Michigan Bankruptcy Blog

Sixth Circuit Affirms Decision to Deny Chapter 7 Debtor’s Proposed Exemption Because She Lacked Equity in Property After a Sale

In the case of Susan G. Brown v. Douglas Ellmann ^[1], the U.S. Court of Appeals for the Sixth Circuit (the “Sixth Circuit”) recently affirmed a bankruptcy court’s decision to deny a Chapter 7 debtor’s proposed exemptions for the value of redemption rights she enjoyed under Michigan law related to the sale of a property she surrendered to the bankruptcy estate.

[1] Case No. 16-1967 (6^th Cir., March 20, 2017).

Background

In her initial petition, the debtor stated her intent to relinquish her home to the bankruptcy estate. The home, valued at $170,000, was subject to $219,000 in her secured mortgage claims. The debtor did not claim an exemption for the value of redemption rights related to the property.

The Chapter 7 trustee (the “Trustee”) sought permission to sell the property for $160,000 and to distribute the proceeds. After the Trustee sought this relief, the debtor objected and sought to claim the exemptions, which totaled approximately $23,000.

The bankruptcy court granted the Trustee permission to move forward with the sale and denied the debtor’s requested exemptions. The debtor appealed to the district court, which affirmed the bankruptcy court decision. The case was then appealed to the Sixth Circuit, which also affirmed the bankruptcy court.

Sixth Circuit Appeal

The Sixth Circuit began its opinion by analyzing, and rejecting, two arguments made by the Trustee that the Sixth Circuit lacked jurisdiction to hear the debtor’s appeal.

The first argument was that the case was moot on “constitutional, statutory, and equitable grounds.” The argument was based on Bankruptcy Code Section 363(m), which provides that appeals from decisions to grant authority to a trustee to sell certain property are moot if the appellant failed to obtain a stay from the bankruptcy court order approving the sale, and the trustee already conveyed the property to a bona fide purchaser for value.

There are two approaches among the circuit courts of appeal when it comes to interpreting this statute. A majority of circuits have adopted a per se rule that automatically moots appeals if a stay is not obtained. The minority rule, which was adopted by the Sixth Circuit in this case, adds an additional element that a party alleging mootness must prove: that the reviewing court cannot “grant effective relief without impacting the validity of the sale.” Because the Sixth Circuit determined that it would be capable of issuing effective relief in this case, it ruled that the Trustee failed to prove that the case was moot.

The second jurisdictional argument raised by the Trustee was that the debtor lacked standing. The Sixth Circuit explained that a party has standing to appeal a bankruptcy court order only if they have been “directly and adversely affected pecuniarily by the order.” The Sixth Circuit also rejected the jurisdictional argument, “since the effect of the bankruptcy court’s order was to deprive [the debtor] of her purportedly exempted share of the proceeds from the sale of her residence….”

The Sixth Circuit then turned to the issue of whether the bankruptcy court erred in denying the debtor’s request for exemptions. It affirmed the bankruptcy court decision because there was no equity remaining in the property after it was sold. The court explained that a debtor’s purported redemption rights must “attach to some equity held by the debtor after satisfaction of the secured liens on the property.”

The debtor’s primary argument in opposition to the Sixth Circuit’s reasoning was that it is inconsistent with the U.S. Supreme Court’s recent decision in Law v. Siegel, which involved an interpretation of a bankruptcy court’s equitable powers under Bankruptcy Code Section 105(a). However, the Sixth Circuit found the Siegel case inapplicable, because it addressed a bankruptcy court’s discretionary power under Section 105(a), whereas “this case addresses the bankruptcy court’s interpretation of a specific provision of the Bankruptcy Code.”

If you have any questions about this case, or bankruptcy issues in general, please contact Patricia Scott at pscott@fosterswift.com or 517.371.8132.

Categories: 6th Circuit Court of Appeals, Chapter 7