Type: Amicus
Date: April 10, 2020
Description: Whether section 1129(b)(2)(B)(ii) requires debtors to offer new value for exempt property.
Result: Pending.
Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds
The bankruptcy court properly reduced the debtor’s homestead exemption and imposed a constructive trust on the property where the debtor paid off her mortgage using funds from the sale of a vehicle she did not own and to which the creditor had the right of possession. Graybill v. Thomas (In re Bentley), No. 19-14758 (11th Cir. Apr. 22, 2020) (unpublished).
This case involved a 1930 Cord Phaeton automobile. Originally, the car was owned by the debtor’s son, Lynford Bentley. Dr. Susan Kolb lent Lynford $50,000, which loan was secured by the car. Lynford stopped paying on the loan, and then he died. Dr. Kolb sued Lynford’s girlfriend to obtain the car or its value. But Lynford’s mother, and the debtor in this case, Catherine Bentley, took possession of the car and removed it from Georgia to Florida. A Georgia judge issued an order giving Dr. Kolb the right to possession of the car, and Dr. Kolb informed Catherine of that order. Notwithstanding her knowledge of Dr. Kolb’s right to possession of the vehicle, Catherine sold it at auction, clearing $112,947.81. She used the majority of the funds to pay off her mortgage. Dr. Kolb sued Ms. Bentley for fraudulent transfer. Ms. Bentley filed for Chapter 7 bankruptcy and claimed a homestead exemption under Florida law.
Finding that Ms. Bentley never owned the vehicle and therefore had no right to the funds she used to pay off her mortgage, the bankruptcy court sustained the trustee’s objection to the exemption claim, reducing the amount of the exemption by $112,947.81. The bankruptcy court also overruled the debtor’s objection to Dr. Kolb’s claim and imposed a constructive trust on the debtor’s homestead property. On appeal, the district court affirmed. [Read more…] about Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds
IRA and 401(k) Obtained Through Divorce Not Exempt
Incorrectly relying on the decision in Clark v. Rameker, the Eighth Circuit found that the chapter 7 debtor was not entitled to exempt funds in his ex-spouse’s IRA and 401(k), which he obtained through a dissolution agreement but which had not been transferred to his name at the time of his bankruptcy petition. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), No. 18-3415 (8th Cir. Feb. 7, 2020).
The debtor acquired his ex-wife’s IRA and half of her 401K in a dissolution. When the debtor failed to pay his divorce attorney’s fees, his lawyer obtained an order from the court placing an attorney’s lien on the funds in the IRA and the 401K. The lien exceeded the value of the accounts. Six months later, Mr. Lerbakken filed for Chapter 7 bankruptcy, seeking to exempt the two accounts under section 522(b)(3)(C). At the time of his petition, he had not filed a Qualified Domestic Relations Order (QDRO), nor had the accounts been transferred to his name. Upon objection by the divorce attorney, the court found the two accounts were not “retirement funds” and disallowed the exemption. The BAP affirmed. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), 590 B.R. 895 (B.A.P. 8th Cir. 2018). [Read more…] about IRA and 401(k) Obtained Through Divorce Not Exempt
Illinois Workers’ Comp Settlement Proceeds Exempt
Answering a question certified to it from the Seventh Circuit Court of Appeals, the Illinois Supreme Court held that, under Illinois law, “the proceeds of a workers’ compensation settlement are still exempt from the claims of medical-care providers who treated the illness or injury associated with that settlement,” notwithstanding 2005 amendments to the Workers’ Compensation Act. In re Hernandez, 2020 IL 124661 (Sup. Ct. Ill. Jan. 24, 2020). The Seventh Circuit found “that authoritative holding of the state supreme court is dispositive. The proceeds of Hernandez’s workers’ compensation settlement are exempt from the claims of the healthcare providers who treated her workplace injuries.” In re Hernandez, No. 18-1789 (7th Cir. Feb. 11, 2020).
Elena Hernandez filed for chapter 7 bankruptcy owing over $120,000.00 in medical bills incurred for treatment of work injuries. In her bankruptcy schedules, she listed a pending workers’ compensation claim. Shortly after filing her petition, and without consulting the bankruptcy trustee, Ms. Hernandez settled the workers’ compensation claim with her employer for approximately $30,000.00. Ms. Hernandez maintained that, under the state Workers’ Compensation Act (WCA), the settlement was exempt from liability to creditors. Her medical creditors objected to the exemption, arguing that 2005 amendments to the Illinois exemption law had made such settlements accessible to health care providers. The creditors also argued that the settlement was the product of fraud.
The bankruptcy court sustained the objection on process grounds rather than on application of the Illinois exemption. Affirming, the district court relied on its interpretation of the 2005 amendments to the state WCA. On appeal to the Seventh Circuit (case no. 18-1789), that court determined that both sides offered seemingly valid interpretations of the exemption statute. It certified the question to the state supreme court. [Read more…] about Illinois Workers’ Comp Settlement Proceeds Exempt
Fire-Damaged Home Valued as of Pre-Restoration Petition Date
The chapter 7 debtor was entitled to avoid a judicial lien that impaired her homestead exemption, where the home, which had been damaged by fire pre-petition, was valued as of the petition date rather than after post-petition restoration had enhanced the residence’s value. Waltrip v. Sawyers (In re Sawyers), No. 19-6016 (B.A.P. 8th Cir. Dec. 19, 2019).
Before filing for bankruptcy, Ruby Sawyers’s home was damaged by fire, and she received insurance proceeds for over $132,000 for its restoration. At the time of her petition, she had not yet restored the home, and it was valued at $3,000 – $6,000. She claimed a homestead exemption on 100% of the fair market value of the residence to the maximum exemption of $15,000. After the fire and before the bankruptcy petition, David Waltrip and the debtor entered into a consent judgment for $256,739.31, which resulted in a lien against the property. The trustee made no distributions and abandoned all assets. The case was closed. Using the insurance proceeds, Ms. Sawyers then made improvements to the residence, increasing its value to $95,000 – $103,000. The judgment creditor instituted a sheriff’s sale of the property. Ms. Sawyers reopened her bankruptcy and moved to avoid the judgment lien as impairing her homestead exemption. Mr. Waltrip objected. Using a formula under which the value of the property was subtracted from the sum of the liens and the exemption amount, the bankruptcy court found that the judicial lien impaired Ms. Sawyer’s homestead exemption and granted her motion for summary judgment to avoid the lien in full. The creditor appealed to the bankruptcy appellate panel for the Eighth Circuit. [Read more…] about Fire-Damaged Home Valued as of Pre-Restoration Petition Date
State Exemption Need Not Specify that it Applies in Bankruptcy
Reversing the courts below, the Seventh Circuit found that unpaid vacation wages that were exempt under state law were also exempt under bankruptcy law notwithstanding the lack of explicit reference to bankruptcy in the state statute. In re Burciaga, No. 19-2246 (7th Cir. Dec. 13, 2019).
The debtor filed for bankruptcy shortly after losing his job and at a time when his employer owed him $24,000 in unused vacation pay. The debtor sought to exempt 85% of the unpaid vacation time under an Illinois law that allows creditors to reach only 15% of unpaid wages. It was undisputed that Illinois law treats vacation time as wages. The trustee objected to the exemption arguing that there was no suggestion that the state legislature intended the exemption to apply in the federal bankruptcy context. The bankruptcy court sustained the objection, and the district court, agreeing with the trustee’s position, affirmed. [Read more…] about State Exemption Need Not Specify that it Applies in Bankruptcy
Rhode Island Exempts Inherited IRAs
In answer to a question certified by the Bankruptcy Court for the District of Rhode Island, the Rhode Island Supreme Court determined that “under the plain and ordinary meaning of the language in § 9-26-4(11) and § 408, an inherited IRA is defined under § 408, and it is, therefore, exempt under § 9-26-4(11).” In re Kapsinow, No. 2018-94-M.P. (R.I. Dec. 11, 2019) (Bankr. D. R.I. 16-11859).
Chapter 7 debtor, Lynette Kapsinow, inherited an IRA from her mother which she sought to exempt from her bankruptcy estate under the Rhode Island exemption laws. It was undisputed that the account when held by the debtor’s mother was a qualified retirement account under 408 of the Internal Revenue Code. Once her mother died, Ms. Kapsinow had access to the funds without penalty, could not make contributions to the account, and was required to take minimum distributions. [Read more…] about Rhode Island Exempts Inherited IRAs
Court May Not Deny Amendment to Exemptions Based on Bad Faith
Based on Law v. Siegel the bankruptcy court properly overruled the trustee’s objection to the debtor’s amendment to his exemptions without regard to whether the debtor concealed assets in bad faith. Rucker v. Belew (In re Belew), No. 18-3045 (8th Cir. Nov. 26, 2019).
In his bankruptcy schedules, the debtor initially failed to disclose that he had $30,000 in cash in a home safe. When the trustee learned of the cash, the debtor sought to amend his exemptions to exempt the money. The trustee objected because the debtor had intentionally concealed the asset and was therefore precluded from amending based on bad faith. The bankruptcy court overruled the objection and the BAP affirmed. [Read more…] about Court May Not Deny Amendment to Exemptions Based on Bad Faith
Burciaga v. Moglia (In re Burciaga), No. 19-2246 (7th Cir.)
Type: Amicus
Date: September 17, 2019
Description: Whether property of a debtor is exempt under 522(b)(3)(A) if applicable state law provides that the property is not subject to any collection action.
Result: Pending
Vanishing Homestead Exemption Reappears in Bankruptcy Despite Conversion
The District Court for the District of Maine adopted the “complete snap-shot” rule for treatment of a homestead exemption attached to property the debtor owned at the time of his chapter 13 petition and sold during the pendency of that case, even though he failed to reinvest the proceeds within six months as required by state exemption law, and converted his case to chapter 7. Hull v. Rockwell, No. 18-385 (D. Me. Sept. 24, 2019).
When Jeffrey Rockwell filed his chapter 13 petition in August, 2015, he claimed an exemption on his residence for the maximum amount of $47,500. During the course of his chapter 13 plan, in March, 2017, Mr. Rockwell sold the property and contributed the proceeds over and above the amount of his exemption to his plan. In August, 2017, Mr. Rockwell converted his case to chapter 7. He received a discharge in November, 2017. In December, 2017, the trustee filed an objection to Mr. Rockwell’s homestead exemption because he had not reinvested the funds in a new homestead within six months as required by state exemption law. After a hearing, the bankruptcy court overruled the objection. [Read more…] about Vanishing Homestead Exemption Reappears in Bankruptcy Despite Conversion