NCBRC News

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Debtor and Trustee Making Duplicate Mortgage Payments

Where both the debtor and the trustee paid down the debtor’s mortgage and arrearage, the court did not err in finding that the resulting overpayment should go to the trustee. White v. Regions Bank, No. 19-130 (E.D. Tenn. Feb. 24, 2020).

The debtor’s original Chapter 13 plan provided for him to make mortgage payments outside the plan. After he fell behind on those payments, he modified his plan to provide for mortgage and mortgage arrearages to be paid through the plan. The debtor completed his plan, the trustee filed her final report, and the bankruptcy court entered an order of discharge on November 15, 2017. Soon thereafter, it came to light that the trustee had failed to pay the mortgage arrearage. Citing F.R.C.P. 60(b) and her own error, the trustee withdrew her notice of final payment and moved to reopen to administer additional assets. The case continued under the plan with the trustee making payments toward the mortgage and arrearage.

At the same time, however, the bank sent collection letters to the debtor demanding payment of the mortgage and arrears. The debtor, therefore, resumed his payments outside the plan. As a result, with both the debtor and the trustee paying mortgage and arrears, the bank found itself with excess money on its hands. It sought instruction from the court as to where to refund the overpayment. In an order dated April 18, 2019, the bankruptcy court withdrew its earlier order of discharge and ordered the bank to submit the overpayment to the trustee for application to the remaining balance on the arrearage, with any excess going to the debtor. The debtor appealed. [Read more…] about Debtor and Trustee Making Duplicate Mortgage Payments

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IRS Setoff Supersedes Exemption

The IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund. Copley v. U.S.A., No. 18-2347 (4th Cir. May 12, 2020).

When the Copleys filed for Chapter 7 bankruptcy, they listed a debt to the IRS of over $13,500. They also claimed their anticipated tax refund as exempt under Virginia’s exemption for “money and debts due the householder not exceeding $5,000.” They subsequently filed their tax returns, which showed that their withheld income exceeded the amount they owed by over $3,000. Instead of sending the Copleys a refund, however, the IRS notified them that it had used the overpayment to set off the pre-existing tax debt. The debtors filed a complaint in the bankruptcy court seeking an order requiring the IRS to turn over the tax refund to the debtors. The bankruptcy court found that the refund was part of the bankruptcy estate and that the exemption superseded the IRS’s right to set off. The district court affirmed. [Read more…] about IRS Setoff Supersedes Exemption

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Creditor Had Affirmative Duty to Stop State Contempt Action

“A creditor, who has put a collection effort into motion, must affirmatively act to stop, stay, or hold the collection effort in abeyance or risk incurring liability once a bankruptcy commences.” Valentine v. Valentine, No. 19-40593, Adv. Proc. No. 19-4022 (Bankr. E.D. Mo. Jan. 27, 2020).

Before he filed for Chapter 7 relief, the debtor and the creditor were divorced. The divorce agreement obligated the debtor to pay his ex-spouse’s domestic support. At some point after their divorce, the debtor fell behind on his payments and sought to modify the support agreement. His efforts were unsuccessful and, in a state court contempt action, he was ordered to sell his residence to pay the domestic support debt. He failed to do so and continued to reside in the property. He filed for bankruptcy on February 1, 2019. Within days of filing his petition, on February 4, 2019, the state court held a second hearing for contempt due to his failure to sell his residence. Though his ex-spouse’s divorce counsel knew of the bankruptcy filing, he did not attempt to stop the contempt hearing. At the conclusion of the hearing, the state court found the debtor had filed for bankruptcy to remove the residence from the grasp of the creditor. The court issued an Order & Confinement holding in part: “[Debtor] to remain confined until he pays the sums due and owing in principal sum of $64,003.73 as of 1-22-18 or otherwise purges himself of contempt.” Pursuant to this order, the debtor was jailed for four days. On appeal, the state appellate court vacated the Order & Confinement, finding that the debtor had no avenue for purging the contempt. [Read more…] about Creditor Had Affirmative Duty to Stop State Contempt Action

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Debtor May Pay Car Loan Outside Plan at 15% Interest Rate

The bankruptcy court did not abuse its discretion in confirming, over the trustee’s objection, a plan under which the Chapter 13 debtor would pay her car loan outside the plan at the contractual interest rate of 15%. McDonald v. Chambers (In re Chambers), No. 19-10421 (E.D. Mich. Feb. 26, 2020).

The debtor had three loans with Dort Federal Credit Union (DFCU): a car loan, a credit card balance of approximately $1,500, and a cash loan of $1,000. She and DFCU compromised the two non-car loans to $2,00,0, which she proposed to pay through her plan. In addition, DFCU consented to her proposal to pay the car loan outside the plan at the 15% contractual interest rate. The trustee objected because the interest rate exceeded the “prime plus” rate sanctioned in Till v. SCS Credit Corp., 541 U.S. 465 (2004), and would result in the car creditor receiving more than other unsecured creditors. The bankruptcy court confirmed the plan, and the trustee appealed. [Read more…] about Debtor May Pay Car Loan Outside Plan at 15% Interest Rate

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Local Rule Requires Automatic Submission of Tax Returns During Plan

The Arizona District Court found that the District of Arizona’s Local Plan Form for Chapter 13 bankruptcies, under which all debtors must automatically submit their tax returns during the life of their plans, does not conflict with the Code. Reichard v. Brown (In re Reichard), No. 19-2010 (D. Ariz. March 12, 2020) (unpublished).

In 2017, Fed. R. Bankr. P. 3015 was amended to provide that a Chapter 13 debtor must use federal Official Form 113, unless there is a local form governing Chapter 13 plans. Part 2.3 of the Official Form 113 offers three alternatives for dealing with a debtor’s tax returns during the course of his plan, the second of which requires the debtor to provide all tax returns filed during the plan to the trustee within 14 days of filing with the taxing authority. In response, the District of Arizona amended its own Local Plan Form to mirror that second alternative.

In this case, the trustee objected to the debtors’ proposed plan because it did not provide for automatically turning over their tax returns. The bankruptcy court sustained the objection and ordered the debtors to include the provision in their plan. They appealed to the district court. [Read more…] about Local Rule Requires Automatic Submission of Tax Returns During Plan

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Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds

The bankruptcy court properly reduced the debtor’s homestead exemption and imposed a constructive trust on the property where the debtor paid off her mortgage using funds from the sale of a vehicle she did not own and to which the creditor had the right of possession. Graybill v. Thomas (In re Bentley), No. 19-14758 (11th Cir. Apr. 22, 2020) (unpublished).

This case involved a 1930 Cord Phaeton automobile. Originally, the car was owned by the debtor’s son, Lynford Bentley. Dr. Susan Kolb lent Lynford $50,000, which loan was secured by the car. Lynford stopped paying on the loan, and then he died. Dr. Kolb sued Lynford’s girlfriend to obtain the car or its value. But Lynford’s mother, and the debtor in this case, Catherine Bentley, took possession of the car and removed it from Georgia to Florida. A Georgia judge issued an order giving Dr. Kolb the right to possession of the car, and Dr. Kolb informed Catherine of that order. Notwithstanding her knowledge of Dr. Kolb’s right to possession of the vehicle, Catherine sold it at auction, clearing $112,947.81. She used the majority of the funds to pay off her mortgage. Dr. Kolb sued Ms. Bentley for fraudulent transfer. Ms. Bentley filed for Chapter 7 bankruptcy and claimed a homestead exemption under Florida law.

Finding that Ms. Bentley never owned the vehicle and therefore had no right to the funds she used to pay off her mortgage, the bankruptcy court sustained the trustee’s objection to the exemption claim, reducing the amount of the exemption by $112,947.81. The bankruptcy court also overruled the debtor’s objection to Dr. Kolb’s claim and imposed a constructive trust on the debtor’s homestead property. On appeal, the district court affirmed. [Read more…] about Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds

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Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options

The bankruptcy court did not abuse its discretion in permitting the Chapter 13 trustee to modify the debtor’s plan to capture proceeds from the sale of stock options that the debtor received as part of his employment compensation. Berkley v. Burchard (In re Berkley), No. 19-1197 (B.A.P. 9th Cir. April 17, 2020).

Mr. Berkley’s Chapter 13 plan was confirmed in April 2015. In 2016, he became CEO of Antares Audio Technologies. Part of his compensation was the receipt of stock options in the company. After he had completed 57 months of payments on his Chapter 13 plan, Mr. Berkley notified the trustee that Antares was being sold and that his stock options would be bought out for $3.8 million. The trustee moved to modify the plan to incorporate a portion of the sale proceeds to pay off Mr. Berkley’s creditors at 100%. The bankruptcy court granted the motion to modify, and Mr. Berkley appealed. [Read more…] about Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options

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Court Relies on, then Discusses Problems with, Dewsnup

Finding that the case was governed by Dewsnup, a bankruptcy court granted the lien creditor’s motion to dismiss the Chapter 7 debtors’ complaint seeking to strip down its partially unsecured lien. Vasquez v. JPMorgan Chase Bank, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020).

The Chapter 7 debtors initiated a challenge to the controversial decision in Dewsnup v.Timm, 502 U.S. 410 (1992), when they sought to strip down a partially underwater lien held by JPMorgan. Given that, in 1992, the Supreme Court prohibited chapter 7 lien stripping of partially secured liens, the bankruptcy court did the only thing it could do and dismissed the complaint. Acknowledging the problematic nature of the decision in Dewsnup, however, the court went on to examine that case more closely. [Read more…] about Court Relies on, then Discusses Problems with, Dewsnup

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No Bad Faith in Filing Second Chapter 13 Petition while First Still Pending

The bankruptcy court declined to attribute bad faith to the debtors when they voluntarily dismissed one Chapter 13 case after a motion for relief from stay had been filed by the mortgage creditor, and filed a second Chapter 13 petition while the first was still pending. 21st Mortgage Corp. v. Wilkinson, No. 19-3021 (Bankr. M.D. Pa. Nov. 26, 2019).

The debtors’ first Chapter 13 was filed by counsel, and when the debtors failed to respond to the mortgage creditor’s motion for relief from stay, the court granted default judgment in the creditor’s favor. Five months later, through new counsel, the debtors filed another chapter 13 petition. The following day, they voluntarily dismissed their prior case. Relying on Section 109(g)(2), the mortgage creditor filed a motion to dismiss the second petition as being filed in bad faith to avoid the consequences of its motion for relief from stay. [Read more…] about No Bad Faith in Filing Second Chapter 13 Petition while First Still Pending