Boston Bankruptcy Lawyer Blog

Patricia Kluge, 62, filed for chapter 7 bankruptcy this month. She went from simple beginnings in Bagdad, Iraq, to a billion dollar divorce settlement from the richest man in America, and now to a no asset bankruptcy in Virginia. Presently married to William Moses, the couple filed for joint bankruptcy protection. Their bankruptcy petition and schedules indicate that they have $50 million in debt.

Ms. Kluge's bankruptcy story can be seen as a lesson for Massachusetts bankruptcy clients. Born in 1948 of a British father who was a legal translator, and a mother who was of Scottish and Iraqi dissent, her parents divorced and she moved to London with her mother and sisters. Rejecting a secretarial career, Patricia Rose, at 19, worked as a belly dancer in London. She married Russell Gay, the publisher of Knave, a British porn magazine. She worked as a model for the magazine and penned an advice column. She acted in a racy movie. Kluge and Gay divorced in 1976 and she was engaged to a London psychiatrist when she met John Kluge in 1990.

When she married John Kluge, he was chairman of Metromedia and known as the richest person in the United Sates. He was allegedly worth over $5 billion. He converted to Catholicism when he married her in 1981. They built a notorious Virginia estate shortly thereafter. Set on 3,000 acres in Abermarle, Virginia, the 45 -room 23,500 square foot English manor "home" and estate had a full golf course, helicopter pad, horse stables, and a Gothic chapel. The couple was famous for
hosting events for royalty, with celebrities often in attendance.

They also bought an estate in the Scottish Highlands, near the Queen's Balmoral castle. For Christmas, Queen Elizabeth gave her new neighbors a Labrador retriever puppy.

In 1990 all of that came to an end; or a new beginning. Her divorce settlement from John Kluge was alleged to be over more than billion dollars, with interest payments at about $1.6 million per week. She kept the Abermarle estate and the "lodge" in Balmoral as well.

Married to Mr. Moses, the couple tried several avenues of investment. There was the Kluge Winery. They paid $7 million in 1999, and watched it grow to a $70 million asset before the recession. However, Farm Credit Bank foreclosed on the Kluge Estate Winery & Vineyard after a default on the $35 million loan. The couple blames the winery failure on the economy. The land was sold for $7 million, the equipment for $11 million, and the winery for $6 million. Ironically, a businessman who was himself involved in bankruptcy from time to time, Donald Trump, bought the winery! Kluge retains her day job working for her friend the Donald.

There was also a Vineyard Estates subdivision, with 511 acres. This development had an $8.2 million loan to Sonabank. Kluge defaulted on the Sonabank loan in 2010, and the bank bought the estates for $4.9 million in January 2011. Kluge still resides in one house in the subdivision.

The Virginia estate was recently foreclosed upon and is on the market for $16 million by Bank of America. Last summer, to raise money, Ms. Kluge auctioned the furnishings for over $15 million. The draperies alone sold for $150,000!

Bank of America sued Ms. Kluge in federal court in Charlottesville, alleging that there was a default on three loans valued at over $22 million. The couple abandoned defending themselves in the lawsuit, giving their rights, if any, to the bankruptcy Trustee.

The final foreclosure was against Fuel Co, a gas station which Kluge closed in 2007. Assessed at over $1 million it is expected to sell for half of that.

Will there be life after bankruptcy? It would be hard to bet against Patricia Kluge. Working for Donald Trump, former neighbor of the Queen, Ms. Kluge may simply be another victim of the recession, as she invested heavily in real estate. On the other hand, in the span of 21 years, she went from having one billion dollars to filing for Chapter 7 personal bankruptcy.

In Massachusetts, marriage between gay men or women is legal. But it's a state law. There is a contradictory federal law. The Defense of Marriage Act was enacted into law in 1966 and signed into law by President Bill Clinton. It says that the federal government does not acknowledge same sex marriage, notwithstanding what the various state laws say. The usual effect of this law is to have an adverse effect on 1,138 federal laws that relate to marriage, including benefits and taxes, especially estate taxes. President Obama's administration has decided that the Defense of Marriage Act is unconstitutional and stopped enforcing it in February. Thus the Defense of Marriage Act also has an effect on bankruptcies, and in particular Boston bankruptcy, because a 2003 law allows gay marriage in Massachusetts.

How does this relate to filing for bankruptcy in Boston? Because it's a federal law, in federal bankruptcy courts, gay couples cannot file for personal bankruptcy together. However, this may be changing. In a landmark case handed down by a federal bankruptcy judge in California, the federal Defense of Marriage Act was declared unconstitutional by Bankruptcy Judge Thomas Donovan. Apparently, a legally married (under state marriage laws) gay couple in Los Angeles, Gene Balas and Carlos Morales, filed for personal bankruptcy (using federal laws). The United States Trustee filed a motion to dismiss the case, saying that the Defense of Marriage Act prohibited the "benefit" of joint bankruptcy filing, because the couple was not a "man and a woman." Judge Donovan rejected the U.S. Trustee's position declaring that the Defense of Marriage Act was unconstitutional by finding that it violated the equal protection clause of the United States Constitution. This could have ramifications all over federal cases involving Massachusetts, especially in the bankruptcy court.

In the case, Mr. Bolas lost his job, and when he and his husband filed for bankruptcy protection, the US Trustee's office filed their objection. Their lawyer, Attorney Robert Pfister, of Los Angeles, represented the couple pro bono.

In an unusual show of support, 19 other judges signed Judge Donovan's decision, showing a strong sign of consensus among the judges, at least in California. In the decision, Judge Donovan found that the Defense of Marriage Act was an "apparent belief that the moral views of the majority may properly be enacted ... in disregard of the personal status and living conditions of a significant segment of our pluralistic society." While judges in New York and Sacramento have also allowed gay couples to proceed with a bankruptcy, this seems to be the first time that a federal bankruptcy judge has declared the Defense of Marriage Act unconstitutional. Will this be followed in Massachusetts?

Marriage between a gay or lesbian couple was declared constitutional by the Supreme Judicial Court in 2003 in Massachusetts. This decision, a 4-3 opinion, was considered the first of its kind in this country by a top state court. The case Goodridge v. Dep't. of Public Health defined the end of excluding same sex marriages, and was in response to the Massachusetts Senate's request for an opinion regarding the legitimacy of civil unions. In Goodridge, the Supreme Judicial Court found that civil unions were separate and unequal. The next step may be a test in the federal bankruptcy court in Massachsuetts.

The Real Estate Settlement Procedures Act commonly known as RESPA, and passed into law in 1974, was designed to protect mortgage consumers, i.e. homebuyers and sellers, in the transactions of real estate. Our Boston bankruptcy clients frequently ask about how the foreclosures on their Boston homes could, or should, proceed. Sometimes they report that the foreclosures are being transacted improperly. In two noteworthy cases, one in Florida and one in Pennsylvania, consumers effectively "foreclosed" on their banks, using RESPA rules.

The Florida case took place in Collier County, Florida. A couple bought a house, for cash, from Bank of America, based in North Carolina. The sale was as a result of a foreclosure so the title would have been up to date. Nevertheless, the bank's lawyers, after selling the house to the new owners, filed a foreclosure action in Collier County. The homeowners hired an attorney and fought back. They proved not only that they owned the house and that there was no mortgage, but that the foreclosure was illegal. They won their attorney fees in the amount of $2,500. The bank, however, refused to pay. Thus, the homeowners foreclosed on the bank! That is, they hired the deputy sheriffs to go and seize bank assets such as computers, desks, chairs, etc. Fortunately, the "foreclosure" did not last long - Bank of America woke up, paid all of the damages, and apologized. This was clearly a case in which neither the bank, nor its lawyers, even bothered to look at the documentation before filing the foreclosure. They compounded their error by neglecting the case and their duties following the lawsuit.

In the second case, a famous Goth music promoter in Philadelphia, Pennsylvania, Patrick Rodgers, bought a house for $180,000. For some reason, in July 2010, he was asked to take out a $1m insurance policy on his home by his mortgage lender, Wells Fargo. He sent a letter, called a Qualified Written Request (QRW) and, after receiving no response, he followed the rules for RESPA and, receiving no response, filed suit in his local small claims court. He did not need a lawyer for this court. He won a judgment for $1,000 plus costs. Like its sister bank, Bank of America, Wells Fargo ignored its customer and neglected to pay the judgment. Like the homeowners in Florida, Mr. Rodgers hired the local Deputy Sheriffs to levy on the bank. When he posted the notice of sale, the local media picked up the story. Of course, when Wells Fargo woke up, they settled the case.

While the above cases have a happy ending, the reason is because the consumers aggressively pursued the mortgage lenders' neglect. They serve to illustrate that RESPA can work for consumers. The RESPA law goes beyond simply requiring the necessary cost disclosures for real estate closings. It protects consumers thereafter. It's not too great a leap to look at the new Consumer Financial Protection Bureau as another federal regulatory agency that can and will protect financial consumers. And its not any further of a leap to see why consumer advocates, such as Elizabeth Warren, are needed.

In most bankruptcy cases, at the 341 hearing, the bankruptcy trustee will ask the debtor, "How did you get into this situation?" Our Boston bankruptcy clients are instructed to answer honestly, albeit briefly. The answers vary, of course. In Massachusetts bankruptcies, anecdotal evidence shows that there are not as many medical bankruptcies as reported nationally. However, in a fascinating academic study it was shown that there is a direct correlation between cancer and subsequent personal bankruptcy.

The study, presented by Dr. Scott David Ramsey, of the Fred Hutchinson Cancer Center, in Seattle, was conducted in Washington State. It linked the Western District of Washington bankruptcy court records with the National Cancer Institute's SEER (Surveillance Epidemiology and End Results) for Washington State. The study was published by the Journal of Clinical Oncology and included examining 231,799 cancer cases. The results of the study showed that 2.1% of those Washington State cancer cases, or 4,805 people, filed for a "fresh start" personal bankruptcy following the diagnosis. This includes Chapter 7 liquidation and Chapter 13 reorganization personal bankruptcies.

The study further pinpointed the relationship between the specific type of cancer diagnosis and bankruptcy: victims of lung, thyroid, leukemia and lymphoma cancers were most highly correlated with subsequent bankruptcy. Uterine, colorectal and melanoma cancers were the middle group. The lowest cancer to bankruptcy rates were breast and prostate cancers.
The cancer rates were as following within five years of diagnosis:

Lung cancer 7.7%
Thyroid cancer 4.8%
Leukemia/lymphoma 3.6%
Uterine 3.2%
Colorectal 3.1%
Melanoma 3.0%
Breast 2.9%
Prostate 1.7%

As we understand the study, following surgery, lung cancer, colorectal cancer and breast cancer victims were more likely to file for bankruptcy. The same is true for those that were treated with chemotherapy.

The other statistical factors seemed to be: for those who suffered from lung cancer, married people were more likely to file for bankruptcy; and, white people who suffered uterine, breast and prostate cancer were less likely to file for personal bankruptcy.

For all of those who had cancer over age 65, there is a lower bankruptcy risk, across the board for every type of cancer. This may be that those folks have social security, or a set income and are not as reliant on working to pay their bills. Moreover, they are more likely to have Medicare as their health insurance, which notwithstanding the political and economic factors, is a good, solid, medical insurance program.

The study was for adults, age 20 and over. It was conducted for the period of time between 1995 and 2009. Thus, it included the mad rush of personal bankruptcy filings in 2005 when the law changed (on October 1, 2005) and the first wave of mortgage bankruptcies following the "great recession" of 2008.

The several researchers that authored the study are Dr. Scott David Ramsey, Dr. Catherine R. Fedorenko, Dr. Kype S. Snell, Dr. Anne C. Kirchhoff, Dr. William Hollingworth and Dr. David K. Blough. They presented their research at the American Society of Clinical Oncology (ASCO) Annual Meeting on June 2, 2011. They work in three institutions: The Fred Hutchinson Cancer Research Center, in Seattle, Washington; the University of Bristol, Bristol, United Kingdom; and, the University of Washington, Seattle, Washington.