May 21, 2009
Bankruptcy Judge Rules that Conditional Promise to Repay Cost of Training by Union is Non-Dischargeable Student Loan
Brief by University of West Los Angeles Law Student, Sara Hussain.
In re Kesler, 401 B.R. 356 (Bkrtcy, S.D. Ill. 2009)
Issue: Is a conditional promise to repay the cost of training by a union an “educational loan” and, therefore, exempt from discharge pursuant to Section 523(a)(8)(A).
Facts: The plaintiff, Indiana/Kentucky Regional Council of Carpenters Joint Apprenticeship and Training Committee (the "JATC"), is a multi-employer apprenticeship and training trust fund. The debtor Michael O. Kesler was an apprentice from 1996 to 2000 in a union program. The debtor entered into five apprenticeship loan agreements with the JATC. In exchange for signing these agreements, the debtor received carpentry training from the JATC through both classroom teaching and field work. The apprenticeship loan agreements provided that the debtor would have an obligation to repay the cost of his training to the JATC by repaying the loans in cash if he obtained employment in the carpentry industry with a non-signatory employer. Obtaining such employment, however, was a breach of the agreement and triggered an acceleration clause making all amounts due and owing immediately payable. The debtor never earned the in-kind credits because he breached the apprenticeship loan agreements by accepting employment within the carpenter's industry with a non-signatory employer. The debtor failed to repay the funds and the JATC filed suit against him.
The debtor contends that Section 523(a)(8)(A) does not apply as the agreements between the debtor and the JATC are not educational loans within the meaning of the statute. The JATC counters that the debt fits within the statutory definition of an educational loan made under a program funded by a non-profit institution, and that the debtor has not demonstrated undue hardship to himself or his dependents.
The Plaintiff argued that the language of Section 523(a)(8) referring to educational obligations was not limited to obligations for education received at institutions of higher education, and that the purpose of the nondischargeability provision was to preserve the solvency of student loan programs so that funds would be available for future students. They argued that the obligation under the agreement reflected the cost of his training and was therefore an educational obligation within the scope of Section 523(a)(8). Plaintiff argued that “loan” includes extension of credit for tuition and does not to require the delivery of a sum of money ... According to the Scholarship Loan Agreement the plaintiff extended credit ... to pay for the cost of the training program. The debtor acknowledged the money owed and received training by agreeing to pay the specified amount.
Here, “an agreement to repay existed between the debtor and the creditor that was “prior to or simultaneous with the educational services by which the institution extend[ed] credit.” Here, as a condition of receiving training, the debtor affirmatively signed a loan agreement which contained language that a loan existed between the debtor and the JATC. This is an educational loan under Section 523(a)(8) and is not discharged without a showing of undue hardship.
May 19, 2009
3rd Circuit Rules that Mother Transferred Only Bare Legal Title to Debtor Son
Brief by University of West Los Angeles law student, Roksana Moradi (now studying for the California Bar exam)
In re John S. Stewart, Jr., 2009 WL 1111540 (3rd Cir. 2009)(unpublished)
Issue: How does a court determine when the title owner of real property holds only “bare legal title”?
Holding: Intent of the parties. A failed transfer in trust creates a resulting trust under Pennsylvania law and the title owner therefore holds only bare legal title.
Circuit Judge Sloviter,
Debtor’s mother obtained title to the Property in 1951 when she purchased it jointly with her husband. In 2002, she transferred the Property to the Debtor for one dollar (“First Deed”) in an attempt to minimize inheritance taxes on her estate. The Bankruptcy Court found that the Debtor and his mother both understood that the First Deed was conveyed for estate planning purposes and that his mother, not the Debtor, would remain the owner of the Property until she died. Later, Debtor’s mother realized that she had inadvertently omitted her daughter from her estate-planning effort and requested that the Debtor transfer half of his interest to his sister, which he did. Notwithstanding these conveyances, Debtor’s mother continued to reside at the Property and pay all of the bills and taxes associated with the Property out of her own funds.
In 2005, the Debtor filed chapter 7. In his bankruptcy filings, the Debtor listed his ownership interest in the Property as “ 1/2 Bare Legal Title of Caroline Stewart's property.” The Trustee subsequently filed a motion to sell the Debtor's interest in the Property pursuant to 11 U.S.C. § 363(h). The Debtor filed an adversary complaint seeking to enjoin the Trustee from selling the Property.
At trial the Bankruptcy Court held that, under Pennsylvania law, the Debtor’s mother’s transfer of the Property to the Debtor was subject to a resulting trust in favor of herself, who was therefore the equitable owner of the Property. As a result, the bankruptcy estate succeeded only to bare legal title in the Property. The Trustee appealed to the District Court, which affirmed.
The Court of Appeal also affirmed.
A bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). However, “[p]roperty in which the debtor holds ... only legal title and not an equitable interest ... becomes property of the estate under [§ 541(a)(1) ] ... only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.” Therefore, the “bankrupt estate ... obtains no greater ownership right ... than [the debtor] ... would have ... prior to the bankruptcy filing.” Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 372 (3d Cir.1992).
The court then looked to the applicable state law in Pennsylvania to determine what interests the debtor possessed. “[A] resulting trust arises where a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest therein.” Galford v. Burkhouse, 478 A.2d 1328, 1334 (Pa.Super.Ct.1984).
The court found Galford to be persuasive. The Pennsylvania Superior Court there held that “[w]here an express trust fails, a resulting trust may be imposed by operation of law.” Further, because “[t]he Statute of Frauds specifically exempts such trusts ... from its operation,” parol evidence is “admissible to show the circumstances under which [the] resulting trust arose” as long as such evidence is “clear, explicit and unequivocal.” Also, “that the testimony of all parties ... was in agreement that [the transferor] intended to transfer only bare legal title to [the son] at the time he executed the deed,” and thus the “evidence was clearly sufficient to establish a resulting trust.”
Similarly, here the Bankruptcy Court concluded that the Debtor held the Property in a resulting trust for his mother because she “intended to transfer the Property to the Debtor in trust” but “her intentions were ineffective due to the wording of the instrument [i.e., the First Deed] used to effect the transfer.” The Bankruptcy Court found that that the First Deed “was motivated wholly by the estate planning advice [Stewart] received from friends” and that both understood that she would own the Property until she died. Further, that she continued to live at the Property and pay all costs associated with it. The transaction culminating in the Second Deed also supports the conclusion that she retained beneficial ownership of the Property because the Debtor executed the Second Deed on the instructions of his mother in order to further her estate planning goals, “again suggesting that both parties considered the Property to be hers to control.”
The Trustee raised three arguments; First, the Trustee argued that the court should not look beyond the four corners of the First Deed because it unambiguously conveyed Stewart's entire interest in the Property to the Debtor by “grant[ing]” the Property to the Debtor “in Fee.” However, as noted above, the Pennsylvania Statute of Frauds exempts resulting trusts from its strictures so that parol evidence is “admissible to show the circumstances under which a resulting trust arose.” Further, the parol evidence here is “clear, explicit and unequivocal” that Stewart did not intend to convey to the Debtor her equitable ownership in the Property.
The Trustee next argued that Stewart must have intended to grant the Debtor her entire interest in the Property because, if Stewart retained an equitable interest in the Property, it would have been subject to inheritance taxes upon her death, in contradiction of her avowed estate planning purposes. The court found that at most this argument showed that Debtor’s mother, who was an unsophisticated party with a high school education and no legal training, may have failed to minimize her estate taxes through the conveyances at issue.
Finally, the Trustee contended that, even if the Debtor held the Property in a resulting trust in favor of Stewart, she may avoid Stewart's equitable interest in the Property pursuant to her strong-arm powers under 11 U.S.C. § 544(a)(3). However, under Pennsylvania law, Stewart's clear and open possession of the Property put the Trustee on constructive notice of Stewart's equitable interest therein, and therefore the Trustee may not avoid that interest under § 544(a)(3).
May 18, 2009
So Much for the "Making Homes Affordable Program"
From: Carol G. Stebbins [mailto:[email protected]]
Sent: Monday, May 18, 2009 9:50 AM
To: '[email protected]'
Subject: NACBA or any other organization organizing a statement to the White House about the failure of Making Homes Affordable as a result of lender bureaucracy?
I've spent a significant amount of time and frustration in the last month and 1/2 trying to find some actual results from the Making Homes Affordable program. The lender having the most of my clients' loans is, not unexpectedly, Chase. Communications with Chase have been a disaster. You think you are dealing with one department, you get mailings that you assume are from that department and three weeks later you are told that the mailing was from "President Obama's Making Home Affordable" program . . . .uh, that would be Chase's office that is participating in the $75 billion and not the Pennsylvania Ave address itself, right? And maybe that part of Chase could coordinate with the other Chase departments (at this point I know about Loss Mitigation, Home Preservation, Bankruptcy, and Subprime Departments, and I'm
sure that is ony the tip of the iceberg) through that little thing called the loan number?
Client and I are now at 45 minutes on line with directions to the Chase person not to leave us on a cold transfer but to stay on the line and make a warm transfer, since I've had multiple phone calls to Chase that have created a nearly endless loop, "nearly" because eventually we get a recording that says "I'm sorry, your call cannot be processed any further".
Do you know of any organization that is making an effort to emphatically tell the White House that the $75 billion is going down the administrative expense drain and leaving borrowers more frustrated than every? Because if there is such an effort, I'd be willing to spend time on that rather than on hold with Chase and the likes.
Carol G. Stebbins
Attorney at Law
18880 New Gambier Rd
Mount Vernon, OH 43050
Hey, client and I are now at 1.5 hour on the phone and we are just getting the most wonderful runaround in the world. This is two times worse than it used to be before all these programs and you all know that it was really bad back in the Day.
So -----anybody have a handle on what will happen to this poor woman if I file her? Any chance that the bankruptcy filing would improve her odds of getting something better?
Carol G. Stebbins
National Association of Chapter 13 Trustees Annual Meeting July 1-4 in Boston
The 44th Annual NACTT Seminar, July 1-4, 2009, Marriott Boston Copley Place, Boston, MA, is open to all chapter 13 practicioners. You can access the brochure here.
May 17, 2009
Circuit Court of Appeals Cases from Last Week
5th Circuit Court of Appeals, May 13, 2009
Valley Educ. Found. v. Eldercare Props. Ltd., --- F.3d ---, 2009 WL --------- (5th Cir. 2009)(assumption of real property lease proper where Plaintiff failed to terminate the lease and equitable intervention under Texas law applied to render effective the Debtor's renewal)
6th Circuit Court of Appeals, May 12, 2009
Patel v. Shamrock Floorcovering Servs., Inc., --- F.3d ---, 2009 WL --------- (6th Cir. 2009)(debt found non-dischargeable where debtor was a fiduciary of the creditor and breached his duty to the creditor, and Debtor's company was a "contractor" under Michigan law)
11th Circuit Court of Appeals, May 11, 2009
Carrier Corp. v. Buckley, --- F.3d ---, 2009 WL --------- (11th Cir. 2009)(preference where: 1) the creditor could have become secured but failed to do so; and 2) Debtor did not make the payments in the ordinary course of business)
11th Circuit Court of Appeals, May 15, 2009
Chira v. Saal, --- F.3d ---, 2009 WL --------- (11th Cir. 2009)(settlement agreement reached in the bankruptcy proceedings did not modify the pre-bankruptcy contract of sale, and the settlement agreement was equitable)
Thanks to Findlaw.com