Finding that “[a] bankruptcy court may confirm a plan that holds property in the estate only after finding good case-specific reasons for that action,” and signaling exasperation with the whole topic, Judge Easterbrook of the Seventh Circuit reversed the bankruptcy court’s order of confirmation of the debtors’ plan in which they opted not to have their vehicles revest in themselves post-confirmation. Cherry v. City of Chicago, No. 19-1558 (7th Cir. July 6, 2020). [Read more…] about “Good Reason” Required to Not Revest Property in Debtor after Plan Confirmation
Uncashed Retirement Loan Check Not Exempt
The debtor’s uncashed loan check from her retirement account was property of the estate and was not exempt under section 522(d)(12). Ostrander v. Brown (In re Brown), No. 19-24 (B.A.P. 1st Cir. May 21, 2020).
Prior to filing her bankruptcy petition, the debtor received, but did not cash, an $18,000 check representing a loan from her retirement account. The chapter 7 trustee sought turnover of the check. The bankruptcy court denied the turnover motion finding that, because the funds were from an exempt retirement account and the debtor had not yet cashed the check, the check was likewise exempt. [Read more…] about Uncashed Retirement Loan Check Not Exempt
Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options
The bankruptcy court did not abuse its discretion in permitting the chapter 13 trustee to modify the debtor’s plan to capture proceeds from the sale of stock options that the debtor received as part of his employment compensation. Berkley v. Burchard (In re Berkley), No. 19-1197 (B.A.P. 9th Cir. April 17, 2020).
Mr. Berkley’s chapter 13 plan was confirmed in April, 2015. In 2016, he became CEO of Antares Audio Technologies. Part of his compensation was receipt of stock options in the company. After he had completed 57 months of payments on his chapter 13 plan, Mr. Berkley notified the trustee that Antares was being sold and that his stock options would be bought out for $3.8 million. The trustee moved to modify the plan to incorporate a portion of the sale proceeds to pay off Mr. Berkley’s creditors at 100%. The bankruptcy court granted the motion to modify and Mr. Berkley appealed. [Read more…] about Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options
Non-Debtor Spouse’s Share of Tax Refund Not Part of Estate
The debtor’s non-debtor spouse had no obligation to contribute her share of their joint tax refund to the debtor’s chapter 13 plan even though her income was being used to fund the plan. In re Pelardis, No, 15-10949 (Bankr. S.D.N.Y. Jan. 2020) (unpublished).
The debtor’s confirmed chapter 13 plan committed the amount in excess of $1,500 from his anticipated tax refund. When he and his non-debtor spouse received their joint refund of $6.938, he contributed only his half-share to the bankruptcy estate. The trustee moved to dismiss the case, arguing that because the debtor’s non-debtor spouse had committed her entire income to the debtor’s estate, she was obligated to contribute her portion of the tax refund, and the failure to do so was a material default. [Read more…] about Non-Debtor Spouse’s Share of Tax Refund Not Part of Estate
Debtor Not Required to Turnover Proceeds From Sale of Appreciated Property
A chapter 13 debtor may not be compelled to turn over proceeds from the sale of appreciated real estate which had revested in him post-confirmation and was therefore no longer part of the bankruptcy estate. Black v. Leavitt (In re Black), No. 18-1351 (B.A.P. 9th Cir. Dec. 31, 2019).
The debtor filed chapter 7 bankruptcy listing real property valued at $52,300 for which he sought to take his homestead exemption. The trustee objected on the grounds that the property was used as rental property rather than the debtor’s residence. The debtor received his chapter 7 discharge and moved to convert the case to chapter 13. The bankruptcy court sustained the trustee’s objection to the exemption and granted his motion for turnover. It then granted the debtor’s motion to convert. [Read more…] about Debtor Not Required to Turnover Proceeds From Sale of Appreciated Property
Voluntary 401k Contributions Not Excluded from Disposable Income
A Chapter 13 debtor’s voluntary post-petition contributions to his 401k plan must be included in the calculation of disposable income under section 1325. Penfound v. Ruskin, No. 18-13333 (E.D. Mich. Sept. 20, 2019).
Above-median Debtor, John Penfound, worked continuously for twenty-four years during which time he made regular voluntary contributions to his 401k plans. When he and his wife, Jill Penfound, filed a petition for Chapter 13 bankruptcy, he sought to continue contributing $1,375/month to his 401k and exclude those amounts from his calculation of disposable income. Upon objection by the trustee, the bankruptcy court ordered the debtors to amend their proposed plan based on a re-calculation of disposable income including the monthly contributions to the 401k plan. The debtors appealed confirmation of the amended plan.
Relying on reasoning and dictum in In re Seafort, 669 F.2d 662 (6th Cir. 2012), the district court affirmed. [Read more…] about Voluntary 401k Contributions Not Excluded from Disposable Income
No Amortization of Tax Refund in W.D. Texas
In an opinion that reads like a father chastising his ungrateful children, the District Court for the Western District of Texas scolded the debtors for their proposed treatment of anticipated tax refunds and required them to adhere to the District Plan under which they could retain up to $2,000 of their refunds, but must turn over to the Trustee any amount remaining as disposable income. Vega v. Viegelahn, No. 18-796 and Diaz v. Viegelahn, No. 18-798 (W.D. Tex. Sept. 19, 2019) (consolidated for argument and decision).
Contrary to the District Plan structure, the debtors in this case sought to amortize their tax refunds as income over one year. Upon objection by the trustee, the debtors ultimately amended their plans to conform to the District Plan. They then appealed the Bankruptcy Court’s order of confirmation arguing that the District Plan’s treatment of the tax refunds violated various provisions of the Bankruptcy Code, the Local Rules and the Official Forms. [Read more…] about No Amortization of Tax Refund in W.D. Texas
Malpractice Action against Bankruptcy Attorneys Not Part of Estate
Where the only injury alleged was the denial of discharge, the debtors’ legal malpractice cause of action against their bankruptcy attorneys did not arise pre-petition and, therefore, was not part of the bankruptcy estate. Church Joint Venture v. Blasingame, No. 18-8017 (B.A.P. 6th Cir. April 5, 2019).
The debtors’ bankruptcy attorneys committed malpractice prior to and during the course of the debtors’ chapter 7 case, resulting in denial of discharge. The debtors sued their attorneys for malpractice in state court, and the bankruptcy court granted creditor, Church Joint Venture (CJV), derivative status to pursue a malpractice action in the bankruptcy court on behalf of the estate based on the same conduct. CJV filed an adversary complaint and sought a declaratory judgment that the cause of action for malpractice constituted estate property. On cross-motions for summary judgment, the bankruptcy court found that the cause of action arose post-petition and, therefore, belonged to the debtors rather than the estate.
CJV appealed to the bankruptcy appellate panel for the Sixth Circuit.
Relying on Underhill v. Huntington National Bank (In re Underhill), 579 F. App’x 480 (6th Cir. 2014), the panel affirmed.
The panel began with the premise that, while property interests are determined by state law, federal law determines if and when those property interests become part of the bankruptcy estate. Here, the parties agreed that even though some of the conduct giving rise to the malpractice action took place pre-petition, the debtors did not suffer an injury until they were denied discharge. The panel found that, based on these facts, the debtors did not have a cause of action against the malpractice defendants at the time they filed their petition.
CJV argued that the bankruptcy court erred in looking at when the cause of action accrued under state law instead of looking to when the conduct leading to the denial of discharge took place. It maintained that, because some of that conduct took place prior to the bankruptcy petition, the cause of action was sufficiently rooted in the pre-petition past to render it part of the bankruptcy estate. The panel disagreed. In Underhill, the Sixth Circuit held that pre-petition conduct alone will not root a cause of action in the pre-bankruptcy past but that there must be a pre-petition violation: “[t]hat is, a cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-petition injury.” Underhill, 579 F. App’x at 482-83. Here, the only injury was the denial of discharge – a post-petition event.
For the same reason, the panel rejected CJV’s argument that the bankruptcy court should have split the complaint into pre- and post-petition causes of action and allowed the pre-petition cause of action to go forward. The panel found that, in the absence of injury, there was no pre-petition cause of action.
CJV has appealed to the Sixth Circuit. Church Joint Venture v. Blasingame, No. 19-5505 (6th Cir., filed, May 10. 2019).
Interest in Joint Tenancy Drops from Estate upon Death of Debtor
By operation of state property law, a debtor’s interest in a joint tenancy drops out of the Chapter 7 estate upon the death of the debtor, and this does not conflict with the trustee’s powers under federal law. Cohen v. Chernushin (In re Chernushin), No. 18-1068 (10th Cir. Dec. 21, 2018).
Gregory and Andrea Chernushin owned real property as joint tenants. Mr. Chernushin filed for bankruptcy but committed suicide during the pendency of his case. The Chapter 7 trustee sought to retain and sell the joint tenancy. The bankruptcy court found that upon Mr. Chernushin’s death, the entire interest in the property went to Ms. Chernushin and was therefore no longer part of the bankruptcy estate amenable to sale by the trustee. On appeal, the district court agreed. Cohen v. Chernushin (In re Chernushin), 584 B.R. 567 (D. Colo. 2018). [Read more…] about Interest in Joint Tenancy Drops from Estate upon Death of Debtor
Court Exceeded Power with Plan Provision Re: After-Acquired Property
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