National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Chapter 03 – Case Administration (Sections 301 to 366)

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The Ninth Circuit Considers Whether the Social Security Administration Can Recoup Overpayments Without Violating the Discharge Injunction

In In re Cooper, Case No. 24-1084 (9th Cir. 2024) the Ninth Circuit is determining whether the Ninth Circuit B.A.P. erred when it held that the Social Security Administration (SSA) could recoup an overpayment of Social Security Disability Insurance (SSDI) benefits from Darrin Cooper’s ongoing SSDI payments, without violating the discharge injunction in bankruptcy.

Darrin Cooper was overpaid SSDI benefits due to an administrative error, receiving $73,112.90 more than he was entitled to because the SSA did not account for his concurrent workers’ compensation benefits. After filing for Chapter 7 bankruptcy and receiving a discharge, Cooper discovered the overpayment and the SSA began deducting the overpaid amount from his ongoing SSDI payments.

The B.A.P.’s legal analysis focused on the equitable doctrine of recoupment, which allows a creditor to offset a debtor’s claim with a counterclaim arising from the same transaction. The court applied the “logical relationship test” to determine whether the overpayment and ongoing SSDI payments arose from the same transaction. The court found that both the overpayment and the ongoing payments stemmed from Cooper’s entitlement to SSDI benefits, establishing a strong logical relationship. Therefore, the SSA’s actions did not violate the discharge injunction. The court distinguished this case from others where recoupment was denied, such as in In re Madigan, by emphasizing that Cooper’s SSDI payments did not involve separate disability periods or different reimbursement agreements. Instead, Cooper’s ongoing SSDI entitlement and the overpayment were part of a continuous disability claim, thereby satisfying the same transaction requirement. The court also noted that Cooper did not seek available remedies under the Social Security Act, such as requesting a waiver or appealing the overpayment decision, which could have addressed his financial concerns.

Both NCBRC and NACBA submitted an amicus brief in support of the Debtor.

In re Cooper – Appellants Brief

In re Cooper – NCBRC-NACBA Amicus Brief

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The 8th Circuit Rules That Post-Petition Pre-Conversion Increase In Equity in Real Estate Is Part of the Converted Chapter 7 Estate

The rise in equity in the appellant’s residence after filing for bankruptcy but before conversion became part of her bankruptcy estate after conversion, as outlined in 11 U.S.C.S § 348(f)(1)(A). This occurred because the residence was already part of the appellant’s estate, and she maintained possession and control over it at the time of filing for bankruptcy.

FACTS

“On August 19, 2020, Machele Goetz filed a chapter 13 bankruptcy petition and plan. She owned a residence worth $130,000 and claimed a $15,000 homestead exemption under Missouri law. Freedom Mortgage held a $107,460.54 lien against the residence. It is undisputed that had the trustee liquidated the residence on the date of the petition, the estate would have received nothing net of the exemption, the lien, and the sale expenses.

“Later, on April 5, 2022, the bankruptcy court granted Goetz’s motion to convert her case from chapter 13 to chapter 7. Between the chapter 13 filing and the date of the conversion order, Goetz’s residence had increased in value by $75,000, and she had paid down a further $960.54 on the mortgage. Had the trustee liquidated the residence on the date of conversion, more than $62,000 net of the exemption, the lien, and the sale expenses would have been produced.

“After realizing that the trustee might sell the residence given the change in value, Goetz moved for the bankruptcy court to compel the trustee to abandon it. Goetz argued that the residence was of “inconsequential value and benefit to the estate” under 11 U.S.C. § 554(b), asserting that the post-petition, pre-conversion increase in equity must be excluded from the calculation of her residence’s value to the estate. The trustee resisted Goetz’s motion, arguing that, under 11 U.S.C. § 348(f), the bankruptcy estate in a converted case includes post-petition, pre-conversion increase in equity, meaning Goetz’s residence was still of value to the estate.”

ANALYSIS

Under 11 U.S.C. § 348(f)(1)(A),” the property of the estate in Goetz’s converted chapter 7 case consists of the property of the estate as of the date she filed her chapter 13 bankruptcy petition (August 19, 2020) that remained in her possession as of the date of conversion from chapter 13 to chapter 7 (April 5, 2022). …

“Goetz’s residence is property of the converted estate because she held “legal or equitable interest[]” in it as of August 19, 2020, id. § 541(a)(1), and because it remained in her possession when she converted her case to chapter 7 on April 5, 2022, id. § 348(f)(1)(A). The question is whether the post-petition, pre-conversion increase in equity in that residence is also part of the converted estate. … We start with the first half of the definition of property of the converted estate: whether the property in question was “property of the estate, as of the date of filing of the petition.” 11 U.S.C. § 348(f)(1)(A). …

Property of the Estate

“Property of the estate at “[t]he commencement of a case” includes “[p]roceeds . . . of or from property of the estate.” Id. § 541(a)(6). A voluntary case in bankruptcy commences when the petition is filed. Id. § 301(a); see also id. § 348(a) (“Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition [or] the commencement of the case . . . .”).”

Proceeds

“But the Code does not define “proceeds” or “equity,” so “we may look to dictionaries . . . to determine the meaning.” Schwab v. Reilly, 560 U.S. 770, 783, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (2010); see also Franklin Cal. Tax-Free Tr., 579 U.S. at 126 (looking to Black’s Law Dictionary and the Oxford English Dictionary for the meaning of “define”). Proceeds are “[t]he value [*6] of land, goods, or investments when converted into money; the amount of money received from a sale.” Proceeds, Black’s Law Dictionary (11th ed. 2019). HN6 Equity is “[t]he amount by which the value of or an interest in property exceeds secured claims or liens; the difference between the value of the property and all encumbrances on it.” Equity, Black’s Law Dictionary (11th ed. 2019). An encumbrance is “[a] claim or liability that is attached to property or some other right . . . that may lessen its value, such as a lien or mortgage.” Encumbrance, Black’s Law Dictionary (11th ed. 2019).

“The post-petition, pre-conversion increase in equity in Goetz’s residence—i.e. the difference between its value and the homestead exemption and lien—is therefore proceeds “from property of the estate,” 11 U.S.C. § 541(a) (emphasis added), because it is the amount of money that the estate would receive from a sale of the residence before sale expenses. Cf. In re Potter, 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999) (“Nothing in Section 541 suggests that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.”). Accordingly, the post-petition, pre-conversion increase in equity in Goetz’s residence was property [*7] of the estate at “[t]he commencement of [the] case.” 11 U.S.C. § 541(a).”

NCBRC and NACBA submitted amicus briefs in support of the debtor both at the 8th Circuit and the 8th Circuit B.A.P.

In re Goetz

NCBRC-NACBA Amicus Brief – Goetz

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The Supreme Court Rules Native American Tribes Do Not Have Sovereign Immunity From The Bankruptcy Code.

On June 15, 2023, the court ruled that Native American tribes are subject to the automatic stay and discharge injunction of the Bankruptcy Code.

“We conclude that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity.  Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision plainly applies to them as well.”

In an 8-1 decision (J. Gorsuch dissenting) in Lac DU Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227, 2023 U.S. LEXIS 2544 (June 15, 2023), the court held that the term “governmental unit” found in 11 U.S.C. § 101(27) includes Native American tribes.  As such, Native American tribes are included in the waiver of sovereign immunity under 11 U.S.C. § 106.

NACBA and NCBRC submitted an amici curiae brief in support of the Debtor along with Legal Aid Chicago and the Hon. Judith Fitzgerald, Hon. Joan Feeney, Hon. Phillip Shefferly, Hon. Eugene Wedoff, Hon. Steven Rhodes and the Hon. Carol Kenner.  The brief was submitted by Daniel J. Bussel of KTBS Law LLP and G. Eric Brunstad, Jr. of Dechert LLP.

Factual and Procedural Background

The creditor, federally recognized Tribe Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) through its wholly owned business entity, Lendgreen, lent the Debtor, Brian Coughlin, $1,100 in the form of a high-interest, short-term loan.

Coughlin filed for Chapter 13 bankruptcy before he fully repaid the loan. Lendgreen continued its efforts to collect on his debt, even after it was reminded of the pending bankruptcy petition.

Coughlin eventually filed a motion in Bankruptcy Court, seeking to have the stay enforced against Lendgreen, its parent corporations, and the Band (collectively, petitioners). Coughlin also sought damages for emotional distress, along with costs and attorney’s fees.

The Band moved to dismiss. They argued that the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding, as the Band and its subsidiaries enjoyed tribal sovereign immunity from suit. The Bankruptcy Court agreed; it held that the suit had to be dismissed because the Bankruptcy Code did not clearly express Congress’s intent to abrogate tribal sovereign immunity.

In a divided opinion, the Court of Appeals for the First Circuit reversed, concluding that the Bankruptcy Code unequivocally strips tribes of their immunity. In re Coughlin, 33 F. 4th 600, 603-604 (2022). In so holding, the First Circuit deepened a split among the Courts of Appeals on this question. Compare Krystal Energy Co. v. Navajo Nation, 357 F. 3d 1055, 1061 (CA9 2004) (holding that the Bankruptcy Code abrogates tribal sovereign immunity), with In re Greektown Holdings, LLC, 917 F. 3d 451, 460-461 (CA6 2019) (concluding the reverse).

Analysis

“Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) is a federally recognized Indian tribe. One of the Bands businesses, Lendgreen, extended respondent Brian Coughlin a payday loan. Shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, triggering an automatic stay under the Bankruptcy Code against further collection efforts by his creditors. But Lendgreen allegedly continued attempting to collect Coughlin’s debt. Coughlin filed a motion in the Bankruptcy Court to enforce the automatic stay and recover damages. The Bankruptcy Court dismissed the suit on tribal sovereign immunity grounds. The First Circuit reversed, concluding that the Code unequivocally strips tribes of their immunity. 33 F. 4th 600, 603.

“As an initial matter, the definition of governmental unit exudes comprehensiveness from beginning to end. Congress has rattled off a long list of governments that vary in geographic location, size, and nature. 101(27) (including municipalities, districts, Territories, Commonwealths, States, the United States, and foreign states). The provision then proceeds to capture subdivisions and components of every government within that list. Ibid. (accounting for any department, agency, or instrumentality of the United States …, a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state). And it concludes with a broad catchall phrase, sweeping in other foreign or domestic government[s]. Ibid….

“The pairing of foreign with domestic is of a piece with those other common expressions. For instance, if someone asks you to identify car manufacturers, foreign or domestic, your task is to name any manufacturers that come to mind, without particular regard to where exactly the cars are made or the location of the company’s headquarters. Similarly, at the start of each Congress, a cadre of newly elected officials solemnly swear to support and defend the Constitution of the United States against all enemies, foreign and domestic. 5 U. S. C. 3331. That oath which each Member of Congress who enacted the Bankruptcy Code took indisputably pertains to enemies anywhere in the world. Accordingly, we find that, by coupling foreign and domestic together, and placing the pair at the end of an extensive list, Congress unmistakably intended to cover all governments in 101(27)s definition, whatever their location, nature, or type.

“It is also significant that the abrogation of sovereign immunity in 106(a) plainly applies to all governmental unit[s] as defined by 101(27). Congress did not cherry-pick certain governments from 101(27)’s capacious lists and only abrogated immunity with respect toSection those it had so selected. Nor did Congress suggest that, for purposes of 106(a)s abrogation of sovereign immunity, some types of governments should be treated differently than others. Instead, Congress categorically abrogated the sovereign immunity of any governmental unit that might attempt to assert it. …

“Reading the statute to carve out a subset of governments from the definition of governmental unit, as petitioners view of the statute would require, risks upending the policy choices that the Code embodies in this regard. That is, despite the fact that the Code generally subjects all creditors (including governmental units) to certain overarching requirements, under petitioners reading, some government creditors would be immune from key enforcement proceedings while others would face penalties for their noncompliance. And while the Code is finely tuned to accommodate essential governmental functions (like tax administration and regulation) as a general matter, petitioners would have us find that certain governments are excluded from those provisions reach, notwithstanding the fact that they engage in tax and regulatory activities too. There is no indication that Congress meant to categorically exclude certain governments from these provisions enforcement mechanisms and exceptions, let alone in such an anomalous manner. Cf. Law v. Siegel, 571 U. S. 415, 424 (2014) (declining to read into the Code an exception Congress did not include in its meticulous and carefully calibrated scheme). …

“Putting the pieces together, our analysis of the question whether the Code abrogates the sovereign immunity of federally recognized tribes is remarkably straightforward. The Code unequivocally abrogates the sovereign immunity of all governments, categorically. Tribes are indisputably governments. Therefore, 106(a) unmistakably abrogates their sovereign immunity too. …

Conclusion

“We find that the First Circuit correctly concluded that the Bankruptcy Code unambiguously abrogates tribal sovereign immunity. Therefore, the decision below is affirmed.”

In re Coughlin

Coughlin NACBA Amicus SCt March 2023

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Too Little, Too Late in Motion to Reopen

The bankruptcy court did not abuse its discretion in declining to reopen the debtor’s case sixteen years after its closure to administer an asset the debtor did not own until after his bankruptcy case closed. Gamez v. Lopez (In re Lopez), No. 22-2379 (E.D.N.Y. March 9, 2023).

In the debtor’s Chapter 7 bankruptcy, he did not list any real property on his schedules, nor did he list Mr. Gamez, the appellant in this appeal, as a creditor. In January 2006, the debtor received his discharge and the case was closed with no distribution. In November 2006, Mr. Gamez deeded the real property to himself and Lopez, each with 50% interest. The debtor had been living in this property at the time of his petition. In 2010, the debtor initiated a partition action concerning the property. That case was settled in 2015. Litigation concerning the settlement agreement kept the case before the state court in the following years.

In 2021, Mr. Gamez moved to reopen the debtor’s bankruptcy case to allow him to seek a stay of all state court proceedings and to have the trustee administer the property. The bankruptcy court declined to reopen the case.

Section 350(b) permits a bankruptcy court, at its discretion, to reopen a bankruptcy case “for cause.” Factors the district court found relevant in this appeal included: 1) the length of time the case was closed; 2) whether a state court would be the appropriate forum; 3) the extent of the benefit to the debtor by reopening; 4) whether it was clear at the outset that no relief would be forthcoming to the debtor by granting the motion, and 5) “the availability of relief in another forum [and] whether the estate has been fully administered.”

Applying these factors, the district court found the bankruptcy court did not abuse its discretion in denying Mr. Gamez’s motion. The court noted that the motion came over sixteen years after the case was closed. More significantly, the court pointed out that, contrary to Mr. Gamez’s assertion, there was no evidence that, at the time the debtor filed for bankruptcy, he had any ownership interest in the property. “Since Lopez’s ownership in the property occurred after his Chapter 7 bankruptcy case closed, and there has been ongoing litigation in the state courts concerning the subject property since 2010, the Bankruptcy Court properly determined that the New York state courts were the more appropriate forum.”

Lopez ED NY March 2023

Mr. Gamez filed a notice of appeal to the Second Circuit on March 10. Case no. 23-326.

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“Equity Abhors a Forfeiture”

Where the debtor had paid over 70% of the purchase price of real property, the court found that equitable principles precluded granting relief from stay to allow the seller to enforce a provision in the sales documents requiring the defaulting debtor to “forfeit not only the property, but all deposits, improvements and payments made.” Allied Ventures, LLC. v. Cruz, No. 22-23864 (Bankr. W.D. Tenn. Feb. 23, 2023).The debtor entered into an agreement with Allied, titled Seller-Financed Industrial Purchase Agreement, to purchase property Allied had bought at a tax sale. As the “Buyer,” the debtor was able to take possession of the property and was obligated to pay $290,000 in accordance with a schedule of payments beginning with a $30,000 initial payment and $6,500 monthly payments once Allied obtain title. Once the purchase price was satisfied, Allied would transfer title to the Buyer. Allied exercised control over the property only to the extent that the agreement required the Buyer to use it for a purpose that was legal and that the Buyer provide insurance as specified by Allied.

The debtor also signed a promissory note as “Buyer/Borrower” obligating him to pay the entire purchase price of $290,000. Both the Purchase Agreement and the Promissory Note provided that, in the event of default, “[i]f the scheduled amount of payment is not made in sixty (60) days after the invoice date, you will forfeit not only the property, but all deposits, improvements and payments made.”

The debtor missed a payment and Allied sought to enforce the default provision. It obtained a state court judgment for possession in June 2022, and for reasons that weren’t explained, accepted a payment from the debtor in July, 2022. The debtor posted an $86,000 bond and appealed the state court judgment.

The debtor filed for chapter 13 bankruptcy in September, 2022. In his 100% plan he proposed to treat the debt to Allied as a secured debt and pay the remaining balance through the plan.

The case came before the court on Allied’s motion for relief from stay to allow it to possess and sell the property with forfeiture by the debtor of all payments and improvements made. In its motion, Allied argued that the debtor’s plan incorrectly treated its claim as secured when in fact it was a lease agreement, and that the debtor had failed to propose a feasible plan.

In response, the debtor argued the Allied’s interest was protected by the $417,400 actual value of the property and the insurance he had obtained. His proposed plan included adequate protection payments of $1,800 per month. With respect to the nature of the agreement, the debtor took the position that if the court found it was not a secured loan but an executory contract, he would assume the lease, pay any arrearage through the plan and maintain monthly payments directly. The debtor further “propose[d] to use the $86,000.00 presently being held by the Shelby County Circuit Court Clerk to satisfy any such post-petition arrearage, and to otherwise be applied to the plan as may be determined by the Court.”

The court began its analysis with the nature of the underlying claim. It observed that the seller delivered possession of the property to the debtor and, with limited exceptions, the debtor undertook full responsibility for it. The promissory note created an absolute obligation on the debtor to pay $290,000, and title would transfer at the end of the payment period. The court found that “[a]lthough there is some ambiguity in the arrangement contemplated by the parties, the Court believes and finds for purposes of the pending Motion for Relief from Stay that the agreement between the parties is best characterized as an installment land sales contract.” It noted that, under Tennessee law, such contracts create a situation like a deed of trust where “the vendee is regarded as the owner, subject to liability for the unpaid price, and the vendor is regarded as holding only the legal title in trust for the vendee from the time a valid contract for the purchase of land is entered into.”

The court went on to determine whether the language of repossession and forfeiture in the agreement and the note justified granting Allied’s motion for relief from stay. For that analysis, the court looked to equitable principles. By the time the case came before the court, the debtor had paid 71-77% of the total purchase price. If Allied had its way, the debtor’s more than $200,000 in payments would be forfeit to Allied’s right to sell to another buyer.

This was unpalatable to the court. “Equity abhors a forfeiture.” The court observed that states often deny a vendor the right to sell against a defaulting buyer “when forfeiture would be unreasonable or inequitable.” The trend is to allow the buyer an opportunity to pay the remaining purchase price or the defaulted payments, in a redemption-type solution.

In light of the fact that the confirmation hearing was coming up, the court found no good reason to “short circuit that process.” It denied Allied’s motion for relief from stay.

Allied has appealed this decision to the Bankruptcy Appellate Panel for the Sixth Circuit, case no. 23-8009.

Cruz Bankr WD Tenn Feb 2023

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Punitive Damages for Stay Violation Were Excessive

The punitive damages awarded by the bankruptcy court were unconstitutionally excessive where they were seven times greater than actual damages and the bankruptcy court increased the damages on remand because it found the lender’s success at the BAP level would eliminate a substantial disincentive to engage in the conduct establishing the automatic stay violation. Rushmore Loan Mgmt Serv., LLC v. Moon, No. 22-1126 (D. Nev. Feb. 6, 2023).

When the debtors, Adnette Gunnels-Moon and Willie Moon, filed for chapter 13 bankruptcy, they listed Rushmore as a mortgage creditor on a loan in Adnette Gunnels-Moon’s name only, but gave the wrong address for Rushmore. For that reason, Rushmore was unaware of the bankruptcy and continued to dun the debtors for monthly mortgage payments. At one point when Rushmore called Willie Moon, he told Rushmore that he and Adnette had filed for bankruptcy. The debtors obtained their discharge in 2016. But Rushmore, apparently adhering to an unwritten policy of not accepting bankruptcy notification from a third party, continued its collection activity through the bankruptcy and after discharge.

The debtors reopened their bankruptcy to seek contempt sanctions against Rushmore for violation of the automatic stay and the discharge order. The bankruptcy court found in favor of the debtors on the automatic stay claim and awarded $742.10 representing the costs of reopening the bankruptcy. It also awarded $100,000 in emotional distress damages to Willie, and $200,000 in punitive damages. The court found no discharge injunction violation because it was unclear when Rushmore became aware of the discharge. The court also awarded $56,150 in attorney’s fees, $10,857.94 in costs, and an additional $3,500 in supplemental fees.

The parties filed cross-appeals. The debtors sought to reverse the bankruptcy court’s denial of the discharge injunction claim and its refusal to award certain fees, and Rushmore sought to reverse the damages award to Willie. Rushmore did not challenge the bankruptcy court’s finding that it violated the automatic stay as to Adnette, and did not seek to overturn the $742.10 in damages based on that claim.

The BAP reversed the $100,000 award to Willie, finding Rushmore did not violate the automatic stay as to him, affirmed the finding that punitive damages were warranted but remanded for reconsideration as to the amount, and affirmed the finding that Rushmore did not violate the discharge injunction. The BAP also remanded for reconsideration of the fee awards.

On remand, the bankruptcy court awarded $67,007.94 in fees and costs and $3,500 in supplemental fees. It increased the punitive damage award to $500,000. It awarded an additional $14,827 for Adnette’s defense of Rushmore’s adversary complaint, $70,415.95 to Adnette in appellate fees related to the first fee decision, and $45,235.82 in appellate fees for the contempt decision appeal, for a total appellate fee award of $115,651.77.

The court began its analysis with Rushmore’s challenge to the attorney’s fee awards noting that the goal of section 362(k) is to return debtors to their status as it was before the automatic stay violation. Rushmore argued that the bankruptcy court should have separated out the fees attributable to litigation of the discharge injunction and deducted those fees from the total fee award on the automatic stay claim.

The district court found the bankruptcy court satisfied the BAP’s instructions by explaining that the litigation of the automatic stay violation was inextricably intertwined with the discharge violation litigation and therefore the fees were inseparable.

The district court also found that the failure of Willie’s claims did not require the court to reduce the fees based on litigation of those claims because the evidence supporting them also either supported the automatic stay claims, or were relevant to the egregiousness of Rushmore’s conduct. The court observed that, although a bankruptcy court is required to award fees causally linked to a stay violation, it may approximate. “The essential goal in shifting fees is to do rough justice, not to achieve auditing perfection.”

The court also rejected Rushmore’s contention that the bankruptcy court should have reduced the punitive damage award based on the BAP’s instruction to revisit that award in light of its having reversed the court’s award of damages to Willie. In fact, the BAP merely instructed the bankruptcy to revisit the award. The bankruptcy court complied with that instruction.

Therefore, the court affirmed the award of $70,507.94 in attorney’s fees and supplemental fees to Adnette for prosecution of the original contempt proceedings.

The court next addressed the bankruptcy court’s award of fees to Adnette for litigation surrounding Rushmore’s adversary complaint. The bankruptcy court originally declined to award those fees, but did so after the BAP remanded with instructions to revisit the issue. At that time, the bankruptcy court determined that Rushmore’s complaint sought to dismiss the automatic stay claim. Therefore, the bankruptcy court concluded that Adnette’s defense of Rushmore’s complaint was part of her litigation in support of her automatic stay claim. The district court found no error in this conclusion and affirmed the $14,827 attorney fee award.

Rushmore challenged the bankruptcy court’s award of fees incurred in the appeals of the fee decision, the supplemental fee decision, and the adversary fee decision. Specifically, Rushmore contended that the bankruptcy court should have required Adnette’s attorney to specify the amount of time he spent on the issues Adnette prevailed on, and not award any fees for the time spent on Willie’s failed claim for discharge violation.

The district court found no error in the bankruptcy court’s attorney fee award. It held that the bankruptcy court did not apportion any fees to litigation of Willie’s claims. It also held that there was no clear distinction between the evidence supporting the discharge injunction and the automatic stay claims. The court upheld the award of Adnette’s full fees for defending the fee award on appeal.

As to the appellate fees related to the appeal of the contempt order, Rushmore argued that because the bankruptcy court reduced those fees after remand by 20%, Rushmore prevailed on that appeal and the debtors were not entitled to fee shifting. While the court did not entirely agree, it found that “[t]he bankruptcy court abused its discretion in failing to apportion fees for time spent on Willie’s unsuccessful appeal on the discharge injunction issue.” It found those fees both severable as a practical matter, and not related to the automatic stay violation. The court found that it could reasonably calculate the proper reduction, and it did so, reducing the total fee award based on the contempt order by 80%, to $11,308.96.

Rushmore next argued that the awards in general were disproportionate to the actual damages of $742.10 which Adnette incurred before Rushmore ceased its offending conduct.

The court disagreed. It found that section 362(k)’s deterrent effect is furthered by permitting the debtor to recover attorney’s fees for successfully litigating an automatic stay violation. In this case, Rushmore followed an unwritten and undisclosed policy of ignoring third party information regarding bankruptcy of its borrowers. Because it learned early on that Adnette was in bankruptcy but ignored that information without telling her that the information had to come from her to compel action, it needlessly perpetuated the automatic stay violation. The bankruptcy court took these facts into consideration and did not abuse its discretion in calculating appropriate damages.

Turning to the issue of punitive damages, the court noted that, on remand, the bankruptcy court increased the punitive damage award from $200,000 to $500,000. The bankruptcy court based its decision on the reprehensible nature of Rushmore’s position that it need not act on third party information of bankruptcy and its continued collection efforts. It was also persuaded that greater deterrent was needed because the BAP’s decision against Willie’s claims eliminated his ability to sue on his own behalf for Rushmore’s conduct.

Rushmore countered that the punitive award violated its due process rights by punishing it for prevailing on appeal as to Willie.

In reviewing a punitive damage award on constitutional challenge the court considered: “the degree of the defendant’s reprehensibility or culpability, the relationship between the penalty and the harm to the victim caused by the defendant’s actions, and the sanctions imposed in other cases for comparable misconduct.”

Based on these factors, the court agreed that the punitive damage award was unconstitutionally excessive. It found the award punished Rushmore for its conduct to Willie and others similarly situated rather than for any harm suffered by Adnette. It also found an award greater than a 4:1 ratio of punitive to actual damages requires both particularly egregious conduct, and relatively small actual damages. Here, though Adnette’s award of $742.10 was small, the entire fee award was not.

Having found that the bankruptcy court erred with respect to the punitive damages award, the court found that remanding with instructions to reconsider that award would merely consume more time and money in what was already an outsized case. Therefore it calculated punitive damages. It found that Rushmore’s appeals were not unreasonable and it’s conduct not malicious. There was no evidence that it extended to other borrowers. The court concluded that a 1.5 multiplier satisfied the principles of punishment and deterrence. It reduced the award of punitive damages to $128,002.41.

As the district court anticipated, Rushmore filed an appeal to the Ninth Circuit.

Gunnels-Moon D Nev Feb 2023

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No Harm in Failure to Disclose

The debtor was entitled to reopen her bankruptcy case to disclose a post-confirmation, pre-discharge lawsuit where she successfully completed her 100% plan so there was no harm to creditors by her failure to timely disclose the lawsuit, and the debtor would benefit from the opportunity to comply with Eleventh Circuit disclosure requirements. In re Calixto, No. 17-18317 (Bankr. S.D. Fla. Jan. 31, 2023).

Approximately one year before the end of her chapter 13 plan, the debtor slipped and fell on property owned by Gulfstream Park Racing Association, Inc. One month after she successfully completed her plan and received her discharge, she sued Gulfstream in state court for negligence. Gulfstream moved for summary judgment arguing that the debtor was judicially estopped from pursuing the case because she failed to disclose the lawsuit to the bankruptcy court. The debtor moved to reopen her bankruptcy in order to disclose the claim.

The court began with sections 541 under which a lawsuit is property of a chapter 13 bankruptcy estate, and 1306(a)(1) which incorporates property acquired by the debtor post-confirmation into the bankruptcy estate. It noted that while the Code does not obligate debtors to make ongoing post-confirmation disclosures when they acquire new property, Eleventh Circuit precedent has established that debtors have a continuing duty to disclose a post-confirmation litigation claim.

Having found that the litigation was property of the estate and that the debtor had a duty to disclose it and failed to do so, the court went on to consider the equities of allowing her to reopen her bankruptcy to do so now. It weighed the benefits of reopening against prejudice to any of the parties.

While the court noted that it views nondisclosure with a jaundiced eye, in this case, the debtor’s schedules were accurate when she filed them and when her case was confirmed. Furthermore, all her creditors were paid the full amount of their claims so none were prejudiced by the debtor’s failure to disclose the lawsuit during her bankruptcy and none stood to benefit from the disclosure now. Nor was the trustee prejudiced by the failure to disclose because the debtor retained her right to personally pursue the litigation while her bankruptcy case was pending. Thus, “even if the Debtor had previously disclosed the litigation claim – or if the Court permits her to reopen her case now to disclose it – it would not have, and will not have, any effect on her bankruptcy estate or her creditors.”

On the other hand, by reopening, the debtor stood to benefit from the opportunity to satisfy the procedural technicality established by the Eleventh Circuit and pursue her rights against Gulfstream in state court.

The court found that requiring Gulfstream to address the merits of the debtor’s case in state court did not constitute prejudice.

The court granted the debtor’s motion to reopen.

Calixto Bankr SD Fla Jan 2023

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Trustee Entitled to Attorney’s Fees for Exemption Dispute

Where the debtor’s original exemption claim was for bodily injury, the trustee had a reasonable argument that the actual post-petition settlements of her personal injury case, which specified that they were for non-bodily injury damages, did not fall under that exemption. Because the trustee’s objection related to the post-settlement exemption claim, it was timely. Biondo v. Gold, Lange, Majoros & Smalarz, P.C., No. 22-1666 (6th Cir. Feb. 8, 2023).

Before filing for Chapter 7 bankruptcy, the debtor was in a car accident. In her bankruptcy filings, she listed the personal injury claim with an unknown value. She claimed an exemption in potential recovery, tracking the text of section 522(d)(11)(D), for “payment[s]” she received “on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss.”

The trustee did not object to the exemption. He hired a law firm to litigate the debtor’s claims against the driver of the other vehicle and the debtor’s insurance company. The insurance company settled for $48,500 specifically covering “medical expenses, attorney’s fees, ‘lost wages,’ and all ‘other forms of economic or non-economic loss.’” The driver of the other car settled for $70,000, covering “pain and suffering.”

The debtor moved to compel the trustee to turn over $23,675 from the settlement recovery arguing that the funds were exempt under section 522(d)(11)(D). She and the trustee settled the exemption claim, and the trustee moved to recover $2,880 in attorney’s fees he incurred in litigating the motion to compel. The debtor objected, arguing that the attorney’s services did not fulfill the requirement under section 330(a)(1)(A) that they be either reasonably likely to benefit the estate or necessary to the administration of the case. The bankruptcy court granted the trustee’s request for fees, and the district dismissed the appeal as equitably moot.

The debtor appealed to the Sixth Circuit.

The court began with the parameters of section 522(d)(11)(D)’s exemption, finding that while funds resulting from personal bodily injury are exempt, the exemption does not include “payments for pain and suffering and pecuniary losses.” The exemption is also typically interpreted to exclude payments for medical bills. Here, the two settlements specified that they were for damages other than personal bodily injury. For that reason, the circuit court found the trustee’s objection to the exemption was reasonable and for the benefit of the estate.

The debtor argued that the trustee forfeited his opportunity to object to the exemption because he failed to do so when she filed the exemption claim in her original bankruptcy schedules.

Under section 522(l), in the absence of a timely objection, an exemption is automatically allowed. Citing Mercer v. Monzack, 53 F.3d 1 (1st Cir. 1995), the court found that “exemptions should be unambiguous and should be read to conform with the law.” The debtor must therefore unambiguously identify a particular property as exempt before the clock begins to run.

Here, the debtor’s claimed exemption related only to recovery for bodily injury, as contemplated by section 522(d)(11)(D). It was not until the actual settlements were reached that the debtor at least arguably attempted to apply the exemption to non-bodily injury recovery. The trustee’s post-settlement objection was related to the debtor’s recovery based on medical expenses and other pecuniary losses, as well as pain and suffering. Because the actual funds the debtor sought to exempt differed from the description in her claimed exemption, the court found her original exemption claim did not trigger section 522(l)’s clock and the trustee’s objection was not time-barred. While the trustee could have lodged a prophylactic objection to the debtor’s exemption from the outset, he was not obligated to do so.

Because the district court’s finding that the appeal was equitably moot was not jurisdictional, the circuit court declined to address that issue.

The court affirmed.

Biondo 6th Cir Feb 2023

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Good Faith in Failure to Disclose Lawsuit

Where the debtor failed to amend her schedules before her case was closed, she forfeited the right to do so as a matter of course, but based on the facts and circumstances in this case, the debtor’s neglect was excusable. The court allowed her to reopen her case to claim an exemption in a personal injury settlement. In re Wantz, No. 18-2851 (Bankr. W.D. Mich. Jan. 5, 2023).

Prior to filing her chapter 7 petition, the debtor contacted a personal injury attorney who was representing other women suing the manufacturer of an implanted medical device to explore the possibility of filing a lawsuit. The attorney told the debtor via email that because she had not had the device removed, she would be unlikely to prevail in a lawsuit. When she filed for bankruptcy, the debtor did not disclose this potential cause of action in her bankruptcy. Shortly before receiving her discharge, she signed an Attorney Employment Contract with the personal injury attorney. That agreement stated only that the attorney would investigate her potential claim.

She received her discharge in October, 2018, and her case was closed in November, 2018. In 2020, the debtor received two emails from her personal injury attorney suggesting, but not directly stating, that a case had been filed on her behalf. In March, 2021, the debtor sought medical advice with respect to the device and, upon learning that it was the cause of her pain, had it removed. Her medical expenses were $7,000. At around the same time, the debtor learned that her personal injury case had settled and that she would net $6,500.

Three weeks later, the debtor moved to reopen her bankruptcy to add the settlement to her schedules and claim it as exempt. The trustee objected to the exemption arguing that it was untimely.

Rule 1009(a) provides that a debtor may amend a bankruptcy schedule as a matter of course any time before the case is closed. The question here was whether that automatic right to amend is reignited when a closed case is reopened. The debtor lobbied for the court to find that once a case is reopened the debtor’s right to amend her schedules is “as a matter of course,” as it would be under Rule 1009(a) and that any other conclusion would violate the holding in Law v. Siegel, 571 U.S. 415 (2014).

The court found the debtor’s interpretation of that case was overbroad. Law prohibited a court from surcharging a debtor’s exemptions based on equitable considerations and in contravention of Code provisions. Law did not deal with timeliness of an amendment to the schedule of exemptions. The court here found that because Rule 1009(a) specifically applies to a debtor’s right to amend prior to her case being closed, the obverse is not true. A debtor may not amend her schedules as a matter of course after the case is closed even if it is later reopened.

The court turned next to the impact of Rule 9006, which provides that, with certain specified exceptions, a court may extend a deadline after that deadline has expired upon a showing of excusable neglect. The debtor argued that Rule 9006 was inapplicable because that rule applies only when the act in question “is required or allowed to be done at or within a specified period by these rules.” The debtor argued that because the time for amending schedules is not circumscribed by a specific period but is tied to the non-specific point at which the case is closed, amendments are not subject to Rule 9006’s requirement of a finding of excusable neglect.

The court disagreed with the debtor and with the cases, such as Mendoza v. Montoya (In re Mendoza), 595 B.R. 849 (B.A.P. 10th Cir. 2019), supporting her position. It found that Rule 1009(a)’s requirement that an amendment be filed before the case is closed is sufficiently specific to bring it under the auspices of Rule 9006.

The court turned to whether the debtor had shown excusable neglect, finding that the inquiry was equitable in nature and involved consideration of all relevant circumstances.

The court agreed with the trustee that the debtor’s failure to disclose the lawsuit during her bankruptcy deprived the trustee of the opportunity to litigate the claim for the benefit of the estate. But the court found that prejudice to the trustee and creditors was not significant in light of the fact that the debtor could have claimed an exemption under 522(c) for the settlement at any time during her bankruptcy. The court was unwilling to agree that the trustee would likely have obtained a better outcome from the litigation had she been involved.

As to the length of the delay—three years between filing her petition and reopening her case—the court found the debtor was unaware of several salient facts that would have alerted her to the necessity of disclosing the claim. First, the debtor did not know the cause of her pain was due to the device; second she did not know her attorney had moved past the investigation stage and filed a claim on her behalf; and third, the debtor lacked the sophistication to untangle the conflicting information she had received from her personal injury lawyer. The court noted that the debtor’s personal injury case involved many plaintiffs and that the debtor did not have a relationship with her attorney, but dealt with him from a distance. The court concluded that the debtor acted in good faith.

With the final observation that the debtor’s ultimate recovery did not even meet her medical bills based on the injury, the court found the debtor was entitled to amend her schedules to claim the exemption.

Wantz Bankr. WD Mich Jan 2023

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Chapter 7 Trustee Bound by Pre-Conversion Agreement

The Chapter 7 trustee was bound by the Chapter 13 trustee’s pre-conversion concession that the creditor’s liens were valid. Therefore the Chapter 7 trustee could not prevent the creditor from receiving the proceeds from the sale of the property securing the liens. In re Hillis, No. 20-70372 (Bankr. M.D. Ga. Jan. 11, 2023).

When the debtors filed for Chapter 13 bankruptcy they listed Southern Pine Credit Union as a creditor with security interests in a lawn mower, two John Deere loaders, and a Nissan Armada. During the pendency of the bankruptcy, the debtors sought and received an order approving the sale of the lawn mower and the two loaders with the proceeds going to Southern Pine in satisfaction of the loans secured by all the vehicles including the Nissan Armada. The Trustee consented to the sale, and Southern Pine offered no opposition. The court approved the sale and ordered the creditor to release the lien on the Nissan Armada upon receipt of the proceeds.

The debtors completed the sale but converted to Chapter 7 before they had received the proceeds. Southern Pine moved for relief from stay because it had not yet received the proceeds from the sale. Soon after it filed the motion, the debtors transferred the proceeds to Southern Pine. The chapter 7 trustee, believing the underlying liens might be avoidable, objected to the motion for relief from stay and made a verbal demand at the meeting of creditors for turnover of the funds. Southern Pine responded that the trustee was barred by res judicata from reneging on the pre-conversion agreement. The debtors filed a turnover motion seeking an order requiring the creditor to release the lien on the Nissan as required by the court’s order approving the sale.

The court began by finding that the Chapter 7 trustee had standing in the case because, under section 348(f)(1)(A), the proceeds from the sale of the vehicles became part of the converted estate. Under that provision property in an estate converted from chapter 13 to chapter 7 consists of property the debtors held at the time of their chapter 13 petition which they continue to hold at the time of conversion. The court found that the sale agreement gave the debtor a contractual right to the proceeds which became property of the new estate.

The court agreed with Southern Pine, however, that the Chapter 7 trustee was barred by res judicata from challenging the pre-conversion agreement to transfer the proceeds to the creditor in satisfaction of its liens. The only issue in that regard was whether the Chapter 7 trustee was in privity with the Chapter 13 trustee such that the Chapter 7 trustee should be bound by an agreement entered into by his predecessor. The court found the elements for res judicata as outlined in Griswold v. County of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010), were satisfied. Specifically, where section 704(a)(5) empowers the Chapter 7 trustee to oppose the allowance of an improper claim, section 1302(b)(1) empowers the Chapter 13 trustee to exercise the powers granted in section 704(a)(5). The court observed that when the two trustees have corresponding duties, the performance of those duties by the first binds the second.

Here, the Chapter 13 trustee did not object to the debtor’s motion to sell the property, including the understanding in the motion that Southern Pine had valid liens. Nor was the motion contingent upon the debtors’ staying in chapter 13. The court also rejected the trustee’s argument that because section 348(f) permits him to reevaluate the property of the estate, he is entitled to challenge the validity of the liens. The court found the trustee’s reading of the statute to be too broad. Valuation of property does not include lien validity.

The court concluded that Southern Pine’s motion was moot by reason of its having received the proceeds from the sale. It ordered Southern Pine to release the lien as requested by the debtors and overruled the trustee’s objections.

Hillis Bankr MD Ga Jan 2023