State law discovery sanctions owed to a non-governmental entity for compensatory purposes do not fall under Section 523(a)(7)’s exception to discharge for fines or penalties, and are therefore dischargeable. Costs related to the State Bar’s disciplinary actions are owed to a governmental agency, are punitive rather than compensatory in nature, and are therefore excepted from discharge. Where the debtor’s law license suspension was contingent upon her paying nondischargeable costs, the suspension was not discriminatory in violation of Section 525(b). Albert-Sheridan v. State Bar of Calif., No. 19-60023 (9th Cir. June 10, 2020). [Read more…] about Dischargeability of Sanctions Against Attorney
Debtor’s Assumption of Lease Removes Property from Estate
Once the trustee declines to assume an ongoing lease, the leased property drops out of the estate and new debt based on the debtor’s failure to make payments on the lease is not an administrative expense under section 503(b). Microf LLC v. Cumbess, No. 19-12088 (11th Cir. June 3, 2020).
When he filed for Chapter 13 bankruptcy, the debtor’s plan provided that the arrears owed on an unexpired lease for an HVAC unit would be paid through the estate, and he would assume the ongoing lease, paying for it outside the plan. He failed to maintain the lease payments, and the HVAC creditor, Microf, sought to have the new arrears treated as administrative expenses by the bankruptcy court and given priority for repayment. The trustee objected. The bankruptcy court sustained the objection, finding that when the debtor assumed the lease, the property exited the bankruptcy estate and the new debt could not be deemed an administrative expense. The district court affirmed. [Read more…] about Debtor’s Assumption of Lease Removes Property from Estate
UpRight Law Not Entirely Upright
The bankruptcy court did not abuse its discretion in imposing sanctions for violation of section 526(a) against UpRight law firm for statements in its Attorney Disclosures which were prohibited by an earlier settlement agreement and were therefore misleading. Law Solutions of Chicago, LLC v. Corbett, No. 19-11405 (11th Cir. Aug. 31, 2020). [Read more…] about UpRight Law Not Entirely Upright
Challenge to Dewsnup Moving Up
When the debtors filed for Chapter 7 bankruptcy, they had two outstanding mortgages on their residence. The first was partially secured, and the second was fully underwater. The debtors filed an adversary complaint seeking to strip down the partially secured senior lien. The bankruptcy court, compelled by Dewsnup v.Timm, 502 U.S. 410 (1992) and Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), granted the creditor’s motion to dismiss. In re Vasquez, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020). Agreeing with the bankruptcy court’s “thorough analysis and conclusions,” the district court affirmed. In re Vasquez, No. 20-62 (E.D. N.C. Aug. 2020). [Read more…] about Challenge to Dewsnup Moving Up
Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee
Funds fraudulently transferred during a Chapter 13 case remain in the debtor’s “constructive possession” and become part of the Chapter 7 estate upon conversion. Brown v. Barclay, No. 18-60029 (9th Cir. March 23, 2020).
The Chapter 13 debtor received an inheritance while in bankruptcy, which he divided between himself and his three brothers without notifying the Chapter 13 trustee. When the trustee learned of the unauthorized transfer, he moved the court to convert the debtor’s case to Chapter 7 as a sanction. Finding the debtor had acted in bad faith, the bankruptcy court ordered the conversion. The Chapter 7 trustee sought turnover of the funds from all the brothers. One of the brothers, the appellant in this case, fought turnover on the basis that because the debtor was not in control of the funds at the time of conversion, they did not become part of the chapter 7 estate. The bankruptcy court disagreed, and the bankruptcy appellate panel affirmed. [Read more…] about Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee
First-In First-Out Applies to Commingled Account
The Bankruptcy Court correctly used the first-in, first-out approach to determine how much of a commingled account could be attributed to exempt funds. Tydings v. Reed (In re Tydings), No. 20-4057 (W.D. Mo. Sept. 3, 2020).
After her husband died, the Chapter 7 debtor received surviving widow’s social security benefits, which she deposited into her bank account, where she also deposited her weekly paychecks. Before receiving the social security payments, the debtor had $581.27 in her bank account. In the three months prior to her bankruptcy filing, the debtor deposited $15,171.57 in social security funds and $6,670.38 in wages into the account. During that same period, the debtor withdrew $13,461.07 from the account, leaving a balance of $8,939.15 on the petition date. The debtor claimed the entire balance in her account as exempt in bankruptcy. The trustee objected because not all the funds in the account were exempt. The trustee argued that the court should apply a first-in, first-out (FIFO) analysis, which would allow the debtor to exempt $3,981. The bankruptcy court sustained the objection, and the debtor appealed to the district court. [Read more…] about First-In First-Out Applies to Commingled Account
Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated
Finding that it encroached on a below-median debtor’s substantive rights, the Fifth Circuit invalidated a local form Chapter 13 plan provision that required all debtors to turn over any tax refund in excess of $2,000. Diaz v. Viegelahn, No. 19-50982 (5th Cir. Aug. 26, 2020).
NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case. [Read more…] about Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated
10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
An educational benefit is not a student loan for nondischargeability purposes under section 523(a)(8)(A)(ii). McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020).
When the debtors filed their Chapter 13 petition, they had many outstanding student loans, including six private educational loans held by Navient totaling approximately $107,000 (the Loan). The trustee objected to confirmation of the plan, citing its failure to provide for nondischargeable student loans. The debtors filed an amended plan specifically to correct certain inaccuracies not related to student loans. They also added the provision that “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until the end of the plan.” The plan defined unsecured Class Four claims as “[a]llowed unsecured claims not otherwise referred to in the Plan.” Navient agreed that class four claims were dischargeable. [Read more…] about 10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
Social Security Benefits May Be Considered for Abuse under 707 and Good Faith under 1325
A debtor’s social security income is a proper factor to consider in an abuse analysis under section 707(b)(3)(B) and in a good faith analysis under section 1325(a)(3). Meehean v. Vara (In re Meehean), No. 20-10380 (E.D. Mich. Aug. 18, 2020).
When they filed their Chapter 7 petition, debtors listed $5,842 in monthly income ($4,007 in Social Security benefits and $1,835 in pension income) and $4,446 in monthly expenses. They had $142,871 in secured mortgage debt and $43,100 in unsecured non-priority debt. The trustee moved to dismiss the petition as an abuse of bankruptcy, arguing that, if the debtors committed their social security income to a chapter 13 plan, they could pay off their unsecured debt over five years. The bankruptcy court agreed and granted the trustee’s motion. In re Meehean, 611 B.R. 574 (Bankr. E.D. Mich. 2020).
The debtors appealed to the district court, arguing that the bankruptcy court erred by considering social security income as a factor in a totality of circumstances test for abuse of bankruptcy under section 707(b)(3)(B). [Read more…] about Social Security Benefits May Be Considered for Abuse under 707 and Good Faith under 1325
Standing to Bring Claims in State Court Relating to Estate Property
The Bankruptcy Appellate Panel for the Tenth Circuit found that the bankruptcy court erred when it declined to exercise its exclusive jurisdiction to determine whether state causes of action raised by investors in the debtor’s pre-bankruptcy Ponzi scheme belonged to the Debtor’s bankruptcy estate: an issue which the panel found was “central to whether the investors had standing to pursue those claims and whether they violated the discharge injunction” by doing so. Hafen v. Adams (In re Hafen), No. 19-31 (B.A.P. 10th Cir. July 30, 2020). [Read more…] about Standing to Bring Claims in State Court Relating to Estate Property