Business Law

In re Moreno (Bankr. C.D. Cal.)

The following is a case summary written by ILC member Todd Turoci analyzing In re Moreno, 2020 Bankr. LEXIS 1907 (Bankr. C.D. Cal. July 17, 2020), a recent case of interest.

Summary

This note discusses Moreno and the resulting implications for those married couples that elect to file separate, overlapping bankruptcy petitions.  The question of law addressed in the Moreno opinion was whether community property found to be in the bankruptcy estate of one spouse, upon closure of that case transfers or otherwise vests in the bankruptcy estate of a separate spouse whose case remains open.

The bankruptcy court held that where a married couple files overlapping, separate bankruptcy petitions (1) the bankruptcy estate of the spouse who files his or her petition first obtains a property interest in all community property; (2) the spouse who files his or her petition second then obtains a contingent and reversionary right to that community property; (3) upon closure of the first bankruptcy case, the second spouse’s contingent and reversionary right to all community property arises; and (4) if the second spouse’s bankruptcy case remains open, the community property re-vests with the bankruptcy estate in his or her case

To review the opinion, click here.

Facts

In this case, a married couple elected to file separate, overlapping bankruptcy petitions.  The husband filed a chapter 7 bankruptcy petition initiating a bankruptcy case in December 2018.  In February 2019, the wife filed a chapter 13 petition initiating a second, overlapping bankruptcy case.  The first case was pending when the second case commenced.

Discussed in greater detail below, a significant issue before the court at confirmation was the treatment of a secured claim in connection to a community property vehicle.  The vehicle and associated secured claim were properly disclosed in both the husband’s schedules and the wife’s schedules.  In the wife’s proposed chapter 13 plan, the wife sought to modify the secured claim.  However, when the petition and plan were filed, the husband’s case had not yet been closed.  Given the overlapping nature of the cases, the chapter 13 trustee moved to deny confirmation of the plan and dismiss the case. 

Reasoning

The court denied confirmation of the plan but elected to not dismiss the case.  The court held that the vehicle at issue did become property of the wife’s bankruptcy estate — but importantly — not on the petition date nor when the plan had been proposed, but on a later date.  Consequently, the court held that the plan, which attempted to modify the secured claim associated with that vehicle, was not confirmable.  The court’s reasoning is premised on two propositions: one of those propositions is well settled, while the other lacks clear and on-point caselaw support.

Regarding the first proposition, the court held that “when a married couple files separate bankruptcy cases, all of their community property becomes property of the bankruptcy estate in the case filed first.”  Moreno, 2020 Bankr. LEXIS 1907 at *3.  This is not controversial; pursuant to 11 U.S.C. § 541(a)(2), community property becomes property of the estate upon the filing of a petition.  That said, the implications of 11 U.S.C. § 541 can be surprising.  For instance, in the matter of In re Bauer, No. 05-40208, 2005 Bankr. LEXIS 3033 (Bankr. D. Idaho Aug. 22, 2005), a husband filed his bankruptcy petition eleven (11) minutes before the wife filed hers thereby causing the wife’s homestead exemption claim to be invalid.  The home, as community property, vested exclusively with the husband’s bankruptcy estate.

In Moreno, the court found that the vehicle, as community property, was an asset of the husband’s bankruptcy estate because his petition had been filed first.  Meanwhile, the wife held a contingent and reversionary property right in the vehicle.  Section 554 provides that “any property…not otherwise administered at the time of the closing of a case is abandoned to the debtor…”  11 U.S.C. § 554(c).  In other words, if the trustee fails to sell or otherwise administer any asset of the bankruptcy estate, that asset reverts back to the debtor when the case closes.  Similar to 11 U.S.C. § 554, § 349(b)(3) returns most if not all assets upon dismissal.  See 11 U.S.C. § 349(b)(3).  At the time of the petition, the wife, and therefore her bankruptcy estate, held a contingent and reversionary right to the vehicle.  When the petition and plan were filed in the wife’s case, the contingent right had not yet arisen because the husband’s case remained open.  Hence, when the plan had been proposed, the vehicle had not yet been swept into the wife’s bankruptcy estate and the plan improperly attempted to modify the related secured claim.

The subsequent closure of the husband’s case caused the community property to transfer or otherwise vest with the wife — and by virtue of her bankruptcy filing — in her bankruptcy estate pursuant to 11 U.S.C. § 541(a). 

On an additional and separate ground, the court found that the vehicle was property of the wife’s bankruptcy estate upon closure of the husband’s case.  Section 1306(a) applies strictly to chapter 13 cases and thus is applicable to Moreno and  provides that the bankruptcy estate includes property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted…” 11 U.S.C. § 1306(a)(1).  Accordingly, the wife’s property interest in the vehicle arose during the pendency of her case and was thus property of the estate.

Author’s Comments

Given the plain text of the statutory provisions referenced in Moreno and the body of caselaw that generally supports Moreno outside of the Ninth Circuit, there are strong indicators that the Ninth Circuit will agree with Moreno if taken on appeal.  I submit that, in form and substance, Moreno appears to be decided correctly.  However, practically speaking, I am not sure that the outcome was fair to the debtors (as the debtor’s attorney of record in this case, this should come as no surprise). 

Although the proposed plan had been filed when the vehicle was not yet vested with the wife’s bankruptcy estate, the vehicle had vested with the bankruptcy estate at the time of the confirmation hearing.  On the one hand, there does not appear to be an appreciable need to prepare an amended plan that mirrors the content of the first plan — except that it includes a later submission date.  The court’s denial of the initially proposed plan caused the debtor’s confirmation to be substantially delayed.  On the other hand, I harken back to Acevedo and the U.S. Supreme Court’s commentary, regarding the invalidation of nunc pro tunc orders that attempt to improperly confer jurisdiction, analogizing such orders to an “Orwellian vehicle for revisionist history — creating facts that never occurred in fact.”  Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696, 700-01 (2020). Clearly, a plan that proposes treatment of a claim that, when proposed, was not an allowable claim is not a confirmable plan.

These materials were authored by ILC member Todd Turoci, of The Turoci Firm (todd@theturocifirm.com), with editorial contributions from ILC member Kathleen A. Cashman-Kramer, of counsel to Sullivan Hill, Rez & Engel APLC.

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