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Opinions


    In re Pugh, 19-20696-beh, 2019 WL 4180281 (September 2019) -- Judge B.E. Hanan
    In his Chapter 13 plan, the debtor proposed to modify the mortgage on his residence directly with the lender within six months, and amend the plan if not successful. The mortgage lender objected, pointing out that the debtor did not sign the corresponding note or mortgage; instead, the debtor’s deceased brother was the original borrower, and the debtor obtained title to the property via a quitclaim deed from his mother, who received the property through testation after his brother’s death. The mortgage lender argued that it should not be required to negotiate with a non-borrower, and further asserted that the transfer of the property to the debtor via quitclaim deed triggered the due-on-sale clause of the mortgage. In response, the debtor asserted that the lender should treat him as a borrower because he is a “successor in interest” under RESPA regulations, and that the lender was estopped from challenging mediation attempts because it had agreed to mediation in the debtor’s two prior bankruptcy cases. The court rejected the debtors’ arguments. Because the debtor did not receive the property directly as an heir of the borrower he was not a “successor in interest” under the regulations he cited, nor did a related federal law (the Garn-St. Germain Act) render the due-on-sale clause unenforceable.


    In re Pansier, Case No. 18-22297, 2019 WL 3561593 (August 2019) -- Judge B.E. Hanan
    The pro se debtors sought the bankruptcy judge’s disqualification under 28 U.S.C. § 455(a)—which requires a judge to disqualify herself in any proceeding in which her impartiality might reasonably be questioned—based solely on the Court’s adverse legal rulings and excerpts of statements the Court made at related hearings. After carefully considering each of the 12 alleged bases for recusal identified in the motion, the Court denied the debtors’ request, concluding that a thoughtful and well-informed observer would not view the judge as displaying a deep-seated favoritism or antagonism that would make fair judgment impossible. The Court also observed that granting the debtors’ motion in the circumstances would set a dangerous precedent and create a system where unhappy litigants could demand recusal by any judge who issues one or more adverse rulings or otherwise disagrees with a litigant’s legal theories.


    Cuene v. Peterson (In re Peterson), Case No. 18-29081-beh, Adv. No. 18-2259-beh, 2019 WL 3000796 (appeal filed) (July 2019) -- Judge B.E. Hanan
    A judgment creditor sought a determination that its debt was nondischargeable under 11 U.S.C. section 523(a)(2)(B) and (a)(6), as well as a denial of the debtor’s discharge under 11 U.S.C. section 727(a)(4)(A), based on the debtor’s failure to disclose his interests in real property titled to trusts that a state court judge ruled were the debtor’s alter-egos. The creditor moved for summary judgment on his claims under 523(a)(2)(B) and 727(a)(4)(A), asserting that final judgments in two prior state court proceedings should be given preclusive effect in determining whether relief should be granted as a matter of law.

    The Court granted summary judgment on the creditor’s claim under section 727(a)(4)(A). Recognizing that summary judgment on a fraud-based claim is rare, the Court nevertheless concluded that it was warranted in the circumstances. The debtor’s only defense to the claim was his willful refusal to recognize the state court’s “alter-ego” ruling as valid, claiming that the state court judgment was illegitimate and void because the state court lacked jurisdiction to rule on “common law, pure contract trusts.” No trial was necessary to reject the debtor’s defense as baseless.

    As to the creditor’s claim under section 523(a)(2)(B), the Court alternately held that the creditor had established all elements of the claim, except for “reasonable reliance,” as a matter of law. The Court first considered whether to apply issue preclusion to a state court default judgment against the debtor for intentional misrepresentation, and found that application would not be “fundamentally unfair” in the circumstances, given the debtor’s extensive participation in the underlying proceeding and his apparent tactical decision not to present evidence at a hearing on damages. But because a claim for intentional misrepresentation under Wisconsin common law requires only justifiable, rather than reasonable, reliance, the state court judgment could not preclusively establish the reliance element of the claim.


    In re Bohland, 19-21399-beh, 2019 WL 2511735 (June 2019) -- Judge B.E. Hanan
    The pro se debtor was the sole member of an LLC which had as its only asset a bed and breakfast property. After the creditor obtained a default judgment against the LLC and the creditor attempted to recover her judgment against the LLC via an order for execution, the LLC transferred the property to the debtor, and the debtor filed a Chapter 7 bankruptcy petition. Shortly before the Chapter 7 trustee abandoned the property, the creditor filed a motion for relief from stay under 11 US.C. Section 362(d)(1), arguing that the property was fraudulently conveyed in an attempt to avoid creditors and the petition was filed in bad faith solely to prevent collection efforts. The debtor denied any fraud and included a motion to avoid lien, asserting that the state court judgment in the creditor’s favor impaired her ability to seek the full $75,000 exemption under Wis. Stat. § 815.20. The creditor argued the property was not the debtor’s homestead at the time the judgment lien was recorded, so the request to avoid the lien should be denied.

    The Court determined there was cause to grant the creditor relief from the stay, because doing so would not harm the debtor or creditors and would not interfere with the case. The Chapter 7 trustee already abandoned the property, such that it would not be liquidated for the benefit of unsecured creditors, the debtor's discharge would occur imminently, and this was a “no asset” case.

    As to the debtor’s argument that the judgment lien should be avoided because it impairs her homestead exemption, the Court held the debtor could not claim any portion of her interest in the property as exempt, because she was not the title owner of the property at the time the judgment was docketed.


    In re Pansier, Case No. 18-22297-BEH, 2019 WL 1495100 (appeal pending) (April 2019) -- Judge B.E. Hanan
    The 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 , 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. section 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 section 523(a)(8).


    Smith v. Kleynerman (In re Kleynerman), Case No. 18-26659, 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. section 523(a)(4), because the judgment debt was for money 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 section 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 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, 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 sided 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. section 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, 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.