Albany Bankruptcy Lawyer Blog

Judge Littlefield's decision in the case of In Re: Bhisham Nandallall was announced on May 3, 2010. This case dealt with an application by the case trustee to have the discharge of the debtor revoked under Sections 11 U.S.C. 727 (d)1 and (d)2. An application to revoke a discharge is an action to take away a discharge that has already been granted in a case. The application to revoke the discharge needs to be made within one year of the granting of the discharge.

The Trustees' main gripe was that the Debtor "fraudulently" did not disclose that he had transferred a note and mortgage that he owned to one of his creditors (a "very close friend"), and that he likewise "fraudulently" failed to report payments ($450 per month for twelve months) he had received under a note and mortgage.

The Debtor's defense was that the non-disclosures were inadvertent mistakes, that he did not think the mortgage was of "significant value" given that the mortgage was perpetually in default, and that he was distracted by the foreclosure on one of his properties and other events in his life (divorce from his wife and pregnancy of his girlfriend). In addition, debtor pointed out that the trustee had constructive notice of the transfer of the mortgage.

The application under (d)1 requires that the discharge having been obtained by fraud and the party requesting the revocation "did not know of such fraud until after the granting of the discharge".

The court did not revoke the discharge under (d)1 because even after having found the fraud, and finding that the Trustee testified credibly that he did not discover the fraud prior to the granting of the discharge, trustee was on constructive notice of the transfer of the mortgage by the county clerk's records.

The application under (d)2 was based upon the Debtor acquiring or becoming entitled to property of the estate, and knowingly and fraudulently failing to report the acquisition or the entitlement, or to deliver or surrender the property to the Trustee. The property at issue here were post-petition note and mortgage payments. The Debtor reported these payments on his tax return. He did not report his entitlement or receipt of these payments to the Trustee, nor did he deliver or surrender payment of them to the Trustee. The Court's ultimate decision would be based upon whether the failure to report and deliver such property by the debtor was done "knowingly and fraudulently".

As the Court succinctly stated: "The Debtor acted knowingly because he knew that the post-petition payments belonged to the estate and that he was obligated to report or surrender them to the Trustee. The Debtor acted fraudulently because his conduct in failing to report or turnover the post-petition payments to the Trustee evinces his intent to defraud the estate. The Trustee has presented sufficient evidence to establish a prima facie case under § 727(d)(2). Therefore, the burden of production shifted to the Debtor to rebut the inference of fraudulent intent." The Court found that the Debtor's testimony that he forgot about the note and mortgage payments and thought that the mortgage was worthless to not be credible, and was not supported by other evidence, and so revoked his discharge.

"A discharge is reserved for an honest but unfortunate debtor. D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 234 (2d Cir. 2006). To obtain a discharge, a debtor must fully and accurately disclose all material facts. See Cont'l Ill. Nat'l Bank & Trust Co. of Chi. v. Bernard (In re Bernard), 99 B.R. 563, 570 (Bankr. S.D.N.Y. 1989)."

One of the main tools for collection lawyers once they obtain a judgment against a person is to pursue bank account assets of individuals. Normally the collection lawyer will serve a restraining notice upon the bank, with a information subpoena requesting the bank to specify the existence of any accounts by the judgment debtor, and to particularize the amounts in any accounts.

The New York State legislature recently provided amendments to rules relating to the restraint of individuals' bank accounts (Article 52 of the CPLR). Under current law if the sole source of direct deposits into a bank account is exempt income, such as social security income or pension income, and provided that the balance of the account is less than $2500.00 there can be no restraint against the account. In order to maintain this exemption, it is preferable to keep all exempt assets separate from other monies. It might also be beneficial to use separate accounts for exempt moneys and the remaining funds the individual has, which could be perhaps be deposited in an account at a different bank.

A separate amendment will allow approximately $1700.00 of other funds which are not of an exempt nature to be safe from restraint. These rules do not seem to work across state lines, so a New York Judgment may restrain monies in the accounts outside the state. If the monies have an exempt source they should be ultimately released from the restraint. However, it is an inconvenience for the debtor to prove that the money in the account is exempt. In addition, if there are non-exempt funds mixed with exempt funds, the mixing of the funds together "commingling" may result in the funds no longer being exempt.

The restraint of the account in and of itself, does not result in the taking of the funds. It is only a "freezing" of the funds until the Sheriff levy against the account which follows the restraint. So a person may have time to declare the exemption for the funds, or possibly file bankruptcy and claim an exemption for the funds in the bankruptcy, and use the bankruptcy filing to stop the restraint against the account.

In the Chapter 13 case of In re Wesseldine, case no. 09-62553 U.S. Bankruptcy Judge Diane Davis, decided that the $3700 fee limit for debtor's attorneys that choose the flat fee option was appropriate. Attorney Jessica G. Grady, Esq. had submitted a fee of $3500 for services from the initial consultation through confirmation of the plan. She sought additional fees for legal services that would be performed after the confirmation of the plan. The Court has approved a "presumptive or flat fee" for Chapter 13 cases filed in the Northern District of New York Bankruptcy Court in the Albany Division and Utica Division of the Court. This approval was set forth in Administrative Order 09-07 and has been effective since September 1, 2009. The method for using the flat fee requires the debtor and their counsel to sign the document entitled "Rights and Responsibilities of Chapter 13 Debtors and their Attorneys", which is a fee agreement for a flat fee. The fee agreement is based upon the attorney committing at a minimum to do certain minimum services which are included in the agreement. The attorney was seeking approval for $3500.00 for the services prior to the confirmation hearing, and additional services that would not be barred by the "flat fee agreement". The debtors counsel carved some of the services out of the fee agreement, excluding services for any adversary agreements. The objection by the Chapter 13 Trustee to the plan, based upon the fee request was appropriate. Judge Davis determined that the attorney could have applied for a fee based upon an hourly rate, but the Court would have reviewed the time charged for the services provided. The Court held that this case was a routine Chapter 13 case and Ordered that the attorneys fee statement under 2016 (b) should be amended to reflect a flat fee of $3500.00.

Judge Diane Davis was formerly the Standing Chapter 13 Trustees' counsel in the Northern District of New York at Albany. She practiced for many years in the Albany District appearing before the Hon. Robert E. Littlefield. This decision seemed very consistent to what I would have expected in the Albany District of the Court. Based upon my experience in the Albany District this decision would be a predictable result.

The Debt Limits for Chapter 13 Debtors have been increased. Every 3 years the monetary amounts for various sections of the Bankruptcy Code are effected by the Cost of Living Increases. This is provided for by 11 U.S.C. 104. Effective on April 1, 2010 debtors will now qualify to file a Chapter 13 reorganization if as of the date of the filing of the petition the debtor(s) noncontingent, liquidated unsecured debts are less than $360,475 and noncontingent, liquidated secured debts are less than $1,010,650.00. This gives a little bit more breathing room for individuals who own small businesses or individuals who own real property and wish to stop a foreclosure on their personal residence, to file under Chapter 13 of the bankruptcy code rather than being required to file a more complicated and costly Chapter 11 bankruptcy.

The United States Supreme Court in its decision issued on March 8, 2010 did determine that lawyers were included in the definition of "Debt Relief Agencies" as the term is included in the 2005 BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) bankruptcy reform legislation. New Supreme Court Justice Sotomayor delivered the opinion of the court in the case Milavetz, Gallop & Milavetz. The court opined that a plain reading of the law indicated the intent of congress to include lawyers in the definition of debt relief agencies, and further reasoned that congress was not impermissibly regulating attorneys which is normally left to the individual states. As stated in the decision, "Congress and the bankruptcy courts have long overseen aspects of attorney conduct in this area of substantial federal concern."

The regulation of debt relief agencies includes attorney advertising and goes into certain areas including the prohibition of giving certain advice. With regard to advertising BAPCPA requires that debt relief agencies state that the assistance that they give may involve bankruptcy relief. The Court determined that this was appropriate based upon the government's interest in preventing deceptive advertising. Debt relief agencies are prohibited by BAPCPA from advising consumer debtors to incur debt in contemplation of bankruptcy. The Court did provide some guidance as to what this means. Primarily the focus is on preventing abusive conduct, such as advising the debtor to load up on debt prior to the filing of the bankruptcy or incurring secured debts just prior to the bankruptcy to help qualify for a bankruptcy by using the new debt as an additional qualifying debt under the BAPCPA means test.