Background

• Debtors filed a voluntary Chapter 7 petition on January 25, 2013; case deemed no-asset with trustee's no-distribution report (March 27, 2013); discharge granted May 6, 2013 and case closed; debtors later disclosed a $25,000 payment from a Fed Reserve-SunTrust Mortgage settlement; the payment related to a potential foreclosure-related claim and was claimed as exempt; trustee moved to reopen May 22, 2013 to administer the payment and object to exemptions; debtors amended Schedules B/C to reflect the payment and argued it was not property of the estate; threshold issue was whether the payment is property of the estate, rooted in prepetition conduct; the court analyzed relevant dates and events surrounding the foreclosure actions and the 2011/2013 consent orders.
• The background includes: (a) first foreclosure action (Sept 17, 2009) dismissed without prejudice (Dec 14, 2009); (b) 2011 consent order in Fed Reserve enforcement action; (c) 2011 Foreclosure Review concept and process; (d) 2013 settlement/consent order altering the review to a cash payment; (e) actual $25,000 payment received April 12, 2013; (f) postpetition disclosure and reopening action by trustee.
• The debtors’ postpetition payment is contested as to whether it is rooted in prepetition conduct and thus estate property; the payments arose from the 2013 consent order that stated third-party rights were limited; the payment was not a prepetition right, and the settlement was finalized postpetition (Feb 28, 2013) with a press release indicating no rights created for debtors.
• The court ultimately concluded that the $25,000 payment was not sufficiently rooted in prebankruptcy past to be property of the estate and denied the trustee’s exemption objection.
• Procedural posture included reopening of the case after discharge to administer the asset and the court’s explicit consideration of whether January 7, 2013 press release and the 2013 consent order created enforceable rights for the debtors.

Issues

Key Cases Cited

• Segal v. Rochelle, 382 U.S. 375 (U.S. 1966) (test for whether postpetition receipts are rooted in prepetition past)
• Andrews, In re, 80 F.3d 906 (4th Cir. 1996) (Segal-based analysis applied to postpetition property)
• In re Jenkins, 410 B.R. 182 (Bankr.W.D.Va.2008) (postpetition property depends on prepetition root in facts)
• In re Hamlett, 304 B.R. 737 (Bankr.M.D.N.C.2003) (estate includes causes of action at filing; prepetition rights matter)
• In re Edmonds, 273 B.R. 527 (Bankr.E.D.Mich.2000) (contingent interests at petition date can make postpetition payments estate property)
• Bracewell v. Bracewell, 322 B.R. 698 (Bankr.M.D.Ga.2005) (crop disaster payments distinguished from contingent employee rights)