October 20, 2018

Another Debtor Ripped Off by a Foreclosure Scam (Part 2)

Last month, I wrote a post describing a case that was recently heard by one of the judges in the Northern District of Georgia.  In this case, a debtor had filed a Chapter 13 the day of a foreclosure.  The lender was not aware of the bankruptcy so it went ahead with the foreclosure sale.  Like many foreclosure sales in Georgia, the amount of the mortgage was equal to the likely value of the house so there were no bidders at the foreclosure sale.  Instead, the lender bid the amount of the mortgage and was, in effect, the winning bidder.

By the end of foreclosure Tuesday, the lender’s law firm had learned of the Chapter 13 filing so the law firm did not “record” the foreclosure deed.  Instead, the lender filed a motion to “validate foreclosure” asking the judge to permit the foreclosure to go through thereby divesting the debtor of title.

The debtor painted a very sad picture – he and his wife had four children of their own and a sister and her three children were also living in the home – and they faced  homelessness if the foreclosure was allowed to go through.  Further, the debtor claimed that he and his wife had been victimized by a “paralegal service” that had prepared emergency “two page” petitions then did nothing more.

The lender’s attorney took a very hard line – between the husband and wife, these debtors had filed 5 previous cases only one of which actually worked for more than a few months.  The debtor was trying to scam the system and the court ought not permit such an action.  Further, the debtor had used the same paralegal service twice – if they were a ripoff why did he use them a second time?

The judge, who is a compassionate and decent man,  was clearly struggling with what to do.  I felt that the lender’s attorney took the wrong approach.  In my view the debtor and his wife came across more confused than pathologically dishonest.  They clearly did not have entirely clean hands when it came to using the bankruptcy process to stop a foreclosure, but I could see that the judge was bothered by the idea that 7 children and two families might end up on the street.

In my previous post I asked what you thought would happen.  Here’s what the judge did: [Read more…]

Missed Mortgage Payments in Your Chapter 13 – An Expensive Problem

In the Northern District of Georgia, the “standard” Chapter 13 plan that is used provides that on-going mortgage payments are to be made directly to the mortgage company during the pendency of your Chapter 13 plan.  In other words, if you file Chapter 13 because you are three payments delinquent, your missed payments (the mortgage “arrearage”) will be paid in your plan.  However your ongoing mortgage payments are sent directly to the mortgage company.

I know that in some bankruptcy filing districts, on-going payments are collected by the trustee and paid through the trustee’s office.   The trustees in the Northern District of Georgia do not do this as a matter of course.

This means, therefore that Chapter 13 debtors have the significant responsibility for paying their mortgage payments on time each month after their cases are filed.  If you miss one or two payments, the mortgage lender can and will file a Motion for Relief from Stay.  They will argue that your missed payments reflect your inability to afford your mortgage and that bankruptcy protection ought to be lifted so that the mortgage lender can foreclose. [Read more…]

What Happens to Your Car Accident Claim Rights if the Defendant Files Bankruptcy?

Imagine that you are involved in a car accident that was not your fault.  You hire a lawyer who files suit against the negligent driver asking for damages.  Thankfully the other driver has insurance, so if you win your case, there will be a source of recovery.  Now imagine that right in the middle of this process, the negligent driver files a Chapter 13 bankruptcy.  What are your rights?  Can you still pursue insurance proceeds.  Does the negligent driver’s insurance company get leverage over you because of the bankruptcy filing?

This is exactly the situation that a colleague of mine found himself in.   He asked me to help and this is how we decided to handle this situation.  First, we prepared and filed a Motion for Relief From Stay.  Our motion set out the facts and asked the judge to lift the debtor/defendant’s bankruptcy protection so that we could go after insurance proceeds.  We noted that the Georgia legislature made a public policy decision to require all drivers in Georgia to have minimum insurance coverage.  If the bankruptcy judge allowed a bankruptcy filing to completely shield the debtor and his insurer from all liability, the bankruptcy court would be either (1) protecting debtors who broke Georgia law by not having insurance, or (2) harming innocent plaintiffs and providing a windfall to insurance carriers who were otherwise contractually obligated to pay damages on behalf of negligent drivers.

It is fairly well settled in the 11th Circuit that a plaintiff can obtain relief from the stay to pursue insurance proceeds.  I think that the Bankruptcy Judge will accept our argument on this issue.

This case involves another, slightly less obvious issue as well.  This issue has to do with bad faith claims by a defendant against his own insurance company.   Georgia law contains an interesting provision designed to protect defendants from insurance companies that act in bad faith.  Realize that if you are the negligent party in an accident, your insurance company will provide legal counsel to you at no charge – that is part of the insurer’s contractual obligations to you.  However, the insurance company’s interest and your personal interest are not exactly the same.  You buy insurance to protect you from personal liability and you expect that any lawyer retained by the insurance company to protect you to have this same goal.  The insurance company, however, only has a financial interest in resolving your case for some figure less than the policy limits.  If your policy has a limit of $50,000, then the insurance company is only obligated to pay $50,000, whether the verdict is $51,000 or $251,000.

The Georgia legislature recognizes that insurance companies may be inclined to “roll the dice” with a jury if their financial exposure is capped.  After all, as a defendant, you do not have the authority to demand that the insurance company tender full policy limits as an inducement to settlement.

In order to protect defendants, the legislature included a code section which provides that if the plaintiff demands policy limits and the defendant’s insurer refuses, the defendant’s insurer can be held liable for the plaintiff’s full recovery is the plaintiff goes to trial and wins a verdict larger than the policy limits.     The right to sue the insurer for failure to tender policy limits, however, rests in the defendant only.

This was the situation in our case.  The plaintiff had serious injuries that could reasonably be expected to result in a jury verdict of more than the $50,000 policy limit.  Our problem – how do we, as the plaintiff, preserve the bad faith claim, which could serve as a valuable source of recovery for our client?

We came up with the idea of asking the bankruptcy judge to assign to us (the plaintiff) the debtor’s rights to pursue a bad faith claim against the debtor’s insurance company.  Our argument was that the bad faith rights were added by the legislature to dissuade insurance carriers from acting in a manner that was not in the best interest of its policyholders.  The debtor/policyholder paid his premium and purchased this full protection.  The debtor’s bankruptcy filing ought not relieve the insurer from fulfilling its contractual obligations to the debtor.

Further we put forth the argument that the plaintiff is a third party beneficiary of the insurance contract that exists between the defendant/debtor and the vehicle liability insurer.  As a matter of public policy, the insurer ought not be freed from its obligation to act in a socially responsible manner just because the policyholder filed for bankruptcy.

The debtor/policyholder would have no personal liability in any case.  The insurer is not filing for bankruptcy and should not be the beneficiary of bankruptcy protection, especially since the loser in this scenario would be the injured plaintiff.  To put this another way, if the insurer is freed from the risk of a statutory bad faith claim, it truly has no incentive to make a fair offer to the injured plaintiff.  If the debtor/policyholder’s bad faith claim risk is wiped out by the debtor’s bankruptcy, the injured plaintiff would suffer far more than the insurer would benefit.  The plaintiff would lose settlement leverage and potentially a source of recovery.  The insurance carrier would benefit from a windfall since it already included in its premium cost the bad faith risk factor.

In our view, the only way to preserve the bad faith claim would be for the court to award this policy benefit – the right to sue the insurer for bad faith damages – to the plaintiffs.  If the insurer tenders policy limits, the bad faith claim issue is moot.  If the insurer tenders less than policy limits, it does so at the risk of the bad faith liability.

My colleague is presenting this very argument in a few days to one of the bankruptcy judges in the Northern District of Georgia.  We’ll see what happens.

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