N.C. Business Court: Bass v. NC Dept. of Revenue- Statute of Limitations for Tax Refund

Summary:

Mr. Bass filed his 2012 federal tax return electronically, but unintentionally failed to file his state return. In July 2016, the North Carolina Department of Revenue (“NCDOR”) sent Mr. Bass a Notice of Intent to Assess for Failure to File North Carolina Return (“the Notice”) and then Mr. Bass filed his 2012 return on August 4, 2016, contending a refund was due. The NCDOR denied the refund, as the return was beyond the 3-year statute of limitations. Mr. Bass sought review with the Office of Administrative Hearings (“OAH”) and after it ruled in his favor, holding that while N.C.G.S. § 105-241.8(a) provides as 3 year limit on seeking a refund, N.C.G.S. § 251(b) applied when the Notice was sent with the statute of limitations then running from the date of the notice. The NCDOR appealed , with the case assigned to the North Carolina Business Court.

While it was uncontested that there was substantial evidence to support the OAH holding the Mr. Bass had unintentionally failed to file his 2012 state tax return, the Business Court rejected the OAH interpretation as an absurd reading that “would inevitably result in the DOR being at risk for a stale claim of refund whenever it contacted a purported non-filer more than three years after the due date of the return….”

Further, the finding by the OAH that the NCDOR was aware that a Mr. Bass was entitled to a refund from the data it had from the IRS was not supported by any evidence introduced.

Accordingly, the refund was barred by the statute of limitations.

Commentary:

This does not stand for the proposition that if the NC DOR had actually received information from the IRS regarding Mr. Bass sufficient to calculate taxes, that he might not have been entitled to a refund, but merely that Mr. Bass, a pro se litigant, had not introduced such evidence. Perhaps if he had questioned the NCDOR, he could have established that it had, in fact, assessed his tax liability earlier and determined that a refund was due. This could potentially be useful in bankruptcy, both for Trustee’s seeking to recover tax refunds, but also as the date of assessment of taxes is pertinent in determining dischargeability.

While the amount of the tax refund is not mentioned, nothing in this opinion indicates a that it was particularly large. (That Mr. Bass did not have an attorney, also supports that it might not have been.) This makes the assignment of a dispute over an individual’s tax refund to the N.C. Business Court somewhat surprising, since it has no obvious hallmarks of being a “complex business” case.

For a copy of the opinion, please see:

Bass v. NC Dept. of Revenue- Statute of Limitations for Tax Refund

Tagged with: ,

Law Review: Levitin, Lin, & Wachter- Mortgage Risk Premia During the Housing Bubble

Abstract:

How did mortgage risk pricing for securitized loans change during the lead-up to the 2008 financial crisis? Using a database from a major American bank that serves as trustee for private-label securitized loans, this paper shows that the decline in underwriting standards was accompanied by a decline in credit spreads on mortgages, after adjusting for loan/borrower characteristics. Observable information, including FICO and LTV, became less influential on mortgage risk pricing over time during the housing bubble. As the volume of mortgages expanded and lending terms eased during the bubble, the increase in risk failed to be reflected in higher risk premiums. The result is consistent with a rightward shift of the mortgage credit supply curve during the housing bubble.

Commentary:

This study indicates that the housing bubble was driven primarily by an increase in the supply of credit rather than a growth in demand. More research would be valuable to determine whether and to what extent that supply of credit was dependent on anti-modification of mortgages.

For a copy of the paper, please see:

Mortgage Risk Premia During the Housing Bubble

Tagged with: ,

E.D.N.C.: In re Hurlburt- Anti-Deficiency Mortgage Statute does not Circumvent Anti-Modification Provisions

Summary:

After direct appeal to the 4th Circuit was declined, the district court affirmed the opinion of the bankruptcy court in Hurlburt that the anti-deficiency statute of N.C.G.S. § 45-21.28 does not allow debtors to circumvent the anti-modification provisions of 11 U.S.C. § 1322(b)(2) and (c)(2), with Witt v. United Companies Lending Corp. (In Re Witt), 113 F.3d 508 (4th Cir. 1997) controlling.

Commentary:

The district court did explicitly draw attention to the fact that in neither Witt nor Nobelman v. American Savings Bank, 508 U.S. 324 (1994), did those courts address mortgages where anti-deficiency statutes would have precluded an unsecured claim, thereby limiting the mortgage claim to the value of the collateral. This and the substantial criticism of Witt notwithstanding, the district court was bound by that decision.

This is, one suspects, just the second step in an attempt to have the 4th Circuit revisit or narrow Witt and failing that, seek certiori from the Supreme Court to finally address this issue.

For a copy of the opinion, please see:

Hurlburt- Anti-Deficiency Mortgage Statute does not Circumvent Anti-Modification Provisions

Tagged with: ,

Bankr. E.D.N.C.: In re Stockwell- Dismissal of 3rd and 4th Bankruptcy for Bad Faith under §707(a)

Summary:

Between March 7, 2017, and November 28, 2017, Mr. Stockwell filed first a Chapter 13 and then three Chapter 7 cases, with the fourth case being filed while the third was still pending. (The dismissal of the third case had been set aside as it had been automatically dismissed due to the failure to file documents under 11 U.S.C. § 521(I) while the Bankruptcy Administrator’s motion to dismiss with prejudice.) Mr. Stockwell’s cases were filed with the apparent intent of holding off a foreclosure by Ocwen, as it was the only creditor listed in any of his cases. (That failure to disclose other creditors and to file complete schedules had caused the dismissal of the first and second cases.)

The bankruptcy court consolidated the motions to dismiss the third and fourth cases, ultimately finding that both should be dismissed under 11 U.S.C. § 707(a) as they were filed in bad faith. Further, applying 11 U.S.C. § 109(g), the bankruptcy court found cause to bar Mr. Stockwell from filing further cases for a period of twelve (12) months, holding that while § 109(g) specifically proscribes that a case can be dismissed with prejudice for 180 days the court had authority to bar filings for longer.

Commentary:

Without disagreeing with the result, it is unfortunately that the court again imported “bad faith” into 11 U.S.C. § 707(a), particularly as that section specifically allows for dismissal for “unreasonable delay by the debtor that is prejudicial to creditors” and failure to file documents required, either of which would have been sufficient and more appropriately narrow bases for dismissal in this case.

For a copy of the opinion, please see:

Stockwell- Dismissal of 3rd and 4th Bankruptcy for Bad Faith under §707(a)

Tagged with: , ,

E.D.N.C.: Summitbridge v. Faison- No Unsecured Claim for Attorneys Fees for Under Secured Creditor

Summary:

In a Chapter 11 case, Summitbridge held a secured (but under secured) claim, which was satisfied, pursuant to the confirmation order, by tender of the collateral. Summitbridge then filed an additional unsecured, nonpriority claim for it attorneys fees, pursuant to its promissory note, in the amount of 15% of the outstanding indebtness, totaling more than $300,000. The bankruptcy court disallowed this unsecured claim.

In affirming, the district court recognized the line of cases that “reasoned that claims for post-petition attorneys’ fees are contingent, unliquidated claims which are not precluded by Section 502 and are thus allowable. See In re 804 Congress, L.L.C., 756 F.3d 368 (5th Cir. 2014), on remand, 529 B.R. 213 (Bankr. W.D. Tx. 2015); In re SNTL Corp., 571 F.3d 826, 842 (9th Cir. 2009); In re Welzel, 275
F.3d 1308 (11th Cir. 2001)); see also Ogle v. Fid. & Deposit Co. of Maryland, 586 F.3d 143, 148
(2d Cir. 2009). As none of these were precedent, the district court nonetheless agreed with the bankruptcy court, since the express allowance of post-petition attorneys fees to unsecured creditors in some circumstances indicates that the lack of express allowance in others is not permitted. To allow attorneys fees for an under secured creditor would render the restriction in 11 U.S.C. § 506(b) superfluous. It would also diminish the distribution to other unsecured creditors.

Commentary:

While this was a Chapter 11 case, there is no reason that it should not equally apply in Chapter 13 cases. That would have the effect of precluding the allowance of attorney’s fees for under secured creditors under 11 U.S.C. § 506(b). (Or for those for which, pursuant to the Hanging Paragraph of 11 U.S.C. § 1325(a), U.S.C. § 506 does not apply.) First among these would be most liens secured by cars or other personal property, which more often than not is underwater. The standard practice of allowing creditor’s attorneys fees and costs in the resolution of a Motion for Relief should be questioned and denied, absent some other statutory basis, such as § 330 (a)(4)(B), which allows payment to of fees for the debtor’s attorney, or § 1322(e), which allows for contractual fees in a plan curing a default. (Since §1322(e), is not, unlike §1322(a), (b), and (c) or §1325(a), incorporated in the provisions for modification under §1329, it should not serve as a basis for allowance of post-petition attorney’s fees for a secured creditor following a proposed cure of a post-petition default.)

For a copy of the opinion, please see:

Summitbridge v. Faison- No Unsecured Claim for Attorneys Fees for Under Secured Creditor

Tagged with: ,

Bankr.  M.D.N.C.: In re Young- Denial of DischargeBankr.  M.D.N.C.: In re Young- Denial of Discharge

Summary:

In their Chapter 7, the Youngs agreed, in a court approved settlement,  to allow the sale of their residence, splitting the net proceeds  equally with the Trustee and were to keep “only those furnishings necessary to furnish their new residence”, with the remainder of their personal property  to be auctioned.  After initially identifying the property they were to retain with the Trustee’s auctioneer, the Young sold all of their additional property with a different auction company, using the funds to pay for moving costs.  It appears that the proceeds from the sale of the personal property amounted to $937.50.  The Trustee and Bankruptcy Administrator then sought denial of the Youngs’ discharge pursuant to 11 U.S.C. § 727(a)(2).

While recognizing that this was “no small request”, the bankruptcy court proceeded to analyze the Young’ actions for an actual intent to ‘hinder, delay, or defraud’, as “constructive intent is not sufficient.”  In re Bowen, 498 B.R. 584, 588 (Bankr. W.D. Va. 2013) (citing In re Smoot, 265 B.R. 128, 142 (Bankr. E.D. Va. 1999), subsequently aff’d sub nom. Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001); Zanderman, Inc. v. Sandoval (In re Sandoval), 153 F.3d 722, 1998 WL 497475, *2 (4th Cir. 1998) (unpublished)).  This requires more than “insignificant or trivial delay or impairment.”  In re McGalliard, 183 B.R. 726, 732 (Bankr. M.D.N.C. 1995), with factors (consolidated from several opinions) including:
1.  Whether the transaction:

a. Was conducted at arm’s length, examining the relationship between the Debtor and the Transferee;

b. Lacked consideration for the conveyance;

c. Liquidated the assets into cash;

d. Transferred the Debtor’s entire estate;

e. Reserved for the Debtor benefits, control, or dominion of the assets.

2. The timing of the transfer relative to:

a. The Debtor’s insolvency, indebtedness, or filing of the bankruptcy petition;

b. The Pendency or threat of litigation;

c. Whether the debtor was aware of the existence of a significant judgment or overdue debt;

d. Whether the debtor is aware that a creditor is in hot pursuit of its judgment/claim.

3. Secrecy or concealment of the transaction.

Here the bankruptcy court found that the actions by the Youngs satisfied many of these factors, including unauthorized sale of the personal property and retention of cash themselves, immediately before the property was to be sold by the Trustee.  Accordingly, the bankruptcy court denied their discharge.

Additionally, the bankruptcy court found that the estate had been damaged by the Youngs’ illicit sale  of the personal property, finding that the request by the Trustee either for turnover of the property or the proceeds from the sale.  Finding that “present possession” of property was not necessary, but that the Trustee could “recover from an entity that had possession of estate property at any time during the case and allows the trustee to recover the value of such property.” In re Price, No. 06-62721-MGD, 2006 WL 6589883, at *2 (Bankr. N.D. Ga. Sept. 20, 2006).  Additionally, the bankruptcy court held that its contempt power would support a money judgment for the proceeds.

Commentary:

The money judgment/turnover is a partial solution for a Trustee stymied by the holding by the Supreme Court in Law v.  Siegel, which held that a debtor’s exemptions could not be surcharged,  even in the face of fraudulent behavior.  Here the Youngs will not lose their exemption, but in addition to losing their discharge will have additional debt of $937.50 to the estate following this case.

It would likely have been better if the auctioneer had compiled an itemized list of personal property that the Youngs were to retain and those they would be turning over for auction.  Even better if possession had been taken immediately.  Either would have minimized or eliminated the risk of the illicit sale occurring.  Additionally, the costs of itemizing and storing these assets would have perhaps induced a Trustee to be less interested in administering personal property assets worth less than $1,000.00.

While this would not likely have had an affect on their behavior in this case, it is not clear, either from this opinion or the settlement, why the Youngs agreed to split the net proceeds from the sale of the house equally, but still capped at their exemptions, with the Trustee rather than insisting that their exemption be paid first.  That question was ultimately moot, as the Trustee was unable to find any buyers for the homestead and abandoned it to the secured creditors.

Lastly, there is still another pending adversary proceeding, where the Trustee is seeking to avoid an alleged fraudulent conveyance of a different piece of real property from the Youngs to Mrs.  Young’s brother and nephew.

For a copy of the opinion, please see:

In re Young- Denial of Discharge

Tagged with: , , , , ,

Law Review: Cain- The Bankruptcy of Refusing to Hire Persons Who Have Filed Bankruptcy

Abstract:

In 1978, Congress made it illegal for government employers to deny employment to, terminate the employment of, or discriminate with respect to employment against a person who has filed bankruptcy. In 1984, Congress extended this prohibition to private employers by making it illegal for such employers to terminate the employment of, or discriminate with respect to employment against a person who has filed bankruptcy. Under the law as it currently exists, private employers can refuse to hire a person who has filed bankruptcy solely because that person has filed for bankruptcy. Meanwhile, employers have substantially increased their use of credit history checks as a pre-employment screening device. Credit history checks will disclose bankruptcy filings, and because blacks and Latinos are overrepresented among bankruptcy filers, these groups are disproportionately affected by bankruptcy discrimination. This disparate impact probably violates Title VII of the Civil Rights Act of 1964. Moreover, there is scant empirical support for the proposition that creditworthiness is a reliable proxy for workplace performance or employee trustworthiness.

Relying on bankruptcy status simpliciter is antithetical to a core purpose of the bankruptcy system, which is to give debtors a fresh start. Employers’ prerogatives to operate according to whatever employment policies and practices they want should be balanced against employees’ and potential employees’ right to participate in the labor market in an environment free from irrational discrimination. It is irrational to deny employment to a person who is or was a debtor if the person is otherwise qualified, and the job can be successfully performed regardless of bankruptcy status. To allow such discrimination makes the bankruptcy system’s promise of a fresh start illusory.

Commentary:

In addition to a review of the case law relating to restrictions on private and government employment discrimination based on bankruptcy, this article also provides a very in depth review of how lending practices impact bankruptcy filings based on race, leading to potential disparate impacts of bankruptcy in hiring and which could be prohibited under the Title VII of the Civil Rights Act.

For a copy of the paper, please see:

The Bankruptcy of Refusing to Hire Persons Who Have Filed Bankruptcy

Tagged with: , ,

Bankr. E.D.N.C.: In re Redding – Substantial and Unanticipated Change In Circumstances for Modification of Chapter 11

Summary:

Ms. Redding’s Chapter 11 plan was confirmed providing that she was to have six months in which to market and sell her principal residence and was required to make adequate protection payments on the mortgage claim of $1,000.00 per month during that time. After failing to do either, Ms. Redding filed a motion to modify, asserting that the a possible increase in the value of the real property, due to potential grants to ameliorate flooding problems.

The bankruptcy court found that the standard for modification of a Chapter 11 plan was same the “substantial and unanticipated circumstances” standard in Chapter 13. See Murphy v. O’Donnell (In re Murphy), 474 F.3d 143, 150 (4th Cir. 2007) (discussing analysis developed in In re Arnold, 869 F.2d 240, 243 (4th Cir. 1989)). Under this, the speculative change in circumstances offered by Ms. Redding was not “substantial”.

Commentary:

Obviously, if the flood grants do cause an substantial increase in the property values before there is a final foreclosure sale, that would then be unanticipated.

For a copy of the opinion, please see:

Redding – Substantial and Unanticipated Change In Circumstances for Modification of Chapter 11

Tagged with: , ,

Bankr. E.D.N.C.: In re Gonyo- Marital Adjustments to CMI

Summary:

The Bankruptcy Administrator sought dismissal of Mrs. Gonyo’s Chapter 7 arguing that she improperly excluded several of her non-filing husband’s expenses as “marital adjustments” from her Current Monthly and also failed to include both the couple’s tax refund and her husband’s incentive pay in that calculation.

In reaching the later conclusion, the bankruptcy court defined “income” as “a gain or recurrent benefit . . . that derives from capital or labor.” In re Sanchez, No. 06-40865, 2006 WL 2038616, at *2 (Bankr. W.D. Mo. 2006) and that her husband’s incentive pay received during the preceding six calendar months was included in CMI.

As to the tax refund, Mrs. Gonyo argue that since it was received outside the six calendar months it was not included in CMI. The bankruptcy court, however, held that Mrs. Gonyo’s portion of the tax refund must be pro rated over 12 months to adjust the actual tax liability deduction in the Means Test.

In regard to the Marital Adjustment, the bankruptcy court held that only those expenses that “do not support, benefit, or otherwise affect household members” (emphasis in the original) and that are “purely personal in character to the non-debtor spouse” (emphasis again in the original) are appropriate . The bankruptcy court rejected Mrs. Gonyo’s contention, from In re Gregory, No. 10-09739-8-JRL, 2011 WL 5902884 (Bankr. E.D.N.C. Aug. 17, 2011), aff’d sub nom. Bankr. Adm’r v. Gregory, 471 B.R. 823 (E.D.N.C. 2012), that expenses not necessary for the “day-to-day functioning of the household” was a controlling factor. Accordingly, the expenses for the RV, the college expenses for two children and the soccer expenses for a third were household expenses that could not be excluded under the marital adjustment.

Lastly, the bankruptcy court held that the failure to include all applicable income and the accumulation of $40,000 in debt in just her name since her prior bankruptcy, raised concerns about abuse under the totality of the circumstances of § 707(b)(3), but that the court was not required to address, since the case would be dismissed under § 707(b)(1).

Commentary:

While Mrs. Gonyo has converted her case to Chapter 13, many of these issues may not have been thrown into such sharp relief if the case had originally been filed with some dividend proposed to the sole unsecured creditor.

For a copy of the opinion, please see:

Gonyo- Marital Adjustments to CMI

Tagged with: , , ,

Bankr. E.D.N.C.: Ohnmacht v. Commercial Credit Group, Inc. – Subject Matter Jurisdiction to Determine Non-Bankruptcy Causes of Action Related to Discharge Violation

Summary:

The Ohnmachts, having completed their Chapter 11 plan and received a discharge, sent a demand letter to Commercial Credit Group demanding that the judgment against them be cancelled. When CCG declined, they re-opened their bankruptcy and brought an adversary proceeding asserting breach of contract, violation of N.C. Gen. Stat. § 1-239 and § 75-1.1 et seq, intentional and negligent infliction of emotional distress, negligence and seeking relief under the Federal Declaratory Judgment Act (“FDJA”), 28 U.S.C. § 2201(a). They also included in a Motion for Contempt and Sanctions for alleged violation of provisions the preference judgment, the plan, confirmation order, and the discharge injunction.

CCG moved to dismiss the seven non-bankruptcy causes of action, asserting that the bankruptcy court lacked subject matter jurisdiction to determine such.

The Ohnmachts first contention was that their Confirmed Plan retained subject matter jurisdiction. The bankruptcy court rejected this holding that “retention of jurisdiction provisions … are superfluous and do not confer the court with subject matter jurisdiction” that it would not otherwise have.

Next the Ohnmachts asserted that under either the law of the case doctrine or judicial estoppel that CCG should be precluded from asserting that the bankruptcy court lacked subject matter jurisdiction. The law of the case doctrine dictates that “when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988) (quoting Arizona v. California, 460 U.S. 605, 618 (1983) (emphasis added in this opinion)). This does not, however, apply to subject matter jurisdiction as Rule 12(h)(3) requires that “[i]f the court determines at any time that it lacks subject matter jurisdiction, the court must dismiss the action.” Fed. R. Civ. P 12(h)(3) (emphasis added in this opinion). That CCG asserted, in a separate third-party action that the bankruptcy court had subject matter jurisdiction “to the same extent” as in the Ohnmacht’s adversary proceeding, did not constitute judicial estoppel, which applies only to facts and not the law or legal theories.

Turning then to whether it had subject matter jurisdiction over the non-bankruptcy causes of action raised by the Ohnmachts, the bankruptcy court held that none “arose under” the Bankruptcy Code, but were either state law based or sought declaratory relief under the FDJA, which only applies if a court has jurisdiction. Similarly, jurisdiction for proceedings “arising in” the bankruptcy case did not apply, as such claims must have “no existence outside of the bankruptcy.” See Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364, 372 (4th Cir. 1996) and Gupta v. Quincy Med. Ctr., 858 F.3d 657 (1st Cir. 2017). The bankruptcy court held that the breach of contract claim does not extend “arising in” jurisdiction. The FDJA claim had no independent “arising in” jurisdiction. The other causes of action “can and do exist” outside the bankruptcy case. Lastly, the bankruptcy court held that it did not have “related to” jurisdiction, as the outcome of this adversary proceeding would have no effect on a completed Chapter 11 plan.

The bankruptcy court did find, nonetheless, that it had jurisdiction over the Contempt Motion.

Commentary:

Since, following Houck v. Lifestore, the federal district court may have had original, subject matter jurisdiction to hear the discharge violation, it would seem that it would then have been able to decide the other seven causes of actions, making the lawsuit their a better option.  (In Houck, the 4th Circuit held the district court had jurisdiction over stay violations under 11 U.S.C. §362(k), which provides a specific cause of action,  whereas discharge violations proceed more generally from 11  U.S.C. §105 and/or the inherent authority of a court to enforce its own orders.  That may limit the underlying jurisdiction for a district court.)

The bankruptcy court commented in Footnote 4 that “[t]his entire matter could have been avoided if [CCG] had engaged outside counsel sooner or attempted to work to fashion a remedy to the issues raised in the Demand Letter. Competent corporate counsel should know when to engage professionals who have knowledge and experience in a specific discipline.” This does not bode well for CCG on the Contempt Motion. Stay tuned.

For a copy of the opinion, please see:

Ohnmacht v. Commercial Credit Group, Inc. – Subject Matter Jurisdiction to Determine Non-Bankruptcy Causes of Action Related to Discharge Violation

Tagged with: , , , , ,
Top