Bankruptcy – Chapter 13 Bankruptcy Plan – ‘Non-Exempt’ Property

The sale of the debtor’s residence without first obtaining an order from the bankruptcy court violated the Chapter 13 bankruptcy plan.

We affirmed in part, vacated in part, and remanded to the bankruptcy court.

Debtor Christine Sugar appealed from the district court’s orders affirming the bankruptcy court’s finding that Sugar’s sale of her residence, without prior court authorization, violated her confirmed Chapter 13 bankruptcy plan.

On appeal, Sugar raised two threshold arguments challenging whether the bankruptcy court could consider the applicability of the Local Rule to her sale: (1) the Local Rule is invalid, and (2) paying off the balance due under the Plan entitled her to immediate discharge and deprived the bankruptcy court of authority to consider any other matters. The text of the Plan leads us to reject both arguments. Sugar’s contention that the Local Rule is invalid fails because, regardless of its facial validity as a local rule, she agreed to be bound by its provisions under the plain language of her confirmed Plan. The proper time for lodging any objections to the validity of the Local Rule or seeking not to be bound by it would have been before or in the confirmation process, not years later. Instead, Sugar agreed to the terms of her Plan, which plainly and unreservedly stated that she would also be subject to the Local Rule. As a matter of simple contract enforcement, then, Sugar cannot now object to the general proposition that the Local Rule governed her conduct following Plan confirmation. Nor did paying off the balance due under the Plan deprive the bankruptcy court of authority to rule on its order to show cause and the Trustee’s motion to modify or dismiss. Sugar argued that as soon as she paid the remaining balance of her agreed-to monthly payments, she was entitled to immediate discharge under 11 U.S.C. § 1328(a). That argument overlooks one of Sugar’s other obligations under the Plan: her applicable commitment period. While Sugar or the Trustee could have moved to modify the applicable commitment period at any time, neither did so. As such, the applicable commitment period remained in force despite Sugar’s satisfaction of her separate obligation to make certain payments under the Plan. Thus, she was not entitled to discharge at that time under § 1328(a), and the bankruptcy court continued to have authority to entertain other motions relating to Sugar’s still-pending bankruptcy proceedings.

Having rejected Sugar’s threshold arguments, we next turned to her contentions that the Local Rule did not apply to the sale of her residence. In one fashion or another, each of Sugar’s arguments rest on the mistaken belief that her residence did not constitute “non-exempt property” subject to this Local Rule. While the differences between Chapter 7 and Chapter 13 proceedings distinguish what can be done with the property within the context of a debtor’s bankruptcy, those differences have no bearing on the fundamental character of the North Carolina homestead exemption as a dollar-limited exemption. We rejected Sugar’s contention that her residence was entirely exempt as a result of her claiming this exemption.

Next, Sugar contended that the residence was nonetheless properly classified as “partially exempt” rather than “non-exempt.” By its plain terms, the Local Rule applied to the disposal of any of Sugar’s non-exempt property valued at over $10,000. Sugar chose to sell the entire residence, which comprised exempt and non-exempt parts, but that blended reality of the one transaction did not somehow relieve her of complying with the Local Rule. Because Sugar’s decision involved the sale of non-exempt property valued at over $10,000, the Local Rule applied to the transaction, and she was required to obtain a court order before proceeding. We rejected each of Sugar’s arguments challenging the district court’s determination that she violated the Local Rule when she sold her residence without a court order.

We affirmed the bankruptcy court’s determination that Sugar’s sale of her residence without first obtaining an order from the bankruptcy court violated the terms of the Local Rule, which she agreed to be bound by in her confirmed Plan. But we vacated the judgment insofar as it ordered the dismissal of Sugar’s Chapter 13 proceeding and barred her from refiling for bankruptcy for five years. And we remanded so the bankruptcy court can assess the record evidence relating to Sugar’s bad faith, and particularly how her reliance on advice of counsel factors into the overall assessment, in determining what relief or sanctions were appropriate in light of the violation of the Local Rule and Sugar’s confirmed Plan.

Affirmed in part, vacated in part, and remanded.

In re Christine M. Sugar (Lawyers’ Weekly No. 001-082-25, 34 pp.) (G. Steven Agee, J.) Appealed from the U.S. District Court for the Eastern District of North Carolina, at Raleigh (Louise W. Flanagan, J.) Argued: Travis P. Sasser, Sasser Law Firm, Cary, North Carolina, for Appellant; Michael Brandon Burnett, Office of the Chapter 13 Trustee, Raleigh, North Carolina, for Appellees. On Brief: Brian C. Behr, Kirstin E. Gardner, Office of the Bankruptcy Administrator, Raleigh, North Carolina, for Appellees. U.S. Court of Appeals for the Fourth Circuit