Thursday, December 30, 2010
Treating Straddle Tax Claims in Chapter 13
http://www.abiworld.org/committees/newsletters/consumer/vol8num10/treat.html
by: Thomas D. DeCarlo
Chapter 13 Trustee Office; Southfield, Mich.
Each year, thousands of debtors file for relief under chapter 13 between Jan. 1 and April 15. A certain number will then timely file tax returns for the prior year, and find that they have a tax liability. These “straddle” liabilities—liabilities for tax years preceding the year in which the chapter 13 is commenced but before the deadline for filing the tax return—pose serious problems for debtors who need and deserve the fresh start promised in chapter 13. How can a debtor deal with these tax liabilities in the chapter 13, if at all? Four recent decisions from Michigan illustrate the difficulties in analyzing and treating these straddle liabilities.
In In re Turner, [1] the debtor filed for chapter 13 relief on Jan. 13, 2009, and timely filed his State of Michigan tax return that indicated a liability of $2,396 for the tax year ending Dec. 31, 2008. The debtor filed a proof of claim on behalf of the state, which objected to the claim. The court focused on § 1305, which provides that only the taxing authority can file a claim for “taxes that become payable...while a case is pending.” The court stated that while the debtor could pay the taxes at any time after Jan. 1, the taxes are not payable until the final day on which a tax return can legally be filed. The taxes are not due to or legally enforceable by the taxing authority until that date, and until the return is filed, the taxing authority cannot know whether there is a liability. The court also noted that if the tax liability is found to be a pre-petition obligation, then the taxing authority may be denied the time required by Bankruptcy Rule 3002 for filing a proof of claim, and the taxing authority has 180 days from the petition date to file the claim. The debtor filed for relief on Jan. 13, and the bar date for a governmental proof of claim would run on July 28. If the tax liability is not fixed until April 15, then the governmental unit would have only 88 days between April 15 and July 28 to actually file the proof of claim. The fact that the taxes are not payable and the apparent adverse impact on the state’s ability to file a proof of claim compelled the conclusion that the straddle tax liability was a post-petition liability that could not be treated in the chapter 13 plan unless the state chose to file a proof of claim and receive payment through the Plan.
In In re Senczyszyn, [2]the court determined that § 1305 does not define “pre-petition” vs. “post-petition” claims, but applies only after a court makes the threshold determination that the claim is a post-petition claim. The court stated that whether an obligation is a claim is based on § 101(5)(A), which defines any right to payment—whether liquidated, unliquidated, contingent or otherwise—and is to be construed in the broadest terms possible. Under Sixth Circuit precedent, the obligation will be a claim if the obligation has its basis in a pre-petition relationship between the debtor and creditor. That relationship, standing alone, gives the creditor the required notice of an obligation to file a proof of claim. Applied to tax obligations, the liability by definition arises out of a pre-petition relationship between the debtor and taxing authority. Every fact that is necessary for the existence and extent of the claim occurred as of Dec. 31 of the prior year. The straddle tax liability is a claim as of Dec. 31 that, as a pre-petition priority claim, must be treated in debtor’s chapter 13 plan pursuant to § 1322, free from the restrictions of § 1305.
Two other cases [3] used a third approach to straddle tax claims and were the first to disagree with the Senczyszyn court regarding the status of the claim as a pre-petition claim. These courts agreed with the Turner court’s holding that the state’s “right to payment” did not arise until April 15 and, therefore, the claim did not arise until April 15, well after the commencement of the cases.
The courts then focused on §§ 1322 and 507(a)(8)(A)(i). Section 507(a)(8) gives priority status to any claim that is measured by income for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due after three years before the date of the filling of the petition. Straddle tax liabilities are “measured by income” for a tax year ending prior to the commencement of the case—the debtor's income in 2009 certainly predates the filing of the case in 2010. The last date on which the debtor could timely file a return would have been April 15, 2010, a date is that is after a date that was three years prior to the commencement of the case. Thus, the debtor’s tax obligation for the year 2009 constituted a “priority” tax claim under § 507.
Section 502 provides that any claim that arises after commencement of the case for tax that is otherwise entitled to priority is determined and allowed as if the claim had arisen before the date of the Petition. Section 1322 requires that the debtor's plan provide for full payment of all allowed priority claims over the life of the plan. "[Sections] 502(i), 507(a)(8) and 1322(a)(2)…establish a Congressional intent to treat taxes on income for the taxable year preceding the bankruptcy cases as prepetition claims and to bring those claims into the bankruptcy plan." [4]
Regardless of the analysis used—whether the “straddle” tax claim is a pre-petition claim or is a post-petition claim that nonetheless can be treated in the Plan—allowing a debtor to treat these claims is more consistent with the “fresh start” policy of the Bankruptcy Code. Presumably, debtors are all committing all of their disposable income to the funding of the plan, raising the question of how the debtor would be able to pay this additional claim. Payment of the claim assures that the claim will be paid, as full payment of the priority claim is a condition to the debtor receiving a discharge. Payment through the chapter 13 plan also simplifies the collection by the taxing authority, which must do nothing more than file a proof of claim. The taxing authority may be denied the ability to charge interest and penalties. However, a taxing authority’s goal should be to collect taxes owed, not to seek unnecessarily punitive additional charges or fees. Payment of straddle tax claims through the chapter 13 plan furthers the goals of both the Code in providing the debtor with a fresh start and those of the taxing authority for collection of outstanding tax obligations.
1. 420 B.R. 711 (Bankr. E.D. Mich. 2009).
2. 426 B.R. 250 (Bankr. E.D. Mich. 2010).
3. In re Wilson, Case No. 10-45791 (Bankr. E.D. Mich. 2010), and In re Hight, 426 B.R. 258 (Bankr. W.D. Mich.), aff'd, 434 B.R. 505 (W.D. Mich. 2010).
4. In re Hight, 434 B.R. at 510.
by: Thomas D. DeCarlo
Chapter 13 Trustee Office; Southfield, Mich.
Each year, thousands of debtors file for relief under chapter 13 between Jan. 1 and April 15. A certain number will then timely file tax returns for the prior year, and find that they have a tax liability. These “straddle” liabilities—liabilities for tax years preceding the year in which the chapter 13 is commenced but before the deadline for filing the tax return—pose serious problems for debtors who need and deserve the fresh start promised in chapter 13. How can a debtor deal with these tax liabilities in the chapter 13, if at all? Four recent decisions from Michigan illustrate the difficulties in analyzing and treating these straddle liabilities.
In In re Turner, [1] the debtor filed for chapter 13 relief on Jan. 13, 2009, and timely filed his State of Michigan tax return that indicated a liability of $2,396 for the tax year ending Dec. 31, 2008. The debtor filed a proof of claim on behalf of the state, which objected to the claim. The court focused on § 1305, which provides that only the taxing authority can file a claim for “taxes that become payable...while a case is pending.” The court stated that while the debtor could pay the taxes at any time after Jan. 1, the taxes are not payable until the final day on which a tax return can legally be filed. The taxes are not due to or legally enforceable by the taxing authority until that date, and until the return is filed, the taxing authority cannot know whether there is a liability. The court also noted that if the tax liability is found to be a pre-petition obligation, then the taxing authority may be denied the time required by Bankruptcy Rule 3002 for filing a proof of claim, and the taxing authority has 180 days from the petition date to file the claim. The debtor filed for relief on Jan. 13, and the bar date for a governmental proof of claim would run on July 28. If the tax liability is not fixed until April 15, then the governmental unit would have only 88 days between April 15 and July 28 to actually file the proof of claim. The fact that the taxes are not payable and the apparent adverse impact on the state’s ability to file a proof of claim compelled the conclusion that the straddle tax liability was a post-petition liability that could not be treated in the chapter 13 plan unless the state chose to file a proof of claim and receive payment through the Plan.
In In re Senczyszyn, [2]the court determined that § 1305 does not define “pre-petition” vs. “post-petition” claims, but applies only after a court makes the threshold determination that the claim is a post-petition claim. The court stated that whether an obligation is a claim is based on § 101(5)(A), which defines any right to payment—whether liquidated, unliquidated, contingent or otherwise—and is to be construed in the broadest terms possible. Under Sixth Circuit precedent, the obligation will be a claim if the obligation has its basis in a pre-petition relationship between the debtor and creditor. That relationship, standing alone, gives the creditor the required notice of an obligation to file a proof of claim. Applied to tax obligations, the liability by definition arises out of a pre-petition relationship between the debtor and taxing authority. Every fact that is necessary for the existence and extent of the claim occurred as of Dec. 31 of the prior year. The straddle tax liability is a claim as of Dec. 31 that, as a pre-petition priority claim, must be treated in debtor’s chapter 13 plan pursuant to § 1322, free from the restrictions of § 1305.
Two other cases [3] used a third approach to straddle tax claims and were the first to disagree with the Senczyszyn court regarding the status of the claim as a pre-petition claim. These courts agreed with the Turner court’s holding that the state’s “right to payment” did not arise until April 15 and, therefore, the claim did not arise until April 15, well after the commencement of the cases.
The courts then focused on §§ 1322 and 507(a)(8)(A)(i). Section 507(a)(8) gives priority status to any claim that is measured by income for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due after three years before the date of the filling of the petition. Straddle tax liabilities are “measured by income” for a tax year ending prior to the commencement of the case—the debtor's income in 2009 certainly predates the filing of the case in 2010. The last date on which the debtor could timely file a return would have been April 15, 2010, a date is that is after a date that was three years prior to the commencement of the case. Thus, the debtor’s tax obligation for the year 2009 constituted a “priority” tax claim under § 507.
Section 502 provides that any claim that arises after commencement of the case for tax that is otherwise entitled to priority is determined and allowed as if the claim had arisen before the date of the Petition. Section 1322 requires that the debtor's plan provide for full payment of all allowed priority claims over the life of the plan. "[Sections] 502(i), 507(a)(8) and 1322(a)(2)…establish a Congressional intent to treat taxes on income for the taxable year preceding the bankruptcy cases as prepetition claims and to bring those claims into the bankruptcy plan." [4]
Regardless of the analysis used—whether the “straddle” tax claim is a pre-petition claim or is a post-petition claim that nonetheless can be treated in the Plan—allowing a debtor to treat these claims is more consistent with the “fresh start” policy of the Bankruptcy Code. Presumably, debtors are all committing all of their disposable income to the funding of the plan, raising the question of how the debtor would be able to pay this additional claim. Payment of the claim assures that the claim will be paid, as full payment of the priority claim is a condition to the debtor receiving a discharge. Payment through the chapter 13 plan also simplifies the collection by the taxing authority, which must do nothing more than file a proof of claim. The taxing authority may be denied the ability to charge interest and penalties. However, a taxing authority’s goal should be to collect taxes owed, not to seek unnecessarily punitive additional charges or fees. Payment of straddle tax claims through the chapter 13 plan furthers the goals of both the Code in providing the debtor with a fresh start and those of the taxing authority for collection of outstanding tax obligations.
1. 420 B.R. 711 (Bankr. E.D. Mich. 2009).
2. 426 B.R. 250 (Bankr. E.D. Mich. 2010).
3. In re Wilson, Case No. 10-45791 (Bankr. E.D. Mich. 2010), and In re Hight, 426 B.R. 258 (Bankr. W.D. Mich.), aff'd, 434 B.R. 505 (W.D. Mich. 2010).
4. In re Hight, 434 B.R. at 510.
AZ and NV AGs Sue Bank of America for Alleged Deceptive Loan Mod Activities
Arizona Attorney General Terry Goddard, and Attorney General Catherine Cortez Masto, both announced lawsuits against Bank of America Corporation and its affiliates for allegedly engaging in deceptive trade practices and violations of state consumer fraud statutes relating to loan modification activities.
A copy of the Arizona AG’s complaint is available at:
http://www.azag.gov/press_releases/dec/2010/BofAComplaint.pdf
A copy of the Nevada AG’s complaint is available at:
http://ag.state.nv.us/newsroom/press/2010/Bank%20of%20America%20Filed%20Complaint.pdf
The AGs’ complaints allege that Bank of America is supposedly:
1) “Misleading consumers by promising to act upon requests for mortgage modifications within a specific period of time;”
2) “Misleading consumers with false assurances that their homes would not be foreclosed while their requests for modifications were pending, but sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions;”
3) “Misrepresenting to consumers that they must be in default on their mortgages to be eligible for modifications when, in fact, current borrowers are eligible for assistance;
4) “Making false promises to consumers that their modifications would be made permanent if they successfully completed trial modification periods, but then failing to convert these modifications;”
5) “Misleading consumers with inaccurate and deceptive reasons for denying their requests for modifications;”
6) “Falsely notifying consumers or credit reporting agencies that consumers are in default when they are not;”
7) “Misleading consumers with offers of modifications on one set of terms, but then providing them with agreements on different sets of terms, or misrepresenting that consumers have been approved for modifications.”
The Arizona AG’s complaint also asserts that Bank of America is violating the March 13, 2009 consent judgment with Countrywide. In the consent judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America assumed responsibility for Countrywide’s compliance with the consent judgment.
The Arizona complaint alleges that, instead of providing the relief to which eligible homeowners were entitled, Bank of America supposedly failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.
A copy of the Arizona AG’s complaint is available at:
http://www.azag.gov/press_releases/dec/2010/BofAComplaint.pdf
A copy of the Nevada AG’s complaint is available at:
http://ag.state.nv.us/newsroom/press/2010/Bank%20of%20America%20Filed%20Complaint.pdf
The AGs’ complaints allege that Bank of America is supposedly:
1) “Misleading consumers by promising to act upon requests for mortgage modifications within a specific period of time;”
2) “Misleading consumers with false assurances that their homes would not be foreclosed while their requests for modifications were pending, but sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions;”
3) “Misrepresenting to consumers that they must be in default on their mortgages to be eligible for modifications when, in fact, current borrowers are eligible for assistance;
4) “Making false promises to consumers that their modifications would be made permanent if they successfully completed trial modification periods, but then failing to convert these modifications;”
5) “Misleading consumers with inaccurate and deceptive reasons for denying their requests for modifications;”
6) “Falsely notifying consumers or credit reporting agencies that consumers are in default when they are not;”
7) “Misleading consumers with offers of modifications on one set of terms, but then providing them with agreements on different sets of terms, or misrepresenting that consumers have been approved for modifications.”
The Arizona AG’s complaint also asserts that Bank of America is violating the March 13, 2009 consent judgment with Countrywide. In the consent judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America assumed responsibility for Countrywide’s compliance with the consent judgment.
The Arizona complaint alleges that, instead of providing the relief to which eligible homeowners were entitled, Bank of America supposedly failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.
Monday, December 27, 2010
United States: Red Flags Rule Now Excludes Lawyers, Doctors, and Other Professionals
http://thomas.loc.gov/cgi-bin/bdquery/z?d111:S.3987:
On December 18, 2010, President Obama signed the Red Flag Program Clarification Act of 2010. Effective immediately, the act changes the definition of the word "creditor" in the FTC Red Flags Rule to exclude most professionals that take payment after rendering services. LexisNexis has a great website on Red Flags Rule, if you would like more information
The Red Flags Rule requires "creditors" and "financial institutions" to address the risk of identity theft by developing and implementing a written prevention program. As originally written, the Rule defined "creditors" using a very broad definition covering all businesses or organizations that regularly defer payment for goods or services or provide goods or services and bill customers later. As the FTC noted in its own guidance on the Rule, this definition included most lawyers, medical providers, accountants, and other professionals. Professional organizations such as the American Bar Association objected in the courts and to Congress that the definition of creditor was broader than necessary to reasonably address identity theft, and pointed out that most legal, medical, and financial professionals are already subject to requirements to protect personal information.
The new definition eliminates from the scope of the definition businesses that merely bill consumers for services previously provided, which was the reason many professional organizations were covered. Instead, the Act specifies that the term "creditor" applies only to a business or organization "that regularly and in the ordinary course of business— (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, as described in section 623, in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person." The third item does not include funds advanced on behalf of a person "for expenses incidental to a service provided by the creditor to that person."
The Red Flags Rule was originally scheduled to take effect on March 1, 2008, but enforcement has been postponed several times. Most recently, enforcement was delayed from June 1, 2010 to January 1, 2011 at Congress's request. Those entities that still qualify as creditors under the revised definition should be prepared to comply by the new year, as Congress's stated reason for the extension was to pass this legislation.
For a full summary of the Red Flags Rule, see the previous summary from Digestible Law @ http://www.digestiblelaw.com/?entry=856.
Thanks Mondaq.
On December 18, 2010, President Obama signed the Red Flag Program Clarification Act of 2010. Effective immediately, the act changes the definition of the word "creditor" in the FTC Red Flags Rule to exclude most professionals that take payment after rendering services. LexisNexis has a great website on Red Flags Rule, if you would like more information
The Red Flags Rule requires "creditors" and "financial institutions" to address the risk of identity theft by developing and implementing a written prevention program. As originally written, the Rule defined "creditors" using a very broad definition covering all businesses or organizations that regularly defer payment for goods or services or provide goods or services and bill customers later. As the FTC noted in its own guidance on the Rule, this definition included most lawyers, medical providers, accountants, and other professionals. Professional organizations such as the American Bar Association objected in the courts and to Congress that the definition of creditor was broader than necessary to reasonably address identity theft, and pointed out that most legal, medical, and financial professionals are already subject to requirements to protect personal information.
The new definition eliminates from the scope of the definition businesses that merely bill consumers for services previously provided, which was the reason many professional organizations were covered. Instead, the Act specifies that the term "creditor" applies only to a business or organization "that regularly and in the ordinary course of business— (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, as described in section 623, in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person." The third item does not include funds advanced on behalf of a person "for expenses incidental to a service provided by the creditor to that person."
The Red Flags Rule was originally scheduled to take effect on March 1, 2008, but enforcement has been postponed several times. Most recently, enforcement was delayed from June 1, 2010 to January 1, 2011 at Congress's request. Those entities that still qualify as creditors under the revised definition should be prepared to comply by the new year, as Congress's stated reason for the extension was to pass this legislation.
For a full summary of the Red Flags Rule, see the previous summary from Digestible Law @ http://www.digestiblelaw.com/?entry=856.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Thanks Mondaq.
Paying the Handyman- The IRS wants to Know
If you're the owner of even just a single unit of rental property, starting in 2011 you must begin tracking any vendor doing at least $600 worth of work for you, because you now have to send them an IRS 1099 Form for the 2011 tax year – or face stiff penalties.
The requirement to track vendors and issue the 1099 forms isn't new. It's something larger rental property owners already do. But last year, when the federal government enacted the Small Business Jobs and Credit Act of 2010 (H.R. 5297), it expanded the requirement to all property owners, no matter how small. In effect, even property owners just doing rental as a sideline – maybe as part of a family investment fund or as part of a retirement savings plan – are "conducting a trade or business," so the 1099 reporting requirement now applies to them.
That means you have a legal obligation to obtain certain information from your vendors (generally, their name, address and Social Security number or other Tax ID, plus the amount you pay them over the year), and then issue them the 1099 forms to reflect the income you paid them for the year. (Don't forget to keep a copy for yourself.) Since the requirement takes effect for the 2011 tax year, you should start tracking the payments you make to your vendors beginning in January 2011. After you've tracked your payments for the year, you'll send them the total in the 1099 form in early 2012.
There are some exceptions to the requirement:
Burden: if gathering the information and issuing the forms would create a hardship
Duration: if the property is only a temporary rental of your own residence
Income: if your income from the rental doesn't meet minimal threshold requirements
Additional Guidance to Come
More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship or is considered "minimal" income, so you'll need to watch for that when it comes out.
On the vendor side, the requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants and handymen – in short, virtually all service providers to the property that don't receive a W-2 form from you and who provide at least $600 in services for the year. It's a cumulative amount, so even if that painting job only costs you $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement for sending that vendor the 1099 form.
How to Comply
To satisfy the requirement, you'll want to review your bookkeeping procedures (with your accountant if you work with one) to be confident you have a system in place to track your payments to your vendors. You'll want to set up your tracking procedure so that you can keep separate how you paid them: by credit card, debit card, check or cash.
The IRS will set forth the important dates for the 2011 tax year. You'll want to note those and be sure to comply, because late filing will be penalized. Indeed, penalties have been doubled under the new law.
The initial first-tier penalty has been increased from $15 to $30 (filing 1099 up to 30 days late), the second-tier penalty increased from $30 to $60 (more than 30 days late), and the third-tier penalty increased from $50 to $100 (filing after August 1). There's also a $250 penalty for the intentional failure to file.
As a general matter, you'll be able to request a 30-day extension for getting your forms to the IRS, but that won't apply to your deadline for getting the form to your vendors. Remember, they need to use those in preparing their tax returns.
For many owners, the new reporting requirement will come as a surprise. If you manage property for a small owner, make sure you let them know about it. If you're the owner, be sure to prepare to comply, which means tracking your payments starting this year.
Thanks to Holland & Knight for the info.
The requirement to track vendors and issue the 1099 forms isn't new. It's something larger rental property owners already do. But last year, when the federal government enacted the Small Business Jobs and Credit Act of 2010 (H.R. 5297), it expanded the requirement to all property owners, no matter how small. In effect, even property owners just doing rental as a sideline – maybe as part of a family investment fund or as part of a retirement savings plan – are "conducting a trade or business," so the 1099 reporting requirement now applies to them.
That means you have a legal obligation to obtain certain information from your vendors (generally, their name, address and Social Security number or other Tax ID, plus the amount you pay them over the year), and then issue them the 1099 forms to reflect the income you paid them for the year. (Don't forget to keep a copy for yourself.) Since the requirement takes effect for the 2011 tax year, you should start tracking the payments you make to your vendors beginning in January 2011. After you've tracked your payments for the year, you'll send them the total in the 1099 form in early 2012.
There are some exceptions to the requirement:
Burden: if gathering the information and issuing the forms would create a hardship
Duration: if the property is only a temporary rental of your own residence
Income: if your income from the rental doesn't meet minimal threshold requirements
Additional Guidance to Come
More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship or is considered "minimal" income, so you'll need to watch for that when it comes out.
On the vendor side, the requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants and handymen – in short, virtually all service providers to the property that don't receive a W-2 form from you and who provide at least $600 in services for the year. It's a cumulative amount, so even if that painting job only costs you $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement for sending that vendor the 1099 form.
How to Comply
To satisfy the requirement, you'll want to review your bookkeeping procedures (with your accountant if you work with one) to be confident you have a system in place to track your payments to your vendors. You'll want to set up your tracking procedure so that you can keep separate how you paid them: by credit card, debit card, check or cash.
The IRS will set forth the important dates for the 2011 tax year. You'll want to note those and be sure to comply, because late filing will be penalized. Indeed, penalties have been doubled under the new law.
The initial first-tier penalty has been increased from $15 to $30 (filing 1099 up to 30 days late), the second-tier penalty increased from $30 to $60 (more than 30 days late), and the third-tier penalty increased from $50 to $100 (filing after August 1). There's also a $250 penalty for the intentional failure to file.
As a general matter, you'll be able to request a 30-day extension for getting your forms to the IRS, but that won't apply to your deadline for getting the form to your vendors. Remember, they need to use those in preparing their tax returns.
For many owners, the new reporting requirement will come as a surprise. If you manage property for a small owner, make sure you let them know about it. If you're the owner, be sure to prepare to comply, which means tracking your payments starting this year.
Thanks to Holland & Knight for the info.
3rd Cir Says Escrow Cushion Pre-Petition Arrears To Be Included in BK Proof of Claim
The United States Court of Appeals for the Third Circuit recently held that the bankruptcy automatic stay prohibits a mortgage loan servicer from accounting for a pre-petition escrow shortage cushion in its post-petition calculation of future monthly escrow payments.
A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/092724p.pdf
Under the terms of bankruptcy petitioners' ("Borrowers") purchase-money mortgage, part of the monthly payment was to be paid into an escrow account to be used by the mortgage servicer to pay for taxes, insurance, and other charges as they became due. As permitted by the federal Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq., the mortgage servicer required the Borrowers to pay an amount into the escrow account that was higher than required to cover the actual cost of taxes, insurance, and other charges.
The Borrowers subsequently filed for Chapter 13 Bankruptcy. At that time, the Borrowers had an escrow shortage exceeding $5,000, which included $1,787.69 which the servicer had included as part of its escrow cushion pursuant to RESPA but had not yet distributed for taxes, insurance, and other charges.
After the bankruptcy filing, the servicer issued a revised escrow analysis and a demand for payment which indicated that the servicer had increased the monthly escrow payment. Specifically, the servicer calculated the revised escrow payments presuming the escrow balance at the time of the Borrowers' bankruptcy filing was $0, and included specific line items of $210.65 for a '[s]hortage payment' as well as $87.02 for a "r]eserve requirement."
The servicer's proof of claim did not include the $1,787.69 escrow cushion that had not yet been disbursed or paid out on the Borrowers' behalf through the escrow account. The Third Circuit noted that the servicer 'did not seek to recoup the $1,787.69 cushion via the bankruptcy process, but rather by assessing the [Borrowers] higher post-petition monthly escrow payments to make up for the shortfall.'
The Borrowers filed a motion in the Bankruptcy Court to enforce the automatic stay pursuant to 11 U.S.C. § 362(a), compel the servicer to "cease post-petition collection of pre-petition escrow claims," and award the Borrowers attorneys fees and costs. The Bankruptcy Court denied the motion, and the District Court affirmed.
As you may recall, an automatic stay pursuant to 11 U.S.C. § 362(a)(6) "is applicable only to claims that arise pre-petition, and not to claims that arise post-petition." The Bankruptcy Code defines "claim" to mean the: "(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5).
Addressing Section 101(5), the Third Circuit first noted the United States Supreme Court's observation that the "language "right to payment" in the definition of "claim" meant "nothing more nor less than an enforceable obligation." " In addition, "Congress intended by this language to adopt the broadest available definition of claim." The Third Circuit noted that it had "endorsed this broad interpretation of the term "claim," overruling the narrow "accrual test"" previously established.
Relying on Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008), the Third Circuit held that the Borrowers' unpaid escrow shortage constituted a 'claim' under the Bankruptcy Code. The Court reasoned that "the terms of the Borrowers" mortgage establish that the obligation to pay into the escrow account was enforceable." Thus, the servicer 'had a claim for the unpaid escrow.' The Court further clarified that "the contingent nature of the right to payment does not change the fact that the right to payment exists, even if it is remote, and thereby constitutes a "claim" for purposes of § 101(5)."
The Third Circuit rejected the servicer's argument that 'forcing the Servicer to recoup the missed escrow cushion payments through the Chapter 13 plan improperly modifies the Servicer's rights under RESPA and 'Regulation X,' 24 C.F.R 3500.17.' The Court reasoned that "the principle of protecting the debtor from all efforts to collect pre-petition claims outside of the Chapter 13 structure takes precedence over the Servicer's other rights under RESPA to recalculate the escrow payments."
Having determined that the unpaid $1,787.69 escrow cushion should have been part of the servicer's proof of claim in the bankruptcy action, the Third Circuit remanded the matter for the lower court to determine whether the servicer had "willfully violated the automatic stay," and whether the Borrowers were entitled to damages per 11 U.S.C. § 362(k).
The dissenting opinion argued that the servicer's "pre-petition claim should be limited to the amounts actually disbursed." Quoting the Bankruptcy Court's opinion, the dissent reasoned that "a "right to payment," as incorporated in the statutory definition of 'claim' under 11 U.S.C. §101(5) implicitly encompasses a right of retention, which is not subsumed in the servicer's "right to collect" escrow items." Thus, the dissent noted that, "[a]bsent sums actually expended, as permitted under the loan documents to protect its own collateral interest, the Servicer need not include pre-petition escrow arrears in its proof of claim inasmuch as the mortgage instrument only permits the Servicer to retain such funds as reimbursement to the extent of actual advances. Otherwise, the Servicer merely collects and holds such funds for payment to third parties." This conclusion "is consistent with the Second Circuit's interpretation of "claim" in In re Villarie, 648 F.2d 810, 812 (2d Cir. 1981)."
The dissent also argued that "the majority fails to acknowledge that the Servicer acted in accordance with RESPA" and "never even tries to explain why RESPA is inapplicable." Rather, "under the majority's approach, it is difficult to foresee that any mortgage lender that seeks to recalculate escrow due in accordance with RESPA and Regulation X would not be in violation of the automatic stay." This approach, in effect, "abrogates RESPA."
A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/092724p.pdf
Under the terms of bankruptcy petitioners' ("Borrowers") purchase-money mortgage, part of the monthly payment was to be paid into an escrow account to be used by the mortgage servicer to pay for taxes, insurance, and other charges as they became due. As permitted by the federal Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq., the mortgage servicer required the Borrowers to pay an amount into the escrow account that was higher than required to cover the actual cost of taxes, insurance, and other charges.
The Borrowers subsequently filed for Chapter 13 Bankruptcy. At that time, the Borrowers had an escrow shortage exceeding $5,000, which included $1,787.69 which the servicer had included as part of its escrow cushion pursuant to RESPA but had not yet distributed for taxes, insurance, and other charges.
After the bankruptcy filing, the servicer issued a revised escrow analysis and a demand for payment which indicated that the servicer had increased the monthly escrow payment. Specifically, the servicer calculated the revised escrow payments presuming the escrow balance at the time of the Borrowers' bankruptcy filing was $0, and included specific line items of $210.65 for a '[s]hortage payment' as well as $87.02 for a "r]eserve requirement."
The servicer's proof of claim did not include the $1,787.69 escrow cushion that had not yet been disbursed or paid out on the Borrowers' behalf through the escrow account. The Third Circuit noted that the servicer 'did not seek to recoup the $1,787.69 cushion via the bankruptcy process, but rather by assessing the [Borrowers] higher post-petition monthly escrow payments to make up for the shortfall.'
The Borrowers filed a motion in the Bankruptcy Court to enforce the automatic stay pursuant to 11 U.S.C. § 362(a), compel the servicer to "cease post-petition collection of pre-petition escrow claims," and award the Borrowers attorneys fees and costs. The Bankruptcy Court denied the motion, and the District Court affirmed.
As you may recall, an automatic stay pursuant to 11 U.S.C. § 362(a)(6) "is applicable only to claims that arise pre-petition, and not to claims that arise post-petition." The Bankruptcy Code defines "claim" to mean the: "(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5).
Addressing Section 101(5), the Third Circuit first noted the United States Supreme Court's observation that the "language "right to payment" in the definition of "claim" meant "nothing more nor less than an enforceable obligation." " In addition, "Congress intended by this language to adopt the broadest available definition of claim." The Third Circuit noted that it had "endorsed this broad interpretation of the term "claim," overruling the narrow "accrual test"" previously established.
Relying on Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008), the Third Circuit held that the Borrowers' unpaid escrow shortage constituted a 'claim' under the Bankruptcy Code. The Court reasoned that "the terms of the Borrowers" mortgage establish that the obligation to pay into the escrow account was enforceable." Thus, the servicer 'had a claim for the unpaid escrow.' The Court further clarified that "the contingent nature of the right to payment does not change the fact that the right to payment exists, even if it is remote, and thereby constitutes a "claim" for purposes of § 101(5)."
The Third Circuit rejected the servicer's argument that 'forcing the Servicer to recoup the missed escrow cushion payments through the Chapter 13 plan improperly modifies the Servicer's rights under RESPA and 'Regulation X,' 24 C.F.R 3500.17.' The Court reasoned that "the principle of protecting the debtor from all efforts to collect pre-petition claims outside of the Chapter 13 structure takes precedence over the Servicer's other rights under RESPA to recalculate the escrow payments."
Having determined that the unpaid $1,787.69 escrow cushion should have been part of the servicer's proof of claim in the bankruptcy action, the Third Circuit remanded the matter for the lower court to determine whether the servicer had "willfully violated the automatic stay," and whether the Borrowers were entitled to damages per 11 U.S.C. § 362(k).
The dissenting opinion argued that the servicer's "pre-petition claim should be limited to the amounts actually disbursed." Quoting the Bankruptcy Court's opinion, the dissent reasoned that "a "right to payment," as incorporated in the statutory definition of 'claim' under 11 U.S.C. §101(5) implicitly encompasses a right of retention, which is not subsumed in the servicer's "right to collect" escrow items." Thus, the dissent noted that, "[a]bsent sums actually expended, as permitted under the loan documents to protect its own collateral interest, the Servicer need not include pre-petition escrow arrears in its proof of claim inasmuch as the mortgage instrument only permits the Servicer to retain such funds as reimbursement to the extent of actual advances. Otherwise, the Servicer merely collects and holds such funds for payment to third parties." This conclusion "is consistent with the Second Circuit's interpretation of "claim" in In re Villarie, 648 F.2d 810, 812 (2d Cir. 1981)."
The dissent also argued that "the majority fails to acknowledge that the Servicer acted in accordance with RESPA" and "never even tries to explain why RESPA is inapplicable." Rather, "under the majority's approach, it is difficult to foresee that any mortgage lender that seeks to recalculate escrow due in accordance with RESPA and Regulation X would not be in violation of the automatic stay." This approach, in effect, "abrogates RESPA."
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New York Bill to Shield More Debtors in Bankruptcy Is Signed by Paterson
New York debtors in bankruptcy and other court cases will be able to shield more assets from lenders under a law signed by Governor David Paterson, Bloomberg News reported on Thursday. The law increases the dollar value of some exemptions for the first time since the 19th century, and raises others to levels that would help debtors live without government assistance, said Charles Juntikka, a New York City lawyer who represents debtors. Under the new law, debtors can retain vehicles valued as much as $4,000 above an associated loan, up from $2,400. They also may keep a home with equity of $75,000 to $150,000, depending on location, up from $50,000. Home equity is the value of a home, less mortgages. The measure may make it harder for New York City to enforce parking rules and collect unpaid tickets, according to a July letter from Mayor Michael Bloomberg. The city will seek to amend it to solve that problem, said a spokesman for the mayor.
http://www.bloomberg.com/news/print/2010-12-23/new-york-bill-to-shield-more-debtors-in-bankruptcy-is-favored-by-paterson.html
http://www.bloomberg.com/news/print/2010-12-23/new-york-bill-to-shield-more-debtors-in-bankruptcy-is-favored-by-paterson.html
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