In Conte v. Hill, No. 24-10264, the U.S. Court of Appeals for the Eleventh Circuit affirmed a bankruptcy court’s order denying a Chapter 13 trustee’s motion to modify two confirmed plans to require turnover of post-confirmation personal injury settlement proceeds. The injuries in both cases occurred post-petition. The Eleventh Circuit affirmed that plan modification remains a discretionary determination for the bankruptcy court.
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Facts
In In re Conte, the Eleventh Circuit is reviewing a decision from the District Court for the Southern District of Alabama that upheld a bankruptcy court’s denial of a Chapter 13 trustee’s motion to modify confirmed plans based on debtors’ post-confirmation personal injury settlements.
[Read more…] about Eleventh Circuit to Decide Key Issues in Post-Confirmation Plan ModificationsNo 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.
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.
Mortgage Statements Not Attempts to Collect a Debt
Where statements sent by the mortgage servicer listed the higher, pre-modification amount due, but specifically stated they were not an attempt to collect a debt and did not include an amount in potential late fees, the bankruptcy court erred in finding the statements were in violation of the automatic stay. Freedom Mortgage Corp. v. Dean, No. 22-1469 (M.D. Fla. Jan. 26, 2023).
The debtors had a mortgage with Roundpoint Mortgage Servicing obligating them to monthly payments of $2,102.32. They filed for chapter 13 bankruptcy after falling behind on the payments. Roundpoint and the debtors agreed on a trial mortgage modification which was approved by the court and which lowered their monthly payments to $1,927.15. Freedom Mortgage Corporation then took over the mortgage from Roundpoint. Freedom began sending the debtors monthly statements listing the amount due according to the pre-modification mortgage terms. With each statement, Freedom included a payment coupon. Despite notifications by the debtors’ counsel that the amount listed was incorrect, Freedom did not lower it to the modified amount until after the bankruptcy court permanently confirmed the modification. The court then ordered Freedom to show cause why it should not be sanctioned for violating the automatic stay.
In response, Freedom argued that it was obligated under the Truth in Lending Act to send out monthly statements and that the statements it sent conformed to the Consumer Financial Protection Bureau’s Form H-30(F) and were therefore moored in a “safe harbor.” The bankruptcy court rejected Freedom’s arguments and found its monthly statements were an attempt to collect a debt in violation of the stay. The court sanctioned Freedom in the amount of $15,060.00 representing the costs associated with the mortgage statements and the sanctions hearing.
Freedom appealed to the district court.
The district court rejected Freedom’s “Chevron defense” where it urged the court to adopt the CFPB’s interpretation of bankruptcy’s automatic stay. The court found that defense applies only to agencies interpreting laws which they are charged with administering. Here, the CFPB is not charged with administering the bankruptcy code. Therefore, Freedom’s use of the Form H-30(F) did not insulate it from the requirements of the automatic stay.
Nonetheless, the court found the statements were not an effort to collect on the debt. Though it found no direct precedent, the court analogized the Eleventh Circuit’s interpretation of what constitutes a collection activity under the FDCPA. In Daniels v. Select Portfolio Servicing, Inc., 34 F. 4th 1260 (11th Cir. 2022), the circuit court first noted that a statement’s compliance with TILA did not necessarily make it in compliance with bankruptcy’s section 362. The court went on to set forth four criteria for determining if a statement is an attempt to collect a debt: 1) if the statement contains language to the effect that it is collecting a debt, 2) if the statement requests payment by a certain date, 3) if there is a late fee listed in the statement terms, and 4) if there is history between the parties suggesting that the statement is intended to collect a debt.
Applying those criteria to the case before it, the court found the statements explicitly indicated that they were not intended to collect a debt. The statements instructed the debtors to make their monthly payments to the trustee if required by the bankruptcy plan. To the extent the inclusion of payment coupons with the statements could suggest an attempt to collect, the court found the language to the contrary in the body of the statement overrode that suggestion.
Though the statements included payment dates, they specifically listed $0 as the late fee throughout the entire bankruptcy proceeding.
As to the fourth element, the court found that because Freedom took over the mortgage after the debtors filed for bankruptcy, there was no history to create expectations. Therefore, the fourth element was neutral.
Based on these findings, the court found the statements were not an attempt to collect a debt in violation of the automatic stay. The court cautioned that had the statements included a late fee, that, in combination with the incorrect amount due, might have led to affirmation of the bankruptcy court’s finding.
The court reversed.
Plan Confirmation Does Not Defeat Antimodification Provision
Although the debtor’s confirmed chapter 13 plan included a provision for release of the mortgage lien upon payment of the lender’s claim, the bankruptcy court erred in releasing the lien when the claim was for arrearages only, there remained outstanding principle at the end of the plan, and the mortgagee challenged release of the lien prior to discharge. Mortgage Corp. of the South v. Bozeman, No.21-10987 (11th Cir. Jan. 10, 2023).
The chapter 13 debtor’s bankruptcy schedules listed her mortgage debt as $17,393.04 plus $6,817.42 in arrearages. The mortgagee filed a proof of claim for the arrearages only. Though the life of the debt extended beyond the terms of the plan making it amenable to the “cure and maintain” option, the debtor listed the mortgage claim as “a secured claim paid through the plan.” Another provision guaranteed secured creditors’ retention of their liens until all payments under the plan were completed but provided that “[c]reditors must file a proof of claim to be paid.” The bankruptcy court identified the plan as a “full payment” plan under which the debtor’s entire mortgage debt would be considered paid at the end of completion of the plan payments.
The debtor completed her plan after less three years and after paying only the mortgage arrearage in full. With $15,032.73 remaining on the loan principle, the mortgagee sought to foreclose. The debtor responded with a motion for an order releasing the lien. The bankruptcy court found that the debtor had complied with the terms of her confirmed plan and granted the debtor’s discharge including release of the lien. The district court affirmed. The mortgagee appealed to the Eleventh Circuit.
The circuit court framed the issue as a contest between the anti-modification provision of section 1322(b) and the finality of a confirmation order under section 1327.
The court began with section 1322, observing that because the mortgage extended beyond the life of the plan, the “short -term” exception to the anti-modification provision did not apply. Nor did the debtor’s plan fall into the “cure and maintain” avenue of mortgage provision because the plan specifically contemplated either repayment of the entire mortgage early, or repayment only of the arrearages and release of the remaining debt and lien. The court found that when the bankruptcy court deemed the mortgagee’s claim satisfied and the lien released, it modified the mortgagee’s state-established right to full repayment of the original debt at the agreed upon interest rate.
The court found its decision was controlled by Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821, 822 (11th Cir. 2003). In that case, the confirmed chapter 13 plan provided for only partial payment of mortgage arrears. The court reasoned that the anti-modification provision prohibited modifications to the mortgagee’s rights and therefore the creditor’s “secured claim for arrearage survived the plan, and the creditor retained its right to full satisfaction of its claim.” The Bateman court stated that, “[a]llowing the confirmed plan to extinguish the mortgagee’s rights would deny the effect of the antimodification provision.”
In this case, the court found the bankruptcy court erred by eliminating the mortgagee’s entire claim and lien upon payment only of the arrearages. “Supreme Court and our precedent require us to conclude that declaring a homestead-mortgagee’s lien satisfied before the debt the lien secures is paid in full constitutes an impermissible modification of the homestead-mortgagee’s rights under the antimodification provision.” Because Nobelman v. Am. Savs. Bank, 508 U.S. 324, 332 (1993) emphasized that the anti-modification provision protects the “rights” rather than “claims” of the creditors, it was irrelevant that the debtor may have treated the mortgage in accordance with the claim as filed by the mortgagee.
The conflict arose out of the conflict between the antimodification provision and the res judicata effect of plan confirmation in section 1327. That section provides: “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”
In United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the Supreme Court held that the interest of finality requires that parties be held to the terms of a confirmed plan. In that case the bankruptcy court confirmed a plan which discharged the interest on the debtor’s student loan without fulfilling the requisite showing of undue hardship. The Supreme Court found that where the creditor had notice of the plan terms and did not object, the res judicata effect of plan confirmation outweighed the fact that the plan terms were contrary to other requirements of the Code. This is so even if the plan contains provisions that are impermissible under the Code.
The debtor argued that Espinosa abrogated Bateman.
For five reasons, the court here found that Espinosa had no effect on the release of a lien after a confirmed plan erroneously modified the rights of the lienholder.
First, the court found that Espinosa was expressly limited to challenges brought under Federal Rule of Civil Procedure 60(b)(4), seeking relief from judgment.
Second, the procedural posture of Espinosa differed significantly from Bateman. Espinosa involved a creditor coming back six years after the debt was discharged and ten years after plan confirmation to launch a collateral challenge to the discharge. Bateman, on the other hand, involved a challenge to treatment of a claim after plan confirmation but prior to discharge and was not a collateral attack on the debt that was subject to discharge.
The court here, noted that, like the lender in Bateman, the mortgagee “timely objected to and appealed the bankruptcy court’s decision to release its lien.”
Third, the holding in Espinosa relied on whether a particular judgment was “void,” within the meaning of Rule 60(b)(4). The Supreme Court declined to “expand the universe of judgment errors” that would render an order void under the rule.
Fourth, Bateman was not decided on the basis that the plan was illegally confirmed and therefore, as in the case here, Bateman did not involve a collateral attack on the confirmed plan and was not decided on section 1327 finality.
Finally, the court noted that it had confirmed its holding in Bateman in the post-Espinosa case of Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306, 1331 (11th Cir. 2018).
The court turned to whether the express terms of the debtor’s plan according to which the bankruptcy court released the mortagee’s lien should have been given effect under the finality rule set forth in section 1327. The court found that, under Bateman, the bankruptcy court should not have released the lien, stating that “even though our cases have recognized the importance of finality, they have also said time and again that secured liens survive bankruptcy proceedings.”
In sum, the court stated: “Although MCS did not timely object to the Plan’s confirmation or appeal the discharge of Bozeman’s debt, MCS did oppose Bozeman’s motion to release its lien, and it timely appealed the bankruptcy court’s order granting her motion. And because releasing MCS’s lien before MCS receives full payment would impermissibly modify MCS’s rights, MCS’s lien must survive the bankruptcy proceeding.”
$5 Million Domestic Support Debt and Offshore Trust
The bankruptcy court was not bound by the state court’s finding that the debtor’s ex-wife did not violate the stay when she had the debtor arrested for failure to pay domestic support out of an offshore trust he claimed no ownership interest in, but the court found the issues more appropriate for summary judgment and granted the debtor’s motion to vacate its earlier order of dismissal. Foufas v. Foufas, No. 20-22967, Adv. Proc. No. 22-1013 (Bankr. S.D. Fla. June 17, 2022). [Read more…] about $5 Million Domestic Support Debt and Offshore Trust
Debtor Squeezes Through Loophole and Lands in Dismissal
Where the debtor filed her second chapter 13 petition while her first case was still pending, the automatic stay was not reduced by section 362(c)(3) but, without regard to the debtor’s intent, the second case was an abuse of process and the court could dismiss sua sponte after notice and a hearing. In re Giles, No. 22-14494 (Bankr. S.D. Fla. July 15, 2022). [Read more…] about Debtor Squeezes Through Loophole and Lands in Dismissal
Cat Confiscation Case
The County Animal Control Office did not violate the automatic stay when it refused to return 36 cats it had confiscated from the debtor’s property where it acted within its police and regulatory powers, and the court lacked jurisdiction to order the return of the cats where the trustee had abandoned them. In re Mitchell-Smith, No. 21-57646 (Bankr. N.D. Ga. June 17, 2022). [Read more…] about Cat Confiscation Case