Bankruptcy Court May Not Limit Debtor’s Right to Modify as Condition of Confirmation

Posted by NCBRC - June 30th, 2020

The Fifth Circuit held that the bankruptcy court improperly required a chapter 13 debtor to amend his plan to pledge 100% payment to unsecured creditors with no right to modify unless the modification likewise paid 100% or the debtor relinquished his right to discharge. Brown v. Viegelahn (In re Brown), No. 19-50177 (5th Cir. June 8, 2020). Read More

Uncashed Retirement Loan Check Not Exempt

Posted by NCBRC - June 29th, 2020

The debtor’s uncashed loan check from her retirement account was property of the estate and was not exempt under section 522(d)(12). Ostrander v. Brown (In re Brown), No. 19-24 (B.A.P. 1st Cir. May 21, 2020).

Prior to filing her bankruptcy petition, the debtor received, but did not cash, an $18,000 check representing a loan from her retirement account. The chapter 7 trustee sought turnover of the check. The bankruptcy court denied the turnover motion finding that, because the funds were from an exempt retirement account and the debtor had not yet cashed the check, the check was likewise exempt. Read More

Arbitration Clause Not Enforced in Discharge Violation Case

Posted by NCBRC - June 24th, 2020

In the absence of intervening legislative or Supreme Court directive, the Second Circuit followed its precedent finding that a debtor could not be compelled to arbitrate his contempt motion for violation of the discharge injunction. Belton v. GE Capital Retail Bank, No. 19-648 (2d Cir. June 16, 2020) (consolidated with Bruce v. Citicorp Inc., No. 19-655). Read More

$67,000 in Fees and Costs Reasonable for Stay Litigation

Posted by NCBRC - June 13th, 2020

The debtors’ attorney was entitled to approximately $67,000.00 in attorney’s fees and expert witness fees and costs for his representation of the debtors in their action against the creditor for violation of the automatic stay. In re Moon, No. 13-12466 (Bankr. D. Nev. May 29, 2020).

After they had obtained their discharge, the debtors reopened their bankruptcy with new counsel, Christopher Burke, in order to file a motion to hold Rushmore Loan Management Services, LLC, in contempt for violation of the automatic stay and the discharge injunction. After an evidentiary hearing, the bankruptcy court found Rushmore in violation of the automatic stay, but because the date Rushmore learned of the discharge was not established, the court did not find it in violation of the discharge injunction. The bankruptcy court awarded the debtors over $100,000 in actual damages, $200,000 in punitive damages, and attorney’s fees and costs under section 362(k)(1).

Mr. Burke then submitted his fee application seeking $56,150 in fees based on 112.3 hours of work at $500.00/hour, $1,950.30 in costs, and $8,907.64 in witness fees for the expert testimony of John Rao. He further sought an order enhancing his fees by a multiplier of 1.5. Rushmore objected to the fee application generally, arguing that because he did not have a written fee agreement with the debtors, Mr. Burke did not comply with ethics requirements. Rushmore further argued that Mr. Burke’s hourly rate and the expert witness fee were excessive. Finally, Rushmore argued that Mr. Burke was not entitled to a fee enhancement. Read More

Sixth Circuit Says Contributions to Retirement Plan Not Disposable Income

Posted by NCBRC - June 9th, 2020

Rejecting its dictum to the contrary in Seafort, the Sixth Circuit held that a debtor’s voluntary contributions to her retirement account, begun prior to bankruptcy, may continue during bankruptcy and are excluded from her disposable income. Davis v. Helbling (In re Davis), No. 19-3117 (6th Cir. June 1, 2020).

Ms. Davis had approximately $200,000 in debt of which approximately $189,000 was unsecured. She proposed a chapter 13 plan paying $323.00 for sixty months. The trustee objected on the basis that she underrepresented her disposable income by failing to include $220/month in wages withheld as a contribution to her employee 401(k) retirement plan. The bankruptcy court reluctantly sustained the trustee’s objection, stating that it was bound to follow the Sixth Circuit’s direction on the issue of voluntary contributions to an IRA as set forth in dictum in Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012). Ms. Davis amended her plan to reflect the $220 as additional disposable income then objected to her own plan. The bankruptcy court confirmed the amended plan and certified the case for direct appeal. Read More

Debtor and Trustee Making Duplicate Mortgage Payments

Posted by NCBRC - June 3rd, 2020

Where both the debtor and the trustee paid down the debtor’s mortgage and arrearage, the court did not err in finding that the resulting overpayment should go to the trustee. White v. Regions Bank, No. 19-130 (E.D. Tenn. Feb. 24, 2020).

The debtor’s original chapter 13 plan provided for him to make mortgage payments outside the plan. After he fell behind on those payments, he modified his plan to provide for mortgage and mortgage arrearages to be paid through the plan. The debtor completed his plan, the trustee filed her final report, and the bankruptcy court entered an order of discharge on November 15, 2017. Soon thereafter it came to light that the trustee had failed to pay the mortgage arrearage. Citing F.R.C.P. 60(b) and her own error, the trustee withdrew her notice of final payment and moved to reopen to administer additional assets. The case continued under the plan with the trustee making payments toward the mortgage and arrearage.

At the same time, however, the bank sent collection letters to the debtor demanding payment of the mortgage and arrearage. The debtor, therefore, resumed his payments outside the plan. As a result, with both the debtor and the trustee paying mortgage and arrearage, the bank found itself with excess money on his hands. It sought instruction from the court as to where to refund the overpayment. In an order dated April 18, 2019, the bankruptcy court withdrew its earlier order of discharge and ordered the bank to submit the overpayment to the trustee for application to the remaining balance on the arrearage with any excess going to the debtor. The debtor appealed. Read More

IRS Setoff Supersedes Exemption

Posted by NCBRC - June 1st, 2020

The IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund. Copley v. U.S.A., No. 18-2347 (4th Cir. May 12, 2020).

When the Copleys filed for chapter 7 bankruptcy they listed a debt to the IRS of over $13,500. They also claimed their anticipated tax refund as exempt under Virginia’s exemption for “money and debts due the householder not exceeding $5,000.” They subsequently filed their tax returns which showed that their withheld income exceeded the amount they owed by over $3,000. Instead of sending the Copleys a refund, however, the IRS notified them that it had used the overpayment to set off the pre-existing tax debt. The debtors filed a complaint in the bankruptcy court seeking an order requiring the IRS to turn over the tax refund to the debtors. The bankruptcy court found that the refund was part of the bankruptcy estate and that the exemption superseded IRS’s right to set-off. The district court affirmed. Read More

Creditor Had Affirmative Duty to Stop State Contempt Action

Posted by NCBRC - May 29th, 2020

“A creditor, who has put a collection effort into motion must affirmatively act to stop, stay, or hold the collection effort in abeyance or risk incurring liability once a bankruptcy commences.” Valentine v. Valentine, No. 19-40593, Adv. Proc. No. 19-4022 (E.D. Mo. Jan. 27, 2020).

Before he filed for chapter 7 relief, the debtor and the creditor were divorced. The divorce agreement obligated the debtor pay his ex-spouse domestic support. At some point after their divorce the debtor fell behind on his payments and sought to modify the support agreement. His efforts were unsuccessful and, in a state court contempt action, he was ordered to sell his residence to pay the domestic support debt. He failed to do so and continued to reside in the property. He filed for bankruptcy on February 1, 2019. Within days of filing his petition, on February 4, 2019, the state court held a second hearing for contempt due to his failure to sell his residence. Though his ex-spouse’s divorce counsel knew of the bankruptcy filing, he did not attempt to stop the contempt hearing. At the conclusion of the hearing, the state court found the debtor had filed for bankruptcy in order to remove the residence from the grasp of the creditor. The court issued an Order & Confinement holding in part: “[Debtor] to remain confined until he pays the sums due and owing in principal sum of $64,003.73 as of 1-22-18 or otherwise purges himself of contempt.” Pursuant to this order, the debtor was jailed for four days. On appeal, the state appellate court vacated the Order & Confinement finding that the debtor had no avenue for purging the contempt. Read More

Debtor May Pay Car Loan Outside Plan at 15% Interest Rate

Posted by NCBRC - May 20th, 2020

The bankruptcy court did not abuse its discretion in confirming, over the trustee’s objection, a plan under which the chapter 13 debtor would pay her car loan outside the plan at the contractual interest rate of 15%. McDonald v. Chambers (In re Chambers), No. 19-10421 (E.D. Mich. Feb. 26, 2020).

The debtor had three loans with Dort Federal Credit Union (DFCU): a car loan, a credit card balance of approximately $1,500 and a cash loan of $1,000. She and DFCU compromised the two non-car loans to $2,000 which she proposed to pay through her plan. In addition, DFCU consented to her proposal to pay the car loan outside the plan at the 15% contractual interest rate. The trustee objected on the grounds that the interest rate exceeded the “prime plus” rate sanctioned in Till v. SCS Credit Corp., 541 U.S. 465 (2004), and would result in the car creditor receiving more than other unsecured creditors. The bankruptcy court confirmed the plan and the trustee appealed. Read More

Local Rule Requires Automatic Submission of Tax Returns During Plan

Posted by NCBRC - May 14th, 2020

The Arizona District Court found that the District of Arizona’s Local Plan Form for chapter 13 bankruptcies under which all debtors must automatically submit their tax returns during the life of their plans does not conflict with the Code. Reichard v. Brown (In re Reichard), No. 19-2010 (D. Ariz. March 12, 2020) (unpublished).

In 2017, Fed. R. Bankr. P. 3015 was amended to provide that a chapter 13 debtor must use federal Official Form 113, unless there is a local form governing chapter 13 plans. Part 2.3 of the Official Form 113 offers three alternatives for dealing with a debtor’s tax returns during the course of his plan, the second of which requires the debtor to provide all tax returns filed during the plan to the trustee within 14 days of filing with the taxing authority. In response, the District of Arizona amended its own Local Plan Form to mirror that second alternative.

In this case, the trustee objected to the debtors’ proposed plan because it did not provide for automatically turning over their tax returns. The bankruptcy court sustained the objection and ordered the debtors to include the provision in their plan. They appealed to the district court. Read More