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Casenotes: 2010 WDNY Bankruptcy Cases Archives

Debtor's exemption surcharged for failure to list an asset: Seres

In re Seres; WDNY Bk 08-12185; Ford Credit v. Seres & Wallach; AP 09-01289 (Judge Bucki; Decision dated October 1, 2010). If a debtor fails to list an ongoing personal injury lawsuit on his bankruptcy petition, or report it to the trustee at the 341 hearing, that debtor's personal injury exemption will be surcharged for the trustee's costs and expenses caused by the failure to disclose, so says Judge Bucki. I would predict that Rochester Judge Ninfo, rather than surcharging the exemption, would have denied it outright, in a similar situation.In 2001, the debtor was involved in a car accident in Lackawana NY. Two years later, he filed a personal injury lawsuit against the other driver. In 2004, Ford Tilting Credit Trust was added as a defendant in the lawsuit Apparently Ford Credit was the actual owner of the vehicle. It must have been a lease; in New York, car owners are liable for accidents caused by drivers of their car. Since then New York law has changed regarding liability of businesses that lease cars.

Debtor not liable for depreciated loss in value of car when case converted from 13 to 7: Lang

In re Lang Bk 05-16767 (Judge Bucki, decision September 17, 2010.) When this debtor filed Chapter 13 in 2005, she filed a five year plan to cure the arrears on her residence. At the time, she owned a car, free and clear, with $7,250 unexempt equity (value in excess of New York's $2,400 auto exemption.) Four years later, the arrears had been paid off and the debtor converted to Chapter 7. The car had significantly depreciated, of course, so the Chapter 7 trustee wanted from the debtor the equivalent of the unexempt value of the car when the case was originally filed, not on the conversion date. Buffalo Judge Carl Bucki ruled against the trustee, stating that, upon conversion, the asset of the bankruptcy estate is the asset as it exists when the case is converted. The court stated on page 3 of the decision as follows: Section 348(f)(1)(A) of the Bankruptcy Code states generally that when a case under chapter 13 is converted to another chapter, "property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion." For purposes of administration, therefore, the chapter 7 trustee may treat an asset as property of the estate if it satisfies two conditions.2 First, it must have been property of the estate as of the date of filing. Second, it must remain in the debtor's possession or control on the date of conversion.Therefore, the Chapter 7 trustee was only entitled to the unexempt equity in the vehicle, if any, as of the time of conversion.

Secured Creditor, Corporate Owner not liable for Corporate Wages: Lyons Equipment

In re: Lyons Equipment Company, Inc. Bk 09-21419; AP 09-1059 (Judge Bucki; decision September 8, 2010)Buffalo Bankruptcy Judge Carl Bucki has ruled that a secured creditor which took over management of a corporation is not liable for unpaid wages that were incurred prior to the take-over. Lyons Equipment owed Greystone Business Credit $2.4 million dollars, which was secured by the corporate assets. In September 2008, Greystone took over operation of Lyons, installing their own 'chief restructuring officer.' Under Greystone's management, Lyons repaid the secured creditor almost all of the money owed to it.Meanwhile a former commissioned employee sued Lyons for unpaid commissions. The employee also sued Greystone and its restructuring officer. State Court was on the verge of ruling in favor of Greystone when Lyons filed Chapter 11. All parties agreed to allow the Bankruptcy Court to make the final ruling on Greystone's liability.Judge Bucki ruled in favor of the secured creditor and its restructuring officer. Greystone was under no obligation to look after the interest of any creditors other than itself (absent collusion or breach of a statutory obligation.) While there are penalties for failure to pay employees (New York Labor Law Sect. 191-c, regarding commissioned employees, Labor Law Sect. 198-a, regarding criminal penalties for failure to pay wages, and Business Corporation law sect. 630, regarding shareholder liability for unpaid wages), they did not apply to a creditor of the corporation. The restructuring officer owed an independent duty of sound management to Lyons as an officer of the corporation, but paying off a secured creditor of Lyons, to avoid a catastrophic repossession of corporate assets, was within the scope of that duty. Furthermore, as a matter of 'realistic expectations", it would not be proper to find a restructuring officer personally liable for payment of wages incurred before he or she was installed into that position.The Court also found that the former principal of the business, who was replaced by the restructuring officer, was also not financially liable to the former employer. Only the corporation, not its management or creditors, had a contractual relationship with the employee.

Debtor's truck can be his homestead, at least in part: Tullar

In re: Tullar; Bk 10-11214 (Judge Kaplan; August 18, 2010). It would be an understatement to say this was a case of first impression. The debtor's sole residence was the sleeper cab in his Peterbilt truck. Did the truck qualify for New York's homestead exemption? Judge Kaplan in Buffalo concluded that it did, at least in part.The judge observed that there was no other sleeper-cab-as-homestead case anywhere in the country, and analogous cases concerning house boats or motor homes in other states were of no help, given the different text of other state's homestead exemption laws. New York's exemption statute was amended to include "a mobile home" in 1980. The purpose of the amendment was to clearly exempt manufactured homes on rented lots like trailer parks. Reflecting on the interpretation requirements of New York Statutes, Sections 111 and 127, one provision (Sect. 127) states a statute should be interpreted considering the circumstances surrounding the enactment, while the other (Sect. 111) states that statutes should reflect legislative intent. Here, Judge Kaplan assumed that the legislature, when it added mobile homes to the homestead exemption, was only thinking of non-moving residences. On the other hand, the over-all legislative intent of the homestead exemption is to protect a debtor's dwelling, whatever it is.The judge finally concluded that in equity the debtor's residence was his residence, however unusual, and should be exemptible. As the debtor drove the truck 1/3 of the time for work, he only used it 2/3 of the time as his residence and, therefore, only 2/3 of the equity could be exempted as a homestead (he could claim the $600 tools of the trade exemption for the 1/3 non-residential equity.)

Bad Faith Chapter 13 plan: case filed 10 days after property transferred: Johnson

In Re: Walter Johnson Bk 08-14477 Judge Bucki April 21, 2010. This Chapter 13 case was filed October 9, 2008. According to the decision, Roger Dulski transferred the real estate at 1985 Genesee Street, Buffalo, to the debtor ten days earlier. Dulski himself had filed Chapter 13 in 2000 and again in 2005, both of which cases had been dismissed. During the eight years he owned the property, Dulski failed to pay property taxes, water bills or sewer charges, and the property accumulated $70,000 in secured taxes and fees. Dulski then transferred the property to Johnson, who is described as a "tenant" in the building, operating a car repair facility there. Johnson then immediately filed his Chapter 13 case, proposing to value the property at $32,000 and avoid all the tax liens and fees in excess of that amount. Unsecured creditors would receive a distribution of 5%.The City of Buffalo filed an objection to the plan, based on the good faith requirement of Sect. 1325(a). Specifically, Sect. 1325(a)(3) requires that "the plan has been proposed in good faith and not by any means forbidden by law" and Sect. 1325(a)(7) "the action of the debtor in filing the petition was in good faith."The Court noted that these are two separate requirements, that the plan be proposed in good faith and that the petition be filed in good faith. As for the first requirement, the court found that the plan was filed in good faith: "The present facts do not necessarily indicate a lack of good faith with respect to the proposal of a plan, as needed to comply with section 1325(a)(3). No matter how ambitious or even aggressive in its assertion of rights, a plan is generally proposed in good faith when it seeks nothing more that what the law would allow. See In re Cavaliere, 238 B.R. 247 [Judge Bucki] (Bankr. W.D.N.Y. 1999)."However, the court found the petition was not filed in good faith. The court noted that Johnson was not personally liable on the secured debt related to the Genesee Street property, acquired the property immediately prior to filing bankruptcy, and had made no effort to deal with the financial problems of the property outside of bankruptcy. In other words, the property was acquired exclusively to cram down the secured creditors in bankruptcy, and the bankruptcy was filed exclusively for the same purpose. "Essentially, therefore, the present bankruptcy attempts to resolve problems that are not of Johnson's making, but which were transferred to Johnson for the purpose of compromising the rights of another person's creditors."For that reason, the objection was upheld and the plan as filed not approved. As a post-decision note, the debtor filed an amended plan a week after this decision was filed, calling for full payment with interest to all the property tax and fees secured creditors and 100% repayment to unsecured creditors. This plan was confirmed.

For distribution purposes, a Trustee cannot file a claim on behalf of a creditor: Davis

In re Gregory Davis 05-90690 (Judge Kaplan, June 11, 2010.) Note: the Case number on this case is 05-90690, NOT 05-09690, as is listed on the decision and order of June 11, 2010. Background information for this case note came from the court docket and the claims register, not just the decision.This case was filed October 11, 2005, in the massive rush of cases filed immediately preceding the implementation of BAPCPA, the new bankruptcy provisions. Schedule F listed a total of thirteen claims for a total of $71,590.00. The case was closed as a no-asset case Feb. 28, 2006. A year later, February 25, 2007, the trustee moved to reopen the case due to an unscheduled asset. Apparently the debtor had a pre-bankruptcy claim, arising out of a personal injury accident July 13, 2005, that had not been listed on his bankruptcy schedules.A motion to settle the personal injury action for $25,000 was filed Dec. 22, 2008 and approved a month later. A separate motion to compromise an underinsured motorists claim for $65,000 was made Sept. 22, 2009 and approved a month after that.On March 19, 2007, the Court Clerk sent out a notice to creditors to file claims. The deadline, or "bar date", to file timely claims was June 20. It appears that only two claims were filed prior to the bar date, for $5,267.58. On September 16, 2009, the Court Clerk sent out a "Notice of Surplus Funds" to all creditors, stating that the time to file claims against the surplus had been extended to Oct. 9. As noted by the Court in its decision and order, the provision in Bankruptcy Rule 3002 authorizing this so-called "Surplus Money Notice" was deleted in 1996, following amendments to the Bankruptcy Code's treatment to tardy claims in 1994. The court stated that "[f]or some reason, a Surplus Money Notice went out in this particular case...", meaning for some reason other than a legally-justified reason. In any case, no new claims were filed by October 9. Then, on November 15, 2009, the trustee filed thirteen claims, one for each of the originally-scheduled claims (including the two claims for which a timely proof of claim had previously been filed by the actual creditor.) These thirteen claims were for $71,590, the originally scheduled amounts, and included a student loan claim for $43,575.The trustee's Final Report was filed Feb. 3, 2010. It states that the trustee had $51,675.56 to distribute; that all fifteen claims would be treated as timely filed general unsecured claims, and that they would be paid about 56% of their claims. It also stated that the trustee would receive $7,375.21 as a commission on the funds he was distributing to creditors. The trustee only receives a commission on funds paid to creditors, not funds paid to the debtor as surplus.On Feb. 21, 2010, the debtor's attorney objected to the final report and filed an objection to the thirteen claims filed by the trustee. The objection simply stated that the claims were tardily filed. In a letter dated May 18, 2010, the trustee took the position that his thirteen claims should be allowed as valid tardy claims in the case (there is nothing to indicate why the original final report listed the trustee's claims as timely, not tardy.) The Court disagreed with the trustee's position, in a careful statutory analysis:Bankruptcy Code §501(a) authorizes a creditor to file a claim. §501(c) states that if a creditor does not file a timely claim, the trustee may file a claim for the creditor.Bankruptcy Code §726 describes the order in which payment is to be made to creditors in a Chapter 7 case:§726(a)(1) provides first payment to priority and administrative claims, including trustee commissions and expenses.§726(a)(2) directs the next right-of-payment to the following:
(A) timely-filed 501(a) claims;
(B) timely-filed 501(c) claims and
(C) tardily-filed 501(a) claims IF the creditor did not have actual notice of the bankruptcy claims bar date. §726(a)(3) directs the next payment tier to tardily-filed §501(a) claims that don't fall into the lack-of-notice exception of §726(a)(2).§726(a)(4) and (5) directs payment to fines and penalties and to post-petition interest.§726(a)(6) directs any remaining surplus to the debtor.The Court's conclusion is simple: a tardy claim filed by the trustee under §501(c) doesn't fall anywhere in the §726 distribution scheme. It would appear that for a trustee-filed claim under §501(c) is ever to be paid, it would have to have been filed before the claims bar date passed.Observation: The predicament the trustee found himself in this case was unfortunate. The claims notice was mailed out two years after the case was filed because the debtor failed to list the personal claim asset on the original schedules. The claims were years old at that point and the bankruptcy schedules only listed a single address for each creditor. There is no way of knowing how accurate those addresses were, or whether credit departments, collection agencies or claims purchasers had contacted the debtor prior to the filing (I always include every address I can find for every creditor listed on my client's schedules.) I don't know what the trustee intends to do with this case, but it is not too late to induce creditors to file claims. Even now such claims would be treated as tardily-filed 501(A) claims, which at a minimum would be paid in the §726(a)(3). From my own experience, I know how difficult it is to track down someone at a national credit card bank who can locate some account closed out years earlier, and which has often been sold off to some murky third party. In this particular case, the trustee might get lucky; if the huge student loan claim is still outstanding, that claim would be easier to track and to induce to file a claim (and the debtor would get his student loan bill paid off, not the worst outcome.) But the method used by the trustee here was improper. The trustee undertook no investigation into why claims were not filed, and didn't even bother to knock off the two timely-filed claims from the list of claims he filed. If he had prevailed, he would have received his full commission, but I doubt any of the creditors that didn't file claims would have received any benefit. The dividend checks would have been mailed to the same dated addresses where the request to file claims had been filed. The checks probably would have been returned undeposited, and eventually these unclaimed dividends would have been deposited with the court clerk, to remain in limbo for years.

Retroactive application of Increased homestead exemption; Part II: Calloway and Nguyen

In re: Tanya Calloway 09-12133 (Judge Bucki; Feb. 16, 2010); In re Nguyen Bk 05-92833 (Judge Bucki Sept. 22, 2009). In August 2005, New York increased its "homestead exemption" from $10,000 to $50,000. In a previous bankruptcy case out of Rochester (I was the trustee), a creditor had asserted that the change only applied to debts that would be incurred after the change, not retroactively. Several bankruptcy and district courts disagreed, and held that the statute was retroactive, a position adopted by the Second Circuit: CFCU Community Credit Union v. Hayward, 552 F.3d 253 (2nd Cir. 2009).In th Calloway case (attached), the debtor seeks to avoid a judicial lien against her house, and the creditor opposes the motion. The creditor attempts to differentiate Hayward because in this new case it is an actual judgment lien, not just a debt, which existed prior to the August 2005 change. The creditor's position is that it would be unconstitutional for them to be deprived of their property rights (their lien against the unexempt homestead) by a legislative action. They also claim that it would be a misinterpretation of the statute.The bankruptcy court disagreed. Following a similar decision by fellow Buffalo Judge Kaplan, In re Trudell, 381 B.R. 441 (Bankr. W.D.N.Y. 2008), Judge Bucki applied the statute retroactively even to judgment liens. Quoting an old New York Court of Appeals case, Watson v. New York Central Railroad Company, 47 N.Y. 157, 162 (1872), "a judgment creditor of an owner has no estate or proprietary interest in the land." Judge Bucki had previously ruled on this very issue in an unreported slip opinion in the Nguyen case in September 2009 (attached here). Post-decision appeals: The Nguyen decision is currently on appeal before the District Court for the Western District of New York (09-cv-00913; Judge Richard J. Arcara). The Calloway decision is also on appeal to District Court (10-cv-00250; Judge William M. Skretny.) The creditors in both the Nguyen and the Calloway appeals are represented on appeal by Attorney Edward Crossmore, the same attorney who appealed Hayward, unsuccessfully, all the way to the Second Circuit.

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