Storage Liens and bankruptcy …

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

***

The bankruptcy court here allowed a storage lien for pre-petition repossession costs but held that post-petition storage costs violated the automatic stay, as the storage lot, Collateral Bankruptcy Services, had violated the automatic stay by retaining possession of the vehicle and not turning it over to the Trustee.

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

http://www.flmb.uscourts.gov

In re: Case No. 8:16-bk-10041-MGW

Chapter 7

Stefan Kaschkadayev,

Debtor.

___________________________________/

ORDER AND MEMORANDUM OPINION ON STAY RELIEF MOTION

Before filing for bankruptcy, the Debtor surrendered his car to Collateral Bankruptcy Services, a towing and storage company. Collateral Bankruptcy Services, which has continued to maintain possession of the Debtor’s car, now seeks stay relief to foreclose a statutory lien for unpaid storage charges. Because Collateral Bankruptcy Services’ postpetition storage charges were incurred in violation of the automatic stay, the Court will grant Collateral Bankruptcy Services limited stay relief to foreclose its statutory lien for unpaid prepetition storage charges.

Background

Under the Bankruptcy Code, debtors are prohibited from retaining personal property that secures a debt unless they redeem the collateral or reaffirm the debt. But debtors who want to surrender collateral—instead of redeeming it or reaffirming the debt—complain that they sometimes have difficulty doing so. Some debtors complain that they are told to deliver the collateral to the secured creditor at a specified time and place, only to find that the secured creditor is not there. Other debtors have been told the secured creditor will pick up the collateral only to be left holding the collateral even after they have received a discharged and their case has been closed. Apparently, there is a burgeoning new industry of companies willing to take possession of collateral from debtors and store it for their benefit.

One of those companies is Collateral Bankruptcy Services. Collateral Bankruptcy Services, which is owned by a chapter 7 panel trustee, offers to safely retrieve and secure surrendered collateral at no cost to the debtor, the debtor’s lawyer, or the debtor’s estate. Collateral Bankruptcy Services says its calling card is its excellent customer service: its agents, the company says, show up on time (wearing clean uniforms) at the debtor’s preferred location. In Collateral Bankruptcy Services’ view, there is a market for a debtor friendly (and trustee friendly) alternative to repossession agents.

As the Court understands the business model, debtors contact Collateral Bankruptcy Services to pick up secured collateral—e.g., a car—and tow it to Collateral Bankruptcy Services’ storage facility.

If Collateral Bankruptcy Services is required to pick up the collateral, it charges a towing fee (around $3 per mile) for transporting the collateral to its storage facility. Naturally, it charges a storage fee as well (usually $55 per day). According to Collateral Bankruptcy Services, its towing and storage charges are “middle of the road” for those services.

Collateral Bankruptcy Services, however, has been struggling to make its business practices comport with the Bankruptcy Code. Early on, in In re Ervin, Collateral Bankruptcy Services took possession of the debtor’s car, imposed a storage lien for unpaid storage charges, foreclosed its storage lien, took title to the car at the foreclosure, and resold it to a third party—all without relief from the automatic stay.

In another case, In re Galvez, Collateral Services imposed a storage lien on a car before seeking stay relief.

Collateral Bankruptcy Services’ conduct in Ervin and Galvez was, to say the least, problematic. By taking possession of the debtors’ cars after the petition date in those cases, Collateral Bankruptcy Services took possession of property of the estate in violation of the automatic stay.

In Ervin, this Court ordered Collateral Bankruptcy Services to pay the secured creditor the value of its collateral as a sanction for the stay violation. In Galvez, Collateral Bankruptcy Services agreed to withdraw its belated stay relief motion and consented to the Court granting the secured creditor’s stay relief motion.

It is worth noting that the Court would not have necessarily granted a timely stay relief motion in Ervin or Galvez because, by taking possession of the debtor’s car postpetition, Collateral Bankruptcy Services was interfering with the debtor’s duty under § 521 to first surrender the car to the Trustee and, if the Trustee abandoned it, to then surrender the car to the secured creditor.

But this case presents a different problem: Here, unlike in Ervin and Galvez, Collateral Bankruptcy Services took possession of the Debtor’s car before the petition date. One month before the petition date, Collateral Bankruptcy Services picked up the Debtor’s 2014 Chrysler Town & Country and towed it 62 miles to its storage facility.

One week later, Collateral Bankruptcy Services served a claim of lien on JP Morgan Chase Bank, which has a lien on the Debtor’s car.10 According to the claim of lien, Collateral Bankruptcy Services has incurred $183 in towing charges (62 miles at $3/mile), $330 in storage charges (6 days at $55/day), $125 in recovery charges, and $75 in administrative fees, for a total of $713.11

When he filed this case, the Debtor did not list his 2014 Chrysler Town & Country on Schedule B. Instead, he says in his Statement of Financial Affairs that the Bank repossessed his car in October, and he lists them on Schedule F. But Collateral Bankruptcy Services says it picked the car up at the Debtor’s request.

Collateral Bankruptcy Services now asks the Court to grant it stay relief so it can foreclose its storage lien since there is no equity in the car.

Conclusions of Law

On its face, Collateral Bankruptcy Services’ stay relief motion seems straightforward. Collateral Bankruptcy Services alleges that the value of the Bank’s lien exceeds the value of the car. So there is no equity in the car. And because this is a chapter 7 case, the car is not necessary for an effective reorganization. On top of that, Collateral Bankruptcy Services has a statutory lien for unpaid storage charges under section 713.78, Florida Statutes, which primes the Bank’s, as well as any other lien on the Debtor’s car. In fact, absent this bankruptcy case, Collateral Bankruptcy Services would have been entitled to sell the Debtor’s car as early as December 12, 2016, at a public auction under section 713.78(6), Florida Statutes.13 But there is one problem with Collateral Bankruptcy Services’ motion.

Although Collateral Bankruptcy Services has sought stay relief before foreclosing its storage lien, it has nonetheless violated the automatic stay in this case. Bankruptcy Code § 362(a)(3) explicitly prohibits any act to exercise control over property of the estate. The Debtor’s car, of course, was property of the estate as of the petition date. So Collateral Bankruptcy Services violated the automatic stay by maintaining possession of the Debtor’s car. In fact, Bankruptcy Code § 542(a) requires Collateral Bankruptcy Services to turn the car over to the Trustee.

Collateral Bankruptcy Services’ stay violation is not a mere technical violation. By continuing to maintain possession of the Debtor’s car, Collateral Bankruptcy Services is increasing its storage charges at a rate of $55 per day. The increased storage charges, in turn, increase the amount of the statutory lien imposed to secure those charges, which reduces any potential recovery by the Bank.

Acts taken in violation of the automatic stay, however, are automatically void.15 So Collateral Bankruptcy Services is not entitled to any storage charges incurred since the petition date. And its storage lien is limited to the amount of its unpaid prepetition storage charges. Accordingly, it is

ORDERED:

  1. The automatic stay imposed by 11 U.S.C. § 362 is hereby lifted to allow Collateral Bankruptcy Services to impose a storage lien on the Debtor’s 2014 Chrysler Town & Country (VIN# 2C4rC1BG9ER271800) for unpaid storage charges incurred before the petition date.
  2. The 14-day stay under Rule 4001(a)(3) shall be waived to permit Collateral Bankruptcy Services to immediately enforce its in rem relief under this Order.
  3. Collateral Bankruptcy Services shall be allowed to exercise its state and common law in rem remedies with respect to the Debtor’s car, including giving notice and taking all actions necessary to protect its rights. Under no circumstances, however, shall Collateral Bankruptcy Services seek to exercise any in rem relief with respect to postpetition storage charges. Nor shall Collateral Bankruptcy Services seek or obtain an in personam judgment against the Debtor.

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

 

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Discharging Student Loans: Ripe time, Ripe place …

As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is another in a long line of Student Loan dischargeability cases …

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Student Loans Discharge Action Dismissed because the issue is not ripe!

In Re: David Wayne Sheppard and Tena Marie Sheppard, Debtors; vs. the U.S. Department of Education; West Virginia Junior College, Defendants.

Case # 16-20208; Adversary # 16-2049; Southern District of West Virginia

February 21, 2017

Memorandum Opinion and Order

Pending is the motion to dismiss by the Defendant, the United States Department of Education, filed December 5, 2016. The Plaintiff, Tena Marie Sheppard, responded in opposition to the motion to dismiss on December 12, 2016, and the United States Department of Education (“the Department”) replied on January 18, 2017. The motion to dismiss is ready for adjudication.

Although the Department has filed its motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the grounds for dismissal better align with Rule 12(b)(1).

I.

Mrs. Sheppard and her husband have been deemed permanently disabled by the Social Security Administration. On April 22, 2016, Mrs. Sheppard, along with her husband, filed a joint Chapter 13 petition. The Sheppards have proposed a Chapter 13 plan that provides for a monthly payment of $854.69 for 66 months. However, their disposable income amounts to only $444.68. At this time, the proposed Chapter 13 plan remains unconfirmed. A confirmation hearing is scheduled for March 1, 2017.

Mrs. Sheppard filed this adversary proceeding to discharge her student loans on August 17, 2016. In the complaint, Mrs. Sheppard alleges that the Department and West Virginia Junior College are non-priority unsecured creditors in the associated bankruptcy case. Further, she alleges that the repayment of her student loans imposes an undue hardship because she is disabled and unable to work. Mrs. Sheppard seeks a declaratory judgment as to the dischargeability of the debt pursuant to 11 U.S.C. § 523(a)(8), arguing both that the subject loans do not qualify as educational loans and, in the alternative, that the loans cause undue hardship. On October 7, 2016, the Department filed a Proof of Claim asserting Mrs. Sheppard owed $15,310.73 for unpaid student loans. On December 5, 2016, the Department moved to dismiss the adversary proceeding, stating that the matter was not prudentially ripe. Mrs. Sheppard answered and the Department replied. As of this date, West Virginia Junior College has neither answered nor otherwise moved.

II.

  1. Governing Standard

As noted, the Department moves to dismiss pursuant to Rule 12(b)(6).Inasmuch as it argues lack of ripeness, however, the Department challenges the Court’s subject-matter jurisdiction. Accordingly, the Court analyzes the matter pursuant to Rule 12(b)(1), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b).

Rule 12(b)(1) provides for a dismissal if the court lacks subject-matter jurisdiction. The Court has statutory subject-matter jurisdiction under 28 U.S.C. § 1334(b). A bankruptcy court “may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11.” 28 U.S.C. § 157(b)(1). The Court “may hear and determine” cases and core proceedings “arising under” the Bankruptcy Code or “arising in” a case under the Code. § 157(b)(1). The determination of the dischargeability of a debt is specifically listed as a core proceeding under 28 U.S.C. § 157(b)(2)(I).

A defendant may challenge subject-matter jurisdiction facially or factually. Kerns v. U.S., 585 F.3d 187, 192 (4th Cir. 2009). A facial challenge asserts the allegations in the complaint are insufficient to establish subject-matter jurisdiction. Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir. 1999). This type of challenge involves the same procedural protections customarily available to a plaintiff under Rule 12(b)(6). Kerns, 585 F.3d at 192. In sum, “the facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction.” Id.

When a defendant asserts “that the jurisdictional allegations of the complaint [are] not true,” he is asserting a factual challenge. Id. (internal quotation marks omitted)(quoting Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir. 1982). When a challenge is factual, “the court may look beyond the pleadings and the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists.” Stahlman v. U.S., 995 F. Supp. 2d 446, 451 (D. Md. 2014). The presumption of truthfulness available under Rule 12(b)(6) does not apply. Kerns, 585 F.3d at 192.

Here, the Department asserts that the complaint fails to allege sufficient facts to support the exercise of subject matter jurisdiction. That is a facial challenge. The Court will thus treat as true the facts alleged in the complaint, along with affording Mrs. Sheppard the reasonable inferences flowing therefrom.

  1. Law and Analysis

The Department asserts that Mrs. Sheppard’s undue hardship challenge lacks prudential ripeness. It contends the dischargeability of a student loan does not ripen until at or near the time a Chapter 13 discharge is granted. Although a bankruptcy court is given statutory and adjudicatory subject-matter jurisdiction under 28 U.S.C. § 1334(b) and 28 U.S.C. § 157, ripeness involves constitutional and prudential subject-matter jurisdiction. U.S. Const. art. III, § 2, cl. 1. “Ripeness has two components: constitutional ripeness and prudential ripeness.” Educ. Credit Mgmt. Corp. v. Coleman, 560 F.3d 1000, 1004 (9th Cir. 2009).

  1. Constitutional Ripeness

For constitutional ripeness to exist, the matter presented must amount to a “case or controversy.” Babbitt v. UFW Nat’l Union, 442 U.S. 289, 298 (1979). This requires asking whether the “conflicting contentions of the parties . . . present real, substantial controversy between parties having adverse legal interests, a dispute definite and concrete, not hypothetical or abstract.” Id. (internal quotation marks omitted) (quoting Railway Mail Ass’n v. Corsi, 326 U.S. 88 (1945)). Precedent indicates the constitutional ripeness of a student loan discharge action arises when the debtor files for bankruptcy. Cassim v. Educ. Credit Mgmt. Corp., 597 F.3d 432440 (6th Cir. 2010); Coleman, 560 F.3d at 1005. Our court of appeals has not spoken directly to the point, indicating instead that it would “decline- to adopt a hard and fast rule which would preclude bankruptcy courts from ever entertaining a proceeding to discharge student loan obligations until at or near the time the debtor has completed payments under a confirmed Chapter 13 plan.” Ekenasi v. Educ. Res. Inst., 325 F.3d 541, 547 (4th Cir. 2003).

Inasmuch as Mrs. Sheppard has sought relief under Chapter 13, her dischargeability suit is constitutionally ripe.

  1. Prudential Ripeness

As noted, a matter that is constitutionally ripe must also be prudentially ripe. The Supreme Court has held that “[p]roblems of prematurity and abstractness may well present ‘insuperable obstacles’ to the exercise of the Court’s jurisdiction, even though that jurisdiction is technically present.” Socialist Labor Party v. Gilligan, 406 U.S. 583, 588 (1972) (quoting Rescue Army v. Mun. Ct. of L.A., 331 U.S. 549 (1947)). On the precise question respecting prudential ripeness of a student loan dischargeability action, the United States Court of Appeals for the Eighth Circuit concluded prudential ripeness is absent until “relatively close” to the actual date that a Chapter 13 discharge is granted. Bender v. Educ. Credit Mgmt. Corp., 368 F.3d 846, 848 (8th Cir. 2004).

Our court of appeals appears to tip toward this position. It has concluded that the matter would have to qualify as an “exceptional circumstance” to be considered ripe prior to discharge: it will be most difficult for a debtor, who has advanced his education at the expense of government-guaranteed loans, to prove with the requisite certainty that the repayment of his student loan obligations will be an “undue burden” on him during a significant portion of the repayment period of the student loans when the debtor chooses to make that claim far in advance of the expected completion date of his plan. Ekenasi, 325 F.3d at 547.

In Ekenasi, the debtor claimed undue hardship when attempting to discharge his student loan obligations. Id. at 544. At the time that the adversary proceeding was filed, the debtor’s Chapter 13 plan had been confirmed for three months. Id. The bankruptcy court granted the debtor a complete discharge of his student loan obligations because the debtor was unlikely to increase his income or his disposable income after the plan’s conclusion. Id. On appeal, the district court affirmed. Id. The court of appeals disagreed, concluding that a dischargeability determination so early in the case required too much speculation. Id. at 548. Although the plan had been confirmed, completion was two years away. Id. Our court of appeals noted that when the plan was scheduled to conclude, three of the debtor’s six children would no longer be dependents. Id. at 549. Further, the debtor’s obligations to general unsecured creditors would be discharged in their entirety. Id. These changes would have potentially increased the debtor’s disposable income during the life of the plan, which would have relieved any undue hardship. Id.

Here, Mrs. Sheppard asserts that the repayment of her student loans creates an undue hardship because both she and her husband are deemed permanently disabled by the Social Security Administration. Because of their disabilities, the Sheppards contend that their circumstances will not change in the future (Id.). Although their incomes appear to be fixed, discharging Mrs. Sheppard’s student loans would still require a great deal of speculation on the Court’s part. Unlike the Chapter 13 plan in Ekenasi, Mrs. Sheppard’s Chapter 13 plan has not been confirmed. Further, her proposed plan is unfeasible because her plan payments greatly outweigh her disposable income. Allowing this adversary proceeding to continue would require the Court to speculate not only regarding the confirmability of the proposed plan, but also that the Sheppards will obtain a Chapter 13 discharge at the plan’s conclusion, which is at least five years away. Assuming a modified plan produced a feasible path forward, at least one bankruptcy court has astutely observed as follows:

Roughly 60% of Chapter 13 cases in this district do not result in a discharge, usually because of the debtor’s inability to make the required plan payments for the requisite three or five years. Given the strong possibility that a Chapter 13 case will be dismissed long before discharge can occur, a determination of undue hardship early in the case would likely be rendered unnecessary and irrelevant. In re Brantley, No. 15-81516-WRS, 2016 WL 3003429, at *3 (Bankr. M.D. Ala. May 17, 2016)

In view of this necessary speculation, the Court concludes that Mrs. Sheppard’s adversary proceeding is premature and outside the boundaries of prudential ripeness.1 Additionally, the Court concludes that dismissal does not work a sustainable hardship on the parties. See In re Brantley, at *4 (While Brantley would understandably want to know whether the Chapter 13 payments she is making will obtain a discharge of her student loans, the Defendants have an equally compelling interest in avoiding potentially unnecessary litigation. Also, the Court is disinclined to keep the proceeding open in perpetual stasis, draining the Court’s resources, for five years while Brantley completes her plan payments.”).

III.

Based upon the foregoing discussion, it is, accordingly, ORDERED that the United States Department of Education’s Motion to Dismiss be, and is hereby, GRANTED.

***

The Court isn’t kicking the ball down the road – it makes a very logical and reasonable statement: why look into the dischargeability of a debt until we are more confident these Debtors will even receive a discharge? Who knows what will happen in the intervening years? As of April 2018, the Debtors are still paying into their Chapter 13 Plan … two-plus years to go!

But I worry about this issue – I have seen many objections to dischargeability of student loans fall apart in a Chapter 13. “If the Debtor can afford five years of monthly plan payments why can’t they afford monthly student loan payments afterwards?”

Heads, they win; Tails, you lose…

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

 

Tweeking your mortgage in a Chapter 13 … part 2.

Read a summary of this case.

 

From the United States Bankruptcy Court for the Northern District of Illinois

In re: ANDRES HUERAMO, Case No. 16-32350

Opinion by the Honorable Judge Deborah L. Thorne

 

Andres Hueramo (“Debtor”) is attempting to save his home (the “Residence”) through confirmation of a chapter 13 plan. Both the Debtor and the lender, Byline Bank agree that the Residence’s value is far less than the remaining balance owed to Byline. Debtor has asked this court to determine the value of the Residence, through the adversary case and through his proposed plan, to modify Byline’s secured claim. Byline has filed a motion to modify the automatic stay and has objected to the proposed plan.

For the reasons stated below, the court holds that the Debtor’s attempt to defeat the prohibition against modification of the secured claim on the Residence is not authorized under the Bankruptcy Code. Both the Debtor and Byline agree that there is no equity in the Residence if the secured claim is not reduced and for this reason, the motion to modify the automatic stay is granted.

  1. Jurisdiction

The court has subject matter jurisdiction to decide this matter under 28 U.S.C. § 1334(b) and the Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. A motion to modify the automatic stay under section 362 and plan confirmation are core proceedings under 28 U.S.C. § 157(b)(2)(A), (G) and (O).

  1. Background & Procedural History

The Debtor is a co-owner with his wife of the Residence located at 2503 S. 57th Court, Cicero, Illinois 60804. Debtor previously had an interest in an investment commercial property located at 2346 S. Central Avenue, Cicero, Illinois 60604 (the “Commercial Property”). The note held by Byline1 was originally secured by both the Residence and the Commercial Property.

Prepetition, the Commercial Property was foreclosed upon by Byline or sold and is no longer collateral for the Byline note. The loan secured by the Residence matured on December 22, 2013 and Byline proceeded with a state court foreclosure. On August 13, 2015, the state court entered

a Judgment of Foreclosure and Sale in the amount of $392,810.49. Debtor’s right to redemption expired on November 13, 2015 and a judicial sale was scheduled.

On October 11, 2016, the date scheduled for the judicial sale, Debtor filed for relief under chapter 13. The Debtor has proposed a chapter 13 plan which modifies the secured claim of Byline to $140,0002 and proposes to pay the secured portion of the claim with a balloon payment during the last month of the plan. Byline filed a motion to modify the stay and objects to the proposed plan for a number of reasons, including that the plan violates the anti-modification prohibition of section 1322(b)(2) of the Bankruptcy Code and further that the payments to be made to Byline are not regular, equal monthly payments as required under section 1325(a)(5)((B)(iii)(1).

  1. Discussion

The crux of the matter before the court is whether the Debtor can modify the rights of Byline in the Debtor’s Residence. If the Debtor cannot modify the rights of Byline, the value of the Residence is not relevant as the Debtor’s proposed plan cannot be confirmed. The Debtor, while not disputing that the 2503 S. 57th Court property is the Debtor’s Residence, is trying to distinguish the prohibition against modifying the rights of a lender in a debtor’s primary residence contained in section 1322(b)(2). The Debtor asserts that section 1322(b)(2) does not apply for two reasons: (1) at the time the loan was made, it was secured by the Residence and the Commercial Property, and (2) the loan documents include as security, personal property and, therefore, the loan is collateralized by more than just the primary residence.

Byline counters this argument by asserting that the Petition Date is the relevant date to make the determination of whether the anti-modification provisions of section 1322(b)(2) apply.

Using the Petition Date eliminates the argument that the original collateral, which included the Commercial Property, allows the strip-down of Byline’s lien on the Residence. Byline further argues that the inclusion of incidental personal property in its security interest cannot be used to circumvent the anti-modification prohibition of section 1322(b)(2).

  1. Section 1322(b)(2)

Section 1322(b)(2) prohibits the modification of “a claim secured only by a security interest in real property that is the debtor’s principal residence….” 11 U.S.C. § 1322(b)(2). A security interest, however, that is in property other than the debtor’s principal residence may be subject to modification. Thus, the issue in this case is whether the Byline loan is a “commercial loan” and subject to modification or whether the loan only includes Debtor’s primary residence.

If this court uses the Petition Date as the proper time to determine the nature of the loan, the claim may not be modified under Section 1322(b)(2), while it may be modified if the loan origination date is controlling.

A majority of courts have determined that the petition date is the appropriate date for determining whether the anti-modification provision of § 1322(b)(2) applies to a claim. In re Landry, 462 B.R. 317 (Bankr. D. Mas.2011). see also In re Benafel, 461 B.R. 581, (B.A.P. 9th Cir.2011) (holding that the determination of whether the debtor is using real property as his principal residence is made as of the petition date for the purposes of section 1322(b)(2)); In re Abdelgadir, 455 B.R. 896, (B.A.P. 9th Cir.2011) (same but construing section 1123(b)(5)); In re Leigh, 307 B.R. 324, 331–32 (Bankr.D.Mass.2004) (whether claim is secured by collateral in addition to debtor’s principal residence is determined as of the petition date). This court agrees.

On the Petition Date, the Debtor retained only the Residence as Byline’s lien had been released against the Commercial Property through a foreclosure. The fact that the Commercial Property was no longer part of the collateral base leaves the Debtor squarely in the prohibition of the anti-modification under section 1322(b)(2). In re Amerson, 143 B.R. 413 (Bankr. S.D. Miss. 1992) (release of lien against chapter 13 debtor’s car prior to the filing of the petition left only the debtor’s primary residence as security for the loan and thus, anti-modification benefit existed under section 1322(b)(2)).

Finally, Debtor contends that because the mortgage also grants a security interest in personal property related to the Residence, the anti-modification provision of section 1322(b)(2) is defeated. While the Bankruptcy Code is clear that if a security interest was granted in property other than the debtor’s residence, section 1322(b)(2) might not apply, but if the security interest granted as part of a mortgage in the debtor’s principal residence also grants an interest in rents or other “incidental property”, the anti-modification provision is not impacted.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) applicable to bankruptcy cases filed on or after October 17, 2005 added the following definitions:

(13A) The term “debtor’s principal residence”—

(A) Means a residential structure, if used as the principal residence by the debtor, including incidental property, without regard to whether the structure is attached to real property . . .

BAPCPA also added section 101(27B) which defines “incidental property”:

(27B) The term “incidental property” means, with respect to a debtor’s principal residence—

(A)Property commonly conveyed with a principal residence in the area where the real property is located;

(B) All easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds; and (C) All replacements or additions.

Thus, under the express terms of these provisions added by BAPCPA, it appears that a lender does not lose its section 1322(b)(2) protection by taking a security interest in any of the listed “incidental property.” In re Inglis, 481 B.R. 480, 482-3 (Bankr. S.D. Ind. 2012). The Debtor has not pointed to any personal property other than “incidental property” that would otherwise destroy the anti-modification provision of section 1322(b)(2). Thus, the Debtor may not modify the rights of Byline. The Debtor’s proposed plan is not confirmable.

  1. Modification of the Stay

Section 362 states that the automatic stay may be modified for property when the debtor does not have any equity in the property and the property is not necessary for reorganization. 11 U.S.C. Section 362(d). Both parties acknowledge that Debtor holds no equity in the property.

The only question remains is whether the property is necessary for reorganization. In order to successfully demonstrate that a successful reorganization is possible, the Debtor must cure the arrearage owed to Byline and the Debtor has not done so in his proposed plan. See In re Stincic, 559 B.R. 890 (Bankr. W.D. Wis. 2016)(holding that debtor failed to satisfy burden of showing that property was necessary to any reorganization reasonably in prospect, where debtor did not have the ability, based on his earnings, to cure his more than $56,000 arrearage on mortgage debt even over the full term of 60-month plan.)

In this case, Debtor has not satisfied his burden. The only method of potential reorganization presented to the court was by modifying Byline Bank’s secured claim. As discussed above, Debtor is not permitted to avoid the anti-modification provisions of Section 1322(b)(2). The court remains unconvinced that there is a reasonable possibility that Debtor can successfully reorganize. As a result, Byline Bank’s motion to modify the stay is granted. Byline has also requested that this court dismiss the case.

  1. Conclusion

Confirmation of the proposed plan is denied for the reasons discussed above. Byline’s Motion to Modify the Automatic Stay is granted. A status on the future of this case is continued to March 1, 2017 at 10:30.

Deborah L. Thorne

United States Bankruptcy Judge

Dated: February 9, 2017

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

 

Tweeking your mortgage in a Chapter 13 … part one

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

***

Very rarely can you manipulate your home mortgage in a Chapter 13 – that is, you can change the payment terms, interest or amount owed.

One of the criteria is if the home mortgage includes collateral OTHER than your home – another piece of real or personal property for example.

In this case we have a debtor trying to change his home mortgage because at one time the debt was also tied in with commercial real estate and business (non-real) property.

A bankruptcy attorney needs to keep track of these opinions if his clients wish to affect his mortgage payments in a Chapter 13. Especially as this case is from northern Illinois, the opinion and ruling here will be strongly considered in our District!

If a client seeks the advice of a bankruptcy attorney and it is similar to the facts in this case – he or she may face the same result!

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Bankr ND Illinois: Chapter 13 Debtor could Not Modify rights of Secured Creditor in Primary Residence, even though Mortgage also gave creditor Security Interest in Personal Property

The crux of the matter before the court is whether the Debtor can modify the rights of Byline in the Debtor’s Residence.

If the Debtor cannot modify the rights of Byline, the value of the Residence is not relevant as the Debtor’s proposed plan cannot be confirmed. The Debtor, while not disputing that the is the his residence, is trying to distinguish the prohibition against modifying the rights of a lender in a debtor’s primary residence contained in section 1322(b)(2).

The Debtor asserts that section 1322(b)(2) does not apply for two reasons: (1) at the time the loan was made, it was secured by the Residence and the Commercial Property, and (2) the loan documents include as security, personal property and, therefore, the loan is collateralized by more than just the primary residence.

A majority of courts have determined that the petition date is the appropriate date for determining whether the anti-modification provision of § 1322(b)(2) applies to a claim.

On the Petition Date, the Debtor retained only the Residence as Byline’s lien had been released against the Commercial Property through a foreclosure. The fact that the Commercial Property was no longer part of the collateral base leaves the Debtor squarely in the prohibition of the anti-modification under section 1322(b)(2).

Finally, Debtor contends that because the mortgage also grants a security interest in personal property related to the Residence, the anti-modification provision of section 1322(b)(2) is defeated. While the Bankruptcy Code is clear that if a security interest was granted in property other than the debtor’s residence, section 1322(b)(2) might not apply, but if the security interest granted as part of a mortgage in the debtor’s principal residence also grants an interest in rents or other “incidental property”, the anti-modification provision is not impacted.

Thus, under the express terms of these provisions added by BAPCPA, it appears that a lender does not lose its section 1322(b)(2) protection by taking a security interest in any of the listed “incidental property.” In re Inglis, 481 B.R. 480, 482-3 (Bankr. S.D. Ind. 2012). The Debtor has not pointed to any personal property other than “incidental property” that would otherwise destroy the anti-modification provision of section 1322(b)(2). Thus, the Debtor may not modify the rights of Byline. The Debtor’s proposed plan is not confirmable.

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Read the entire opinion here.

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About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Derivative Standing: going where Trustees fear to tread!

As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

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A Court could Grant Chapter 13 Debtor Derivative Standing to Pursue Preferential Avoidance Action that would Benefit Estate where Trustee is Unwilling to Pursue Claim

The Debtor does not have $12,000 and his only recourse is to ask the court for permission to bring the 547 action to avoid preferential transfer himself.

The Bankruptcy Code is clear that chapter 13 trustees are granted avoidance powers in the first instance. Only when the trustee is unwilling to bring the action is it appropriate to consider granting derivative standing.

If the trustee is unwilling to pursue the claim, the Debtor will be granted derivative standing to bring the claim. If the trustee intends to bring the claim, derivative standing will be denied.

IN RE ROTHENBUSH (Bankr MD Fla.)

***

Here a bankruptcy attorney should tread carefully – asking for derivative standing is basically telling the Court the Trustee is not doing his or her job! Hopefully both the Trustee and the Court will understand!

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

 

Ponzi Schemes and Fraudulent Transfers: the Ivey-First Citizens case

 

Click here for a summary of this opinion.

 

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Case No. 15-2209

In Re: JAMES EDWARDS WHITLEY, Debtor.

———————————

CHARLES M. IVEY, III, Chapter 7 Trustee for the Estate of James Edwards Whitley, Plaintiff – Appellant,

v.

FIRST CITIZENS BANK & TRUST COMPANY, Defendant – Appellee.

Appeal from the United States District Court for the Middle District of North Carolina, at

Greensboro. William L. Osteen, Jr., Chief District Judge.

Argued: October 26, 2016 Decided: January 31, 2017

Before GREGORY, Chief Judge, WYNN, Circuit Judge, and DAVIS, Senior Circuit Judge.

Affirmed by published opinion. Chief Judge Gregory wrote the opinion, in which Judge Wynn and Senior Judge Davis joined.

GREGORY, Chief Judge:

This appeal is from an adversary proceeding in the bankruptcy of debtor James Edwards Whitley. Charles M. Ivey III, the Chapter 7 trustee for Whitley’s estate, appeals the district court judgment affirming the bankruptcy court’s award of summary judgment for First Citizens Bank and Trust Company (“First Citizens Bank” or “the Bank”) on the trustee’s claim that certain deposits and wire transfers to Whitley’s personal checking account at First Citizens Bank are avoidable as fraudulent transfers.

We find that the transactions at issue do not constitute transfers within the meaning of the Bankruptcy Code, and we therefore affirm.

I.

This case arises out of Whitley’s bankruptcy, which in turn stems from Whitley’s Ponzi scheme wherein he defrauded his friends, family, and acquaintances out of millions of dollars under the guise of investing their money in a purchase order factoring contract business. The details of Whitley’s fraudulent scheme are recounted in our earlier opinion affirming his criminal sentence for wire fraud and money laundering. See United States v. Whitley, 544 F. App’x 154 (4th Cir. 2013). As we explained there, a “purchase order factoring contract” is needed when a supplier requires that a buyer pay for goods by cash on delivery, but the buyer wants to purchase the goods on 30 to 60 day terms. The purchase order contractor agrees to pay the supplier upon delivery of the goods, which enables the buyer to delay payment for a specified period of time. Id. at 155 n.1. Whitley did not invest any of his victims’ funds in such a business; he instead spent their funds both to further his Ponzi scheme and for his own personal use. Id. at 156.

This scheme unraveled in late 2009 when Whitley was unable to secure additional funds to continue his fraudulent operations.

In early 2010, a group of eight individual creditors filed with the bankruptcy court an involuntary petition against Whitley for relief pursuant to 11 U.S.C. § 303. The petition was granted on March 30, 2010. In 2012, after more than two years of bankruptcy proceedings and Whitley’s conviction for wire fraud and money laundering, the trustee filed a complaint on behalf of the bankruptcy estate against First Citizens Bank, where Whitley had a personal checking account in his name. Whitley had used this account to deposit funds, receive wire transfers, and write checks as part of his fraudulent scheme in the two years preceding the filing of the involuntary bankruptcy petition. Administrative Record (“A.R.”) 482. In the complaint, the trustee alleged, among other things, * that certain deposits and wire transfers to Whitley’s account, including personal and cashier’s checks and wire transfers from Whitley’s “investors,” constituted transfers from Whitley to the Bank that were made with the actual intent to hinder, delay, or defraud creditors, and that they were therefore avoidable as fraudulent transfers under 11 U.S.C. § 548(a)(1)(A). Id.

*The bankruptcy court granted the Bank’s motion to dismiss the trustee’s other claims, and the trustee did not appeal the dismissal of those claims.

The bankruptcy court granted summary judgment for First Citizens Bank on the grounds that although the transactions were transfers from Whitley to the Bank, those transfers neither diminished the bankruptcy estate nor placed the funds beyond the creditors’ reach, and they were therefore not avoidable as fraudulent transfers. The district court affirmed on the same grounds. The trustee timely appealed to this Court.

II.

We review de novo the bankruptcy court’s and the district court’s legal conclusions and review for clear error the bankruptcy court’s factual findings. In re Taneja, 743 F.3d 423, 429 (4th Cir. 2014). Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). And “[i]n reviewing the grant of summary judgment, we can affirm on any legal ground supported by the record and are not limited to the grounds relied on by the district court.” Jackson v. Kimel, 992 F.2d 1318, 1322 (4th Cir. 1993).

A.

The trustee alleges that the transactions at issue should be avoided as fraudulent transfers made from Whitley to the Bank with the actual intent to hinder, delay, or defraud Whitley’s creditors. The trustee argues that the bankruptcy and district courts erred by requiring that the transactions diminish the bankruptcy estate in order to qualify as fraudulent transfers under § 548(a)(1)(A). Where actual fraudulent intent is present, the trustee contends, there is no requirement that the transactions diminish or otherwise move property away from the bankruptcy estate.

First Citizens Bank counters that the bankruptcy and district courts properly required that the transactions diminish the bankruptcy estate. The Bank points out that § 548(a)(1)(A) requires that an avoidable transfer be one “of an interest of the debtor in property,” which, the Bank maintains, federal courts have interpreted to mean that the property would have been in the estate if not for the transfer. The Bank also emphasizes the underlying policy of fraudulent transfer law, which is to prevent depletion of the estate. Here, where Whitley deposited checks and received wire transfers in his personal checking account, the Bank argues that he neither transferred his interest in the funds to the Bank nor diminished the bankruptcy estate, since Whitley at all times had access to and control of the funds.

We asked the parties to address at oral argument the significant threshold question of whether the transactions at issue are even transfers within the meaning of § 101(54) of the Bankruptcy Code, such that we might proceed to consider whether the transactions are avoidable transfers under § 548(a)(1)(A). The trustee argued that the transactions did constitute transfers under § 101(54)’s broad definition, which includes any “dispos[al] of or parting with [] property.” The trustee contended that depositing and accepting funds into a bank account as Whitley did here constitutes parting with property under § 101(54) because of the Bank’s access to and interest in the funds. First Citizens Bank responded that no such parting with property occurred. It argued that there was no change to Whitley’s rights and interests in the property after the deposits and wire transfers because Whitley still had access to his account, he could withdraw the funds at will, and any funds in the account were available to the bankruptcy estate.

We now find that the transactions at issue do not constitute transfers within the meaning of the Bankruptcy Code. Because our resolution of this threshold question disposes of the appeal, we need not reach the parties’ other arguments.

B.

Under 11 U.S.C. § 548(a)(1)(A), a “trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily [] made such transfer . . . with actual intent to hinder, delay, or defraud any” creditor. The Bankruptcy Code defines “transfer,” in pertinent part, as any “mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with[] (i) property; or (ii) an interest in property.” Id. § 101(54)(D). The threshold question here is whether the transactions at issue are transfers within the meaning of § 101(54), such that they might be considered under § 548.

Congress sought to make “[t]he definition of transfer” in the Bankruptcy Code “as broad as possible,” drafting it to include “any transfer of an interest in property,” including “[a] deposit in a bank account or similar account.” S. Rep. No. 95-989, at 27 (1978) (stating also that “any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody, and control are interests in property”). The Senate Report did not, however, distinguish between different types of deposits; it merely articulated the general principle that “transfer” is meant to encompass an array of transactions. Courts are thus divided on whether § 101(54)’s definition of “transfer,” even interpreted as broadly as Congress intended, includes a debtor’s deposits in his own unrestricted bank account in the regular course of business.

Some courts have found that these types of transactions do constitute “transfers” within the meaning of § 101(54). For instance, in In re Schafer, 294 B.R. 126 (N.D. Cal. 2003), where the debtor opened a new account and deposited his funds there because a creditor had attached his old account, the court found that “[t]here is no ambiguity around the definition of transfer, deposits in bank accounts clearly qualify.” Id. at 132. And in Meoli v. Huntington Nat’l Bank, No. 1:12-CV-1113, 2015 WL 5690953, at *9-10 (W.D. Mich. Sept. 28, 2015), the court found that a customer’s deposits in his bank account were transfers and that the bank was the immediate transferee as a result of the deposits. See also Redmond v. Tuttle, 698 F.2d 414, 417-18, 417 n.8 (10th Cir. 1983) (finding that deposits in debtors’ checking account were transfers within the meaning of § 101(54)).

These courts looked to the Senate Report’s statement that the definition of “transfer” should be read as broadly as possible, as well as the broad language of § 101(54) itself.

But courts have just as strongly concluded that deposits by a debtor into his own unrestricted checking account in the regular course of business do not constitute “transfers” within the meaning of § 101(54). The Fourth Circuit said precisely that almost ninety years ago: An ordinary deposit in a bank, however, is not a “transfer” . . . . It . . . results in substituting for currency, bank notes, checks, drafts, and other bankable items a corresponding credit with the bank, which may be checked against, and which provides the depositor with the medium of exchange in universal use in the transaction of business. . . . [I]f the deposit is in reality a deposit, made in good faith as such, subject to the withdrawal of the depositor, and not made as a cloak for a payment or other forbidden transaction, it is not a transfer within the meaning of the Bankruptcy Act . . . . Citizens’ Nat. Bank of Gastonia, N.C. v. Lineberger, 45 F.2d 522, 527-28 (4th Cir. 1930); see also Bank of Commerce & Trs. v. Hatcher, 50 F.2d 719, 720 (4th Cir. 1931) (same) (citing Lineberger, 45 F.2d at 527). The Lineberger and Hatcher courts relied heavily on language from the Supreme Court, which had previously stated that “[i]t cannot be doubted that, except under special circumstances, . . . a deposit of money upon general account with a bank creates the relation of debtor and creditor. . . . It creates an ordinary debt, not a privilege or right of a fiduciary character.” N.Y. Cty. Nat’l Bank v. Massey, 192 U.S. 138, 145 (1904). And this “ordinary debt,” with the Bank’s corresponding obligation to make the funds available at the depositor’s will, does not change the debtor’s interest in the funds. See id. Courts have interpreted Massey to say that this type of transaction therefore does not constitute a transfer within the meaning of the Bankruptcy Code. See, e.g., In re Consol. Pioneer Mortg. Entities, 211 B.R. 704, 714-15 (S.D. Cal. 1997), aff’d in part, rev’d in part on other grounds, 166 F.3d 342 (9th Cir. 1999).

Though Lineberger, Hatcher, and Massey all predate the current Bankruptcy Code, courts continue to rely on these cases in similarly finding that certain deposits do not constitute transfers under § 101(54). In Consolidated Pioneer Mortgage, the court found that “[n]otwithstanding [§ 101(54)’s] broad definition [of ‘transfer’], it is well settled that a customer’s bank deposits into its own unrestricted checking account are not transfers within the meaning of the Bankruptcy Code.” Id. at 714 (citing Massey, 192 U.S. at 145). And relying on the passage from Lineberger quoted above, the court added, “Although the customer ‘disposes of’ or ‘parts with’ the deposited items in exchange for the credit, this ‘parting’ is not a transfer for bankruptcy purposes because, in effect, the assets available to the customer have not changed.” Id. at 714-15. And at least one bankruptcy court in this Circuit has similarly applied Lineberger to determine that these types of transactions are not transfers under § 101(54). See In re Rood, 459 B.R. 581, 606 (Bankr. D. Md. 2011), aff’d, 482 B.R. 132 (D. Md. 2012), aff’d sub nom. S. Mgmt. Corp. Ret. Trust v. Rood, 532 F. App’x 370 (4th Cir. 2013), and aff’d sub nom. S. Mgmt. Corp. Ret. Trust v. Jewell, 533 F. App’x 228 (4th Cir. 2013) (“[W]ith respect to those ‘transfers’ that were actually deposits of funds into accounts controlled by [the debtor], the court observes that ‘an ordinary deposit in a bank . . . is not a “transfer.”’” (quoting Lineberger, 45 F.2d at 527)). According to these courts, such transactions do not change the debtor’s possession, custody, or control of the property because the transactions result in only a substitution of the property for a corresponding credit—a credit that may be redeemed by the debtor at any time.

Other bankruptcy and circuit courts, considering the issue both before and after the enactment of the current Bankruptcy Code, agree. See In re Prescott, 805 F.2d 719, 729 (7th Cir. 1986) (“Deposits into bank accounts clearly can be transfers under the new Bankruptcy Code. . . . However, . . . to the extent a deposit is made into an unrestricted checking account, in the regular course of business and withdrawable at the depositor’s will, it is not avoidable by the trustee . . . .”) (citing Katz v. First Nat’l Bank of Glen Head, 568 F.2d 964, 969 (2d Cir. 1977)); Katz, 568 F.2d at 969 (“It is well settled that deposits in an unrestricted checking account, made in the regular course of business, do not constitute transfers within the meaning of the Bankruptcy Act.”); In re Tonyan Const. Co., Inc., 28 B.R. 714, 728-29 (Bankr. N.D. Ill. 1983) (stating that “[o]rdinarily, a deposit in an unrestricted checking account does not constitute a parting with property, because it ‘results in substituting for currency, bank notes, checks, drafts, and other bankable items a corresponding credit with the bank, which may be checked against’” (quoting Lineberger, 45 F.2d at 527)); In re Perry, 336 F. Supp. 420, 425 (D.S.C. 1972) (finding that “deposits and subsequent set-offs are not transfers” because they “result in a substitution of credit for various forms of commercial paper or currency” and “are withdrawable at the will of the depositor”).

While recognizing that some courts read § 101(54) more broadly, we are persuaded by the precedent in this Circuit and our sister circuits that the better interpretation of “transfer” does not include a debtor’s regular deposits into his own unrestricted checking account—a specific circumstance not explicitly contemplated by the Senate Report. When Whitley made deposits and accepted wire transfers into his checking account at First Citizens Bank, he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will. Indeed, any funds in the account were at all times part of the bankruptcy estate. The Bank’s mere maintenance of Whitley’s checking account does not suffice to make deposits and wire transfers in that account “transfers” from Whitley to the Bank, and we decline to read § 101(54) to say otherwise.

We express no opinion on whether other types of deposits, such as those made to restricted checking accounts, would constitute transfers under § 101(54). Our holding is limited to the narrow circumstances presented here: when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business, he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite “disposing of” or “parting with” property has not occurred; there has not been a “transfer” within the meaning of § 101(54).

Contrary to the bankruptcy and district courts, we find that the deposits and wire transfers at issue here are not § 101(54) “transfers” from Whitley to First Citizens Bank. The transactions therefore cannot be avoidable transfers under § 548(a). Accordingly, summary judgment for First Citizens Bank is proper on this narrower ground.

III.

For all of these reasons, the district court’s judgment is AFFIRMED.

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

Are Ponzi Schemes A Fraudulent Transfer in Bankruptcy? “The Answer May Surprise You!”

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is a case where the bank also suffers from its customer’s Ponzi schemes … but at the hands of a bankruptcy Trustee!

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4th Cir: Wire Transfers to Debtor’s Checking Account were Not “Transfers” under the Bankruptcy Code and therefore were not avoidable under Sect. 548

This appeal is from an adversary proceeding in the bankruptcy of debtor James Edwards Whitley. Charles M. Ivey III, the Chapter 7 trustee for Whitley’s estate, appeals the district court judgment affirming the bankruptcy court’s award of summary judgment for First Citizens Bank and Trust Company (“First Citizens Bank” or “the Bank”)

This case arises out of Whitley’s bankruptcy, which in turn stems from Whitley’s Ponzi scheme wherein he defrauded his friends, family, and acquaintances out of millions of dollars under the guise of investing their money in a purchase order factoring contract business. This scheme unraveled in late 2009 when Whitley was unable to secure additional funds to continue his fraudulent operations.

In early 2010, a group of eight individual creditors filed with the bankruptcy court an involuntary petition against Whitley for relief pursuant to 11 U.S.C. § 303. The petition was granted on March 30, 2010. In 2012, after more than two years of bankruptcy proceedings and Whitley’s conviction for wire fraud and money laundering, the trustee filed a complaint on behalf of the bankruptcy estate against First Citizens Bank, where Whitley had a personal checking account in his name. Whitley had used this account to deposit funds, receive wire transfers, and write checks as part of his fraudulent scheme in the two years preceding the filing of the involuntary bankruptcy petition. Administrative Record (“A.R.”) 482. In the complaint, the trustee alleged, among other things, that certain deposits and wire transfers to Whitley’s account, including personal and cashier’s checks and wire transfers from Whitley’s “investors,” constituted transfers from Whitley to the Bank that were made with the actual intent to hinder, delay, or defraud creditors, and that they were therefore avoidable as fraudulent transfers under 11 U.S.C. § 548(a)(1)(A). Id.

The bankruptcy court granted summary judgment for First Citizens Bank on the grounds that although the transactions were transfers from Whitley to the Bank, those transfers neither diminished the bankruptcy estate nor placed the funds beyond the creditors’ reach, and they were therefore not avoidable as fraudulent transfers. The district court affirmed on the same grounds. The trustee timely appealed to this Court.

Contrary to the bankruptcy and district courts, we find that the deposits and wire transfers at issue here are not § 101(54) “transfers” from Whitley to First Citizens Bank. The transactions therefore cannot be avoidable transfers under § 548(a). Accordingly, summary judgment for First Citizens Bank is proper on this narrower ground.

***

Click here to read the entire opinion.

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Venue Wish Upon a Star…

I am a bankruptcy attorney in Mount Vernon, IL and I occasionally speak with clients who have just moving to, or moving away from, Southern Illinois. They may own real estate, have bank accounts or earn income elsewhere.

Can they still file here? This case addresses that …

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Bankr D Puerto Rico: Venue for Bankruptcy Case (28 U.S.C. § 1408) Focuses on Debtor’s “Principal Assets” and their Location(s) in the 180-day period before filing of petition

IN RE: JELITZA AMAEZ ORTIZ Debtor, CASE NO. 15-05938; Chapter 13

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO

From February 27, 2017

OPINION AND ORDER

This case is before the court upon the Debtor’s Response to the Court’s Order to Show Cause, the Chapter 13 Trustee’s Position as to Debtor’s Response to Order to Show Cause In Compliance with Court Order, and the Debtor’s Opposition to Trustee’s Motion to Dismiss and/or Transfer of Venue Pursuant to FRBP 1014. The court, having reviewed the documents filed, having heard oral arguments from the parties, and the court being otherwise fully advised, for the reason set-forth below finds that venue is proper for administration of the instant bankruptcy case in the United States Bankruptcy Court for the District of Puerto Rico.

Procedural Background

On August 3, 2015, the Debtor filed a voluntary petition in the bankruptcy court for the District of Puerto Rico under the provisions of chapter 13 of the Bankruptcy Code. The Debtor’s schedules disclosed that on the date of filing of the voluntary petition the Debtor owned real and personal property located in both the District of Puerto Rico as well as in the State of Florida. The Debtor’s schedules also disclosed that on the date of filling of the voluntary petition the Debtor resided in the State of Florida and was employed in the State of Florida. On July 27, 2016, during a hearing on confirmation of Debtor’s amended Chapter 13 plan, the court, sua sponte, entered an Order to Show Cause for the Debtor to show cause as to why the instant proceeding should not be dismissed, without prejudice, for having been filed in a district not being the proper venue under 28 USC § 1408.

The Debtor grounds her response to the court’s Order to Show Cause on three arguments. First, the Debtor cites the First Circuit Bankruptcy Appellate Panel opinion in the case of In re Handel, 253 B.R. 308, 310 (B.A.P. 1st Cir. 2000), for the proposition that there is a strong presumption that the district selected by the Debtor is the proper venue and the party opposing such selection carries the burden of proof by the preponderance of the evidence. The Debtor concludes, based on the facts of this case, that the Trustee has failed to establish by a preponderance of the evidence that the District of Puerto Rico is not the proper venue for the prosecution of the Debtor’s Chapter 13 bankruptcy case. Id. Second, the Debtor relies on the case of In the Matter of Mid Atlantic Retail Group, Inc., 2008 WL 612287 (Bankr. M.D.N.C. 2008) for the assertion that a debtor may have more than one appropriate venue based upon more than one principal asset. The Debtor argues that because one of the Debtor’s two real properties is located in the District of Puerto Rico, the Debtor owns “principal assets” in Puerto Rico which lay proper venue in this District. Proper venue in the District of Puerto Rico is not-exclusive to “principal assets” being located and proper venue also existing in the State of Florida. The Debtor’s third argument is that because the Chapter 13 Trustee’s position, which concluded that the Debtor’s Chapter 13 case should be dismissed or transferred pursuant to FRBP 1014, is untimely because it was filed more than 420 days after the filing of the Debtor’s voluntary petition.

In response, the Chapter 13 Trustee concludes that “the District of Puerto Rico is not the proper venue for the administration of the case” and requests that “the case should be dismissed or transferred pursuant to the dispositions of Rule 1014(a)(2).” The Trustee premises his position on the argument that “only one district would have the location of debtor’s “principal assets,” and therefore only one choice option for venue.”  For three reasons the Trustee argues that the District of Puerto Rico is not the “one district” where the Debtor’s ‘principal assets’ are located. First, the Trustee argues that because the real property located in the District of Puerto Rico is allegedly not a “primary asset” of the Debtor; the Puerto Rico real property cannot be classified as a “principal asset” of the Debtor for venue purposes. Second, the Trustee alleges that because 53% of the Debtor’s assets are located in the state of Florida, as opposed to only 46% of the assets being located in the District of Puerto Rico, the assets located in Puerto Rico cannot to be considered the Debtor’s “principal assets” under Section 1408. The Trustee’s third argument is that because the Debtor has indicated an intent to surrender the real property located in Puerto Rico, the Puerto Rico real property cannot be determined to be a “principal asset.”

The parties thoroughly discussed their positions at a January 10, 2017 hearing. The issue before the court is whether, on the facts of this case, venue is proper for the instant case in the District of Puerto Rico. After considering the position of the parties, the court concludes that venue is proper in the Bankruptcy Court for the District of Puerto Rico for the administration of the instant bankruptcy case.

Jurisdiction

The court has jurisdiction pursuant to 28 U.S.C. §§ 157(b)(1) and 1334(b).

Applicable Law and Analysis

Venue in the filing of a bankruptcy case is controlled by the provisions of 28 U.S.C. § 1408. Section 1408 provides that “a case under title 11 may be commenced in the district court for the district—

(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or …”

The four tests of venue, “domicile, residence, principal place of business in the United States, and principal assets in the United States, are given in the alternative. Any of the four is jurisdictionally sufficient.” In re Gurley, 215 B.R. 703, 707-708 (Bankr. W.D. Tenn. 1997). The First Circuit BAP has declared that “[t]here is a presumption that the district where the bankruptcy petition is filed is the appropriate district for venue purposes. and the burden is on the party disputing venue to establish that position by a preponderance of the evidence.” See In re Handel, 253 B.R. 308, 310 (B.A.P. 1st Cir. 2000); see also, In re Honeycutt, 2012 WL 6681833, *2 (Bankr. E.D. N.C. 2012); see also, In re Acor, 510 B.R. 588, 592 (Bankr. W.D. Tenn. 2014) (“Venue is presumed to be proper in the district where a bankruptcy case is filed, and the burden of proving otherwise is on the party who has moved to transfer or dismiss the case.”). “The venue statute does not require that only the principal asset may support venue; rather, venue may be proper in a district where principal assets are located. Thus, a debtor may have more than one appropriate venue based upon more than one principal asset.” See In re Mid Atl. Retail Grp., Inc., No. 07-81745, 2008 WL 612287, at *3 (Bankr. M.D.N.C. Jan. 4, 2008), citing, In re Ross, 312 B.R. 879, 889 (Bankr.W. D. Tenn.2004). “[T]he court determines proper venue by reference to facts existing during the 180 days prior to the commencement of the case to determine the district of the debtor’s residence, domicile, principal place of business, or location of the person’s principal assets.” In re Handel, 253 B.R. 308 at 310, citing, In Micci v. Bank of New Haven, 188 B.R. 697, 699 (S.D.Fla.1995).

In the instant case, venue is appropriate in the District of Puerto Rico. The court agrees with the reasoning that “[a] debtor may have more than one appropriate venue based upon more than one principal asset.” See In re Mid Atl. Retail Grp., Inc., No. 07-81745, 2008 WL 612287, at *3 (Bankr. M.D.N.C. Jan. 4, 2008). Therefore, in cases where the Debtor has assets in multiple districts the inquiry for the court is to determine whether ‘principal assets’ are located in the district selected by the Debtor. Moreover, the assets to be considered are those assets owned by the Debtor during the 180 days prior to the commencement of the case. In this case, the Chapter 13 Trustee does not contest that the Debtor owned real property, bank accounts, accounts receivables, and an IRA account all located in District of Puerto Rico during the 180 days prior to the commencement of the case.

As the Chapter 13 Trustee acknowledges, these assets amount to approximately 46% of the Debtor’s estate, while the assets in Florida amount to 53%.

Therefore, the court finds that these assets, collectively, constitute “principal assets” of the Debtor which justify venue in the District of Puerto Rico.

The Trustee’s arguments fail to overcome the presumption that the venue selected by the Debtor, the District Court of Puerto Rico, is an inappropriate district for venue purposes. The Trustee invites the court to focus the inquiry only on the Debtor’s “primary asset.” The Trustee argues that the Debtor’s “primary asset” is the real property located in the State of Florida; not the assets located in the District of Puerto Rico. The “primary asset,” however, is not the term used by the venue statue. Rather, the statutory text of 28 U.S.C. § 1408 confirms that the court should focus the inquiry on the “principal assets” owned by the Debtor. See 28 U.S.C. § 1408. Additionally, the court disagrees with the Trustee’s argument that “only one district would have the location of the debtor’s “principal assets.” As recognized by the court in the Mid Atl. Retail Grp., Inc., supra, case “[a] debtor may have more than one appropriate venue based upon more than one principal asset.” See In re Mid Atl. Retail Grp., Inc., No. 07-81745, 2008 WL 612287, at *3 (Bankr. M.D.N.C. Jan. 4, 2008). The court also disagrees with the allegation that the real property located in the District of Puerto Rico, because the Debtor allegedly intends to surrender the same, should not be considered a “principal asset” in the venue inquiry. In determining which assets are to be considered for venue purposes, the court’s focus is on the assets owned by the debtor during the 180 prior to the commencement of the case. In this case, the Trustee concedes that the Debtor owned the real property located in the District of Puerto Rico, as well as other personal property, during the 180 days prior to the commencement of the case. Accordingly, the court will consider the Puerto Rico real property, irrespective of the Debtor’s alleged intent to surrender the same, in determining whether principal assets of the Debtor were located in the District of Puerto Rico.

Accordingly, this court finds that that the Bankruptcy Court for the District of Puerto Rico is the proper venue for the administration of the instant Chapter 13 case. Thus, the Chapter 13 Trustee’s request for the instant case to be dismissed or transferred pursuant to FRBP 1014(a)(2) is hereby denied.

Conclusion

For the reasons stated herein, the court finds that venue in the District of Puerto Rico is proper and the Chapter 13 Trustee’s request for the instant case to be dismissed or transferred pursuant to FRBP 1014(a)(2) is hereby denied.

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About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

 

A taxing problem …

Paying tax refunds to a Chapter 13 Trustee as part of a Chapter 13 Plan is an annual problem for bankruptcy attorneys.

As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

This is from the Northern District of Illinois which means it will be given closer consideration by the district in which I practice.

I found this paragraph from In Re: Crystal C. Morales, Case No. 16 21624 (ND IL) very interesting. Some Debtors in a Chapter 13 depend on their tax refund each year for certain annual expenses – such as real estate taxes. Although I advise my clients they must turn over their refunds – and they usually agree and understand – once the money is in hand …

This may be an interesting and – if allowed by the court – effective way to allow Debtors to keep their refunds.

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“(A Debtor) can fix the problem (of a large tax refund) by calculating their disposable income using a reasonable estimate of their actual tax liability instead of the amount withheld for taxes. Under Lanning, this estimate should almost always be based on the debtor’s past experience. The debtor should then divide her actual tax liability by 12 and deduct that number from CMI. The income left after the Debtor deducts the rest of her reasonable expenses is the minimum plan payment required under § 1325(b). If the debtor proposes to pay that amount, the Debtor need not pay future tax refunds to the trustee. The Debtor has fully complied with § 1325(b)(2).” In Re: Crystal C. Morales, Case No. 16 21624 (ND IL).

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In the Southern District of Illinois, we have one Chapter 13 Trustee, who allows Debtors to keep $750.00 (or double if a joint-filing) of their refunds. It works.

But for Debtors receiving larger refunds, this may be a good alternative!

***

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Turning over tax credits in a Chapter 13

Since today is officially Tax Day, I thought a case dealing with tax refunds and credits would be appropriate…

As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

This is from the Northern District of Illinois which means it will be given closer consideration by the district in which I practice.

It is interesting to read the Court addressing how the various Trustees in its district approaches tax refunds in a Chapter 13. Bankruptcy attorneys should keep track of their district’s Trustee’s procedures and be prepared to advise their clients as to what to expect!

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Crystal Morales, the debtor in this chapter 13 case, filed a motion to confirm her plan, that provided she will make monthly payments to the chapter 13 trustee of $400. The trustee objects to this plan because it does not require the debtor to pay what the trustee calls her tax “refund” as an additional plan payment each year. The trustee’s objection will be overruled.

The debtor receives an annual payment based on tax credits for low-income workers. She is not required to pay that income to the trustee. Instead, the debtor can offset that annual payment with expenses that she will incur throughout the year that are reasonably required to support herself and her two children.

The payment was not actually a refund of amounts the debtor had previously paid to the government for taxes but instead consisted of an earned income credit of $3,350, a child tax credit of $1,000, and an education credit of $1,000.

The trustee contends that the definition of “current monthly income” (“CMI”) in §1325(b)(2) of the Bankruptcy Code requires this result because it does not exclude income received through tax credits. She therefore asserts that the entire lump sum payment that the debtor expects to receive is “projected disposable income” that must be sent to the trustee each year as an additional plan payment. In the trustee’s view, every chapter 13 debtor who does not pay 100% of unsecured claims must turn over to the trustee all tax refunds received during the course of the plan as additional plan payments.

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS

In Re: Crystal C. Morales, Case No. 16 B 21624

MEMORANDUM OPINION

  1. Background

The debtor is self-employed. She earns $1,000 per month and receives $500 per month from food assistance programs to support herself and her two children. She received an income tax “refund” of $5,350 for the 2015 tax year.

The trustee’s position is not correct. Under § 1325(b), debtors have choices regarding how to deal with expected tax refunds. They may agree to turn over tax refunds as a shortcut to eliminate the need to determine a reasonable tax expense to deduct from CMI. Or they may deduct from their CMI a reasonable estimate of their actual tax expense. If debtors estimate their tax liability properly at the time of confirmation, they need not pay tax refunds to the trustee.

Or in cases like this – in which the “refund” is generated from tax credits to low-income workers – debtors may prorate the expected “refund” over 12 months, thereby increasing their CMI by 1/12 of the expected annual payment. They may then offset the increase with reasonable expenses that accumulate over the course of the year. If the full expected “refund” is offset, debtors need not pay any additional amount to the trustee beyond their regular monthly plan payment. In sum, the trustee is not automatically entitled to the tax refunds of debtors who will not pay unsecured creditors 100% of their claims.

  1. Calculating Plan Payments in Chapter 13

Analysis of the tax refund issue must begin with § 1325(b) of the Bankruptcy Code, which often prescribes the minimum amount that debtors must pay to creditors in their plans.

Section 1325(b) says that if a trustee or unsecured creditor objects to a debtor’s plan, the court may not approve the plan unless it provides that all of the debtor’s projected disposable income during the relevant commitment period will be applied to make payments to unsecured creditors. 11 U.S.C. § 1325(b)(1)(B). Since the trustee objects in this case, the debtor’s plan cannot be confirmed unless it provides that she will pay her projected disposable income to her creditors. The key phrase – projected disposable income – is best analyzed by first examining how “disposable income” is calculated and then considering the impact of the word “projected.”

  1. Disposable Income

Section 1325(b)(2) defines “disposable income” as current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended (A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and (ii) for charitable contributions . . . .

11 U.S.C. § 1325(b)(2). In other words, disposable income equals current monthly income (CMI) minus reasonably necessary expenses.

  1. CMI

Section 101(10A) defines “current monthly income” as the average of all income and benefits received by the debtor, with certain exclusions not relevant here, during the six months prior to the filing of the bankruptcy petition. 11 U.S.C. § 101(10A). As bankruptcy courts have consistently held, CMI is a measurement of gross pre-tax income and includes public assistance benefits such as the earned income tax credit. See, e.g., In re Forbish, 414 B.R. 400, 402-03 (Bankr. N.D. Ill. 2009); In re Royal, 397 B.R. 88, 93–94 (Bankr. N.D. Ill. 2008); In re Cook, No. 12-04896-TOM-13, 2013 WL 5574978, at *6 (Bankr. N.D. Ala. Oct. 10, 2013).

Importantly, a debtor’s CMI is not synonymous with the number at the bottom of Schedule I for two reasons. First, Schedule I requires a debtor to disclose gross income from all sources, including income excluded from the definition of CMI (like Social Security). It also requires the debtor to subtract deductions his employer has made from his pay for taxes and other items. Second, Schedule I does not reflect an average of the debtor’s gross income during the six months before the petition date. See Forbish, 414 B.R. at 402; In re Spraggins, 386 B.R. 221, 225 (Bankr. E.D. Wis. 2008). So Schedule I does not calculate a debtor’s CMI.

  1. Expenses

Once CMI is calculated, § 1325(b)(2) permits debtors to deduct reasonably necessary expenses for themselves and their dependents. The amount of reasonably necessary expenses that a debtor may deduct from CMI is significantly affected by whether the debtor’s CMI is above or below the median income for the debtor’s household size in his state. If the debtor’s CMI is above the median, the debtor’s expenses are limited by national and local standards as set forth in § 707(b)(2). 11 U.S.C. §1325(b)(3). If the debtor’s CMI is below the median, no formal limits are prescribed; reasonably necessary expenses are evaluated on a case-by-case basis. See In re Brooks, 784 F.3d 380, 384 n.3 (7th Cir. 2015). It is important to note that for both abovemedian and below-median debtors, reasonably necessary expenses are not limited to those listed on Schedule J. In fact, some reasonably necessary expenses, such as taxes, insurance, and union dues, appear on Schedule I, not Schedule J.

In short, the debtor’s disposable income equals her CMI minus all reasonably necessary expenses. Schedules I and J do not determine the debtor’s plan payment, but, as discussed later, they can provide a convenient shortcut for calculating disposable income when the parties agree to this approach.

  1. “Projected” Disposable Income

Section 1325(b) requires a debtor to commit her projected disposable income to the plan. The Supreme Court examined the meaning of “projected” in Hamilton v. Lanning, 560 U.S. 505 (2010). The Court explained that the bankruptcy judge “should begin by calculating disposable income, and in most cases, nothing more is required.” Id. at 519. Yet, the word “projected” allows bankruptcy judges “in unusual cases” to “go further and take into account other known or virtually certain information about the debtor’s future income or expenses.” Id.

Under § 1325(b) and Lanning, the debtor’s plan payment in almost all cases will depend on the debtor’s financial circumstances when the petition is filed. The formula in § 1325(b) for setting the plan payment is not intended to address possible future changes in income or expenses unless they are virtually certain to occur. If income or expenses increase or decrease significantly after confirmation, the only way to change the plan payment is through a motion to modify the plan under § 1329 of the Code, 11 U.S.C. § 1329.

Courts have developed presumptions and other tests for determining when potential future tax refunds are virtually certain to be received and therefore must be included in the calculation of projected disposable income. In this case, however, the issue is not disputed. The debtor concedes that she expects to receive similar annual payments in the future based on the earned income credit, child tax credit, and educational credit. These payments therefore satisfy the test for “projected” disposable income and must be included in the calculation of the debtor’s plan payment.

  1. Reasonable Tax Expense

The statutory formula for determining plan payments – CMI minus reasonable expenses – provides the framework for resolving the tax refund issue. As many courts have held, the proper way to deal with taxes when calculating the debtor’s plan payment is to deduct a reasonable estimate of the debtor’s actual tax liability from CMI. See, e.g., In re Hilgendorf, No. 10-37111-svk, 2011 WL 353240, at *1 (Bank. E.D. Wis. 2011) (holding that “the refund is actually an overestimated expense”); In re Robenhorst, No. 10-25095-svk, 2011 WL 1434696, at 6.

If a debtor typically gets a tax refund because her employer withholds more than she will actually owe in income taxes each year, then the amount listed in Schedule I for payroll tax deductions does not accurately reflect her actual tax expense. It is too high. She can fix the problem by calculating her disposable income using a reasonable estimate of her actual tax liability instead of the amount withheld for taxes. Under Lanning, this estimate should almost always be based on the debtor’s past experience. The debtor should then divide her actual tax liability by 12 and deduct that number from CMI. The income left after she deducts the rest of her reasonable expenses is the minimum plan payment required under § 1325(b). If the debtor proposes to pay that amount, she need not pay future tax refunds to the trustee. She has fully complied with § 1325(b)(2).

Instead of using the correct numbers for calculating the plan payment, the trustee in this case as well as debtors in this district often use Schedules I and J as a shortcut to determine the plan payment. Under their approach, the amount listed in Schedule I for taxes withheld is used as the estimate of the debtor’s tax expense. The trustee then requires the debtor to pay 100% of any future tax refunds to the trustee as an additional plan payment, presumably to correct any errors from overwithholding. Debtors are free to agree to this approach as an easy way to deal with the tax issue. But the trustee cannot require it. If debtors account for their expected income and tax expense correctly at the time of confirmation, tax refunds need not be paid as additional plan payments.

The tax refund issue often arises in cases in which the debtor’s employer is withholding more than the debtor’s actual tax liability. In this case, however, the debtor’s tax “refund” does not result from overwithholding. Nothing is withheld from her earnings because she is self-employed, and at her low income she owes no taxes. So the tax “refund” the trustee seeks in this case is not actually a refund at all. Instead, the “refund” arises from an earned income credit, a child tax credit, and a refundable education credit. These credits are essentially public assistance payments to people who are employed but have low income. See, e.g., In re Hardy, 787 F.3d 1189, 1193 (8th Cir. 2015) (child care tax credit is exempt as a public assistance benefit). In these circumstances, the issue cannot be resolved simply by using a good estimate of the debtor’s actual tax expense because she already correctly estimates her tax expense as zero. Instead, the debtor must accurately account for both the extra annual income and her offsetting expenses when calculating her plan payment.

  1. Income From Tax Credits

The essence of the trustee’s objection in this case is that the debtor’s expected tax credits must be included in CMI and therefore must be paid in full to the trustee every year. As discussed above, the trustee is correct that the tax credits are included in CMI. But that does not mean the debtor must pay all of these tax credits to the trustee. The debtor can still comply with § 1325(b) if she accounts for the expected tax credits in calculating her plan payment. The simplest way to do this is to divide the annual payment by 12 and add the resulting amount to her calculation of CMI. She may then deduct from the higher CMI figure the reasonable expenses she expects to incur each month (or each year, divided by 12) to arrive at the monthly plan payment.

In this case, the debtor’s tax credit payment for the previous tax year was approximately $5,300. Dividing this number by 12 results in increased CMI of approximately $440 per month.

The debtor has said she would like to amend her Schedules I and J to prorate both this additional income and additional expenses. If the debtor amends her Schedules I and J, and if the increases in her expenses that could potentially offset the additional prorated income are reasonable, the court would confirm her plan without requiring her to pay future tax “refunds” to the trustee.

  1. The Trustee’s Arguments

The trustee objects to this approach of prorating the annual tax credit payment as income over 12 months, calling it “illusory” and arguing that it would make the debtor’s plan unfeasible because she would not have the actual cash flow each month to make plan payments. Neither argument has merit.

First, the income is in no sense “illusory;” it is real and must be accounted for in the debtor’s CMI calculation, as the trustee herself insists. In fact, the instructions on Schedule I direct the debtor to prorate any income not received on a monthly basis: “2. List monthly gross wages, salary and commissions (before all payroll deductions). If not paid monthly, calculate what the monthly wage would be.” Official Form 106I (emphasis added). The separate instruction manual for completing the forms explains in more detail: “If your income is received in another time period, such as daily, weekly, quarterly, annually, or irregularly, calculate how much income would be by month, as described below.” Instructions: Bankruptcy Forms for Individuals 26 (Rev. Apr. 2016). The instructions then provide specific examples of non-monthly income and show debtors how to add up all the expected income payments received in a year, divide that number by 12, and disclose the resulting number as monthly income. So prorating on Line 2 of Schedule I annual income from tax credits is not only appropriate, it is required.

Since the debtor must include the expected tax credits in her Schedule I and her CMI even though she does not receive them on a monthly basis, § 1325(b) permits her to deduct her reasonable expenses from them. As with Schedule I, the instructions for Schedule J direct the debtor to take all expenses, whether weekly, quarterly or annual, and “show all totals as monthly payments.” Id. at 28. In other words, a debtor must prorate expenses incurred over the course of the year to determine the proper amounts to list in Schedule J as monthly expenses.

Thus, the official forms and instructions direct debtors to prorate all income and expenses by adding up the total amounts for a year and dividing by 12 to arrive at monthly figures disclosed in Schedules I and J. Section 1325(b) then permits debtors to deduct their reasonable expenses from their income, regardless whether the income is received or the expenses are incurred annually or otherwise. In other words, debtors may deduct reasonable expenses from all income they receive, including annual payments like tax credits. The trustee’s contention – that the debtor must turn over the full amount of her tax credits – does not permit the debtor to deduct her reasonable expenses from the credits. The trustee’s approach eliminates entirely the “expenses” component from the statutory formula for plan payments – CMI minus reasonable expenses – when the income is received annually. There is no such limit on a debtor’s right to deduct expenses from income under § 1325(b).

The trustee’s second argument – that prorating annual income will make the plan unfeasible – also fails. If the debtor has reasonable expenses that offset the tax credits, her plan payment will not increase. If she does not have enough expenses to offset the full amount of the tax credits, she can still choose to make the correct monthly plan payment. She can then cover the rest of her expenses as she presumably did pre-petition, either by saving the amounts received from the tax credits and using them to pay expenses during the year, or by delaying paying bills and deferring purchases until she received the tax credits. Given the timing of this case, the debtor should in fact receive her annual tax credits soon and can use them to pay her additional expenses as they arise.

$5,300 in tax credits increases the debtor’s total income, including food assistance of $504 per month, to a total of only $1,900 per month, or $23,328 annually from all sources, to support a family of three. To describe the debtor’s current budget as “tight” would be an understatement. It is difficult to see how a family of three could realistically live on this budget, which does not provide enough for known expenses, let alone the unpredictable expenses that debtors typically face over the course of a plan. If the debtor’s monthly income were $1,940 per month (instead of $1,500 per month with a lump sum payment of $5,300 once per year), it would be hard to envision any viable objection to a budget that used up most or all of that income to make a $400 plan payment and cover the reasonable expenses of the debtor and her two children.

The result should not be different simply because the debtor receives a $5,300 lump sum after filing her tax return.

It is worth noting that, to justify her position, the trustee has suggested that the Code “requires” her to seek tax refunds in every case in which unsecured creditors are not paid 100% of their claims. She is mistaken. Section 1325(b)(1) states that if the trustee objects, the projected disposable income test applies. It permits her to object but does not require her to do so. Other chapter 13 trustees in this district exercise their discretion not to seek payment of these tax credits from low-income debtors. They violate no statutory or other duty in doing so.

The trustee also suggests that the Handbook for Chapter 13 Trustees issued by the U.S. Trustee Program requires her to demand that debtors turn over their tax refunds in every case. The portion of the handbook cited, however, merely states that the trustee should “conduct a disposable income analysis on each case and object as appropriate if all projected disposable income is not committed to make payments to unsecured creditors under the plan.” Handbook for Chapter 13 Trustees, § C. This is entirely consistent with the statute, which allows but does not require trustees to object. By advising trustees to object “if appropriate,” the handbook recognizes the discretion trustees have in determining whether to object.

One trustee in this district does not usually seek refunds even in cases in which tax refunds are generated from overwithholding. The other two trustees allow all debtors to keep $2,000 of their tax refunds. Those debtors may then seek to modify the plan if they wish to keep larger amounts.

The approach these trustees take is consistent with many opinions holding that chapter 13 debtors may keep all or a portion of tax refunds to cover a reasonable amount of unplanned expenses that debtors are likely to incur. See, e.g, In re Ramos, 494 B.R. 181, 187 (Bankr. D.P.R. 2013); In re Skougard, 438 B.R. 738, 741-42 (Bankr. D. Utah 2010); Michaud, 399 B.R. at 372; In re Spraggins, 386 B.R. at 226-28, supplemented, No. 07-24728-svk, 2008 WL 2073947 (Bankr. E.D. Wis. May 14, 2008) (permitting debtors to retain 50% of their tax refund “to help with unforeseen expenses and increased costs of living”). Rooted in all of these approaches is the sensible recognition that, to succeed in a chapter 13 case, a debtor must have some flexibility in his budget.

III. Conclusion

The trustee’s objection to confirmation on the basis that the debtor is required to pay her entire tax “refund” to the trustee is overruled. The debtor must file amended Schedules I and J prorating additional income and expenses. To the extent the expenses are reasonable, they may be deducted from the debtor’s CMI to determine the appropriate plan payment, and the plan will be confirmed without language requiring payment of expected tax credits.

Dated: February 27, 2017

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About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com