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Fighting for Fairness: NCBRC, NACBA, and NCLC File Amicus Brief in Michigan Bankruptcy Exemptions Battle

“Michigan’s most vulnerable debtors deserve protection—not political obstruction.”

That’s the central argument made by the National Consumer Bankruptcy Rights Center (NCBRC), the National Association of Consumer Bankruptcy Attorneys (NACBA), and the National Consumer Law Center (NCLC) in a critical amicus brief filed before the Michigan Court of Claims. These leading consumer advocacy organizations are weighing in on a legal battle that could determine the financial future of countless struggling Michiganders.

At issue is House Bill 4901 (HB 4901)—a long-overdue update to Michigan’s bankruptcy exemption laws that would allow debtors to keep their homes, cars, and basic assets while seeking financial relief. The bill passed both chambers of the Michigan Legislature. But in a stunning act of defiance, House Speaker Matt Hall and Clerk Scott Starr have refused to present the bill to Governor Gretchen Whitmer, effectively blocking it from becoming law.

[Read more…] about Fighting for Fairness: NCBRC, NACBA, and NCLC File Amicus Brief in Michigan Bankruptcy Exemptions Battle

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The 8th Circuit Considers Whether Post-Petition Equity Increases During a Chapter 13 Are Part of The Bankruptcy Estate in a Converted Chapter 7

UPDATE: This 8th Circuit has since issued a decision on this case. Click here to view our article discussing their ruling.

The 8th Circuit Court of Appeals is considering the issue whether the increased value of the debtor’s residence during a chapter 13 bankruptcy is part of the chapter 7 estate upon conversion.  This is an appeal from the 8th Circuit Bankruptcy Appellate Panel affirming the bankruptcy court’s ruling that an increase in equity in real estate during a chapter 13 is part of the bankruptcy estate in a converted chapter 7 case.  Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. 2023).

The Debtor originally filed a chapter 13 bankruptcy. At filing the debtor there was no excess equity in her residence over her exemption and the mortgage. At confirmation property of the estate vested in the Debtor. Two years later Debtor converted her case to a chapter 7 bankruptcy. The value of her property appreciated during her chapter 13 so that approximately $62,000 could be liquidated by the trustee. The Debtor filed a motion to abandon property. The bankruptcy court denied the motion finding the increased equity part of the chapter 7 estate.

“Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include all of a debtor’s interests both equitable and legal, except those specifically excluded. 11 U.S.C. § 541. Estate property includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case,” and “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(6) and (7).

“Upon conversion from one chapter to another, this definition is [*5] adjusted. Section 348 qualifies the scope of bankruptcy estate property by clarifying that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion[.]” 11 U.S.C. § 348(f)(1)(A). If a debtor converts a case under Chapter 13 to a case under another chapter, the property the debtor acquired between the petition date and the conversion date is not property of the converted case, unless the debtor sought to convert the case in bad faith. 11 U.S.C. § 348(f)(2). …

“As the bankruptcy court observed, courts are split on the question of whether postpetition preconversion market appreciation or an increase in equity resulting from payments toward a lien inures to a debtor’s benefit upon conversion to a Chapter 7 case. …

“Goetz and the Amici Curiae insist that section 348(f) is ambiguous. They urge the Court to consider legislative history, which they maintain supports their argument that postpetition preconversion equity increases should benefit debtors. We detect no ambiguity in sections 348(f) and 541. Even if we were to conclude that section 348(f)(1)(A) is ambiguous, the legislative history of this statute does not mandate a different outcome.7 HN5 Section 348(f)(1)(A), as enacted, accomplished the purpose of the legislation as articulated in the legislative history: it eliminated a “serious disincentive to [C]hapter 13 filings” by adopting the reasoning of In re Bobroff and specifying that property a debtor acquires postpetition is not property of the converted bankruptcy estate. H.R. Rep. No. 103-835, at 57 (1994), as reprinted in [*9] 1994 U.S.C.C.A.N. 3340, 3366; see 11 U.S.C. § 348(f)(1)(A); Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985). Section 348(f) does not specify that debtors are entitled to retain equity resulting from payments during the Chapter 13 case—the scenario referenced in the House Report. Likewise, the statute does not address whether debtors are entitled to retain postpetition preconversion equity resulting from market appreciation, asset improvements or repairs. To accept Goetz’s argument, one must read this clarification into the statute.

“The plain meaning of a statute is conclusive, except in the “‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” (Citations omitted.) …

“Congress’s failure to address the example included in the legislative history does not mean this omission was inadvertent. Recognizing that statutes are often the result of compromise, we decline to accept Goetz’s invitation to assume that Congress intended that debtors may retain postpetition preconversion market appreciation and equity resulting from debt payments without language articulating this intent.

“We also reject Goetz’s claim that interpreting section 348(f) to allow the bankruptcy estate to benefit from postpetition preconversion estate property value increases treats Goetz as though she converted her case in bad faith. To the extent Goetz acquired new property after she petitioned for bankruptcy relief under Chapter 13, this property remains her property. In enacting section 348(f), Congress distinguished between property of the estate at the time of conversion that remains in the possession or control of the debtor from property acquired after petition. The former is property of the estate (Goetz’s residence), the latter is property of debtor unless she converted in bad faith. The bad faith provision neither hinders nor advances Goetz’s claim to the equity increase in her residence. It simply does not apply. Accordingly, the bankruptcy court correctly concluded that postpetition preconversion nonexempt equity accrues for the benefit of the converted Chapter 7 estate.”

No date has yet been set for oral argument.

Appellant Goetz’ Brief

NCBRC-NACBA Amicus Brief – Goetz

Appellee Trustee Webers Appellee Brief

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The Ninth Circuit Reviews Whether an Exemption of “100% of FMV” Protects the Entire Value of the Property Including any Post-Petition Appreciation

UPDATE: The Ninth Circuit has since decided this case. Click here to read our article discussing their ruling.

The Ninth Circuit Court of Appeals is considering whether an exemption of “100% of FMV” protects all the equity in the property, over and above the allowable exemption, and any appreciation in value post-petition.  The Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court and found that an exemption claim of “100% of FMV” included the entire value of the property, not the allowable exemption. Further, the court held that this exemption claim included any post-petition appreciation because there was no objection to the exemption.  Masingale v. Munding, 644 B.R. 530 (B.A.P. 9th Cir. 2022).  The BAP held:

“Monte L. Masingale and Rosana D. Masingale filed a chapter 11 bankruptcy petition and claimed a “100% of FMV [fair market value]” exemption in their homestead. No one objected. Years later, the bankruptcy court converted the case to chapter 7. Mrs. Masingale and the chapter 7 trustee disputed the amount of the homestead exemption to which Mrs. Masingale was entitled: the chapter 7 trustee argued that she was bound by the statutory limit under § 522(d)(1), but Mrs. Masingale contended that she was entitled to the entire fair market value of the property, because no one had objected to the claimed homestead exemption. The bankruptcy court agreed with the chapter 7 trustee and approved his request to sell the property, limiting the homestead exemption to $45,950.

“Mrs. Masingale appeals, arguing that the bankruptcy court erred in determining the amount of the homestead exemption. We agree with Mrs. Masingale. We REVERSE the portions of the order on appeal that determine the amount of the homestead exemption and REMAND. We publish to explain the effect of a “100% of FMV” exemption claim and to reiterate that parties must timely object to any improper exemption claim, no matter how frivolous. …

“As a matter of first impression, we hold that the Masingales’ claim of an exemption equal to “100% of FMV” includes postpetition appreciation and becomes incontestable if there is no timely objection. The snapshot rule is one of the limits on a debtor’s entitlement to exemptions. Taylor holds that, if no one objects, the debtor can get the benefit of exemptions to which the debtor is not entitled. In other words, in order to get the benefit of the snapshot rule, a trustee or party in interest must object to an exemption claim that contradicts that rule.”

The case is tentatively set for oral argument in early December 2023.

Appellant Trustee Munding Brief

Appellee Masingale Brief

NCBRC Amicus Brief In Support of Appellee – Masingale

Appellant Trustee Munding Reply Brief

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The Fourth Circuit Considers Whether Restitution Ordered by a Maryland Court Upon is Non-Dischargeable

UPDATE: The Fourth Circuit has since issued a decision on this case. Click here to read our article discussing their ruling.

The Fourth Circuit is considering whether restitution included in a “probation before judgment” is non-dischargeable in Chapter 13 under 11 U.S.C. §1328 (a)(3).  Section 1328(a)(3) provides that “the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt— … for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.”  This is an appeal from the District Court in Feyijinmi v. Md. Cent. Collection Unit, Civil Action No. RDB-22-00904, 2022 U.S. Dist. LEXIS 198970 (D. Md. Nov. 1, 2022).

In 2006 the Debtor was found guilty of welfare fraud and sentenced to probation before judgment and ordered to pay restitution for $7,275.33.  In 2014 the Debtor filed a Chapter 13 bankruptcy and received a discharge on February 26, 2020.  Post-discharge the creditor notified the Debtor that she had an outstanding debt for the restitution and that they may intercept her tax refund.

The Debtor then filed a motion to reopen the bankruptcy and filed a complaint to determine whether the restitution was discharged.  The bankruptcy court held that the debt was non-dischargeable and was affirmed by the district court.  The court held

“The central fact is whether there is an implication of guilt. In Wilson, the court determined that probation before judgment following a guilty plea constituted a finding of guilt necessary to categorize the debtor’s restitution as attached to a criminal conviction. Here, the Appellant was found guilty, which squarely implies guilt sufficient to attach her restitution to a criminal conviction under 11 U.S.C. § 1328(a)(3). The appellant’s argument raises a distinction without a difference. Therefore, the Appellant’s probation before judgment following a finding of guilt constitutes a criminal conviction under 11 U.S.C. § 1328(a)(3) and her restitution was non-dischargeable.” Feyijinmi v. Md. Cent. Collection Unit, Civil Action No. RDB-22-00904, 2022 U.S. Dist. LEXIS 198970, at *9 (D. Md. Nov. 1, 2022).

NACBA submitted an amicus brief in this case supporting the Debtor.  The brief was written and submitted by Peter Goldberger of Ardmore, Pennsylvania.

The briefing, in this case, is complete and an order-setting oral argument is expected shortly.

Amicus Brief In re Feyijinmi

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Debtor Misled Lender as to Discharge of Debt

The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).

When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.

At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.

The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.

The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”

Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.

The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.

The debtor has filed an appeal to the Third Circuit, case no. 23-1358.

Bernhard ED Pa Feb 2023

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Trustee Entitled to Attorney’s Fees for Exemption Dispute

Where the debtor’s original exemption claim was for bodily injury, the trustee had a reasonable argument that the actual post-petition settlements of her personal injury case, which specified that they were for non-bodily injury damages, did not fall under that exemption. Because the trustee’s objection related to the post-settlement exemption claim, it was timely. Biondo v. Gold, Lange, Majoros & Smalarz, P.C., No. 22-1666 (6th Cir. Feb. 8, 2023).

Before filing for Chapter 7 bankruptcy, the debtor was in a car accident. In her bankruptcy filings, she listed the personal injury claim with an unknown value. She claimed an exemption in potential recovery, tracking the text of section 522(d)(11)(D), for “payment[s]” she received “on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss.”

The trustee did not object to the exemption. He hired a law firm to litigate the debtor’s claims against the driver of the other vehicle and the debtor’s insurance company. The insurance company settled for $48,500 specifically covering “medical expenses, attorney’s fees, ‘lost wages,’ and all ‘other forms of economic or non-economic loss.’” The driver of the other car settled for $70,000, covering “pain and suffering.”

The debtor moved to compel the trustee to turn over $23,675 from the settlement recovery arguing that the funds were exempt under section 522(d)(11)(D). She and the trustee settled the exemption claim, and the trustee moved to recover $2,880 in attorney’s fees he incurred in litigating the motion to compel. The debtor objected, arguing that the attorney’s services did not fulfill the requirement under section 330(a)(1)(A) that they be either reasonably likely to benefit the estate or necessary to the administration of the case. The bankruptcy court granted the trustee’s request for fees, and the district dismissed the appeal as equitably moot.

The debtor appealed to the Sixth Circuit.

The court began with the parameters of section 522(d)(11)(D)’s exemption, finding that while funds resulting from personal bodily injury are exempt, the exemption does not include “payments for pain and suffering and pecuniary losses.” The exemption is also typically interpreted to exclude payments for medical bills. Here, the two settlements specified that they were for damages other than personal bodily injury. For that reason, the circuit court found the trustee’s objection to the exemption was reasonable and for the benefit of the estate.

The debtor argued that the trustee forfeited his opportunity to object to the exemption because he failed to do so when she filed the exemption claim in her original bankruptcy schedules.

Under section 522(l), in the absence of a timely objection, an exemption is automatically allowed. Citing Mercer v. Monzack, 53 F.3d 1 (1st Cir. 1995), the court found that “exemptions should be unambiguous and should be read to conform with the law.” The debtor must therefore unambiguously identify a particular property as exempt before the clock begins to run.

Here, the debtor’s claimed exemption related only to recovery for bodily injury, as contemplated by section 522(d)(11)(D). It was not until the actual settlements were reached that the debtor at least arguably attempted to apply the exemption to non-bodily injury recovery. The trustee’s post-settlement objection was related to the debtor’s recovery based on medical expenses and other pecuniary losses, as well as pain and suffering. Because the actual funds the debtor sought to exempt differed from the description in her claimed exemption, the court found her original exemption claim did not trigger section 522(l)’s clock and the trustee’s objection was not time-barred. While the trustee could have lodged a prophylactic objection to the debtor’s exemption from the outset, he was not obligated to do so.

Because the district court’s finding that the appeal was equitably moot was not jurisdictional, the circuit court declined to address that issue.

The court affirmed.

Biondo 6th Cir Feb 2023

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Experian Not Required under FCRA to Know Legal Validity of Debt

Where it was not clear whether the debtor’s educational loan was included in his discharge, Experian did not violate the FCRA by reporting it as an outstanding debt. Mader v. Experian Information Solutions, Inc., No. 20-3073 (2d Cir. Jan. 4, 2023).

In 2013, the debtor received a chapter 7 discharge, covering “all dischargeable debts.” After his bankruptcy was closed, he continued to repay his pre-bankruptcy private educational loan to Navient, and Navient continued to report to Experian that the debt was outstanding. After a time, the debtor changed course and sued Experian in district court under the Federal Credit Reporting Act for issuing a false report with respect to that loan, alleging that the debt had been discharged in his bankruptcy. Experian moved for summary judgment.

The district court focused on whether the loan had been discharged under section 523(a)(8)(A)(i) which provides that an educational loan is typically not dischargeable in bankruptcy if it was “made under any program funded in whole or in part by a governmental unit or nonprofit institution.” The parties offered conflicting evidence as to whether the private educational loan was issued under a “program” covered by section 523(a)(8)(A)(i). Without addressing the evidence presented by the debtor, the district court found the loan was nondischargeable and granted summary judgment in Experian’s favor.

The debtor appealed to the Second Circuit.

The circuit court found the district court erred in two respects: first, it incorrectly concluded that no issue of material fact remained as to whether the educational loan had been discharged; second, and more importantly, it erred in finding that it had to resolve the issue of whether the debt had been discharged in order to reach a conclusion as to the FCRA claim against Experian.

Section 1681e(b) of the FCRA provides that credit reporting agencies must “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” The court found that “accuracy” for purposes of the reporting agency mandate required that the agency’s report be based on “objectively and readily verifiable information.” Reporting agencies are not required to resolve open legal questions as to the validity of the underlying debt, and “inaccuracies that turn on legal disputes are not cognizable under the FCRA.”

In this case, the court found that there was no “objectively and readily verifiable information” which would have alerted Experian that the underlying educational loan had been discharged. The bankruptcy discharge order did not specifically include the debt and, in fact, both the debtor and Navient continued to treat the debt as ongoing even after the bankruptcy discharge.

Nor was the status of the debt clear based on settled case law. Courts have taken differing views as to whether the type of private educational loan at issue in this case is dischargeable under section 523(a)(8), and final determination of the issue involved a factual dispute as to the funding and structure of the lending program. The court reiterated that the district court’s resolution of the issue on summary judgment was in error. Finally, the court noted that other courts addressing similar cases have disapproved use of the FCRA to make collateral attacks on the validity of debts.

The court concluded that the “unresolved legal question regarding the application of section 523(a)(8)(A)(i) to [the debtor’s] educational loan renders his claim non-cognizable under the FCRA.” It observed that the proper avenue for relief would have been for the debtor to dispute the debt directly with Navient.

Mader 2d Cir Jan 2023

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Unemployment Overpayment Not a Priority Tax Debt

Kentucky’s Office of Unemployment Insurance’s claim for an overpayment of unemployment compensation benefits was not entitled to priority in the debtor’s chapter 13 case where the nature of the claim was better characterized as a “penalty” than a “tax.” In re Clardy, No. 22-30089 (Bankr. W.D. Ky. Dec. 1, 2022). [Read more…] about Unemployment Overpayment Not a Priority Tax Debt

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Who Would Win in a Fight, Allowed Claim or Confirmed Plan?

The winner? Confirmed plan. Where the mortgagee had notice and opportunity to object to confirmation of the debtor’s Chapter 13 plan providing for mortgage arrears in the amount of approximately half the mortgagee’s allowed proof of claim, the mortgagee could not be heard, at the debtors’ successful completion of their plan, to complain that the debtors still owed pre-petition arrears. In re Edelstein, No. 17-11461 (Bankr. N.D. Ill. Nov. 7, 2022). [Read more…] about Who Would Win in a Fight, Allowed Claim or Confirmed Plan?

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Act Not Willful Where Debtor Suffered Acute Psychosis

A debt based on a civil judgment for pain and suffering arising out of an incident during which the debtor had an acute psychotic break and severely beat the claimant, was dischargeable in bankruptcy because his psychiatric condition prevented him from acting willfully within the meaning of section 523(a)(6). Lombardi v. Picard (In re Picard), No. 16-15432 Adv. Proc. No. 16-359 (Bankr. E.D. Pa. June 10, 2022). [Read more…] about Act Not Willful Where Debtor Suffered Acute Psychosis