4th Circuit: Burwick v. Pilkerton- Admissions trump Interrogatories


Ms. Burwick denied certain allegations in her answers to Interrogatories but her response to a set of Admissions, sent pursuant to Rule 36, with similar questions was fourteen (14) days late. As such, those admissions were deemed, pursuant to Rule 36 ((b), “conclusively established,” despite any contradiction in the Interrogatories and summary judgment was granted to Pilkerton as there were no genuine disputes of material fact.


The opinion notes that Burwick did move to withdraw her untimely admissions, but the district court did not seem to address this in granting summary judgment. Rule 36(b) does allow for the withdrawal or amendment of admissions, but not necessarily an after-the-fact extension.

While this is not a solely a bankruptcy issue, Requests for Admissions under Rule 36 are, following Bankruptcy Rule 7036, applicable and very powerful in Adversary Proceeding and Contested Matters. If ignored, these could be used, for example, to “conclusively establish” secured creditor acceptance of a “non-conforming plan” under 11 U.S.C. § 1325(a)(5)(A) or vesting of property in a third party under 11 U.S.C. § 1322(b)(9). While confirmation of a plan is not immediately a “contested matter” under Bankruptcy Rule 9014, an objection by the affected creditor is not necessary, as one from the Trustee or any other party would suffice. Rule 36 would then come into play, as the request for admissions can be served “on any party” (Emphasis added), meaning that filing a Proof of Claim should be sufficient.

For a copy of the opinion, please see:

Burwick v. Pilkerton- Admissions trump Interrogatories

Posted in 4th Circuit Court of Appeals Tagged with: , , , ,

Bloomberg BNA: Mounting Student Debt Mobilizing Bankruptcy Courts by Diane Davis

Mounting Student Loan Debt Mobilizes Bankruptcy Courts


Mounting Student Loan Debt Mobilizing Bankruptcy Courts

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in…

By Diane Davis

Wiping out student loan debt in bankruptcy is so difficult it’s rarely an option for distressed borrowers. But there are indications that bankruptcy courts are starting to play a bigger role in addressing what is widely considered a financial crisis and a drag on the U.S. economy.

While not aiming to discharge debt, about two dozen bankruptcy jurisdictions allow debtors to participate in programs that cap repayments based on income. And attorneys are having anecdotal success in negotiating with the government to get more debtors into these repayment plans even when they are in bankruptcy.

Although borrowers in these types of plans may have lower default rates, according to one consumer agency, they, too, come with caveats in bankruptcy. Some debtors, in the end, may not be that much better off as interest on their loan piles up.

Bloomberg Law®, an integrated legal research and business intelligence solution, combines trusted news and analysis with cutting-edge technology to provide legal professionals tools to be proactive advisors.

Right now, though, it’s called progress for those helped by restructuring student debt obligations in court.

Edward C. Boltz, a consumer advocate and partner with Law Offices of John T. Orcutt, P.C., Durham, N.C., told Bloomberg BNA June 19 that judges and trustees are becoming more engaged in the process and “bankruptcy must be part of the solution.”

“We can’t count on Congress to change the bankruptcy laws, so right now we have to rely on non-statutory changes,” said Boltz, former president of the National Association of Consumer Bankruptcy Attorneys.

Under Water

Judge John E. Waites of the U.S. Bankruptcy Court for the District of South Carolina told Bloomberg BNA July 11 that he sees it as his “mission” to educate consumer attorneys and trustees in cases before him that involve student debt. He likens the problem to the subprime mortgage crisis at the center of the 2008-09 financial meltdown and believes government will wind up having to “fix it.”

About 44 million Americans hold student loans totaling more than $1.4 trillion, most of it from federal sources, according to the Consumer Financial Protection Bureau. Student loans are second to mortgages and ahead of credit cards and auto loans in household consumer debt rankings, according to a study from the Brookings Institution.

The U.S. Department of Education estimates that more than 8 million borrowers with federal loans have defaulted on their debt, and face wage garnishment, loss of benefits, and worse credit scores, the CFPB says. Moreover, student debt can impact the chances of owning a home or accumulating wealth, according to areport from the Federal Reserve Bank of Boston.

Politicians, academics, and economists widely agree that the situation is acute. But borrowers typically have few options to restructure this red ink, unlike people who find themselves under water due to credit card, business, or other personal debt.

Right to Remedy Situation

Student loan borrowers who experience financial hardship and are in default have a right under federal law to remedy their situation by enrolling in an income-driven repayment plan, according to Seth Frotman, the CFPB’s student loan ombudsman.

This plan covers federal student loans, and monthly payments are based on income and family size instead of the balance outstanding. Besides providing a more affordable payment, income-driven repayment plans also allow a borrower’s remaining balance to be forgiven after qualifying payments are made for 20 or 25 years. The period for forgiveness varies, depending on the plan and other factors. Under Internal Revenue Service rules, this amount is taxable.

Income-driven repayment has grown rapidly this decade. About 5.3 million people, or a quarter of all borrowers with direct loans, the largest federal student loan program in which the government is the lender, were enrolled in an income-driven repayment plan as of June 2016, compared to 10 percent in 2013, the Government Accountability Office said in a 2016 report.

There are four income-driven repayment plans: Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), and the Income-Contingent Repayment Plan (ICR Plan).

The main difference between these plans is the formula to calculate the monthly payment and eligibility, according to theEducation Department website.

New Challenge: Trump Effect

Many student loan borrowers would face new challenges, however, if President Donald Trump has his way.

Trump recently outlined his plan in his fiscal 2018 budget proposalto streamline and cap student loan repayment, but the initiative comes with caveats.

Under the proposal, there would be one income-driven repayment plan that would cap a borrower’s monthly payment at 12.5 percent of discretionary income. For undergraduate borrowers, any balance remaining after 15 years of repayment would be forgiven. But borrowers with graduate debt would get their debt forgiven after 30 years of repayment.

While Trump’s proposal could provide simplification, Parent PLUS loan borrowers would lose an affordable option under his budget, Persis Yu, a staff attorney with the National Consumer Law Center’s Direct Student Loan Borrower’s Assistance Project, Boston, told Bloomberg BNA June 21.

Parent PLUS Loans are those made to a parent borrower to help pay for the costs of a student’s undergraduate education.

“To some extent, simplification just isn’t possible,” Yu said. “You really can’t take away plans from people who already have them,” she said. Under Trump’s proposal, Parent PLUS Loans wouldn’t be available to parents after July 1, 2018, Yu said.

Parent PLUS Loans are an important option for some families when other federal loans aren’t enough to cover the cost of education, Yu explained in her blog. But Yu said she regularly hears from distressed parent PLUS borrowers because they have fewer options than other federal loan borrowers, and many end up in default.

Trump’s proposed budget also would eliminate the Public Service Loan Forgiveness (PSLF) program, which allows borrowers who are repaying their direct federal student loans under an income-driven repayment plan while working full time for a public service employer to have any remaining balance forgiven after 10 years of qualifying payments.

“The proposed defunding of Public Service Loan Forgiveness would be limited to borrowers taking out new student loans on or after July 1, 2018, according to the Department of Education,” Adam S. Minsky, an attorney specializing in student loan debt in Boston, told Bloomberg BNA via email June 15.

Minsky, who has published a blog on Trump’s student loan proposals, said this means current borrowers enrolled in one of the income-driven repayment plans should be able to remain in that program.

He said, however, that he has “major concerns about the legality of defunding the program while it still remains intact in statute.” The public service loan initiative can only be repealed by Congress, he said.

“There would certainly be legal challenges if eligible borrowers are denied PSLF, since borrowers could still be legally entitled to the benefit regardless of funding as long as the program remained intact in statute,” Minsky said in his May 17 blog.

Congress also must sign off on the White House spending plan that seeks deep cuts in domestic programs in return for a large boost in military spending. And lawmakers so far have reacted skeptically, so the future of Trump’s budget for the fiscal year beginning Oct. 1 is uncertain.

Filing Bankruptcy

Bankruptcy presents a high bar for anyone thinking about getting a discharge of their student loan debt. It’s not impossible to get a student loan discharge, but in most cases, a petitioner must show that continuing to pay the debt “will impose an undue hardship on you and your dependents.”

Most courts use what’s called the Brunner test to evaluate if a borrower has shown an undue hardship, but the Eighth Circuit uses the “totality of the circumstances” test. Because many student loans aren’t dischargeable in bankruptcy, many debtors in Chapter 13 want to enroll in or stay in their income-driven repayment plans, John Rao, an attorney with the National Consumer Law Center, Boston, specializing in bankruptcy and mortgage servicing, told Bloomberg BNA June 16.

There has been real tension when borrowers in default file Chapter 13 because the student loan servicer typically “puts the loan on a shelf” during the case and this has “awful consequences for consumers,” Rao said.He said there’s an Education Department regulation that places student loans in forbearance when they file for Chapter 7 bankruptcy and it lasts until the bankruptcy is concluded.

That means the servicer stops collecting on the student loan debt for the three or four months the case is in bankruptcy, but interest continues to accrue.The Department of Education hasn’t issued any regulations or guidance, however, on what happens in Chapter 13 cases, Rao said. As a result, student loan servicers treat Chapter 13 filers as if they had filed Chapter 7 and put the loan in forbearance, he said.

That means “borrowers can emerge from Chapter 13 further in debt because of the interest that continues to accrue on their loans for three to five years,” Rao said.

Waites, the bankruptcy judge, said he regularly sees student loan debt in many of the Chapter 13 cases that come before him.Still, Chapter 13 is probably the “most favored” method of handling the debt, he said, because at least borrowers are “trying to repay and manage their debts.”

In a Chapter 13, a debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to-five- year period. The Department of Education did not respond to a request for comment on its policies for Chapter 13 debtors with student loan debt.

Making Progress Slowly

A “series of administrative, policy, and procedural hurdles may limit access to enrollment in (income-driven repayment plans) for borrowers with previously defaulted federal student loans,” according to a May 2017 update report from the CFPB student loan ombudsman.Frotman’s report said that borrowers making those kinds of payments default at lower rates than borrowers enrolled in other types of payment arrangements.

Consumer advocates like Rao and Boltz, have asked the Department of Education to address this issue and have made progress.

In a few cases, attorneys have been able to negotiate terms of Chapter 13 plans with the government allowing borrowers to enroll and participate in income-driven repayment plans, Rao said.

This is a good first step, but “more than an ad hoc, case-by-case approach to this issue is needed,” Rao said.

Most Chapter 13 filers are in a five-year plan, which means they will end up with a “lost five years” where they aren’t making any progress in their income-driven repayment programs, Boltz said.

When Boltz met with Department of Education and Treasury officials, he argued that a governmental unit that operates a student grant or loan program can’t discriminate against a debtor based on Bankruptcy Code Section 525(c).

By not allowing borrowers to enroll or continue in their income-driven repayment plans while in Chapter 13, the government was essentially discriminating against debtors, he said.

Student Loan Workarounds

One success story with negotiating terms of Chapter 13 plans with the Department of Education is in a case in the U.S. Bankruptcy Court for the Middle District of North Carolina.

Boltz represented a debtor with more than $200,000 in debt who was able to get the court to approve an order stating that she could enroll in an income-driven repayment plan or seek a consolidation of her student loans if necessary without violating the automatic stay in bankruptcy.

The court’s order specifically states that during the case, it won’t be a violation of the automatic stay to send the debtor normal monthly statements about payments due and any other communication.

The Department of Education and student loan servicers said their concern was potentially violating the stay if they allowed debtors to enroll or continue in these programs, Boltz said. The order also has detailed instructions on what the debtor can and can’t do with her student loan debt.

What’s Next?

Another step in the right direction could be coming soon from the U.S. Bankruptcy Court for the Western District of Pennsylvania in Pittsburgh. That court is planning to roll out a “full blown student loan bankruptcy program for all debtors,” Boltz said.

The clerk of that court didn’t reply to a request for comment on the program.

In his court in South Carolina, Waites focuses on giving seminars to debtors’ attorneys to show them they have options when dealing with student loan debt. Sometimes consumer attorneys have the mistaken idea that there isn’t much they can do to help a debtor when they have significant student loan debt, he said.

His court publishes guidelines on the court’s website establishing a procedure for debtor’s counsel to be paid for extra services performed to address student loan debt in Chapter 13 cases.

The court recognizes that attorneys will frequently have to perform extra services when handling bankruptcy cases with student loan debt and has agreed to allow certain fees.

“It’s reasonable to put provisions in a Chapter 13 plan” that relate to the student loan debt, Waites said. The Chapter 13 plan is very powerful, he said.

The concept of “separate classification” to pay unsecured debt is becoming more prevalent now, Waites said.

Previously, some courts have held that separately classifying long-term student loan debt unfairly discriminates. In a recent order, however, Waites concluded that a Chapter 13 plan’s separate classification of a debtor’s student loans is permissible and doesn’t unfairly discriminate.

“The proposed plan promotes the policy of paying student loans and curing student loan default so the debtor can achieve a fresh start and her goals of reorganization, of obtaining employment, and of paying her creditors to the best of her ability,” he said.

Talking about these issues and getting these orders out for the public to see in cases that have helped debtors deal with student loan debt will hopefully “do some good” in time to change things, Waites said.

To contact the reporter on this story: Diane Davis in Washington atDDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz atJHorowitz@bna.com

For More Information

For more information about income-driven repayment plans:https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf; for more information about student loan law: https://library.nclc.org/node/99568

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.


Posted in Uncategorized

Dallas News: Free yourself from debt, without regrets

Free yourself from debt, without regrets by Liz Weston, Nerdwallet


Posted in Uncategorized

Bankr. M.D.N.C.: In re Griffin- Attorney Certification of Reaffirmation


The bankruptcy court issued a show cause order to the Debtor’s attorney for signing a certification that a reaffirmation would not be an undue hardship for the Debtor. The court held that in regards to a reaffirmation the debtor’s attorney must file an Affidavit stating that the Reaffirmation:

1. Represents a fully informed and voluntary agreement by the debtor;
2. Does not impose an undue hardship on the debtor or a dependent of the debtor;
3. That the attorney fully advised the debtor of the legal effect and consequences of the agreement and any default under such an agreement, as well as other options available instead of reaffirmation. See See In re Vargas, 257 B.R. 157, 165 (Bankr. D. N.J. 2001).
4. Verifies the creditors’ current security interests as unavoidable. Id.
5. Is based on the attorney’s personal knowledge of the facts. See In re Adams, 229 B.R. 312, 317 (Bankr. S.D.N.Y. 1999)

If the Debtor’s attorney cannot certify these, the statement required by 11 U.S.C. § 524(c)(3) should not be signed, thereby setting the Reaffirmation for hearing with the possible outcome being a determination that the debtor had timely complied with the requirements of 11 U.S.C. §§ 521(a)(2) and 524(c) and that accordingly, the Debtor is allowed a “ride through”. See In re Perkins, 418 B.R. 680, 681-82 (Bankr. M.D.N.C. 2009) (citing, inter alia, Coastal Federal Credit Union v. Hardiman, 398 B.R. 161, 189 (E.D.N.C. 2008)).


Despite the skepticism expressed in this order, at hearing, the court found that the Debtor’s attorney had, in fact, satisfied these requirements and that the Reaffirmation did not present an undue hardship.

For a copy of the opinion, please see:

Griffin- Attorney Certification of Reaffirmation

Posted in Middle District, North Carolina Bankruptcy Cases Tagged with: , , ,

4th Circuit: In re Jackson – Debtor is Entitled to the Full Means Test Deduction under National or Local Standard


The Bankruptcy Administrator moved to dismiss the Debtors case arguing that on the Means Test they were limited to deduction of the lesser of either the actual mortgage and vehicle expenses or the amounts under the applicable National or Local standard. In affirming denial of this motion by the the bankruptcy court, the Court of Appeals held that based on the plan language of 11 U.S.C. § 707(b)(2)(A)(ii)(I) “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards.” 11 U.S.C. § 707(b)(2)(A)(ii)(I) (emphases supplied). In addition to the unambiguous application of the statutory language, the Court held that a contrary result would create the absurd result of “punishing frugal debtors”, by encouraging them to incur secured debts up to the amounts under the standards.


In Footnote 5, this opinion also provides instructions for certification of issues for direct appeal under 28 U.S.C. § 158(d)(2)(A) and Bankruptcy Rules 8002 and 8006.

For a copy of the opinion, please see:

Jackson – Debtor is Entitled to the Full Means Test Deduction under National or Local Standard

Posted in 4th Circuit Court of Appeals Tagged with: , ,

Bankr. W.D.N.C.: In re Duvall- Impact of Abandonment on Debtor is Not Relevant


The Trustee sought to abandon LLCs of inconsequential value to avoid tax liabilities of more than $1 million due to recaptured pass through losses. Abandonment of these assets would shift the tax liability to the debtor, who contended that this would improperly burden his fresh start. The bankruptcy court rejected this as the “[i]mpact on the debtor is not … one of the factors to be considered in authorizing abandonment, which suggests that impact on the debtor is not a necessary
consideration.” In re Johnston, 49 F.3d 538, 541 (9th Cir. 1995)

For a copy of the opinion, please see:

Duvall- Impact of Abandonment on Debtor is Not Relevant

Posted in North Carolina Bankruptcy Cases, Western District Tagged with:

Bankr. E.D.N.C.: In re Cooper- Adequate Protection Payments Only Required Where Use of Property Causes Depreciation in Interest


Throughout extended litigation regarding the validity of a junior mortgage (there are more than 300 docket entries in this Chapter 13 case), a motion to dismiss filed by the trustee remained pending due to the inability to confirm a plan. After more then five years when the court determined both liens were valid in In re Cooper, but demoted lien of First American, the Debtors proposed a plan surrendering the property to the secured creditors, with the collateral to satisfy those claims and the $61,554.84 paid by the debtors to date being held by the trustee.

First American, the holder of the second mortgage, opposed confirmation arguing that the plan was unfair and not proposed in good faith, since it had received no payments. At the same time, First American filed a separate motion seeking adequate protection payments, retroactive to the petition date, pursuant to 11 U.S.C. § 363(e).

Finding that adequate protection payments can be required “to the extent that the …use under this title … results in a decrease in the value of such entity’s interest in such property.” (Emphasis added.) Following BB&T v. Beaman (In re Constr. Supervision Servs. Inc.) , the bankruptcy court, however, held that it was not the “ use of the Property that resulted in the decrease in value of First American’s interest in the Property, but the reversal of lien position.” (Emphasis in the original.)

For a copy of the opinion, please see:

Cooper- Adequate Protection Payments Only Required Where Use of Property Causes Depreciation in Interest

Posted in Eastern District, North Carolina Bankruptcy Cases Tagged with: ,

Bankr. M.D.N.C.: In re Carter- Standing in Involuntary Bankruptcy; Good Faith in Filing Involuntary Bankruptcy


The Debtor caused a fatal motor vehicle accident while under the influence and was subsequently pleaded guilty to felony death by motor vehicle. At the time of the collision, the Debtor was covered by his own insurance with State Farm and the Allstate insurance policy held by the owner of the car the Debtor was driving. The decedent’s estate settled with both Allstate, but after being unable to reach terms with State Farm, ultimately obtained a wrongful death verdict for approximately $2.8 million. When collection efforts failed, the Estate commenced an involuntary Chapter 7, with the Trustee employing special counsel to pursue automobile liability claims against State Farm and Allstate.

State Farm and Allstate sought dismissal of the bankruptcy arguing that while, following Wilson v. Wilson, 121 N.C. App. 662, 468 S.E.2d 495 (1996), North Carolina does not recognize a cause of
action for third-party claimants against the insurance company of an adverse party based on bad
faith and unfair and deceptive trade practices, the decendent’s estate were using the involuntary bankruptcy case to prosecute such the potential claims for its sole benefit.

Agreeing with the Trustee, however, the court held that the potential claims were actually first-party claims belonging to the Debtor, as he had causes of action against the insurers related to when and how to settle claims arising under such insurance policies. See Alford v. Textile Ins. Co., 103 S.E.2d 8 (N.C. 1958). Upon the filing of the bankruptcy, those potential claims against the insurers became assets of the bankruptcy estate.

(That these potential claims were not scheduled in the petition was dispensed with by the court, as all assets, even if unknown or undisclosed are assets of the bankruptcy estate. See Field v. Transcon. Ins. Co., 219 B.R. 115, 119 (E.D. Va. 1998), aff’d, 173 F.3d 424 (4th Cir. 1999) (holding that the trustee was entitled to bring the debtor’s bad faith failure to defend or settle automobile accident claims against insurance company).)

Since the Trustee had only at this point sought to conduct examinations of the insurers pursuant to Rule 2004 and had not yet commenced any Adversary Proceeding, the court held that State Farm had not suffered a “actual or imminent injury” sufficient to have standing to seek dismissal of the bankruptcy. Even if State Farm did have standing, the court alternatively held that the assertion that the involuntary bankruptcy was filed by the decendent’s estate “to prevent wasting of the Debtor’s sole possible asset” was, absent any evidence from State Farm to the contrary, enough to establish the good faith of the filing.


Lest personal injury attorneys look towards this case as a new means to raise third-party claims, the later history is pertinent. Unsurprisingly, this decision was appealed and, after being subsequently cast into doubt in following the dismissal shortly after this opinion in In re Black, the parties also consented to the dismissal of the case.

In Black, the same special counsel had sought to also use an involuntary bankruptcy to similarly assert claims held by that Defendant/Debtor against insurers. Unlike in Carter, however, Black involved a Defendant/Debtor which was not incarcerated and with whom the Plaintiff’s personal injury attorney had sought the assistance of the same attorney who had served as special counsel to the Trustee in Carter to prepare, after some degree of consultation with the Defendant/Debtor, the involuntary bankruptcy petition. After the bankruptcy was filed, Mr. Black sought dismissal of the case himself. The court there found that the Black case had been filed in bad faith because the Debtor/Defendant had generally been paying his debts and, particularly damning, were that the actions of the personal injury attorney and special counsel seemed “duplicitous in nature” and potentially violated the Rules of Professional Conduct. Unlike in Carter, there was no allegation that potential claims were wasting, as Mr. Black could still pursue such claims himself.

These twists and turns of events leave the tactic of using involuntary bankruptcies to bring a Defendant/Debtor’s causes of action against insurers for the benefit of creditors in limbo,  as the problematic behavior in Black cast a shadow on Carter.

For a copy of these opinion, please see:

Carter- Standing in Involuntary Bankruptcy; Good Faith in Filing Involuntary Bankruptcy

Black-Bad Faith Involuntary Bankruptcy

Posted in Middle District, North Carolina Bankruptcy Cases Tagged with: , , ,

Bankr. E.D.N.C.: In re Rogers- Denial of Homestead Exemption in Adjacent Property


Ms. Roger inherited real property from her mother, which included a residence and a building originally used as a country store, which was subsequently renovated into a residential rental property. After obtaining a mortgage against the entire property, Ms. Rogers, with the consent of the lienholder, subdivided the residence and the rental properties. Upon filing Chapter 13, Ms. Rogers claimed both properties under her homestead exemption, as the two were previous a single parcel and the rental property produced revenue necessary for payment of taxes and insurance on both.

Relying on both the definitions of the term “residence” from the dictionary and the Bankruptcy Code at 11 U.S.C. § 101(13A), including the related term “incidental property” at § 101 (27B), the court held that the adjacent property did not fall within any of these, particularly as the rent derived was completely separate from the residence, particularly as the tenant was neither a dependent nor even relative.

For a copy of the opinion, please see:

Rogers- Denial of Homestead Exemption in Adjacent Property

Posted in Eastern District, North Carolina Bankruptcy Cases Tagged with: , ,

Bankr. E.D.N.C.: Baum v. Baum- Discharge under § 523(a)(15) for Debts In Connection with Divorce Decree


During a period of financial distress and shortly before their divorce, Doreen Baum made repeated unauthorized withdrawals from the Martin Baum’s IRAs, and did not pay the mortgage on the couple’s beach house, using the funds for the support and maintenance of the family. When the Baums divorced, the parties entered into an consent orders for Alimony and Equitable Distribution. While aware of the unauthorized withdrawals, Martin Baum believed any claims he had for fraud were preserved, whereas Doreen Baum believe these consent orders resolved all issues, including for the unauthorized withdrawals.

Doreen Baum filed Chapter 7 and Martin Baum brought an Adversary Proceeding seeking to both have the bankruptcy court determine that Doreen Baum was indebted to him for compensatory and punitive damages resulting from fraud and to have such declared nondischargable. The initial complaint was not timely filed, so Martin Baum was unable to maintain nondischargability claims under U.S.C. § 523(a)(2) or (4) for debts “obtained by false pretenses, a false representation, or actual fraud . . . [and] for fraud or defalcation while acting in a fiduciary capacity . . . .” The court did, nonetheless, allow amendment of the complaint to assert nondischargability under § 523(a)(15) for a debt incurred “in connection with a separation agreement, divorce decree or other order of a court of record….”

The bankruptcy court then had to determine whether to rule first on the fraud or dischargability claim, which presented a “chicken and egg” conundrum as:

If the court determines that [Doreen Baum] is not liable to [Martin Baum] under the either of Fraud Claims, then there is no debt for determination of dischargeability. Contrarily, if the court determines the Fraud Claims, as asserted, are dischargeable obligations, then the need to fully adjudicate and liquidate the Fraud Claims likewise becomes unnecessary.

Since jurisdiction over the fraud claims, based on state law, was more questionable, the bankruptcy court evaluated dischargability first.

Regarding dischargability, Doreen Baum’s insistence that the equitable distribution order resolved liability from the unauthorized transfers, complicated the determination under § 523(a)(15). That notwithstanding, the bankruptcy court held that as Doreen Baum had no outstanding liability, whether liquidated or not, to Martin Baum as a result of the equitable distribution order, the objection to discharge failed.

Despite having stated that a determination of the fraud claim would be unnecessary if any such debt was dischargeable, the bankruptcy court, nevertheless, continued on in that regard, as the issue could present itself in a later claims objection by the Trustee. While the action by Doreen Baum could meet most of the requirements for either actual or constructive fraud, the bankruptcy court did not, despite expressing it abhorrence at her actions, believe that Martin Baum had been actually damaged, as required for actual fraud, nor that Doreen Baum had sought to benefit herself, as necessary to establish constructive fraud, as the funds were used mainly for joint household expenses. Continuing, the bankruptcy court expressed that punitive damages could be awarded even absent actual damages.


This case has been appealed.

For a copy of the opinion, please see:

Baum v. Baum- Discharge under § 523(a)(15) for Debts In Connection with Divorce Decree

Posted in Eastern District, North Carolina Bankruptcy Cases Tagged with: , , , , , , ,