NCBRC News

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Tax Sale Survives Multiple Attacks

The bankruptcy court applied the proper standard for determining “reasonably equivalent value” in the tax sale of the debtor’s home where it used a hypothetical foreclosure sale as the comparator rather than the fair market value. The Rooker-Feldman doctrine prevented the bankruptcy court from nullifying the sale despite procedural irregularities. And even where the debtor won, she lost. The court limited her damages based on the tax buyer’s violation of state consumer protection laws to minor pecuniary loss where it found emotional distress damages are unavailable under state law. Marshall v. Abdoun (In re Marshall), No. 22-10 (E.D. Pa. March 20, 2023).

After the debtor and her husband split up, he agreed to pay taxes on their marital home but failed to do so. The property was sold to Yasir Abdoun for $29,000 in a tax sale without the hearing required by state law. The fair market value of the home was $76,400. In March, 2015, before the debtor knew her home had been sold, Mr. Abdoun and two police officers showed up at her house where only her minor son was home and demanded that they vacate the property. Thus began a nine-month period of threats, demands and public humiliation while the debtor tried to recover her home and Mr. Abdoun tried to evict her from it.

In December, 2015, the debtor filed for chapter 13 bankruptcy proposing to pay 100% of secured debt including that held by Mr. Abdoun. Mr. Abdoun filed a claim for $45,552.11 representing the $29,000 purchase price, $2,900 in interest, $11,200 of “rent,” $593 for homeowner’s insurance, $1,059.11 for real estate taxes, and $800 for water.

The debtor filed an adversary complaint against Mr. Abdoun seeking to avoid the transfer of property as constructively fraudulent under section 548(a)(1)(B)(i)-(ii)(I), and to recover the property pursuant to section 550(a)(1). In an amended complaint she claimed Mr. Abdoun’s deed for her property was invalid.

She also alleged that Mr. Abdoun violated Pennsylvania’s Fair Credit Extension Uniformity Act (the “FCEUA”), and the Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The debtor asked the court to set a redemption amount of $19,000, categorize the claim as general unsecured. At trial, the debtor added a claim for violation of the automatic stay. At that time, Mr. Abdoun also reduced his claim to the $29,000 he paid for the property.

The bankruptcy court denied the debtor’s avoidance claim finding that she failed to show that the amount the property sold for was not what she would have received had the property been sold at foreclosure auction. The court found, however, that Mr. Abdoun’s conduct in trying to remove her from the property violated both the UTPCPL and the FCEUA, and that she was entitled to damages under the UTPCPL. The bankruptcy court found that the Rooker-Feldman doctrine precluded it from nullifying Mr. Abdoun’s deed.

As to damages, the court found that the debtor was entitled to recover only her pecuniary loss of $200 plus $100 statutory enhancement. It set the redemption price at $28,700 representing the amount Mr. Abdoun paid minus the damages to the debtor. The court denied the debtor’s motion for reconsideration and she filed an appeal to the district court.

On appeal, the district court began with the application of the Rooker-Feldman doctrine to the debtor’s claim that the sale was invalid due to failure to follow state hearing procedures. That doctrine bars review of a state judgment by a federal court if “(1) the federal plaintiff lost in state court; (2) the plaintiff complain[s] of injuries caused by [the] state-court judgments; (3) those judgments were rendered before the federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject the state judgments.”

Here, the debtor relied on James v. Draper (In re James), 940 F.2d 46 (3d Cir. 1991), which established a void ab initio exception to the Rooker-Feldman doctrine. The debtor argued that the court entering judgment of the sale to Mr. Abdoun lacked subject-matter jurisdiction because the sale took place without a hearing in accordance with state-required procedures, and therefore the void ab initio exception applied.

The district court found, however, that post-James cases, such as Todd v. United States Bank National Association, 685 F. App’x 103 (3d Cir. 2017), questioned that exception to the Rooker-Feldman doctrine, and in fact, concluded that no such exception existed.

The court also declined to adopt the alternative theory offered by the debtor based on dictum from In re Razzi, 533 B.R. 469 (Bankr. E.D. Pa. 2015), to the effect that Rooker-Feldman is inapplicable when the case involves a bankruptcy debtor objecting to a claim, rather than challenging a state court judgment. The judge in Razzi opined that such a circumstance could be “conceptualized” as the debtor taking a defensive posture rather than one like the one arising in Rooker-Feldman where the “state-court losers complain[ed] of injuries caused by state-court judgments rendered before the district court proceedings commenced and invit[ed] district court review and rejection of those judgments.” The court here found that, “[i]n the absence of any persuasive caselaw adopting or applying Judge Frank’s posited ‘theory’ with respect to the first requisite of the Rooker-Feldman doctrine, this Court declines to adopt and apply it here.”

The court turned next to the debtor’s assertion that the transfer of the deed to Mr. Abdoun was avoidable as constructively fraudulent under section 548(a)(1)(B)(i)(I). The issue turned on whether the property was sold for its reasonably equivalent value. The bankruptcy court relying on BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), compared what Mr. Abdoun bought the property for with what it would likely have brought in a foreclosure sale. The debtor argued that the proper comparison was with the fair market value of the property.

The court was unpersuaded. BFP held that “reasonably equivalent value” in the context of a forced foreclosure sale, is the actual sales price rather than the fair market value of the property, so long as state foreclosure procedures were followed. Where, as here, the state procedures for the sale were not properly followed, the Supreme Court said that such irregularity could result in invalidation of the sale, but that, in that case, the reasonably equivalent value would be what the property would have garnered in a hypothetical foreclosure sale that followed state procedures. Based on this, the court here found that the bankruptcy court applied the correct comparison for section 548(a)(1)(B)(i)(I) purposes. Where the debtor failed to present evidence that a properly held foreclosure sale would have brought in more than Mr. Abdoun paid for the property, the court found no error in the bankruptcy court’s order.

The court next addressed the debtor’s appeal of the bankruptcy court’s finding that she was not entitled to emotional distress damages under the enforcement provision in the UTPCPL. That statute provides that a successful litigant may recover actual damages or $100, whichever is greater. The court has discretion to award up to three times actual damages and “may provide such additional relief as it deems necessary or proper.” Though this language suggests that a court may award damages for emotional distress, courts have uniformly held that no such damages are recoverable under the statute. Therefore, the district court upheld the bankruptcy court’s denial of those damages.

The debtor next argued that even though her complaint did not allege intentional infliction of emotional distress under state common law, the bankruptcy court had the power under Rules 7054 and 7015 to award damages for that cause of action when the facts at trial support it. But Rule 7054 and its counterpart FRCP 54, have been limited by due process principles to theories of recovery that were squarely brought out and litigated at trial. For issues not raised in the pleadings, Rule 7015 and FRCP 15, provide that unpled causes of action must be addressed at trial by implied or express consent of the parties. But consent will not be implied when the evidence going to the unpled cause of action also supports a cause of action that was pled.

Here, the debtor did not raise intentional infliction of emotional distress as a cause of action until after the Bankruptcy court entered judgment against her and the evidence supporting it at trial was the same as that supporting her emotional distress claim under the UTPCPL. Therefore the court no implied consent and affirmed the bankruptcy court’s denial of those damages under the state common-law theory.

The court thus affirmed the bankruptcy court’s order and opinions.

Marshall ED Pa Mar 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 2023Tags: Carve-out agreements, Exemptions

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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 in 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 actually 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 in the nature of 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

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No Harm in Failure to Disclose

The debtor was entitled to reopen her bankruptcy case to disclose a post-confirmation, pre-discharge lawsuit where she successfully completed her 100% plan so there was no harm to creditors by her failure to timely disclose the lawsuit, and the debtor would benefit from the opportunity to comply with Eleventh Circuit disclosure requirements. In re Calixto, No. 17-18317 (Bankr. S.D. Fla. Jan. 31, 2023).

Approximately one year before the end of her chapter 13 plan, the debtor slipped and fell on property owned by Gulfstream Park Racing Association, Inc. One month after she successfully completed her plan and received her discharge, she sued Gulfstream in state court for negligence. Gulfstream moved for summary judgment arguing that the debtor was judicially estopped from pursuing the case because she failed to disclose the lawsuit to the bankruptcy court. The debtor moved to reopen her bankruptcy in order to disclose the claim.

The court began with sections 541 under which a lawsuit is property of a chapter 13 bankruptcy estate, and 1306(a)(1) which incorporates property acquired by the debtor post-confirmation into the bankruptcy estate. It noted that while the Code does not obligate debtors to make ongoing post-confirmation disclosures when they acquire new property, Eleventh Circuit precedent has established that debtors have a continuing duty to disclose a post-confirmation litigation claim.

Having found that the litigation was property of the estate and that the debtor had a duty to disclose it and failed to do so, the court went on to consider the equities of allowing her to reopen her bankruptcy to do so now. It weighed the benefits of reopening against prejudice to any of the parties.

While the court noted that it views nondisclosure with a jaundiced eye, in this case, the debtor’s schedules were accurate when she filed them and when her case was confirmed. Furthermore, all her creditors were paid the full amount of their claims so none were prejudiced by the debtor’s failure to disclose the lawsuit during her bankruptcy and none stood to benefit from the disclosure now. Nor was the trustee prejudiced by the failure to disclose because the debtor retained her right to personally pursue the litigation while her bankruptcy case was pending. Thus, “even if the Debtor had previously disclosed the litigation claim – or if the Court permits her to reopen her case now to disclose it – it would not have, and will not have, any effect on her bankruptcy estate or her creditors.”

On the other hand, by reopening, the debtor stood to benefit from the opportunity to satisfy the procedural technicality established by the Eleventh Circuit and pursue her rights against Gulfstream in state court.

The court found that requiring Gulfstream to address the merits of the debtor’s case in state court did not constitute prejudice.

The court granted the debtor’s motion to reopen.

Calixto Bankr SD Fla Jan 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).

Prior to 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 for 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 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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Debt Owed to Trust is DSO

Where the debtor’s payments to his ex-wife’s Trust were in lieu of alimony and were understood by both the debtor and his ex-wife to be for her future support, the payments were in the nature of a domestic support obligation not dischargeable in bankruptcy. Hundt v. Ventrone (In re Ventrone), No. 21-11643, Adv. Proc. Nos. 22-00005, 22-00026 (Bankr. E.D. Pa. Jan. 2023).

In order to buy a house, the plaintiff and her then-husband, the debtor, withdrew $415,000 from a Trust established for the plaintiff’s benefit. They then entered into a post-nuptial agreement providing that in the event of divorce, “the original Distribution invested in the Property of $415,000, . . . shall be returned to the Trust at the time of sale, free and clear from any and all claims by [Debtor].”

Three years later, the debtor and the plaintiff divorced. They entered into a property settlement agreement (PSA) which incorporated the post-nuptial agreement and PSA further provided that:

“The parties agree that in the event that the sale of the Marital Residence does not satisfy their $415,000.00 obligation to the Trust, that they shall divide the deficiency between the net sale proceeds returned to the Trust and the $415,000.00 liability with [Debtor] being responsible for 37.5% of the deficiency and [Plaintiff] being responsible for 62.5% of the deficiency.”

In 2018, the parties sold the property but the proceeds were not sufficient to fully repay the trust. The debtor failed to make the payments required by the PSA to make up his share of the deficiency. After the Family Court issued a couple of contempt orders and held a contempt hearing, it ordered the debtor to make a one-time payment to the court for $30,625, and to make three other payments in the amount of $1,225 each. All the payments represented amounts owed to the Trust. The debtor complied with the order except that each of the checks he submitted to the Family Court contained conditional language that ultimately prevented the plaintiff from depositing them. The debtor refused to submit acceptable replacement checks.

The Family Court issued a bench warrant and after a hearing on that warrant, the court ordered the debtor to liquidate his 401K accounts and pay the proceeds to the plaintiff to satisfy Marital Obligations. The court also ordered the debtor to pay $4,500 in attorney’s fees.

The debtor filed for chapter 13 bankruptcy. The Trust filed a claim for $174,451.79 plus the attorney’s fees as awarded by the Family Court. “Out of an abundance of caution,” the plaintiff filed the identical claim. The debtor objected to the claim on the bases that the contempt order was for only $113,913.28, that attorney’s fees should not have been included, and that the claim was not for a domestic support obligation. The debtor and the plaintiff (along with the Trust) filed opposing adversary complaints relating to whether the plaintiff’s claims were nondischargeable domestic support obligations under various paragraphs in section 523(a).

The case came before the court on the plaintiff’s motion for summary judgment. Though the plaintiff cited several provisions of section 523(a), the court rested its decision on section 523(a)(5) which excepts domestic support obligations (DSO) from discharge in chapter 13.

The court began its analysis with the question of whether the plaintiff’s claim was for a DSO, finding that to qualify as such the debt must be, “(i) ‘owed to or recoverable by’ a governmental unit or a person with a specific relationship to the Debtor such as a spouse, former spouse, or child of the Debtor; (ii) the underlying obligation [must be] in the nature of alimony, maintenance, or support of such person; (iii) the obligation [must arise] from an agreement, court order, or as otherwise defined; and (iv) the debt [must not be] assigned to a non-governmental entity unless voluntarily done by the spouse, former spouse, or child of the Debtor.”

The court rejected the debtor’s argument that the claim was not a DSO because it was payable to the Trust rather than to the plaintiff herself. The court found that where the obligation is in the nature of support for a spouse or child, it qualifies as a DSO even though it may be payable to another entity.

The court looked to three factors to determine whether the payments were intended for support: “(i) the language and substance of the agreement; (ii) the parties’ financial circumstances; and (iii) the function of the obligation.”

Here, under the terms of the PSA, the debtor was obligated to make payments to the Trust “in lieu of alimony” for the plaintiff’s support. The court noted that the plaintiff’s income was substantially less than the debtor’s and the plaintiff had the responsibility of paying her own and their children’s expenses. In testimony in the Family Court the debtor acknowledged that the Trust constituted the plaintiff’s future support and that his payment into it was in furtherance of that end. That the obligation was for support was reinforced by the fact that the plaintiff sought and received enforcement by the Family Court.

Having found the plaintiff’s claim was a nondischargeable DSO, the court turned to whether the plaintiff’s claim for $4,500.00 in attorney’s fees was also nondischargeable as a DSO. It found the law well-settled that an award of attorney’s fees in connection with a divorce proceeding are in the nature of a DSO.

The court concluded that the claim in the modified amount of $118,413.28, as well as the $4,500 attorney’s fee award and any additional legal fees awarded by the Family Court, were nondischargeable under section 523(a)(5). It granted summary judgment to Plaintiffs. The debtor filed a motion to reconsider on March 7.

Ventrone Bankr ED Pa Jan 2023

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Debt Collector Can’t Blame Debtor or FDCPA for Discharge Violation

A debt collector’s efforts to collect an unsecured judgment that had been discharged in bankruptcy violated the discharge injunction even though the debtor requested information about the debt. The statement sent to the debtor was explicitly designated an “attempt to collect a debt,” and the debt collector had sufficient information to alert it to the debtor’s bankruptcy discharge. Skaggs v. Gooch (In re Skaggs), No. 17-50941 (Bankr. W.D. Va. Jan. 19, 2023).

In 1988, Virginia Cellular One, Inc., obtained a judgment against the debtor on a contract liability. The debtor owned no real estate so the judgment was unsecured. The debtor filed for bankruptcy in 2017. In 2019, he received his discharge, including Virginia Cellular’s judgment. Months later, he inherited real property. When he attempted to sell the property, the title agency erroneously told him that he would have to pay the judgment. The debtor contacted the debt collection agency handling the debt, the defendants in this case, and they provided him with a payoff statement and a discounted payoff amount. The payoff statement stated that it was “an attempt to collect a debt.” The debtor then emailed the defendants informing them that the debt had been discharged in bankruptcy. There was continued correspondence between the debtor and the defendants concerning repayment of the debt until the debtor’s bankruptcy attorney stepped in and informed the title agency that the debt had been discharged. The sale of the property was then completed, and the defendants’ collection efforts stopped.

The bankruptcy court found that the defendants’ collection efforts violated the discharge injunction and held a separate hearing to determine the appropriate damages. The debtor sought $25,000 in attorney’s fees and an additional $2,000 in various other costs.

The court noted at the outset that the defendants’ conduct did not warrant punitive damages because they ceased collection efforts and there was therefore no need to coerce compliance with the discharge order. Turning to the question of remedial damages, the court took into consideration whether the defendants had acted in good faith, finding that a court may take good faith into consideration when determining the amount of compensatory damages.

The court was unconvinced by the defendants’ contention that its conduct was compelled by the FDCPA. The court found the statement here was more than “information about the debt” but was an unequivocal effort to collect the debt. Furthermore, the defendants’ effort to pass the blame to the debtor for failing to provide additional information about his bankruptcy was unavailing in light of the fact that the debtor had alerted the defendants to his bankruptcy and the further information they sought was a matter of public record.

The court concluded that the defendants had not demonstrated good faith such that they were worthy of a reduction in the damages award.

The defendants next asked the court to limit the award to $910.00, the loss the debtor incurred prior to the sale of the property when the defendants ceased their collection efforts. The court declined. “In effect, the defendants argue that it is reasonable for a bankruptcy debtor to incur greater costs and expenses to obtain reimbursement than the actual reimbursement, in effect rendering an award of compensatory damages meaningless.” The court found the amount of the attorney’s fees was reasonable and ordered the defendants to pay $25,000.00.

Turning to the debtor’s request for an additional $2,000 for damages related to time away from work, transportation expenses to attend hearings and depositions, and for emotional distress, the court declined to award those damages, finding the debtor had not provided sufficient evidence to support them. With respect to emotional distress, the court added that the Fourth Circuit does not permit such damages in civil contempt cases.

Skaggs Bankr WD Va Jan 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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Passive Voice and 1885 Case Sink Debt Discharge

SCOTUS determined that section 523(a)(2)(A), which excludes from discharge debts incurred by fraud, applies to innocent partners of the fraudulent actor where the statute does not draw any connection between the individual debtor and the fraudulent conduct but instead is written in passive tense saying merely that a debt owed by an individual and procured by fraud is nondischargeable. Bartenwerfer v. Buckley, No. 21-908,  __ U.S. __ (Feb. 22, 2023). The decision was unanimous with a concurring opinion by Justice Sotomayor adding that the decision turned on the fact that the debtor had an agency relationship with the fraudulent actor.  

The debtor, Kate Bartenwerfer and her husband David Bartenwerfer, bought property in San Francisco which they planned to remodel and sell at a profit. David handled the project and the debtor was not actively involved. After they sold the property, the buyer discovered a number of undisclosed problems. He sued both Kate and David in state court for breach of contract, negligence, and nondisclosure of material facts, and won a judgment against them jointly in the amount of $200,000. The Bartenwerfers then filed for chapter 7 bankruptcy. The purchaser filed an adversary complaint seeking a finding that his claim was nondischargeable as having been incurred by false pretenses or fraud. The bankruptcy court found that the debt was nondischargable as to both David and Kate.

The Bankruptcy Appellate Panel for the Ninth Circuit reversed the finding as to Kate, finding that the debt was nondischargeable as to her only if she knew, or had reason to know of David’s fraud. On remand, the bankruptcy court found that Kate’s liability on the debt was discharged. The BAP affirmed. The Ninth Circuit reversed, finding that, under Strang v. Bradner, 114 U. S. 555 (1885), a debtor is liable for her partner’s fraud and cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari.

Writing for the Court, Justice Barrett began with section 523(a)(2)(A), which provides that a discharge does not discharge an individual debtor for a debt “obtained by false pretenses, a false representation, or actual fraud . . .” The Court found all requirements for exclusion from discharge were met. Kate Bartenwerfer was an individual, the state court judgment created a debt, and the debt was based on fraud. The fact that the individual debtor was not the one who committed the fraud was irrelevant in light of Congress’s use of the passive tense referring only to fraud with respect to the debt rather than the actor.

The Court observed that its conclusion was supported by the common law understanding that fraud is not limited to the wrongdoer but extends to principals liable for the fraud of their agents, or to partners liable for the acts of other partners.

The Court was unpersuaded by the debtor’s argument that the context of section 523(a)(2) lends credence to her position. Specifically, the debtor maintained that sections 523(a)(2)(B) and (C) both refer to acts of misconduct actually carried out by the individual debtor. The debtor extrapolated that Congress intended nondischargeability in section 523(a)(2)(A) also to be based on actual culpability by the debtor.

The Court reached the opposite conclusion, finding that the express reference to the individual actor in paragraphs 523(a)(2)(B) and (C) suggested that the absence of a similar reference in section 523(a)(2)(A) indicated Congress’s intent to broaden nondischargeability under that section to non-culpable actors. The Court was satisfied that the difference between section 523(a)(2)(A) and the similarly fraud-based, but individually targeted, nondischargeability of section 523(a)(2)(B) supported the view that Congress intended different levels of culpability.

The Court referred to its 1885 decision in Strang, where it held that two innocent business partners of the third partner who committed fraud were equally liable because they benefitted from the fraud to the same extent the culpable partner did. They could not discharge the debt in bankruptcy even though the Code at that time specifically referred to nondischargeability of debts incurred by the fraud “of the bankrupt.” The nineteenth century Court established that the fraud of one partner was the fraud of all. Congress’s removal of the phrase “of the bankrupt” in later iterations of the provision reinforced the Court’s finding that Congress intended to extend nondischargeability to non-culpable parties.

The Court observed that the underlying state law judgment applied to both Kate and David and that the debtor’s arguments related to general unfairness of making an innocent party liable for the fraud of another would have been better directed to that court.

The Court affirmed the Ninth Circuit decision finding the debt nondischargeable as to Kate Bartenwerfer.

Justice Sotomayor filed a concurring opinion joined by Justice Jackson. Crucial to her concurrence was Kate Bartenwerfer’s concession that she and David were partners in the remodeling and sale endeavor. Justice Sotomayor noted that had there been no agency or partnership relationship between the two, she would have reached the opposite conclusion.

Bartenwerfer SCt Feb 2023