Summary:
Through a combination of selecting vesting of assets at confirmation and the use of nonstandard provisions, Maynor's plan in essence sought to excuse the requirement from Local Rule 4002-1(g)(4), which (at the time of this decision*) provided that:
(4) DISPOSITION OF PROPERTY. After the filing of the petition and until the plan is completed, the debtor shall not dispose of any non-exempt property having a fair market value of more than $10,000 by sale or otherwise without prior approval of the trustee and an order of the court.
Additionally, the Notice and Order to the Debtor, which is issued upon the filing of a chapter 13 case in the E.D.N.C, provides:
(4) Financial/Address Changes: You must notify your attorney and the trustee of any change of mailing address or employment. You must notify the court of any change in mailing address. You must also promptly notify your attorney and the trustee of any substantial changes in your financial circumstances, including substantial changes in your income, expenses, or property Ownership. . . .
(10) Disposition of Property: You must not dispose of any non-exempt property having a fair market value of more than $10,000.00 by sale or otherwise without prior approval of the trustee and an order of this court.
The Chapter 13 Trustee objected to confirmation, based on the "the over-arching and troubling question" of these provisions, which had been rejected on multiple previous by the bankruptcy and district courts in the E.D.N.C., see, e.g., In re Skilling (Bankr. E.D.N.C. Oct. 10, 2022) intended “to limit the debtor’s obligations under the Order and Notice, or to obfuscate and confuse the trustee as to his intention with respect to this or any of the other nonstandard provisions of the Plan.”
The bankruptcy court agreed, holding that the "continuing interest in 'the preservation of the debtor’s financial situation,' the bankruptcy process is dependent upon disclosure and transparency."
Continuing, in strikingly strong language ("Repetition alone, with no new binding law and no unique factual circumstances, is now and will remain insufficient."), the bankruptcy court indicated that, despite concerns about issuing an advisory opinion (and perhaps exercising more restraint that the 4th Circuit Court of Appeals seemed to require in its oddball Kiviti v. Bhatt decision), it would " articulate the bases upon which it will not confirm plans that include provisions that are identical in substance, form, or intent" to those proposed here.
The court began by drawing the distinction between exemptions for things in themselves, for example "professionally prescribed health aids'', see N.C.G.S. § 1C‑1601(a)(7), and exemptions for a specified value, for example, most pertinently in this case and generally the $35,000 homestead exemption at N.C.G.S. § 1C‑1601(a)(1). While acknowledging that Local Rule 4002-1(g)(4) can be read in more than one way, the court found the practical understanding of the rule requires that that if, at the time property is ultimately sold, the fair market value exceeds $10,000 over liens plus the claimed exemption, then court authority is required to sell the property.
In regardings to what continued authority the court has over property that vested in the debtor at confirmation, while recognizing that the interplay of 11 U.S.C. § § 1306(a) and 1327(b) "has confounded courts" and that the 4th Circuit has not specifically adopted any of the five vesting theories, the bankruptcy court nonetheless found that the 4th Circuit decisions in Murphy v.O’Donnell (In re Murphy) (4th Cir. 2007) and Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989), held that “a debtor cannot use plan confirmation as a license to shield himself from the reach of his creditors when he experiences a substantial and unanticipated change in his income.”
As such, the bankruptcy court held that, absent a reversal of Murphy, the Fourth Circuit would reject the estate termination, estate transformation or estate replenish approach as adopted in the In re Elassal, 654 B.R. 434 (Bankr. E.D.Mich. 2023) opinion. Under the remaining vesting theories which the 4th Circuit could adopt, viz. estate preservation, conditional vesting or estate replenishment as applied in Barbosa v. Soloman, (1st Cir. 2000), ann would still subject the debtor to oversight regarding the disposition of assets.
Commentary:
* The proposed amendment to Local Rule 4002-1(g), a copy of which is attached, would instead provide:
(4) DISPOSITION OF PROPERTY. After the filing of the petition and until the plan is completed, the debtor shall not dispose of any non-exempt property (whether vested or not) having a fair market value of more than $10,000 with non-exempt equity in excess of $12,000 by sale or otherwise without prior approval of the trustee and an order of the court. “Non-exempt equity” shall be calculated using the fair market value of the property as of the date of sale or transfer after subtracting the amount of any claimed, allowed exemption and the petition date amount of any non-avoidable lien.
And, as before, leaving aside the theories of vesting and attempts at procedural asymmetric warfare in Chapter 13, the root of this issue is that the homestead exemption in North Carolina is outdated and woefully inadequate, leaving Chapter 13 Debtors in particular, due to the plans lasting as long as five years, often forced into the Hobson's choice of either remaining in their home despite opportunities and obligations that would urge selling and relocating or selling that property and only keeping proceeds that will be insufficient for homeownership elsewhere. The better solution would be for the North Carolina Bar Bankruptcy Section to work towards reasonable exemption reform.
To read a copy of the transcript, please see:
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