Chapter 7 debtors filed an adversary proceeding seeking to discharge $9,558.66 in student loan debt under 11 U.S.C. § 523(a)(8) because excepting such debt from a discharge would impose an undue hardship on them. Debtor Robert Braun had co-signed the loans for the benefit of the debtors’ son. The U.S. Department of Education (“DOE”) moved for summary judgment, arguing that the debtors could not meet the second prong of the undue hardship test set out in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987), as adopted by In re Roberson, 999 F.2d 1132 (7th Cir. 1993), and somewhat softened by Krieger v. Educational Credit Mgmt. Corp., 713 F.3d 882 (7th Cir. 2013).
Applying the second Brunner prong, the Court considered whether additional circumstances exist to indicate that the debtors’ inability to pay while maintaining a minimum standard of living is likely to persist for a significant portion of the repayment period. Shortly after filing their bankruptcy case, the debtors signed three reaffirmation agreements to maintain loans on two vehicles. By the time they filed this adversary proceeding, they had satisfied one of the car loans. Moreover, debtors anticipated fully repaying the second loan within seven months, and repaying the third within fourteen months. This progress will, at the fourteen-month point, allow the debtors to enjoy a net monthly income of more than five times the monthly amount due on the student loans. These impending improved circumstances allowed the Court to confirm that the debtors can repay the loan during the repayment period while maintaining at least a minimum standard of living. Based on the debtors’ failure to meet their burden to establish that the obligation to pay the son’s student loans would impose an undue hardship under 11 U.S.C. § 523(a)(8), the Court granted the DOE’s motion for summary judgment.
Brisk v. Swinehart (In re Swinehart), Ch. 7 Case No. 18-25585-kmp, Adv. No. 18-2200, 2019 WL 5206267, 2019 Bankr. LEXIS 3267 (Bankr. E.D. Wis. Oct. 15, 2019) (October 2019) -- Judge K.M. Perhach
The Plaintiffs sought a determination that debt was non-dischargeable pursuant to 11 U.S.C. § 523(a)(4) based on fraud or defalcation by the Debtor as a fiduciary under Wisconsin’s theft by contractor statute. The Court denied the Debtor-Defendant’s motion for summary judgment. There were genuine issues of material fact regarding (1) the amount paid by the Plaintiffs and the amount held in trust for their home improvement project; (2) the amount paid to subcontractors and suppliers on the project; (3) whether the Debtor spent all of the funds that he received from the Plaintiffs on their project or used them for other personal or corporate purposes; (4) whether the Debtor paid the project subcontractors and suppliers proportionally; (5) whether the trust funds could be traced to the payments made to the subcontractors and suppliers; and (6) the Debtor’s state of mind while acting in a fiduciary capacity.
Sonnentag v. Swinehart (In re Swinehart), Ch. 7 Case No. 18-25585-kmp, Adv. No. 18-2198, 2019 WL 5204457, 2019 Bankr. LEXIS 3266 (Bankr. E.D. Wis. Oct. 15, 2019) (October 2019) -- Judge K.M. Perhach
The Plaintiffs sought a determination that debt was non-dischargeable pursuant to 11 U.S.C. § 523(a)(4) based on fraud or defalcation by the Debtor as a fiduciary under Wisconsin’s theft by contractor statute. The Court denied the Debtor-Defendant’s motion for summary judgment. There were genuine issues of material fact as to whether the Debtor spent the money paid by the Plaintiffs on labor and materials for their home improvement project without using any of it for other personal or corporate purposes. The Debtor implied that if he had used the Plaintiffs funds improperly, he only did so negligently, and this would not be sufficient to establish defalcation under § 523(a)(4). However, the Court could not make a determination about the Debtor’s state of mind from the summary judgment record.
In re Lowman, No. 16-20057-kmp (Bankr. E.D. Wis. Oct. 7, 2019) (October 2019) -- Judge K.M. Perhach
The Debtors sought and obtained two deferrals of the entry of discharge pursuant to Bankruptcy Rule 4004(c)(2) and corresponding extensions of time to file a reaffirmation agreement pursuant to Rule 4008(a). However, the Court was unable to grant the Debtors’ third, fourth, fifth, or sixth request for a deferral of discharge. Pursuant to Rule 4004(c)(2), the Court has the authority to defer discharge for a 30-day period, and if the debtor files another motion “within that period,” to defer the entry of discharge to “a date certain.” The rule does not authorize subsequent deferrals. See also In re Kropp, No. 16-29342-gmh (Bankr. E.D. Wis. June 5, 2017). By contrast, Rule 4008(a) permits a court “at any time and in its discretion, [to] enlarge the time to file a reaffirmation agreement,” so the Court granted the requested extension of time and stayed effectiveness of its order until expiration of the extension.
In re Edwards, No. 19-27975-kmp, 2019 Bankr. LEXIS 3156 (Bankr. E.D. Wis. Oct. 3, 2019) (October 2019) -- Judge K.M. Perhach
The Court sustained an objection by the Debtor’s mortgage creditor and denied the Debtor’s motion to continue the automatic stay in her fourth Chapter 13 bankruptcy case in the last three years. The Court found that the Debtor did not rebut the presumption that the case was not filed in good faith by clear and convincing evidence pursuant to 11 U.S.C. § 362(c)(3). The Debtor had filed all four of her bankruptcy cases on the eve of sheriff’s sale or a hearing on a motion to confirm the sheriff’s sale. Because the Debtor had not paid her mortgage creditor for the last four to five years, the arrearage on the Debtor’s mortgage debt had almost doubled. The Debtor also had a history of proposing plans hinging on participation in the Court’s Mortgage Modification Mediation program but failing to comply with the program requirements. Finally, there was a lack of evidence as to a substantial change in the Debtor’s personal or financial affairs.
In re Dawn Schroeder, Case No. 17-27289 (September 2019) -- Chief Judge G.M. Halfenger
Before confirmation Richard Voss filed proof of a claim secured by a mortgage on the chapter 13 debtor's residence. The confirmed plan provided for mediation to modify the mortgage and either payment on Voss's claim outside of the plan, if modified, or a plan modification to address the claim, if not. About a year after confirmation, after mediation failed, Voss filed an amended proof of claim, seeking to increase the amount of his secured claim based on a post-confirmation increase in the value of the debtor's residence. The debtor objected to Voss's claim and filed a request to modify the confirmed plan to pay Voss's allowed secured claim through the plan in the amount stated in his original proof of claim and to otherwise treat his claim as an allowed unsecured claim. The court concluded that the debtor's proposed modification of the plan is permissible under 11 U.S.C. §§1322(c)(2) & 1329, disallowed Voss's amended proof of claim based on insufficient cause to amend, and sustained the debtor's objection to Voss's claim.
In re Bruce, Case No. 18-21283-beh, 2019 WL 5887173 (September 2019) -- Judge B.E. Hanan
The Chapter 13 debtor filed a motion seeking sanctions for violations of the automatic stay, and for contempt against a county child support agency based on the agency’s continued collection of both pre-petition arrears and current child support payments from the debtor via payroll deductions, even after the debtor’s plan was confirmed. The debtor later dropped his request for stay-violation sanctions, after conceding that the agency’s post-petition collection activity was excepted from the stay per 11 U.S.C. § 362(b)(2)(C) and proceeded with a motion for contempt sanctions and attorney fees. The agency argued that a finding of contempt was not warranted because it was not notified that the debtor’s plan had been confirmed until four months after the order, and it stopped collecting child support arrearages as soon as it was given notice.
The Court determined that the agency’s continued garnishment of the debtor’s wages after plan confirmation and before it received actual notice of the confirmation order did not constitute contempt, warrant sanctions, or warrant granting attorney fees. The Court found that the agency, as a priority creditor, did not have a duty to monitor the debtor’s bankruptcy case for potential plan confirmation. Furthermore, the agency did not act in knowing or reckless disregard of the confirmation order because it had no actual knowledge of its existence during the time period in dispute. Additionally, the Court found that the debtor could not be awarded attorney fees because he failed to state an adequate basis for damages.
In re Patrick and Hope Souter, Case No. 19-21582 (September 2019) -- Chief Judge G.M. Halfenger
The court ordered the debtors to show cause why their chapter 13 case should not be dismissed or converted based on their failure to file all applicable tax returns as required by 11 U.S.C. §1308, a requirement for plan confirmation specified in 11 U.S.C. §1325(a)(9). The debtors argued that some of §1325(a)'s requirements may be mandatory—including §1325(a)(1)'s requirement that the plan must comply with all applicable provisions of the Code, United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 (2010)—but others are discretionary, such as §1325(a)(9)'s requirement that the debtor must comply with §1308, and the court may confirm the plan even if such a requirement is not satisfied, if no one objects. The court held that the best construction of §1325(a), given Supreme Court and Seventh Circuit authority, is that all of its requirements are mandatory. The court denied confirmation and dismissed the case.
In re Pugh, Case No. 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 Karl Boddy, Jr. and Theresa Boddy, Case No. 19-23004 (August 2019) -- Chief Judge G.M. Halfenger
The chapter 13 debtors' amended plan provides for an allowed claim secured by a mortgage on their principal residence, stating that the debtors will seek a modification of the mortgage through the court’s mortgage modification mediation program; if mediation is successful, the debtors will pay the claim "outside of the plan"; if mediation is unsuccessful, the debtors "will file a feasible plan to address the mortgage claim." The mortgage creditor consented to mediation but objected to plan confirmation, asserting that the plan does not conform to 11 U.S.C. §1325(a)(5). The court denied confirmation.