4th Circuit: Ruling vacates sanctions against debtor

Where the district court sanctioned the debtor for selling her house without permission, in violation of a local rule, but it failed to consider testimony that she relied on the advice of her counsel, the sanction was vacated.

Background

Christine Sugar appeals 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. Sugar also asserts the lower court erred in sanctioning her. In addition, Travis P. Sasser, Sugar’s attorney, separately appeals the district court’s affirmance of the bankruptcy court’s decision to impose monetary sanctions against him personally.

Local rule

The Eastern District of North Carolina’s local rules provided that Sugar “must not dispose of any non-exempt property having a fair market value of more than $10,000.00 by sale or otherwise without prior approval of the trustee and an order of [the bankruptcy] court.” Sugar argues: (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.

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.

Sugar’s second argument overlooks that the Plan stated that Sugar’s “applicable commitment period” was 36 months. 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.

Application

Sugar contends that the North Carolina homestead exemption, regardless of the plain language of the statute, exempted the entire property not subject to a lien from the bankruptcy estate. Sugar’s argument simply rewrites the statute contrary to its plain meaning. The court rejects this argument because North Carolina’s homestead exemption is a dollar-limited exemption.

Next, Sugar contends that the residence was nonetheless properly classified as “partially exempt” rather than “non-exempt.” This court disagrees. By its plain terms, the local rule applied to the disposal of any of Sugar’s non-exempt property valued at over $10,000. As a practical matter, 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.

Last, Sugar contends that the local rule did not apply because the Plan provided for property to vest with her upon Plan confirmation, at which point the entire residence was removed from the bankruptcy estate and thus no longer “exempt” or “non-exempt.” Sugar’s argument conflates vesting with what it means for property to be non-exempt, and it ignores the plain language of her Plan.

Sanctions

The bankruptcy court dismissed Sugar’s bankruptcy proceeding and imposed a five-year prohibition on refiling for bankruptcy. However, it failed to consider what, if any, effect evidence that she acted according to Sasser’s incorrect advice that her residence was exempt and that she did not need to obtain a court order before selling her residence. The bankruptcy court’s failure is particularly troubling given that it had the option of imposing several less-harsh remedies to address Sugar’s changed financial condition and violation of the local rule.

Because evidence in the record demonstrates that Sugar relied on Sasser’s incorrect advice that her residence was exempt and that no court order was required, and because the bankruptcy court did not consider that evidence as part of its determination that “cause” to dismiss existed under § 1307(a), the bankruptcy court’s judgment as to Sugar must be vacated and the matter remanded for the court to undertake the required review under a totality-of-the-circumstances standard.

However, because the record fully supports the bankruptcy court’s determination that Sasser willfully advised his client to violate the local rule, and there was “no fair ground of doubt” as to whether the Plan and the local rule permitted the sale of Sugar’s residence without a prior court order, the order of monetary sanctions against Sasser is affirmed.

Affirmed in part, vacated in part and remanded.

Sugar v. Burnett, Case Nos. 24-1374, 24-1436, March 5, 2025. 4th Cir. (Agee), from EDNC at Raleigh (Flanagan). Travis P. Sasser for Appellant. Michael Brandon Burnett for Appellees. 34 pp.