OpinionsThe debtors sought reconsideration of the Court’s February 25, 2019 decision lifting the automatic stay in favor of the Internal Revenue Service, asserting that (1) the Court erred by failing to consider the merits of their argument that the statute of limitations to collect the debtors’ 1995 through 1998 tax liabilities had expired, and (2) “newly discovered evidence” in the form of a Notice of Federal Tax Lien that the IRS filed on October 31, 2018, warranted reconsideration. Although the Court concluded that the debtors had failed to carry their burden of demonstrating that the Court overlooked any dispositive factual matters or controlling decisions of law in making its decision, or that any newly discovered evidence existed that would probably change the outcome, the Court on its own re-examined the relevant law and facts. On reconsideration, the Court determined that its prior decision that the IRS had established cause to modify the stay was correct and affirmed that portion of its prior ruling, but for equitable reasons, the Court amended its prior order to allow the IRS to enforce its levy rights with respect to only the debtors’ 1999 through 2006 and 2014 tax liabilities. Tuttle v. ECMC (In re Tuttle), Case No. 16-28259-beh, Adv. No. 17-02116-beh, 600 B.R. 783 (March 2019) -- Judge B.E. Hanan The unemployed 46-year-old Chapter 7 debtor brought an adversary proceeding seeking discharge of more than $59,000 in student loan debt under 11 U.S.C. § 523(a)(8) because excepting such debt from discharge would impose an undue hardship on the debtor, his wife, and their young son. The lender argued against an undue hardship discharge and also sought a determination that a trust established by the debtor's mother shortly before her death created an income stream for the debtor's benefit. The Court analyzed whether repayment of this debtor's student loans would constitute an undue hardship under the three-part test of In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993) and Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987): (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living if forced to repay the loans; (2) that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period; and (3) that the debtor has made good faith efforts to repay the loans. The Court determined that the debtor satisfied the first prong because he could not presently maintain a minimum standard of living and still make his loan payment. In this consideration, the Court found that the trust created by the debtor’s mother was not available to debtor as a part of his revenue stream. With regard to the second prong, the Court decided that the debtor did not meet the “certainty of hopelessness” standard because he failed to present evidence of insurmountable circumstances making him unable to pay his student loan debt for the remainder of the payment period. Finally, the Court concluded that the debtor did not satisfy the third (good faith) prong, because he did not show that he was unemployable in other fields. For all these reasons, the debtor did not meet his burden of establishing that repayment of his student loans would impose an undue hardship under § 523(a)(8). Smith v. Kleynerman (In re Kleynerman), Case No. 18-26659-beh, Adv. No. 18-02220-beh, 2019 WL 1111569 (March 2019) -- Judge B.E. Hanan The debtor-defendant filed a Chapter 7 bankruptcy petition and included on his schedules a $499,000 debt to the plaintiff arising from a Milwaukee County Circuit Court judgment. The plaintiff then filed an adversary case against the debtor-defendant to deem that judgment nondischargeable pursuant to 11 U.S.C. § 523(a)(4), because the judgment debt was based upon a breach of fiduciary duty and as a result of fraud or defalcation while acting in a fiduciary capacity. The debtor-defendant set forth three affirmative defenses: (1) issue preclusion as to misrepresentation or fraud; (2) issue preclusion as to mental competence; and (3) no fiduciary capacity for purposes of § 523(a)(4). The Court decided two motions in limine, which asked the Court to bar evidence of the plaintiff’s mental competence and of the debtor-defendant’s alleged misrepresentations. The motions were based on the doctrine of issue preclusion or collateral estoppel, which bars relitigation of issues determined in prior court actions and applies to discharge exception proceedings. The court applied Wisconsin law, explaining that relitigation of an issue of law or fact in a subsequent action is foreclosed if two elements are present: (1) the issue was actually litigated in a prior action and was necessary to the judgment, and (2) the application of issue preclusion would be fundamentally unfair. The Court ultimately concluded that the issues of mental incompetence and the issues of six specified representations listed in Question 4 of the verdict were actually litigated and determined by a valid final judgment and that it was not fundamentally unfair to estop the plaintiff from presenting evidence on either issue. In re Pansier, Case No. 18-22297-beh, 2019 WL 949898, amended in part on reconsideration, 2019 WL 1495100 (April 3, 2019) (February 2019) -- Judge B.E. Hanan The IRS moved for relief from stay to reinstate its monthly collection of the debtor’s pension income, claiming that its interest in the debtors' property, which was secured by federal tax liens of over $250,000 (attributable to tax liability for 1995 through 2006 and 2014), was not adequately protected because the debtors were spending their discretionary income rather than using it to pay their taxes. The debtors objected for a number or reasons, including that the Court lacked jurisdiction to lift the stay because the pension income had been claimed as exempt and that the IRS lacked standing to seek relief from stay. The Court rejected the debtors’ arguments, as well as the debtors’ assertion that the IRS’s tax liens alone were sufficient to provide adequate protection. The debtors’ sworn schedules showed over $2,300 in monthly discretionary income left after payment of expenses, none of which they had offered to use to make payments to the IRS on its secured claim during the 11 months their Chapter 7 case had been pending. After considering the equities of the case, the Court declined to allow the IRS to levy the full amount of the monthly pension income (approx. $4,050), and instead lifted the stay to allow the IRS to reinstate its monthly levy on only the debtors’ reported discretionary income (approx. $2,300). [Note: The Court amended this decision in part on reconsideration, see 2019 WL 1495100 (Bankr. E.D. Wis. Apr. 3, 2019).] In re Lettie, Case No. 18-24510-beh, 597 B.R. 637 (February 2019) -- Judge B.E. Hanan The debtors' counsel sought an order from the Court directing the Chapter 13 trustee to pay counsel's approved fees before the debtors proceeded with their imminent intent to convert their case to Chapter 7, prior to confirmation of a Chapter 13 plan. The Court denied the request, concluding that, under Harris v. Viegelahn, 135 S.Ct. 1829 (2015), a Chapter 13 trustee may not pay allowed administrative expenses, such as the allowed fees of the debtors' counsel, prior to the impending conversion of a case to Chapter 7 when no plan has been confirmed. The Court agreed with the majority of courts that have held Harris applies equally to cases converted from Chapter 13 to Chapter 7 after confirmation and prior to confirmation. The Court further noted that (1) 11 U.S.C. § 1326(a)(2) requires confirmation of the plan before a Chapter 13 trustee may begin distributing plan payments, and there is no other mechanism in Chapter 13 to allow the trustee to do so when a case is converted pre-confirmation; and (2) ordering the trustee to distribute funds in a manner that is not authorized by, and is inconsistent with, the Code's payment scheme is beyond the Court's equitable powers under § 105(a). In re Schmitt, Case No. 18-21755-beh, 595 B.R. 564 (December 2018) -- Judge B.E. Hanan The trustee objected to the debtor’s exemption of a preferential prepetition payment made to satisfy a bench warrant, arguing that the payment was voluntary and therefore could not be exempted, citing 11 U.S.C. § 522(g). The debtor, on the other hand, claimed that the payment involved a heavy dose of coercion, so § 522(g) did not prohibit the exemption. The Court first noted that the preferential payment itself had not yet been recovered, meaning it was not property of the estate and the debtor’s exemption appeared premature. Nevertheless, because the relevant case law lacked clarity and consistency concerning the effectiveness of such an “early” exemption, the court considered the narrow question presented—whether the payment was “voluntary” within the meaning of § 522(g)—to provide guidance to the parties in pursuing recovery of the payment (a process the trustee already had begun). After analyzing other cases in which bankruptcy courts considered similarly coercive conduct as resulting in involuntary transfers, the Court concluded that the transfer at issue was not voluntary, but was the result of an operation of law. Section 522(g) therefore would not preclude the debtor from exempting the payment if it were recovered and became property of the estate under § 541(a)(3), so the Court overruled the trustee’s objection. Doss v. Norhardt Crossing Condo. Ass’n (In re Doss), Case No. 17-21492-beh, Adv. No. 18-2091-beh, 2018 WL 6604270 (December 2018) -- Judge B.E. Hanan A creditor moved for sanctions against the debtor-plaintiff’s attorney, asserting that counsel did not conduct a reasonable pre-filing inquiry before filing a complaint seeking to avoid the creditor’s lien, in violation of Rule 9011(b)(2). Because the motion for sanctions was filed just a few hours short of providing the full 21-day safe harbor period of Rule 9011(c)(1)(A), the Court first addressed, sua sponte, the creditor’s technical violation of the rule. The Court concluded that the debtor-plaintiff’s attorney had waived the benefits of the safe-harbor protection in the circumstances, and therefore the creditor’s lack of compliance did not prevent the Court from reaching the merits of the motion. As to the merits, the Court found that the attorney’s pre-filing legal investigation was objectively unreasonable under the circumstances, and therefore violated Rule 9011(b)(2), but declined to award the creditor the full amount of attorney’s fees and costs requested. Instead, the Court concluded that one quarter of the creditor’s reasonable attorney’s fees and costs was an appropriate sanction in the circumstances, after considering equitable factors including the attorney’s prior conduct and practice. In re Rodriguez, Case No. 18-20215-beh (November 2018) -- Judge B.E. Hanan The debtor objected to a creditor’s partially secured claim, arguing that the claim should be disallowed in its entirety because it lacked evidence of (1) the transfer from the original claim-holder to the current claimant, and (2) the creditor’s security interest (which, in substance, was actually an assertion that the claim lacked evidence of perfection). The court rejected the debtor’s arguments, noting that Rule 3001 does not require proof of a prepetition transfer of a claim and, even if it did, lack of such evidence is not a basis for disallowance under 11 U.S.C. § 502(b). The debtor did not dispute that she owed the debt, but rather listed both the claimant and the debt (as uncontested and unsecured) on her schedules. In addition, the debtor’s challenge to the secured portion of the claim was really an implied argument that the security interest was not perfected and therefore avoidable under the trustee’s strong-arm powers of § 544(a). This allegation was supported by an affidavit from the debtor’s attorney, not from the debtor or someone with personal knowledge of the relevant facts as required by Local Rule 3007(b), and was insufficient to establish a basis for disallowance. Robert 100, LLC v. Draper (In re Draper), Case No. 17-26352-beh, Adv. No. 17-2296-beh, 2018 WL 6252865 (November 2018) -- Judge B.E. Hanan The plaintiff, a commercial property lessor, brought an adversary proceeding alleging that it relied upon a false financial statement signed by the defendant/debtor when it agreed to lease restaurant premises to the debtor’s and his son’s limited liability company, and therefore the $40,817 debt stemming from the breached lease was nondischargeable under 11 U.S.C. § 523(a)(2)(B). Both parties agreed that the financial statement at issue was false, but the debtor denied that he signed either the financial statement or the lease, testifying that his son, who bears the same name, signed both without his knowledge. After trial, the Court determined that: (i) the debtor did not make a statement in writing, because the signature on the financial statement was not his and he did not present the statement to the plaintiff; (ii) the statement at issue was a statement respecting the debtor's or an insider's financial condition; (iii) the plaintiff actually and reasonably relied on the financial statement; and (iv) the plaintiff failed to establish that the debtor caused the written statement to be made or published with intent to deceive, because he did not make the statement and did not intend to deceive. The Court found in favor of the defendant. In re Kolchinsky, Case No. 17-30872-beh, 2018 WL 5779861 (November 2018) -- Judge B.E. Hanan In response to the Chapter 13 debtor’s Schedule I disclosure that she is unemployed and her only source of income is a $2,000 monthly contribution from her elderly mother, the Court issued an order requiring the debtor to show cause why her case should not be dismissed for ineligibility under 11 U.S.C. § 109(e), which limits debt relief to “individual[s] with regular income.” The Bankruptcy Code does not define “income” but does define an “individual with regular income” as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.” Courts have recognized that whether nontraditional sources of income, such as family contributions, create chapter 13 eligibility depends on a matter’s particular facts and circumstances. Although purely gratuitous contributions generally do not qualify as regular income, other considerations may result in a different outcome. Here, the Court found that because the debtor and her mother have shared a household for the preceding eight years and appear to provide mutual support (the debtor’s mother is a widow and the debtor is a disabled, divorced mother with sons living at home), the debtor’s mother has a substantial interest in the debtor's successful completion of her plan, and the contribution is thus consistent and stable enough to qualify the debtor as an “individual with regular income” under § 109(e). |