Michigan Bankruptcy Blog

Sixth Circuit Affirms Holding That “Carve Out” Recovered By Chapter 7 Trustee Did Not Constitute Equity in the Debtors’ Property Subject to Debtors’ Exemptions

Baldridge v. Douglas Stanley Ellmann (In re Baldridge), Appeal No. 13-1700 (6th Cir., Feb. 3, 2014).

On appeal from the District Court for the Eastern District of Michigan, the Sixth Circuit held that a $28,000 “carve out” recovered by the Chapter 7 Trustee pursuant to 11 U.S.C. § 506(c) after closing a sale on the debtors’ property was not property of the estate that could be subject to the debtors’ exemption because the property was over encumbered by two mortgages, leaving no equity for the debtors to exempt.

In Baldridge, the debtors argued that the $28,000 recovered by the Trustee from the second mortgage creditor should be deemed property of the estate and subject to their exemption because it resulted from the debtors’ surrender of their right of redemption. The Sixth Circuit stated that there was no factual support for the debtors’ allegation that the $28,000 reflected the value of the debtors’ right of redemption that was ultimately paid to the Trustee in exchange for his agreement to waive the redemption rights. The court noted that there is no dispute that the Trustee had the authority to waive the right of redemption. The court further went on to note that the sale proceeds were insufficient to satisfy both the first and second mortgages on the property, and in fact left a deficiency of over $200,000 owed to the second mortgagee. Therefore, because the sale proceeds were insufficient to satisfy the debt obligations owed to the secured creditors, there was no “residual equity” in the property in which the debtors’ exemptions could attach.

Although the debtors’ argument was unique, this case serves as a reminder that assets brought into the estate by the Trustee do not always equate to property of the estate that the debtor can exempt.

Categories: 6th Circuit Court of Appeals, Chapter 7