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Archives for January 2015

Additional Bankruptcy Cases to Consider Regarding Estate Property

January 15, 2015 by TomScottLaw

Property of the Estate - An 8-Part Series#7 of 8 in Series — Previous Article #6: Cause of Action Assets Must Be Disclosed Whether Property of Estate or Debtor
Here are four additional bankruptcy cases to consider regarding property of the estate:

Case #1:

In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013)

Inheritance is not property of the estate. More than 180 days after filing the Chapter 13 bankruptcy, the debtor became entitled to receive inheritance of more than $45,000.00. The trustee filed a section 1329 motion to modify the plan to increase the dividend to unsecured creditors. The debtor argued that the inheritance is not disposable income as the Code defines current monthly income as income received in the six full months prior to filing the case. The Court disagreed with the debtor’s position, but ruled that the inheritance was not property of the estate. It then ruled that there is no difference between property that has been exempted and is therefore no longer property of the estate and property such as this inheritance which never became property of the estate. Therefore, similar to exempt property, the trustee may not modify the plan to acquire that property.
Bankruptcy Opinion: In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013)[7]

Case #2:

In re Waldron, 536 F.3d 1239, 1245 (11th Cir. 2008).

The Waldron court found that an amended disclosure pursuant to Rule 1009 was the appropriate vehicle for a debtor to make post-confirmation disclosures. In so holding, the Waldron court observed:

“The disclosure of post-confirmation assets gives the trustee and creditors a meaningful right to request, under section 1329, a modification of the debtor’s plan to pay his creditors. A confirmed plan may be modified at the request of the debtor, the trustee, or the holder of an allowed unsecured claim to ‘(1) increase or reduce the amount of the payments on claims of a particular class provided for by the plan; [or to] extend or reduce the time for such payments.’ 11 U.S.C. § 1329(a). Payments under a plan are based on the debtor’s disposable income when the plan is confirmed. Id. § 1325(b)(1)(B). When a debtor discloses assets acquired after confirmation, creditors may move the bankruptcy court to modify the plan to increase payments made by the debtor to satisfy a larger percentage of the creditors’ claims. Id. § 1329(a)(1). If post-confirmation assets were not subject to disclosure, modifications for increased payments would be rare because few debtors would voluntarily disclose new assets… [emphasis added].”

The Peebles Court disagreed with the Waldron Court stating,

“Thus, the whole point of the exercise in Waldron was to determine if the asset in question could be included in disposable income. Though not explicitly stated, the clear corollary of the Waldron holding is that non-estate property need not be disclosed because it will never comprise disposable income that might support an upward modification of plan payments. Accordingly, the Court holds that the non-estate property at issue in this case, namely an inheritance received more than 180 days post-petition, is not included in disposable income.” See In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013).

These two cases demonstrate the circular argument for an estate transformation approach, that is: if an asset is not necessary for the fulfillment of the confirmed plan then it is not property of the estate and Rule 1009 would not require an amendment. However, had the trustee or creditors known about the asset then the trustee could have modified the plan under section 1329 to increase the dividend to unsecured creditors and the new asset would be necessary for the fulfillment of the modified plan. Then the debtor would be required to disclose the asset that the trustee had included in the modification.
Bankruptcy Opinion: IN RE WALDRON, 536 F.3d 1239 (11th Cir. 2008)[4]

Case #3:

In re Foreman (378 BR 717 – Bankr. Court, SD Georgia, 2007).

In this case the debtor attempted to amend her schedules to include a post-confirmation wrongful death claim. The Court held that:

“[b]ecause Debtor’s interest in this cause of action arose post-confirmation, the potential asset is not property of the bankruptcy estate as defined by 11 U.S.C. § 541. See Witko v. Menotte (In re Witko), 374 F.3d 1040 (11th Cir.2004) (concluding that “[p]re-petition causes of action are part of the bankruptcy estate and post petition causes of action are not”); see also Telfair, 216 F.3d 1333 (adopting the estate transformation approach to post petition acquired property, and holding that after confirmation only the property necessary for, the execution of the plan remains as property of the bankruptcy estate). Furthermore, because the cause of action is not property of the bankruptcy estate, Debtor is under no ongoing duty to disclose and amend the schedules of her confirmed bankruptcy case.”

The Court denied the debtor’s motion to amend the schedules.
Bankruptcy Opinion: In re Foreman (378 BR 717 – Bankr. Court, SD Georgia, 2007)[4]

Case #4:

Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009)

A Chapter 7 debtor filed a cause of action that originally was not listed in her Bankruptcy Schedules, but she advised the trustee about the claim at the meeting of creditors. The Court of Appeals found the debtor’s oral disclosure of the cause of action to the trustee sufficient to comply with the Code, and enough to prevent the application of judicial estoppel.

“Matthews, in whose favor we must draw all reasonable inferences, states in her affidavit that she informed the trustee about her pending administrative complaints at the meeting of creditors for her Chapter 7 bankruptcy. . . . The Bankruptcy Code contemplates the possibility that a debtor may later discover and inform the trustee of additional assets not already listed on the schedules, given the trustee’s obligations to investigate the debtor’s financial affairs, and to examine the debtor at the meeting of creditors. . . . That is precisely what happened here, at least as far as the record shows, and the inference we draw is that following Matthews’s oral disclosure the trustee determined that her discrimination claims were not sufficiently valuable to warrant pursuing them on behalf of the creditors.”

Bankruptcy Opinion: Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009)[4]

Next Article in Series: Debtor Obligated to Disclose Assets Acquired During Life of Bankruptcy Plan

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener; [6] Leagle; [7] Chapter11Cases

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Filed Under: Chapter 13, Property & Asset Protection

Cause of Action Assets Must Be Disclosed Whether Property of Estate or Debtor

January 4, 2015 by TomScottLaw

Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties#6 of 8 in Series — Previous Article #5: Chapter 7 and Chapter 13 Bankruptcy Codes Conflict
Under the estate transformation approach, it would appear that any after acquired asset would not become property of the estate unless that property would be necessary to complete the terms of the plan. As an example, if a Chapter 13 plan was filed to repay priority tax claims and the debtor was later wrongfully terminated any chosen action necessary to complete the terms of the plan would become property of the estate to the extent necessary to repay those priority claims.
In addition, the trustee would have the option of attempting to modify the plan under section 1329[1] to increase the dividend to unsecured creditors if the trustee felt there was additional disposable income available. However, if the asset is not necessary to the fulfillment of the plan (and it is not property of the estate) does it need to be disclosed? Clearly if the asset is a cause of action, it must be disclosed regardless of whether the asset is property of the estate, otherwise the debtor may be barred from pursuing that action through judicial estoppel.

A case we are currently litigating is a good example of this:
On the date of filing, the debtor owned a house, which was fully encumbered by a mortgage and had no equity value at all. The debtor surrendered the house, basically saying, “I don’t want it any more.”
The estate trustee, of his own agreement, abandoned the property and returned it, fully encumbered, to the debtor. The property was no longer part of the estate.
A couple of years later, the home was sold at a tax sale because the debtor wasn’t paying the taxes on it. At a tax sale, investors bid on properties. You, as an investor, if the home is worth $100,000, have to bid at least the amount of the owed taxes, or higher if bidding against another investor.
For example, for this $100,000 home with a $100,000 mortgage and $10,000 in back taxes owed, the investor bid $40,000. Either the mortgage company or the debtor have one year to pay the $10,000 in back taxes, plus 10% interest (of the investor’s initial purchase price.)
For investors, it is a great deal to bid at a tax sale because one of two things is going to happen. In this case, if no one redeems the property, the investor buys a $100,000 piece of property for $40,000, which is a very good deal. If the property is redeemed, the investor gets his money back, plus a 10% return on the investment ($4,000), which is not quite as profitable, but is still a very good short-term ROI.
The results were: the investor bid $40,000; the debtor didn’t want the property and was out of the picture; and the mortgage company, for whatever reason, never paid the $10,000 tax bill (and the 10%). The mortgage company never started foreclosure proceedings, so the investor received the property, for $40,000, free and clear of any liens whatsoever, and owned it 100% outright. The county treasurer retained $10,000 to cover the taxes due, which left an additional $30,000, called an overage, which went to the current property owner – the investor. The overage did not go to pay any liens, because those were wiped out when nobody redeemed the property, so the county treasurer sent the $30,000 back to the homeowner.
When the estate trustee was informed about the overage refund, his reaction was, “Uh, uh, that’s property of the estate.” The trustee’s position was that this was property of the estate at the time of filing and that the debtor apparently misstated the facts by claiming there was no equity in the house. But, in fact, there was equity in it because, as stated earlier, property of the estate includes any unforeseen, speculative contingent, and it is the debtor’s responsibility to have listed it. We disagree with the trustee’s position and have submitted a brief in an effort to settle through an even split of the $40,000.

Debtor Must Schedule All Legal or Equitable Interests as Assets

In the case, Cowling v. Rolls Royce Allison (S.D. IN Case No. 1:11-cv-01719-JMS-TAB, Oct. 5, 2012)[6], the court held “[a]t the outset, the Court must determine whether the claims Mr. Cowling asserts in this lawsuit should be included in his Chapter 13 bankruptcy estate. The clear answer is ‘yes’. Under the Bankruptcy Code, a debtor must schedule as assets ‘all legal or equitable interests of the debtor in property as of the commencement of the case.’ 11 U.S.C. § 541(a)(1).

Cause of Action Assets Acquired During Bankruptcy Considered Property of Estate

Additionally, causes of action which the debtor acquires while the bankruptcy is pending are also considered property of the bankruptcy estate. 11 U.S.C. § 1306(a)(1)[1] (‘Property of the [Chapter 13 bankruptcy] estate includes…all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted…’).” The District Court simply dismissed the case without prejudice due to the debtor’s lack of standing to bring the cause of action and thus did not need to even rule on the issue of judicial estoppel. The District Court also held that the debtor has an ongoing duty to schedule newly acquired assets while the case is open. Sections 1307[1] and 1330[1] allow for revocation of confirmation and dismissal in limited circumstances where the confirmation order itself was procured through fraud.

Next Article in Series: Additional Bankruptcy Cases to Consider Regarding Estate Property

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener; [6] Leagle

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Filed Under: Chapter 13, Property & Asset Protection

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