The plaintiff filed an adversary complaint against the debtor-defendant, asserting that the defendant's debt was excepted from discharge by several paragraphs of section 523(a). After summary judgment one claim remained: that section 523(a)(3) excepts the debt from discharge because the debtor-defendant did not list or schedule the plaintiff as a creditor in time to permit him to file a proof of claim or commence an adversary proceeding under section 523(c). After trial the court determined that the debt was dischargeable. The parties agreed that the debtor-defendant did not schedule the debt or list it, and the plaintiff did not have notice of the case, in time to file a proof of claim or file a section 523(c) adversary proceeding. The court noted that, while section 523(a)(3), by its terms, appeared to except the debt from discharge regardless of whether the debt was of a kind specified in section 523(a)(2), (4), or (6), precedent in the Seventh Circuit required the court to determine whether an equitable exception to section 523(a)(3) applied. After reviewing the facts of the case, the court concluded that the debtor-defendant met the requirements for the equitable exception and determined that the debt was dischargeable under section 523(a)(3)(A). With respect to section 523(a)(3)(B), the court concluded that the plaintiff did not meet his burden to prove that the debt was a debt covered by section 523(a)(2) or (6) and, accordingly, the court determined that the debt was dischargeable under section 523(a)(3)(B).
In re Hampton, Case No. 16-29012 (February 2019) -- Chief Judge G.M. Halfenger
The chapter 13 trustee moved to dismiss the case due to the debtor's failure to make plan payments and to pay one-half of her net income-tax refunds for 2016 and 2017. The parties agreed to resolve the trustee's motion on terms, including that the debtor would resume making plan payments and either pay one-half of the 2016 and 2017 refunds or modify the plan to provide for such payment. The court denied the trustee's motion on those terms. The debtor then filed a request to modify the plan, and the trustee objected, asserting that the modification did not comply with the court's order denying the motion to dismiss and that it was not proposed in good faith as required by 11 U.S.C. §§1325(a) & 1329(b). The court concluded that the modification satisfied the two applicable requirements of the order denying the trustee's motion to dismiss: (1) it provided for payment of one-half of the 2016 and 2017 tax refunds and (2) the plan as modified was feasible. The court also rejected the trustee's argument that the modification was not proposed in good faith, as that objection was based on terms that the trustee reportedly relied upon in settling the motion to dismiss but did not include in the parties' settlement agreement: namely, that the debtor could not modify the plan to require her to pay less than thirty-six months' worth of payments under the original plan terms (plus one-half of the net tax refunds received during the plan term, if any) or forgive plan payments already missed. Accordingly, the court overruled the trustee's objection.
In re Kristopher and Jody Hill, Case No. 18-30063 (February 2019) -- Chief Judge G.M. Halfenger
The debtors proposed a chapter 13 plan that proposed to value a secured claim. The debtors placed the plan language regarding the valuation of the secured claim in Section 8.1 of the model plan—the "nonstandard" provisions section—rather than in section 3.2—the section that includes a "request for valuation of security". The court denied confirmation of the debtors' chapter 13 plan because it did not conform with the model chapter 13 plan and because the record did not demonstrate that the debtors had served the plan on the secured creditor, as required by Federal Rule of Bankruptcy Procedure 3012(b).
In re Morgan, 18-24459 (February 2019) -- Judge B.H. Ludwig
The confirmed chapter 13 plan provided for payment to a secured creditor even though that creditor failed to file a proof of claim. The court denied the debtors’ motion to enlarge time to file a proof of claim on behalf of the creditor and sustained the trustee’s claim objection. The court rejected the debtors’ arguments that the plan should be deemed an informal proof of claim; the confirmed plan obviated the creditor’s need to file a proof of claim; and the time for the debtors to file a proof of claim on behalf of the creditors should be enlarged. The district’s local plan form specifically stated that “a timely proof of claim must be filed in order to receive payments from the trustee under the plan,” binding the debtors and the creditor to that requirement.
In re Wulff, Case No. 17-31982 (February 2019) -- Judge B.H. Ludwig
The confirmed chapter 12 plan provided for payments to a secured creditor even though that creditor filed untimely proofs of claim. The court denied the motions filed by the creditor and the debtor to extend time to file proofs of claim as moot and overruled the trustee's objection to the creditor’s late-filed proofs of claim. The creditor could not establish grounds for an extension of the Rule 3001(c) proof of claim deadline, and the debtor could not show excusable neglect necessary to enlarge the Rule 3004 deadline under Rule 9006(b)(1). Nevertheless, the chapter 12 trustee was bound by the confirmation order and could not re-litigate the plan's treatment of the claims.
In re Valent, Case No. 17-21634 (January 2019) -- Chief Judge G.M. Halfenger
The mortgage creditor filed an affidavit of default, asserting that the debtor failed to make monthly mortgage payments as required by the court's April 13, 2018 order. The debtor filed a response and asserted that she made the required mortgage payments. The court set an evidentiary hearing to determine whether the debtor defaulted under the terms of the April 13, 2018 order. The order setting the evidentiary hearing further stated that if the court determined that the creditor's affidavit was accurate, the court would consider whether the debtor had made a false representation to the court and whether sanctions should be issued. Conversely, the order stated that if the court determined that the creditor's affidavit was not accurate, then the court would consider whether the creditor had made false representations to the court and whether sanctions should be issued against it. Several days before the evidentiary hearing the mortgage creditor and debtor filed a letter informing the court that they had reached a verbal agreement to settle the matter and asked the court to cancel the evidentiary hearing. The court denied the request because the parties could not agree to resolve the issue of whether a false representation had been made to the court by one of the parties. The court emphasized that the court's practice of resolving motions with so-called "doomsday" orders "depends mightily on parties making accurate representations about compliance" with those orders. Accordingly, the court denied the parties' request to cancel the evidentiary hearing.
In re Gary and Jody Huenerberg , Case No. 17-28645 (January 2019) -- Chief Judge G.M. Halfenger
The Internal Revenue Service objected to confirmation of the debtors' amended chapter 13 plan asserting that its appeal of the court's earlier order disallowing a portion of its claim as a priority unsecured claim divested the court of jurisdiction necessary to confirm the plan. The court held that appeal of such an order does not generally divest the bankruptcy court of the jurisdiction needed to confirm a chapter 13 plan but that, in this instance, the principle underlying the divestiture doctrine cautions against confirming the amended plan, which contains language that is inconsistent with the court's order adjudicating the extent to which the IRS's claim is entitled to priority treatment and that directly concerns an open issue on appeal: whether the portion of the IRS's claim attributable to an outstanding shared responsibility payment imposed under 26 U.S.C. §5000A (enacted as part of the Affordable Care Act) is for a tax or a penalty for purposes of priority under 11 U.S.C. §507(a)(8). The court concluded that the problematic language in the amended plan is unnecessary and can therefore be removed through further amendment, thereby resolving the divestiture issue, to the extent one exists.
In re Michael J. Flynn, Case No. 18-24800 (December 2018) -- Chief Judge G.M. Halfenger
After the debtor did not pay the first installment of the filing fee as ordered, the court dismissed the case. Months later, the debtor paid the balance of the filing fee and moved to vacate the dismissal order. The court denied the motion for three reasons. First, the motion stated no legal basis for relief, as required by Local Rule 9013(b). Second, although the motion might be construed as a motion for relief from a final order under Federal Rule of Bankruptcy Procedure 9024 and, by reference, Federal Rule of Civil Procedure 60, its statements do not state plausible grounds for relief under those rules. Third, given that the meeting of creditors was scheduled to occur months earlier, the creditors received notice of the dismissal, and 11 U.S.C. §349(a) allows a debtor to file a new case and seek a discharge of his past debts, the equitable circumstances did not support vacating the dismissal order.
In re Schmitt, Case No. 18-21755-beh, 2018 WL 6720027 (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 section 522(g). The debtor, on the other hand, claimed that the payment involved a heavy dose of coercion, so section 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 section 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 section 541(a)(3), so the court overruled the trustee’s objection.
Doss v. Norhardt Crossing Condominium Association v. Doss (In re Doss), Adv. No. 18-2091, Case No. 17-21492, 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.