National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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Tax Foreclosure Sale Avoidable

The county’s tax foreclosure sale of the debtor’s real property was avoidable as a fraudulent conveyance, and the debtor’s annuity was properly excluded from the calculation of the debtor’s insolvency for avoidance purposes where the creditor failed to object to the debtor’s claim of exemption with respect to the annuity. DuVall v. County of Ontario, NY, No. 21-6236 (W.D.N.Y. Nov. 9, 2021).

In May, 2017, the debtor’s real property was sold to the Doe appellants in a tax foreclosure sale. In March, 2019, before title transferred, the debtor filed a chapter 13 bankruptcy petition, listing an annuity of an undisclosed amount. The debtor claimed the annuity as exempt under section 522(d)(11)(E) and proposed a 100% plan including paying off the county’s tax claim. The debtor then filed a petition to avoid the tax lien under sections 522(h) and 548(a)(1)(B). The county failed to object to the claimed exemption for the annuity but filed a motion in limine to admit evidence as to its value. The bankruptcy court denied the motion in limine, and, in a separate order, granted the debtor’s motion to avoid the lien. DuVall v. County of Ontario, 2021 Bankr. LEXIS 369 (W.D.N.Y. Bankr. 2021). [Read more…] about Tax Foreclosure Sale Avoidable

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Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien

Where tax liens are specifically excepted from the debts to which a debtor’s exempt property cannot be liable, the debtors here could not exercise the trustee’s avoidance powers under section 522(h) to avoid their tax debt, nor could they benefit from the trustee’s successful avoidance action. Hutchinson v. IRS, No. 19-60065, amended opinion (9th Cir.  Dec. 23, 2021).

When the debtors filed for chapter 7 bankruptcy, they owed taxes to the IRS. Of that debt, $162,000 represented penalties and was secured by a lien on the debtors’ home. The debtors filed a two-count adversary complaint. In the first count they alleged that because the IRS claim was tax penalty under section 726(a)(4), the lien securing it was avoidable by the trustee under section 724(a). They alleged that because the trustee had not avoided the lien, they could do so themselves under section 522(h), to the extent the lien encumbered their homestead. In the second count they sought to have the avoided lien preserved for their benefit rather than for the benefit of the estate. The trustee responded asserting his right to avoid the lien for the benefit of the estate. The IRS separately moved to dismiss the debtors’ complaint. The bankruptcy court granted the IRS motion to dismiss. Later, the court entered an order avoiding the lien upon motion by the trustee pursuant to section 724(a). The debtors appealed dismissal of their complaint, and the Bankruptcy Appellate Panel for the Ninth Circuit affirmed. [Read more…] about Debtors Cannot Avoid Tax Lien or Reap Benefits of Trustee’s Avoidance of the Lien

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Refund of Mortgage Double Payment to Trustee

An overpayment resulting from the debtor’s mistakenly making mortgage payments while the chapter 13 trustee was making the same payments through the plan was properly remitted to the trustee for distribution rather than being returned to the debtor. White v. Regions Bank, No. 20-5355 (6th Cir. Sept. 30, 2021) (unpublished). [Read more…] about Refund of Mortgage Double Payment to Trustee

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Post-Discharge Litigation Violates Discharge Injunction

The appellants were liable for willful violation of the discharge injunction when they pursued post-discharge state litigation and garnishment based on pre-petition conduct even though the debtor could have but did not raise the discharge as a defense in the state litigation. Morgan v. Morgan, No. 20-291 (D. Utah Oct. 25, 2021). [Read more…] about Post-Discharge Litigation Violates Discharge Injunction

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Appreciation Is Part of Converted Chapter 7 Estate

Post-petition appreciation in a chapter 13 case becomes part of the chapter 7 estate upon conversion. In re Castleman, No. 19-12233 (Bankr. W. D. Wash. June 4, 2021).

When the debtors filed for chapter 13 bankruptcy their residence was valued at $500,000. At the time of conversion of the case to chapter 7, the property value had appreciated to $700,000. The trustee moved to include the appreciation in the chapter 7 bankruptcy estate and the debtors opposed the motion. [Read more…] about Appreciation Is Part of Converted Chapter 7 Estate

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Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”

The Ninth Circuit affirmed the opinion of the bankruptcy appellate panel finding that a state-mandated notification to the state taxing authority of a change in the taxpayer’s federal taxes is a “return, or equivalent report or notice,” which, if not filed by the taxpayer, renders the state tax debt nondischargeable under section 523(a)(1)(B). Berkovich v. Cal. Franchise Tax Bd., No 20-60046 (9th Cir. Oct. 14, 2021) (see discussion of In re Berkovich, 619 B.R. 397 (B.A.P. 9th Cir. 2020) here). [Read more…] about Notification to State Tax Board of Federal Tax Reevaluation is Return “Equivalent”

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No Mortgage Modification for Mixed Use Property

The chapter 11 debtor could not modify her residential mortgage even though much of the property securing the mortgage was used for income-producing purposes. Lee v. U.S. Nat’l Bank Ass’n, No. 20-222 (M.D. Ga. Oct. 4, 2021).

The debtor’s residence was located on forty-three acres of land of which she rented out approximately thirty-five acres as farmland. She took out a mortgage on the property in 2007 and, acting on the advice of the mortgagee, in 2010, allowed the mortgage to go into default in the expectation of refinancing the loan under the federal Housing Action Resource Test (HART). When she was unable to refinance, she filed for chapter 11 bankruptcy seeking to modify the mortgage.

US National Bank filed a claim as trustee for RMAC Trust, Series 2016-CTT (the Trust), in the amount of $253,070.25, representing $139,195.75 in unpaid principal and $82,228.15 in interest. It moved for relief from stay, and the bankruptcy court granted the motion finding that section 1123(b)(5) prohibited modification of the mortgage. The debtor appealed to the district court. [Read more…] about No Mortgage Modification for Mixed Use Property

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Asset Must Be on Schedules to Satisfy 554(c) Abandonment Requirement

Finding that its “task is to interpret the Bankruptcy Code, ‘not to balance the equities,’” the Ninth Circuit held that section “554(c) requires property to be disclosed on a literal schedule, and thus that, absent Trustee or court action, property disclosed only on a statement (e.g., the Statement of Financial Affairs) cannot be abandoned under § 554(c).” Stevens v. Whitmore, No. 20-60044 (9th Cir. Oct. 19, 2021).

When the debtors filed for bankruptcy, they listed a pending state lawsuit against their mortgage servicing company in their Statement of Financial Affairs (SOFA), but failed to list it in their bankruptcy schedules. The debtors informed the Trustee of the lawsuit and provided documentation relating to it. The trustee reviewed the documents, determined that the estate contained “no property available for distribution,” and “that there were no scheduled assets which would benefit [the] estate.” The bankruptcy court discharged the trustee and closed the bankruptcy case. Years later, mortgage servicing company contacted the bankruptcy trustee with an offer of settlement of the lawsuit substantially lower than the debtors sought. The trustee had the bankruptcy case reopened, the state and bankruptcy courts approved the settlement, and the proceeds went to the bankruptcy estate. On appeal, the BAP affirmed. In re Stevens, 617 B.R. 328 (B.A.P. 9th Cir. 2020). [Read more…] about Asset Must Be on Schedules to Satisfy 554(c) Abandonment Requirement

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When a Return Is Not a “Return”

A tax return filed four years after it was due and one year after the IRS completed its own independent tax assessment is not dischargeable under section 523(a) because it does not meet the “honest and reasonable” standard set forth in the Beard test for what constitutes a “return.”  IRS v. Starling, Nos. 20-7478, 20-7954 (S.D.N.Y. Sept. 16, 2021).

When the debtor failed to file his 2002 federal tax return, the IRS, in 2005, sent a notification of delinquency informing the debtor that it had performed its own assessment on his behalf and providing instructions for the debtor to file his own return, contest the one completed by the IRS, or take other action. Upon receiving no response from the debtor, the IRS finalized its assessment in 2006. In 2007, the debtor filed a return for the 2002 taxes which mirrored the assessment conducted by the IRS.

The debtor then petitioned for chapter 13 bankruptcy and the IRS filed a claim for the delinquent taxes. Upon completion of his plan and discharge, the debtor had paid off only a portion of the 2002 taxes. The IRS, and its private collection agency, ConServe, continued to dun him for the remaining tax debt until the statute of limitations rendered the debt uncollectible. The debtor then filed a motion in the bankruptcy court seeking sanctions against the IRS and ConServe for violation of the discharge order, asserting that the tax debt had been discharged in his bankruptcy. The bankruptcy court agreed, In re Starling, 617 B.R. 208 (Bankr. S.D.N.Y. 2020), and, after the court denied its motion for reconsideration, the IRS and ConServe appealed to the district court. [Read more…] about When a Return Is Not a “Return”

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Attorney Cannot Enforce Lien Based on Improper Fees

A state default judgment lien was avoidable in bankruptcy under the court’s inherent power to police attorney conduct where the lien was security for unpaid attorney fees which were unreasonable. Moore v. Sanchez (In re Sanchez), No. 20-1267 (D. N.M. Sept. 22, 2021).

The debtor hired the creditor, Moore, to represent him in his divorce case. The case went two months without a fee agreement, then Moore presented the debtor with a bill for fees and costs in the amount of $15,000. The debtor paid him $7,000 and they reached a compromise as to the remaining portion of the bill. They entered into a retainer agreement providing for a 2% monthly interest rate on unpaid fees and an automatic lien on the debtor’s personal and real property as security. In January, 2011, Moore sued the debtor in state court to collect unpaid fees. The court awarded Moore a default judgment of $18,732.64 at 24% interest per year. By February, 2018, the debt had grown to $50,073.90, and Moore moved for foreclosure on the debtor’s home. The debtor filed for chapter 7 bankruptcy. In his petition, the debtor valued the house at $55,300.00 and claimed it as fully exempt. He also listed the debt to Moore as secured and disputed. He moved to avoid the judicial lien against his exempt property. [Read more…] about Attorney Cannot Enforce Lien Based on Improper Fees