Depending on whether the Supreme Court grants certiorari and how the justices rule in Czyzewski v. Jevic Holding Corp., the debtor in a Michigan case might be able to preserve some value for herself even though the chapter 7 trustee sold her home for less than the mortgages.
The Solicitor General filed a brief in May recommending that the high court grant certiorari and reverse the Third Circuit’s decision in Jevic. The appeals court held that proceeds from a settlement can be distributed contrary to the rules of priority.
In the Michigan case, a woman filed under chapter 7 while owning a home worth $170,000 that was encumbered by mortgages totaling almost $220,000. On consent of the lenders, the trustee arranged a sale for $160,000. The holder of the first mortgage agreed to take about $148,000 in full satisfaction of the debt. The senior lender also agreed that the trustee could distribute $6,000 to the holder of the second mortgage. After paying the brokerage fee and closing costs, the trustee would have money left over for distribution to unsecured creditors.
The debtor objected, claimed a homestead exemption, and contended that she was entitled to some of the sale proceeds. The bankruptcy judge ruled against her and approved the sale. The district court affirmed in an opinion on May 31.
Chief District Judge Denise Page Hood of Detroit made short shrift of the appeal. Citing Sixth Circuit authority, she said there can be a homestead exemption only if there is equity in the property. Since the sale price was less than the first mortgage, she ruled that there was nothing to which the claimed exemption could attach.
Ordinarily, the exempt value in a home is preserved for the debtor and bypasses creditors. In the Michigan case, unsecured creditors got a sliver of the home’s value even though the homeowner claimed an exemption. It could be argued, therefore, that the settlement between the trustee and the mortgage lenders evaded the order of distribution in bankruptcy because unsecured creditors made a recovery from the home while the debtor’s exemptions yielded nothing.
The Michigan case shows some similarities to Jevic because the holder of the first mortgage made a carve-out for unsecured creditors to curry favor with the trustee and permit a quick sale. The mortgage lenders also benefitted from bankruptcy because the judge’s sale approval order evicted the debtor from her home by a date certain.
The second mortgage holder got a $6,000 benefit by allowing a distribution to unsecured creditors because the junior lender would have recovered nothing in foreclosure.
In substance, unsecured creditors whose interests in the home ordinarily would have been subordinate to the debtor’s exemptions came out ahead of the homeowner. In that respect, the Michigan settlement seems analogous to Jevic.
If the Supreme Court hears Jevic, the justices will decide whether settlements must comply with the rules of priority. Although Jevic does not involve a claimed exemption, the outcome might provide a basis for deciding whether a chapter 7 trustee can craft a settlement that creates an estate for unsecured creditors while leaving a debtor with no recovery on her exemptions.
The justices will probably decide about granting certiorari in Jevic before the Supreme Court’s term ends on June 27.
To read ABI’s discussion of the Jevic certiorari petition, click here.