A district judge sitting in the Ninth Circuit disagreed with a decision last year from that circuit’s Bankruptcy Appellate Panel regarding ownership of settlement payments stemming from mortgage issuance and foreclosure abuses unearthed in the wake of the Great Recession.
Although District Judge Mark W. Bennett attempted to harmonize his decision with the BAP’s, the two holdings may be irreconcilable nonetheless.
In the BAP decision, In re Neidorf, 534 B.R. 369, the debtor filed a chapter 7 petition. The lender secured a modification of the automatic stay and foreclosed her home before the debtor got her discharge. Years later, the lender entered into a $1.1 billion consent order with the Comptroller of the Currency requiring payments to homeowners whose homes might have been foreclosed wrongfully during a specified period. The debtor fell within the parameters of those in the affected class and received a $31,000 payment.
The BAP held that the payment did not belong to the estate either as proceeds of property of the estate or as property that the estate acquires under Sections 541(a)(6) or (a)(7).
Writing for the BAP, Bankruptcy Judge Meredith A. Jury of Riverside, Calif., said that the “payment was neither created with or by property of the estate nor can it be said that the payment is traceable to or arose out of any prepetition interest included in the bankruptcy estate. The fact that Debtor’s Residence became property of the estate, in and of itself, does not support the inclusion of the Foreclosure Payment as after-acquired property under Section 541(a)(7).”
Consequently, the BAP held that the payment was not estate property because “qualifying events giving rise to Debtor’s legal rights to the payment all occurred postpetition.”
In the appeal before Judge Bennett, the disputed $8,100 payment came from a separate consent order that the same lender entered into with the Federal Reserve Board in retribution for funneling some homeowners into more costly subprime mortgages when they would have qualified for prime mortgages.
The bankruptcy court held that the payment was estate property, and Judge Bennett agreed.
The debtors argued there would have been no entitlement to payment absent the post-petition consent order, just like Neidorf. They also contended there was no evidence they had been defrauded by the lender, which admitted no guilt or liability in connection with the consent order.
Judge Bennett disagreed. Noting that estate property can include claims that debtors do not know they have, he said the consent order was sufficient “evidence of fraud” to show that a cause of action had accrued when the debtor took down the loan before bankruptcy. He therefore held that the payment was either proceeds of estate property or after-acquired property under Sections 541(a)(6) or (a)(7).
Judge Bennett pointed out a crucial factual distinction with Neidorf. He said the pivotal event in his appeal was the taking of the loan – which occurred before bankruptcy – where the basis for liability in the BAP case was foreclosure, which occurred after bankruptcy.
While the distinction is factually correct, the BAP said it was the consent order “which created the rights and remedies for the specified class of borrowers.” In Neidorf, the BAP seemed to view the consent order – occurring post-petition in both cases – as creating a property interest that had not previously existed.
On the other hand, when the BAP said that the qualifying events “all occurred postpetition,” the appellate panel might have been referring to foreclosure as well as the consent order.
Which opinion is correct? Are the two decisions reconcilable? Wait two years, and perhaps the Ninth Circuit will have the answers.
Judge Bennett, of Sioux City, Iowa, in the Eighth Circuit, was hearing the appeal in Idaho by designation.