Consumer Bankruptcy

By: Michael J. Casaceli

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff

Joining a majority of courts, the New Jersey District Court, in Cook v. IndyMac Bank,[1] held that the debtor, Cook, could not use section 506(d) of the Bankruptcy Code (the “Code”) to “strip off” a wholly unsecured junior lien.[2]  Cook’s home was encumbered by a first and second mortgage.  Cook sought to strip off the second mortgage pursuant to section 506(d),[3] because the first mortgage exceeded the appraised value of the home.[4]  The court denied Cook’s attempted “strip off” because it would grant a windfall to debtors whose property unexpectedly sells for more than its appraised value.[5]  The court found that the only way to “strip off” a second mortgage is to contest its status as an allowed claim under section 502 of the Bankruptcy Code.[6]

By: Patrick McBurney

St. John's Law Student

American Bankruptcy Institute Law Review Staff

            Affirming the decision of the bankruptcy court, the Bankruptcy Appellate Panel for the First Circuit in Pawtucket Credit Union v. Picchi (In re Picchi),[1] held that a debtor was allowed to modify a creditor’s secured mortgage in a multi-family dwelling because a multi-family house does not fall within section 101(13A)’s definition of a debtor’s principal residence.[2] Pawtucket, the secured creditor, held a second mortgage on the debtor’s two-family home.[3] The debtor, Picchi, resided in one of the units, and rented out the second unit.[4] Picchi’s chapter 13 plan reduced Pawtucket’s secured claim to zero because the appraised value of the property was insufficient to satisfy the secured claim of Picchi’s senior lender.[5] The bankruptcy court determined that Pawtucket’s claim could be modified by Picchi and approved the plan.[6] 

By: Jennifer K. Arcarola

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In In re Balas & Morales,[1] the United States Bankruptcy Court for the Central District of California held that a legally married same-sex couple could jointly petition for bankruptcy.[2]  The debtors, Gene Balas and Carlos Morales, are a same-sex couple legally married in California who jointly filed for bankruptcy under chapter 13.[3] The United States Trustee (the “Trustee”) moved to dismiss the case, alleging that section 1307(c) of the United States Bankruptcy Code (the “Code”) prohibits two males from jointly filing for bankruptcy[4] because the Defense of Marriage Act (the “DOMA”) defines “spouse” as a person of the opposite sex who is a husband or a wife,[5] and so Trustee alleged that their case should be dismissed “for cause” pursuant to section 1307(c) of the Code.[6]  The court concluded that (1) the DOMA was unconstitutional as applied to a same-sex married couple under the Equal Protection Clause of the Fifth Amendment, (2) no legitimate government interest was served in applying the statute, and (3) none of the eleven grounds for dismissal listed in section 1307 were implicated.[7]

By: Bryan Kotliar
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, in In re Siler,[1] the court allowed a debtor whose monthly disposable income created the presumption of abuse under the means test to remain in chapter 7 since the creditors would not receive any distribution under a chapter 13 plan.[2] Generally, if a debtor cannot rebut the presumption of abuse, the case must be dismissed or converted to chapter 13, which is why the Bankruptcy Administrator[3] moved to dismiss.[4] However in this case, under a chapter 13 plan, the debtor would be entitled to deduct her ERISA contributions and 401(k) loan obligation repayments from her monthly disposable income—deductions not available for her CMI calculation under chapter 7.[5] Because of these deductions, creditors would not receive any distribution under an alternate chapter 13 plan.[6] Therefore, the court held that the debtor was entitled to remain in chapter 7, notwithstanding the language of 707(b), because dismissing or converting her case to chapter 13 would create absurd results contrary to Congress’s intent.[7]

By: Justin Zaroovabeli
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Reiman,[1] a Michigan bankruptcy court held that a trustee could not revoke abandonment of property that he later discovered to have additional value.[2] The Reimans, the debtors, listed both their house’s value and a secured claim above their house’s value on their chapter 7 schedules.[3] After the trustee filed his no-asset report, the bankruptcy case closed and the debtors received a discharge.[4] The property eventually foreclosed at a bid price below the house’s fair market value and the trustee moved to re-open the case to recover any additional value in the house.[5] Although the court re-opened the case,[6] the court denied the trustee’s motion to revoke abandonment because the trustee’s no asset-report was not influenced by an unforeseeable change or mistake of law.[7] The court also noted that policy considerations typically favored finality in bankruptcy cases.[8]