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The 6th Circuit To Determine Whether the Debtors’ Post-Petition Application of Their Tax Refund to Future Tax Liabilities is Per Se Intent to Hinder a Trustee Justifying a Denial of Discharge

The Sixth Circuit in Wylie v Miller is reviewing the decision of the District Court for the Eastern District of Michigan. The district court reversed the bankruptcy court’s decision, holding that the bankruptcy court erred in applying a per se rule that the debtors’ post-petition application of their tax overpayment to future tax liabilities constituted an intent to hinder the trustee.

Facts

Jason and Leah Wylie filed for Chapter 7 bankruptcy and were denied discharge under 11 U.S.C. § 727(a)(2)(B) by the bankruptcy court. The denial was based on the Wylies’ post-petition election to apply a $20,736 tax overpayment from their 2019 tax return to their 2020 tax liabilities, which the bankruptcy court interpreted as an intent to hinder the trustee.

Analysis

The court’s analysis centered on the bankruptcy court’s application of a per se rule regarding the debtors’ intent. The bankruptcy court found that the Wylies’ election to apply their 2019 tax overpayment to their 2020 tax liabilities was sufficient to establish an intent to hinder the trustee. This conclusion was drawn without direct evidence of the Wylies’ intent but rather inferred from the action itself, effectively applying a per se rule that such an action always constitutes intent to hinder.

The court found this application problematic because it did not consider the specific circumstances or the debtors’ actual intent. The court highlighted that intent to hinder, delay, or defraud must be supported by concrete evidence and not merely inferred from the action of applying tax overpayments. The Wylies had consistently made similar elections pre-petition, which the bankruptcy court had previously found were made without intent to hinder, delay, or defraud. The court emphasized that exceptions to discharge must be narrowly construed, and a broad per se rule undermines this principle by potentially denying a fresh start without sufficient evidence.

The court also noted that the bankruptcy court failed to account for the Wylies’ testimony, which consistently stated that their intent was to ensure payment of future tax liabilities, not to hinder the trustee. The bankruptcy court’s failure to distinguish between intent to prefer one creditor over another and intent to hinder the trustee further weakened its position. Therefore, the application of a per se rule was inappropriate, and the court reversed the decision, remanding for entry of a discharge.

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

Wylie v Miller – Amici Brief

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“Equity Abhors a Forfeiture”

Where the debtor had paid over 70% of the purchase price of real property, the court found that equitable principles precluded granting relief from stay to allow the seller to enforce a provision in the sales documents requiring the defaulting debtor to “forfeit not only the property, but all deposits, improvements and payments made.” Allied Ventures, LLC. v. Cruz, No. 22-23864 (Bankr. W.D. Tenn. Feb. 23, 2023).The debtor entered into an agreement with Allied, titled Seller-Financed Industrial Purchase Agreement, to purchase property Allied had bought at a tax sale. As the “Buyer,” the debtor was able to take possession of the property and was obligated to pay $290,000 in accordance with a schedule of payments beginning with a $30,000 initial payment and $6,500 monthly payments once Allied obtain title. Once the purchase price was satisfied, Allied would transfer title to the Buyer. Allied exercised control over the property only to the extent that the agreement required the Buyer to use it for a purpose that was legal and that the Buyer provide insurance as specified by Allied.

The debtor also signed a promissory note as “Buyer/Borrower” obligating him to pay the entire purchase price of $290,000. Both the Purchase Agreement and the Promissory Note provided that, in the event of default, “[i]f the scheduled amount of payment is not made in sixty (60) days after the invoice date, you will forfeit not only the property, but all deposits, improvements and payments made.”

The debtor missed a payment and Allied sought to enforce the default provision. It obtained a state court judgment for possession in June 2022, and for reasons that weren’t explained, accepted a payment from the debtor in July, 2022. The debtor posted an $86,000 bond and appealed the state court judgment.

The debtor filed for chapter 13 bankruptcy in September, 2022. In his 100% plan he proposed to treat the debt to Allied as a secured debt and pay the remaining balance through the plan.

The case came before the court on Allied’s motion for relief from stay to allow it to possess and sell the property with forfeiture by the debtor of all payments and improvements made. In its motion, Allied argued that the debtor’s plan incorrectly treated its claim as secured when in fact it was a lease agreement, and that the debtor had failed to propose a feasible plan.

In response, the debtor argued the Allied’s interest was protected by the $417,400 actual value of the property and the insurance he had obtained. His proposed plan included adequate protection payments of $1,800 per month. With respect to the nature of the agreement, the debtor took the position that if the court found it was not a secured loan but an executory contract, he would assume the lease, pay any arrearage through the plan and maintain monthly payments directly. The debtor further “propose[d] to use the $86,000.00 presently being held by the Shelby County Circuit Court Clerk to satisfy any such post-petition arrearage, and to otherwise be applied to the plan as may be determined by the Court.”

The court began its analysis with the nature of the underlying claim. It observed that the seller delivered possession of the property to the debtor and, with limited exceptions, the debtor undertook full responsibility for it. The promissory note created an absolute obligation on the debtor to pay $290,000, and title would transfer at the end of the payment period. The court found that “[a]lthough there is some ambiguity in the arrangement contemplated by the parties, the Court believes and finds for purposes of the pending Motion for Relief from Stay that the agreement between the parties is best characterized as an installment land sales contract.” It noted that, under Tennessee law, such contracts create a situation like a deed of trust where “the vendee is regarded as the owner, subject to liability for the unpaid price, and the vendor is regarded as holding only the legal title in trust for the vendee from the time a valid contract for the purchase of land is entered into.”

The court went on to determine whether the language of repossession and forfeiture in the agreement and the note justified granting Allied’s motion for relief from stay. For that analysis, the court looked to equitable principles. By the time the case came before the court, the debtor had paid 71-77% of the total purchase price. If Allied had its way, the debtor’s more than $200,000 in payments would be forfeit to Allied’s right to sell to another buyer.

This was unpalatable to the court. “Equity abhors a forfeiture.” The court observed that states often deny a vendor the right to sell against a defaulting buyer “when forfeiture would be unreasonable or inequitable.” The trend is to allow the buyer an opportunity to pay the remaining purchase price or the defaulted payments, in a redemption-type solution.

In light of the fact that the confirmation hearing was coming up, the court found no good reason to “short circuit that process.” It denied Allied’s motion for relief from stay.

Allied has appealed this decision to the Bankruptcy Appellate Panel for the Sixth Circuit, case no. 23-8009.

Cruz Bankr WD Tenn Feb 2023

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Sixth Circuit Questions “Person-Aggrieved” Standard for Appeal

The debtors’ claim against lenders for charging improper fees during their bankruptcy belonged to the bankruptcy estate, but the lenders’ appeal of the bankruptcy court’s order of abandonment was dismissed because they lacked a direct financial stake in the outcome of the bankruptcy court’s decision and, therefore were not “persons-aggrieved.” In so holding, the Sixth Circuit indicated that had the lenders challenged the “person-aggrieved” standard it would likely have been found to have been abrogated by subsequent Supreme Court precedent and congressional action. Schubert v. Litton Loan Servicing, No. 21-3969 (6th Cir. March 28, 2023).

The debtors alleged that from 2000 to 2004, while they were in bankruptcy, Litton Loan Servicing, L.P., JPMorgan Chase Bank, N.A., and Ocwen Financial Corporation (collectively, “the lenders”), breached their mortgage agreement by collecting fees to which they were not entitled. The debtors received their discharge in 2006 without having disclosed the claim against the lenders to the bankruptcy court, apparently because they only discovered the overcharges a decade later during foreclosure proceedings. Upon discovery, the debtors sued the lenders in state court for breach of contract. The lenders argued that the claim belonged to the bankruptcy estate. The debtors had the state court case stayed and they reopened their bankruptcy case, seeking abandonment of the claim. The lenders opposed abandonment and countersued for an injunction to prevent the debtors from pursuing the state action. The debtors moved to dismiss the lenders’ complaint.

After a hearing, the bankruptcy court denied the debtor’s motion to dismiss and ruled that the claim belonged to the estate. It ordered the trustee to abandon the claim and declined to issue an injunction. Upon appeals by both sides, the district court affirmed.

The case came before the Sixth Circuit on the lenders’ appeal of the abandonment order, and the debtor’s appeal of the denial of their motion to dismiss.

As an initial matter, the court found the lenders had standing to pursue the appeal. The prospect of state court litigation established the necessary “injury fairly traceable to the defendant’s conduct and likely redressable by a favorable decision.”

Another jurisdictional question was more troublesome. The court found the lenders did not pass the “person-aggrieved” test, which bars appeals in bankruptcy by a party “who lack[s] a direct financial stake in the appeal’s outcome.” The person-aggrieved test was included in section 158 of the Bankruptcy Code until Congress removed it in the 1978 amendments to the Code.

The court indicated that the test, which has been deemed to be jurisdictional, is a likely candidate for abrogation in light of the subsequent Supreme Court decision in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125–27 (2014). Lexmark prohibited a court from limiting its jurisdiction for prudential or policy reasons. “[W]hen Congress creates a right to sue consistent with the Constitution, a court may not take it away.”

However, the lenders did not seek abrogation of the test, so the court rendered its decision based on the test’s continued viability. It found that the lenders did not have the requisite financial stake in the appeal’s outcome because they sought only to preclude state court litigation. “[U]nder our precedent, staving off the threat of litigation doesn’t count. In re LTV Steel Co., Inc., 560 F.3d 449, 452–53 (6th Cir. 2009).”

The court turned next to the debtors’ appeal of the bankruptcy court’s denial of their motion to dismiss the lenders’ adversary complaint. The circuit court stated that the lenders had standing to bring the adversary complaint for the same reason they had standing to appeal. The court also rejected the debtor’s argument that the bankruptcy court lacked the power to determine which claims belong in the estate, finding that that determination is well within the bankruptcy court’s administrative powers under section 157(b)(2)(A).

Finally, the court disagreed with the debtors’ contention that the lenders were not parties in interest. On the contrary, the lenders had “a practical stake in maintaining the settlement of claims the bankruptcy produced.” Had the claim against them been raised during the bankruptcy proceedings, they could have addressed it at that time.

The court dismissed the lenders’ appeal and affirmed the ruling that was the subject of the debtors’ appeal.

In a concurring opinion, Judge Moore stated that the person-aggrieved standard, rather than being at odds with more recent law, “reflects a zone-of-interests analysis that is consistent with Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014).” Judge Moore observed that the person-aggrieved standard, while most often requiring a financial stake in the proceedings, may also be met when there is a public interest in the outcome of an appeal. In her opinion, when properly applied, the person-aggrieved standard “directs the courts to perform a zone-of-interest analysis in line with Lexmark.”

She agreed with the majority, however, that the lenders’ appeal did not fall under the zone-of-interests the abandonment statute, section 554, was intended to address. That provision was designed to prevent trustees from pursuing the sale of property only to increase the trustee’s commission without benefit to the estate. In this case, the lenders’ appeal was solely intended to free them from state court litigation and would not benefit the bankruptcy estate. Therefore, the appeal was outside the zone of interest.

Schubert 6th Cir March 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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Good Faith in Failure to Disclose Lawsuit

Where the debtor failed to amend her schedules before her case was closed, she forfeited the right to do so as a matter of course, but based on the facts and circumstances in this case, the debtor’s neglect was excusable. The court allowed her to reopen her case to claim an exemption in a personal injury settlement. In re Wantz, No. 18-2851 (Bankr. W.D. Mich. Jan. 5, 2023).

Prior to filing her chapter 7 petition, the debtor contacted a personal injury attorney who was representing other women suing the manufacturer of an implanted medical device to explore the possibility of filing a lawsuit. The attorney told the debtor via email that because she had not had the device removed, she would be unlikely to prevail in a lawsuit. When she filed for bankruptcy, the debtor did not disclose this potential cause of action in her bankruptcy. Shortly before receiving her discharge, she signed an Attorney Employment Contract with the personal injury attorney. That agreement stated only that the attorney would investigate her potential claim.

She received her discharge in October, 2018, and her case was closed in November, 2018. In 2020, the debtor received two emails from her personal injury attorney suggesting, but not directly stating, that a case had been filed on her behalf. In March, 2021, the debtor sought medical advice with respect to the device and, upon learning that it was the cause of her pain, had it removed. Her medical expenses were $7,000. At around the same time, the debtor learned that her personal injury case had settled and that she would net $6,500.

Three weeks later, the debtor moved to reopen her bankruptcy to add the settlement to her schedules and claim it as exempt. The trustee objected to the exemption arguing that it was untimely.

Rule 1009(a) provides that a debtor may amend a bankruptcy schedule as a matter of course any time before the case is closed. The question here was whether that automatic right to amend is reignited when a closed case is reopened. The debtor lobbied for the court to find that once a case is reopened the debtor’s right to amend her schedules is “as a matter of course,” as it would be under Rule 1009(a) and that any other conclusion would violate the holding in Law v. Siegel, 571 U.S. 415 (2014).

The court found the debtor’s interpretation of that case was overbroad. Law prohibited a court from surcharging a debtor’s exemptions based on equitable considerations and in contravention of Code provisions. Law did not deal with timeliness of an amendment to the schedule of exemptions. The court here found that because Rule 1009(a) specifically applies to a debtor’s right to amend prior to her case being closed, the obverse is not true. A debtor may not amend her schedules as a matter of course after the case is closed even if it is later reopened.

The court turned next to the impact of Rule 9006, which provides that, with certain specified exceptions, a court may extend a deadline after that deadline has expired upon a showing of excusable neglect. The debtor argued that Rule 9006 was inapplicable because that rule applies only when the act in question “is required or allowed to be done at or within a specified period by these rules.” The debtor argued that because the time for amending schedules is not circumscribed by a specific period but is tied to the non-specific point at which the case is closed, amendments are not subject to Rule 9006’s requirement of a finding of excusable neglect.

The court disagreed with the debtor and with the cases, such as Mendoza v. Montoya (In re Mendoza), 595 B.R. 849 (B.A.P. 10th Cir. 2019), supporting her position. It found that Rule 1009(a)’s requirement that an amendment be filed before the case is closed is sufficiently specific to bring it under the auspices of Rule 9006.

The court turned to whether the debtor had shown excusable neglect, finding that the inquiry was equitable in nature and involved consideration of all relevant circumstances.

The court agreed with the trustee that the debtor’s failure to disclose the lawsuit during her bankruptcy deprived the trustee of the opportunity to litigate the claim for the benefit of the estate. But the court found that prejudice to the trustee and creditors was not significant in light of the fact that the debtor could have claimed an exemption under 522(c) for the settlement at any time during her bankruptcy. The court was unwilling to agree that the trustee would likely have obtained a better outcome from the litigation had she been involved.

As to the length of the delay—three years between filing her petition and reopening her case—the court found the debtor was unaware of several salient facts that would have alerted her to the necessity of disclosing the claim. First, the debtor did not know the cause of her pain was due to the device; second she did not know her attorney had moved past the investigation stage and filed a claim on her behalf; and third, the debtor lacked the sophistication to untangle the conflicting information she had received from her personal injury lawyer. The court noted that the debtor’s personal injury case involved many plaintiffs and that the debtor did not have a relationship with her attorney, but dealt with him from a distance. The court concluded that the debtor acted in good faith.

With the final observation that the debtor’s ultimate recovery did not even meet her medical bills based on the injury, the court found the debtor was entitled to amend her schedules to claim the exemption.

Wantz Bankr. WD Mich Jan 2023

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Creditor Must Resume Statements After Discharge

PNC’s TILA obligation to provide regular statements concerning the plaintiffs’ debt resumed after the debtors received their bankruptcy discharge even though the plaintiffs’ bankruptcy case was not closed until almost four years later. Polonowski v. PNC Bank, NA, No. 20-151 (W.D. Mich. Jan. 23, 2023).

The plaintiffs had a home equity line of credit (HELOC) with PNC which was secured by a mortgage on their residence. Pursuant to its obligation under the Truth in Lending Act (TILA), PNC sent the debtors periodic statements concerning the debt. When the debtors filed for chapter 7 bankruptcy, PNC stopped sending the statements. While their bankruptcy was still pending the plaintiffs reaffirmed their debt to PNC. On November 15, 2018, the plaintiffs received their discharge, but their bankruptcy case remained open until July, 2022. PNC failed to resume the periodic statements, informing the plaintiffs’ counsel that it would not send statements so long as the bankruptcy case remained open.

The plaintiffs filed suit against PNC in district court and moved for partial summary judgment on the issue of liability.

PNC argued that its obligation to send periodic statements under TILA conflicted with bankruptcy’s automatic stay, and that TILA releases creditors from their obligation to issue account statements when doing so would violate other federal laws. In PNC’s view, as long as the bankruptcy remained open, the property remained part of the bankruptcy estate under section 362(c)(1), and it could not send statements.

The court agreed that when the plaintiffs filed for chapter 7 bankruptcy, the stay suspended PNC’s obligation to issue statements, but found that, under section 362(c)(2)(C), its obligation resumed when the plaintiffs received their discharge.

To the argument that the property remained part of the bankruptcy estate, the court emphasized the distinction between in rem and in personam proceedings, noting that because the plaintiffs had reaffirmed the debt, their bankruptcy discharge lifted the stay with respect to them. The court stated that sending information about a debt was not an “act against the property of the estate.” It analogized the case with one involving the discharge injunction noting that a creditor seeking to collect post-discharge on a debt the debtor had reaffirmed, would not violate the discharge order.

The court concluded that the plaintiffs’ interpretation of sections 362(c)(1) and 362(c)(2)(C) was consistent with the parameters of the automatic stay and with the historical distinction between in rem and in personam proceedings, and that “Defendant’s interpretation is not consistent with either the statutory language or the historical approach to acts against the person and acts against property.”

The court granted the plaintiffs’ motion for summary judgment on the issue of liability.

Polonowski WD Mich Jan 2023

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Laches Forecloses Trustee’s Motion to Dismiss

Where the Trustee slept on her right to challenge the debtor’s method of calculating her plan payments until shortly before the debtor completed her plan, the doctrine of laches compelled denial of the trustee’s motion to dismiss. In re Melcher, No. 16-21536 (Bankr. E.D. Ky. Aug. 30, 2022).

The debtor and the chapter 13 Trustee negotiated a 60-month plan in which the debtor agreed to commit one third of her annual gross income over $120,000 to the plan (“excess income payments”). The debtor calculated her first excess income payment by taking the income from Box 1 of her W-2 form, subtracting $120,000 and multiplying the result by .33. After discussion with the Trustee and one of her creditors, the debtor’s payment was accepted as correct. The debtor used the same method of calculation for the following years’ excess income payments. [Read more…] about Laches Forecloses Trustee’s Motion to Dismiss

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Sixth Circuit Discusses Appellate Jurisdiction

Where the BAP remanded to the bankruptcy court for a finding on whether the creditor violated the automatic stay by failing to prevent the continuation of a contempt hearing against the debtor, the Sixth Circuit relied on precedent to conclude that the BAP’s order was not final and appealable. Wohleber v. Skurko (In re Wohleber), No. 19-3223/3225 (6th Cir. Nov. 18, 2020) (unpublished). In her concurring opinion, Judge Batchelder argued that the precedent relied on by the majority was erroneous and advocated for adopting a rule that “we have appellate jurisdiction if either the bankruptcy court’s judgment or the intermediate appellate judgment is final.” [Read more…] about Sixth Circuit Discusses Appellate Jurisdiction

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Lien for Incarceration Costs Is Avoidable Judicial Lien

The State Treasurer’s lien based on a statute authorizing the state to seek reimbursement from a prisoner for the costs of his incarceration was not a statutory lien but a judicial lien which the debtor could avoid as impairing his exemptions. State Treasurer v. Wigger, No. 19-732 (W.D. Mich. Nov. 16, 2020).

The debtor was a prisoner in the Central Michigan Correctional Facility. The Michigan State Treasurer sought to recover some of the costs of his incarceration under the State Correctional Facility Reimbursement Act (SCFRA). After a bench trial, the state court found the State Treasurer was entitled to reimbursement from the debtor’s IRA funds and from proceeds from a judgment the debtor had against his son. The debtor initiated a chapter 7 bankruptcy and filed an adversary proceeding seeking to have the state’s lien voided as a judicial lien impairing his exemptions under section 522(f)(1). The bankruptcy court granted the debtor’s lien avoidance motion finding that the lien impaired his exemption for retirement funds under section 522(d)(12), and his exemption for property valued up to $13,100 under section 522(d)(5). [Read more…] about Lien for Incarceration Costs Is Avoidable Judicial Lien