Where the debtor did not discover the injury giving rise to a medical product liability class action suit until after her bankruptcy was closed, the settlement proceeds from that cause of action were not property of the estate even though the debtor underwent the medical procedure while the bankruptcy was still pending. In re Purcell, No. 08-40224 (Bankr. D. Kan. July 19, 2017). [Read more…] about Discovery Rule Applies to Accrual of Cause of Action
Mortgage Deficiency Judgment Liens Are Avoidable
Section 522(f)(2)(C) does not create an exception to lien avoidance for mortgage deficiency judgment liens. In re Pace, No.16-8036 (B.A.P. 6th Cir. June 20, 2017).
Antoinette Pace filed a Chapter 13 petition in which she scheduled her residence with a value of $147,630 and claimed a homestead exemption for $132,900. At that time, Farmers National Bank (FNB) held two judicial liens resulting from post-foreclosure deficiency judgments (though the two liens appeared duplicative, the bankruptcy court and the BAP treated them as separate liens). There were also two liens on the house held by Midland Credit Management (MCM) and Matthew Giannini, as well as a county lien against the property for unpaid real estate taxes. Ms. Pace converted to Chapter 7 and moved to avoid the non-tax liens as impairing her homestead exemption. The motion was unopposed. The bankruptcy court granted the motion to avoid the MCM and Giannini liens but denied the motion to avoid the liens held by FNB.
On appeal, the Bankruptcy Appellate Panel began by rejecting Ms. Pace’s argument that because her motion was uncontested it should have been granted with respect to all the liens. The court found that a movant has the burden of demonstrating the merits of her motion and a court has the authority and obligation to assess its merits without regard to whether it is opposed.
Ms. Pace next argued that FNB’s liens were avoidable under section 522(f)(1) in accordance with the specification in 522(f)(2)(A) that a lien impairs an exemption when the sum of all liens plus the amount of the exemption “exceeds the value that the debtor’s interest in the property would have in the absence of any liens.” It was undisputed that, based on this calculation alone, Ms. Pace would have been entitled to judgment in her favor.
The bankruptcy court, however, interpreted section 522(f)(2)(C), which provides that “[t]his paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure,” as an exception to the larger avoidance provision and found that FNB’s liens were not avoidable.
The BAP disagreed, noting that, while the Sixth Circuit has not addressed the issue, the majority of courts have found that deficiency judgments are not “judgment[s] arising out of a mortgage foreclosure.” The panel walked through the various analyses courts have used to reach this conclusion, beginning with courts that have found that deficiency judgments are incidental to the judgment of foreclosure to which section 522(f)(2)(C) actually applies. Other courts have examined state foreclosure laws to determine that deficiency judgments are based on the promissory note rather than the security interest and do not, therefore, fit within the meaning of the avoidance exception.
Still other courts, notably the First Circuit in Banknorth, N.A. v. Hart (In re Hart), 328 F.3d 45 (1st Cir. 2003), have found that the text of section 522(f)(2)(C) does not create an exception to avoidance at all, and that, therefore, resort to state law to determine the nature of a deficiency judgment is unnecessary. The Hart court reasoned that section 522(f)(1) generally authorizes avoidance of judicial liens that impair exemptions. Section 522(f)(2)(A) provides, for “purposes of this subsection,” a method for determining whether a lien is subject to avoidance under section 522(f)(1). Subparagraph (f)(2)(C), however, is limited to “this paragraph,” and serves to further define the terms within paragraph (f)(2) rather than carve out a separate exception to the lien avoidance provision. The Hart court found that section 522(f)(2)(C) “clarifies that the entry of a foreclosure judgment does not convert a consensual mortgage into a judicial lien which may be avoided.” A deficiency judgment lien, on the other hand, is a judgment lien like any other for purposes of avoidance.
The BAP agreed with and adopted the reasoning set forth by the First Circuit in Hart. The panel reasoned further that had Congress intended section 522(f)(2)(C) to create an exception to avoidance, it would have made section 522(f)(1) subject to paragraph (2)(C), as it did with the exception set forth in paragraph (3). The panel concluded that “522(f)(2)(C) can and must be applied in accordance with its plain meaning; it does not preclude avoidance of mortgage deficiency judgment liens.”
DOR May Not Collect Child Support Arrearage Outside Plan
Where the debtor’s plan provided for repayment of child support arrearage inside the plan, the Florida Department of Revenue was precluded from post-confirmation garnishing of the debtor’s wages in connection with that debt. Dempsey v. Fla Dept. of Rev., No. 16-328 (E.D. Tenn. June 20, 2017).
Kenneth Dempsey’s confirmed chapter 13 plan provided, “Miami Dade Child Support – Arrearage Child Support to be paid in full inside the plan.” Notwithstanding its knowledge of Mr. Dempsey’s bankruptcy and his treatment of the arrearage in his plan, the Florida Department of Revenue began garnishing Mr. Dempsey’s wages. Mr. Dempsey filed a motion for contempt. The bankruptcy court ordered the FDOR to cease its garnishments, refund any amounts it had collected but not yet disbursed, and reduce its claim in the bankruptcy by the amount it had garnished and disbursed. It declined to find the FDOR in contempt, however. The parties filed cross-appeals. [Read more…] about DOR May Not Collect Child Support Arrearage Outside Plan
Automatic Stay Does Not Preclude Criminal Restitution Collection
The automatic stay does not prevent the government from collecting criminal restitution under the Mandatory Victim’s Restitution Act, 18 U.S.C. § 3613(a). Partida v. U.S. Dept. of Justice, No.15-60045 (9th Cir. July 7, 2017).
Deborah Partida was convicted of embezzlement and theft of labor union funds. She filed for Chapter 13 bankruptcy owing over $200,000 in court-ordered restitution for the crime. When the government offset the debt against her current income, she moved to hold it in contempt for a stay violation. The bankruptcy court denied the motion and the Bankruptcy Appellate Panel affirmed. Partida v. United States (In re Partida), 531 B.R. 811 (B.A.P. 9th Cir. 2015). [Read more…] about Automatic Stay Does Not Preclude Criminal Restitution Collection
Debtors Have Standing to Seek Abandonment
The debtors were “parties in interest” for purposes of establishing standing to compel abandonment of their residential property. Jahn v. Burke (In re Burke), No. 16-6603 (6th Cir. July 14, 2017).
After Philip and Nekolia Burke filed Chapter 7 bankruptcy, the trustee sought to evict them from their residence and sell the property for the benefit of creditors. The trustee tendered a check to the Burkes representing their homestead exemption. The Burkes refused the money and moved to compel the trustee to abandon the property as being of inconsequential value to the bankruptcy estate. In the alternative, the Burkes moved to convert to chapter 13. At the evidentiary hearing, the parties offered competing valuations with the Burkes presenting testimony of two appraisers that the residence had a value of approximately $108,000 and was security for a mortgage for $91,581. The trustee countered with the testimony of a realtor, a home inspector, and himself that the value was approximately $200.000. The bankruptcy court resolved the valuation issue in favor of the Burkes and granted the motion to compel abandonment. The district court affirmed. [Read more…] about Debtors Have Standing to Seek Abandonment
Deadline for Revocation of Discharge Not Jurisdictional
The one-year deadline for seeking revocation of a discharge order is not jurisdictional and may therefore be waived. Weil v. Elliott (In re Elliott), No. 16-55359 (9th Cir. June 14, 2017).
When Edward Elliott filed his Chapter 7 bankruptcy petition he failed to mention one important asset: his home. He received a discharge under section 727(a). Fifteen months later, when the trustee discovered the fraudulent nondisclosure, she filed an adversary complaint seeking an order vacating the discharge under section 727(d)(1). Section 727(e)(1) permits a trustee to seek revocation of discharge within one year of the discharge order. Mr. Elliott did not raise the issue of untimeliness in his response to the adversary complaint. The bankruptcy court revoked his discharge. The Bankruptcy Appellate Panel, however, found the one-year filing deadline to be jurisdictional and reversed. Elliott v. Weil (In re Elliott), 529 B.R. 747, 755 (B.A.P. 9th Cir. 2015). On remand, the bankruptcy court dismissed the adversary complaint for lack of jurisdiction. The trustee was permitted direct appeal to the Ninth Circuit. [Read more…] about Deadline for Revocation of Discharge Not Jurisdictional
Section 707(b) Applies to Converted Cases
Section 707(b) applies to a case converted to chapter 7 from chapter 13. Pollitzer v. Gebhardt, No. 16-11506 (11th Cir. June 27, 2017).
Stratton Pollitzer contributed to his chapter 13 plan for two years before converting under section 1307 to chapter 7. Upon conversion, the trustee moved the court to dismiss the case as abusive under section 707(b) because Mr. Pollitzer’s income was sufficient to significantly repay his unsecured creditors. Conceding that his petition failed the means test, Mr. Pollitzer took the position that because his case was originally filed as a chapter 13, section 707(b) was inapplicable. Both the bankruptcy court and the district court concluded that section 707(b) applies to converted cases. The Eleventh Circuit agreed. [Read more…] about Section 707(b) Applies to Converted Cases
Direct Payments to Mortgagee are “Payments under the Plan”
“A Chapter 13 debtor’s direct payments to a secured creditor under a ‘cure and maintain’ plan are ‘payments under the plan’ for purposes of § 1328(a), and a debtor who fails to make such payments is not entitled to a discharge under 11 U.S.C. § 1328(a).” In re Coughlin, No. 11-76202 and In re Sangamaya, No. 12-71109 (Bankr. E.D. N.Y. June 15, 2017). [Read more…] about Direct Payments to Mortgagee are “Payments under the Plan”
Some Federal Student Loans Cancelled in New Jersey
Approximately 2,200 students who enrolled in any one of five schools operated by Corinthian Colleges, Inc., a New Jersey for-profit entity, are eligible to have their federal student loans canceled. Corinthian Colleges ceased operations in 2015 under scrutiny by government entities into fraudulent conduct including misrepresentations made between 2010 and 2014 about post-graduate employment rates, the transferability of credits, and other issues. The schools affected by the loan cancellation are Everest Institute, Everest College, Everest University, Heald College, and Wyotech. Students who have their federal loans canceled will make no further payments and will receive a refund of payments already made. The loan cancellation was announced on May 22, 2017, in a Press Release issued by Attorney General Christopher S. Porrino’s Office. The Attorney General’s office is sending outreach letters and application forms to those students who may be eligible for the loan cancellation.
Equitable Estoppel vs. Right to Amend Schedules
Where new facts arose to support a claim for homestead exemption and the debtor did not make any misrepresentation upon which the trustee reasonably relied, the bankruptcy court erred in disallowing the exemption based on equitable estoppel. Lua v. Miller (In re Lua), No. 15-56814 (9th Cir. June 27, 2017) (unpublished).
Rosalva Lua claimed a homestead exemption in her initial bankruptcy schedules, removed the claim in her First Amended Schedules, and reasserted it in her Second Amended Schedules approximately three years later. The bankruptcy court sustained the trustee’s objection to the exemption based on equitable estoppel. The district court affirmed. [Read more…] about Equitable Estoppel vs. Right to Amend Schedules