National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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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 Graybill v. Thomas (In re Bentley), No. 19-14758 (11th Cir. Apr. 22, 2020) (unpublished).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, 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 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

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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 in the amount 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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New Median Family Income Table

The United States Trustee has issued an increase in the median family income used for completing Bankruptcy Forms 122A-1 and 122C-1. The increase is based on consumer price index adjustments and is effective as of today, April 1, 2020. The new table is available here.

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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 veteran’s 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 in light of the fact that 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 in the amount of $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