HELP!! Post Petition Equity in Assets

[leichenb]

Help... I'm against the fence in a filing DUE end of day today!! (much litigation by ex-wife in my bankruptcy) and seeking any case history or relevant case law supporting the below position.

Debtor filed Ch. 7 (no reaffirmation on home). Funds from post-petition income provided (per court order) to ex-wife who was to remit funds to bank for mortgage. Ex-wife failed to remit.

Trustee is seeking return of those funds to the estate.

Debtor is of position that as the funds were from post-petition income, the estate is obligated to return the funds to the debtor.

The home was sold privately, with consent from the Trustee, with debtors 50% proceeds allocated to the estate.

[HHM]

Timing is likely the issue.

Were the funds "earned" post petition, or simply "received" post petition.

For example, most people are paid their wages in arrears. So, the check you received sept 28, 2012 is for work done the 10th - 24th. If the debtor files BK on the 25th, those wages are pre-petition even though money is not actually received until after the BK is filed.

However, I am still a little confused on the facts.

Debtor sends money to Ex-Spouse after Debtor filed BK 7. Ex spouse was supposed to pay the mortgage, but didn't.
Question: where is the money now?
Maybe the trustee is arguing a preference issue

[leichenb]

Timing is likely the issue.

Were the funds "earned" post petition, or simply "received" post petition.

For example, most people are paid their wages in arrears. So, the check you received sept 28, 2012 is for work done the 10th - 24th. If the debtor files BK on the 25th, those wages are pre-petition even though money is not actually received until after the BK is filed.

However, I am still a little confused on the facts.

Debtor sends money to Ex-Spouse after Debtor filed BK 7. Ex spouse was supposed to pay the mortgage, but didn't.
Question: where is the money now?
Maybe the trustee is arguing a preference issue

Clarifying:

Funds were earned post-petition (clearly)
Debtor send funds to wife (separated at the time), now the ex.. Wife was supposed to send the funds to pay mortgage as per court order, but didn't. Wife retained the funds.
Home was sold. Trustee is debiting ex-wife 50% proceeds of sale of home by the amount of the funds she failed to remit.
Debtor asserts he is entitled to return of the funds, that they are not subject to be held by the estate and applied to creditors.

[HHM]

That seems like an odd position. I am not really sure what the trustee is arguing.

Was the house sold for a profit?

Is the trustee arguing that since debtor was not residing in the house, he is not entitled to homestead, but he is still half owner, so any proceeds that are due him are non-exempt. If that is the case, the debtor is out of luck.

[leichenb]

Clarifying:

Funds were earned post-petition (clearly)
Debtor send funds to wife (separated at the time), now the ex.. Wife was supposed to send the funds to pay mortgage as per court order, but didn't. Wife retained the funds.
Home was sold. Trustee is debiting ex-wife 50% proceeds of sale of home by the amount of the funds she failed to remit.
Debtor asserts he is entitled to return of the funds, that they are not subject to be held by the estate and applied to creditors.

Yes, there was profit over the mortgage amounts. This is the only source of funds to the estate and I believe the Trustee has spent in excess of $20K in his time (he represents). I imaging that the Trustee is attempting to retain these funds to his own benefit, such that he is paid.

[justbroke]

While I'm still a bit confused, I can see where the Trustee believes that the Estate is entitled to the money. But it just doesn't have any legal precedence when you look at it from a post-petition context. Since this is all post-petition, there is no preference and the money paid or not paid, is not part of the bankruptcy estate. However, I don't know how the debtor claims that "he" is entitled to the funds!

I think both the debtor and the Trustee somehow are trying to claw back money that was given to the non-debtor ex-spouse as part of either a divorce decree or property settlement. That the non-debtor ex-spouse did not use the money on the mortgage, should be irrelevant to the proceeds of the sale.

That's my opinion. I feel that the Trustee and the debtor are both just a little too greedy.

[LadyInTheRed]

The ex was required by court order to use the funds to pay the mortgage. If she made the mortgage payment, the estate's interest in the proceeds of sale would be greater. It seems to me that the trustee may have a valid claim to 50% of the funds, unless perhaps the debtor's obligation to pay the wife is dischargeable in the BK.

I don't see how the debtor can claim any interest in the funds.

[leichenb]

Lady, that's the gist... and the clarification I'm seeking pertains to case law or bankruptcy law with regard to post petition equity in an asset. I've found a number of references where the debtor is entitled to retain post petition equity. If the wife had made the payments, they would have resulted in direct post petition equity. It would seem a division would need to occur to isolate the post petition from the pre petition equity.

Typically, a debtor would stay making payments on a property at the time of filing, thus eliminating this issue.

Honestly, I'm not so much looking to hash this out here, rather, than seek any specific rulings anyone may be familiar with ... faster than combing through every opinion that results from a google search....

[justbroke]

This is too messy and is exactly why bankruptcy and divorce don't mix too well. Whether their is an actionable claim under the terms of the final decree of dissolution, then I don't see where the Trustee makes the claim. That's the kicker, right? The question would be, if you were to fight this to the bitter end, would be whether this even has any jurisdictional context in the bankruptcy court (is a core proceeding) or whether this is a breach under the final decree and whether it's actionable in the State non-bankruptcy court.

Yuck! (And this is just my opinion on this matter. I have none and know of no caselaw to support either theory.)

[despritfreya]

This must have been a 363 sale and Lady has hit the nail on the head.

The Trustee is surcharging the co-owner for her failure to make mortgage payments as required by a Court Order. Not sure if the Court Order is out of the bk court or the divorce court but it is a Court Order nonetheless.

He is not trying to recover YOUR funds. The Trustee’s position is that her failure to tender payments caused the payoff of the lender to be that much greater and, as a result, the recover to the estate that much less.

I have seen this argument before and can tell you that the party being surcharged either settled with the trustee for a portion of what was being claimed or simply allowed Trustee to recover the funds from the money held in escrow for the co-owners benefit as litigating the amount in controversy was just stupid. As a result, I have no case law for you.

Now, if the party being surcharged is litigating pro se, fine but, just remember, if the pro se litigant loses the court could order payment of the Trustee’s legal fees out of the co-owner's remaining funds being held in escrow.

While this may be too late, my advice: offer to settle for half of the amount in controversy.

By the way, how much are we talking about?

Des.

[justbroke]

Very cool Des. So, as I tried to place my finger on this, it would otherwise be actionable as part of the decree, so the Trustee leverages that in order to claw back the payments. Pretty interesting indeed. The part that held me up was that this was not the Trustee selling the property under 11 USC 363, but that the debtor (or non-debtor) sold the property with consent.

[despritfreya]

Very cool Des. So, as I tried to place my finger on this, it would otherwise be actionable as part of the decree, so the Trustee leverages that in order to claw back the payments. Pretty interesting indeed. The part that held me up was that this was not the Trustee selling the property under 11 USC 363, but that the debtor (or non-debtor) sold the property with consent.

JB,

I am making some assumptions, which may or may not be correct. If a Trustee is demanding recovery of $$ there has to be a reason. I do not see a Trustee complaining if everyone was on board with the transaction so I am reading "between the lines". OP indicates that the Trustee has spent $20k in time (his or his attny???) therefore I tend to doubt this is a "friendly" sale of property.

Des.

[justbroke]

I am making some assumptions, which may or may not be correct. If a Trustee is demanding recovery of $$ there has to be a reason. I do not see a Trustee complaining if everyone was on board with the transaction so I am reading "between the lines". OP indicates that the Trustee has spent $20k in time (his or his attny???) therefore I tend to doubt this is a "friendly" sale of property

Okay, I see the issue now... and I'm reading between the lines as well. It appears, that the Trustee may have attempted to sell the property and or wasted hours (money) litigating via a Motion to Sell. So, even though the debtor and non-debtor sold the property on their own, the Trustee still wants to claw back as much of his/her earned fees (and commission) as possible.