By Ryan C. Wood
I do not know how many of our articles answer questions with the answer, “it depends,” but when you have multiple factors that come together to answer a question what else can be said? It depends. Many times a deal is worked out or there is some sort of payment owed to a former homeowner after their house is foreclosed on. You may have heard of cash for keys or deals in short-sales that provide money to the former owner to leave the property voluntarily or for some other reason so the new owner does not have to pay to have them legally evicted. If the owner of the property filed for bankruptcy prior to the foreclosure is the payment from the mortgage company to the former owner property of the bankruptcy estate?
In re: Carrie Margaret Neidorf BAP No. AZ-14-1496-JuKiPa
In the Neidorf case the debtor, Carrie Margaret Neidorf, filed for protection under Chapter 7 of the Bankruptcy Code on July 12, 2008. Unfortunately she was having problems making her mortgage payments and could not afford to keep her home. Ms. Neidorf’s mortgage company filed a motion for relief from stay to obtain bankruptcy court permission to foreclose on her home. Given Neidorf was behind on her mortgage payments her bankruptcy attorneys did not oppose the motion and the motion was approved or granted. Her bankruptcy case progressed and Neidorf received her Chapter 7 discharge on October 21, 2008. Her house was then foreclosed on the following year on July 14, 2009. This case was an asset case so the Chapter 7 trustee assigned to the case had assets to liquidate or administer to creditors. Asset cases will generally remain open for far longer than a no asset Chapter 7 case. The Neidorf case was no different. It took five years for the Chapter 7 trustee to fully administer the estate and filed an application for compensation on November 14, 2013 and the court approved the Chapter 7 trustee’s fees and expenses on December 19, 2013. Unfortunately the bankruptcy case was never officially closed. Note to bankruptcy lawyers, make sure your Chapter 7 bankruptcy cases are closed and a final decree is entered.
So, after around six years from the date the Chapter 7 bankruptcy petition was filed Ms. Neidorf disclosed to the Chapter 7 trustee that she received a payment after the foreclosure of her home and the Chapter 7 trustee argued the payment was actually property of the bankruptcy estate and should be turned over. Ms. Neidorf is of course arguing the payment was not part of the bankruptcy estate and she should keep the payment.
Section 541(a)(7) of the Bankruptcy Code provides property of the bankruptcy estate is any interest in property that the estate acquires after the petition date. If a property interest is created by the property of the estate or results from property of the estate while the bankruptcy is pending that is also part of the bankruptcy estate. Section 541(a)(7) is a catchall more or less for property of the estate created with and during the pendency of the bankruptcy case. TMT Procurement Corp. v. Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512, 524 25 (5th Cir. 2014); H.R.REP. 95-595, 549, reprinted in 1978 U.S.C.C.A.N. 5963, 6455 & 6523 24.
The judge in Ms. Neidorf’s main bankruptcy case held she could keep the payment and it was not part of the bankruptcy estate. That decision was appealed to the Ninth Circuit Bankruptcy Appellate Panel. The 9th Cir. BAP agreed with the lower bankruptcy court judge. The 9th Cir. BAP held the Chapter 7 trustee did not prove how the bankruptcy estate could have an interest in the postpetition payment resulting from the foreclosure of Ms. Neidorf’s home. How was the payment created with or by property of the estate? Just because Ms. Neidorf’s house was part of the bankruptcy estate does not automatically mean the payment resulting from the foreclosure of the house is an after-acquired property pursuant to Section 541(a)(7) of the Bankruptcy Code. The foreclosure payment was actually the result of circumstances that occurred after the filing of Ms. Neidorf’s Chapter 7 bankruptcy case. Bank of America, N.A. entered into a settlement in a lawsuit that then created the right to payment to borrowers that were in foreclosure between January 1, 2009, to December 31, 2010.
Just because an asset is created by an asset of the bankruptcy estate does not automatically mean the asset is part of the bankruptcy estate that must be turned over to the trustee.
