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Opinions


    In re Rios, Case No. 22-21161, 2023 WL 4055909, 2023 Bankr. LEXIS 1589 (Bankr. E.D. Wis. June 16, 2023) (June 2023) -- Judge K.M. Perhach
    The debtors moved to stay the court’s order modifying the automatic stay to permit the Internal Revenue Service to enforce its tax lien on the debtors’ right to Social Security benefits while they pursued an appeal of the court’s order to the district court. The court denied the debtor’s motion for a stay pending appeal. Granting a stay pending appeal would not cause the debtors to begin receiving their Social Security benefits, so the debtors did not show that they would suffer irreparable harm in the absence of a stay. The debtors also did not demonstrate that they had a likelihood of success on the merits of their appeal. The debtors intended to argue on appeal that (1) they did not acquire a “right to property” in their Social Security benefits until they survived until the end of the month and actually received funds; (2) at the time the bankruptcy case was filed, the IRS only had a lien on the Social Security benefits the debtors had actually received pre-petition; (3) during the debtors’ bankruptcy case, the automatic stay prevented the IRS’s statutory tax lien from attaching to the Social Security benefits that the debtors received post-petition; and (4) a discharge would prevent the IRS’s statutory lien from attaching to the Social Security benefits received by the debtors after their discharge. However, the IRS’s statutory lien attached to all of the debtors’ property and rights to property, including their right to receive future Social Security benefits. The lien on the right to receive future payment of Social Security benefits arose pre-petition and would survive a discharge under § 1328(a). The debtors proposed to use the Social Security benefits to make their Chapter 13 plan payments without proposing adequate protection of the IRS’s interest in the benefits, so the IRS was entitled to relief from the automatic stay.


    Dubis v. BMO Harris Bank (In re Cruz), Ch. 7 Case No. 21-26297, Adv. No. 22-2030, 2023 Bankr. LEXIS 755 (Bankr. E.D. Wis. March 20, 2023) (March 2023) -- Judge K.M. Perhach
    The Chapter 7 trustee could avoid a home mortgage recorded within the 90-day preference period as part of a refinancing transaction. The earmarking doctrine did not save the bank from the tardy perfection of the mortgage during the preference period. The doctrine of equitable subrogation also did not provide a defense to the trustee’s preference action. Finally, the court rejected any contention that equity would shield the creditor from preference liability even if the COVID-19 pandemic caused the delay in the recording of the mortgage.


    In re Rios, No. 22-21161, 649 B.R. 30 (Bankr. E.D. Wis. March 3, 2023) (appeal pending, No. 23-cv-00358-PP) (March 2023) -- Judge K.M. Perhach
    Chapter 13 debtors proposed to use their Social Security benefits to cover their expenses and make their plan payments. The debtors’ plan proposed to pay the arrears owed on the debtors’ first and second mortgages, a loan secured by a vehicle, a tax claim filed by the Wisconsin Department of Revenue, the trustee’s fees, and the debtors’ attorney’s fees. The debtors’ plan further proposed to pay the IRS’s $31,000 priority claim, but did not propose to pay anything to the IRS on its $220,000 secured claim. The IRS requested that the court modify the automatic stay to allow the United States to levy from the debtors’ combined monthly Social Security payments “to implement its right of setoff and/or to enforce its statutory liens to the extent the Debtors have ‘rights to property’” under 26 U.S.C. § 6321. The court found that the IRS demonstrated an interest in the debtors’ property, a pre-petition federal tax lien on the debtors’ Social Security benefits, and this interest was entitled to adequate protection. Because the debtors did not propose adequate protection of the IRS’s interest in that property, the court held that the IRS was entitled to relief from the automatic stay. The court modified the stay to permit the IRS to enforce its federal tax liens on the debtors’ right to Social Security benefits in accordance with applicable nonbankruptcy law. The debtors have appealed this decision.


    In re Egerson, No. 21-22557 (Bankr. E.D. Wis. Sept. 30, 2022) (September 2022) -- Judge K.M. Perhach
    A debtor proposed a Chapter 13 plan providing for payment of 12% interest on tax principal amounts included in the proof of claim filed by the Racine County Treasurer, but providing for payment of 3.25% interest on accrued interest and penalties. The County objected to confirmation of the plan, asserting that the debtor should pay 12% interest on the entire amount of its claim. The court overruled the objection. Section 511 of the Bankruptcy Code establishes the rate of interest to be paid on tax claims and requires courts to look to “applicable nonbankruptcy law” to determine the appropriate interest rate. In Wisconsin, interest accrues at the rate of 12% per year on “delinquent general property taxes, special charges, special assessments and special taxes.” Wis. Stat. § 74.47(1). The statute does not provide for 12% interest on accrued interest or 12% interest on accrued tax penalties. Notably, the court’s reading of the Wisconsin statute corresponded to the method the County used to calculate interest before the debtor filed the bankruptcy case.


    In re Harris, No. 21-23864 (Bankr. E.D. Wis. Sept. 22, 2022) (September 2022) -- Judge K.M. Perhach
    Chapter 13 debtors objected to the proof of claim filed by the City of Milwaukee. The City failed to meet its burden of proving by a preponderance of the evidence that charges for delinquent municipal services, delinquent storm water services, delinquent water services, “other special” services, and interest and penalties were a “property tax” entitled to priority status under 11 U.S.C. § 507(a)(8)(B). The court sustained the claim objection and also overruled the City’s objection to the debtors’ Chapter 13 plan which proposed to pay the 2020 net property tax owed to the City as an unsecured priority claim under § 507(a)(8)(B) and the remaining balance of the claim as a general unsecured claim. Accord In re Peete, 642 B.R. 299 (Bankr. E.D. Wis. 2022).


    Bach v. Milwaukee County et al. (In re Bach), Ch. 7 Case No. 20-23343, Adv. No. 21-2020 (Bankr. E.D. Wis. July 1, 2022), aff’d, No. 22-CV-0806-BHL (E.D. Wis. Jan. 24, 2023) (July 2022) -- Judge K.M. Perhach
    A debtor claimed that Milwaukee County and various county officials violated the discharge injunction. The County and officials had two judgment liens on the debtor’s property. The debtor argued that they violated the discharge injunction because they were named by the mortgage creditor as additional defendants in a foreclosure lawsuit against her. She further claimed that one of the officials violated the discharge injunction because an attorney filed a notice of appearance on the official’s behalf in a separate foreclosure lawsuit and filed letters in that case stating that the attorney did not intend to appear at scheduled motion hearings. The attorney also filed a notice of demand for surplus, asserting a claim to any surplus funds remaining after the proceeds of any sheriff’s sale were applied to the foreclosure judgment. The court granted the motion for summary judgment filed by Milwaukee County and the related defendants and dismissed all the claims asserted against them. The district court affirmed this decision on appeal.


    Bach v. Office of Lawyer Regulation (In re Bach), Ch. 7 Case No. 20-23343, Adv. No. 21-2020 (Bankr. E.D. Wis. June 8, 2022), aff’d, No. 22-CV-0866-BHL (E.D. Wis. Jan. 24, 2023) (June 2022) -- Judge K.M. Perhach
    A debtor sought a determination that her Chapter 7 bankruptcy discharged debt she owed to the State of Wisconsin Office of Lawyer Regulation for the costs associated with her attorney disciplinary proceeding. Finding Osicka v. Office of Lawyer Regulation, 25 F.4th 501 (7th Cir. 2022) directly on point, the court determined the debt was excepted from discharge under 11 U.S.C. § 523(a)(7). The court granted the Office of Lawyer Regulation's motion for summary judgment. The district court affirmed the decision on appeal.


    In re Neitzel, No. 21-25185 (Bankr. E.D. Wis. May 10, 2022) (May 2022) -- Judge K.M. Perhach
    The court denied a debtor’s motion for an order finding a creditor in contempt for violation of the automatic stay. The creditor filed a summons and complaint with a Minnesota state court after the debtor had filed the bankruptcy case. In Minnesota, a civil action is commenced when the summons is served on the defendant. The Minnesota rules further provide that the lawsuit is deemed dismissed with prejudice if the plaintiff fails to file the summons and complaint with the court within one year of service of the summons. The creditor commenced the litigation by serving the summons and complaint on the debtor before the debtor filed the bankruptcy case. Under the facts of the case, the creditor’s filing of the summons and complaint with the Minnesota state court after the debtor filed the bankruptcy case did not constitute a continuation of the litigation in violation of the automatic stay. The creditor only sought a judgment against a non-debtor defendant. Simultaneously with the filing of the summons and complaint, the creditor filed a notice in which it sought to dismiss its claims against the debtor due to his bankruptcy filing as well as a proposed order dismissing the claims against the debtor. When the Minnesota state court did not docket the dismissal as it expected, the creditor followed up to have the claims against the debtor dismissed. Accord In re Neitzel, No. 21-25186-rmb (Bankr. E.D. Wis. April 1, 2022).


    Anderson Tooling, Inc. v. Anderson (In re Anderson), Ch. 7 Case No. 16-28979, Adv. No. 16-2465 (Bankr. E.D. Wis. Apr. 1, 2022) (April 2022) -- Judge K.M. Perhach
    The court previously denied the plaintiff’s motion for summary judgment against the joint debtor, determining that it could not apply issue preclusion to find that the state court conspiracy judgment entered in favor of the plaintiff was excepted from discharge under 11 U.S.C. § 523(a)(4) and/or § 523(a)(6). The court then held a trial and found that the plaintiff did not prove its claims against the joint debtor for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny or that there was a willful and malicious injury by the joint debtor or that the joint debtor acted with malice, wickedness, or a deliberate intent to injure the plaintiff. The court rejected the plaintiff’s contention that the evidence it presented at trial supplemented the record on summary judgment in such a way that the court could apply issue preclusion following the trial and rule in its favor.


    In re Gregory, No. 21-20607 (Bankr. E.D. Wis. Dec. 23, 2021) (December 2021) -- Judge K.M. Perhach
    A mortgage creditor objected that its claim was secured only by a security interest in real property that was the Chapter 13 debtors’ principal residence and 11 U.S.C. § 1322(b)(2)’s anti-modification provision prohibited the debtors’ proposed modification of its claim. After conducting an evidentiary hearing, the Court sustained the objection to confirmation. Based on the testimony and evidence presented at the hearing, the Court found that at the time the petition was filed, the debtors were living in the property at issue as their principal residence. Section 1322(b)(2) prohibited the debtors’ proposed cramdown of the mortgage creditor’s claim.