Summary:
In Sugar & Sasser v. Burnett, the Fourth Circuit upheld in part and vacated in part a district court’s affirmance of the bankruptcy court’s sanctions arising from a Chapter 13 debtor’s unauthorized sale of her residence. The debtor, Christine Sugar, sold her home during the pendency of her case without prior court approval as required by Eastern District of North Carolina Local Bankruptcy Rule 4002-1(g)(4) and her confirmed Chapter 13 plan, even though the property was partially exempt
Despite having claimed homestead exemption under N.C. Gen. Stat. § 1C-1601(a)(1) for a portion of the equity in her home, the court of appeals held that such exempts only a dollar value interest in property, not the property itself. Accordingly, it rejected arguments that vesting of the property upon plan confirmation removed it from the reach of the Local Rule or § 1329 modification.
The bankruptcy court dismissed her case with a five-year refiling bar and required her attorney to pay sanctions in the amount of $15,000. The Fourth Circuit affirmed the finding of a violation and the sanctions against counsel, but vacated the dismissal and refiling bar imposed on the debtor, remanding for the bankruptcy court to reconsider those sanctions because the bankruptcy court failed to account for Sugar’s reliance on the erroneous legal advice of her attorney.
Commentary:
This decision underscores that confirmation does not confer carte blanche over exempt property. Even where equity is partially protected under a homestead exemption, any property—vested or not—that includes non-exempt value remains subject to procedural safeguards. The Fourth Circuit's reaffirmation of the distinction between exempting an “interest” versus an “entire asset” is significant. To the extent that vesting of assets in the debtor at confirmation, rather than retention by the bankruptcy estate, is allowed (as it should be under Trantham) that does not grant unqualified control to Chapter 13 debtors to sell property post-confirmation. Here, the court made clear that the proceeds attributable to non-exempt value remain subject to modification under § 1329 and court oversight.
For consumer debtors, especially those pro se or guided by overly zealous counsel, this decision highlights that even if local rules such as EDNC LBR 4002-1(g)(4) are improper, the correct avenue for challenging those is the appellate process not simply ignoring them.
The existence of a potential defense of reliance on advice of counsel also raises thorny ethical issues for debtors attorneys, as that would seem to trigger a direct conflict of interest between the debtor and the lawyer, who may or may not have provided improper or inaccurate advice.
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