Refund of Mortgage Double Payment to Trustee

Posted by NCBRC - November 9, 2021

An overpayment resulting from the debtor’s mistakenly making mortgage payments while the chapter 13 trustee was making the same payments through the plan was properly remitted to the trustee for distribution rather than being returned to the debtor. White v. Regions Bank, No. 20-5355 (6th Cir. Sept. 30, 2021) (unpublished).

After the chapter 13 trustee filed her final report, and the bankruptcy court granted the debtor a discharge, the trustee realized she had failed to make payments toward the arrearage on the debtor’s mortgage as required by the terms of the plan. She moved to reopen. Without expressly withdrawing the order of discharge, the bankruptcy court reopened the case, and the trustee made the appropriate payments. In the meantime, however, the debtor had begun making those same payments outside the plan. As a result, the mortgagee Bank found itself holding overpayments. Over the debtor’s objection, the bankruptcy court ordered the Bank to turn the excess over to the trustee so she could pay the balance of the arrearage. In that order, the bankruptcy court also vacated the previous discharge.

On appeal, the district court affirmed. While the appeal was pending, the trustee completed payments under the plan, the remaining overpayment was returned to the debtor, and the bankruptcy court issued a second discharge.

The debtor appealed to the Sixth Circuit challenging the order vacating the first discharge and remitting the excess funds to the trustee.

As an initial matter, the court found that, because the bankruptcy court and trustee are expected to carry on with administration of the estate during appeal, it was not error for the bankruptcy court to issue the second discharge while the appeal was pending.

The court next addressed the appellees’ argument that the second discharge rendered the debtor’s appeal of the vacatur of the first discharge moot. The court found that because all parties were still before the court and knew of the appeal, equitable relief was available. It rejected the appellees’ argument that the debtor suffered no injury by reason of the vacatur order, finding that he claimed damage to his credit rating and lost job opportunities.

The court then turned to the merits to determine whether the bankruptcy erred in vacating the first discharge order. It found that Rule 60(b) permits a court to vacate a final judgment due to a mistake and rule 9024 exempts a case that has been reopened from the one-year limitation to Rule 60(b). The fact that the error was committed by the trustee was immaterial. Had the court known of the error it would not have issued the first discharge and, when it was made aware of the error, it was within its discretion to vacate it. The court further found that the debtor had notice and an opportunity to be heard, and in fact, agreed to the vacatur.

Finally, the debtor challenged the order that the overpayment should go to the trustee instead of to himself. The court found that the payments the debtor made directly to the Bank were not authorized and were therefore improperly distributed. Because the trustee has a fiduciary duty to the estate and to creditors, the court concluded that the trustee has implicit authority to recoup improperly distributed funds and the bankruptcy court did not err.

The court affirmed.

On October 13, 2021, the trustee filed a motion in the Sixth Circuit seeking sanctions against the debtor for filing a frivolous appeal.

White 6th Cir Sept 2021

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