unless this deadline is extended within the 60 day period.  This is a deadline provided in the notice of meeting of creditors and is generally absolute.  If you file the adversary proceeding on day 61 the Bankruptcy Code, Federal Rules of Bankruptcy Procedure and case law supports the adversary proceeding should be dismissed as not timely filed.      

Disturbing Trend

An extremely disturbing trend is for bankruptcy trustees, judges and the clerk’s office stepping into the shoes of creditors whether knowingly or not.  It is open to interpretation as to the responsibilities of trustee’s and various unrelated parties to creditors.  This creates rights and obligations that do not actually exist though.  Whether certain amended schedules have to be served on creditors is provided for in the Federal Rules of Bankruptcy Procedure and Bankruptcy Local Rules on a jurisdictional basis.

FRBP 4003(b)

(b) Objecting to a Claim of Exemptions: (1) Except as provided in paragraphs (2) and (3), a party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under §341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. The court may, for cause, extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension.

Exemptions are what protect assets and exclude the assets of a bankruptcy filer from the bankruptcy estate.  This is basic statutory interpretation 101.  So a party has until 30 days after the meeting of creditors to object to claimed exemptions or from when any amendment to the list or supplemental schedules are filed, and there is no language requiring serving on anyone with an amend Schedule C.  This is the plain language of FRBP 4003 and it is unambiguous.  If Congress wanted the amended Schedule C to be filed and served the word served would also be included.  Depending upon your jurisdiction you may have a local rule that requires service of the amended Schedule C.  Here in the Northern District of California there is no such local rule requirement.

In interpreting statutes “[t]he starting point of [the] inquiry is the language of the statute itself.”  United States v. Cabaccang, 332 F.3d 622, 625 (9th Cir. 2003) (en banc).  In so doing, we use canons of construction.  Those canons: help courts determine the meaning of legislation, and in interpreting a statute a court should always turn first to one, cardinal canon before all others.  We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there.  When the words of a statute are unambiguous, then, this first canon is also the last: “judicial inquiry is complete.”

Unfortunately some chapter 13 trustees object to approval of chapter 13 plans of reorganization and require bankruptcy attorneys to provide and pay for service of amended schedules when the law does not require it.  This phantom service requirement is costly and provides rights to creditor the law does not actually provide.  The creditor should have filed a simple one page request for special notice that takes minutes and participated in the bankruptcy case and then all documents filed would then be served on them.   Sadly bankruptcy attorneys choose to capitulate to the trustee demands for service because it is even more costly to have a contested confirmation hearing to have the court overrule the trustee’s objection to confirmation or approval of the chapter 13 plan.  Damned if you do and more damned if you do not even though the words on paper are clear as day.  See most jurisdictions have what are called no look fees or flat fees for various circumstances in chapter 13 cases.  There is the basic case fee plus add-ons like owning a home or having vehicle loans.  There are no add-ons for having to meet requirements that do not exist.  If the bankruptcy attorney and client choose to fight and have the objection to confirmation overruled the bankruptcy attorney is just going to spend a bunch of their own time and money which also will result in delay of confirmation or approval of the chapter 13 plan that may have unforeseen consequences.  This is a sad dynamic that exists and is getting worse. 

Another examples is here in the Northern District of California we have this wonderful Bankruptcy Local Rule, B.L.R. 3015-1 that provides only parties or creditors adversely affected by a plan of reorganization amendment are entitle to service of the amended plan.  Well this makes perfect sense.  If a party is not adversely affected then what is the problem?  Again, chapter 13 trustees ignore the plain language of this Bankruptcy Local Rule and create an obligation to service of an amended plan that does not exist thereby increasing costs in the bankruptcy case.

Another example of this is FRBP 3002.1 or the notice of final cure.  While this is actually a great thing because it requires a secured creditor like a mortgage lender to have provide a notice as to whether the bankruptcy filer is current on the loan or mortgage when a chapter 13 case ends it has created problems when there are disagreements over how much is still owed or that anything is owed at all.  This issue is created because of the mistaken interpretation of bankruptcy attorneys right to payment for their time.  The opinion is that all bankruptcy attorneys fees must be paid through the chapter 13 plan unless ordered by the Court.  The opinion that any unpaid bankruptcy attorney fees are discharged unless paid through the plan adds an even more troubling wrinkle to a bankruptcy attorneys duty to properly represent their client.  The Notice of Final Cure is filed after completion of the chapter 13 plan, so how would the time spent and fees reasonable earned ever be paid through the chapter 13 plan?  This issue actually came up in a case and the case was appealed to the Ninth Circuit Bankruptcy Appellate Panel.  The 9th Circuit BAP held that fees the bankruptcy attorney earned for doing their job properly could not be paid given the plan was done and in their opinion had to be paid through the plan.  This is even though FRBP 3002.1 provides: (i) Failure to Notify. If the holder of a claim fails to provide any information as required by subdivision (b), (c), or (g) of this rule, the court may, after notice and hearing, take either or both of the following actions: (1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or (2) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.

Section (i)(2) provides for the award of reasonable attorney’s caused by the failure to provide proper or accurate information in the notice of final cure?  Or just reasonable attorney’s fees if the notice is not filed at all?  Even if the reasonable attorney’s fees are awarded how are they to be paid when most courts incorrectly believe all bankruptcy attorney’s fees and expenses have to be paid through a plan that will now have been completed……..?  More to come on this issue.

I Was Never Served With The Lawsuit

By Ryan C. Wood

Yeah, I know you were not served with the lawsuit.  That does not mean a judgment, that is, a default judgment, was not entered against you accruing judgment interest at 10% (California Law).  You were sued and the process service company committed a fraud and filed a proof of service under penalty of perjury saying you were somehow personally served with the summons and complaint.  You are now finding out about the lawsuit because your employer received a wage garnishment notice or your bank account was levied on.  I know this is the first you are hearing of this lawsuit.  The lawsuit was probably filed over five years ago and has now grown to a substantial amount of money given the 10% judgment interest and addition of attorneys’ fees and expenses.  Bankruptcy lawyers hear about this over and over again unfortunately.  So what happened?

Service of a Lawsuit

When a lawsuit is filed against you the summons and complaint with other documents are supposed to be personally served on you.  That means the summons and complaint were handed to you, thus personal service.  If the summons and complaint cannot be handed to you for whatever reason there is also personal service by substitute service.  Generally a competent member of your household, someone that lives with you, your domicile, someone 18 years of age or older can be served personally instead of you with the summons and complaint.  Then the summons and complaint has to be mailed to you at that address.  You can be served at your place of employment if the summons and complaint are left with your boss or someone in charge.  There are issues with personal service by substitute service at your place of employment though given the nature of it and is less common than substitute service where you live.  You can even be served personally by publication believe it or not. 

How Come I Never Knew About This Lawsuit

You will need to obtain the proof of service of the summons and complaint filed in the case to know how the summons and complaint were allegedly served on you and when.  I am talking about primarily collection lawsuits for various debts such as credit cards.  It is not possible to hide a lawsuit between neighbors for building a fence on the wrong property and a lawsuit is filed to have the fence removed.  It is very easy to hide a lawsuit for unpaid bills and have the lawsuit move forward without your knowledge.  The goal is to obtain a default judgment and then enforce it at some point in the future.  Not move a fence, an unpaid wage claim or personal injury claim.  The reason you did not pay the debt in full or stopped making payments does not matter.  The account may have gone to a collection agency too and that is the entity suing.  The summons and complaint were filed with the court then sent to a process service company to personal serve you.  The lawsuit filer does have information about you that may or may not still be accurate.  You filled out an application for the credit card or some other type of credit account.  You may or may not still live there.  If you still live at the same address as in the application and the process service company alleges they personally served you there or served a competent member of your household at that location by substitute service it is difficult to prove whether they actually did or not.  If you lived at a different address then what is listed in the proof of service at that time there is hope.  If there is other inaccurate or impossible information like the address where you were allegedly served does not actually exist on Earth there is hope.  Yes, I have in fact dealt with a proof of service of a summons and complaint allegedly served at an address that does not exist on planet Earth and a default judgment was entered against the defendant in that case.  Not good.  The point is the proof of service will have some sort of discrepancy you know is not accurate or true.  Proving that the method of service never happened is another story and is not free.  So you never were served with the summons and complaint and now the plaintiff requested and received a default judgment against you that is enforceable.  Your bank accounts can be levied on.  Your wages can be garnished.  A judgment lien can be recorded against your home or other real property if you own any.  Not good. 

The Plaintiff or Their Attorneys Will Wait Four Years or More to Enforce the Judgment

This is part of the game plan for the fraudulent service of lawsuits on defendants.  It has been going on for years and years.  Why do they wait to enforce the default judgment?  One reason is the fraudulently obtained default judgment accrues interest at 10% per annum here in California.  So a $7,000 judgment that was not worth spending too much time trying to collect on becomes $12,000 or more and becomes much more worth spending time and money to enforce.  Second it becomes more and more difficult to prove the service of the summons and complaint is fraudulent as time passes.  Records are lost and memories fade. 

How to Make it All Go Away

Well, unfortunately filing for bankruptcy if eligible is the fastest and cheapest way to make the default judgment go away forever.  This is a broad generalization and depending upon your individual circumstances not possible.  As a bankruptcy attorney I have discussed the service of a summons and complaint over and over again with potential clients.  If you have other debts that are a problem as well again bankruptcy will tie that all up into a nice neat bow.  To fight in state court and have the default vacated attorneys’ fees and expenses can exceed $3,000 or more. 

Is A Claim Allegedly Created By A Debtor’s Bankruptcy Filing Property of The Bankruptcy Estate


Which came first, the chicken or the egg? When a bankruptcy case is filed a bankruptcy estate is created including all claims of the bankruptcy filer at the time of the filing of the case. The timing is down to the hour, minute and second. The second the bankruptcy case is filed the automatic stay takes effect stopping any and all collection activity and draws a line in the sand as to what is part of the bankruptcy estate and what is not. The bankruptcy estate includes potential claims or causes of action that exist at the time the bankruptcy case is filed that may or may not be collectable or possible to be pursued. “Legal causes of action are included within the broad scope of § 541.” Goldstein v. Stahl (In re Goldstein), 526 B.R. 13, 21 (9th Cir. BAP 2015) (citing Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986) ). More key words are the claim has to be “sufficiently rooted in the pre-bankruptcy past.”

The issue that is the subject of this article is about whether a claim that would not exist but for what took place in the bankruptcy case a claim that is property of the bankruptcy estate? Which came first, the chicken or the egg?

Appellate Part of the Story

This particular case is a recent Ninth Circuit Bankruptcy Appellate Panel appeal from the State of Nevada involving an alleged malpractice claim against the bankruptcy attorney of the bankruptcy filers. This happened to be a Chapter 7 case and the Chapter 7 trustee assigned to the case argued the malpractice claim against the attorney for the bankruptcy filers was property of the estate given the problem arguably arose prior to the bankruptcy case being filed. The issue was the filing of an extension for a tax return that made certain taxes not dischargeable in the Chapter 7 bankruptcy case. The case was filed on October 10, 2016, and the order of discharge was signed and entered in February 21, 2017. If the chapter 7 bankruptcy case had been filed six days later the tax debt for tax year 2012 would have been dischargeable. The bankruptcy case was not closed though due to other issues. In June 2017 the Internal Revenue Service sent notice to the bankruptcy filers they still owed the IRS $257,570.46 for tax year 2012. Not good. The bankruptcy filers obtained new counsel filed their malpractice claim against their original bankruptcy attorney alleging damages including their passports being revoked due to the tax debt, one of the bankruptcy filers could not obtain employment so they alleged total damages of over $1 million. The lower bankruptcy court held the malpractice claim was not part of the bankruptcy estate and the Chapter 7 trustee appealed this ruling.

The Part of the Story That is Not Part of the Appellate Record

One of the biggest problems with tales like is context. Us business owners get bit by this all the time and probably many people in general. Someone has a gripe or complaint about a service they received but when telling others about it they leave out certain facts and the part that will make them seem unreasonable for having a problem. There are always two sides to a situation. So here is some more context as obtained in the actual bankruptcy petition filed under chapter 7 that is the subject of this appeal.

Secured Debt: The bankruptcy filers owned a house in Las Vegas, NV with secured debt totaling $883,948 and an alleged fair market value of $650,000; so the house is underwater.

Unsecured Priority Debt: These are unsecured debts that are not dischargeable. The bankruptcy filers owed a total of $106,000 to the State of Nevada for unpaid sales tax from their businesses.

General Unsecured Debt: These are unsecured debts that are dischargeable.

1. American Express: $195,919.00
2. Bank of America: $236,305.59
3. Chase: $54,197.00
4. Dino Sattalante Trust: $1,500,000.00
5. Forum Shops, LLC: $60,000.00
6. Internal Revenue Service:
—Tax Year 2011 $311,495.92
—Tax Year 2012 $243,231.67
7. James G. Naughton Trust: $55,000.00
8. Mario Herman, Esq. $40,000.00
9. MOAC Mall Holdings, LLC $196,809.20
10. RPAI South West Management $440,000.00
11. Sphere Investments, LLC $628,000.00
12. Wells Fargo Bank $19,632.00

TOTAL: $3,989,473.48 in dischargeable general unsecured debts that were ultimately discharged upon the entry of the debtors’ order of discharge on February 27, 2017, but for the 2012 taxes owed to the IRS.

Let Us Have Fun With Numbers

For some additional context let us compare debts discharged in this case with a 30 year work life for a normal American. If we divide $3,989,473 by 30 years it works out to $129,666.66 a year or more than 95% of Americans earn in a lifetime……..
The bankruptcy attorney that is subject of the malpractice claim charged the bankruptcy filers $10,000, a pretty good lick, for her services and successfully helped them discharge 85% of their debts. A realtor would have received $111,974.19 in commission for selling a house with a value of $3,732,473 …..

Please note there is no issue in this case regarding the $3,732,473 in debt discharged or the $311,495.92 owed to the IRS for tax year 2011. It is all discharged; poof, gone. So again the issue is the unpaid taxes owed to the IRS totaling $243,231.67 for tax year 2012 only.

Some Additional Context Regarding The Timing of The Filing of This Chapter 7 Not Provided in the Appeal Facts

These bankruptcy filers had a judgment entered against them by Sphere Investments, LLC, listed above totaling $680,000 prior to the case being filed and the Sphere Investments, LLC, levied on the bankruptcy filers’ Wells Fargo Bank accounts obtaining $29,069.23. I am going to speculate a little here, but it is more than plausible and makes sense. The part of the story that is not told is that the levy took place on July 12, 2016. This chapter 7 case was filed on October 6, 2017, or less than 90 days after the levy of the bankruptcy filers’ bank accounts and the seizing of the $29,069.23 by Sphere Investments, LLC. The filing of the chapter 7 bankruptcy case within 90 days of the levy made the levy a voidable preference claim/transfer pursuant to Section 547 of the Bankruptcy Code and the levied funds would have to be turned over to the chapter 7 trustee and/or possibly returned to the bankruptcy filers depending upon circumstances. I am speculating here again, but I could absolutely understand if the plan was to file the chapter 7 to prevent any further levy on bank accounts and file the case within 90 days of the levy to try and get some of the levy funds back. If anything at least the judgment creditor Sphere Investments, LLC will not get to keep the levied funds. Again, I am speculating, but the bankruptcy filers’ say great, the litigation with Sphere Investments, LLC was very bitter so let us hurry up and file the chapter 7 petition within 90 days if the levy date. No mention that an extension regarding their 2012 tax return was filed extending the time for the taxes to be dischargeable……. Again, I am speculating some here, but very plausible.

The chapter 7 trustee and judgment creditor ended up settling that each would get half of the levied funds. The point is if the chapter 7 case has been filed

Back To The Appeal And Is The Malpractice Claim Property Of The Bankruptcy Estate

The bankruptcy court held that the malpractice claim against the bankruptcy filers’ attorney was not a claim of the bankruptcy estate and the Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court’s ruling. The bankruptcy filers’ alleged the attorney was negligent for not advising them about the consequences of the six month extension they filed with the IRS regarding the 2012 tax return.

The definition of what is a claim when filing for bankruptcy protection is broad on purpose and the broad definition is for a good reason. So is a claim created by the filing of the bankruptcy case recoverable by the trustee assigned to the case for the benefit of the creditors in the bankruptcy case? When did the claim arise?

The Ninth Circuit Bankruptcy Appellate Panel agreed with the lower bankruptcy court and affirmed that the malpractice claim was not part of the bankruptcy estate and arose after the case was filed. The chapter 7 trustee argued that the bankruptcy filers’ had a contingent interest in the malpractice claim at the time the case was filed that was sufficiently rooted in the bankruptcy filers’ pre-bankruptcy given the bankruptcy attorney’s legal representation began prepetition/before the case was filed. The lower bankruptcy court applied Nevada Law regarding the malpractice claim and focused on the actual damages. For there to be a claim actual damages must accrue. In this case the bankruptcy court held the actual damages did not accrue until after the bankruptcy case was filed when the original bankruptcy attorney did not seek to dismiss the chapter 7 case before discharge or after the June 2017 letter was received by the bankruptcy filers informing them the 2012 taxes were not discharged.

Ninth Circuit Bankruptcy Panel has previously held that to be sufficiently rooted in the prebankruptcy past the payment or claim must arise from some prepetition right or entitlement. In re Bender, 385 B.R. 800 (Table), 2007 WL 4896288, *4 (9th Cir. BAP 2007), appeal dismissed, 586 F.3d 1159 (9th Cir. 2009)(“[The Ninth Circuit] has limited its use of Segal to situations where a debtor received a post-petition benefit pursuant to a pre-petition right or entitlement.”); see also In re Bolton, 584 B.R. 44, 55 (Bankr. D. Idaho 2018).
In sum if the damages arise post-petition then the claim should not be part of the bankruptcy estate even though some of the facts or events that led to the post-petition damages took place before the case was filed.

Chapter 13 Bankruptcy and Escrow Payments and Projected Escrow Shortages


Let the insanity begin. What I will be discussing today are mortgage payments that include property taxes and insurance. The property tax and insurance have been “impounded” as part of the normal monthly mortgage payment and is traditionally called an escrow account. So this type of mortgage payment includes principal, interest, property tax and insurance. Before discussing how this has become extremely frustrating when filing a Chapter 13 bankruptcy case in the Northern District of California let us look at why this situation exists to begin with.

Why Are Property Taxes and Insurance Not Paid Directly By The Borrower

Lenders need to protect their investment. Fine, so as part of that lenders need to ensure property taxes are paid timely and the home is insured. No problem. Here in California lenders cannot force an impound escrow account unless the borrower’s loan to value ratio exceeds 80 percent. I believe this is the most common reason why impound accounts exist. A house is purchased via some favorable program that allows less than a 20% down payment at the time of purchase resulting in a ratio 80% or more. So if you put 20% or more as a down payment then the mortgage company cannot force you into an escrow or impound account. A lender or loan officer could also suggest the borrower have an impound escrow account and the borrower then would voluntarily agree to it.

Also here in California servicers and lenders are required to pay 2% interest to borrowers on funds held in escrow accounts. See Cal. Civ. Code Section 2954.80.

Pursuant to the Real Estate Settlement Procedures Act (RESPA) the servicer or mortgage company must review the property taxes and insurance each year to make sure they are not holding a surplus. At the same time RESPA allows the servicer or lender to collect up to two additional months of escrow payments as a cushion or reserve to protect the servicer or lender in the event a borrower misses monthly mortgage payments. See 12 U.S.C §2609(a)(1).

This is where the problem is created.

How Can A Borrower Have A Projected Escrow Shortage If They Paid All Mortgage Payments When Filing a Chapter 13 Bankruptcy Case?

The key words here are “projected escrow shortage” at the time the chapter 13 bankruptcy case is filed by the bankruptcy attorney of the borrow. So yeah, property taxes change and so do insurance premiums, but not that much. When a borrower files for relief under chapter 13 and is current with all mortgage payments at the time of filing the petition the bankruptcy filer normally just keeps paying the servicer or mortgage company directly just like prior to the filing of the chapter 13 since there are no missed mortgage payments. If no missed payments then no problem; life goes on regarding the loan even though the chapter 13 petition is filed. The chapter 13 should have no effect on the servicer or mortgage lender or the borrower as the bankruptcy filer. The servicer or mortgage lender is a secured creditor and normally files a proof of claim in the chapter 13 bankruptcy case providing the amount of the total secured debt owed and that there are no mortgage arrears or missed payments prior to the case being filed.

Here is when there are more and more problems because of escrow or impound accounts and alleged shortages. Proof of claims are being filed for escrow shortages or projected escrow shortages even though the bankruptcy filer has paid the servicer or mortgage lender all mortgage payments as required.

If the shortage is projected the shortage does not yet exist until some future date? If it does not exist how can this projected shortage be part of a proof of claim? Or if there is future projected escrow shortfall the only way for the servicer or mortgage company to obtain the shortfall is supposed to be by increasing the future escrow payments after the bankruptcy case is filed just like if no chapter 13 had been filed in the first place.

But wait just a second. So now this touches on what is a “claim” in bankruptcy? The Supreme Court of the United States provides “right to payment” in the definition of “claim” meant “nothing more nor less than an enforceable obligation[.]” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). “Congress intended by this language to adopt the broadest available definition of `claim.'” Id; see also FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003). So applying these definitions to a projected escrow shortage we can all agree the shortage is a “right to payment” pursuant to RESPA and the cushion of two escrow payments and can be part of a proof of claim.

Why is this happening though? The servicer of mortgage company is not properly calculating their RESPA cushion prior to the chapter 13 being filed. After the servicer or mortgage company pays a borrower’s property tax there should be a balance in the escrow account representing two escrow payments, the RESPA cushion. This is not happening and when the chapter 13 case is filed it triggers a review of the escrow account and behold there is a projected shortage.

I am not sure why this has become an issue when this dynamic of escrow accounts and RESPA cushion have existed for a very long time, but it is a problem now. Creditors referring to other Circuit opinions that provide that the collecting of pre-petition projected escrow shortages through post-petition mortgage payments is a violation of the automatic stay and arguably opens the creditor to possible sanctions for the violation of the automatic stay. There are a number of potential solutions to the problem, but the one that makes the most sense is that servicers and mortgage companies just properly calculate the RESPA cushion upon review of escrow accounts like they are supposed and this should never be a problem upon the filing of a bankruptcy case. After all, the borrower has made all payments as required by the servicer or mortgage loan company. What more can the borrower to make sure this is not a problem but make the payment requested each month on time?

Another solution is the include language in the chapter 13 plan that provides the service or mortgage lender may collect a pre-petition escrow shortfall from post-petition payments and not be in violation of the automatic stay. This will most likely trigger the necessity of having a confirmation hearing regarding the chapter 13 plan when a hearing would not normally be necessary. This is a waste of judicial resources, the chapter 13 trustee’s time and the attorney for the debtor’s time given the servicer or mortgage loan company did not properly calculate the escrow payment prior to the chapter 13 being filed.

Another solution is to stipulate that the creditor may collect pre-petition projected escrow shortages from post-petition mortgage payments. There is no guarantee that the trustee’s office will sign-off on this stipulation and again could end up with a hearing regarding confirmation of the chapter 13 plan that normally would not have to take place.

To be fair I could also provide any number of scenarios that a debtor or their bankruptcy attorney creates in the course of seeking confirmation of a chapter 13 plan that creditors, the Court and trustee’s office believe to waste their time over and over again so ………… I am just writing about this issue from a bankruptcy filer’s perspective and their attorney.

Why Is It Difficult to Project Escrow Account Funds?

Here in California we have Proposition 13 that limits how much property taxes can increase each year. You would think this would allow servicers and mortgage companies to easily estimate future property taxes and property insurance payments year after year so that there are no issues. Again, I get how sometimes getting numbers right is difficult even when a good faith effort is made to get the numbers right.

It just appears the escrow analysis that is required by law is not happening until the chapter 13 case is filed and the projected escrow shortage is created. If the chapter 13 case was never filed the servicer or mortgage lender would just continue to send statements with a monthly dollar amount owed and the borrower would just keep making the payment each month and there would be no issues. The part of the monthly escrow payment would increase or decrease depending upon the whim of the servicer or mortgage company ……….