On July 18, 2017, the U.S. Court of Appeals for the Fifth Circuit ruled
that debts resulting from a plan designed to defraud mortgagees of foreclosure
sale proceedings could
not be discharged pursuant to 11 U.S.C §§ 523(a)(4) and 523(a)(6).
The holding affirmed two prior bankruptcy court decisions against the
debtor, Mr. Charles Cowin.
Mr. Cowin designed a fraudulent mortgage scheme where a straw buyer acquired
property contingent on a first mortgage at a condominium association’s
foreclosure proceeding. The straw buyer then signed a tax-transfer loan
agreement with a pair of Texas corporations managed by Cowin in order
to pay overdue property taxes on the property. After paying the taxes,
the tax-transfer lender obtained a tax-transfer lien on the property.
The straw buyer would then proceed to default and fail to issue payments
mandated by the tax-transfer loan agreement. Cowin would direct the tax-transfer
deed trustee to enter into foreclosure. The trustee would then use the
foreclosure sale proceeds to collect a $1,000.00 fee, pay the private
lenders’ tax transfer liens in full, and transfer the remaining
funds to the buyer.
The trust deed documents Cowin used to transfer title lacked wording obligating
the trustee to allocate the remaining proceeds to junior lienholders based
on their priority before reimbursing the grantor pursuant to Texas Tax
Code § 32.06(b) & (j). By omitting this language, the bankruptcy
court found that Cowin intended to divert the excess proceeds from the
foreclosure sales away from the preexisting mortgage holders and to entities
controlled by a co-conspirator.
Bank of America sued Cowin and his co-conspirators in federal court, seeking
to recover excess funds and other damages incurred from the fraudulent
foreclosure proceedings. In February 2010, while the Bank of America litigation
was pending, Cowin filed for Chapter 11 bankruptcy, which was dismissed
after five weeks.
Cowin filed a second bankruptcy case in May 2010. Shortly thereafter, Countrywide,
Deutsche Bank, and several other banks that held preexisting mortgages
on properties acquired by Cowin’s co-conspirators, brought adversary
proceedings in an effort to obtain a finding of non-dischargeability.
The bankruptcy court consolidated the proceedings and then dismissed Cowin’s
bankruptcy case after determining that Cowin had abused the bankruptcy
system by submitting two Chapter 11 petitions in two years without providing
a plan or disclosure statement in either case. At the parties’ request,
however, the bankruptcy court retained jurisdiction over the pending adversary
In January 2013, the federal court action resulted in a settlement stipulating
that if Cowin did not reimburse the Bank in the amount of $500,000.00
by September 1, 2013, the Bank could then pursue relief from the automatic
stay for entry of an agreed judgment. The following month, prior to the
court’s ruling, Cowin filed another Chapter 7 bankruptcy.
After lifting the automatic stay in order for the federal district court
to enter the agreed upon judgment on April 24, 2013 in the federal court
case, the bankruptcy court concluded that Cowin was liable to the Bank
for $268,477.78, the cumulative total of the excess foreclosure proceeds,
and that all of his debts resulting from transgressions of state statutes
The Bank then initiated an adversary proceeding in Cowin’s Chapter
7 case, requesting a finding that the judgment was non-dischargeable.
On June 12, 2013, Cowin appealed the bankruptcy court’s non-dischargeability
determination to the trial court. On September 30, 2014, the court issued
partial summary judgment in favor of the Bank, stating that Cowin was
collaterally stopped from questioning the previous non-dischargeability
ruling. The trial court then granted Cowin’s subsequent motion to
certify an appeal directly to the Fifth Circuit
Cowin’s appeal claimed that (a) the bankruptcy court had ruled in
error that his debts were non-dischargeable; (b) the bankruptcy court’s
ruling breached the Chapter 7 automatic stay; (c) the trial court settlement
agreement precluded any pre-settlement causes of actions—including
those determining non-dischargeability; (d) the bankruptcy court errantly
concluded he told the trustee to foreclose; and (e) the bankruptcy court
wrongfully granted preclusive effect to the adversary proceeding judgment.
The Fifth Circuit first clarified that the dischargeability of a given
debt is a federal issue pursuant to the Bankruptcy Code, which mandates
non-dischargeability must be proven by a preponderance of the evidence.
The Court next addressed section 523(a) of the Bankruptcy Code, which
establishes the categories of non-dischargeable debt. Pertinent to this
case, section 523(a)(4) and (6) excepts from discharge debts for both
fraud while serving as a fiduciary and for malicious injury by a debtor
to another entity.
The Fifth Circuit rejected Cowin’s assertion that the bankruptcy
court was errant in attributing the actions and intent of his co-conspirators
to him when making their determination. The Court also concluded that
the Bankruptcy Code explicitly permits creditors to submit adversary actions
to determine dischargeability of debt and thus, the automatic stay in
Cowin’s Chapter 7 case was not violated. In sum, the Fifth Circuit
affirmed the district court and bankruptcy court holdings in both adversary