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E.D.N.C.: In re Sugar- Dismissal with Prejudice for Willful Violation of Local Rules

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By Ed Boltz, 11 April, 2024

Summary:  

This district court reviewed the dismissal of Ms.  Sugar's  Chapter 13 bankruptcy case, based on Sugar's sale of her property without seeking permission from the bankruptcy court, in violation of Local Bankruptcy Rule 4002-1(g)(4), and further  barring her from filing future petitions.

Sugar filed  Chapter 13 bankruptcy and her plan allowed her homestead exemption of $32,348.81, valued at $150,000. Subsequently, the bankruptcy administrator filed a motion for a status conference upon learning that Sugar was in the process of selling her property without court approval, with the Bankruptcy Court finding that Sugar intentionally violated Local Bankruptcy Rule 4002-1(g)(4) by selling her property without prior court approval. This rule prohibits the sale of non-exempt property valued over $10,000 without court and trustee approval.

On appeal, Sugar argued that her property had been claimed as exempt from the bankruptcy estate, that Local Bankruptcy Rule 4002-1(g)(4) exceeded the bankruptcy court’s rulemaking authority, and that the dismissal was improper.

The District Court held that the property did indeed form and remain part of the bankruptcy estate subject to the Bankruptcy Code, Local Rules, and the confirmed plan's terms. It ruled that the Local Bankruptcy Rule 4002-1(g)(4) was procedural and consistent with the Bankruptcy Code, and thus valid. The court also found no basis for Sugar's argument that she had an objectively reasonable basis for selling the property without court approval, and it rejected the claim that no harm was done by her actions.

Commentary:

This decision by the district court does not appear to have been appealed further to the Fourth Circuit Court of Appeals.  Whatever the merits of the underlying issues regarding vesting,  post-petition appreciation, etc.,  this case,  with the record showing rather flagrant disregard by the debtor,  is certainly not the best vehicle to advance those arguments.

Procedurally,  perhaps a better argument in this case (whether at the bankruptcy court  or on appeal at the district court)  is whether this bar from refiling is truly a dismissal under 11  U.S.C.  §1307  or more accurately denial of discharge under 11 U.S.C.   §1328 (akin to 11 U.S.C. 727), as this  (or any?) bar to refiling a bankruptcy under any Chapter has the effect of prohibiting the discharge.  The latter process would have,  pursuant to Rule 7001(4),  required an Adversary Proceeding with its heightened due process protections,  perhaps not changing the outcome.

The bankruptcy court order sanctioning the debtor's attorney is still on appeal and pending decision, 5:23-cv-00411-FL,  where hopefully he has independent counsel.

To read a copy of the transcript, please see:

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