Trustee Objection to Exemptions

[BobMango]

Editorial Note: This is a really advanced question and my parents have retained an attorney to pursue this but I thought I’d throw it out there for any insights you all might have.

My parents filed Chapter 7 pro se and have hit a bit of a snag with the trustee. They own a rental house originally purchased with her sister, for my (now-deceased) grandmother to live in. After my grandmother passed the house was turned to use as a rental. My parents are not on the mortgage but are on the title. They had been on the mortgage in the past but a number of years ago (seven or more, maybe) it was transferred out of their names (quit claim) and refinanced in my aunt’s name only. They were subsequently added back on the title but not the mortgage.

My aunt manages the property, collects the rent and pays the mortgage, which is only in her name anyway. My parents have no role in the management of the property and the property is currently mortgaged for more than its value. There was a joint checking account that she shared with my aunt that the trustee has seized (with the assistance of Wells Fargo. The funds in the account were exempted using the Federal Wildcard 522(d)(5).

The trustee has filed an objection to the exemption of the bank account with the following reason:

“On the basis that the Debtors have a rental house, and if the Debtor were to exempt the funds in the bank account, the Trustee may pursue collection of rents and to sell the rental house.”

To me this sounds like a threat from the trustee, something like, “let me keep the bank account and I’ll leave the rental alone.” My parents have received no income or tax deductions for the rental, this is backed up by their tax filings for the past several years.

A couple of things come to mind. In order for the trustee to be able to take the rental property, which has no equity at present, I believe he will need to avoid the lien. This looks to be a long shot for him, but if the bank did something wrong then he may have a shot. This would be the worst possible outcome as it leaves my aunt on the hook for the mortgage, for which she would no longer have any property generating rental income to pay it.

Questions:
Is the trustee correct in stating that he is entitled to collect rents after a Chapter 7 filing? The filing was in New Mexico and the rental property is in California. Since my parents are not on the mortgage and take no role in managing the property, is it possible that rental income after filing is part of the bankruptcy estate?

Would it make sense to do something like offer the trustee half of the bank account if he’ll abandon the rental property?

We will see what the attorney says, but I would be interested in any input in the meantime.

[bcohen]

If the funds in the bank account are in fact exempt, then your parents should be able to prevail. The rental property, if in fact it has no equity, is not an asset and the trustee cannot avoid a properly perfected mortgage lien in order to sell it. The trustee is also not entitled to rental income going forward, because the income did not exist upon filing, and is not property of the bankruptcy estate.

That being said, depending on the amount of money at stake, and what your parents' attorney is charging, it may be cheaper to settle. The trustee has unlimited resources to fight a protracted legal battle, and unfortunately, your parents do not.

[justbroke]

Remember, my view is always the view of the Trustee and aggressive creditors and may not reflect the Trustee's reach. First, I think the statement by the Trustee is a threat. I would never have recommended filing Pro Se where you own any property, especially property where you are on the title, but not the mortgage!

Is the trustee correct in stating that he is entitled to collect rents after a Chapter 7 filing? The filing was in New Mexico and the rental property is in California. Since my parents are not on the mortgage and take no role in managing the property, is it possible that rental income after filing is part of the bankruptcy estate?

First, you have to dispatch with what are your parent's property rights. Is the property being held as a Tenancy In Common or some sort of Joint Tenancy. I won't pretend to know all the intricacies of how property is titled, but, how that property is titled could affect how far the Trustee can reach!

The titling issue is interesting because California's default is that it's a Tenancy In Common (TIC) - an "undivided" interest each in half the property. If the Trustee is looking at how the property is held, and it's TIC, then the Trustee may believe that the Debtor's Estate actually DOES own half the property and the property is property of the Estate with 1/2 interest. The Trustee could move to sell the property. Your parent's attorney will be looking specifically at this.

Contrary to bcohen's theory where no equity means not property of the Estate, I find it not so simple. The fact is, it is property of the Estate. Now, the Trustee may need to abandon a "worthless" property, but if there is a titling issue which has exposed a 1/2 interest, this could be an issue. For example, say the Trustee motions to sell free and clear of liens... then it's an issue! Would the Trustee win such a motion... I can't tell you. (Remember, this is just my crazy alter-ego as a Trustee. Also, remember that, at least in my State of Florida, Trustees have done even crazier things selling underwater homes for a carve out!)


(Read 11 USC 363(h) if you want an idea of how far this "sell free and clear" reaches. There are only four conditions to meet in order for the Trustee to do so, and not one mentions equity.)

Would it make sense to do something like offer the trustee half of the bank account if he’ll abandon the rental property?

Maybe. That's something that your attorney would need to work out. You want to make sure it's a "good" offer and that the Trustee won't take the money and still pursue the home.

Nothing that I wrote is meant to scare you, but to let you be aware that the Trustee's powers are pretty, um, powerful. Yes, they can sell things free and clear of liens to get to a debtor's interest. Now, is this whole thing just to scare your parents into giving up the bank account? I would say, perhaps, yes and it reads like a threat. A settlement may be in order. As bcohen stated, maybe an offer of half the bank account. I would not do anything without speaking with an attorney about any of this, and I would use an attorney to litigate this issue.

[despritfreya]

With all due respect, BC’s answer to your inquiry is not correct.

1. The rental property IS property of the bk estate subject only to your aunt’s ownership interest (I assume - 50%). Who is responsible for the loan or is managing the property is not relevant based upon the information you have provided.

2. Post petition rents generated from property of the estate BELONG to the bk estate subject only to the co-owner’s 50% interest. Unless the lien holder has a valid and properly invoked “assignment of rents” those rents do not belong to the creditor nor should they be paid to the creditor without the Trustee’s approval. This covers at least 50% of every post petition rental payment and those funds should be given to the Trustee unless he states otherwise or abandons the rental property.

3. The fact that the property is underwater DOES NOT stop the Trustee from attempting a short sale. There are numerous posts on this forum addressing a Trustee’s attempt to find $$ where there is none. The co-owner might have a say in this but the Trustee has the right to sell both the estate's and the co-owner's interest in property.

The issues your parents are facing are not uncommon. I see such things many times each year mostly stemming from pro se cases. The Trustee is holding the exempt funds hostage and waiting for an offer to settle the dispute with the rental property. Your parents need to find a good attny who knows how to negotiate such a settlement.

Lastly, your parents MUST timely respond to the exemption objection or they will lose that argument. Alternatively they can try to get the Trustee to give them an “open extension” regarding the need to respond. . . but they need to do something and I strongly recommend that they do not do it pro se.

Des.

[BobMango]

Thanks for the responses. Seems to be a case where reaching a settlement may be the quickest and least risky approach. They will have the attorney file their response to the objections and look to negotiate a settlement.

As JB indicated, the trustee has all the time and resources he needs to get what he wants. Same reason a lot of criminal defendants take a plea bargain, you might win at trial, but the cost of losing is too much of a risk.