Michigan Bankruptcy Blog

The purpose of bankruptcy is to provide for an orderly process by which a debtor’s assets can be fairly divided and distributed among creditors.

One of the primary reasons that most debtors seek bankruptcy relief is the automatic stay, which prevents creditors from pursuing collection efforts outside of the bankruptcy proceedings. Creditors can, however, seek relief from the automatic stay from the bankruptcy court under certain circumstances.

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.

State unemployment benefits are paid pursuant to a system that relies on trust. Benefits are paid based on representations made by claimants that they are out of work and that they continue to seek out full-time work. If a claimant finds part-time work, then benefits are reduced accordingly.

A recent opinion from the United States Bankruptcy Court for the Western District of Michigan (the “Court”) addresses a Chapter 7 debtor’s attempt to discharge a debt owed to the State of Michigan for overpaid unemployment benefits, and penalties and interest stemming from the overpayment. 

In the Summer of 2014, we wrote about a Chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Western District of Michigan (the “Bankruptcy Court”) involving an intra-family squabble. Our analysis focused on the Bankruptcy Court’s decision related to cross motions for summary judgment filed by the parties, and whether the doctrine of “collateral estoppel ”was applicable to the claims being asserted by the parties in an adversary proceeding pending in the bankruptcy.

While bankruptcy offers a fresh start to debtors, it’s not always a fast fresh start, as evidenced by the fact that the Bankruptcy Court recently published another opinion in the same adversary proceeding relating to a similar claim and again analyzing the applicability of collateral estoppel.

The Bankruptcy Code is federal law. It affords debtors protections - including the automatic stay and debt discharge injunction - that hold creditors at bay.

The Fair Debt Collection Practices Act (“FDCPA”) is also federal law. It contains limitations on what a debt collector can do when attempting to collect a debt.

Because debts - and more particularly attempts to collect those debts - drive people into bankruptcy, bankruptcy courts are sometimes forced to grapple with questions of how the Bankruptcy Code and FDCPA interact and impact each other.

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.

There has been much discussion in the media in the past year about the massive amount of professional fees that have been wracked up during the City of Detroit's Chapter 9 bankruptcy. There is always great interest - and debate - about such fees due to the nature of the process: insolvent individuals or companies with no place left to turn file for bankruptcy, creditors take a "haircut" on their claims, and the lawyers get paid. Or so the story goes. As with any complex process, though, there is plenty of nuance that gets lost in the wash, and often is more to the story.

From Ponzi schemes to fraudulent transfers, many Chapter 7 bankruptcy cases involve allegations of wrongdoing. Bankruptcy trustees, who stand in the shoes of the bankrupt entity in asserting claims, often bring actions against third parties alleging participation in, and orchestration of, fraudulent schemes. Because the alleged wrongdoing many times involves actions or transactions in which the debtor took part, defendants in such lawsuits frequently raise a defense based on the doctrine of in pari delicto. 

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.

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.

A recent decision in the U.S. Bankruptcy Court for the Western District of Michigan[1] granted a Motion filed by the Chapter 7 Trustee requesting turnover by the debtor of proceeds of a life insurance policy that were used by the debtor to pay the burial expenses of her father.

In the case, the Chapter 7 Trustee filed a Motion to Compel Turnover of Non-Exempt Assets seeking $9,698.90 from the debtor, including non-exempt cash, jewelry, a whole life insurance policy, and the proceeds from an insurance policy on her father's life. The debtor disputed that she was required to turn over the $7,208.84 in life insurance on her father's life, who died two days after her bankruptcy filing. The debtor argued that she used the proceeds to pay for her father's burial, and that she was not a beneficiary of the policy, but rather the owner.

The Bankruptcy Court of the Western District of Michigan recently held that a spendthrift provision in a trust was negated by other trust provisions, and resulted in a debtor’s beneficial interest in the trust becoming property of the estate.¹

The issue before the Court was whether the trust restrictions prevented the debtor’s beneficial interest from being included in property of the estate.² In this case, the debtor’s mother created a trust in 2001, and the debtor was one of four named beneficiaries of the trust. Upon the settlor’s death in August, 2011, the trust became irrevocable. The trust included a spendthrift provision that prevented any beneficiary from assigning his interest in trust income or principal. The trust also included a provision authorizing the trustees, in their discretion, to distribute trust principal to a beneficiary in the event the beneficiary could not support himself. The trust further contained an “age-based restriction” on a beneficiary’s withdrawal rights (including the debtor’s rights). The “age-based restriction” specifically provided that after a beneficiary reaches age 25, the beneficiary has a “continuing right to withdraw any amount up to one half of the value of the trust assets; and after the beneficiary attains age 30, the beneficiary has a continuing right to withdraw all trust assets.” When the settlor of the trust died, the debtor was 42-years-old. 

The Bankruptcy Court of the Western District of Michigan recently denied a Trustee’s Motion to Sell Avoidance Actions pursuant to 11 U.S.C. 363(b).¹ The Trustee’s Motion sought authority to sell potential causes of actions under Chapter 5 of the Bankruptcy Code, as the estate had limited resources to pursue the actions. The Court noted that the Sixth Circuit has not decided the issue of whether a Bankruptcy Trustee has authority to sell avoidance actions.

The real issue before the Court was whether an avoidance action is “property of the estate” given a Trustee has authority to sell property of the estate pursuant to § 363(b). The Court rejected the Trustee’s argument that avoidance actions are included within property of the estate.

Effective May 1, 2013, the Bankruptcy Courts for the Western and Eastern Districts of Michigan will begin charging a new fee of $25 for each claim transferred. The purpose of the fee, as stated by the Judicial Conference Committee, relates to the number of claims transferred and the impact they have on the workload of the Bankruptcy Courts, including Court time and resources.

The fee will be assessed upon the filing of the claim transfer, regardless of who files the claim transfer. The $25 fee will be charged for each individual claim transfer, and it will also apply to partial claims transfers.

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.

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):

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.

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 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 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."