In a move that could have sweeping implications for Chapter 13 bankruptcy cases nationwide, Martha G. Bronitsky, the Chapter 13 Trustee, has filed a petition for certiorari with the Supreme Court in In re Saldana. The case centers on whether voluntary contributions to retirement accounts should be excluded from a debtor’s disposable income calculation. The Ninth Circuit’s decision in In re Saldana sided with the debtor, holding that voluntary retirement contributions are shielded from creditors, a ruling that some argue disrupts the balance between debtor protections and creditor rights under the Bankruptcy Code. Now, the Supreme Court is being asked to step in, potentially impacting thousands of Chapter 13 cases filed each year.
[Read more…] about Can Debtors Prioritize Retirement Over Creditors? Trustee Seeks Supreme Court Review in In re SaldanaNinth Circuit Clarifies Disposable Income Exclusions for Chapter 13 Debtors Concerning Voluntary Contributions to Retirement Plans
Facts
Jorden Marie Saldana, a surgical technician earning approximately $101,776 annually, filed for Chapter 13 bankruptcy to reorganize her finances and address over $64,000 in unpaid taxes and unsecured debts. In calculating her disposable income, Saldana excluded $747 per month in voluntary contributions to her employer-managed retirement plan.
The Chapter 13 trustee objected, arguing that voluntary retirement contributions constitute disposable income under the Bankruptcy Code and must be applied to repay creditors. The bankruptcy court agreed, sustaining the trustee’s objection and requiring Saldana to adjust her Chapter 13 plan. Saldana appealed to the district court, which affirmed the bankruptcy court’s decision. Saldana then appealed to the Ninth Circuit.
Analysis
The Ninth Circuit reversed the lower courts, holding that voluntary contributions to employer-managed retirement plans are excluded from disposable income under Chapter 13. The court relied on the “hanging paragraph” in 11 U.S.C. § 541(b)(7), which explicitly states that such contributions “shall not constitute disposable income as defined in section 1325(b)(2).”
The Ninth Circuit emphasized that the statutory language is unambiguous, allowing Chapter 13 debtors to exclude any amount of voluntary contributions to qualified retirement plans from their disposable income calculations. This interpretation aligns with Congress’s intent in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which sought to protect retirement savings while encouraging Chapter 13 reorganizations.
The court rejected alternative interpretations that would limit the exclusion to pre-petition contributions or cap it based on historical contribution levels. It also dismissed concerns about debtor abuse, noting that Chapter 13’s good faith requirements and other safeguards adequately address potential misuse of the exclusion.
Conclusion
The Ninth Circuit’s decision in In re Saldana reinforces the broad protections for retirement contributions in Chapter 13 bankruptcy cases. By excluding voluntary contributions from disposable income, the ruling encourages debtors to maintain long-term financial stability while reorganizing their debts.
NCBRC and NACBA filed an amici brief in support of the debtor
4th Circuit Considers Whether the FDCPA Protects Discharged Debtors From Improper Collection
The 4th Circuit Court is considering an appeal from the District Court for the Northern District of West Virginia which dismissed the Debtor’s FDCPA complaint due to lack of standing since his debt was discharged in a prior chapter 7 bankruptcy.
Facts
John Koontz entered into a mortgage loan with CitiFinancial, which was later serviced by SN Servicing Corporation (SNSC) and then by Land Home Financial Services (LHFS). After Koontz received a Chapter 7 bankruptcy discharge in 2017, he continued to make voluntary payments on the loan. He alleged that SNSC and LHFS charged excessive late fees and failed to respond to his requests for information.
Analysis
The district court analyzed whether Koontz had standing to pursue claims under the FDCPA and WVCCPA, given his bankruptcy discharge. Under the FDCPA, the court determined that Koontz was not obligated or allegedly obligated to pay the debt because the bankruptcy discharge extinguished his personal liability. The court referenced the Fourth Circuit’s decision in Lovegrove v. Ocwen Home Loans Servicing, LLC, where post-discharge mortgage statements containing disclaimers were not considered attempts to collect a debt. The court concluded that SNSC’s and LHFS’s communications, which included similar disclaimers, were not attempts to collect a debt under the FDCPA.
For the WVCCPA claims, the court held that Koontz was not a “consumer” as defined by the statute because his personal obligation to pay the mortgage debt was discharged in bankruptcy. The court referenced its previous decision in Fabian v. Home Loan Center, Inc., which held that a discharged debtor is not a “consumer” under the WVCCPA and therefore lacks standing to bring claims under the Act. The court rejected Koontz’s reliance on other federal court cases, noting that many involved phone calls rather than written correspondence and did not alter the applicability of Fabian.
The court dismissed Koontz’s claims, reaffirming that a bankruptcy discharge eliminates personal liability for the debt, thereby negating standing under the FDCPA and WVCCPA. The court emphasized the importance of clear and unequivocal disclaimers in post-discharge communications to avoid violating debt collection laws.
NCBRC along with the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center filed a brief in support of the Debtor.
Amici Brief in Support of Appellant – Koontz vs SN Servicing
The 9th Circuit Holds A Homestead Exemption Is Limited to Statutory Cap in a Chapter 11 to 7 Conversion
The Ninth Circuit held that the failure to object to a claimed homestead exemption within the 30-day period does not allow the debtor to exempt more than the statutory limit when the case originated as a Chapter 11 bankruptcy and included conflicting representations regarding the exemptions.
Facts
Monte and Rosana Masingale filed for Chapter 11 bankruptcy in 2015, claiming a homestead exemption of “100% of FMV” (fair market value) for their residence. No party in interest objected within the 30-day window. The case was later converted to Chapter 7, and the Masingales sought to sell the home and retain all proceeds, despite the statutory cap on the homestead exemption.
Analysis
The court’s legal analysis focused on whether the initial lack of objection to the homestead exemption claim allowed the Masingales to exempt more than the statutory limit. The court distinguished this case from Taylor v. Freeland & Kronz and Schwab v. Reilly, which involved different circumstances and did not originate in Chapter 11.
The court noted that the Masingales, as Chapter 11 debtors-in-possession, owed fiduciary duties to their creditors. During the Chapter 11 proceedings, they made representations in their Disclosure Statement and Chapter 11 Plan that they were not claiming above-limit exemptions or that such exemptions would only be allowed after creditors were fully paid. These representations indicated that the homestead exemption would be limited to the statutory cap, contrary to their Schedule C notation of “100% of FMV.”
The court reasoned that these conflicting representations within the 30-day objection period affected whether the “100% of FMV” notation created a clear and objectionable exemption. The court emphasized that the fiduciary duties and specific statements made in Chapter 11 documents provided context that negated the need for an early objection based solely on the Schedule C notation. Therefore, the initial failure to object did not permit the Masingales to claim an exemption above the statutory limit.
Tips
- Clarify Exemption Claims: Ensure that exemption claims are clear and consistent across all bankruptcy documents to avoid disputes and objections.
- Understand Fiduciary Duties: Recognize that debtors-in-possession in Chapter 11 have fiduciary duties to creditors, and their representations can impact exemption claims.
- Timely Objections: While objections to facially invalid exemptions should be timely, consider the entire context and any additional representations made by the debtor within the objection period.
NCBRC filed an amicus brief in support of the Debtors and provided a moot court to Debtors’ counsel to prepare for oral arguments.
The 9th Circuit Reviews Whether Res Judicata Applies to Exemptions
The 9th Circuit Court in Nance v Warfield is considering whether to overrule the District Court of Nevada which held that the bankruptcy court erred in overruling the trustee’s res judicata-based objection to the debtor’s federal exemptions in the property and RV. The court also concluded that the bankruptcy court exceeded its authority by sua sponte granting an exemption for the RV under the federal wildcard exemption.
Facts
Lawrence Warfield, the trustee of Johnie Lee Nance’s bankruptcy estate, objected to Nance’s claimed exemptions for his property and RV under Arizona law. After the court sustained the trustee’s objections, Nance amended his schedule to claim exemptions under Washington law, and the trustee again objected. When those objections were sustained, Nance amended his schedule to claim federal exemptions. The bankruptcy court overruled the trustee’s objections to these federal exemptions and sua sponte granted an exemption for the RV under the federal wildcard exemption.
Analysis
The district court analyzed the applicability of res judicata to the debtor’s successive exemption claims. It noted that claim preclusion, a form of res judicata, bars litigation of claims that were or could have been raised in a prior action. The court applied the three-part test for claim preclusion: identity of claims, final judgment on the merits, and identity or privity between parties. The court found that the debtor’s claims for exemptions in the property and RV, regardless of the legal framework (Arizona, Washington, or federal law), arose from the same nucleus of operative facts and involved the same property. Therefore, the claims were identical.
The court also determined that the previous rulings sustaining the trustee’s objections constituted final judgments on the merits, satisfying the second criterion. Finally, the parties involved in the objections were identical, fulfilling the third requirement for claim preclusion. Consequently, the court concluded that the bankruptcy court erred in overruling the trustee’s objections based on res judicata.
Additionally, the court addressed the bankruptcy court’s sua sponte action to grant an exemption for the RV under the federal wildcard exemption. The court emphasized the principle of party presentation, which requires courts to decide only the questions presented by the parties. The court found that the bankruptcy court exceeded its authority by granting an exemption that the debtor had not claimed, noting that the debtor, represented by counsel, could have asserted the exemption but did not. Therefore, the court held that the bankruptcy court’s action was improper and reversed its decision.
NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellant.
The Seventh Circuit Rules That a Chapter 13 Trustee May Not Take A Fee If the Case is Dismissed Pre-Confirmation
On May 3, 2024, the Seventh Circuit Court agreed with the Ninth and Tenth Circuits that the Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor’s plan is not confirmed. See Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023) and Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).
The debtor filed a Chapter 13 bankruptcy and made approximately $3,800 in payments. The trustee distributed about $750 in pre-confirmation adequate protection payments. The court never confirmed the debtor’s plan, and the case was dismissed. The trustee charged her fee of about $260. The debtor filed a motion to turn over all remaining funds including the trustee’s fee and the bankruptcy court agreed. The bankruptcy court certified the case for a direct appeal to the Seventh Circuit.
The court held:
“If the plan is confirmed, the trustee must distribute the remaining payments in accordance with the plan. Id. § 1326(a)(2). But where, as here, a plan is not confirmed, “the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).” Id. This requires “the standing trustee [to] return all of the pre-confirmation payments [she] receives, without first deducting [her] fee.” In re Doll, 57 F.4th 1129, 1141 (10th Cir. 2023) (emphasis in original). While § 1326(a)(2) has two exceptions, neither covers the trustee’s fee. As to the first, “[t]he Chapter 13 trustee’s fee is not an administrative expense under Section 503(b),” In re Evans, 69 F.4th 1101, 1104 n.2 (9th Cir. 2023), and the trustee has not argued that it is. As for the second, the trustee’s fee is not a payment “previously paid”—because only certain adequate protection payments are permitted pre-confirmation—nor is it a payment “due and owing to creditors.” 11 U.S.C. § 1326(a)(2). Because neither exception applies to the Chapter 13 trustee’s fee, she must return her fee to the debtor.”
Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *3-4 (7th Cir. May 3, 2024). The court held that the trustee may not keep her fee under Section 1326(b) because that provision applies only to payments after a plan is confirmed. Further, the trustee has no right to keep her fee under 28 U.S.C. § 586(e)(2).
“And § 586(e)(2) is irrelevant, as it “only addresses the source of funds that may be accessed to pay standing trustee fees.” In re Doll, 57 F.4th at 1140; see also id. at 1144 (“‘[C]ollect’ in 28 U.S.C. § 586(e)(2) cannot mean … that the act of ‘collection’ of funds irrevocably constitutes a payment to the Trustee of his fees.”); In re Evans, 69 F.4th at 1108 (“Section 586 only provides that when a trustee does collect her fee pursuant to 1326(b), she does so by collecting her fee from all payments received under confirmed plans.”) (cleaned up). Rather, § 1326(a) governs “what happens to such [collected] payments if a Chapter 13 plan is not confirmed.” In re Doll, 57 F.4th at 1140. Section 1326(a)(2) mandates that the trustee return all payments, including her fee, to the debtor. Sections 1326(b) and 586(e)(2) do not compel a different result.”
Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *5-6 (7th Cir. May 3, 2024).
The Second Circuit is still considering this issue in the case of in In re Soussis, Case No. 22-155 (2nd Cir. 2023).
NACBA member Mike Miller from the Semrad Law Firm, LLC in Chicago, Illinois, successfully represented this debtor.
NACBA and NCBRC supported the debtor by filing an amicus brief in support and by providing Mr. Miller a moot court prior to oral argument.
In re Johnson – 7th Circuit Decision
NACBA-NCBRC File stamped brief
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.
State Law Does Not Create Exemption in Trust
A state statute protecting a trust from judgment creditors is not an exemption statute for bankruptcy purposes where it was not designated as such and it did not provide unequivocal protection against all forms of collection. In re Morris, No. 21-30468 (Bankr. N.D. Ill. Jan. 13, 2023).
In his chapter 7 bankruptcy schedules, the debtor listed an interest as a potential beneficiary in a trust that did not have a spendthrift provision. The debtor claimed an exemption for the interest under Illinois law, 735 ILCS 5/2-1403 (1999), which provides:
Judgment debtor as beneficiary of trust. No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor. . . .
The trustee objected, arguing that the statute did not create a bankruptcy exemption.
Illinois is an opt-out state, so the court looked to state law to determine whether the trust interest would be exempt even though, unlike other specified exemptions like retirement plans and worker’s compensation awards, the statute at issue here did not create an explicit exemption. The court found that exemptions under the state laws are not limited to those so designated. Rather, “exempt property is any property that the legislature has identified and declared to be free from liability to processes such as seizure and sale, or attachment to satisfy debts.” The essential characteristic of an exemption “is simply whether the provision unequivocally protects the identified property against all forms of collection.”
In this case, the statute the debtor relied on was limited to protecting a debtor’s interest in a trust from judgment creditors. But the court found the chapter 7 trustee was merely gathering estate assets under section 541. He was not a judgment creditor nor was he attempting to collect on a judgment. The court quoted from In re Gutterridge, 2013 WL 395140 (Bankr. C.D. Ill., Jan. 31, 2013), discussing the same state statute, that “once a bankruptcy petition is filed, the Illinois statute in this case cannot apply to create an exemption to a trust that is otherwise simply an asset of the bankruptcy estate.”
The court noted that the grantors could have placed the trust out of reach under section 541(c)(2) by including a spendthrift provision. But the trust in this case did not do so.
The court rejected the debtor’s argument that because certain forms of collection such as levy, garnishment and attachment, all involve a judgment the state statute essentially applies to all collection actions. The court found no support for the argument in the language of the statute. Had the legislature intended to create an exemption, it could have done so.
The court concluded that the narrow language of the Illinois statute was not an “unequivocal” protection of the trust for bankruptcy exemption purposes. It sustained the trustee’s objection.
The Seventh Circuit Considers Whether a Chapter 13 Trustee May Take A Fee If the Case is Dismissed Pre-Confirmation
The Seventh Circuit, in the case of In re Johnson, Case No. 23-2212 (7th Cir. 2023), accepted a direct appeal from the Bankruptcy Court for the Northern District of Illinois. The bankruptcy court held that a chapter 13 trustee may not deduct her fee if a chapter 13 case is dismissed without having a plan confirmed. The court adopted the reasoning in Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).
At present, two courts have affirmed that a trustee may not deduct a fee if the chapter 13 case is dismissed prior to confirmation. In addition to the Doll opinion, the Ninth Circuit agreed in Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023). The Doll decision is currently being considered for certiorari by the Supreme Court. Another case is pending on this issue in In re Soussis, Case No. 22-155 (2nd Cir. 2023).
NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellee. NCBRC NACBA Filed Amicus Brief – In re Johnson
The Ninth Circuit Considers Whether Appellate Rights are Property of the Estate
In In re Lopez, Case No. 23-55682 (9th Cir. 2023), the Ninth Circuit is considering whether the bankruptcy court erred in (1) ruling that the Chapter 7 debtor’s right to appeal a prepetition personal injury judgment against her was property of the estate, (2) denying the debtor’s motion for the Chapter 7 trustee’s abandonment of the appeal rights, and (3) denying the debtor’s motion for reconsideration.
NCBRC filed an amicus brief requesting that the court narrowly confine its ruling to the specific facts of the case. The concern is that a broad ruling will have a significant impact in other factual situations.
The fact that something has monetary value is not sufficient, by itself, to make it property of the estate. Just as no one would argue that a debtor’s kidneys should be property of the estate because they could have monetary value, it is not difficult to find many examples of situations in which classifying a right to appeal as property, simply because a trustee could sell it, would be extremely problematic. A debtor could be involved in a hotly-contested custody case, where a very questionable decision was appealed. The opposing party, perhaps far wealthier than the debtor, could offer to buy from the trustee the debtor’s right to appeal for more than the debtor could afford, thus ending the appeal. Similarly, a debtor could be involved in a contested divorce, in which a clearly erroneous support order for $100,000, which would not be dischargeable in bankruptcy, 11 U.S.C. § 523(a)(5), was entered against the debtor. In that situation, too, the opposing party could offer the trustee $10,000 for the right to appeal, cutting off any review of the support order and leaving the debtor with a $100,000 debt after bankruptcy.
And such situations are not limited to family law matters. A debtor could be appealing an erroneous criminal conviction. The alleged crime victim, or even a prosecutor trying to save the costs of appeal, could purchase the debtor’s right to appeal from a bankruptcy trustee, perhaps causing the debtor to be imprisoned for years. Or the debtor might be appealing an erroneous judgment or other decision that would lead to loss of a professional license, which would severely impair the debtor’s fresh start.
The loss of a debtor’s right to appeal could also lead to large debts becoming nondischargeable in bankruptcy when, in fact, they should be discharged. For example, a debtor could erroneously be found liable for a large amount in a fraud judgment that, if not reversed, would result in a nondischargeability determination under 11 U.S.C. § 523(a)(2). See Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654 (1991) (collateral estoppel applies in dischargeability determination). If the plaintiff could pay the bankruptcy trustee for the debtor’s right to appeal, and then dismiss the appeal, the debt would not be discharged.
In all these situations, and undoubtedly many others, the fact that a right may have monetary value to the bankruptcy estate, and could be sold by the trustee, should not, by itself, make that right property.
The amicus brief for NCBRC and NACBA is here: Lopez amicus brief v4