Kramer Levin Secures Win for Consumer Debtors, Prevailing in Fifth Circuit Pro Bono Bankruptcy Appeal

On March 18, 2024, Kramer Levin prevailed in a pro bono bankruptcy appeal to the U.S. Court of Appeals for the Fifth Circuit, winning a victory that should help thousands of consumer debtors.

Our client, Maria Christina Morgan, is a nurse who borrowed from a hedge fund, Ovation Services, to pay $17,000 in real estate taxes she owed to Nueces County, Texas. The $17,000 was secured by an assignment of Nueces County’s super-senior tax lien on Ms. Morgan’s condominium unit, valued at $89,000.

The fund charged Ms. Morgan 17.5% interest plus legal fees. Ms. Morgan lost her job during the pandemic, fell behind on her payments, faced foreclosure on her debt (now $24,000, including legal fees) and in 2022 filed for bankruptcy with a Chapter 13 plan that paid the fund in full, including legal fees as allowed by the court, over five years.

The Southern District of Texas has a local rule and Local Form Chapter 13 Plan that require all secured creditors to report their legal fees every 180 days in order to give Chapter 13 debtors the ability to pay those fees over the five-year plan period. In the absence of the rule, a tax lien assignee could delay reporting its legal fees until the end of the Chapter 13 plan, when the debtor had no ability to pay them. Given the super-senior nature of a tax lien — prior even to mortgages in Texas and in other states — a tax lien assignee is virtually certain to collect everything it is owed.

Ovation Services, which is enforcing tax liens in 464 cases in the Southern District of Texas, objected to Ms. Morgan’s plan and the local rule, arguing that a bankruptcy plan could not compel periodic disclosure of legal fees. Ovation Services lost in bankruptcy court and on appeal to the district court, but Ms. Morgan’s Chapter 13 counsel had not been paid to represent her on appeal, leaving her without counsel when the fund appealed to the U.S. Court of Appeals for the Fifth Circuit.

In addition to Ovation Services’ pre-bankruptcy legal fees, totaling $3,000 in connection with a $17,000 loan, Ovation has since sought $7,000 in additional legal fees for work during the Chapter 13 case and could have sought even more fees in connection with its appeal of Ms. Morgan’s Chapter 13 plan.

Ms. Morgan retained Kramer Levin as pro bono appellate counsel. Bankruptcy and Restructuring senior partner Thomas Moers Mayer filed a brief in the Fifth Circuit, after which Ovation Services moved to dismiss its appeal — agreeing, as part of the dismissal, to forgo collection of any legal fees relating to the appeals to the district and circuit courts.

The dismissal preserves as precedent the decisions of the bankruptcy and district courts upholding the Southern District of Texas’ local rule and plan form. The victory will immediately affect all Chapter 13 cases involving tax liens in the Southern District of Texas, including the 464 cases for Ovation Services alone. The dismissal also supports similar rulings in other Texas districts (where Ovation Services and other assignees are enforcing tax liens) and may have ramifications for consumer debtors nationwide in connection with enforcement of delinquent property tax liens — which the National Tax Lien Association estimates as totaling $21 billion each year.