A bankruptcy court lacks the power to require a chapter 13 debtor to include a plan provision pledging to pay into the plan the cash equivalent of any non-cash property obtained post-confirmation. Roseberry v. U.S. Trustee, No. 18-1039 (S.D. Ill. Dec. 18, 2018). [Read more…] about Court Exceeded Power with Plan Provision Re: After-Acquired Property
Traffic Fines Not Given Priority in Chapter 13
Claims based on post-petition traffic fines are not administrative expenses entitled to priority in chapter 13 bankruptcy. City of Chicago v. Marshall, No. 17-2308 (lead case) (N.D. Ill. Nov. 27, 2017).
Bankruptcy debtors in seven separate cases and two courts incurred post-petition traffic fines in the City of Chicago. The City moved the courts to prioritize its claims as “administrative expenses” under sections 503 and 507(a). The courts denied the City’s motions. [Read more…] about Traffic Fines Not Given Priority in Chapter 13
Fourth Circuit Side-Steps Retirement Contribution Issue
Finding that the trustee did not raise the statutory issue of whether and when a chapter 13 debtor may make voluntary contributions to his retirement account, the Fourth Circuit found no clear error in the bankruptcy court’s factual finding of good faith. Gorman v. Cantu (In re Cantu), No. 17-1034 (4th Cir. Dec. 18, 2017) (unpublished).
Ricardo Cantu’s chapter 13 plan proposed to pay $51,240 toward his $148,346 unsecured debt over five years. The plan payments were based on a disposable income calculation which contemplated $338 in monthly repayments to two retirement accounts which Mr. Cantu had taken out against his government-backed Thrift Savings Plan. The trustee argued that one of the loans from the TSP would be paid off shortly after commencement of the plan, and applying the forward-looking approach, the anticipated reduction in retirement contributions should be considered in calculating Mr. Cantu’s disposable income. The trustee also objected to Mr. Cantu’s inclusion of domestic support payments in the amount of $1,625 per month, when his divorce decree ordered monthly payments of $1,500. Mr. Cantu countered that once he paid off the loan from the TSP he intended to resume making contributions in the same amount to that Plan. He also maintained that the discrepancy between the divorce decree and his actual payments was a result of a scrivener’s error in the divorce decree.
With respect to Mr. Cantu’s voluntary contributions to his retirement account, the bankruptcy court adopted the majority view that such payments may be deducted from the disposable income calculation under section 1325(b), so long as they are made in good faith. The court rejected the two contrary approaches under which 1) voluntary retirement contributions may be made only if they were being made prior to bankruptcy and in the same amount, and 2) voluntary contributions are prohibited in all circumstances. The court then addressed the factual issues of whether the contributions were proposed in good faith and whether the domestic support payments were accurate. The court resolved both issues in Mr. Cantu’s favor. In re Cantu, 553 B.R. 565 (Bankr. E.D. Va. 2016). The district court affirmed.
On appeal, the Fourth Circuit side-stepped the statutory issue of which approach to voluntary retirement plan contributions to adopt, concluding that the trustee did not appeal the bankruptcy court’s application of the majority view, but instead, limited his argument to whether the bankruptcy court correctly resolved the factual issue of good faith. The circuit court found that the bankruptcy court did not commit clear error. Mr. Cantu had been making regular contributions to his TSP until he was forced to stop when he took out hardship loans against the account. In addition, the amount of his contributions was far less than the allowable contribution amount.
The court also found that the bankruptcy court did not commit clear error in accepting Mr. Cantu’s testimony, supported by a pre-divorce Separation Agreement, that the divorce decree did not accurately reflect the agreement between the ex-spouses.
Finding that the bankruptcy court’s factual conclusions were supported by the evidence, the circuit court affirmed.
Judge Thacker concurred in part and dissented in part. She maintained that the trustee in fact raised the issue on appeal of whether and when a debtor may make voluntary contributions to a retirement account, and the court should have taken the opportunity to take a position on the issue. With respect to the domestic support payments, Judge Thacker opined that the bankruptcy court was bound to apply the only court-ordered payments, to wit: those specified in the divorce decree, and that it overstepped by applying, instead, an amount not reflected in that document.
“Snapshot” Rule Precludes Amended Homestead Exemption
The snapshot rule governs whether the chapter 13 debtor may claim a homestead exemption for one residence after the residence for which she originally claimed the exemption was subject to foreclosure. Earl v. Lund Cadillac, LLC, No. 16-16428 (9th Cir. Nov. 27 2017) (unpublished).
When Rachael Earl filed her chapter 13 petition she owned two residential properties: Claiborne and Sunnyvale. She resided in the Claiborne property and she claimed it as her homestead exemption. Unable to stop the foreclosure proceedings on that property, however, Ms. Earl converted to chapter 7 and sought to claim an exemption in the Sunnyvale property. The bankruptcy court sustained the unsecured creditor’s objection, and the district court affirmed.White v. Stump, 266 U.S. 310, 313 (1924) teaches that exemptions are fixed at the time of filing the petition. Under this “snapshot” rule, exemptions claimed post-petition may be allowed only if they could have been claimed on the petition date. Likewise, while under Rule 1009(a) the debtor has right to amend her exemptions at any time before the case is closed, the amended exemption must still be one she could have claimed on the petition date.
The court looked to Arizona law to determine whether Ms. Earl could have claimed the Sunnyvale property as her homestead at the time she filed her petition. In Arizona, entitlement to a homestead exemption depends upon the debtor’s actually residing on the property. In this case, Ms. Earl lived, at all relevant times, in the Claiborne residence. The fact that she converted from chapter 13 to chapter 7 did not change the result, even if the court were to agree with those cases looking at exemptions as of the conversion date, as Ms. Earl still lived in the Claiborne property at the time of the conversion.
Because Ms. Earl had no right to claim the exemption under state law, she had no right to amend her bankruptcy exemptions to claim it post-petition. The court affirmed.
Special Counsel Violates Code and Rules by Failure to Disclose Fee Agreements
Special counsel representing a bankruptcy debtor in a separate tort action must comply with bankruptcy statutes and rules relating to disclosure of their employment arrangements, including any fee-sharing agreements. Wright v. Csabi (In re Wright), No. 13-10472, Adv. Proc. No. 16-1004 (Bankr. S.D. Tex. Dec. 2017).
During her bankruptcy, chapter 13 debtor, Vicky Wright, presented to the court an agreement she had entered into with James Grissom to represent her in a contingency-fee tort claim. The court approved the agreement. Unbeknownst to the court, Mr. Grissom had separately entered into fee-sharing agreements with Francisco Rodriguez and William Csabi. After the tort case settled for $650,000, the court ordered that Mr. Grissom be paid $90,000 pursuant to the prior-approved agreement, and that the rest of the settlement proceeds go to the chapter 13 estate for distribution to creditors. Notwithstanding this order, Mr. Grissom distributed $73,330 each to Mr. Rodriguez and Mr. Csabi pursuant to the fee-sharing agreements. Ms. Wright’s bankruptcy counsel, Abe Limon, sent demand letters to Messrs. Rodriguez and Csabi notifying them that the transferred funds were property of the bankruptcy estate and demanding turnover. Mr. Csabi turned the funds over several months later and Mr. Rodriquez did not turn over the funds. Ms. Wright filed an adversary complaint seeking disgorgement and turnover.
The court proceeded to address the allegations in the adversary complaint with the following conclusions having been established in previous orders: 1) Ms. Wright’s portion of the settlement proceeds were part of the bankruptcy estate, and 2) Mr. Grissom never disclosed his fee agreements with either Mr. Rodriguez or Mr. Csabi to the court.
The court began with the admonition that special counsel seeking employment in a tort case related to a chapter 13 bankruptcy must comply with Rule 2014, local rule BLR 2014-1, and section 327(e), including filing an application with the bankruptcy court disclosing the terms of employment and fee-sharing agreements, and that, under Fifth Circuit precedent, this obligation is ongoing. As these violations were not specifically pled in the adversary complaint, the court relied on its power under section 105(a) to “attend to” them.
The court went on to address the statutory violations alleged in the complaint.
Section 329 and Rule 2016 mandate that any lawyer representing a debtor in connection with a bankruptcy case, including in a capacity that will impact the debtor’s case, must disclose to the court the financial arrangement under which he is employed. Section 504 prohibits fee sharing including fee-sharing agreements that might be permitted under non-bankruptcy state bar rules.
The court further found that because the settlement proceeds, except that portion carved out to pay the court-approved fees to Mr. Grissom, were property of the bankruptcy estate, Mr. Grissom’s unauthorized use of those funds to comply with his fee-sharing agreements violated the automatic stay. Both Mr. Rodriguez and Mr. Csabi also violated the automatic stay by accepting and retaining the funds after being made aware of the bankruptcy at the latest, when Ms. Wright’s chapter 13 attorney notified them in a letter seeking turnover of the funds.
As this order dealt only with liability, the court did not address the allegations in the complaint relating to damages. Nor did the court address alleged violation of the Texas Disciplinary Rules of Professional Conduct, citing interests of comity.
Trustee $65,000 Fee Application Denied
“Trustee’s plan of action from the minute he was assigned these Chapter 7 cases was abundantly clear: he sought to manufacture equity through the Stipulations and Carve-Outs with the IRS to sell the Homesteads and generate funds that would primarily benefit Trustee, Counsel, and other bankruptcy professionals, while only minimally benefitting unsecured creditors.” Based on this conclusion, the Bankruptcy Appellate Panel for the Tenth Circuit, in a lengthy opinion, upheld the denial of over $65,000.00 in fees for the chapter 7 trustee and his counsel. Jubber v. Bird (In re Bird), Nos. 16-39, Jubber v. Christensen (In re Christensen), 16-40 (B.A.P. 10th Cir. Nov. 30, 2017). [Read more…] about Trustee $65,000 Fee Application Denied
Advanced Sick Leave Is Debt Subject to Recoupment
Advanced sick leave created a debt in bankruptcy that was subject to recoupment by the creditor/employer. Patterson v. Social Security Administration, No. 14-65877, Adv. Proc. No. 15-5129 (Bankr. N.D. Ga. Oct. 5, 2017).
Chapter 7 debtor, Tyree Patterson, worked for the Social Security Administration. The SSA had a policy whereby an employee who has exhausted his sick leave can “borrow” against future sick leave and “repay” the borrowed days with later-accrued sick leave. After Mr. Patterson obtained his discharge in bankruptcy, the SSA “collected” on his pre-petition advanced sick leave by reducing his newly accrued sick leave. Mr. Patterson reopened his bankruptcy to complain that the SSA’s conduct violated the discharge injunction. [Read more…] about Advanced Sick Leave Is Debt Subject to Recoupment
Debt to DHS Not Domestic Support Obligation
A payment on a debt to the DHS based on an overpayment of food stamp benefits does not fall under the preferential transfer exception for domestic support obligations simply because the overpayment was made under a program for the support of the debtor’s children. Halbert v. Dimas (In re Halbert), No. 16-13005, Adv. Proc. No. 16-479 (Bankr. N.D. Ill. Nov. 16, 2017).
The DHS overpaid funds to the debtor, Tyeane Halbert, under its Supplemental Nutrition Assistance Program (“SNAP”). Within ninety days of Ms. Halbert’s bankruptcy petition, the DHS intercepted her tax refund to offset the debt based on the overpayment. Ms. Halbert sought to recover the refund under section 522(h) on the grounds that the transfer was a preference under section 547(b). The DHS argued that the payment fell under section 547(c)(7)’s exception to preferences for “domestic support obligations,” pointing to the definition of that term in section 101(14A)(ii) as a debt owed to a governmental unit which is “in the nature of . . . support.”
The court began its analysis with a look at Wisconsin Dep’t of Workforce Dev. v. Ratliff (In re Ratliff), 390 B.R. 607 (E.D. Wis. 2008), where that court found a debt based on overpayment of food stamp benefits was excepted from discharge under section 523(a) as a domestic support obligation. The court in Ratliff, and courts reaching similar holdings, based its conclusion on a finding of causal connection between the purpose of the original payment for support and the debt that arose out of the overpayment.
Cases finding the other way, such as In re Vanhook, 426 B.R. 296, 301 (Bankr. N.D. Ill. 2010), hold that the debt arising out of an overpayment (or wrongful payment), generally has a different character than the original purpose of the payment. While the original payment was intended for support, the debt arose out of a separate obligation arising out of the excess payment amount and does not serve any purpose related to domestic support. As the court in In re Lutzke, 223 B.R. 552, 554 (Bankr. D. Or. 1998), pointed out, any payment on the debt based on overpayment is not intended for the domestic support of the creditor. [The court noted, however, that where one spouse with a child-support obligation overpays to the other spouse sharing child-support, the overpayment debt could be considered to retain the “nature of support” in that it could go to the creditor spouse’s actual child support obligations.]
The court noted that most debts owed to a governmental unit would be the result of an overpayment of support in one form or another and, therefore, finding that the ensuing debt retains the nature of support would apply too broadly. Rather, the court reasoned, the type of domestic support obligations owed to a governmental unit that would be covered by the definition in section 101(14A)(ii) would more appropriately be the type of debt where the support obligation is assigned to the government, or where the payment is owed to the government in situations of “foster care, wardship or residential treatment centers.”
The court thus concluded that the transfer was preferential under section 547(b) and did not fall under the exception set forth in section 547(c) and granted summary judgment in favor of Ms. Halbert.
Win for Debtor in Student Loan Arena
A loan that is not itself an “educational benefit” does not fall under section 523(a)(8)(A)(ii)’s exception to discharge as an “obligation to repay funds received.” Essangui v. SLF V-2015 Trust, No. 16-12984, Adv. Proc. No. 16-201 (Bankr. Md. Oct. 2, 2017).
Chapter 7 debtor, Yolande Essangui, enrolled in a Medical Education Readiness Program (MERP, or Program) in preparation for entering Ross University School of Medicine. Because MERP was not a Title IV institution, students were not eligible to receive federal student loans to attend the Program. Ms. Essangui financed her attendance in MERP with the private loan at issue, which, by the time of her bankruptcy, totaled $37,175.25. She used the money to pay tuition, buy books and pay for housing and other expenses during her schooling. Ms. Essangui completed the Program and enrolled in Ross University, but never graduated.
As it was undisputed that the loan was not an “educational benefit overpayment or loan” under section 523(a)(8)(A)(i), or a “qualified education loan” under section 523(a)(8)(B), the issue was whether the debt was “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” under section 523(a)(8)(A)(ii).
After a walk through the history of student loan treatment in bankruptcy, the court arrived at the relevant language in BAPCPA, which it found was intended to “enhance fairness” to both creditors and debtors. Citing Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 635 (B.A.P. 9th Cir. 2015), the court adhered to the minority position that Congress’s separation, in 2005, of “an educational benefit overpayment or loan” in paragraph (A)(i) and “funds received” in paragraph (A)(ii) indicates that Congress did not intend the latter paragraph to cover loans.
The court rested its decision on principals of statutory interpretation in which Congress is presumed to organize statutes meaningfully and give different meanings to different words. The court found it significant that the funds received in paragraph (A)(ii) must be “as” an educational benefit rather than be “for” an educational benefit. Under this language, the funds themselves must be the educational benefit rather than be provided for the purpose of acquiring the educational benefit. Furthermore, paragraph (A)(ii) delineates three types of funds: an “educational benefit,” a scholarship and a stipend. Where scholarships and stipends typically need to be repaid only upon the debtor’s failure to complete her education, the court reasoned that Congress intended “educational benefit,” to be similarly contingent. This contingent “obligation to repay funds” is not equivalent to a “loan.”
The court further found that applying paragraph (A)(ii) to loans would render the language in paragraph (A)(i), which specifically covers government-related loans, and paragraph (B), which covers “any other educational loan that is a qualified education loan,” superfluous. Paragraph (A)(ii), if given the broad interpretation endorsed by the creditor here, would already cover those loans. The minority position also comports with the general principal of narrowly interpreting exceptions to discharge.
The court concluded that “the language of the statute suggests that Congress worked to strike a delicate balance between the fresh start policy for debtors and the protection of certain educational programs and lenders offering loans for such programs.” Where the creditor did not argue that the funds themselves were an “educational benefit,” and section 523(a)(8)(A)(ii) does not apply to loans, Ms. Essangui was entitled to summary judgment.
Court Rejects Terms Slipped into Reaffirmation Agreement
“A party to a reaffirmation agreement cannot bootstrap contract terms into the reaffirmation agreement through inconspicuous additions to the statutory disclosures on a form represented to be a Director’s Form.” In re Jenkins, No. 17-30753 (Bankr. S.D. Ohio Sept. 26, 2017).
Chapter 7 debtor, Tracy Michelle Jenkins, entered into a reaffirmation agreement with KH Network Credit Union concerning Ms. Jenkins’ 2015 Volvo. After Ms. Jenkins received her discharge, the Credit Union rescinded the reaffirmation agreement. The Credit Union pointed to language it had added to the “Disclosure Statement” on Director’s Form 2400A, in which it asserted a right to rescind the agreement in the manner it followed.
As an initial matter, the court found that it had jurisdiction over the action because, rather than being a disagreement as to the terms of a contract requiring application of state law, the disagreement involved interpretation of Ms. Jenkins’s rights under section 524 of the Code.
The court began its substantive analysis with the general principles that reaffirmation agreements serve the valuable purpose of permitting a debtor to retain necessities but often at the cost of a heavy financial obligation to the debtor. For that reason, safeguards such as the disclosures on Director’s Form 2400A are statutorily mandated and, under section 524(k)(1), must be made “clearly and conspicuously and in writing.”
The court found that, while in theory a creditor may negotiate and add to a reaffirmation agreement terms allowing it to rescind, the Credit Union here did not comply with the requirements necessary to alter the standard terms of the agreement. The court pointed to several deficiencies in the terms the Credit Union sought to enforce: 1) it was not visually conspicuous, 2) it was appended to the disclosure section of the agreement which is a recitation of the debtor’s statutory rights, and 3) it was not included in the Agreement section where it would have been properly included in the negotiated contractual terms. Where the disclosure requirements are intended for the protection of debtors, the Credit Union’s inclusion of its own rescission rights in that section of the agreement contradicted and diluted its purpose.
The Credit Union argued that it rescinded the agreement due to Ms. Jenkins’s failure to enter into a separate reaffirmation agreement with it for an unsecured debt. The court found that there was no evidence of any agreement between the parties as to this separate contractual term and, under Ohio law, a contract may be rescinded upon fraud or mistake of fact, but that no such justification existed here. The credit union opted to sign the reaffirmation agreement with no contingency provision included. Ms. Jenkins could not be said to have breached the contract by reason of noncompliance with a term that was not in it.
The court found that under section 105(b), it had the power to alter the terms of the reaffirmation agreement to conform to the provisions and principles of the Bankruptcy Code.