Timely filing of a notice of appeal is a jurisdictional prerequisite and an appellant must at least conform his filing to general adherence to the requirements outlined in Rule 8003(3). In re Dorsey, 2017 U.S. App. LEXIS 16905, No. 16-31085 (5th Cir. Sept. 1, 2017). [Read more…] about Reminder: Timely Notice of Appeal Is Jurisdictional
1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation
The mortgage creditor canceled the underlying debt when it filed a “cancellation of debt” form with the IRS and the debtors paid income taxes on the canceled debt. In re Lukaszka, No. 17-242 (Bankr. N.D. Ia. Aug. 4, 2017).
In their proposed chapter 13 plan, James and Darcey Lukaszka sought an order requiring First Federal Credit Union, a junior mortgagee, to release their mortgage lien on the basis that, four years earlier, First Federal had issued the debtors a “cancellation of debt” form, 1099-C, indicating that it was no longer seeking to collect on the debt. As a result, the Lukaszkas reported the almost $60,000.00 debt cancelation to the IRS as income and paid taxes on it.
First Federal objected to confirmation. [Read more…] about 1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation
Court Takes a Hard Line on Curing Direct Mortgage Payment Default
A loan modification to cure a post-confirmation default on direct mortgage payments must be approved by the court prior to expiration of the chapter 13 plan. In re Hanley, 2017 WL 3575847, No. 11-76700 (Bankr. E.D. N.Y. Aug. 14, 2017).
Brian and Anahi Hanley’s confirmed chapter 13 plan provided for cure of their mortgage default through the plan and for regular mortgage payments to be made directly to the mortgagee, Nationstar Mortgage, LLC. They fell behind on their direct mortgage payments and, several months before completion of their plan, they entered into a trial loan modification which would cure the post-confirmation default. Though the Hanleys made all payments under the loan modification, they failed to sign and return the Loan Modification Approval Letter within the time required by Nationstar.
At the expiration of their plan, Nationstar filed a Rule 3002.1 Response notifying the court of the default based on the loan as it stood prior to the trial loan modification. The trustee moved to dismiss their bankruptcy without discharge. The Hanley’s moved to strike Nationstar’s Response and sought to modify their plan to allow them to cure the default in accordance with the terms of the loan modification.
For purposes of its decision, the court adopted the Hanleys’ factual assertion that the parties had agreed to the loan modification but had not submitted it to the court for approval. It thus framed the issue as “whether a chapter 13 debtor may cure an acknowledged default in post-petition direct mortgage payments, to be made pursuant to a confirmed chapter 13 plan, through a loan modification approved after the expiration of the 60th month.”
In answer to this question, the court found that the debtors had two choices for dealing with the post-petition default: modify the loan or modify the plan. It explained that a loan modification entered into by the parties outside the plan may cure a default even though the new loan terms are not memorialized in a plan modification. Alternatively, the cure of a post-confirmation default may be accomplished through a plan modification without an agreement between the parties to modify the loan. However, both options, the court emphasized, required approval by the court prior to expiration of the plan.
Acknowledging the “draconian” nature of denying discharge after the Hanleys had made all plan payments for five years, the court reasoned that its equitable powers were constrained by the Code and the terms of the Hanleys’ plan. Section 1328(a) makes discharge contingent upon completion of all plan payments, and relevant case law establishes that where a plan provides for mortgage payments outside the plan, those payments must be current as well.
The court noted that there is a line of cases in which courts have held that post-confirmation plan modifications to cure post-petition mortgage defaults are not permitted at all under section 1329. The court disagreed with or distinguished those cases, finding that, where, as here, the secured creditor’s rights under the loan agreement would not be altered by the modification, section 1329(a)(2) permits a modification extending the time for repayment. The court reiterated, however, that any such plan modification must take place prior to the expiration of the plan.
The court also recognized that some courts permit chapter 13 debtors to cure defaults post- plan completion either on equitable principles or on the theory that “the debtors are not seeking to extend the plan, rather they are only curing a default on already scheduled payments.” The court declined to adopt their reasoning finding instead that the Code does not allow for leeway in curing a default on plan payments. Citing sections 1322(a)(4), (d)(1), (d)(2), 1325(b)(1)(B) and 1329(c), and calling it a “drop dead jurisdictional deadline,” the court concluded that the right to discharge requires all plan payments be complete at the expiration of the plan.
Nor would the court permit a retroactive loan modification to cure the default in light of Nationstar’s position that it had not ultimately agreed to the modification.
The court granted the trustee’s motion to dismiss under section 1307(c)(6) due to a “material default.”
Judicial Lien Need Not Be Enforceable To Be Avoidable
An unenforceable judgment lien on the debtor’s homestead property, which he owned as a tenancy in the entireties with his non-debtor spouse, was an inchoate lien that created a “cloud” over the title and therefore fell within section 522(f)’s purview for avoidance of a lien that impairs an exemption. CRP Holdings v. O’Sullivan, No.17-6012 (B.A.P. 8th Cir. Sept. 22, 2017).
The case came before the BAP upon appeal of the bankruptcy court’s order voiding the lien. The case was before the bankruptcy court for the second time after remand from the Eighth Circuit on the sole issue of whether CRP had a cognizable lien on Casey Drew O’Sullivan’s interest in the entireties property. CRP Holdings A-1, LLC v. O’Sullivan (In re O’Sullivan), 841 F.3d 786, 790 (8th Cir. 2016); In re O’Sullivan, 569 B.R. 163, 169 (Bankr. W.D. Mo. 2017). [Read more…] about Judicial Lien Need Not Be Enforceable To Be Avoidable
Disallowance for Procedural Reasons Does Not Support Voidance of Lien
Where the mortgage servicer’s proof of claim was disallowed for procedural rather than substantive reasons, the debtors were not entitled to have the underlying lien declared void under section 506(d). Kohout v. Nationstar Mortgage, LLC., No. 3:16-CV-1372 (N.D. N.Y. Sept. 11, 2017).
Chapter 13 debtors, Kevin and Susan Kohout objected to the mortgage servicer’s proof of claim on the basis that it was not supported by proper documentation as required by Rule 3001(c). When Nationstar (through its predecessor-in-interest) failed to respond to the objection, the bankruptcy court disallowed the claim. The Kohouts then sought to void the lien that was the subject of the disallowed claim under section 506(d). The bankruptcy court granted summary judgment in favor of Nationstar. [Read more…] about Disallowance for Procedural Reasons Does Not Support Voidance of Lien
Court Applies Realistic Fact-Based Analysis to Student Loan Discharge
The Brunner undue hardship test requires examination of the unique facts and circumstances of each case, and the analysis for whether the debtor’s financial condition is likely to persist should not look beyond the life of the loan. ECMC v. Murray, No. 16-2838 (D. Kans. Sept. 22, 2017).
After an evidentiary hearing and inquiry into Alan and Catherine Murray’s expenses and income, the bankruptcy court found they could not maintain a minimal standard of living if they were required to pay off their student loans in their entirety, including interest, but that they could afford to pay off the principals.
ECMC appealed the discharge of all but the principal to the District Court. [Read more…] about Court Applies Realistic Fact-Based Analysis to Student Loan Discharge
Attorney Fees Paid Out of Undistributed Funds
Undistributed funds in the hands of the Chapter 13 trustee at the time of the debtor’s voluntary dismissal revest in the debtor, and where the debtor’s contract with her bankruptcy counsel provided for payment of attorney’s fees out of undistributed funds there was “cause” for the court to order such payment. In re Beaird, No.16-21725 (Bankr. D. Kans. Sept. 11, 2017).
When Ms. Beaird voluntarily dismissed her Chapter 13 plan, the trustee held $13,788.87 in undistributed funds earmarked for distribution to Rushmore Loan Management Corp. The accumulation of funds was a result of Rushmore’s delay in filing its proof of claim until approximately ten months after Ms. Beaird filed her petition. [Read more…] about Attorney Fees Paid Out of Undistributed Funds
Eleventh Circuit Eliminates Presumption of Intent for Judicial Estoppel
Whether a debtor intends to make a mockery of the judicial system when she fails to disclose a civil lawsuit in her bankruptcy schedules requires consideration of a totality of facts and circumstances. Slater v. U.S. Steel Corp., No. 12- 15548 (11th Cir. Sept. 18, 2017).
When she filed her chapter 7 bankruptcy petition, Sandra Slater failed to disclose her civil lawsuit for retaliation and discrimination in her employment that was pending in district court. In fact, in her Schedule B and in the Statement of Financial Affairs she affirmatively stated that she had no contingent claims or pending lawsuits. After her bankruptcy was fully administrated, U.S. Steel moved for summary judgment in the district court seeking a finding that her pending claims for employment discrimination should be barred by the doctrine of judicial estoppel due to her failure to disclose them in her bankruptcy. The next day, explaining that she had misunderstood the questions in the bankruptcy filings, Ms. Slater amended her bankruptcy documents to list the lawsuit. The bankruptcy court granted the trustee’s motion for an order to employ Ms. Slater’s current district court lawyers (who were different from her bankruptcy lawyer) so they could continue to pursue the employment lawsuit. Ms. Slater then converted from chapter 7 to chapter 13 but failed to make all required contributions to the plan and her case was ultimately dismissed.
Based on Eleventh Circuit precedents, Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) and Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), the district court in Ms. Slater’s civil case held that the claims were barred by judicial estoppel by virtue of her failure to disclose and the presumption that she was motivated by the desire to conceal the asset from bankruptcy creditors. The court granted summary judgment to U.S. Steel. The Eleventh Circuit affirmed, but in her concurring opinion, Judge Tjoflat urged the court to reconsider its precedents en banc.
In en banc review, the Eleventh Circuit reconsidered its rule that “the mere fact of the plaintiff’s nondisclosure is sufficient [to establish intent to mislead], even if the plaintiff corrected his bankruptcy disclosures after the omission was called to his attention and the bankruptcy court allowed the correction without penalty.”
The court began its analysis with a look at of the difference between chapter 7 and chapter 13, finding that, in chapter 7, the debtor’s property becomes part of the bankruptcy estate to be administered by the trustee and, therefore, only the trustee has standing to pursue a pending lawsuit. In chapter 13, on the other hand, once a plan is confirmed the property of the estate reverts to the debtor and she has standing to maintain the civil suit.
With this difference in mind, the court turned to principles of judicial estoppel. Under that doctrine, a court will bar a suit when the person against whom the doctrine is to be applied “(1) took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the civil lawsuit and (2) intended to make a mockery of the judicial system.” It is the second prong of this test that the court focused on in its decision, noting that Barger and Burnes essentially create a presumption of satisfaction of the second prong by virtue of satisfaction of the first.
The court found the presumption erroneously ignored the possibility that a debtor’s failure to disclose could be based on inadvertence or mistake and was inconsistent with other precedents out of the Eleventh Circuit. For instance, Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004), held that judicial estoppel could not be applied to bar a chapter 7 debtor’s civil lawsuit because that debtor, having lost standing to pursue the civil case upon filing for bankruptcy, could not have taken inconsistent positions as to her assets. In Ajaka v. Brooksamerica Mortgage Corp., 453 F.3d 1339 (11th Cir. 2006), the court looked to judicial estoppel in the context of chapter 13. There, the debtor disclosed the civil action to his bankruptcy attorney, but the attorney failed to list it in the bankruptcy schedules. The creditors, however, were aware of the lawsuit and the debtor amended his schedules later to include it. The Eleventh Circuit found the district court’s application of judicial estopped to have been in error and remanded with instructions for the court to address whether the debtor had the requisite intent to conceal.
The Slater panel found that proper analysis of the second prong of the judicial estoppel test requires examination of a totality of the facts and circumstances including, but not limited to, such factors as the debtor’s level of sophistication, whether and under what circumstances she corrected the nondisclosure, whether the debtor’s attorney and/or the creditors were aware of the lawsuit, whether the debtor revealed any other lawsuits to which she was a party, and what action the bankruptcy court deemed appropriate to address the late disclosure. The court overruled Barger and Burnes to the extent they allowed a court to infer a debtor’s intent to mislead without considering these and other relevant circumstances.
The court reasoned that its current ruling was more in line with the principles behind the doctrine of judicial estoppel. It ensures that the debtor had the requisite culpable mental state, it allows the actions of the bankruptcy court to be taken into consideration thereby addressing whether the omission in fact undermined the integrity of the judicial system, and it better supports the equitable underpinnings of the doctrine. Because the bankruptcy Code and Rules permit a debtor to amend her schedules at any time, and allows the court to reopen a case to administer an asset, the bankruptcy system has its own tools for dealing with non-disclosures to avoid apparent manipulation. The court also noted that “[i]f a court applies judicial estoppel to bar the plaintiff’s claim absent such intent, it awards the civil defendant an unjustified windfall.” Furthermore, as a practical matter, application of judicial estoppel could deprive the debtor’s creditors of the benefits of a victory in the civil lawsuit.
The court noted that in so holding, it joined three other circuits that have applied a totality-of-the-circumstances analysis to the question of judicial estoppel. See Spanie v. Cmty. Contacts, Inc., 756 F.3d 542, 548 (7th Cir. 2014); Ah Quin v. Cty. of Kauai Dep’t. of Transp., 733 F.3d 267, 276 (9th Cir. 2013); Eubanks v. CBSK Fin. Grp., Inc., 385 F.3d 894, 899 (6th Cir. 2004). It disagreed with two circuits applying a similar presumption as that overruled in Barger and Burnes. See, e.g., Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1157-60 (10th Cir. 2007); Ine Superior Crewboats, Inc., 374 F.3d 330, 335-36 (5th Cir. 2004).
The court remanded to the panel to determine whether the district court abused its discretion in applying judicial estoppel to Ms. Slater’s civil lawsuit.
Chief Judge Ed Carnes filed a concurring opinion noting that the decision allows a court to consider the credibility of the debtor even if her testimony with respect to intent is uncontradicted.
Much of the reasoning applied by the en banc panel was argued by NACBA in its amicus brief.
No Jurisdiction over Appeal of District Court Vacation of Confirmation Order
“When a district court vacates a bankruptcy court order confirming a bankruptcy plan and remands for further proceedings, there is no final order sufficient to confer jurisdiction under 28 U.S.C. § 158(d).” Bank of New York Mellon v. Watt, No. 15-35484 (9th Cir. Aug. 16, 2017).
In their bankruptcy plan, Nicholas and Patricia Watt included a provision vesting title to their residence in the mortgagee, Bank of NY, and specifying that “vesting shall not merge or otherwise affect the extent, validity, or priority of any liens on the property.” Bank of NY opposed the mandatory vesting provision and objected to confirmation of the plan. The bankruptcy court confirmed the plan. [Read more…] about No Jurisdiction over Appeal of District Court Vacation of Confirmation Order
In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over
In chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate, and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition. Hawk v. Engelhart (In re Hawk), No. 16-20641 (5th Cir. Sept. 5, 2017).
Chapter 7 debtors, Gregory and Marcie Hawk, listed an IRA on their schedules and claimed an exemption for the account funds under Texas exemption law. The trustee did not object within thirty days and the court allowed the exemption. Over several months, the Hawks withdrew funds from the account and did not roll them over into a new retirement account within sixty days as required under Texas law. The bankruptcy court found that the funds had lost their exempt status and ordered the Hawks to turn them over to the trustee. The district court affirmed. [Read more…] about In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over