February 2007

Debtor/Creditor NewsMag
A publication of the Debtor/Creditor Rights Committee of the Business Law Section of the State Bar of Michigan
Bankruptcy Decisions

Decisions from the Eastern and Western Districts of Michigan
and the Sixth Circuit BAP and Court of Appeals

By: Laura J. Eisele

1. Debt arising from car accident non-dischargeable pursuant to driving while intoxicated exception, despite that driver was not formally charged

Simons v. Hart
, 347 B.R. 635 (Bankr. W.D. Mich. 2006). In Hart, Carl Simons (“Simons”) was riding his motorcycle when a car driven by Gregory Hart (“Hart”) attempted to make a left turn and collided with Simons’ motorcycle. Simons’ leg was severed approximately six inches below the hip as a result of the accident. At the scene of the accident, the presiding officer observed that Hart was impaired by alcohol. A breath test indicated blood alcohol level of .051. Hart filed for bankruptcy relief after Simons filed a civil suit against Hart as a result of the accident. Simons filed a complaint to determine dischargeability under 11 U.S.C. 523(a)(9) which provides that a debt “for death or personal injury caused by the debtor’s operation of a motor vehicle, if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance” is not subject to discharge. Judge Stevenson held that the debt arising from the accident was non-dischargeable despite that Hart was not formally charged with driving while intoxicated. Judge Stevenson’s holding was based on MCLA 257.625 which defines alcohol-related traffic offenses.

2. Court finds new Michigan exemption statute unconstitutional

In re Wallace
, 347 B.R. 626 (Bankr. W.D. Mich. 2006). In Wallace, Judge Hughes sustained a debtor’s claimed exemption of her interest in real property based upon Mich. Comp. Laws. 600.5451.(1)(n) because Judge Hughes held that that subsection, along with the balance of Mich. Comp. Laws 600.5451 is unconstitutional. The court reasoned that the Bankruptcy Clause of the Constitution gives Congress the exclusive power to establish what exemptions a debtor may claim in conjunction with a bankruptcy proceeding. Congress could not, nor did it, re-delegate to the states this power through its enactment of Section 522(b)(2)(A). Therefore, Michigan’s attempt to create its own set of bankruptcy-specific exemptions is constitutionally unenforceable.

3. District judge reverses bankruptcy court decision finding Michigan homestead exemption statute unconstitutional

Vinson v. Dakmak
, 347 B.R. 620 (E.D. Mich. 2006). In this case, two co-debtors pursuant to a mortgage filed for bankruptcy relief and each claimed a $30,000.00 homestead exemption under M.C.L.A. section 600.5451(n). District Judge Edmunds reversed a bankruptcy court decision finding that section unconstitutional in violation of the Bankruptcy Code homestead exemption which does not permit a bankruptcy debtor to exempt a co-debtor’s interest in the property. Judge Edmunds interpreted the statute as providing for only one exemption of $30,000.00. Because Judge Edmunds found it impermissible for both debtors to claim the entire $30,000.00 exemption, she upheld the objection of the Chapter 7 trustee.

4. Bankruptcy court grants in part a motion for disgorgement of professional fees

In re World Wide Waste Services, Inc., 345 B.R. 810, (Bankr. E.D. Mich. 2006). In this case, Judge Shapero granted in part a motion for disgorgement of paid administrative expenses. The debtors remained in chapter 11, had not confirmed a plan, were admittedly administratively insolvent, and had no expectation of receipt of any material additional funds. Debtors’ special counsel filed a motion for disgorgement of paid administrative expenses on the theory that because the estate was administratively insolvent, in order to provide a pro rata distribution for administrative creditors. The movant argued that pursuant to Specker Motor Sales Co. v. Eisen, 393 F.3d 659 (6th Cir. 2004), disgorgement was mandatory. Debtors objected to the motion arguing, among other matters, that because the administrative fees were paid with the consent of the secured lender pursuant to a final financing order, Specker did not apply. The court rejected that argument and also rejected the concept that attorneys’ fees paid pursuant to a final fee application are not subject to disgorgement. Thus the court ruled that disgorgement was theoretically permitted at this juncture. However, the court did not order disgorgement, but rather noted that a business judgment would have to be made as to the practical issues surrounding disgorgement, including cost/benefit analysis of the process. Judge Shapero likened the situation to the collection of a large receivable pool or pursuit of preference actions.

5. Court finds that Assignee of Mortgage Lien is properly perfected despite failure to record assignment

In re Cook, 457 F.3d 561, (6th Cir. 2006). The court held that a bankruptcy trustee could not avoid a mortgage lien based on the fact that the mortgage assignment was unrecorded, because the recording of the original mortgage gave the trustee constructive notice. In addition, the court held that the assignee’s possession of the promissory note related to the mortgage was also perfected such that the assignee had priority over the trustee in bankruptcy. Finally, the court held that the assignee’s filing of a financing statement after the mortgagor’s bankruptcy filing did not violate the automatic stay because the assignee did not transfer or attempt to perfect legal title to the mortgagor’s property, but only recorded the bank’s equitable interest which did not belong to the debtor’s.

6. Late claims in Chapter 7 paid after timely filed claims

In re Brighton Tool and Supply, Inc., Case no. 04-31593 (Bankr. E.D. Mich. 2006). In this Chapter 7 case, Judge Shapero addressed the issue of whether a claim filed late in a chapter 7 case is strictly barred, or whether the claim is allowed, but subject to the priority scheme of Bankruptcy Code §726. In the instant case, the claimant was aware of the chapter 7 case, and mailed her proof of claim prior to the bar date, but the claim was not received until after the bar date. The court held that the claim was allowed, but would be paid under section 726(3), after the claims of timely filed claims and after late claims where the claimant did not have notice of the bar date.

7. Debtor may not extend time to file a credit counseling certificate

In re Moore, Case No. 06-45895 (Bankr. E.D. Mich. 2006). In this chapter 7 case, a debtor filed a motion to extend the deadline to file a credit counseling certificate. The filed certificate ultimately disclosed that the debtor had obtained credit counseling after the bankruptcy filing. The court held that because Bankruptcy Code §109(h)(1) requires the credit counseling to take place during the 180 day period preceding the date of filing of the petition, the certificate filed by the debtor did not comply with sections 109(h)(1) or 521(b)(1). Therefore, the debtor’s motion to extend time to file credit counseling certificate lacked merit because the debtor was ineligible to be a debtor in a bankruptcy case. The court denied the debtor’s motion to extend time and dismissed the chapter 7 proceeding.

8. If Debtor files its credit counseling certificate after the chapter 7 case is closed, Debtor must move to reopen

In re Hollan, Case No. 06-41122 (Bankr. E.D. Mich. 2006). In this individual chapter 7 case, the clerk of the court closed the case without entry of a discharge because the debtor did not file a certification of completion of an instructional course concerning personal financial management. The debtor moved the court to set aside the case closing. The court held that pursuant to the Bankruptcy Courts Local Rules, Guideline 3, if the debtor files the certificate after the case is closed, the appropriate procedure is for the debtor to file a motion to reopen the case to request entry of a discharge, which motion requires a filing fee