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Recent Cases in the Bankruptcy Court Western District of New York Archives

Tax refund considered Income for Waiver of Filing Fee Purposes: In re Brooks

A debtor's attempt to have her bankruptcy filing fee waived was ultimately denied by Judge Bucki in Buffalo, after it was revealed the debtor was entitled to a large tax refund when the case was filed. This tax refund was treated as income, at least for the purpose of determining eligibility to have the filing fee waived, and the reasoning of the case could potentially be applied elsewhere. In re Brooks, WDNY Bk #12-10456; Hon. Carl L. Bucki; decision July 19, 2012.The debtor filed bankruptcy February 17, 2012. She was represented by an attorney, who had charged $915 for his services. The debtor filed an application for waiver of the $306 bankruptcy filing fee, under 28 U.S.C. §1930(f)(1), which states "the bankruptcy court may waive the filing fee in a case under chapter 7 of title 11 for an individual if the court determines that such individual has income less than 150 percent of the income official poverty line . . . and is unable to pay that fee in installments". Therefore, the debtor must show both that he or she is under the 150% of the poverty line and is unable to pay the filing fee even in installments. Even then, the waiver is discretionary ("The court MAY waive. . .")

Charges & Cash Advances & charges Just Prior to Filing Provoke Discharge Complaint

If a debtor has recently run up a credit card account, will the bank seek to have its debt excepted from discharge? How much debt and over what sort of time period might cause a bank to file an exception-to-discharge lawsuit in the bankruptcy case? One review of discharge exception lawsuits filed by one bank in particular would suggest that charges and cash advances of $4,000 or more incurred during the five months prior to filing could provoke a lawsuit.

Acceleration of a mortgage does not turn it into a short term mortgage: Maiorino

In re: Maiorino 08-21335 (Decision March 11, 2009; Judge Ninfo) In this case a Chapter 13 debtor attempted to modify a long-term mortgage by paying it off in full within the plan at below-contract rate of interest (See the case note in Laimer, in the 2008 cases.) The debtor argued that as a judgment of foreclosure has accelerated the mortgage, it was all now due-in-full and, as the last payment was now due within the period of a Chapter 13 plan, it could be modified. Judge Ninfo disagreed and held that the Sect. 1322(c)(2) provision, which states that residential mortgages cannot be modified if the last payment is due after the term of the Chapter 13 plan, applies to the original payment schedule of the mortgage, not the shorter tern caused by the acceleration of the mortgage in foreclosure. Note this phrase (which may return if new legislation allows modification of home mortgages in Chapter 13): "Although all of the circumstances under which a debtor might be better off by intentionally going into default on a mortgage, so that it could be modified in a Chapter 13 proceeding may be numerous and unclear, if a mortgage that has been accelerated by a debtor's default is held to be eligible for modification under Section 1322(c)(2), such a holding could open up the possibility of abuse"

Exempting life insurance after Wornick decision: MacDonald

In re MacDonald 08-11741 (Decision March 10, 2009; Judge Bucki, Buffalo) Motion by debtors to compel trustee to return life insurance proceeds turned over pursuant to the 2002 decision in Teufel etc. Prior to 2008, Western District of New York courts held that when a husband and a wife both file bankruptcy and one spouse has a life insurance policy with cash value and the other spouse as the beneficiary, the bankruptcy trustee, as trustee for both the owner and beneficiary of the policy, could claim in the cash value. The Second Circuit overruled this line of cases Wornick v. Gaffney 554 F3d 486, decision 9/24/08, and ruled that the cash value of reciprocal life insurance policies in joint cases are exempt. The MacDonald debtors then amended their exemptions to add the life insurance and then moved to have the trustee return funds previously turned over. Judge Bucki granted that motion, noting that the exemption issue had not previously been litigated in this particular case, so no "law of the case" had been established to preclude the debtors from exempting the asset now.

Successor creditors must prove they own the claim: Doherty

In re: Doherty 06-22278 & Benedetti 07-21620 (Decision February 23, 2009; Judge Ninfo): Proofs of claims were filed in each case by alleged successors to the original creditors. The Trustee objected to the claims, and the Court disallowed them, as the claimant failed to show the chain of title or anything else that would prove ownership of the claim.

Recorded mortgage with misspelled name not a perfected lien: Badagliacca

In re Badagliacca 06-22132; Arnold as Trustee v. Bank of New York AP 08-2032 (Decision February 23, 2009; Judge Ninfo) Mortgage misspelled the debtor's surname on its mortgage document ('Badaglicca' rather than 'Badagliacca'), so that a search of the index of land records does not reveal the mortgage. Held, the mortgage lien is avoided as against the trustee (acting as a hypothetical bona fide purchased.)

Retainer agreement governs attorney fees for responding to turnovers: Kasperek and Martinelli

In re: Kasperek Bk 08-11760 & In re Martinelli Bk 08-11761 (Decision January 15, 2009; Judge Bucki, Buffalo: Two potential asset cases where the trustee (John Ring) requested turnover of documents and assets. The debtors' attorney apparently demanded additional fees from each client before he would represent them in the turnover motion. The attorney did not file a supplemental 2016 statement. The attorney did not appear at the initial turnover motion, and the trustee brought a motion to disgorge. The attorney did appear at the adjourned turnover date and all turnover matters were resolved. Judge Bucki concluded that an attorney may structure his retainer arrangement as he or she sees fit, but is obligated by its terms. In this case, the 2016 statement stated the attorney would "render legal services for all aspects of the bankruptcy case." The judge stated that this certainly would include responding to a turnover motion. The judge ordered to attorney to compensate the trustee $500 for the cost of bringing the turnover motions and the disgorgement motions. Whatever the Rule 2016 statement (and attorney's retainer agreement) says, the court will enforce.

Second Circuit Decision: 2005 New York State Homestead exemption increase retroactive: Hayward

CFCU Community Credit Union v. Hayward (Scribner as trustee); WDNY Bk07-4369bk; 552 F.3d 253; Second Circuit Court of Appeals decision January 9, 2009: The NY homestead exemption was increased from $10,000 to $50,000 in August 2005, and the Haywards filed Chapter 7 shortly thereafter. CFCU, by Attorney Edward Crossmore, argued that the $40,000 increase should only apply to debts incurred after the law went into effect. The WDNY, EDNY, and NDNY bankruptcy courts disagreed, as did the District Court in WDNY and NDNY. CFCU appealed to the Second Circuit. Held: as an interpretation of New York law, the increase in the homestead was retroactive to debts incurred before the law was modified. Specific holdings: 1) The Commerce Clause of the U.S. Constitution (forbidding the impairment of contracts) was not infringed. The change did not substantially impair the contractual expectations of the parties, and even if it did, the changes was constitutionally justified as furthering a "significant and legitimate public purpose." 2) Other than the Commerce Clause issue, this was a matter of New York law interpretation, not federal law interpretation. The Supreme Court decision in Owen v. Owen did not apply. Owen was a Florida case where a creditor obtained a judgment against the debtor's condo, Florida then changed its exemption laws to include condos as homesteads but the change specifically excluded pre-change judgment liens; the debtor then filed bankruptcy and sought to avoid the judicial lien. The Supreme Court allowed the judgment to be avoided because the property being exempted - the condo - was exempt property and Florida's limitation on that exemption - excluding older judgments - did not carry into bankruptcy. Somehow the Hayward court concluded that "Owen holds no sway here." 3) Under New York law remedial legislation can apply retroactively and the legislative history here, especially the sponsoring legislator's memorandum, indicated that the legislature intended that the change would be retroactive.

Self-employment net income exempt: Dziedzic

In re Dziedzic 08-14061 (Decision March 24, 2009; Judge Bucki, Buffalo): Personal services income exemption for self-employed applies to net income only. Debtor, a self-employed chiropractor, asserted a 90% personal services exemption for services rendered 60 days prior to filing, pursuant to NY CPLR Sect. 5205(d). According to debtor's schedules, only 18.2% of gross business revenue represented personal income, the rest was for overhead. Debtor had $5,625.49 in the bank when the case was filed, plus $100 cash. $2,500 was exempt cash and the debtor did not claim an exemption for another $2,079.38. Of the balance of $1,146.11, the debtor claimed 90% exempt. The court agreed with the trustee that only 90% of 18.2% of this money was exempt, as only 18.2% was actual "earnings" as that word is used in the exemption statute, CPLR 5205(d).

Fraudulent Conveyance: return of engagement ring: Gallagher

In re Gallagher Bk 07-22720; Gordon v. Kinney AP 09-2003 (Judge Ninfo, 9/30/2009): Another ring case. The debtor filed bankruptcy in October 2007. Two and a half years earlier, she gave the engagement ring back to Mr. Kinney. The 2 1/2 years is significant because it takes the transfer out of the bankruptcy fraudulent transfer period (2 years) and also places the transfer before the increase in the New York homestead exemption from $10,000 to $50.000. To avoid a transfer, the trustee had the burden to prove the debtor was insolvent when the transfer took place. The trustee had thought that the judge had accepted this conclusion prior to trial, but the judge found that there was a clerical error, so that it appeared the debtor was ever-so-slightly solvent when the transfer was made. Solvency is determined by adding up all the debtor's unexempt assets and debts at the time of transfer. The decision includes a chart showing $183,704 in assets and $169,983 in debts. The decision does not explicitly say so, but the $183,704 in assets should have been reduced by $10,000, the debtor's homestead exemption (she apparently had about $45,000 in equity in her house.) As the trustee had not shown the debtor to be insolvent, the transfer was not considered to be fraudulent under New York law. Note that had the transfer taken place after August 2005, when the homestead exemption rose to $50,000, the debtor would have been insolvent and the transfer avoidable.

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