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-beh, 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. § 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 § 523(a)(8).
Schouten v. Jakubiak, Adv. Proc. No. 16-2141 (March 2019) -- Chief Judge G.M. Halfenger
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).
Smith v. Kleynerman (In re Kleynerman), Case No. 18-26659-beh, 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. § 523(a)(4), because the judgment debt was 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 § 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 the issues 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, Case No. 18-24510-beh, 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 agreed 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. § 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 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.