Recent Cases

Recent bankruptcy cases in the Western District of New York (Rochester and Buffalo)
(Case notes drafted by Peter Scribner, Esq.)

Bankruptcy Judges:
Rochester: Hon. John C. Ninfo
Buffalo: Hon Carl Bucki; Hon. Michael Kaplan

Self-employment net income 90% exempt: In re Dziedzic #08-14061 (Decision March 24, 2009; Judge Bucki, Buffalo): Personal services income exemption for self-employed applies to net income only. Debtor, a self-employed chiropractor, asserted a 90% personal services exemption for services rendered 60 days prior to filing, pursuant to NY CPLR Sect. 5205(d). According to debtor's schedules, only 18.2% of gross business revenue represented personal income, the rest was for overhead. Debtor had $5,625.49 in the bank when the case was filed, plus $100 cash. $2,500 was exempt cash and the debtor did not claim an exemption for another $2,079.38. Of the balance of $1,146.11, the debtor claimed 90% exempt. The court agreed with the trustee that only 90% of 18.2% of this money was exempt, as only 18.2% was actual "earnings" as that word is used in the exemption statute, CPLR 5205(d).

Pay Advice case #4: In re Gilbert #08-12922 (Decision April 10, 2009; Judge Bucki, Buffalo) Another pay advice case. Here the debtor did not file with the court pay advices within 45 days of the petition date but did provide them to the trustee at the 341 hearing. The trustee apparently reviewed and returned the paystubs without comment, and then filed a dismissal motion when the 45 day deadline passed. Judge Bucki ruled that the motion was legally sound but the trustee, having accepted the stubs without comment, was equitably estopped from moving to have the case deemed dismissed. Not mentioned in the case: Could the UST or another party have made the motion? Could they still?

Acceleration of a mortgage does not turn it into a short term mortgage: In re: Maiorino #08-21335 (Decision March 11, 2009; Judge Ninfo) In this case a Chapter 13 debtor attempted to modify a long-term mortgage by paying it off in full within the plan at below-contract rate of interest. The debtor argued that as a judgment of foreclosure has accelerated the mortgage, it was all now due-in-full and, as the last payment was now due within the period of a Chapter 13 plan, it could be modified. Judge Ninfo disagreed and held that the Sect. 1322(c)(2) provision, which states that residential mortgages cannot be modified if the last payment is due after the term of the Chapter 13 plan, applies to the original payment schedule of the mortgage, not the shorter tern caused by the acceleration of the mortgage in foreclosure. Note this phrase (which may return if new legislation allows modification of home mortgages in Chapter 13): "Although all of the circumstances under which a debtor might be better off by intentionally going into default on a mortgage, so that it could be modified in a Chapter 13 proceeding may be numerous and unclear, if a mortgage that has been accelerated by a debtor's default is held to be eligible for modification under Section 1322(c)(2), such a holding could open up the possibility of abuse"

Exempting life insurance after Wornick decision: In re MacDonald #08-11741 (Decision March 10, 2009; Judge Bucki, Buffalo) Motion by debtors to compel trustee to return life insurance proceeds turned over pursuant to the 2002 decision in Teufel etc. The Second Circuit overruled this line of cases Wornick v. Gaffney 554 F3d 486, decision 9/24/08, and ruled that the cash value of reciprocal life insurance policies in joint cases are exempt. The MacDonald debtors then amended their exemptions to add the life insurance and then moved to have the trustee return funds previously turned over. Judge Bucki granted that motion, noting that the exemption issue had not previously been litigated in this particular case, so no "law of the case" had been established to preclude the debtors from exempting the asset now.

Successor creditors must prove they own the claim: In re: Doherty #06-22278 & Benedetti #07-21620 (Decision February 23, 2009; Judge Ninfo): Proofs of claims were filed in each case by alleged successors to the original creditors. The Trustee objected to the claims, and the Court disallowed them, as the claimant failed to show the chain of title or anything else that would prove ownership of the claim.

Recorded mortgage with misspelled name not a perfected lien: In re Badagliacca #06-22132; Arnold as Trustee v. Bank of New York AP #08-2032 (Decision February 23, 2009; Judge Ninfo) Mortgage misspelled the debtor's surname on its mortgage document ('Badaglicca' rather than 'Badagliacca'), so that a search of the index of land records does not reveal the mortgage. Held, the mortgage lien is avoided as against the trustee (acting as a hypothetical bona fide purchased.)

Retainer agreement governs attorney fees for responding to turnovers: In re: Kasperek Bk #08-11760 & in re Martinelli Bk #08-11761 (Decision January 15, 2009; Judge Bucki, Buffalo: Two potential asset cases where the trustee (John Ring) requested turnover of documents and assets. The debtors' attorney apparently demanded additional fees from each client before he would represent them in the turnover motion. The attorney did not file a supplemental 2016 statement. The attorney did not appear at the initial turnover motion, and the trustee brought a motion to disgorge. The attorney did appear at the adjourned turnover date and all turnover matters were resolved. Judge Bucki concluded that an attorney may structure his retainer arrangement as he or she sees fit, but is obligated by its terms. In this case, the 2016 statement stated the attorney would "render legal services for all aspects of the bankruptcy case." The judge stated that this certainly would include responding to a turnover motion. The judge ordered to attorney to compensate the trustee $500 for the cost of bringing the turnover motions and the disgorgement motions. Whatever the Rule 2016 statement (and attorney's retainer agreement) says, the court will enforce.

Pay Advice case #3: Catania Bk #08-13478 (Decision December 10, 2008; Judge Bucki, Buffalo: Case dismissed "automatically" due to failure to file pay advice. Chapter 7 filed August 7. Pay stubs were filed for the period June 12 to July 3, and nothing between July 3 and August 7. Debtor attorney attempted to correct the error Sept. 7, but erroneously filed the same pay stubs as before. HELD: Court had no discretion, case must be deemed to have been automatically dismissed 46 days after filing. Sect. 521(a)(1)(B)(iv) requires pay advice for the 60 days prior to filing be filed with the court, or the case is automatically dismissed 45 days after filing. As there were no pay advices for the month prior to filing, and as the missing pay advice could not be derived from YTD (compare this to Judge Bucki's Wojda case or Judge Ninfo's Riffle case) or the trustee estopped from claiming the case is dismissed (Judge Bucki's Ober and Gilbert cases), this case must be considered dismissed pursuant to Sect. 521(i).

Second Circuit Decision: 2005 Homestead exemption increase retroactive. CFCU Community Credit Union v. Hayward (Scribner as trustee); WDNY Bk#07-4369bk; 552 F.3d 253; Second Circuit Court of Appeals decision January 9, 2009: The NY homestead exemption was increased from $10,000 to $50,000 in August 2005, and the Haywards filed Chapter 7 shortly thereafter. CFCU, by Attorney Edward Crossmore, argued that the $40,000 increase should only apply to debts incurred after the law went into effect. The WDNY, EDNY, and NDNY bankruptcy courts disagreed, as did the District Court in WDNY and NDNY. CFCU appealed to the Second Circuit. Held: as an interpretation of New York law, the increase in the homestead was retroactive to debts incurred before the law was modified. Specific holdings: 1) The Commerce Clause of the U.S. Constitution (forbidding the impairment of contracts) was not infringed. The change did not substantially impair the contractual expectations of the parties, and even if it did, the changes was constitutionally justified as furthering a "significant and legitimate public purpose." 2) Other than the Commerce Clause issue, this was a matter of New York law interpretation, not federal law interpretation. The Supreme Court decision in Owen v. Owen did not apply. Owen was a Florida case where a creditor obtained a judgment against the debtor's condo, Florida then changed its exemption laws to include condos as homesteads but the change specifically excluded pre-change judgment liens; the debtor then filed bankruptcy and sought to avoid the judicial lien. The Supreme Court allowed the judgment to be avoided because the property being exempted - the condo - was exempt property and Florida's limitation on that exemption - excluding older judgments - did not carry into bankruptcy. Somehow the Hayward court concluded that "Owen holds no sway here." 3) Under New York law remedial legislation can apply retroactively and the legislative history here, especially the sponsoring legislator's memorandum, indicated that the legislature intended that the change would be retroactive.

Funds in bank account are bankruptcy asset until check clears: In re Borowiec Bk #07-04258 (Decision November 5, 2008; Judge Bucki, Buffalo). Debtor's property tax payment check cleared the bank four hours after the bankruptcy was filed. The trustee brought a turnover motion against the debtor. The court ruled that the actual property could not be turned over, as it had already been transferred, in good faith, to the tax collector, but that the debtor enjoyed "unjust enrichment" and granted a judgment in favor of the trustee.

Some mortgage proof of claim expenses allowed: In re Zunner Bk #08-10862 (Decision November 5, 2008; Judge Bucki, Buffalo). In Chapter 13 case where the mortgage bank filed a proof of claim for the bank's expense in obtaining a title report and a broker's price opinion, even though the mortgage was current at the time the petition was filed. The mortgage allows the bank to charge the borrower "any amount that the lender expends under this mortgage to protect the value of the property and lender's rights in the property." Judge Bucki ruled that the $100 titled report was a justifiable expense, as the mortgage was in default at the time the report was prepared. The $100 broker's price opinion was not a justifiable expense, as it did not protect the value of the property.

Cash Collateral agreements needed in business Chap. 13: In re Kjoller (07-23133) (Decision November 10, 2008; Judge Ninfo): Bankruptcy Code section 1304 and Section 363(c)(2) and (4) makes a Chapter 13 business debtor a trustee of an explicit statutory trust covering cash collateral. These sections require a business debtor to get the consent of any cash collateral secured party or Court order allowing the debtor to use any cash collateral, including receivables or sale revenue, or to put the cash collateral in a separate account and account for it to the secured creditor. Court expects in future chapter 13 cases the debtor and the trustee will address any possible tax collateral issue at the earliest opportunity. In this case, the bank filed a motion to dismiss the case for the debtor's alleged "embezzlement" or "defalcation" of cash collateral. The court dismissed the embezzlement complaint, and allowed the defalcation claim to continue. The case also includes extensive notes about motions to dismiss complaints and amendments to complaints.

Debtor must claim an exemption to avoid a transfer: In re Gross (Bk #99-16587; Decision October 7, 2008; Judge Bucki): Debtor's original case was filed 12/1/99 and she claimed the cash exemption. Less than a month prior (11/19/99), a creditor filed a judgment lien on her house. The debtor was unaware of the lien until the case was reopened in 2008. The debtor did not amend her exemptions to switch from cash to homestead; rather she moved to avoid the judgment as a preferential transfer. Debtors can avoid involuntary preferential transfers (and other transfers) under 522(h) if a trustee can, but does not avoid the transfer, if the debtor "could have exempted" the transferred asset. The debtor argued, unsuccessfully, that she "could have" exempted the equity in the homestead, even though she didn't. Judge Bucki ruled that the debtor must actually claim the exemption to avoid the transfer and/or avoid the lien. The Judge also stated that any action to avoid a preferential transfer must be by AP and not by motion.

Short term home mortgages can be modified in Chapter 13: In re Latimer (Bk #08-21242; Decision October 28, 2008; Judge Ninfo): Chapter 13 case: the debtors had a second mortgage where the final payment was due within the five year time period of the plan. Following the 11th Circuit Court of Appeals (in re Paschen, 296 F3d 1203) and the 6th Circuit Bankruptcy Appeals Panel (In re Eubanks , 219 BR 468), and not following the 4th Circuit in In re Witt (113 F. 3d 508), Judge Ninfo stated the mortgage could beneficiary modified in the Chapter 13 plan. Mortgages that are against the debtor's house and where the repayment period extends beyond the end of the plan cannot be modified in Chapter 13, but here, where the repayment period was within the plan period, the debtor could bifurcate, or divide, the mortgage into a secured and unsecured portion and pay off the unsecured part as an unsecured claim.

ADA Claim not exempt in New York: In re: Graci (Bk #05-18224; Decision September 23, 2008; Judge Bucki, Buffalo). When this debtor filed bankruptcy, she was litigating a claim under Americans with Disabilities Act (42 USC Sect. 12101 et sec.). In New York, a debtor can exempt (that is, keep free and clear from creditors) up to $7,500.00 of a claim for a personal injury. Judge Bucki ruled that an ADA claim is not exempt as a personal injury claim.

Cash value of reciprocal life insurance exempt in joint cases: Wornick v. Gaffney 554 F3d 486; second Circuit Court of Appeals, decision September 24, 2008: This decision settled (and mostly over-ruled) a long series of conflicting decisions among the bankruptcy and district courts judges in the Western District of New York. The cash surrender value of a debtor's life insurance policy, where someone else is the beneficiary, is exempt in New York. In a series of Western District of New York decisions, it was eventually held that if a husband and wife filed a joint bankruptcy, and one was the beneficiary of the other's life insurance, the trustee held the entire interest in the policy and the cash value was no longer exempt. The Second Circuit reversed all of these cases and concluded that when a husband and wife file a chapter 7 case jointly, it is the same as separate cases, and the reciprocal life insurance policies are exempt. See MacDonald #08-11741 (Judge Bucki 3/10/09)

Equitable ownership of a car: In re Brenda Dufoe (Bk #08-20468; decision August 27, 2008) (Judge Ninfo). New York Vehicle and Traffic Law Section 2108 says that the owner listed on the title certificate of a motor vehicle is presumed to be the owner of that vehicle. In this case, the debtor and another were co-owners in a business which included buying and selling high-end cars. The debtor's name was on the title certificate, but the business partner claimed to be the sole "beneficial" or "equitable" owner of the vehicle. Judge Ninfo decided that the V&T Sect. 2018 presumption of ownership can be rebutted in the right circumstances, but that the business partner did not rebut it in this case. However, the judge did indicate that it was possible that the other party might have a partial beneficial interest in the vehicle, and advised the parties to negotiate a settlement. This concept of a partial beneficial interest in a vehicle titled to another person may be the subject of future bankruptcy litigation in New York.

Tax foreclosure and Chapter 13: In re William J. Wisotzke, Jr. (Bk #08-21178; decision August 14, 2008; Judge Ninfo.) When is it too late to file a Chapter 13 and stop a property tax foreclosure? In New York, it depends on the statutory process being used in foreclosure. The Bankruptcy Court in Rochester, in a 2001 case, ruled that a Chapter 13 filed after a Monroe County tax foreclosure sale was too late to stop the transfer of the property to a new owner (In Re Rogers, Bk #01-24200. That decision was affirmed by the Second Circuit Court of Appeals in 2003 (333 F3d. 64). The tax foreclosure in Rogers was conducted to a local statute, Sect. 22 of the Monroe County In Rem Tax Foreclosure Act, and the bankruptcy court (and Circuit Court) held that the tax foreclosure was completed when the property was 'struck down" at the sale.

In the Wisotzke case, the property being foreclosed for taxes was in Honeoye, NY, in Ontario County. The Chapter 13 in this case was filed a few hours prior to the tax foreclosure sale. However, unlike Monroe County, Ontario conducts its tax foreclosures not under a local statute but rather under the "in rem" process of Article 11 of New York Real Property Tax Law (RPTL). In an Article 11 tax foreclosure, a deadline for the property owner to "redeem" the property for taxes is set. In this case, the deadline to redeem was January 18, and Ontario County Court entered a default judgment awarding the property to Ontario County February 29, pursuant to RPTL Sect. 1131. The deadline to reopen such a default judgment must be made within one month of the default judgment (RPTL 1131). In this case, the Chapter 13 petition was filed more than a month after the County Court's default judgment was entered. The Bankruptcy Court ruled that the debtor had no possible ownership interest in that property after the 30 day deadline to reopen the default expired, and so the filing of the petition did not stop the foreclosure sale from going forward.

There is an interesting side note to this decision. The debtor's house in Wisotzke and was foreclosed for non-payment of $10,750 in property taxes and then subsequently sold at the foreclosure sale for $66,000. There does not appear to have been a mortgage on the property. When a valuable asset of the debtor is transferred for inadequate consideration within two years of the bankruptcy petition, a bankruptcy trustee can "avoid" or reverse the transfer on behalf of the other creditors as a fraudulent conveyance under New York law (Debtor & Creditor sect. 270) or as a fraudulent transfer under the Bankruptcy Code (11 USC Sect. 548). In the Wisotzke case, the debtor argued that the involuntary transfer of a house worth $74,600 in satisfaction of $10,750 in taxes was inadequate consideration. The bankruptcy court, in an aside (dicta), indicated that there was "substantial merit" to the argument, although not one that was before the court at that moment. In the Rogers case, the Bankruptcy Court ruled that the debtor's interest was terminated only after a public tax foreclosure sale, and that public tax sales were sales for reasonably equivalent value, with the surplus money above and beyond the taxes going back to the former owner (or junior le inholders.) The county does not get a windfall in such an auction. But in Wisotzke, the county appeared to receive a substantial windfall. Title to the property was transferred to the county prior to the foreclosure sale, so the county appears to have received - and kept - $66,000 in sale proceeds in satisfaction of a $10,750 tax bill. One would anticipate that the fraudulent transfer issue in this case will be further litigated, either by the trustee or by the debtor.

Dis-chargeability of a bar fight claim: In re Donald L. Wright (Bk #04-17680; AP 08-1075; decision July 21, 2008; Judge Kaplan in Buffalo.) Debtor injured another person in a bar fight, and the other person sued in bankruptcy court to have the claim for injuries from the fight excepted from discharge. A claim for "willful and malicious injuries" can be excepted from the discharge received by a debtor in bankruptcy under 11 USC Sect. 523(a)(6). Here, the debtor apparently admitted to hurting the other person in a deposition, and that was enough for the Bankruptcy Court to grant summary judgment to the injured party and except the claim from discharge.

Economic stimulus package cases: In re Daniel & Wendy Alguire; Bk #08-10691; decision June 24, 2008; Judge Kaplan in Buffalo.) Remember the "economic stimulus" rebate checks received earlier in 2008? What was the status of those checks in a New York bankruptcy? Judg Kaplan took this case and fourteen others and issued a general decision on the question. He ruled that the economic stimulus checks were tax refunds on the debtor's 2007 tax returns. The fact that they were retroactive tax refunds was irrelevant. In New York, debtors who do not own real estate, or have no equity in their residence, can exempt $2,500 in cash, bank accounts and tax refunds owed but not received. Therefore, Judge Kaplan determined, for any case filed after the statute authorizing the stimulus package was enacted but before the checks actually were received, they could be treated as tax refunds and exempted as cash for those debtors eligible for cash exemptions. This case may be an important guideline in the event Congress issues any additional stimulus packages in the future.

Pay advice case #2: In re: Jeffrey T. Ober (Bk #06-00704; decision June 27, 2008; Judge Bucki in Buffalo): Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to diel with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Ober, the case was filed April 3, 2006, but pay advices were filed only through March 2, so the last 30 days of pay advices were missing. Never the less, no one objected to the petition while it was in Chapter 13. The chapter 13 plan was confirmed, after notice to all creditors, and a later amended chapter 13 plan was confirmed, again after notice to all creditors. After two years in chapter 13, the case was converted to Chapter 7. Only then did someone - the new chapter 7 trustee - object to the case and claim that the petition should be treated as if it had been automatically dismissed two years earlier. The court did not indicate how it would have ruled if the question had been presented back at the beginning of the case. Instead the court decided that it was far too late for the trustee to claim the case should be treated as if it were dismissed. The chapter 7 trustee's predecessor - the chapter 13 trustee - should have objected to the case earlier, before the plan was confirmed, twice, after notice to all creditors. Interestingly, the case made no reference to Judge Ninfo's Riffle case.

Pay advice case #1 (affirmed by District Court): In re Stephen R & Lora P. Riffle (Bk #07-22372; decision January 24, 2008; Judge Ninfo). Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to file with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Riffle, the debtor filed his last pay stub, plus a year-to-date summary of income received in each paycheck. A creditor filed a motion asking for the case to be considered automatically dismissed because the debtor did not file all four of his bi-weekly paystubs for the 60 day period prior to filing his case. The court, however, agreed with the debtor and the trustee that the items that were filed were, in this case, sufficient "other evidence of payment" to verify the debtor's income. The court also specifically stated that, for any Rochester bankruptcy case, if a debtor files any evidence of payment, the case will not be considered to be automatically dismissed unless another party files a motion within 30 days of the expiration of the 45 day "automatic dismissal" date. NOTE: THIS CASE WAS AFFIRMED ON APPEAL (United States District Court for the Western District of New York (Case #08-CV-6082; decision August 7, 2008; Judge Siragusa)