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Creditors Rights

Creditors Beware: Potential Pitfalls of Automatic Stay Violations

The “automatic stay” is one of the principal immediate benefits of filing bankruptcy. Upon filing a bankruptcy petition, the automatic stay springs into effect to stop any creditor’s debt collection efforts, lien enforcement actions, lawsuits and a host of other actions against the debtor and the debtor’s property. It is primarily designed to maintain the status quo while the court examines the debtor’s financial situation. The automatic stay is often likened to “closing the windows and locking the doors” to prevent any property from leaving the newly-created bankruptcy estate. As its name implies, the automatic stay is effective without any further action by the debtor or the court, and the court will eventually monitor the gathering and distribution of the debtor’s assets. However, until that time, or until the stay is lifted, creditors are generally precluded from taking any action against the debtor or the debtor’s estate.

Pursuant to the Bankruptcy Code, 11 U.S.C. 362(b), there are exceptions to the stay such as civil actions involving the establishment of paternity or the collection of a domestic support obligation. However, the exceptions outlined in § 362(b) are often narrowly construed, and the courts have broad powers to extend the reach of the automatic stay even further when necessary.

Most creditors readily acknowledge that the automatic stay applies to them, but they ask the court to lift the stay via a “motion for relief” under 11 U.S.C. § 362 of the Bankruptcy Code. Such motions commonly allege a lack of adequate protection of an interest in estate property, or lack of an adequate “equity cushion,” or, alternatively, that the debtor does not have equity in the subject property and that the property is not necessary to an effective reorganization in bankruptcy. If the court grants the creditor’s motion for relief, the creditor may repossess and foreclose upon its collateral; however, the creditor is still prohibited from pursuing any actions against the individual debtor. The stay continues until the earlier of the dismissal or the closing of the bankruptcy case, and any actions in violation of the stay are void in Texas. See In re Pierce, 272 B.R. 198, 204 (Bankr. S.D. Tex. 2001).

Not only are actions taken in violation of the stay void in Texas, but they may also be punishable by the court, particularly where the court finds that the creditor willfully violated the automatic stay. See In re Repine, 536 F.3d 512 (5th Cir. 2008). For example, Section 362(k) creates a private cause of action for a debtor to file suit against a creditor who willfully violates the automatic stay to the injury of the debtor. If the creditor is aware of the stay and intentionally acts in violation of the stay, the law provides that the debtor shall recover actual damages, including costs and attorney’s fees.

In addition to economic loss, emotional damages also qualify as actual damages. For example, in a recent appeal before the Fifth Circuit, the Court found that emotional distress damages may also be awarded in the appropriate case, but the plaintiff is required to set forth “specific information” concerning damages caused by his alleged emotional distress rather than relying only on “general assertions.” Repine, 536 F.3d at 521—522. For example, in Repine, the creditor was an attorney for the Debtor’s ex-wife in connection with a child support enforcement action wherein the family court held the debtor in criminal contempt for failure to pay child support and ordered that he be incarcerated until he paid the amounts due and owing to his wife and child. The parties eventually negotiated options for settling the child support enforcement action and securing the debtor’s release from jail, and the court entered an agreed order lifting the automatic stay to enforce the settlement terms. Specifically, the agreed order provided that attorney’s fees due and owing to the ex-wife’s attorney shall be provided for as a priority unsecured claim to be paid through the debtor’s Chapter 13 plan.

In light of the bankruptcy court’s entry of the agreed order, the family court held a hearing regarding the debtor’s release from jail, where the attorney opposed the debtor’s release, as she was concerned that her fees would not be paid. After the hearing, the debtor remained in jail since he had still not paid child support, during which time his father passed away. Also, the attorney threatened in a fax that she would refuse to appear in court to submit an agreed order releasing the debtor from jail, despite her client’s wishes, until she received “a copy of the certified checks” for her attorney’s fees. Subsequently, the attorney’s client and the debtor jointly moved to enforce the bankruptcy court’s agreed order, and the court ordered the attorney to appear and show cause why she should not be held in contempt for attempting to collect her attorney’s fees in violation of the automatic stay.

Despite being personally served with the show cause order, the attorney failed to appear, and the bankruptcy court issued a warrant for her arrest. The U.S. Marshal took the attorney into custody, and the bankruptcy court admonished the attorney to cease any and all collection efforts. Nevertheless, the attorney continued her efforts to collect her attorney’s fees and continued to refuse to consent to the debtor’s release from jail so he could attend his father’s funeral. Consequently, the ex-wife and debtor commenced an adversary proceeding seeking damages and attorney’s fees for the attorney’s willful violation of the automatic stay. After a two-day trial, the bankruptcy court awarded the plaintiffs actual damages (including $4,400.00 for emotional distress, punitive damages and attorney’s fees.) The attorney appealed; however, the district court affirmed the bankruptcy court’s decision.

Subsequently, the Fifth Circuit Court of Appeals vacated the bankruptcy court’s decision in part, finding that the debtor’s general testimony that he felt “very upset” at what his sons would think of him for being in jail and that it was “very traumatic” for him to miss his father’s funeral was insufficient evidence to support an award of emotional damages. Repine, 536 F.3d at 522. However, it is important to note that such an award is available to the plaintiff who makes specific, supportable assertions of emotional distress.

Furthermore, Section 362(k) provides that, in “appropriate circumstances,” a debtor may recover punitive damages. 11 U.S.C. 362 (k). In defining “appropriate circumstances,” the Fifth Circuit recently ruled that an “egregious” intentional misconduct is required on the violator’s part in order to impose punitive damages. Repine, 536 F.3d at 521. In Repine, the Fifth Circuit affirmed the bankruptcy court’s award of punitive damages, finding that the attorney’s violation of the stay was particularly egregious, “reckless,” and “arrogant,” especially since the attorney ignored the court’s orders and her client’s wishes, and she persisted in her collection efforts despite the bankruptcy court’s admonishment.

Accordingly, once a creditor becomes aware of a debtor’s bankruptcy filing, it is imperative that all collection efforts and communications of any kind with the debtor cease immediately in order to prevent any violation of the automatic stay. Once a creditor is aware of the stay and acts in violation of the stay, the debtor likely becomes entitled to actual damages and, in certain cases, may be awarded punitive and emotional damages. Such consequences may be easily avoided with a quick bankruptcy search of the subject obligor(s) prior to any communications, demands or other debt collection acts.

Creditors should consult with legal counsel soon after a bankruptcy filing in order to obtain advice for promptly and effectively protecting such creditors’ rights.

By David M. O’Dens and Kerry M. Hayden

Categories
Commercial Litigation

New Modification Program Could Be Beacon of Hope in the Seemingly Hopeless World of Troubled Mortgages

The fingers of those laying blame for the financial crisis have pointed in a number of directions, including Wall Street investment banks, securities ratings agencies, mortgage brokers, Fannie Mae and Freddie Mac, and politicians on both sides of the aisle. Regardless of who is ultimately at fault, it is undeniable that at the heart of the crisis lie troubled mortgage loans.

For various reasons, including falling home prices, creative loan products, and interest rate adjustments, default rates on mortgage loans increased dramatically over roughly the last two and a half years, from under 5 percent in the third quarter of 2006 to roughly 12 percent at the end of 2008. While the problem initiated in the subprime market and in states like Florida, California, and Nevada, the problem eventually spread through the prime market as well, affecting homeowners nationwide with loans of wide-ranging values. As mortgage defaults became widespread, mortgage-backed securities failed, as did the credit default swaps effectively insuring them, leaving investors with assets of dubious, if any, value.

From a litigation perspective, rising default and foreclosure rates have spawned an escalating volume of foreclosure-related litigation. Borrowers are bringing a variety of claims challenging their loans, the rights of lenders to foreclose, and the rights of lenders to evict. In many of these cases, loan modifications would potentially be the most advantageous resolution for both borrower and lender alike due to falling home prices, increasing days on market, and already inflated lender REO inventories. But modifying these loans is often a difficult proposition for lenders due to high default amounts, and many borrowers are facing pay cuts and layoffs, further stymieing their ability to make monthly payments.

Legislators have been searching for solutions to assist with modifications, but to date an effective solution has remained elusive. For example, Congress passed the HOPE for Homeowners Act of 2008 with the goal of creating an FHA program to help homeowners avoid foreclosure by fostering modifications to reduce principal balances and interest rates. Due to the program’s hard-to-meet requirements, however, it is estimated that there have been fewer than 100 applications nationwide for participation in the program and as few as only one foreclosure actually prevented as a result of the program.

Despite the failure of prior programs, there may yet be hope on the horizon. Just recently, on March 4, 2009, the Treasury Department announced the “Making Home Affordable” program, a new attempt to assist with modifications to avoid foreclosure. The $75 billion program will require participating lenders to reduce payments to no more than a 38 percent debt-to-income ratio (“DTI”). For further payment reductions down to a 31 percent DTI, the Treasury Department will provide lenders with dollar-for-dollar matching to soften their losses. Lenders will have the option to forbear principal, extend loan terms up to 40 years, and reduce interest rates as low as 2 percent for a period of 5 years before they are gradually increased back. Servicers will receive an upfront incentive of $1,000 for each modification under the program, and will also receive additional $1,000 incentive payments for up to 3 years for borrowers who stay in the program. Among the eligibility requirements are an unpaid principal balance of $729,750 or less, and occupation of the collateral property as a 1 to 4 unit primary residence.

Because the Making Home Affordable program is so new, its actual impact, of course, remains to be seen. But changes in this program from its predecessors, such as the elimination of loan-to-value ratio caps for participation, seem to indicate that legislators may be learning from their prior failed attempts, engendering cautious optimism that an effective solution will be found soon.

By J. Garth Fennegan and Michael R. Steinmark

Categories
Business Counsel Services

It’s Not Just About the Money: How the New Stimulus Bill Expands HIPAA Privacy and Security Requirements

Introduction

1. HIPAA

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) developed four major health information standards: (1) Transaction and code standards; (2) Privacy standards; (3) Security
standards; and (4) National identifier standards. The privacy and security standards were developed to increase and/or protect the confidentiality and availability of a patient’s medical information.
HIPAA privacy and security rules set certain compliance standards for healthcare professionals.

2. Stimulus Bill

On February 17, 2009, House Resolution 1 became Public Law No. 111-005. Titled the “American Recovery and Reinvestment Act of 2009 (“Act”),” most will recognize it as the “Stimulus Bill” or “Stimulus Package.” While the primary purpose behind the Act was to stabilize the struggling economy by creating jobs and assisting those affected by the recession, other significant provisions were included that amended existing laws and regulations such as the HIPAA privacy and security rules. Unless otherwise specified, the requirements discussed below will take effect twelve months from the enactment of the Act.

HIPAA Changes

The following is an analysis of some of the changes from the Act as it relates to HIPAA.

1. Business Associates

Covered entities are required to protect any and all electronic protected health information (“PHI”) created, received, maintained, or transmitted. A “covered entity” includes hospitals, surgery centers, physicians, medical groups and other medical facilities. The rules require certain administrative, physical and technical safeguards, as well as the establishment of policies, procedures and documentation standards. Previously, the rules required covered entities to obtain satisfactory assurances of protection through written contracts or agreements from business associates in order to allow a business associate to create or receive PHI on its behalf. Business associates are people who, on behalf of covered entities, engage in a function or activity that involves the use or disclosure of personal identifiable health information. It also includes people who provide legal, actuarial, accounting, consulting, data aggregation, management,administrative, accreditation or financial services where the provision of those services involves the disclosure of individually identifiable health information to the person.

The Act now expands the rules applicable to covered entities requiring safeguards, policies, procedures and documentation standards to directly govern business associates. Business associates
can no longer implement their own defined reasonable and appropriate safeguards. As such, CPAs, lawyers and business consultants must implement the statutory safeguards, policies and procedures to protect the PHI they are receiving from covered entities. This expansion also results in business associates becoming subject to the civil and criminal penalties for security violations that were previously only applicable to covered entities.

In addition, it should be noted that the Act contains a statement that the “additional requirements of this title that relate to security and that are made applicable to covered entities shall also be
applicable to such a business associate.” It is unclear how broad the statement will be interpreted, especially given provisions within the bill which contain explicit references to business associates.
Therefore, it should be noted that provisions describing standards for covered entities regarding security may be applicable to business associates as well, including those discussed in this article.

2. Notification of Breaches

If an unauthorized acquisition, access, use or disclosure of “unsecured” PHI occurs, covered entities must notify all individuals whose PHI has been accessed, acquired or disclosed as a result
of the breach without unreasonable delay after discovery of the breach. Business associates must notify the covered entity of such breaches but are not required to notify all individuals. The notice
must contain certain information such as descriptions of what happened, the types of PHI involved, steps individuals should take to protect themselves, a description of what the covered entity is
doing to investigate, and contact procedures for additional information. Notice must also be submitted to the Secretary of Health and Human Services (“Secretary”). If the PHI involves more than 500 individuals, then notice must be provided immediately; otherwise, notice can be logged and submitted annually.

The above-described requirements will apply to breaches discovered on or after the date of publication of the interim final regulations to be promulgated by the Secretary within 180 days of the enactment of the Act.

3. Restrictions on Certain Disclosures of PHI

Currently, a covered entity must allow an individual to request a restriction on the use or disclosure of PHI to carry out treatment, payment, or health care operations. However, the covered entity
is not required to agree to a restriction. Now, the Act requires a covered entity to comply with the requested restriction if: (1) “the disclosure is to a health plan for purposes of carrying out payment
or health care operations (and is not for purposes of carrying out treatment)”; and (2) the PHI “pertains solely to a health care item or service for which the health care provider involved has
been paid out of pocket in full.” Compliance with these new restrictions may become an administrative nightmare for each individual request.

4. Disclosure Standards

The Act significantly alters the standard with which a covered entity must comply with the use, disclosure, or request of PHI by altering the existing “minimum necessary” standard. Previously, a covered entity would have to limit PHI to the “minimum necessary to accomplish the intended purpose of the use, disclosure, or request.” The covered entity was left to make this determination. The Act now requires a covered entity to limit PHI to the Limited Data Set. The Limited Data Set includes 16 individual identifiers such as name, address, phone number, email address, social security number and medical record numbers. Only if this requirement proves to be insufficient can the covered entity then rely on the old “minimum necessary” standard.

Just to add some confusion to the entire process, the Limited Data Set standard described above is only a temporary standard. The new Limited Data Set standard must be followed until the Secretary
has issued guidance on what constitutes “minimum necessary.” The Secretary is to issue this guidance within 18 months of the date of enactment of the Act. (Don’t be surprised if the Secretary requests an extension on the 18 months.) Upon the issuance of the guidance, the new Limited Data Set standard no longer applies and the new and Secretaryapproved “Minimum Necessary” standard will apply.

5. Accounting of Certain PHI

Individuals have a right to an accounting of disclosures of PHI made by a covered entity in the past six years prior to the date of the request. But an exception exists providing that a covered
entity is not required to account for disclosures made to carry out treatment, payment and health care operations.

The Act has now eliminated this exception for covered entities that use or maintain electronic health records with respect to PHI. The Act now gives individuals the right to an accounting of
disclosures through an electronic health record made by a covered entity during the previous three years even if made to carry out treatment, payment and health care operations. A covered entity
that receives the request may (1) provide an accounting for disclosures made by both the covered entity and their business associates, or (2) provide an accounting for disclosures made by the covered entity and provide the contact information of their business associates. If the latter is given and an individual makes a request upon the business associate, the business associate is required to provide an accounting of disclosures that he or she has made.

It is important to note that covered entities that have acquired electronic health records as of January 1, 2009 are not required to account for disclosures made before January 1, 2014. For covered
entities that acquire electronic health records after January 1, 2009, accountings must be made for disclosures made on or after the later of (1) January 1, 2011, or (2) the date it acquires an electronic health record. Please keep in mind that these dates may change, as the Secretary has authority to alter them.

Conclusion

As you can see, the American Recovery and Reinvestment Act of 2009 has changed some important provisions related to HIPAA. Healthcare providers, consultants, accountants and lawyers should all review their security procedures when handling PHI to ensure they are in compliance with the new rules.

By Michael S. Byrd and Bradford E. Adatto