Listserve – Good Question, or Bad Advertising?

1. Listserve – Good Question, or Bad Advertising? Judge Richard Schmidt Southern District Texas – Don’t call him. He’ll call you. . . Pete Holzer JORDAN, HYDEN, WOMBLE, CULBRETH & HOLZER, P.C. 361 653-6624 Sapna Aiyer Lone Star Legal Aid 713 652 0077 x 1286 Dawn Guilliams Adams Law Firm 281 391 9237

2. Process • Audience: All members of the Bankruptcy Section • Administrator: Lily Hewgley, Sections Web Designer, State Bar of Texas • Legal advice- Section VP for communications, currently Tim Million at Munch Hardt • Moderator screening of posts • Listserve etiquette • How to post:   texbk-1@mailman.prismnet.com • Getting off • Consumer / business? • Moderated?

3. For beginners, a place to pose questions The question: I want to take a 2004 exam but I’ve never done one. What is the process? Can I do a mini 2004 exam at the 341 meeting? The answer: In the Southern District, you need to try and get an agreement before you file anything.  If you have an agreement, you don't need to have an order, you could just use a subpoena.  You can always file something on an agreed basis. If you don't have an agreement, make sure your request is far enough out to allow for objections and if you are asking for documents, at least 30 days per the discovery rules, they also apply unless you have an emergency.

4. A place to discuss “hot topics” The question I always thought that under Texas law the deed of trust followed the note, and that the holder of the note could foreclose under the deed of trust even if it had been assigned in the real property records.   If an assignee of a deed of trust can foreclose, what happens if the (different) holder of the note sues under it?

5. The answer Unfortunately, there’s conflicting case law out there, and someone looking to support their position either way does not have far to go.  I have several cases on the Debtor/borrower’s side, and the argument goes something like this: • The UCC applies to the negotiable instrument, and therefore a party seeking to foreclose must qualify as a “person entitled to enforce” under B&CC 3.301 (also known as the Texas UCC) • there are 3 ways under 3.301, as a holder of the instrument, as a nonholder in possession of the instrument with rights of a holder, or as a person not in possession of the instrument entitled to enforce under one of the provisions for a lost or stolen note. • In many cases, the foreclosing party can’t satisfy the UCC provisions, often because of a break in the chain of endorsements (see B&CC 3.201).  There is also a provision providing that the indorsement must be made on the instrument (B&CC 3.204). • As a response to that, as has been noted in several posts below, many mortgage companies/servicers are taking the position that they don’t have to satisfy the UCC – that the Property Code is the only statute that must be satisfied. • They then often use MERS to justify an assignment of the deed of trust to whoever it is that is claiming the right to foreclose. They will then argue that the homeowner doesn’t have the right to contest the assignment because they aren’t a party to the assignment. • There’s not really any statutory support for that position, but they have had limited success in some federal district courts.  See, for example the following cases cited for this argument: 1. Olaoye v. Wells Fargo, 4:11-CV-772-Y, 2012 WL 1082308 (N.D. Tex., Apr 2, 2012) Bell v. Bank of America Home Loan Servicing, No. 4:11-cv-02085, 2012 WL 568755 (S.D. Tex., Feb. 21, 2012); 2. Salmeron v. CitiMortgage, Inc., No. 3:11-CV-1398-M-BK, 2012 WL 760110 (N.D. Tex., Feb. 3, 2012); and 3. DeFranceschi v. Wells Fargo, No. 4:10-CV-455-Y, 2011 WL 3875338 (N.D. Tex., Aug. 31, 201 4. Reardean v. Citimortgage; Case No. A-11-CA-420-SS (W.D. Texas., Jul. 25, 2011)

6. (it’s a looonnnng answer) • The problem with this argument, as was also pointed out below, is that these decisions trample on long-standing case law stating that you can’t separate the note from the deed of trust.  One of the oldest Texas case cites to this principle is Kirby Lumber Corp. v. Williams, 230 F.2d 330 (5th Cir. 1956) (“The rule is fully recognized in this state that a mortgage to secure a negotiable promissory note is merely an incident to the debt, and passes by assignment or transfer of the note. . . . The note and mortgage are inseparable.)”.  • Many cases go on to point out that an assignment of the note carries with it an assignment of the mortgage.  More importantly, and here’s where the “separate obligation” theory argument breaks down, an assignment of the mortgage by itself is a nullity – that the mortgage can have no separate existence from the note.  This principle dates all the way back to a U.S. Supreme Court case from 1872 – Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 274 (1872).  Some courts have incorrectly concluded that a note follows the deed of trust, but that is simply not the case based on the language of the S/C case.  The deed of trust follows the note, but not the other way around. • The Texas Supreme Court cited Carpenter with approval in a 1934 decision – West v. First Baptist Church of Taft, 71 S.W. 2d 1090, 1098 (Tex. 1934) ) (“The trial court’s finding and conclusion ignore the settled principle that a mortgage securing a negotiable note is but an incident to the note and partakes of its negotiable character. . . .’The note and mortgage are inseparable; the former as essential, the latter as an incident.’” (quoting Carpenter).  The West case goes on to state that the mortgage securing the negotiable note (i.e., the deed of trust), is but an incident to the note “and partakes of its negotiable character”, which appears to directly contradict the notion that you can foreclose without satisfying the UCC requirements. • Ironically, in at least one case – the Reardean case cited above – the court chastised the homeowner for not having any more authority than a 120-year old supreme court case that the court concluded was not on point.  As far as I’m aware, however, the principle from that 120-year old supreme court case has not been overturned.

7. A place to discuss new issues The Fifth Circuit just (1/4/12) issued an opinion that is going to change our world. (Or at least part of it.) In McCoy v. Mississippi State Tax Commission, 2012 WL 19376 (5th Cir. 2012), the court interpreted the hanging paragraph at the end of 523(a) which was added by BAPCPA. That paragraph provides: For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.) Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law. [Emphasis added.] The Fifth Circuit held that “applicable filing requirements” includes the requirement that a return be timely filed. If a “return” is not timely filed, it does not qualify as a “return” under 523(a). Congress has now defined “return” so that a real, actually filed return is not a “return” if it was filed so much as one day late. (Even if it was actually filed more than two years prior to the bankruptcy filing.) (If congress really wanted to change prior law, shouldn’t they have put the hanging paragraph at the end of 523(a)(1)(B)(ii) [instead of after the other 17 unrelated sub-paragraphs and sub-sub-paragraphs in 523(a)] or wouldn’t they have changed the existing wording of 523(a)(1)(B)(ii)? I am not arguing that the result is incorrect. It appears to be “correct” if you read all of this together. I am simply suggesting that this is one more example of a poorly conceived and/or drafted  provision our “friends” in Washington left us with to sort out. Although McCoy involved state income tax returns, there is no basic difference between the Mississippi tax code and the Internal Revenue Code as far as filing requirements. (The Mississippi tax code also requires that returns be filed by April 15th.)                                                                            Literally one week after McCoy,(1/11/12) Judge Lief Clark issued an opinion in Hernandez, v. U.S., Adv. No. 11-5126C (Bankr.W.D.Tex.2012) which made the same analysis with respect to the Internal Revenue Code. He reached the same conclusion Judge King did in McCoy. To make sure that the client’s tax returns were timely filed, you should probably order a “tax account transcript” for each year in question. (Your client can sign the form so you can order these.)

8. Good, Bad, or Ugly? Can you strip a lien in a chapter 7? I would like the answer to be yes…. (attorney name – no, we’re not telling you who it is)

9. Good, Bad, or Ugly? I represent a creditor in two chapter 7 bankruptcies (one in the Southern District and one in the Eastern) where the debts are primarily business debts yet there is significant disposable income left every month.  My client holds a judgment in each that is 80-90% of the unsecured debt.  I would like to file a motion to convert the bankruptcies to a 13 based on 11 USC 707(a).  I have found post-BAPCPA case law from the western district supporting an argument that bad faith is recognized as a valid basis for discharge or conversion under 707(a), but I am concerned with how little this issue appears to have been litigated (indicating that this is not really a valid avenue).  Before I waste anyone’s time filing these motions, I wanted to see if anyone has had any experience with this issue. attny name firm phone

10. Good, Bad, or Ugly? Debtor was unemployed for the last 6 months and just found a new job.  There is no presumption of abuse under the Means Test, as Debtor did not receive any income during the last 6 months.  Nevertheless, debtor may have some disposable income on Schedule J based on the new employment.  If he has disposable income, but passes the Means Test, are there any problems/concerns if he files for Ch 7 now? attny name address phone no. email

11. Good, Bad, or Ugly? Debtors surrendered home in a Ch 7, and mortgage company ultimately foreclosed.  HOA fees were due on the property prior to the foreclosure.  HOA attorneys are now demanding the fees that were incurred prior to the foreclosure and post-discharge.  Is the HOA allowed to request these fees -- or does the debtors’ discharge prohibit such collection activity? attny name

12. Good, Bad, or Ugly? The Texas exemptions include Insurance Code Section 1108.051 which includes the language "any benefits, including the cash value and proceeds of an insurance policy... issued by...accident insurance company." Has anyone tried to exempt personal injury proceeds under this section and what was the result? (And before you ask, no my debtor cannot use federal exemptions) thank you in advance... attny name address

13. Survey says . . . Physician files personal Chapter 7. His practice is set up as a Professional Association.; he is the sole member of the P.A. and owns 100% of it.  The PA did not file bankruptcy.  Creditor obtained a judgment against the P.A., but not the Doctor, prior to the personal bk. Dr. was served with post-judgment discovery requests (In his role as the President of the P.A.), failed to respond, then failed to appear for a show cause hearing. An order for contempt was entered (before he filed bk) and now Creditor is threatening to obtain a writ of attachment and seek to have Dr. jailed until he responds to discovery on behalf of the P.A.A)   Ignore the Creditor; the discovery is stayed because the PA is an asset of the Debtor’s estate.B)   Dr. must answer the discovery because he’s not a party to the PA lawsuit, just a witness, but a writ of attachment would violate the stay in the Dr.’s bankruptcy case.C)   Debtor cannot ignore subpoenas to appear as a witness (not a party).  If the PA wants the benefits of bankruptcy it must file itself.D)   Tell the Dr. to bring his toothbrush with him to the next court hearing because he is probably going to jail until he answers the discovery. E)    Answer the discovery before the bankruptcy judge gets upset too!  

14. Debtor has  outstanding IRS debt of $40K.  Has equity in homestead of $60K.   He just inherited two more pieces of real estate with combined equity of about  $125,000.00 Debtor created an irrevocable spendthrift trust and conveyed all his property to the trust, with he and  his children as beneficiaries.  He would receive a small monthly payment from rental of one property. Can he now filed BR and discharge the IRS debt without disturbing the irrevocable trust? A) I didn’t know Bernie Madoff practiced real estate too! B) See Texas Property Code Section 112.035(d). C) What’s a self settled trust? D) No. You can not create a self settled trust in which you are the beneficiary and then discharge the debt. Nice try.