A post-discharge settlement based on a consent decree relating to the lender’s misconduct at the time it entered into a lending agreement with the chapter 7 debtors was property of the estate. In re Porrett, No. 09-3881 (Bankr. D. Idaho March 10, 2016).
Gary Allen and Jennifer Sue Porrett had a mortgage through Wells Fargo. They filed chapter 7 bankruptcy and Wells Fargo obtained relief from stay and foreclosed on the property. The Porretts were discharged in 2009. Two years later, Wells Fargo entered into a consent decree with federal regulators based upon Wells Fargo’s practice of pressing borrowers to take sub-prime mortgages even though they were eligible for more favorable prime loans during the period that the Porretts obtained their mortgage. Upon hearing of the consent decree the trustee moved to reopen the Porretts’ bankruptcy to compromise the claim and accept Wells Fargo’s offer of a $8,120.23 settlement. The Porretts argued that because the consent decree was entered into post-bankruptcy it was not property of the estate. The court disagreed.
The court relied on broad interpretation of section 541(a)(1) which defines estate property as “all legal or equitable interests of the debtor in property as of the commencement of the case.” Sections 541(a)(6) and (a)(7) pull into the definition of estate property “[p]roceeds, product, offspring, rents, or profits from property of the estate” and “any interest in property that the estate acquires after the commencement of the case.” The court found this “all-embracing” definition encompasses property created by or with property of the estate or is traceable to any pre-petition interest. Because the consent decree was recompense for practices taking place when the Porretts entered into the mortgage with Wells Fargo, the court found the settlement was traceable to that pre-petition event.
The Porretts’ argued that the settlement was not necessarily connected to their contract because it related to all eligible mortgages from a particular period without regard to specific conduct with respect to each one. The court disagreed finding that a legal cause of action that factually exists at the time of filing is property of the estate even if the debtor is not aware of its existence at the time of the bankruptcy. Here, the cause of action arose out of Wells Fargo’s violation of state law when it diverted borrowers into more costly loans. The fact that the debtors were included in the consent decree and that the trustee had to release Wells Fargo from liability in order to receive the funds, indicated that the Porretts were, in fact, victims of this nefarious practice.
The court turned to the issue of when the cause of action accrued, exploring several options for that date. Under the Idaho Consumer Protection Act a cause of action accrues when the loan is made. On the other hand, under state law, a cause of action for fraud accrues when the victim discovers the fraud. For purposes of determining estate property in bankruptcy, a cause of action accrues when the debtor could have brought the action. Because all the elements of a cause of action for fraud existed when the Porretts began paying the higher interest rate, the court found the cause of action accrued then even though the state statute of limitations did not begin to run until they actually discovered Wells Fargo’s malfeasance.
The court distinguished In re Neidorf, 534 B.R. 369 (B.A.P. 9th Cir. 2015) (see NCBRC blog) where the consent decree benefitting the debtors post-discharge was not directly traceable to pre-petition conduct. Rather, in that case, the consent decree mandated payment based on the foreclosure that took place on the debtor’s estate property during the bankruptcy. Unlike in this case, the Neidorf court found the settlement was traceable to the foreclosure rather than to the initial lending agreement.
