National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Subchapter II – Debtor’s duties and benefits (Sections 521 to 528)

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4th Circuit Considers Whether the FDCPA Protects Discharged Debtors From Improper Collection

The 4th Circuit Court is considering an appeal from the District Court for the Northern District of West Virginia which dismissed the Debtor’s FDCPA complaint due to lack of standing since his debt was discharged in a prior chapter 7 bankruptcy.

Facts

John Koontz entered into a mortgage loan with CitiFinancial, which was later serviced by SN Servicing Corporation (SNSC) and then by Land Home Financial Services (LHFS). After Koontz received a Chapter 7 bankruptcy discharge in 2017, he continued to make voluntary payments on the loan. He alleged that SNSC and LHFS charged excessive late fees and failed to respond to his requests for information.

Analysis

The district court analyzed whether Koontz had standing to pursue claims under the FDCPA and WVCCPA, given his bankruptcy discharge. Under the FDCPA, the court determined that Koontz was not obligated or allegedly obligated to pay the debt because the bankruptcy discharge extinguished his personal liability. The court referenced the Fourth Circuit’s decision in Lovegrove v. Ocwen Home Loans Servicing, LLC, where post-discharge mortgage statements containing disclaimers were not considered attempts to collect a debt. The court concluded that SNSC’s and LHFS’s communications, which included similar disclaimers, were not attempts to collect a debt under the FDCPA.

For the WVCCPA claims, the court held that Koontz was not a “consumer” as defined by the statute because his personal obligation to pay the mortgage debt was discharged in bankruptcy. The court referenced its previous decision in Fabian v. Home Loan Center, Inc., which held that a discharged debtor is not a “consumer” under the WVCCPA and therefore lacks standing to bring claims under the Act. The court rejected Koontz’s reliance on other federal court cases, noting that many involved phone calls rather than written correspondence and did not alter the applicability of Fabian.

The court dismissed Koontz’s claims, reaffirming that a bankruptcy discharge eliminates personal liability for the debt, thereby negating standing under the FDCPA and WVCCPA. The court emphasized the importance of clear and unequivocal disclaimers in post-discharge communications to avoid violating debt collection laws.

NCBRC along with the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center filed a brief in support of the Debtor.

Amici Brief in Support of Appellant – Koontz vs SN Servicing

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The 9th Circuit Holds A Homestead Exemption Is Limited to Statutory Cap in a Chapter 11 to 7 Conversion

The Ninth Circuit held that the failure to object to a claimed homestead exemption within the 30-day period does not allow the debtor to exempt more than the statutory limit when the case originated as a Chapter 11 bankruptcy and included conflicting representations regarding the exemptions.

Facts

Monte and Rosana Masingale filed for Chapter 11 bankruptcy in 2015, claiming a homestead exemption of “100% of FMV” (fair market value) for their residence. No party in interest objected within the 30-day window. The case was later converted to Chapter 7, and the Masingales sought to sell the home and retain all proceeds, despite the statutory cap on the homestead exemption.

Analysis

The court’s legal analysis focused on whether the initial lack of objection to the homestead exemption claim allowed the Masingales to exempt more than the statutory limit. The court distinguished this case from Taylor v. Freeland & Kronz and Schwab v. Reilly, which involved different circumstances and did not originate in Chapter 11.

The court noted that the Masingales, as Chapter 11 debtors-in-possession, owed fiduciary duties to their creditors. During the Chapter 11 proceedings, they made representations in their Disclosure Statement and Chapter 11 Plan that they were not claiming above-limit exemptions or that such exemptions would only be allowed after creditors were fully paid. These representations indicated that the homestead exemption would be limited to the statutory cap, contrary to their Schedule C notation of “100% of FMV.”

The court reasoned that these conflicting representations within the 30-day objection period affected whether the “100% of FMV” notation created a clear and objectionable exemption. The court emphasized that the fiduciary duties and specific statements made in Chapter 11 documents provided context that negated the need for an early objection based solely on the Schedule C notation. Therefore, the initial failure to object did not permit the Masingales to claim an exemption above the statutory limit.

Tips

  1. Clarify Exemption Claims: Ensure that exemption claims are clear and consistent across all bankruptcy documents to avoid disputes and objections.
  2. Understand Fiduciary Duties: Recognize that debtors-in-possession in Chapter 11 have fiduciary duties to creditors, and their representations can impact exemption claims.
  3. Timely Objections: While objections to facially invalid exemptions should be timely, consider the entire context and any additional representations made by the debtor within the objection period.

NCBRC filed an amicus brief in support of the Debtors and provided a moot court to Debtors’ counsel to prepare for oral arguments.

Masingale 9th Circuit Opinion

NACBA-NCBRC Amicus Brief in Support of Appellee

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The 9th Circuit Reviews Whether Res Judicata Applies to Exemptions

The 9th Circuit Court in Nance v Warfield is considering whether to overrule the District Court of Nevada which held that the bankruptcy court erred in overruling the trustee’s res judicata-based objection to the debtor’s federal exemptions in the property and RV. The court also concluded that the bankruptcy court exceeded its authority by sua sponte granting an exemption for the RV under the federal wildcard exemption.

Facts

Lawrence Warfield, the trustee of Johnie Lee Nance’s bankruptcy estate, objected to Nance’s claimed exemptions for his property and RV under Arizona law. After the court sustained the trustee’s objections, Nance amended his schedule to claim exemptions under Washington law, and the trustee again objected. When those objections were sustained, Nance amended his schedule to claim federal exemptions. The bankruptcy court overruled the trustee’s objections to these federal exemptions and sua sponte granted an exemption for the RV under the federal wildcard exemption.

Analysis

The district court analyzed the applicability of res judicata to the debtor’s successive exemption claims. It noted that claim preclusion, a form of res judicata, bars litigation of claims that were or could have been raised in a prior action. The court applied the three-part test for claim preclusion: identity of claims, final judgment on the merits, and identity or privity between parties. The court found that the debtor’s claims for exemptions in the property and RV, regardless of the legal framework (Arizona, Washington, or federal law), arose from the same nucleus of operative facts and involved the same property. Therefore, the claims were identical.

The court also determined that the previous rulings sustaining the trustee’s objections constituted final judgments on the merits, satisfying the second criterion. Finally, the parties involved in the objections were identical, fulfilling the third requirement for claim preclusion. Consequently, the court concluded that the bankruptcy court erred in overruling the trustee’s objections based on res judicata.

Additionally, the court addressed the bankruptcy court’s sua sponte action to grant an exemption for the RV under the federal wildcard exemption. The court emphasized the principle of party presentation, which requires courts to decide only the questions presented by the parties. The court found that the bankruptcy court exceeded its authority by granting an exemption that the debtor had not claimed, noting that the debtor, represented by counsel, could have asserted the exemption but did not. Therefore, the court held that the bankruptcy court’s action was improper and reversed its decision.

NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellant.

Warfield v Nance Amici Brief NACBA-NCBRC

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The Ninth Circuit Considers Whether Appellate Rights are Property of the Estate

In In re Lopez, Case No. 23-55682 (9th Cir. 2023), the Ninth Circuit is considering whether the bankruptcy court erred in (1) ruling that the Chapter 7 debtor’s right to appeal a prepetition personal injury judgment against her was property of the estate, (2) denying the debtor’s motion for the Chapter 7 trustee’s abandonment of the appeal rights, and (3) denying the debtor’s motion for reconsideration.

NCBRC filed an amicus brief requesting that the court narrowly confine its ruling to the specific facts of the case.  The concern is that a broad ruling will have a significant impact in other factual situations.

The fact that something has monetary value is not sufficient, by itself, to make it property of the estate. Just as no one would argue that a debtor’s kidneys should be property of the estate because they could have monetary value, it is not difficult to find many examples of situations in which classifying a right to appeal as property, simply because a trustee could sell it, would be extremely problematic. A debtor could be involved in a hotly-contested custody case, where a very questionable decision was appealed. The opposing party, perhaps far wealthier than the debtor, could offer to buy from the trustee the debtor’s right to appeal for more than the debtor could afford, thus ending the appeal. Similarly, a debtor could be involved in a contested divorce, in which a clearly erroneous support order for $100,000, which would not be dischargeable in bankruptcy, 11 U.S.C. § 523(a)(5), was entered against the debtor. In that situation, too, the opposing party could offer the trustee $10,000 for the right to appeal, cutting off any review of the support order and leaving the debtor with a $100,000 debt after bankruptcy.

And such situations are not limited to family law matters. A debtor could be appealing an erroneous criminal conviction. The alleged crime victim, or even a prosecutor trying to save the costs of appeal, could purchase the debtor’s right to appeal from a bankruptcy trustee, perhaps causing the debtor to be imprisoned for years.  Or the debtor might be appealing an erroneous judgment or other decision that would lead to loss of a professional license, which would severely impair the debtor’s fresh start.

The loss of a debtor’s right to appeal could also lead to large debts becoming nondischargeable in bankruptcy when, in fact, they should be discharged. For example, a debtor could erroneously be found liable for a large amount in a fraud judgment that, if not reversed, would result in a nondischargeability determination under 11 U.S.C. § 523(a)(2). See Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654 (1991) (collateral estoppel applies in dischargeability determination). If the plaintiff could pay the bankruptcy trustee for the debtor’s right to appeal, and then dismiss the appeal, the debt would not be discharged.

In all these situations, and undoubtedly many others, the fact that a right may have monetary value to the bankruptcy estate, and could be sold by the trustee, should not, by itself, make that right property.

The amicus brief for NCBRC and NACBA is here:  Lopez amicus brief v4

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The Fourth Circuit Rules That Parties in an Adversary Proceeding Cannot Manufacture a Final Judgment

In Kiviti v. Bhatt, No. 22-1216, 2023 U.S. App. LEXIS 24415 (4th Cir. Sep. 14, 2023), the court ruled that the parties in an adversary proceeding cannot manufacture a final judgment to appeal an otherwise interlocutory order.  Further, the mootness doctrine employed by Article III courts to determine whether a case or controversy exists does not apply to bankruptcy courts as non-Article III courts.

Before filing the bankruptcy, the Chapter 7 Debtor (Bhatt) was contracted to renovate the creditor’s (Kiviti) home.  Upon finding the Debtor was unlicensed, the creditor filed suit in state court to recover all funds paid ($58,770).  Before judgment, the Debtor filed a Chapter 7 bankruptcy.

The creditors then filed an adversary proceeding with two counts.  The first count asked the court to enter a judgment against the Debtor for the amount paid.  The second count asked the court to find the debt non-dischargeable under 11 U.S.C. § 523(a)(2)(A).  The creditors also filed a proof of claim despite the small bankruptcy estate.

The bankruptcy court granted the Debtor’s motion for summary judgment on the non-dischargeability count leaving only the first count asking for a money judgment.  The creditors wished to appeal but needed a final judgment.  Therefore, the parties agreed to dismiss the first count without prejudice.

On appeal, the court reviewed whether the case was final to review the bankruptcy court’s decision to dismiss the non-dischargeability count.  The creditors argued that the adversary proceeding was moot because if they were unsuccessful in challenging the dismissal of the non-dischargeability count, their debt would be discharged and uncollectable.  The court held that the parties can’t manufacture finality.  Furthermore, the court held that mootness is a limitation on Article III courts (stemming from the case or controversy requirement) but not bankruptcy courts as non-Article III courts.  Instead, bankruptcy courts can rule on moot proceedings

“The parties cannot manufacture finality

“The parties will be unsurprised by our holding that the bankruptcy court’s order was not final—and so not appealable—when entered. After all, that is why they agreed to dismiss Count I. They thought that, by doing so, they would make the order final because there would no longer be anything left to adjudicate in the adversary proceeding. J.A. 63 (agreeing to dismiss Count I “so as to give rise to a final order from which an appeal . . . may be taken”); J.A. 73 (“The instant appeal is from an interlocutory  order that became a final order upon dispensation of the remaining cause of action below.”).

“They were wrong. They cannot “use voluntary dismissals as a subterfuge to manufacture jurisdiction for reviewing otherwise non-appealable, interlocutory orders.” See Waugh Chapel S., 728 F.3d at 359. When Congress requires finality, we must ensure that “every matter in the controversy . . . [is] decided in a single appeal.” Microsoft Corp. v. Baker, 582 U.S. 23, 36, 137 S. Ct. 1702, 198 L. Ed. 2d 132 (2017) (quoting McLish v. Roff, 141 U.S. 661, 665-66, 12 S. Ct. 118, 35 L. Ed. 893 (1891)). Yet, if we allowed the parties to appeal Count II now, there would be nothing to stop them from reinstating—and then separately appealing—Count I down the line. See J.A. 63 (agreeing that the dismissal is “without prejudice to the [Kivitis’] right to amend their pleadings to seek a finding of liability should there be an appellate remand”). Such tactics impermissibly “erode the finality principle” Congress enacted. See Microsoft, 582 U.S. at 37; see also In re AroChem Corp., 176 F.3d at 619 (explaining that the “flexible” nature of bankruptcy finality does not “overcome the general aversion to piecemeal appeals” (cleaned up)). So the voluntary dismissal did not make the bankruptcy court’s earlier, partial dismissal final.

“True, some partial dismissals are final and appealable after the parties voluntarily dismiss the remaining claims. See Affinity Living Grp., LLC v. StarStone Specialty Ins. Co., 959 F.3d 634, 638-39 (4th Cir. 2020). But that’s only when the district court dismisses some claims and, in the process, makes it legally impossible to prevail on the remaining claims, even while allowing them to limp on. Id. In this sense, the litigants do not impermissibly create finality by voluntarily dismissing the doomed claims; they merely recognize that it already effectively exists. See id. at 639 (hearing an appeal from a case that was “legally over” even before the voluntary dismissal).

“That is not what happened here. These parties set out to create finality, not recognize it. The adversary proceeding was not “legally over” after the bankruptcy court’s partial dismissal. See id. Count II’s dismissal did not mean the Kivitis could not prevail on Count I. Count I asked whether Bhatt was in debt to the Kivitis—i.e., whether Bhatt violated D.C. law by renovating the Kivitis’ house without a license and thus owed them money. Count II asked whether any such debt was dischargeable—i.e., whether Bhatt obtained such a debt through “false pretenses, a false representation, or actual fraud.” See 11 U.S.C. § 523(a)(2)(A). Just because the bankruptcy court found that Bhatt had obtained $=P13 no debt through fraud did not mean the Kivitis were wrong that he violated D.C. law. Count I was still very much alive.

“The parties agree that the Kivitis could have prevailed on Count I’s merits even after Count II’s dismissal. They maintained their proof of claim which sought the same monies. Yet the Kivitis still argue that their voluntary dismissal recognized rather than created finality because, they say, their Count II loss rendered the adversarial proceeding moot. According to them, a moot proceeding is “legally over” and so this appeal falls within Affinity Living Group‘s safe harbor.

“The root of their mootness argument is that, without Count II, any judgment they won via Count I could not be collected outside bankruptcy and their $58,770 would be recovered—if at all—only through the bankruptcy’s proof-of-claims process. So once Count II failed, they argued, Count I became legally moot. A case is moot when “a court can’t grant any effectual relief whatever” to the complaining party.5 Mission Prod. Holdings, Inc. v. Tempnology, LLC., 139 S. Ct. 1652, 1660, 203 L. Ed. 2d 876 (2019) (quoting Chafin v. Chafin, 568 U.S. 165, 172, 133 S. Ct. 1017, 185 L. Ed. 2d 1 (2013)). Recall that if a debt is discharged, it cannot be collected outside the bankruptcy proceedings. So if the bankruptcy court agreed Bhatt owed the Kivitis money (success on Count I), but determined that debt dischargeable (failure on Count II), the Kivitis could not directly use the judgment they won from Count I to force Bhatt to pay them outside of bankruptcy. Their only means of recovery would be within bankruptcy, via their already filed proof of claim. The Kivitis thus contend that they could not get “any effectual relief” from the adversary proceeding, rendering it moot. Appellant’s Supp. Br. at 10 (“[T]he Bankruptcy Court’s dismissal of Messrs. Kiviti’s claim . . . caused the remaining case to become moot, and to accordingly strip the Bankruptcy Court of Article III jurisdiction.”).

“The Kivitis’ argument is clever, but it misses at least one critical link: Mootness is an Article III doctrine, and bankruptcy courts are not Article III courts. Mootness arises out of Article III’s “case-or-controversy” requirement. The United States’s judicial Power extends only to cases or controversies. U.S. Const. art. III, § 2. To be a case or controversy, parties must have a “‘personal stake in the outcome’ of the lawsuit,” at each stage of the litigation. Lewis v. Cont’l Bank Corp., 494 U.S. 472, 478, 110 S. Ct. 1249, 108 L. Ed. 2d 400 (1990) (quoting Los Angeles v. Lyons, 461 U.S. 95, 101, 103 S. Ct. 1660, 75 L. Ed. 2d 675 (1983)); Campbell-Ewald Co. v. Gomez, 577 U.S. 153, 161, 136 S. Ct. 663, 193 L. Ed. 2d 571 (2016). If they lose that stake, their case drifts beyond the judicial Power and becomes moot. See United States v. Payne, 54 F.4th 748, 751 (4th Cir. 2022). But since bankruptcy courts are not Article III courts, [*17]  they do not wield the United States’s judicial Power. Stern v. Marshall, 564 U.S. 462, 503, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011). So they can constitutionally adjudicate cases that would be moot if heard in an Article III court.

“To be sure, a bankruptcy case must—at the start—be within the judicial Power. Section 1334 grants near-exclusive jurisdiction over bankruptcy matters to federal district courts. 28 U.S.C. § 1334(a). The district court may then refer a bankruptcy case to a bankruptcy judge (who serves as a unit of the district court). 28 U.S.C. §§ 157(a), 151.9 But, of course, a district court can only refer a case that it has jurisdiction over. See Ex parte McCardle, 74 U.S. 506, 514, 19 L. Ed. 264 (1868) (“Without jurisdiction the court cannot proceed at all in any cause.”). So before a bankruptcy case is referred to a bankruptcy court, the case must satisfy Article III. See In re Curtis, 571 B.R. 441, 447 (B.A.P. 9th Cir. 2017) (“[T]he bankruptcy court’s power to hear, or to hear and determine, as the case may be, bankruptcy cases and proceedings is entirely dependent upon the referral by the district court.”)

.“So too must Article III be satisfied after the bankruptcy court acts and the case is returned to the district court from the bankruptcy court. Every action by a district court is constrained by Article III, including reviewing a bankruptcy court order. So a district court has no authority to act without an existing constitutional case or controversy. See In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012); In re Croniser, No. 22-1227, 2022 U.S. App. LEXIS 28563, 2022 WL 7935991, at *1 (4th Cir. Oct. 14, 2022) (unpublished).

“But that limit on the district court’s authority does not constrain the bankruptcy court. Once a case is validly referred to the bankruptcy court, the Constitution does not require it be an Article III case or controversy for the bankruptcy court to act. See In re Technicool Sys., Inc., 896 F.3d 382, 385 (5th Cir. 2018) (“Bankruptcy courts are not Article III creatures bound by traditional standing requirements.”). That requirement comes from the Constitution’s limits on the judicial Power. Bankruptcy courts do not wield judicial Power. End of story

.“At least that is the end of the constitutional story. The statutory story—i.e., whether bankruptcy courts have statutory authority to decide a constitutionally moot matter—is more complex. Still, the tale concludes the same way: a bankruptcy court can adjudicate a constitutionally moot matter.

“Bankruptcy courts, as statutory creatures, have whatever power Congress lawfully gives them. So to see if bankruptcy courts can decide matters outside the judicial Power, we check to see if Congress has given them that power. And Congress has said that bankruptcy courts “may hear and determine all [bankruptcy] cases . . . and all core proceedings . . . referred” to them by a district court. 28 U.S.C. § 157(b)(1) (emphasis added). Not just those that could be fully adjudicated in district court. Once a bankruptcy case lands in bankruptcy court, any number of things could happen before the estate’s distribution is settled. As relevant here, the parties could embroil themselves in an adversary proceeding. But whether that proceeding could itself be adjudicated in an Article III court is of no moment. By § 157’s text, a bankruptcy court’s jurisdiction requires only that the case or core proceeding arise under Title 11 and be referred to the bankruptcy court. § 157(b)(1). Section 157 does not require every “discrete dispute[ ],” see Ritzen, 140 S. Ct. at 587, arising post-referral to satisfy Article III. Nor does any other provision.

“Against this silence, Congress has elsewhere explicitly imported some Article III type requirements onto bankruptcy courts. For example, it created so-called “bankruptcy standing” by giving “parties in interest” a right to be heard, at least in Chapter 11 bankruptcies. See 11 U.S.C. § 1109(b); In re Capital Contracting Co., 924 F.3d 890, 895 (6th Cir. 2019) (discussing § 1109(b)).11 And it also codified some version of mootness for real-property cases. See 11 U.S.C. § 363(m); In re Rare Earth Mins., 445 F.3d 359, 363 (4th Cir. 2006) (explaining that § 363(m) “creates a rule of ‘statutory mootness’”). Yet these principles are not the same as Article III’s limits and Congress has never imported all [*20]  those limitations. We refuse to make that choice for it; indeed we cannot do so. See Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 96 (2012) (“[W]hat a text does not provide is unprovided.”).

“A few bankruptcy courts confronting this issue have disagreed. They point to a district court’s authority to “withdraw, in whole or in part, any case or proceeding” referred to a bankruptcy court. See 28 U.S.C. § 157(d). They also think it significant that Congress called bankruptcy courts “unit[s] of the district court,” with judges that are “judicial officer[s]” thereof. See § 151. Following these breadcrumbs, those courts have held that a bankruptcy court’s power depends on a district court’s power—and thus evaporates if the case strays outside of Article III’s bounds. See, e.g., In re Kilen, 129 B.R. 538, 542-43 (Bankr. N.D. Ill. 1991) (“In light of the derivative nature of the bankruptcy court’s power, it is obvious that the constitutional standards of Article III which bind the district court also bind the bankruptcy court.”); In re Interpictures, Inc., 86 B.R. 24, 28-29 (Bankr. E.D.N.Y. 1988); but cf. Stern, 564 U.S. at 500-01.12

“We are unconvinced. Congress requires bankruptcy courts to get cases from district courts and allows district courts to withdraw cases. And the Constitution limits the cases a district court can refer or withdraw. But these two facts do not add up to a limit on the types of matters a bankruptcy court can adjudicate after referral, nor a requirement that those matters be eligible for withdrawal. That could be how it works—if Congress said so. Yet Congress has not said so. So that is not how it works

.“In the same vein, we refuse to overread Congress’s designation of bankruptcy courts as “unit[s]” of the district court. See 28 U.S.C. § 151. Certainly, district courts oversee many aspects of bankruptcy courts. For example, when bankruptcy judges consider matters within the judicial Power, district courts can—indeed sometimes must—review those actions. § 157(a), (b)(1), (c)(1). But bankruptcy courts are not “mere adjuncts” of district courts. Stern, 564 U.S. at 487. They exercise “broad powers” under their own statutory grant of jurisdiction. See id. at 488. Congress did not impliedly limit that express grant through cryptic labelling in a separate provision

.“The argument to the contrary depends on finding something inherent about the words “cases” and “proceedings” in the bankruptcy jurisdictional provisions that brings them necessarily within the judicial Power. It assumes that when Congress gave federal courts (Article III and non-Article III alike) jurisdiction over bankruptcy “cases” and “proceedings,” it imbued those words with Article III’s limits. So that, even absent Article III, the statutes themselves would require the same level of adversariness.

“But we do not ordinarily interpret a jurisdictional statute’s constraints to be the same as the Constitution’s. In fact, we often go out of our way to create differences and draw distinctions even where—unlike here—the statute uses Article III’s precise language. See Navy Fed. Credit Union v. LTD Fin. Servs., LP, 972 F.3d 344, 352 (4th Cir. 2020) (“Unlike the constitutionally permitted ‘minimal diversity’ jurisdiction, diversity must be ‘complete’ to satisfy this Congressional grant.” (citing Strawbridge v. Curtiss, 7 U.S. 267, 267, 2 L. Ed. 435 (1806)).

“If we did, our caselaw would look very different. The constitutional-jurisdiction inquiry would often collapse into the statutory one. Yet it doesn’t. For example, litigants can have statutory jurisdiction to sue States even if the Constitution forbids it. See, e.g., Hans v. Louisiana, 134 U.S. 1, 10, 10 S. Ct. 504, 33 L. Ed. 842 (1890). More to the point, we dismiss moot cases because they are no longer Article III cases, not because they fall outside the scope of a statute. See, e.g., Eden, LLC v. Justice, 36 F.4th 166, 169-72 (4th Cir. 2022). So we refuse to read in Article III’s limits.

“To recap, bankruptcy courts are not Article III courts. So Article III constraints— such as mootness—do not apply to them as a matter of constitutional aw. They only apply if Congress said so in a statute. But it hasn’t. And that means whether Count I was constitutionally moot is beside the point. The bankruptcy court could still adjudicate it.

“Since the Kivitis cannot argue that their adversary proceeding was constitutionally moot when Count II was dismissed, they have not shown the proceeding was legally doomed when they dismissed Count I. They are thus left arguing the order was final because Count I was practically over post-dismissal. See, e.g., Appellant’s Supp. Br. at 4 (claiming there was “no judicial economy” to pursuing Count I before appealing Count II). Yet the Supreme Court rejected this exact reasoning in Microsoft. The Microsoft plaintiffs also thought it “economically irrational” to litigate their still-legally-viable claims to final judgment. Microsoft Corp., 582 U.S. at 34. Still, the Court refused to let them create finality by voluntarily dismissing those claims. Id. at 36; see also Affinity Living Grp., 959 F.3d at 639 (distinguishing between claims that are “legally” and merely “practically” over). Here too, it is irrelevant that the parties think there is “no judicial economy” in litigating Count I to final judgment before they appeal the order dismissing only Count II. Count I is legally viable, and its dismissal was without prejudice, so that dismissal did not create a final order under § 158(a). And that means the district court lacked jurisdiction to review it.”

Kiviti v Bhatt

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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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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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“Sham” Carve-Out Agreement Rejected

Calling the agreement a “sham,” the district court affirmed the bankruptcy court’s denial of a carve-out agreement between the chapter 7 trustee and the state and federal tax creditors. The court found the agreement would adhere to no one’s benefit but their own. The court also upheld the bankruptcy court’s finding that the debtor’s homestead exemption applied to section 724(b). Summerlin v. Turnage (In re Turnage), No. 22-122 (W.D. N.C. March 14, 2023).

The 72-year-old widowed debtor living on Social Security income and help from her son, filed for chapter 7 bankruptcy. She claimed an exemption of $55,000 in her home which she valued at $124,510.00. Her secured debts at the time of her petition totaled $231,788.29, and consisted of a mortgage on her home and both federal and state tax debts.

The chapter 7 trustee valued the debtor’s home at between $175,000 and $180,000. He objected to her exemption as inapplicable to her tax liens under North Carolina law. He then entered into a carve-out agreement with the debtor’s tax creditors under which he would receive $30,000 for his expenses and “[t]he IRS and NCDOR each get 60% of their secured tax liens. The remaining 40% carved out of the tax liens (approximately $38,000 after payment of the Trustee’s expenses) would be used to pay priority unsecured claims in full and the remainder would be disbursed pro rata among the general unsecured creditors.” He moved the court for authority to sell the property so he could carry out this distribution plan.

The bankruptcy court denied the motion to sell and overruled the objection to the debtor’s exemption. The trustee appealed to the district court.

The court found the appeal turned on application of section 724(b). In addition to establishing the order of distribution where tax liens are involved, that section provides that after the first mortgage is paid off, claimants holding certain types of priority claims may substitute in for the tax lien to the extent of the tax lien. The court noted that the only priority claim that would be available to substitute in for the tax lien would be the trustee’s own compensation, related primarily to the sale of the debtor’s home.

Notably, section 724(b) makes no provision for exemptions. Because North Carolina opted out of the federal exemptions, the court turned to state law to determine how the debtor’s homestead exemption would fare under a section 724(b) distribution scheme. It found state law emphasizes a liberal construction of exemption laws, favoring their application.

The court was unpersuaded by the trustee’s argument that permitting the debtor to take her homestead exemption would impinge on the tax liens. The court differentiated between the homestead exemption’s applicability to proceeds from sale of the home and its applicability to the tax liens themselves. It found that “once the tax agencies agree to the carve-out they cannot direct the allocation of the value created by such carve-out.”

Finally, the court noted with distaste that the carve-out benefited only the trustee and the tax agencies. It stated: “for her ‘fresh start,’ the Debtor, a 72- year-old widow with no meaningful source of income, loses her home and gets no more than a check for about $2,000. The minimal benefit to the other general unsecured creditors does not obscure the reality of this agreement.”

The court affirmed the Bankruptcy Court’s decision that the Debtor’s homestead exemption applies to section 724(b) and its denial of the Motion to Sell.

Turnage WD NC March 2023

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Punitive Damages for Stay Violation Were Excessive

The punitive damages awarded by the bankruptcy court were unconstitutionally excessive where they were seven times greater than actual damages and the bankruptcy court increased the damages on remand because it found the lender’s success at the BAP level would eliminate a substantial disincentive to engage in the conduct establishing the automatic stay violation. Rushmore Loan Mgmt Serv., LLC v. Moon, No. 22-1126 (D. Nev. Feb. 6, 2023).

When the debtors, Adnette Gunnels-Moon and Willie Moon, filed for chapter 13 bankruptcy, they listed Rushmore as a mortgage creditor on a loan in Adnette Gunnels-Moon’s name only, but gave the wrong address for Rushmore. For that reason, Rushmore was unaware of the bankruptcy and continued to dun the debtors for monthly mortgage payments. At one point when Rushmore called Willie Moon, he told Rushmore that he and Adnette had filed for bankruptcy. The debtors obtained their discharge in 2016. But Rushmore, apparently adhering to an unwritten policy of not accepting bankruptcy notification from a third party, continued its collection activity through the bankruptcy and after discharge.

The debtors reopened their bankruptcy to seek contempt sanctions against Rushmore for violation of the automatic stay and the discharge order. The bankruptcy court found in favor of the debtors on the automatic stay claim and awarded $742.10 representing the costs of reopening the bankruptcy. It also awarded $100,000 in emotional distress damages to Willie, and $200,000 in punitive damages. The court found no discharge injunction violation because it was unclear when Rushmore became aware of the discharge. The court also awarded $56,150 in attorney’s fees, $10,857.94 in costs, and an additional $3,500 in supplemental fees.

The parties filed cross-appeals. The debtors sought to reverse the bankruptcy court’s denial of the discharge injunction claim and its refusal to award certain fees, and Rushmore sought to reverse the damages award to Willie. Rushmore did not challenge the bankruptcy court’s finding that it violated the automatic stay as to Adnette, and did not seek to overturn the $742.10 in damages based on that claim.

The BAP reversed the $100,000 award to Willie, finding Rushmore did not violate the automatic stay as to him, affirmed the finding that punitive damages were warranted but remanded for reconsideration as to the amount, and affirmed the finding that Rushmore did not violate the discharge injunction. The BAP also remanded for reconsideration of the fee awards.

On remand, the bankruptcy court awarded $67,007.94 in fees and costs and $3,500 in supplemental fees. It increased the punitive damage award to $500,000. It awarded an additional $14,827 for Adnette’s defense of Rushmore’s adversary complaint, $70,415.95 to Adnette in appellate fees related to the first fee decision, and $45,235.82 in appellate fees for the contempt decision appeal, for a total appellate fee award of $115,651.77.

The court began its analysis with Rushmore’s challenge to the attorney’s fee awards noting that the goal of section 362(k) is to return debtors to their status as it was before the automatic stay violation. Rushmore argued that the bankruptcy court should have separated out the fees attributable to litigation of the discharge injunction and deducted those fees from the total fee award on the automatic stay claim.

The district court found the bankruptcy court satisfied the BAP’s instructions by explaining that the litigation of the automatic stay violation was inextricably intertwined with the discharge violation litigation and therefore the fees were inseparable.

The district court also found that the failure of Willie’s claims did not require the court to reduce the fees based on litigation of those claims because the evidence supporting them also either supported the automatic stay claims, or were relevant to the egregiousness of Rushmore’s conduct. The court observed that, although a bankruptcy court is required to award fees causally linked to a stay violation, it may approximate. “The essential goal in shifting fees is to do rough justice, not to achieve auditing perfection.”

The court also rejected Rushmore’s contention that the bankruptcy court should have reduced the punitive damage award based on the BAP’s instruction to revisit that award in light of its having reversed the court’s award of damages to Willie. In fact, the BAP merely instructed the bankruptcy to revisit the award. The bankruptcy court complied with that instruction.

Therefore, the court affirmed the award of $70,507.94 in attorney’s fees and supplemental fees to Adnette for prosecution of the original contempt proceedings.

The court next addressed the bankruptcy court’s award of fees to Adnette for litigation surrounding Rushmore’s adversary complaint. The bankruptcy court originally declined to award those fees, but did so after the BAP remanded with instructions to revisit the issue. At that time, the bankruptcy court determined that Rushmore’s complaint sought to dismiss the automatic stay claim. Therefore, the bankruptcy court concluded that Adnette’s defense of Rushmore’s complaint was part of her litigation in support of her automatic stay claim. The district court found no error in this conclusion and affirmed the $14,827 attorney fee award.

Rushmore challenged the bankruptcy court’s award of fees incurred in the appeals of the fee decision, the supplemental fee decision, and the adversary fee decision. Specifically, Rushmore contended that the bankruptcy court should have required Adnette’s attorney to specify the amount of time he spent on the issues Adnette prevailed on, and not award any fees for the time spent on Willie’s failed claim for discharge violation.

The district court found no error in the bankruptcy court’s attorney fee award. It held that the bankruptcy court did not apportion any fees to litigation of Willie’s claims. It also held that there was no clear distinction between the evidence supporting the discharge injunction and the automatic stay claims. The court upheld the award of Adnette’s full fees for defending the fee award on appeal.

As to the appellate fees related to the appeal of the contempt order, Rushmore argued that because the bankruptcy court reduced those fees after remand by 20%, Rushmore prevailed on that appeal and the debtors were not entitled to fee shifting. While the court did not entirely agree, it found that “[t]he bankruptcy court abused its discretion in failing to apportion fees for time spent on Willie’s unsuccessful appeal on the discharge injunction issue.” It found those fees both severable as a practical matter, and not related to the automatic stay violation. The court found that it could reasonably calculate the proper reduction, and it did so, reducing the total fee award based on the contempt order by 80%, to $11,308.96.

Rushmore next argued that the awards in general were disproportionate to the actual damages of $742.10 which Adnette incurred before Rushmore ceased its offending conduct.

The court disagreed. It found that section 362(k)’s deterrent effect is furthered by permitting the debtor to recover attorney’s fees for successfully litigating an automatic stay violation. In this case, Rushmore followed an unwritten and undisclosed policy of ignoring third party information regarding bankruptcy of its borrowers. Because it learned early on that Adnette was in bankruptcy but ignored that information without telling her that the information had to come from her to compel action, it needlessly perpetuated the automatic stay violation. The bankruptcy court took these facts into consideration and did not abuse its discretion in calculating appropriate damages.

Turning to the issue of punitive damages, the court noted that, on remand, the bankruptcy court increased the punitive damage award from $200,000 to $500,000. The bankruptcy court based its decision on the reprehensible nature of Rushmore’s position that it need not act on third party information of bankruptcy and its continued collection efforts. It was also persuaded that greater deterrent was needed because the BAP’s decision against Willie’s claims eliminated his ability to sue on his own behalf for Rushmore’s conduct.

Rushmore countered that the punitive award violated its due process rights by punishing it for prevailing on appeal as to Willie.

In reviewing a punitive damage award on constitutional challenge the court considered: “the degree of the defendant’s reprehensibility or culpability, the relationship between the penalty and the harm to the victim caused by the defendant’s actions, and the sanctions imposed in other cases for comparable misconduct.”

Based on these factors, the court agreed that the punitive damage award was unconstitutionally excessive. It found the award punished Rushmore for its conduct to Willie and others similarly situated rather than for any harm suffered by Adnette. It also found an award greater than a 4:1 ratio of punitive to actual damages requires both particularly egregious conduct, and relatively small actual damages. Here, though Adnette’s award of $742.10 was small, the entire fee award was not.

Having found that the bankruptcy court erred with respect to the punitive damages award, the court found that remanding with instructions to reconsider that award would merely consume more time and money in what was already an outsized case. Therefore it calculated punitive damages. It found that Rushmore’s appeals were not unreasonable and it’s conduct not malicious. There was no evidence that it extended to other borrowers. The court concluded that a 1.5 multiplier satisfied the principles of punishment and deterrence. It reduced the award of punitive damages to $128,002.41.

As the district court anticipated, Rushmore filed an appeal to the Ninth Circuit.

Gunnels-Moon D Nev Feb 2023

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Ex-Wife’s Interest in Home Not Property of Debtor’s Bankruptcy Estate

Under Colorado law,  spouses in dissolution proceedings own marital property as co-owners. Therefore the debtor’s ex-wife had a vested equitable interest in an up-front sum plus 50% of the proceeds from the sale of their marital residence as ordered by the divorce court, and that interest did not enter the debtor’s chapter 13 estate. Williams v. Goodman (In re Williams), No. 22-1067 (10th Cir. Dec. 13, 2022) (non-precedential).

The debtor and his wife, Ms. Williams, lived with their children in a home titled only in the debtor’s name. When they divorced, they agreed to sell the home. Ms. Williams was to receive $24,800 from the proceeds and the remaining proceeds were to be divided evenly between the two of them. Instead of selling the home, though, the debtor filed for Chapter 13 bankruptcy.

The debtor’s confirmed plan listed general unsecured creditors as “class four,” with their payments to be made on a pro-rata basis after all prior classes of debts were fully paid. Beyond describing class four claims as allowed and timely filed, the plan did not address any individual unsecured claims.

Ms. Williams filed an adversary complaint seeking a ruling that her interest in the house did not become part of the bankruptcy estate under section 541(a) and seeking an order of nondischargeability of other claims under section 523(a). The debtor filed counterclaims including a request for attorney’s fees under section 523(d). The bankruptcy court ruled in favor of Ms. Williams on the section 541(a) claim and against her on the section 523 claims. The court ruled against the debtor on his counterclaims. It failed to address his claim under section 523.

The debtor moved for reconsideration based on the court’s failure to address the attorney’s fee claim, and at the same time, appealed the court’s decision in favor of Ms. Williams to the Tenth Circuit BAP. The bankruptcy court denied the motion for reconsideration, expressly rejecting his section 523 claim for attorney’s fees at that time. The debtor did not amend his BAP appeal to include the reconsideration order.

In the meantime, the trustee asked the court what she should do with the distributions earmarked for Ms. Williams. If Ms. William’s interest in the house was determined on appeal to be estate property she would be entitled to her pro rata share of the distributions representing only a fraction of the claim. But if it was outside the estate, she would be entitled to the entire amount as ordered by the divorce court. The bankruptcy court ordered the trustee to retain Ms. Williams’ share in a separate trust to await a ruling by the BAP as to the legal question. The debtor appealed that order to the BAP.

In two separate orders, the BAP affirmed the orders of the bankruptcy court. It did not consider the debtor’s arguments related to the bankruptcy court’s order denying reconsideration because the debtor failed to file a notice of appeal of that order.

The debtor appealed both decisions to the Tenth Circuit and that court consolidated the appeals.

The court began with the debtor’s argument that the bankruptcy court’s distribution order contravened the terms of the confirmed plan. The court disagreed, finding that the provision in the plan and the confirmation order concerning class four claims was general in its applicability. The court held that where neither the plan nor the confirmation order addressed the timing of distributions or whether specific claims like Ms. Williams’ were allowed, “the confirmation order did not have preclusive effect regarding the allowance of that claim or the timing of distributions based on that claim.” Therefore, the trustee was not required to adhere to the plan’s treatment of her claim in the event her interest in the house was determined not to be part of the bankruptcy estate. The court also rejected the debtor’s argument that the trustee’s motion for an order of distribution was merely an untimely appeal of the confirmation order.

The court next affirmed the BAP’s refusal to address the debtor’s motion for reconsideration. The court found that when a judgment or order under appeal is amended or added to while the appeal is pending, the appellant must file a new appeal or amend the pending appeal to encompass the new judgment or order. The debtor failed to do so.

The court then turned to the issue of whether Ms. Williams’ equitable interest in the house was not part of the bankruptcy estate under section 541. Section 541(d) states, “[p]roperty in which the debtor holds . . . only legal title and not an equitable interest, . . . becomes property of the estate . . . only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”

Looking to state law to determine the nature of Ms. Williams’ property interest, the court reasoned that at the time of the bankruptcy petition, Ms. Williams “had a vested interest in the house protected by ‘an encumbrance of record,’ created via ‘filing the lis pendens.’” Based on this finding, the circuit court agreed that Ms. Williams had an equitable interest in the property valued at 50% plus $24,800, that the debtor did not hold. Therefore, that interest did not become part of the debtor’s estate.

In answer to the debtor’s argument that Ms. Williams’ interest was not in the home itself, but in a sum of money representing a divorce settlement, the court turned again to state law. Colorado law states that upon filing a dissolution of marriage, marital property “the wife has an interest in the marital property like a co-owner, rather than as a mere creditor of her husband,” and that interest vests automatically.

The court concluded that Ms. Williams’ equitable interest in the property did not enter the debtor’s bankruptcy estate and affirmed the decisions of the BAP.

Williams 10th Cir Dec 2022