NCBRC Editor

by on

Post-Petition Appreciation Not Part of Chapter 7 Estate upon Conversion

A Bankruptcy Appellate Panel for the Tenth Circuit found that the appreciation in value of the debtors’ homestead while in Chapter 13 belongs to the debtors upon conversion to Chapter 7. Rodriguez v. Barrera (In re Barrera), No. 20-3 (B.A.P. 10th Cir. Oct. 10, 2020) (unpublished).

When the debtors filed for bankruptcy, their homestead was valued at $396,606, encumbered by two liens totaling $336,209. They claimed their $75,000 homestead exemption, leaving no equity for the bankruptcy estate. During the course of their Chapter 13 bankruptcy, they sold the homestead for $520,000. They then converted to Chapter 7. The trustee sought turnover of the sale proceeds in excess of the debtors’ exemption. The bankruptcy court denied the trustee’s motion, holding that the value of the property consisted of the value it had on the original petition date. [Read more…] about Post-Petition Appreciation Not Part of Chapter 7 Estate upon Conversion

by on

IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate

Where the judicial lien against the debtor was fully satisfied before the debtor filed his bankruptcy petition, the transfer of funds from his IRA used to satisfy the lien was not an avoidable transfer under Section 547 or Section 522(f) or (h). Elliott v. Pacific Western Bank, No. 18-17421 (9th Cir. Aug. 12, 2020).

When the debtor defaulted on a loan held by Pacific Western Bank, PWB obtained a state court judgment against him and instituted a levy against the debtor’s employee retirement plan (IRA). Under California law, the funds in the debtor’s IRA were exempt only to the extent they were necessary for the debtor’s post-retirement support. The state court issued an executory lien against the debtor’s IRA, and PWB garnished the funds to cover the amount owed. Three months later, the debtor filed Chapter 7 bankruptcy. After he received his discharge, he filed an adversary complaint seeking to recover the funds garnished from his IRA under the theory that they were exempt under state law and Section 522(f) of the Bankruptcy Code. PWB argued that the funds were not exempt in the bankruptcy proceeding because the lien had been fully executed before the filing of the bankruptcy and, therefore, they did not become part of the bankruptcy estate. The bankruptcy court agreed. The district court affirmed. [Read more…] about IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate

by on

6th Circuit Clarifies Treatment of 401(k) Contributions in Chapter 13

Rejecting its own dictum in  Seafort v. Burden (In re Seafort), the Sixth Circuit held that a chapter 13 debtor’s post-petition voluntary contributions to an employer-sponsored retirement plan are not part of her disposable income so long as they are a continuation of pre-petition contributions. Davis v. Helbling (In re Davis), No. 19-3117 (6th Cir. June 1, 2020).

Well before she filed for bankruptcy, the debtor began making monthly contributions in the amount of $220.66 to her retirement account. When she filed for bankruptcy, she included those contributions in her schedule of expenses. The trustee objected to confirmation of the debtor’s proposed Chapter 13 plan on the basis that, because of the monthly contributions to her 401(k), she was not proposing to contribute all of her disposable income to the plan. Adhering to dictum in Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012), the bankruptcy court sustained the trustee’s objection. The debtor amended her plan to incorporate the 401(k) amount, and the bankruptcy court certified the case for direct appeal to the Sixth Circuit. [Read more…] about 6th Circuit Clarifies Treatment of 401(k) Contributions in Chapter 13

by on

Dischargeability of Sanctions Against Attorney

State law discovery sanctions owed to a non-governmental entity for compensatory purposes do not fall under Section 523(a)(7)’s exception to discharge for fines or penalties, and are therefore dischargeable. Costs related to the State Bar’s disciplinary actions are owed to a governmental agency, are punitive rather than compensatory in nature, and are therefore excepted from discharge. Where the debtor’s law license suspension was contingent upon her paying nondischargeable costs, the suspension was not discriminatory in violation of Section 525(b). Albert-Sheridan v. State Bar of Calif., No. 19-60023 (9th Cir. June 10, 2020). [Read more…] about Dischargeability of Sanctions Against Attorney

by on

Debtor’s Assumption of Lease Removes Property from Estate

Once the trustee declines to assume an ongoing lease, the leased property drops out of the estate and new debt based on the debtor’s failure to make payments on the lease is not an administrative expense under section 503(b). Microf LLC v. Cumbess, No. 19-12088 (11th Cir. June 3, 2020).

When he filed for Chapter 13 bankruptcy, the debtor’s plan provided that the arrears owed on an unexpired lease for an HVAC unit would be paid through the estate, and he would assume the ongoing lease, paying for it outside the plan. He failed to maintain the lease payments, and the HVAC creditor, Microf, sought to have the new arrears treated as administrative expenses by the bankruptcy court and given priority for repayment. The trustee objected. The bankruptcy court sustained the objection, finding that when the debtor assumed the lease, the property exited the bankruptcy estate and the new debt could not be deemed an administrative expense. The district court affirmed. [Read more…] about Debtor’s Assumption of Lease Removes Property from Estate

by on

UpRight Law Not Entirely Upright

The bankruptcy court did not abuse its discretion in imposing sanctions for violation of section 526(a) against UpRight law firm for statements in its Attorney Disclosures which were prohibited by an earlier settlement agreement and were therefore misleading. Law Solutions of Chicago, LLC v. Corbett, No. 19-11405 (11th Cir. Aug. 31, 2020). [Read more…] about UpRight Law Not Entirely Upright

by on

Challenge to Dewsnup Moving Up

When the debtors filed for Chapter 7 bankruptcy, they had two outstanding mortgages on their residence. The first was partially secured, and the second was fully underwater. The debtors filed an adversary complaint seeking to strip down the partially secured senior lien. The bankruptcy court, compelled by Dewsnup v.Timm, 502 U.S. 410 (1992) and Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), granted the creditor’s motion to dismiss. In re Vasquez, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020). Agreeing with the bankruptcy court’s “thorough analysis and conclusions,” the district court affirmed. In re Vasquez, No. 20-62 (E.D. N.C. Aug. 2020). [Read more…] about Challenge to Dewsnup Moving Up

by on

Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee

Funds fraudulently transferred during a Chapter 13 case remain in the debtor’s “constructive possession” and become part of the Chapter 7 estate upon conversion. Brown v. Barclay, No. 18-60029 (9th Cir. March 23, 2020).

The Chapter 13 debtor received an inheritance while in bankruptcy, which he divided between himself and his three brothers without notifying the Chapter 13 trustee. When the trustee learned of the unauthorized transfer, he moved the court to convert the debtor’s case to Chapter 7 as a sanction. Finding the debtor had acted in bad faith, the bankruptcy court ordered the conversion. The Chapter 7 trustee sought turnover of the funds from all the brothers. One of the brothers, the appellant in this case, fought turnover on the basis that because the debtor was not in control of the funds at the time of conversion, they did not become part of the chapter 7 estate. The bankruptcy court disagreed, and the bankruptcy appellate panel affirmed. [Read more…] about Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee

by on

First-In First-Out Applies to Commingled Account

The Bankruptcy Court correctly used the first-in, first-out approach to determine how much of a commingled account could be attributed to exempt funds. Tydings v. Reed (In re Tydings), No. 20-4057 (W.D. Mo. Sept. 3, 2020).

After her husband died, the Chapter 7 debtor received surviving widow’s social security benefits, which she deposited into her bank account, where she also deposited her weekly paychecks. Before receiving the social security payments, the debtor had $581.27 in her bank account. In the three months prior to her bankruptcy filing, the debtor deposited $15,171.57 in social security funds and $6,670.38 in wages into the account. During that same period, the debtor withdrew $13,461.07 from the account, leaving a balance of $8,939.15 on the petition date. The debtor claimed the entire balance in her account as exempt in bankruptcy. The trustee objected because not all the funds in the account were exempt. The trustee argued that the court should apply a first-in, first-out (FIFO) analysis, which would allow the debtor to exempt $3,981. The bankruptcy court sustained the objection, and the debtor appealed to the district court. [Read more…] about First-In First-Out Applies to Commingled Account

by on

Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated

Finding that it encroached on a below-median debtor’s substantive rights, the Fifth Circuit invalidated a local form Chapter 13 plan provision that required all debtors to turn over any tax refund in excess of $2,000. Diaz v. Viegelahn, No. 19-50982 (5th Cir. Aug. 26, 2020).

NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case. [Read more…] about Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated