by After the chapter 7 debtors received their discharge they disclosed to the trustee that they had received funds as a result of a settlement agreement between the Federal Reserve and SunTrust Mortgages. They moved to reopen their bankruptcy and amend their schedules to reflect the payment. They also sought to exempt the payment as related to a “potential wrongful foreclosure claims against SunTrust Mortgage” under applicable state exemption laws. The trustee objected to the exemption and sought to administer the payment as part of the bankruptcy estate.
The issue turned on whether the payment was a “legal or equitable interest” of the debtors that existed as of the commencement of the case. The bankruptcy court found that it was not. In re Vanwart, No. 13-515 (Bankr. E.D. N.C. Aug. 27, 2013).
The case involved two consent orders, one of which predated the debtors’ bankruptcy petition and which contemplated in vague terms reimbursement to borrowers against whom SunTrust had instituted foreclosure proceedings. That order provided that “[n]othing in this order, express or implied, shall give to any person or entity, other than the parties hereunder, and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim under this Order.” A second consent order, reached while the debtors’ petition was pending, contemplated payments to borrowers who, like the debtors, had been affected by a foreclosure action by SunTrust during a specified period. Pursuant to that agreement, debtors received a $25,000.00 check. However, neither the consent order nor the paperwork accompanying the payment purported to settle a legal claim held by the debtors, or constitute an admission of wrongdoing on SunTrust’s part.
In cases like this one, the burden is on the debtor to prove that property is not “sufficiently rooted in the prebankruptcy past.” Segal v. Rochelle, 382 U.S. 375, 380 (1966). The court found that although the payment related to a foreclosure action that predated the bankruptcy petition there was no evidence that that foreclosure action was wrongful. Therefore, the court could not conclude that the settlement related to a “cause of action” that existed at the time of the petition. None of the pre-payment actions between SunTrust and the Federal Reserve, or between SunTrust and the debtors, suggested that the debtors could expect to receive a payment as a result of the settlement agreement. And nothing in the ultimate agreement under which the debtors received the payment related it to a wrongful act on the part of SunTrust which would have created a pre-petition property interest in a cause of action. Rather, SunTrust evidently agreed to pay a certain amount to all borrowers who were affected by a foreclosure action during a given period without regard to whether that foreclosure action was wrongful. The court concluded that “[t]he express statements in the consent orders that they do not create rights in any other parties clearly show explicitly that it was not the intent of the parties to create rights in third-parties. As such, there is no indication that the debtors had rights to the payment, enforceable against the SunTrust entities, at any time prepetition, or prior to their receipt of the check.”