By: Dean A. Langdon
Carl Coslow guaranteed a $4.5 million debt to a bank for a company he owned. The company struggled, and in November 2014 it sold a division on installment terms, with payments being made over several years. Those payments were assigned to the bank. The bank agreed to reduce the amount of Coslow’s guarantee in exchange for a $275,000 second mortgage on his home. Fast forward to July, 2016 when Coslow files a Chapter 7 bankruptcy. At that time, the bank was still owed more than the $275,000 secured by the mortgage. But the debt was on track to be paid in fully by May, 2017. In December, 2016 Coslow asked the bankruptcy court to require the trustee to “abandon” his home. There was no equity as of the date he filed bankruptcy. But by the time the request was heard by the bankruptcy court, there was over $200,000 of equity in Coslow’s home. The trustee opposed the request, but the court agreed with Coslow and ordered the trustee to abandon Coslow’s home. The trustee appealed, and the district court affirmed.
Case Law
On May 11, 2020 the Sixth Circuit Court of Appeals reversed and issued an unpublished decision. This decision was that a Chapter 7 Trustee was entitled to the increase in equity of a debtor’s home where the second mortgage was paid off by a third party within months after the bankruptcy was filed. Coslow v. Reisz, Case No. 19-6200. The ruling hinged on the language of the bankruptcy law about what property is included in a bankruptcy estate. It also included when value should be determined if a trustee is asked to abandon property.
The Court first noted that property of a bankruptcy estate includes “proceeds, product, offspring, rents, or profits of or from” property owned by a debtor when a case is filed, except for wages earned thereafter. 11 U.S.C. § 541(a)(6). Then, the Court relied on the fact that the bankruptcy law authorizing abandonment was written in the present tense. This would hold that a bankruptcy court should consider the value of property at the time abandonment is requested, not when the case was filed. While the bankruptcy court and district court held that the trustee was not entitled to the increase in equity that occurred after the bankruptcy was filed, the Sixth Circuit reversed and returned the case to the bankruptcy court to enter judgment in favor of the trustee.
Moving Forward
Most individuals filing for bankruptcy won’t have a $275,000 mortgage paid off in the year after a case is filed. Just because your home (or other real estate or any kind of property) is slowly increasing in value, doesn’t mean a bankruptcy trustee will be able to sell it. However, you should be wary of situations where values are increasing rapidly. Also there could be a substantial reduction in the secured debt against property in the 6-12 months after filing. Based on this ruling, we expect trustees may begin asking about mortgage balances. They can also look into whether property is appreciating, or whether there are any chances a mortgage would be paid other than by regular payments. At DelCotto Law Group, we don’t like surprises, so this is another area we will ask clients about as we look out for their financial fresh start.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.