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.
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 section 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 11 U.S.C. § 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.
CoVantage Credit Union v Stangel (In re Stangel), Adv. No. 17-2132, Case No. 17-20394, 593 B.R. 607 (October 2018) -- Judge B.E. Hanan
The court granted the creditor’s motion for default judgment against the debtor for her alleged fraudulent tender of NSF checks, concluding that the creditor had made a prima facie case of “actual fraud” under § 523(a)(2)(A), based on circumstantial evidence that the debtor did not intend to repay the debt when she incurred it. Relevant evidence included the debtor’s retention of bankruptcy counsel before issuing the bad checks, the large amount of the checks in relation to her income at the time, the issuance and cashing of four separate checks in less than 30 hours, and the fact that the checks were issued from a checking account that had been closed for over three months. As to the state law question of the appropriate amount of damages to award under Wis. Stat. § 895.446, the court rejected the creditor’s argument that the statute mandated an award of exemplary damages, recited factors Wisconsin courts consider in determining whether to exercise discretion in awarding exemplary damages, and concluded that exemplary damages were not warranted.
In re CF Beef & Grain, LLC, Case No. 18-20898, 590 B.R. 849 (September 2018) -- Judge B.E. Hanan
After multiple creditors and the Chapter 12 trustee objected, the court denied confirmation of the debtor’s amended chapter 12 plan, due to lack of feasibility and failure to meet the best-interests test. The court found that the debtor’s cash flow projections were not reasonably possible because they appeared to understate expenses and overstate revenue; the plan did not take into account the possible loss of farmland (and attendant outbuildings) owned by the debtor’s individual members, which was in foreclosure at the time, and would mean the inability to earn any income from grain drying and storing and a reduction in the debtor’s crop acreage by almost a third; and, most significantly, the plan’s success hinged on significant “cash infusions” from another LLC owned by the same individual members, which would be possible only if the other LLC continued to default on its own loan to the debtor’s main secured creditor. In addition, the debtor’s liquidation analysis used excessive discount rates and miscalculated the required secured debt payment in a hypothetical liquidation, and the plan lacked clarity about the precise amount to be paid to unsecured creditors; based on the record, the court could not conclude that the debtor had proven the plan met the best-interests test. Because it appeared the debtor would be unable to propose a confirmable plan in the circumstances, the court granted the requests of both the trustee and an unsecured creditor to dismiss the case.
Pansier et al v. State of Wisconsin et al (In re Pansier), Adv. No. 18-2129, Case No. 18-22297-beh, 2018 WL 4191851 (August 2018) -- Judge B.E. Hanan
The court denied the pro se debtors’ motion for leave to amend their adversary complaint to add the U.S. Trustee as a defendant and seek an injunction barring the U.S. Trustee from investigating the debtors’ interest in property listed on their current bankruptcy schedules via a previously approved Rule 2004 examination or subsequent investigation of the debtors’ property interests. The debtors claimed that res judicata and collateral estoppel applied because they had listed the property in their prior bankruptcy cases such that receiving discharges in one or more of those cases resulted in a final determination that they had no ownership interest in the property. The court denied leave because the amendment would be futile, res judicata and collateral estoppel did not apply, and the debtors could not use a complaint for injunctive relief against the U.S. Trustee to circumvent their obligation to provide full and accurate disclosures in the present bankruptcy case.
Wisconsin Mutual Insurance Company v. Cross (In re Cross), Adv. No. 17-02153, Case No. 17-20977-beh, 2018 WL 3965191 (August 2018) -- Judge B.E. Hanan
The court granted the creditor’s motion for default judgment against the debtor, concluding that the creditor made a prima facie showing of a nondischargable debt under 11 U.S.C. section 523(a)(9), based on a police report (portions of which were considered under Federal Rule of Evidence 803(8)(c)) and a court record evidencing debtor’s guilty plea to the charge of operating while intoxicated (of which the court took judicial notice).
Gorokhovsky v. Ocheretner (In re Gorokhovsky), Adv. No. 17-2360 (July 2018) -- Judge B.E. Hanan
The debtor moved for sanctions against his ex-wife and her family law attorney for allegedly violating the automatic stay by filing a state court motion for contempt based on the debtor’s failure to pay “section 71” payments incurred in the parties’ prepetition divorce. The court denied the motion, first noting—without deciding—that the action may have been excepted from the automatic stay under § 362(b)(2)(B) as an attempt to collect a domestic support obligation from non-estate property, and that the debtor had failed to demonstrate any compensable injury from the action, precluding an award of damages.
Doss v. Norhardt Crossing Condominium Association (In re Doss), Adv. No. 18-2091 (June 2018) -- Judge B.E. Hanan
The court rejected the debtor's argument that statutory liens become avoidable judicial liens after the holder obtains a foreclosure judgment, dismissing the adversary complaint against the debtor's condominium association on summary judgment. The court also ruled that the statutory lien was not avoidable under sec. 506(d), regardless of whether it was "consensual" or "nonconsensual," and that sec. 523(a)(16) applies to discharge of personal liability, not liens.
In re Hicks, Case No. 17-2800 (June 2018) -- Judge B.E. Hanan
The chapter 13 trustee objected to the debtor’s motion to modify a confirmed plan on the basis that its “plan shortening” language operated as a retroactive forgiveness of missed plan payments (and would, essentially, allow for less than 36 months’ worth of plan payments). The court overruled the objection, noting that the disposable income and “applicable commitment period” requirements of § 1325(b) do not apply to modifications under § 1329, but good faith considerations remain applicable.