Michigan Bankruptcy Blog

The Bankruptcy Code grants a trustee (or a debtor in possession) certain “avoidance” powers to recover payments to creditors made shortly before a bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would receive through the bankruptcy process. 

In a recent case in the United States Bankruptcy Court for the Western District of Michigan (the “Court”), the Court considered whether a payment made by a Chapter 7 debtor to her son in advance of the debtor’s bankruptcy filing was “preferential” and thus subject to recovery by the Chapter 7 trustee.

In a recent case, a lawyer was sanctioned by an Ohio bankruptcy judge for his conduct in connection with an adversary proceeding he brought on behalf of a client against a Chapter 7 debtor. The lawyer was vindicated, though, after the Bankruptcy Appellate Panel of the Sixth Circuit (the “BAP”) reversed the bankruptcy court on appeal.

Bankruptcy is a process that permits people to discharge debts, but not all debts are dischargeable. In a recent opinion, the U.S. District Court for the Eastern District of Michigan (the “District Court”) reversed a U.S. Bankruptcy Court for the Eastern District of Michigan (the “Bankruptcy Court”) ruling that a state court criminal restitution claim is dischargeable.

Students have taken on more than $1 trillion in debt to pay for the relentlessly rising costs of higher education. With that much debt outstanding, it’s no surprise that there are increasing numbers of borrowers defaulting on student loan debt, and seeking to discharge that debt by filing for bankruptcy protection. But, as a Wisconsin man recently learned, discharging student loan debt in bankruptcy is no easy feat.

On June 1, 2015, the United States Supreme Court decided Bank of America v. Caulkett, No. 13-1421, together with Bank of America v. Toledo-Cardona, No. 14-163, holding unanimously that a Chapter 7 bankruptcy debtor cannot “strip off” a junior lien.

Lien stripping takes place when there are two or more liens on a property, and the senior lien is “underwater” in that the amount owed on the senior lien is greater than the value of the property. In a Chapter 13 case a property owner can strip off the junior lien, resulting in it being treated as unsecured debt in the bankruptcy.

In these cases, the Court held that a Chapter 7 debtor may not void a junior lien under 11 U.S.C. § 506(d) when the debt owed on a senior lien exceeds the current value of the collateral if the junior creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.

Check out this webinar on our YouTube channel to identify common mistakes that lenders make before and during consumer bankruptcy cases – and how to avoid those mistakes to better protect the lender's rights and collateral.

In litigation, obtaining a judgment is step one. Step two – often as, if not more, difficult than winning a lawsuit – is collection. In a short, interesting Memorandum of Decision and Order (the “Decision”), Judge Dales of the United States Bankruptcy Court for the Western District of Michigan (the “Bankruptcy Court”), writes about some of the practical and legal considerations involved with pursuing collection of a bankruptcy court judgment.

While Chapter 7 bankruptcy offers individuals a fresh start and discharge from many debts, it doesn't come without a price. Property of the debtor becomes property of the estate and is used to pay creditors.

But not all of it. Section 522 of the Bankruptcy Code lists exemptions that debtors can use to exempt property - up to a certain dollar amount in value - from the estate. The purpose of exemptions is to ensure that the individual debtor is able to maintain a basic standard of living post-bankruptcy. But because there are very few assets available for creditor recovery beyond exempt property in many bankruptcy cases, the propriety of a debtor's claimed exemptions is an issue that is oft-litigated.

Such was the case in an appeal to the U.S. Court of Appeals for the Sixth Circuit (the "Sixth Circuit") arising from a Chapter 7 bankruptcy case that was filed in the U.S. Bankruptcy Court for the Eastern District of Michigan.

Two of the most difficult and stressful legal processes that individuals participate in are divorce and bankruptcy proceedings. Unfortunately, as lives are upturned and finances stretched, one often closely follows the other.

Such was the case in a recent case in the United States Bankruptcy Court for the Western District of Michigan.

A husband and wife (both Michigan residents) used equity from property owned by the wife - prior to and during the marriage - to finance a roofing repair business started by the husband in Florida. To accomplish this, the wife quit-claimed her interest in the property to herself and the husband. They then refinanced the property and borrowed $200,000 from the lender. The loan funds were used to pay off the wife's original mortgage on the property ($120,000), pay down the husband's credit card debt and fund the new business.

They then agreed that the husband would make monthly mortgage payments on the new loan until the payments equaled the amount of the original mortgage - $120,000. They subsequently refinanced the loan with two new lenders. Shortly thereafter the husband's business failed, and the husband and wife started divorce proceedings in 2011.

On Monday, November 17, 2014, the U.S. Supreme Court agreed to hear two bankruptcy-related cases that involve issues commonly faced by banks and homeowners with underwater mortgages in Chapter 7 cases. The cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona come from Florida, where many homeowners own homes with mortgages that exceed equity value due to the recent housing crisis. Bank of America holds the second mortgage in both cases. 

Many students don't realize the scope and extent of the lifelong financial burden they saddle themselves with when taking out student loans. It is only after getting into the "real world" that they realize that living expenses are higher, and after tax income is lower, than they anticipated, making student loan debt repayment difficult if not impossible.

Some look to bankruptcy for relief and a fresh start. But all debt is not treated equally in bankruptcy. Student loan debt is not the same as, for instance, credit card debt. It is not dischargeable pursuant to Bankruptcy Code section 523(a)(8) except in one narrow circumstance. Specifically, to discharge student loan debt, a debtor must show undue hardship - a very high bar.

One of the fundamental tenets of a business bankruptcy reorganization plan under Chapter 11 of the Bankruptcy Code is the "absolute priority rule." This rule, codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code, provides that every unsecured creditor must be paid in full before the debtor can retain any property under a reorganization plan. Chapter 11, however, is not solely the domain of business debtors. Individuals (who more commonly seek protection under Chapters 7 and 13) may also file for Chapter 11. So how does the absolute priority rule affect individual debtors? That issue is analyzed in a recent opinion, Ice House America, LLC v. Cardin, issued by the U.S. Court of Appeals for the Sixth Circuit.

Section 110 of the United States Bankruptcy Code provides that a non-attorney can assist in the preparation of the bankruptcy petition. However, as an Inkster, Michigan man just learned (the hard way), the Bankruptcy Code places numerous requirements on bankruptcy petition preparers and subjects those who do not comply to substantial penalties.

On Tuesday, February 25, Derrick Hills of Inkster was sentenced by U.S. District Court Judge Sean F. Cox to 46 months in prison after being convicted by a jury in September of five counts of criminal contempt. The contempt proceedings stemmed from repeated violations of orders issued by U.S. Bankruptcy Judge Steven Rhodes from 2007 to 2009. According to a press release issued by the U.S. Attorney's Office following Hills' conviction at trial:

The evidence presented at trial showed that Hills had acted as a bankruptcy petition preparer since 2007, assisting people in filing for bankruptcy. Hills continued to act as a bankruptcy petition preparer despite five bankruptcy court orders issued by Bankruptcy Judge Steven Rhodes, permanently enjoining Hills from doing so for various non-compliance with bankruptcy rules and complications caused by his acting in the capacity of a bankruptcy petition preparer. Hills assisted individuals with consumer debts in preparing and filing their Chapter 7 bankruptcy paperwork. However, his actions went well beyond what was allowed by law and clearly violated Judge Rhodes Orders.

In re Newcomb Print Communications, Inc., Case No. 12-08042 (Bankr. W.D. Mich., Sept. 6, 2013).

When a debtor files a case under Chapter 11 and retains legal counsel, another person or entity may fund the debtor’s retainer. But even when the debtor is not the source of the funds, the retainer is property of the bankruptcy estate – which is particularly important if the case later converts to Chapter 7.

Lindsey v. Pinnacle Nat’l Bank (In re Lindsey), Appeal No. 12-6362 (6th Cir., Aug. 13, 2013)

The Sixth Circuit held this week in a published opinion that a bankruptcy court’s denial of confirmation of a Chapter 11 plan is not a final appealable order. In so holding, the Sixth Circuit joins four other circuits, while three other circuits have held to the contrary.

In re Casey Marie Anthony, Bankr. M.D. Fla., Case No. 8:13-bk-00922-KRM

Although this blog typically focuses on Michigan bankruptcy cases, last week’s Chapter 7 filing by Casey Anthony raises interesting questions about the impact of bankruptcy on public figures.

Casey Anthony held the national spotlight for nearly three years after being charged with murdering her two-year-old daughter, Caylee.  Anthony initially alleged that Caylee was kidnapped by her nanny, then claimed that Caylee accidentally drowned in the family pool.  After a jury found her not guilty on all charges except some misdemeanors, Anthony faced a barrage of lawsuits, including claims for defamation and for reimbursement by private investigators who searched for Caylee in the months before her remains were found.

Those lawsuits ground to a halt when Anthony filed a voluntary Chapter 7 petition in the Middle District of Florida on January 25, 2013.  In her bankruptcy papers, Anthony lists few assets (comprised mostly of household goods) but discloses unsecured debts of nearly $800,000, plus numerous debts of unknown amounts.  The debts include the pending lawsuits against her and $500,000 in legal fees owed to her criminal defense attorney.

Auday v. Wet Seal Retail, Inc., Case No. 12-5057 (6th Cir., Oct. 25, 2012) (recommended for full-text publication). 

As most bankruptcy practitioners know, a debtor’s pre-petition cause of action – whether for personal injury, breach of contract, or other claim – is property of the bankruptcy estate.  Now, the Sixth Circuit has clarified that only the trustee can file suit in connection with a Chapter 7 debtor’s pre-petition cause of action, unless the action is abandoned.

Moyer v Koster et al (In re Przybysz), Adv. Pro. Case No. 12-80174 (Hon. Scott W. Dales, Sept. 25, 2012).

A recent decision from the Bankruptcy Court of the Western District of Michigan serves as a lesson and reminder to attorneys that complaints must do more than recite legal conclusions – they also must allege sufficient facts to put defendants on notice of the claims and of possible defenses.

The local rules for the Bankruptcy Court for the Western District of Michigan have been amended, effective August 1, 2012.  The new rules can be found here in their entirety.

A redline version of the rules, showing the amendments, can be found here. (We have identified that the following link is no longer active, and it has been removed)

Among other changes, practitioners should review the following amendments:

This blog entry includes material originally prepared by the author for the 2012 FBA Bankruptcy Seminar. 

The U.S. Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), immediately cast a shadow of uncertainty on bankruptcy courts’ constitutional authority to enter final orders.  But Stern leaves many questions unanswered, and the bankruptcy judges within the Western District of Michigan have differed as to whether the case should be interpreted narrowly or broadly.  As a result, depending on the presiding judge in a particular case, Stern may be critically important or unworthy of mentioning.  The following is a brief review of cases in this district that address the scope of Stern.

In re Hopkins, Bankr. W.D. Mich., Case No. 10-13592, Hon. Scott W. Dales (Feb. 2, 2012). 

When the sole member of a limited liability company files Chapter 7 bankruptcy, the membership interest is property of the bankruptcy estate that the trustee may liquidate, subject to claimed exemptions and liens.  But if the LLC owns property, can the trustee also liquidate that property for the benefit of the sole member's creditors?

In re Pellegrini, Bankr. W.D. Mich., Case No. 09-90464, Hon. James D. Gregg (Jan. 17, 2012). 

When Congress adopted BAPCPA, it added an exemption for "[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under certain provisions of the Internal Revenue Code.  11 U.S.C. § 522(d)(12).  Although broader than the exemption previously available for retirement funds, § 522(d)(12) is not limitless – as the Bankruptcy Court for the Western District of Michigan recently emphasized.

Richardson v. Citimortgage, Inc. (In re Emerson), unpublished opinion, BAP No. 11-8015 (Oct. 7, 2011).

The Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") has rejected a trustee's efforts to avoid a mortgage that was mistakenly discharged because the discharge was rescinded before the debtor's bankruptcy filing.

Many are familiar with Anna Nicole Smith, the late television personality who married an elderly oil tycoon shortly before his death and later became embroiled in a legal battle over his estate.  Recently, the bankruptcy case of Vickie Lynn Marshall – Anna Nicole Smith's legal name – made its way to the U.S. Supreme Court and resulted in an opinion that limits the authority of bankruptcy courts to enter final orders in common law actions.

Vickie married J. Howard Marshall approximately a year before his death, and although he gave her many gifts, he did not leave her anything in his will.  Before J. Howard passed away, Vickie sued his son, Pierce, in state probate court for tortious interference with J. Howard's will.  Vickie then filed bankruptcy.  Pierce filed a nondischargeability action and a proof of claim in Vickie's bankruptcy case, asserting that Vickie had defamed him.  Vickie filed a counterclaim against Pierce, essentially restating the tort allegations from her state probate court action.

In re Rahim, E.D. Mich., May 23, 2011 (Case No. 10-15123, Hon. Sean F. Cox).

Previously on this blog, we discussed In re Rahim, a case in which Judge Rhodes dismissed the Chapter 7 case of debtors with primarily non-consumer debts "for cause" under 11 U.S.C. § 707(a) because the case was not filed in good faith. The debtors, both practicing physicians, brought home an annual income of more than $500,000 and had multiple homes and luxury vehicles.

Johnson v CACH, LLC (In re Johnson), E.D. Mich., December 20, 2010 (Case No. 10-12873, Hon. Robert H. Cleland)

When a creditor has a state court judgment, garnishing the judgment debtor's state income tax refund is a common collection method.  If the judgment debtor files bankruptcy, issues often arise as to whether the creditor can keep the refund or whether the debtor is entitled to recover and exempt the refund.

In the "Did You Know?" section of the Michigan Bankruptcy Blog, we feature opinions that are not newly issued but that may be helpful for Michigan bankruptcy practitioners. 

When a person files bankruptcy, most collection actions are automatically stayed.  Subject to certain exceptions, Section 362 of the Bankruptcy Code prohibits the commencement or continuation of an action to recover a pre-petition claim, the enforcement of a pre-petition judgment, and any act to collect a pre-petition claim against the debtor, among other things. 

In re Schafer, 6th Cir. B.A.P., Feb. 17, 2011 (2011 WL 534752, authored by Hon. Marci B. McIvor).

Under the Bankruptcy Code, debtors may choose between the federal exemptions listed in 11 U.S.C. § 522(d) or exemptions available under state law, unless their state has "opted out" of the federal exemption scheme. Michigan has not opted out, so debtors may choose between federal and state exemptions. Since 2005, Michigan law has provided two alternative state-law exemption schemes:

In re Zerbi, Bankr. W.D. Mich., Jan. 6, 2011 (Case No. 09-14649, Hon. Scott W. Dales)

A recent decision from the Bankruptcy Court for the Western District of Michigan provides some practical guidance for debtors and their attorneys about exempting unmatured life insurance policies.

In In re Zerbi, the debtor owned and was the insured under a life insurance policy. The policy had both a "cash value" or investment component and an insurance component. When the debtor filed his Chapter 7 case, the insurance policy had a cash surrender value of approximately $19,248.02. The debtor claimed exemptions in the policy under sections 522(d)(5) (the "wildcard" exemption), 522(d)(7), and 522(d)(8):

Ransom v FIA Card Services, NA, Supreme Court of the United States, Jan. 11, 2011 (Case No. 09-907).

In the first opinion authored by Justice Elena Kagan, the Supreme Court of the United States held that a Chapter 13 debtor who owns a vehicle outright and thus does not make loan or lease payments cannot include vehicle ownership costs in his or her monthly expenses for purpose of the means test.

Under BAPCPA, debtors in Chapter 13 cases must follow a formula to calculate their disposable income - that is, the amount that the debtor must use to pay creditors under a court-approved Chapter 13 plan. To determine disposable income, the debtor deducts certain "reasonably necessary" expenses from his or her monthly income. Those reasonably necessary expenses, which are outlined in the IRS's "National and Local Standards," include allowances for vehicle ownership and operating costs.

In re O'Brien, Bankr. W.D. Mich., Jan. 4, 2011 (Case No. 09-00426, Hon. James D. Gregg).

As previously discussed on this blog, debtors should include a good-faith estimate of an anticipated tax refund in their bankruptcy schedules. In prior cases, the Hon. Jeffrey R. Hughes and the Hon. Scott W. Dales suggested that debtors may not be able to amend their schedules to exempt tax refunds that have already been spent at the time of the amendment. But in a recent opinion, the Hon. James D. Gregg disagreed with those cases and held that, depending on the circumstances, debtors may be able to exempt a tax refund that was not originally disclosed, even if the tax refund has been spent.

In re Rahim, Bankr. E.D. Mich., Dec. 16, 2010 (Case No. 10-57577-R, Hon. Steven Rhodes).

When one thinks of Chapter 7 bankruptcy cases, the low-income consumer debtor who is overwhelmed by debt often comes to mind. But individuals whose debts are primarily "non-consumer" debts – usually business debts – may also qualify for Chapter 7 relief, even if they cannot pass the "means test" required for consumer debtors under BAPCPA. Because business debtors do not have to pass the means test, their incomes may be significantly higher than what one might expect to see in a Chapter 7 case. However, at least one Michigan bankruptcy court is requiring high-income business debtors to tighten their belts when they seek Chapter 7 relief.

In In re Rahim, the married debtors, both practicing physicians, earned a startlingly high income. Despite having filed Chapter 7, the debtors' annual income exceeded $500,000, and their expenses included sizeable mortgage payments on their home, vacation home, and rental home, plus payments on three luxury vehicles. Their debts included numerous mortgages and personal guaranty liability arising out of failed real estate ventures.

Although less sweeping than the 2009 rule amendments, which changed the time periods for many actions, bankruptcy professionals should take note of the most recent changes to the Bankruptcy Rules. 

Notably, Amended Rule 1007(c) increases the time for an individual debtor in Chapter 7 to file the statement of completion of a course concerning personal financial management from 45 days to 60 days.

In re Olsen, E.D. Mich., Oct. 27, 2010 (Case No. 10-10926, Hon. Stephen J. Murphy, III, District Judge).

When a person files bankruptcy, all of his or her property becomes property of the bankruptcy estate. This concept of "property of the estate" casts a wide net and includes all of the bankruptcy debtor's legal and equitable interests in property. However, questions often arise when a debtor is listed as an owner of an asset that someone else purchased. In such cases, the debtor might argue that he or she is not the "true," or equitable, owner of the property and that the property therefore cannot be used to pay creditors.

In In re Olsen, the debtor's husband, who did not file bankruptcy, was in a motorcycle accident. He settled a claim for his personal injuries and used the settlement funds to purchase an annuity. He and his wife, the debtor, were listed as co-owners and co-annuitants, and both were entitled to receive payments under the annuity.

Richardson v. Wells Fargo Home Mortgage, Inc. (In re Brandt), Bankr. W.D. Mich., Nov. 30, 2009 (Adv. Pro. No. 08-80342, 421 B.R. 426, Hon. James D. Gregg), affirmed, W.D. Mich., Aug. 25, 2010 (Case No. 1:10-CV-55, Hon. Robert Holmes Bell).

Outside of bankruptcy, errors in legal descriptions in mortgages often can be corrected. But when a mortgagee files a Chapter 7 bankruptcy case, a mistake in a legal description can open the door for a trustee to avoid the mortgage and potentially liquidate the property for the benefit of the debtor's unsecured creditors.

In re Lipa, E.D. Mich., Aug. 17, 2010 (Case No. 04-74608, Hon. Steven Rhodes).

In re Weeks, W.D. Mich., Jan. 23, 2009 (Case No. 05-02298, 400 B.R. 117, Hon. Jeffrey R. Hughes).

It is not uncommon for debtors - particularly those who own businesses - to sign personal guaranties before their bankruptcy filing. Pre-petition obligations under those guaranties are generally discharged in bankruptcy. But when a post-petition obligation arises under such a guaranty, the Bankruptcy Courts for the Western and Eastern Districts of Michigan are divided as to whether a guarantor-debtor is protected by his or her discharge.

In re Reiman, Bankr. E.D. Mich., July 16, 2010 (Case No. 09-70776, Hon. Phillip J. Shefferly).

Because of the high volume of foreclosures in Michigan, some lenders are bidding less than fair market value at foreclosure sales, particularly on the east side of the state. This has created a conundrum for Chapter 7 trustees who close cases as "no asset" cases, only to discover after the foreclosure sale that they could have sold the property at market value, paid the redemption amount, and still had money remaining to distribute to unsecured creditors.

In re Peckens-Schmitt, Bankr. W.D. Mich., July 16, 2010 (Case No. 10-04164, Hon. Scott W. Dales).

In a notable decision, the United States Supreme Court recently upheld a bankruptcy court's confirmation of a Chapter 13 plan that discharged part of a student loan debt without an adversary proceeding where the student loan creditor had notice of the plan but did not object. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010).

In re Hillenbrand, Bankr. E.D. Mich., Feb. 4, 2010 (Case No. 09-75574, Hon. Steven Rhodes).

Although the commencement of a bankruptcy case usually stays a pending state court action against the debtor, a recent decision of the Bankruptcy Court for the Eastern District of Michigan concluded that the stay does not preclude an action seeking an injunction.

In re Neal, Bankr. E.D. Mich., Feb. 8, 2010 (Case No. 08-57254, Hon. Steven Rhodes).

In this case, the chapter 7 debtors claimed an exemption in their house, which was also subject to an unperfected mortgage. The trustee commenced an adversary proceeding, and the court set aside the mortgage. The trustee then tried to sell the house, but the debtors allegedly failed to cooperate with the trustee and refused to vacate the house.

In re Trudell, Bankr. W.D. Mich., Feb. 19, 2010 (Case No. 09-00340. Hon. Jeffrey R. Hughes).

Attorneys for bankruptcy debtors have a duty under the Bankruptcy Code to ensure that the information in the debtors' schedules is accurate. A recent decision from the Bankruptcy Court for the Western District of Michigan cautions debtors' attorneys that this duty extends to the disclosure of anticipated income tax refunds.

When the chapter 7 debtors filed their schedules, they indicated that they did not expect to receive an income tax refund. Several weeks later, the debtors filed their tax return, which showed that they were entitled to a $5,000 refund. The debtors subsequently amended their schedules to disclose the refund and to fully exempt it. Thereafter, the debtors spent their refund.

In re Caperton, Bankr. W.D. Mich., Dec. 21, 2009 (Case No. 09-09540, Hon. Scott W. Dales).

The Bankruptcy Court for the Western District of Michigan recently rejected a debtor's attempt to exempt property based on a provision of the state constitution. The chapter 7 debtor elected to rely on state exemptions and, in addition to those statutory exemptions, claimed an exemption in $750 in personal property under Article X, § 3 of the Michigan Constitution ("Section 3"). Section 3 provides in part that "personal property of every resident of this state in the amount of not less than $750, as defined by law, shall be exempt from forced sale on execution or other process of any court."