National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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Attorney Fees Paid Out of Undistributed Funds

Undistributed funds in the hands of the Chapter 13 trustee at the time of the debtor’s voluntary dismissal revest in the debtor, and where the debtor’s contract with her bankruptcy counsel provided for payment of attorney’s fees out of undistributed funds there was “cause” for the court to order such payment. In re Beaird, No.16-21725 (Bankr. D. Kans. Sept. 11, 2017).

When Ms. Beaird voluntarily dismissed her Chapter 13 plan, the trustee held $13,788.87 in undistributed funds earmarked for distribution to Rushmore Loan Management Corp. The accumulation of funds was a result of Rushmore’s delay in filing its proof of claim until approximately ten months after Ms. Beaird filed her petition. [Read more…] about Attorney Fees Paid Out of Undistributed Funds

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Eleventh Circuit Eliminates Presumption of Intent for Judicial Estoppel

Whether a debtor intends to make a mockery of the judicial system when she fails to disclose a civil lawsuit in her bankruptcy schedules requires consideration of a totality of facts and circumstances. Slater v. U.S. Steel Corp., No. 12- 15548 (11th Cir. Sept. 18, 2017).

When she filed her chapter 7 bankruptcy petition, Sandra Slater failed to disclose her civil lawsuit for retaliation and discrimination in her employment that was pending in district court. In fact, in her Schedule B and in the Statement of Financial Affairs she affirmatively stated that she had no contingent claims or pending lawsuits. After her bankruptcy was fully administrated, U.S. Steel moved for summary judgment in the district court seeking a finding that her pending claims for employment discrimination should be barred by the doctrine of judicial estoppel due to her failure to disclose them in her bankruptcy. The next day, explaining that she had misunderstood the questions in the bankruptcy filings, Ms. Slater amended her bankruptcy documents to list the lawsuit. The bankruptcy court granted the trustee’s motion for an order to employ Ms. Slater’s current district court lawyers (who were different from her bankruptcy lawyer) so they could continue to pursue the employment lawsuit. Ms. Slater then converted from chapter 7 to chapter 13 but failed to make all required contributions to the plan and her case was ultimately dismissed.

Based on Eleventh Circuit precedents, Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) and Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), the district court in Ms. Slater’s civil case held that the claims were barred by judicial estoppel by virtue of her failure to disclose and the presumption that she was motivated by the desire to conceal the asset from bankruptcy creditors. The court granted summary judgment to U.S. Steel. The Eleventh Circuit affirmed, but in her concurring opinion, Judge Tjoflat urged the court to reconsider its precedents en banc.

In en banc review, the Eleventh Circuit reconsidered its rule that “the mere fact of the plaintiff’s nondisclosure is sufficient [to establish intent to mislead], even if the plaintiff corrected his bankruptcy disclosures after the omission was called to his attention and the bankruptcy court allowed the correction without penalty.”

The court began its analysis with a look at of the difference between chapter 7 and chapter 13, finding that, in chapter 7, the debtor’s property becomes part of the bankruptcy estate to be administered by the trustee and, therefore, only the trustee has standing to pursue a pending lawsuit. In chapter 13, on the other hand, once a plan is confirmed the property of the estate reverts to the debtor and she has standing to maintain the civil suit.

With this difference in mind, the court turned to principles of judicial estoppel. Under that doctrine, a court will bar a suit when the person against whom the doctrine is to be applied “(1) took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the civil lawsuit and (2) intended to make a mockery of the judicial system.” It is the second prong of this test that the court focused on in its decision, noting that Barger and Burnes essentially create a presumption of satisfaction of the second prong by virtue of satisfaction of the first.

The court found the presumption erroneously ignored the possibility that a debtor’s failure to disclose could be based on inadvertence or mistake and was inconsistent with other precedents out of the Eleventh Circuit. For instance, Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004), held that judicial estoppel could not be applied to bar a chapter 7 debtor’s civil lawsuit because that debtor, having lost standing to pursue the civil case upon filing for bankruptcy, could not have taken inconsistent positions as to her assets. In Ajaka v. Brooksamerica Mortgage Corp., 453 F.3d 1339 (11th Cir. 2006), the court looked to judicial estoppel in the context of chapter 13. There, the debtor disclosed the civil action to his bankruptcy attorney, but the attorney failed to list it in the bankruptcy schedules. The creditors, however, were aware of the lawsuit and the debtor amended his schedules later to include it. The Eleventh Circuit found the district court’s application of judicial estopped to have been in error and remanded with instructions for the court to address whether the debtor had the requisite intent to conceal.

The Slater panel found that proper analysis of the second prong of the judicial estoppel test requires examination of a totality of the facts and circumstances including, but not limited to, such factors as the debtor’s level of sophistication, whether and under what circumstances she corrected the nondisclosure, whether the debtor’s attorney and/or the creditors were aware of the lawsuit, whether the debtor revealed any other lawsuits to which she was a party, and what action the bankruptcy court deemed appropriate to address the late disclosure. The court overruled Barger and Burnes to the extent they allowed a court to infer a debtor’s intent to mislead without considering these and other relevant circumstances.

The court reasoned that its current ruling was more in line with the principles behind the doctrine of judicial estoppel. It ensures that the debtor had the requisite culpable mental state, it allows the actions of the bankruptcy court to be taken into consideration thereby addressing whether the omission in fact undermined the integrity of the judicial system, and it better supports the equitable underpinnings of the doctrine.  Because the bankruptcy Code and Rules permit a debtor to amend her schedules at any time, and allows the court to reopen a case to administer an asset, the bankruptcy system has its own tools for dealing with non-disclosures to avoid apparent manipulation. The court also noted that “[i]f a court applies judicial estoppel to bar the plaintiff’s claim absent such intent, it awards the civil defendant an unjustified windfall.” Furthermore, as a practical matter, application of judicial estoppel could deprive the debtor’s creditors of the benefits of a victory in the civil lawsuit.

The court noted that in so holding, it joined three other circuits that have applied a totality-of-the-circumstances analysis to the question of judicial estoppel. See Spanie v. Cmty. Contacts, Inc., 756 F.3d 542, 548 (7th Cir. 2014); Ah Quin v. Cty. of Kauai Dep’t. of Transp., 733 F.3d 267, 276 (9th Cir. 2013); Eubanks v. CBSK Fin. Grp., Inc., 385 F.3d 894, 899 (6th Cir. 2004). It disagreed with two circuits applying a similar presumption as that overruled in Barger and Burnes. See, e.g., Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1157-60 (10th Cir. 2007); Ine Superior Crewboats, Inc., 374 F.3d 330, 335-36 (5th Cir. 2004).

The court remanded to the panel to determine whether the district court abused its discretion in applying judicial estoppel to Ms. Slater’s civil lawsuit.

Chief Judge Ed Carnes filed a concurring opinion noting that the decision allows a court to consider the credibility of the debtor even if her testimony with respect to intent is uncontradicted.

Much of the reasoning applied by the en banc panel was argued by NACBA in its amicus brief.

Slater 11th Cir. opinion Sept 2017

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No Jurisdiction over Appeal of District Court Vacation of Confirmation Order

“When a district court vacates a bankruptcy court order confirming a bankruptcy plan and remands for further proceedings, there is no final order sufficient to confer jurisdiction under 28 U.S.C. § 158(d).” Bank of New York Mellon v. Watt, No. 15-35484 (9th Cir. Aug. 16, 2017).

In their bankruptcy plan, Nicholas and Patricia Watt included a provision vesting title to their residence in the mortgagee, Bank of NY, and specifying that “vesting shall not merge or otherwise affect the extent, validity, or priority of any liens on the property.” Bank of NY opposed the mandatory vesting provision and objected to confirmation of the plan. The bankruptcy court confirmed the plan. [Read more…] about No Jurisdiction over Appeal of District Court Vacation of Confirmation Order

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In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over

In chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate, and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition. Hawk v. Engelhart (In re Hawk), No. 16-20641 (5th Cir. Sept. 5, 2017).

Chapter 7 debtors, Gregory and Marcie Hawk, listed an IRA on their schedules and claimed an exemption for the account funds under Texas exemption law. The trustee did not object within thirty days and the court allowed the exemption. Over several months, the Hawks withdrew funds from the account and did not roll them over into a new retirement account within sixty days as required under Texas law. The bankruptcy court found that the funds had lost their exempt status and ordered the Hawks to turn them over to the trustee. The district court affirmed. [Read more…] about In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over

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Plan Modification to Surrender 910 Vehicle Permissible

So long as the modification is proposed in good faith a debtor may modify a plan which originally provided for a “910 Claim” to be paid off in its entirety, to one in which she surrenders the vehicle and treats any deficiency as unsecured. In re Fayson, No. 16-10013 (Bankr. D. Del. July 13, 2017).

After experiencing maintenance problems and a dispute relating to an undelivered warranty on her 910 vehicle, Tabitha Fayson sought to modify her Chapter 13 plan to surrender the vehicle and treat the deficiency as unsecured. Citing In re Nolan. 232 F.3d 528 (6th Cir. 2000), the creditor argued that the modification she sought was prohibited under the Code. The court disagreed and joined the majority of bankruptcy courts finding that treatment of 910 claims may be modified in the manner sought by Ms. Fayson. [Read more…] about Plan Modification to Surrender 910 Vehicle Permissible

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Contingent Interest in Realty Commissions Is Property of Estate

The debtors’ contingent interest in realty sales commissions based on transactions that were not closed at the time of their bankruptcy filing was property of the bankruptcy estate where all of the debtors’ actual realty services were provided pre-petition. Anderson v. Rainsdon (In re Anderson), No. 16-1316 (B.A.P. 9th Cir. Aug.11, 2017).

Chapter 7 debtors, Melanie and Stephen Anderson, were real estate agents with Keller Williams Realty East Idaho. Under their agreement, sales commissions earned by the Andersons were paid directly to Keller Williams. Keller Williams then retained a portion and paid the remainder to “Bastille,” a separate company established by the Andersons post-petition. Bastille then paid the Andersons a “salary.” On the petition date, the Andersons were involved in thirteen real estate transactions in which the contracts between buyers and sellers had been signed but the sales had not yet closed. The chapter 7 trustee sought turnover under section 542(a) of $52,485.92 in commissions the Andersons would acquire post-petition based on these sales agreements. The bankruptcy court ordered turnover in the amount sought.

On appeal, the BAP began its analysis with section 541(a)(1), which provides that the bankruptcy estate is comprised of “all legal or equitable interest of the debtor in property as of the commencement of the case.” Under Segal v. Rochelle, 382 U.S. 375, 379-80 (1966), such property interests include contingent interests so long as they are “sufficiently rooted” in the debtor’s pre-petition past even if the interest relies on a future contingency that has not occurred at the time of the petition.

The panel turned to whether, as the Andersons argued, under Idaho law, their contingent interests were not sufficiently rooted in the pre-bankruptcy past. In Idaho, a realtor earns a commission when three requirements are fulfilled: 1) a purchaser is found, 2) the purchaser enters into a binding contract with the seller, and 3) the transaction closes according to that contract. In this case, the first two requirements were fulfilled pre-petition and the third, post-petition.

The court noted that while Idaho law governs how and when the Andersons earn the commissions, bankruptcy law applies to the issue of what interests make up the bankruptcy estate. The panel relied on the holding in Jess v Carey (In re Jess), 169 F.3d 1204 (9th Cir. 1999), to find that section 541 is broad enough to encompass the contingent interest at issue in this case. At the time of the petition, the Andersons had performed the services necessary to earn their commissions. Although they did not have a right as of the petition date to sue for those commissions, there were no further post-petition services they needed to provide. The court found, therefore, that the commissions were sufficiently rooted in the pre-bankruptcy past to enter into the bankruptcy estate.

The court also rejected the Andersons’ argument that, at the time of the petition, the commissions were possessed by and therefore property of Keller Williams or Bastille. Section 542(a) is based on the debtor’s interest without regard to current possession, and Idaho law recognizes only individuals as having the right to real estate commissions. Therefore, neither Keller Williams nor Bastille could be the rightful owner of the commissions at any time. Furthermore, given the fact that the Andersons established Bastille post-petition, it could not have possessed the property at the time of the petition.

The Andersons’ constitutional arguments based on the Thirteenth Amendment’s prohibition against involuntary servitude and the Equal Protection Clause were raised for the first time on appeal and, for that reason, were disregarded by the panel.

The panel affirmed the bankruptcy court’s turnover order.

Anderson 9th BAP opinion Aug 2017

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No Bad Faith for Failure to Voluntarily Devote Social Security Funds to Plan

Where the debtor’s plan proposed terms that were within the bankruptcy and social security parameters, and there was no evidence of misconduct or bad faith, the bankruptcy court erred in declining to confirm his plan due to his failure to voluntarily contribute some of his social security funds. In re Manzo, No. 16-7218 (N.D. Ill. Aug. 25, 2017). [Read more…] about No Bad Faith for Failure to Voluntarily Devote Social Security Funds to Plan

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Nice Win for Debtors on Means Test Expense Issue

Section 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor’s actual expenses are less. Lynch v. Jackson, No. 16-1358 (4th Cir. Jan. 4, 2017).

When above-median debtors, Gabriel and Monte Jackson, filed for chapter 7 bankruptcy they complied with Form 22A’s instructions to list their expenses using the IRS National and Local Standard amounts rather than their actual expenses which were less. The bankruptcy administrator moved to dismiss their case as abusive under section 707(b)(2)(A)(i). The bankruptcy court denied the motion to dismiss. In re Jackson, 537 B.R. 238 (Bankr. E.D. N.C. 2015), and the Fourth Circuit accepted direct appeal.

The administrator argued that Form 22A’s instructions are erroneous and that the expense deduction amounts listed in the IRS Standards represent a cap on how high an expense amount may be claimed for certain expenses, but that if the actual amount is less, the debtor must use the lesser amount.

In Ransom v. FIA Card Servs., 562 U.S. 61 (2011), the Court addressed application of the IRS Standard expense deductions in the context of abuse under section 707(b). That Court held that, in order to take the IRS Standard expense deduction, a debtor must actually incur the type of expense designated, i.e. the “vehicle ownership” expense requires that the debtor have lease or loan payments on the vehicle. But that Court left open the question of whether, once the expense is found to be “applicable,” the debtor may take the full IRS Standard amount regardless of actual expenses.

The Fourth Circuit found the answer in the plain language of the statute: “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards. 11 U.S.C. § 707(b)(2)(A)(ii)(I).” The fact that Congress used the word “actual” elsewhere in the same statute indicates that it made a distinction between applicable and actual. The court also recognized the absurdity of punishing a frugal debtor should the bankruptcy administrator’s interpretation of the statute be accepted.

As a procedural matter, the court held that the time to file a petition for direct appeal in section 158(d)(2)(A) is not a jurisdictional constraint and, therefore, the parties’ late filing did not deprive the court of jurisdiction over the appeal where other substantive factors favored direct appeal.

Congratulations to Lee Roland who represented the Jacksons, and to Erik Heath who authored NACBA’s amicus brief in support of the debtors.

Jackson 4th Cir. amended opinion Jan 2017

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Seventh Circuit Discusses Application of Co-Debtor Stay

Bankruptcy’s co-debtor stay was intended to prevent indirect pressure created by creditors attempting to collect against a co-signatory on a debt belonging to the bankruptcy debtor. Therefore, it does not apply to a debt solely belonging to the bankruptcy debtor’s spouse even though state law provides for collection of that debt through marital property. Smith v. Capital One Bank, No. 16‐1422 & 16‐1423 (7th Cir. Dec. 22, 2016). [Read more…] about Seventh Circuit Discusses Application of Co-Debtor Stay