The debtor’s ex-wife’s interest in the marital residence did not enter the bankruptcy estate even though the property was titled to the debtor, where their dissolution agreement gave her half interest and the debtor was prohibited from unilaterally disposing of the property. But the debtor’s ex-wife did not show that his failure to comply with the dissolution agreement generally, was an indication that he undertook the debts created by the agreement by fraud where the evidence did not support her contention that he never intended to comply. Williams v. Williams, No. 18-1197 (Bankr. D. Colo. Jan. 8, 2021). [Read more…] about Ex-Wife’s Interest In Marital Residence Does Not Enter Debtor’s Estate
NACBA Files Amicus in Technical Abandonment Case
NACBA/NCBRC filed an amicus brief in support of the debtors in a case where, two years after he elected not to administer a fully-disclosed cause of action against Ocwen, and the debtors’ bankruptcy case was closed, the chapter 7 trustee moved to reopen the case to obtain approval for a settlement agreement with Ocwen. Stevens v. Whitmore (In re Stevens), No. 20-60044 (9th Cir.) (filed Feb. 26, 2021). [Read more…] about NACBA Files Amicus in Technical Abandonment Case
Stevens v. Whitmore, No. 20-60044 (9th Cir.)
Type: Amicus
Date: February 26, 2021
Description: Whether chapter 7 trustee abandons cause of action asset under section 554(c) when the cause of action is fully disclosed and he determines that it lacks value to the estate, but the debtors listed the asset in their SOFA rather than in their schedules.
Result: Judgment affirmed, Oct. 19, 2021.
Legal Malpractice Claim Accrued When Debtors Denied Discharge
Where the only injury resulting from bankruptcy counsel’s conduct was denial of discharge, the cause of action for legal malpractice accrued post-petition and belonged to the debtors rather than the chapter 7 bankruptcy estate. Church Joint Venture, L.P. v. Blasingame, No. 19-5505 (6th Cir. Jan. 26, 2021).
The debtors filed for chapter 7 bankruptcy but were denied discharge when the court learned of undisclosed assets in the form of personal property, shell companies, family trusts, etc. The debtors filed a malpractice lawsuit against their bankruptcy attorneys in state court. When the trustee declined to bring a suit against the debtors’ attorneys on behalf of the bankruptcy estate, the debtors’ primary creditor, CJV, obtained derivative standing to do so. CJV moved for summary judgment on the issue of whether the cause of action belonged to the estate. The court treated the debtors’ response as a cross-motion for summary judgment and granted judgment in favor of the debtors. The BAP for the Sixth Circuit affirmed. Church Joint Ventures, L.P. v. Blasingame (In re Blasingame), 597 B.R. 614 (B.A.P. 6th Cir. 2019). [Read more…] about Legal Malpractice Claim Accrued When Debtors Denied Discharge
Rodriguez v. Barrera, No. 20-1376 (10th Cir.)
Type: Amicus
Date: January 14, 2021
Description: Whether proceeds from sale of homestead before conversion from 13 to 7 are property of the estate.
Result: Judgment affirmed, January 19, 2022
Voluntary 401k Contributions Not Excluded from Disposable Income
A Chapter 13 debtor’s voluntary post-petition contributions to his 401k plan must be included in the calculation of disposable income under section 1325. Penfound v. Ruskin, No. 18-13333 (E.D. Mich. Sept. 20, 2019).
Above-median Debtor, John Penfound, worked continuously for twenty-four years during which time he made regular voluntary contributions to his 401k plans. When he and his wife, Jill Penfound, filed a petition for Chapter 13 bankruptcy, he sought to continue contributing $1,375/month to his 401k and exclude those amounts from his calculation of disposable income. Upon objection by the trustee, the bankruptcy court ordered the debtors to amend their proposed plan based on a re-calculation of disposable income including the monthly contributions to the 401k plan. The debtors appealed confirmation of the amended plan.
Relying on reasoning and dictum in In re Seafort, 669 F.2d 662 (6th Cir. 2012), the district court affirmed. [Read more…] about Voluntary 401k Contributions Not Excluded from Disposable Income
No Amortization of Tax Refund in W.D. Texas
In an opinion that reads like a father chastising his ungrateful children, the District Court for the Western District of Texas scolded the debtors for their proposed treatment of anticipated tax refunds and required them to adhere to the District Plan under which they could retain up to $2,000 of their refunds, but must turn over to the Trustee any amount remaining as disposable income. Vega v. Viegelahn, No. 18-796 and Diaz v. Viegelahn, No. 18-798 (W.D. Tex. Sept. 19, 2019) (consolidated for argument and decision).
Contrary to the District Plan structure, the debtors in this case sought to amortize their tax refunds as income over one year. Upon objection by the trustee, the debtors ultimately amended their plans to conform to the District Plan. They then appealed the Bankruptcy Court’s order of confirmation arguing that the District Plan’s treatment of the tax refunds violated various provisions of the Bankruptcy Code, the Local Rules and the Official Forms. [Read more…] about No Amortization of Tax Refund in W.D. Texas
Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party
The chapter 7 trustee may “recover money from the entity who received the proceeds from the sale of fraudulently transferred property, but to whom the property itself was never transferred.” Rajala v. Husch Blackwell LLP, No. 08-20957, Adv. Proc. No. 18-6016; Rajala v. Spencer Fane LLP, Adv. Proc. No. 18-6020 (Bankr. D. Kans. Aug. 14, 2019).
Three couples started GRHC, a company designed to explore the possibilities of wind-generated electricity. GRHC initiated a wind-energy project in Pennsylvania called Lookout Windpower. The three couples then created the Lookout Windpower Holding Company (LWHC) and transferred Lookout Windpower from GRHC to LWHC rendering GRHC insolvent. LWHC then sold Lookout Windpower to Edison Mission Energy for over $6.7 million, and GRHC filed for chapter 7 bankruptcy. From the Lookout Windpower sale proceeds, LWHC paid the law firms of Husch Blackwell over $1.3 million and Spencer Fane over $700,000. The trustee in GRHC’s bankruptcy case successfully avoided the transfer of Lookout Windpower from GRHC to LWHC and sought to recover the funds paid to the law firms out of the proceeds from LWHC’s subsequent sale of the property. The law firms moved to dismiss the adversary complaints.
[Read more…] about Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third PartyMalpractice Action against Bankruptcy Attorneys Not Part of Estate
Where the only injury alleged was the denial of discharge, the debtors’ legal malpractice cause of action against their bankruptcy attorneys did not arise pre-petition and, therefore, was not part of the bankruptcy estate. Church Joint Venture v. Blasingame, No. 18-8017 (B.A.P. 6th Cir. April 5, 2019).
The debtors’ bankruptcy attorneys committed malpractice prior to and during the course of the debtors’ chapter 7 case, resulting in denial of discharge. The debtors sued their attorneys for malpractice in state court, and the bankruptcy court granted creditor, Church Joint Venture (CJV), derivative status to pursue a malpractice action in the bankruptcy court on behalf of the estate based on the same conduct. CJV filed an adversary complaint and sought a declaratory judgment that the cause of action for malpractice constituted estate property. On cross-motions for summary judgment, the bankruptcy court found that the cause of action arose post-petition and, therefore, belonged to the debtors rather than the estate.
CJV appealed to the bankruptcy appellate panel for the Sixth Circuit.
Relying on Underhill v. Huntington National Bank (In re Underhill), 579 F. App’x 480 (6th Cir. 2014), the panel affirmed.
The panel began with the premise that, while property interests are determined by state law, federal law determines if and when those property interests become part of the bankruptcy estate. Here, the parties agreed that even though some of the conduct giving rise to the malpractice action took place pre-petition, the debtors did not suffer an injury until they were denied discharge. The panel found that, based on these facts, the debtors did not have a cause of action against the malpractice defendants at the time they filed their petition.
CJV argued that the bankruptcy court erred in looking at when the cause of action accrued under state law instead of looking to when the conduct leading to the denial of discharge took place. It maintained that, because some of that conduct took place prior to the bankruptcy petition, the cause of action was sufficiently rooted in the pre-petition past to render it part of the bankruptcy estate. The panel disagreed. In Underhill, the Sixth Circuit held that pre-petition conduct alone will not root a cause of action in the pre-bankruptcy past but that there must be a pre-petition violation: “[t]hat is, a cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-petition injury.” Underhill, 579 F. App’x at 482-83. Here, the only injury was the denial of discharge – a post-petition event.
For the same reason, the panel rejected CJV’s argument that the bankruptcy court should have split the complaint into pre- and post-petition causes of action and allowed the pre-petition cause of action to go forward. The panel found that, in the absence of injury, there was no pre-petition cause of action.
CJV has appealed to the Sixth Circuit. Church Joint Venture v. Blasingame, No. 19-5505 (6th Cir., filed, May 10. 2019).
Interest in Joint Tenancy Drops from Estate upon Death of Debtor
By operation of state property law, a debtor’s interest in a joint tenancy drops out of the Chapter 7 estate upon the death of the debtor, and this does not conflict with the trustee’s powers under federal law. Cohen v. Chernushin (In re Chernushin), No. 18-1068 (10th Cir. Dec. 21, 2018).
Gregory and Andrea Chernushin owned real property as joint tenants. Mr. Chernushin filed for bankruptcy but committed suicide during the pendency of his case. The Chapter 7 trustee sought to retain and sell the joint tenancy. The bankruptcy court found that upon Mr. Chernushin’s death, the entire interest in the property went to Ms. Chernushin and was therefore no longer part of the bankruptcy estate amenable to sale by the trustee. On appeal, the district court agreed. Cohen v. Chernushin (In re Chernushin), 584 B.R. 567 (D. Colo. 2018). [Read more…] about Interest in Joint Tenancy Drops from Estate upon Death of Debtor