|July 8, 2014|
Previously published on July 1, 2014
A recent case out of the Eleventh Circuit Court of Appeals (the “Court”) concluded that proceeds stemming from a post-confirmation settlement agreement between a chapter 13 debtor and its mortgagor related to a violation of the automatic stay become property of the bankruptcy estate. In Crouser v. BAC Home Loans Servicing, LP (In re Crouser), Case No. 13-14304 (11th Cir. June 2, 2014) (“Crouser”), a chapter 13 debtor received proceeds from the settlement of certain claims against his mortgagor for violation of the automatic stay after confirmation of debtor’s chapter 13 plan. The chapter 13 trustee argued that the settlement proceeds should be classified as property of the estate.
The trustee relied on §1306 of the Bankruptcy Code (the “Code”), which provides that in addition to the property specified in §541 of the Code, property of the estate includes all property that the debtor acquires after the commencement of the case but before the case is closed, dismissed or converted. The Court agreed, finding that because the debtor’s cause of action and subsequent settlement occurred post-petition, but before the case was closed, § 1306 explicitly proscribes that the proceeds of the settlement agreement are property of the estate. In arriving at its decision, the Court found the term “all property” to be broad enough to include causes of action that a debtor acquires post-confirmation.
The takeaway from a creditor’s rights standpoint is that unsecured creditors should be aware of instances where other creditors have violated the automatic stay. These situations could lead to additional funds being brought into the estate and into the pockets of unsecured creditors, who are often left receiving pennies on the dollar for their claim.