NCBRC News

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Loan to Refinance Student Loan Need Not Be Educational Loan to be Nondischargeable

A debt incurred when a debtor refinances a student loan through a non-institutional lender may be nondischargeable in bankruptcy without regard to whether the debt itself constituted a qualified educational loan. Juber v. Conklin (In re Conklin), No. 19-91 (W.D. N.C. Apr. 6, 2020).

The debtor, Lina Conklin, financed her college education, in part, through private student loans. After she graduated, Ms. Conklin became engaged to the creditors’ son, Christopher Juber. At that time, she owed over $100,000 in private student loans at an interest rate of 9.5%. In an effort to assist the as-yet-unmarried couple financially, Christopher Juber’s parents, Kevin and Linda Juber, paid off Ms. Conklin’s student loans using their home equity line of credit (HELOC) at an interest rate of 1.99%. In exchange, Ms. Conklin orally agreed to make biweekly payments to the Jubers of $500, and, when the Jubers sold their home, Ms. Conklin agreed that she and their son would refinance the remaining principal on the HELOC loan. When Ms. Conklin later broke off her engagement with their son, the Jubers and Ms. Conklin entered into a promissory note under which Ms. Conklin agreed to repay the loan over ten years at 9.5% interest. [Read more…] about Loan to Refinance Student Loan Need Not Be Educational Loan to be Nondischargeable

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Ninth Circuit Ties Itself in Knots to Affirm Lien Avoidance Dismissal

In an unusual path, the Ninth Circuit affirmed the bankruptcy court’s dismissal of the debtor’s lien avoidance action where it found the underlying lien, based on an abstract of judgment which did not “substantially comply” with state requirements, to be invalid. Sanger v. Ahn (In re Ahn), No. 18-16794 (9th Cir. Feb. 28, 2020) (unpublished).

Ms. Ahn filed an adversary complaint in her bankruptcy seeking declaratory judgment that the Sangers’ lien was invalid because it was based on an abstract of judgment which did not comply with state law notice requirements. In the alternative, Ms. Ahn sought to avoid the judicial lien as impairing her homestead exemption. The bankruptcy court granted summary judgment to Ms. Ahn on the declaratory judgment count and dismissed the lien avoidance claim as moot.

On appeal, the district court found that the bankruptcy court lacked subject matter jurisdiction to reach the declaratory judgment claim and reversed that holding. Rather than remanding to the bankruptcy court to address the issue of lien avoidance, however, the district court instead went on to determine that the underlying judicial lien was invalid and, therefore, the debtor’s homestead exemption was not impaired under section 522(f). The district court, therefore, affirmed the bankruptcy court’s dismissal of the lien-avoidance claim. [Read more…] about Ninth Circuit Ties Itself in Knots to Affirm Lien Avoidance Dismissal

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Plan May Be Modified to Incorporate HAVEN Act Veteran’s Benefits Exclusions

The Bankruptcy Court for the Eastern District of Michigan found that the debtor may modify her chapter 13 plan to reduce her plan payments based on the post-confirmation enactment of the HAVEN Act, which provides for exclusion of veterans’ disability benefits from CMI. In re Gresham, No. 18-56289 (Bankr. E.D. Mich. March 10, 2020).

In August, 2019, Congress enacted the Honoring American Veterans in Extreme Need Act (HAVEN), which articulates an “express exclusion to CMI for certain compensation, pension, pay, annuity, or allowance paid ‘in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services.’” The stated purpose of the amendment was to correct an “obvious inequity” in section 101(10A) which excludes social security benefits from CMI but not similar veteran’s benefits. As a result of the new legislation, the chapter 13 debtor here sought to modify her 100% chapter 13 plan to exclude those benefits from her CMI and reduce her monthly plan payments. The trustee objected, seeking the court’s direction as to the appropriate application of the HAVEN Act because it was enacted after the debtor’s plan was confirmed without objection. [Read more…] about Plan May Be Modified to Incorporate HAVEN Act Veteran’s Benefits Exclusions

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No Equitable Subordination of Liens in Pennsylvania

Neither Pennsylvania nor the Third Circuit apply the doctrine of equitable subordination to reprioritize a junior lien over a modified senior lien. Hamilton v. Pa. Hous. Fin. Agy., No 18-5417 (E.D. Pa. March 5, 2020).

The debtors had a home mortgage for $145,000. They defaulted on their mortgage and applied for Homeowner’s Emergency Mortgage Assistance (HEMAP). Through that program, they entered into an open-ended mortgage with the Pennsylvania Housing Finance Agency (PHFA), which operated as a line of credit with a principal of $51,000. PHFA then satisfied the mortgage arrearage and maintained the mortgage through April 2013. In May 2013, the then-current mortgage holder obtained a judgment of foreclosure against the debtors for $139,447.26. After that, the debtors and the mortgage assignee entered into a modified agreement, which the debtors later defaulted on. When the creditor sought to foreclose, the debtors filed for Chapter 13 bankruptcy. PHFA filed a claim for over $18,000, and the mortgage creditor filed a claim for over $189,000. Because the mortgage lien exceeded the value of the property, the debtors moved the bankruptcy court to find the PHFA junior debt wholly unsecured under section 506(a). [Read more…] about No Equitable Subordination of Liens in Pennsylvania

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Shared-Responsibility Payment Not an Excise Tax Entitled to Priority

The shared-responsibility payment required by the Affordable Care Act is not an “excise tax on a transaction” subject to priority treatment under section 507(a)(8)(E)(i). United States v. Chesteen, No. 19-30195 (5th Cir. Feb. 20, 2020) (unpublished).

In his Chapter 13 bankruptcy schedules, Mr. Chesteen listed a $695.00 debt to the government based on his failure to make his 2016 shared-responsibility payment (SRP). His proposed plan did not provide for payment of the debt. The government amended its proof of claim to include the debt as “an excise tax on a transaction” entitled to priority under section 507(a)(8)(E)(i) and requiring repayment under section 1322(a)(2). Mr. Chesteen countered that the debt was not a tax but a penalty that did not enjoy priority under the Code. The bankruptcy court agreed with Mr. Chesteen. In re Chesteen, No. 17–11472, 2018 WL 878847, at *3 (Bankr. E.D. La. 9 Feb. 2018). On appeal, the district court reversed, finding the SRP had been enacted under Congress’s taxing powers. United States v. Chesteen, No. 18–2077, 2019 WL 1499532, at *2–3 (E.D. La. 25 Feb. 2019). Neither the bankruptcy court nor the district court addressed the issue of whether the SRP was an “excise tax on a transaction” under section 507(a)(8)(E)(i). [Read more…] about Shared-Responsibility Payment Not an Excise Tax Entitled to Priority

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First Circuit BAP Applies “Gavel Rule” to Foreclosure Sale

A panel for the First Circuit BAP found that the debtor could not cure and maintain her mortgage in bankruptcy because she had no interest in the property, which was sold in a foreclosure sale before her bankruptcy petition, even though the mortgagee failed to record the deed of sale in accordance with state foreclosure law. U.S. Bank Nat’l Assoc. v. Vertullo, Nos. 18-56, 18-63 (B.A.P. 1st Cir. Jan. 10, 2020).

After the debtor defaulted on her mortgage, the mortgagee, U.S. Bank, sold the property to a third party through a foreclosure sale. The foreclosure deed was not recorded. When Ms. Vertullo filed for chapter 13 bankruptcy, the Bank sought to lift the automatic stay to evict Ms. Vertullo from the property. Ms. Vertullo countered that, because the foreclosure sale was not recorded within the time required by state law, she retained an interest in the property and could cure and maintain the mortgage through her plan. The bankruptcy court agreed. It denied the Bank’s motion for relief from stay and, in a separate order, confirmed the debtor’s plan. In re Vertullo, 593 B.R. 92, 94 (Bankr. D.N.H. 2018). The Bank appealed both orders to the Bankruptcy Appellate Panel for the First Circuit. [Read more…] about First Circuit BAP Applies “Gavel Rule” to Foreclosure Sale

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IRA and 401(k) Obtained Through Divorce Not Exempt

Incorrectly relying on the decision in Clark v. Rameker, the Eighth Circuit found that the chapter 7 debtor was not entitled to exempt funds in his ex-spouse’s IRA and 401(k), which he obtained through a dissolution agreement but which had not been transferred to his name at the time of his bankruptcy petition. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), No. 18-3415 (8th Cir. Feb. 7, 2020).

The debtor acquired his ex-wife’s IRA and half of her 401K in a dissolution. When the debtor failed to pay his divorce attorney’s fees, his lawyer obtained an order from the court placing an attorney’s lien on the funds in the IRA and the 401K. The lien exceeded the value of the accounts. Six months later, Mr. Lerbakken filed for Chapter 7 bankruptcy, seeking to exempt the two accounts under section 522(b)(3)(C). At the time of his petition, he had not filed a Qualified Domestic Relations Order (QDRO), nor had the accounts been transferred to his name. Upon objection by the divorce attorney, the court found the two accounts were not “retirement funds” and disallowed the exemption. The BAP affirmed. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), 590 B.R. 895 (B.A.P. 8th Cir. 2018). [Read more…] about IRA and 401(k) Obtained Through Divorce Not Exempt

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Tax Debt from Late-Filed Tax Return Dischargeable

The Eleventh Circuit broke with the First, Fifth, and Tenth Circuits to find that section “523 does not incorporate a mandatory precondition that a tax return must be timely filed to be dischargeable.” Mass. Dept. of Rev. v. Shek, No. 18-14922 (11th Cir. Jan. 23, 2020).

The debtor filed his 2008 Massachusetts tax return seven months late. Six years later, he filed for Chapter 7 bankruptcy in Florida. After discharge, the Massachusetts Department of Revenue commenced collection efforts to collect on the 2008 tax liability. Mr. Shek reopened his bankruptcy seeking to have that debt included in his discharge. Both he and the MDOR filed for summary judgment. The bankruptcy court found that, under the Beard test, section 523(a) did not except Mr. Shek’s tax liability from discharge. The district court affirmed. [blogged here]The MDOR appealed to the Eleventh Circuit. [Read more…] about Tax Debt from Late-Filed Tax Return Dischargeable

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Fifth Circuit Approves Alternative to Judicial Estoppel Reaching Same Result

Finding its decision “odd” and “not the route we would have taken,” the Fifth Circuit affirmed the bankruptcy court’s order declining to apply judicial estoppel to put an end to the debtor’s personal injury litigation against Wal-Mart, but ordering the debtor to turn over any recovery he made through the lawsuit for distribution to creditors. Wal-Mart Stores v. Parker, No. 18-30378 (5th Cir. Jan. 8, 2020) (unpublished).

While Mr. Parker’s Chapter 13 case was pending, he suffered a work-related injury during a delivery to Wal-Mart. He filed a civil lawsuit in state court against the company. He failed to notify the bankruptcy trustee or the court of the lawsuit. He completed his plan, received discharge, and his case was closed. Wal-Mart moved to reopen to seek dismissal of Mr. Parker’s personal injury case based on judicial estoppel. The bankruptcy court found that the elements of judicial estoppel were met, but declined to apply the doctrine. Instead, the court ordered Mr. Parker to turn over any proceeds from the lawsuit to the bankruptcy trustee for distribution to creditors. Wal-Mart sought and obtained leave to appeal directly to the Fifth Circuit. [Read more…] about Fifth Circuit Approves Alternative to Judicial Estoppel Reaching Same Result