And in Maryland your broken leg is still the trustee's broken leg, even if you forgot to tell him.

The intersection between bankruptcy law and state tort law trips many lawyers and their clients. Just about one year ago, we posted about a District of Columbia case ("Your broken leg is now the trustee's broken leg, feel better?") where a fellow lost his right to sue in the Superior Court for personal injury precisely because he forgot to list the claim in his D.C. federal bankruptcy petition.  And now a Maryland appellate court has confirmed the same result for a Maryland litigant who fails to disclose a potential state court claim in a Maryland federal bankruptcy petition.

The Maryland case is called Schlotzhauer v. Morton, decided July 30, 2015, if you're inclined to read the published opinion. But here it is, in a nutshell:

• Ms. Schlotzhauer filed for bankruptcy and did not disclose that she had a claim for personal injury.
  
• She waited until the bankruptcy was over to file a lawsuit in a Maryland Circuit Court.
  
• The Circuit Court granted the defendant's motion and kicked Ms. Schlotzhauer out of court because her claim belonged to the bankruptcy trustee, and not to her.

Ms. Schlotzhauer had to fight to get her claims back, and that included reopening her old bankruptcy to regain control over her personal injury claim. She then had to return to the Maryland courts to overturn the summary judgment.  With this decision, the Maryland Court of Special Appeals has released her to pursue her claim in the Circuit Court. 

But her lawyers sure could have saved themselves a whole bunch of aggravation.  If you have tort claims against others (personal injuries or intentional actions such as assaults, libel, slander or even fraud) when you file for bankruptcy, here is the game plan:

• Disclose the potential claims in your bankruptcy petitions. The moment you file a petition for federal bankruptcy protection, all of what you own becomes "property of the estate," and within the control of the trustee.You can't demand protection from your creditors without upholding your obligations to make full disclosure.
  
• Negotiate with the trustee. Most trustees are not interested in pursuing tort claims, and will consent to release the claim back to you and your lawyer.  This is called "abandonment" of the claim by the trustee. If you skip this step, the claim remains under the trustee's control even after the bankruptcy case is dismissed.
  
• Don't miss your statute of limitations! Whether the claim is held by the trustee or you, that limitations period just keeps ticking along.  Act promptly.

And if you have simply forgotten or through some mistake a claim was never listed in your past bankruptcy, now what?  Like Ms. Schlotzhauer, you will have to return to the bankruptcy court to reclaim your rights to make the state court claim. Ms. Schlotzhauer waited almost three years. The passage of time did not resolve the issue--her state tort claim remained property of the bankruptcy estate under the control of the trustee. 

Your bankruptcy case is a matter of public record, and your petition and schedules remain available for review to anyone searching the national federal database long after the case is closed.   And when you file a lawsuit in state court the lawyers for the other side are going to search those records to determine if your broken leg is really your broken leg, or if it is still the trustee's broken leg.

You own it, but is it really yours?

“Property is surely a right of mankind as really as liberty.”- John Adams

 Our second President of the United States wrote this in 1787. And for over three hundred years, the ownership of property has been the foundation of American society.  Originally, only land owners could vote or govern. We live in a culture that largely measures worth and success if you can afford to own land, develop it, and profit by it’s sale to others, who begin the same cycle for themselves.

“A man’s home is his castle” rings as true, today, as when it was first uttered in four hundred years ago, by Lord Coke.  Right?  Not so fast.

 

 

If “ownership” of land and buildings is defined as that full bundle of rights to control and dispose of the property (what is called the full “fee” interest), then you absolutely are not free to do as you please. Even if you purchased the full fee interest of a property, there are many layers of control and limitation on your rights to use and dispose of that property. Here are a few that you may not have considered. 

Easements are the right of use over the lands of another. Your neighbor, the government or even the utility company have rights to physically intrude on your land.  Your neighbor may have a right to drive his farm tractor across your lot to access adjacent lands. The government may have rights to keep you from using parts of your land (we recently had a case involving a “blast zone” easement near a former Nike missile site owned by Uncle Sam). The utility can run power lines and poles over your land. And perhaps the entire community behind your lot may have a right to use your road to access the public highway.

Environmental easements will also sneak up on you, if you are not careful. That new subdivision may have areas set aside for trees only, or "buffers," or just open space designated as a “conservation easement.” Maryland has one of the most active open space/environmental easement programs in the Country. Some of our clients have been caught short by easements created by prior owners who just wanted to capture a tax break.

Governmental restrictions and private covenants also limit how you use and enjoy your property. Most commonly, zoning restrictions impose limits on businesses in residential areas. Your neighbor doesn’t want to live next to a motorcycle repair shop! And the government doesn’t want that sex toy shop too close to an elementary school.  The largest court disputes arise where residential and business zoned areas rub against each other. “Not in my back yard,” is the usual protest by homeowners, while the business man swears that he is enhancing the community.

If you live in a planned community (whether brand new, or as old as the Homeland and Roland Park neighborhoods in Baltimore City) then you are subject to restrictions created by written restrictions on what you can do with your land, called “covenants.” You might be required to submit any proposed changes to your house to a community architectural committee for approval. We have seen disputes ranging from “don’t let your kids play basketball after 9 PM,” to “tear down that garage because it was not approved by the homeowner’s association.” Even if you did not read your covenants at settlement, you are tied up in their restrictions!

Live on or near the water? Well, your land is likely subject to the rights of others to access the beach or a boat ramp. And be assured that the State of Maryland has many restrictions on how close you may build to the water, what you can build. Your neighbors might even have shared use of your waterfront and pier. And if Mother Nature creates more land by depositing dirt and sand along your property, you may actually own a larger lot.  But if Mother Nature washes that land away, you own less. But be careful about protecting your land—the State of Maryland has tough requirements for “rip-rap” and other methods of erosion protection. We recently advised a client against conflicting claims by the State and their homeowner’s association about maintenance of rip-rap and beachfront property. And don’t dare disrupt wetlands or tidal lands, or you will hear nasty things from the State of Maryland.

You are not immune from government intrusion involving water just because you live inland, near a casual stream or storm conduit.  If that water feeds a river and makes its way to the Chesapeake Bay or ocean, then you are subject to federal restrictions.  One of our past clients thought he was doing a good deed by depositing stones and highway rubble into a stream to slow water flow and save his land from erosion—and he was wrong! A violation notice from the federal government forced removal of the stones and payment of a fine.

Liens are the right given to another by the owner of property to secure a debt, or one created by law in favor of certain creditors. If you borrowed money to purchase your house, then you are already familiar with bank liens evidenced by mortgages, and deeds of trust. These are consensual liens, or liens that you agreed could attach to and encumber your property.

But most liens on your property will be non-consensual. For example, unpaid taxes, water bills, homeowner’s association dues and ground rents will all become liens on your property.  And general debts that become court judgments will also become liens on your property once recorded in the Circuit Court for the County in which the property is located.

And if you own property with others (particularly others to whom you are not married), you must be concerned for non-consensual liens attaching to their interest.  Any impairment of their interests will necessarily effect your interest.

Consensual and non-consensual liens all share one thing—they can be foreclosed by the lien holder. Our office is frequently involved in disputes among competing lien holders, all jockeying for the first priority position, like beasts feeding on fallen prey. These disputes are never good news for the property owner, who is simply waiting for the court to select his financial executioner.

The resolution of property disputes involving easements, restrictions and liens keep lawyers plenty busy. There are many ways that these matters end up in court:

Foreclosures occur once an owner is in default of obligations under a consensual or non-consensual lien. The filing of a foreclosure case can trigger multiple disputes among lien holders claiming first lien position. These disputes often have the unintended benefit to the borrower of postponing the foreclosure sale and ratification which would require him to move out of the home.  In fact, we have seen several cases where a borrower in default lived another four years in the home without making a single mortgage payment.

And if the foreclosure generates a pile of money left over after the foreclosing lender gets paid, then lesser lien holders will file competing claims to the surplus. If there is anything left, it goes to the owner. And each step can involve a contested court hearing.

Quiet Title and declaratory judgment actions—Short of foreclosure, competing lien holders may sue each other while asking the courts to pick the first lien holder.  The grounds for these claims are seemingly limitless, and often do not involve the property owner. But this will not lessen the property owner’s stress level, since he is often made a party to these cases. We are often consulted to explain to the property owner what is happening in these cases.

Bankruptcy-Disputes over consensual and non-consensual liens arise in the main case, whether a Chapter 7 or 13, and can often spill over to a separate adversary proceeding. For example, a bankruptcy trustee might attack the validity of a lien, perhaps because it was not properly recorded or executed at the time it was made.  When the economy tanked in 2008, our office received a flood of these claims. At one point, we had approximately 65 cases involving this particular issue.  Four representative cases were selected by the bankruptcy court for referral to the Maryland Court of Appeals, where we argued discrete points of Maryland law. Once decided, the point of law resolved all of the bankruptcy cases in favor of our client.
Extended fighting among trustees, debtors and competing lien holders in the bankruptcy court also has the unintended benefit to the borrower of stalling an eventual foreclosure. But many lenders and bankruptcy trustees agree to have property sold, while agreeing to fight over who gets paid out of the fund.  That means the borrower loses the house even as the lien holders continue to fight.

Property ownership is not easy. In fact, ownership is less about enjoying the property, and more about excluding others and defending against encroachments on your interests. This requires constant diligence. It may even require court action.

You may still end up in debtor's prison

On a recent trip to Williamsburg, I spent some time in the ancient "gaol," where poor folks might have ended up for failure to pay their bills. Here's an excerpt of their history:

The only offense for which long-term imprisonment was common was debt, though this presented a paradox. Wealthy debtors who had money but refused to pay might be persuaded by the prospect of imprisonment to settle their obligations.

Locking up the poor, though, guaranteed they could never earn the money they owed, and this struck many as absurd. The New York legislature said in 1732 that "many poor persons may be imprisoned a long time for very small sums of money … to the ruin of their families, great damage to the public who are in Christian charity obliged to provide for them and their families … and without any real benefit to their creditors." Yet only in the 1830s did the United States begin to abolish debtors' prisons.

I spent just a few minutes in the jail cells (partly because my wife and traveling companions closed the door and held it shut!), and it was not fun. I was alone in a cell built for 8, but which often held up to 25, with no provisions for personal comfort or privacy.

But you can still be jailed for your unpaid debts!  The "debtor's prison" may have been officially abolished, but that doesn't mean you won't end up in jail after being sued for unpaid bills. Don't appear for trial or the post-trial examination, and you can be arrested--it won't matter if you owe $500 or $5,000 dollars! And see what this Alabama judge had to say on the subject of "private prisons." 

If you've been sued, it goes without saying that you MUST seek guidance of counsel to negotiate with your creditor, counter-sue them, or help you navigate through a bankruptcy. It is not necessarily your inability to pay that will get you jailed, it is your refusal or failure to participate in the judicial process, which will grind you to a pulp if you simply ignore that judicial summons.

[Update: check out this August 19, 2012 report, from St. Louis, that describes how Missouri folk are being imprisoned for days, for debts as small as $400-500!]

And even after the conclusion of the judicial process, including bankruptcy, you can still be haunted by old debt that remains on your credit reports. I've had so many questions about errors in client credit reports which cause disruption in their lives, I am sharing the publicly available information that will allow most folks a "do-it-yourself" remedy to ghost entries.

Once a debt has been written off and a 1099C has been issued, the debt can't be collected. Errors on your credit report must be corrected by the credit reporting agencies according to the Fair Credit Reporting Act.

Collect a copy of the 1099C and any other relevant information and submit this information to the credit reporting agencies with a request to correct your credit report. Inaccurate, incomplete or unverifiable information must be removed or corrected, usually within 30 days. However, a reporting agency may continue to report information it has verified as accurate.

Visit the Federal Trade Commission for a good summary of the process on the official government website. Check it out!

Call us, if you need help.

Visit the Young & Valkenet website.