Justia U.S. 6th Circuit Court of Appeals Opinion Summaries

The debtor filed a voluntary bankruptcy petition and her Chapter 13 plan. A few weeks later, she filed her Michigan state income tax return, showing that she owed $4,900 for the 2008 tax year. She did not make payment, but later filed a proof-of-claim on behalf of the Michigan Department of Treasury, which meant that the tax debt would be paid through her Chapter 13 plan. Treasury objected, arguing that this was a post-petition claim under 11 U.S.C. 1305, which gives only a creditor the option of filing; debtor responded that the claim was permitted under section 501(c). The bankruptcy court overruled the objection; the district court affirmed The Sixth Circuit affirmed. The tax debt is entitled to priority under section 507(a)(8), (i) and (iii), so the post-petition protective claim on behalf of Treasury is treated under section 502(i) as a prepetition claim. A debtor is permitted to file a prepetition claim on behalf of a creditor that fails to timely file.

A Chapter 7 debtor instituted an adversary proceeding against Sallie Mae, Inc. (11 U.S.C. 523(a)(8)) to determine the dischargeability of a student loan (about $25,000). The bankruptcy court entered a default judgment against Sallie Mae and later denied a motion to set aside the judgment. The Sixth Circuit affirmed, holding that the district court acted within its discretion in rejecting an argument of excusable neglect. It is unclear whether Sallie Mae had no reasonable policy in place to see that mail was delivered to appropriate personnel or simply failed to apprise the court of that policy.Sallie Mae was not entitled to notice of a hearing on the motion for default judgment. Service was proper; it was an internal decision to have Sallie Mae's chief operating officer work at a location other than its listed principal address.

Debtors were eligible to participate in their employers' ERISA 401(k) qualified retirement plans, but were not making contributions to those plans when they filed Chapter 13 petitions, but were repaying 401(k) loans to the plans. Proposed Chapter 13 plans called for a five-year commitment period under 11 U.S.C. 1325 and for repayment of 401(k) loans before completion of the commitment periods. Rather than calling for an increase in plan payments to the Chapter 13 trustee for the benefit of unsecured creditors once that repayment was complete, the plans proposed that debtors begin making contributions to their 401(k) retirement plans. The trustee filed objections. The bankruptcy court held that because 11 U.S.C. 541(b)(7) excludes contributions to a 401(k) plan from property of the estate and disposable income, debtors were allowed to exclude proposed 401(k) contributions from disposable income. The Bankruptcy Appellate Panel ruled in favor of the Trustee. The Sixth Circuit affirmed. Post-petition income, available to debtors after 401(k) loans are fully repaid, is "projected disposable income" that must be turned over to the trustee for distribution to unsecured creditors under 11 U.S.C. 1325(b)(1)(B) and may not be used to fund voluntary 401(k) plans.

In 2008, the Eastern District of Michigan ranked 79th of 90 judicial districts in successful completion of Chapter 13 bankruptcy cases. To improve the situation, the judges began entering orders in Chapter 13 plans that required the IRS to send tax refunds directly to the Chapter 13 trustees, not to the individuals as the Internal Revenue Code contemplates. 26 U.S.C. 6402(a). Chapter 13 plans repay creditors over three to five years, requiring the IRS to track debtors’ returns during several tax cycles. The burden became unmanageable when there were 4,966 affected returns in April 2009. The IRS obtained a declaratory judgment preventing the trustees from enforcing existing refund redirection provisions and a writ of mandamus prohibiting the bankruptcy court from including these provisions in future Chapter 13 plans. The Sixth Circuit remanded with instructions to dismiss, finding that the court lacked jurisdiction. The government sued the wrong parties, a group of bankruptcy trustees, but the harm it suffered flows from the bankruptcy court's orders. A judgment against the trustees will not eliminate the problem.

The debtors bought their house in 1994 and, after a Chapter 7 discharge in 2004, refinanced. The loan closed in California, although the house was in Michigan, and the debtors signed a note, but did not sign a mortgage. The loan was funded and assigned to appellant. A few months later, they filed a Chapter 13 petition and the lender produced a recorded mortgage, ostensibly signed by the debtors in Michigan. The Bankruptcy Court found that the signatures were forged. On remand from the district court, it imposed an equitable mortgage on the house. The district court reversed, finding the mortgage void ab initio. The Sixth Circuit affirmed. The district court properly considered the issue, held that the mortgage was void, and declined to impose an equitable mortgage because the assignee is subject to the defense of unclean hands, as was the original lender.

Debtor filed a petition under Chapter 13 of the Bankruptcy Code and, a month later, filed a Certificate of Credit Counseling stating that the counseling session was completed post-petition. At a hearing Debtor represented that the certificate was incorrect and that he actually completed counseling before he filed his petition. The court issued an order for the Debtor to show cause why his case should not be dismissed pursuant to 11 U.S.C. 109(h) and inviting the Trustee to make inquiries to the credit counseling agency. At a later hearing, the Trustee represented that, although the Debtor completed the online portion of counseling prior to filing, he did not complete the telephone component until later. The bankruptcy court dismissed. The Sixth Circuit affirmed.The requirements of 109(h) are unambiguous and the statutory exemptions were not present, so the court did not have discretion to ignore, modify, or defer the requirements, which are a prerequisite to obtaining relief.

Debtors borrowed $157,291.77, secured by their home and took a second loan for $15,870, using their truck as security. They filed Chapter 7 bankruptcy protection and signed a reaffirmation agreement committing to pay those two debts. They stopped making payments; the truck had been stolen. The bank filed an unsecured claim. The trustee sought to avoid the mortgage as not properly perfected; the matter was resolved by agreement. The bank bought the property at auction, re-sold it at a profit of $33,400 and filed an unsecured claim for the full balance of the mortgage. The bankruptcy court allowed the claim; the bank received a total of about $37,000 in payments as an unsecured creditor on the two loans. The bank then sued the debtors in Kentucky state court, seeking about $89,000 on the real property loan and about $11,500 on the truck loan. The bankruptcy court reopened the case and voided the reaffirmation agreement on the ground of mutual mistake because the parties signed the agreement based on the false assumption that the bank held secured interests in the real property and the truck, which would have allowed debtors (rather than the bankruptcy estate) to retain ownership. The district court and Sixth Circuit affirmed.

In 1999 Debtor borrowed $75,558.93 secured by a recorded mortgage lien, encumbering real property and all improvements and fixtures. The property contains a manufactured home, with a plate indicating compliance with federal manufactured home standards. The lender's notes indicated that in 1997, the mobile home was gutted and rebuilt as a house. Debtor did not acquire a separate title to the manufactured home; it is unclear whether such a certificate ever issued. In 2009, Debtor filed a petition for chapter 13 relief. He sought to avoid the lien pursuant to 11 U.S.C. 544 because the Bank failed to perfect its lien on the manufactured home pursuant to Kentucky law. The bankruptcy court granted summary judgment to Debtor. The Sixth Circuit affirmed, first holding that Debtor had derivative standing to seek to avoid the lien. Regardless of the issuance of a certificate of title, Debtor has an interest in the home that is part of the bankruptcy estate. Under Kentucky law, a mobile home is personal property; perfection of a lien requires notation on the certificate of title. The mobile home had not been converted to real property and the lender did not perfect a lien on personal property.

In 2008 debtor purchased a 2003 auto, financed the purchase, and granted the dealership a security interest that was transferred to a finance company and noted on the title. The security interest was later transferred to WFB, which did not record the assignment or note it on the title. Debtor defaulted in 2010 and WFB repossessed the vehicle on January 4, 2011. Debtor filed her chapter 7 petition on January 28, 2011. WFB filed a motion for relief from stay, claiming that debtor did not have equity in the vehicle and it was entitled to relief pursuant to 11 U.S.C. 361, 362, 363 and 554. The court concluded that WFB did not have a perfected security interest. The Sixth Circuit reversed and remanded. Ohio law does require that assignment of a security interest in a motor vehicle be noted on the certificate of title for that interest to remain properly perfected. WFB has a properly perfected security interest in the vehicle and is the party entitled to enforce the security interest.

From 2005 to 2008, debtor, the owner of Waffle House Ffranchises, periodically failed to make all federal income tax withholding, social security, and unemployment payments due to the IRS and to timely file returns. The IRS assessed penalties in excess of $1.5 million; debtor made payments of $637,000 toward the penalty. In 2009 a chapter 11 reorganization plan was confirmed; the business continued to operate until its assets were sold. In 2010 debtor sued the IRS under 11 U.S.C. 548, 550 and the Tennessee Uniform Fraudulent Transfer Act, Tenn. Code Ann. 66-3-301, asserting that the penalty payments provided no value to debtor and were made at a time when the debtor was incurring debt beyond its ability to pay. The bankruptcy court dismissed. The Sixth Circuit affirmed, noting that the payments resulted in a dollar-for-dollar reduction of debtor's undisputed tax debt. Payment of a fine or penalty is not an avoidable transfer, regardless of whether the penalty is a noncompensatory penalty.