- Category: Judge Nugent
- Published on 13 November 2014
- Written by Judge Nugent
- Hits: 45
Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Oct. 30, 2014) Doc. # 46
SIGNED this 30th day of October, 2014.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7
J. MICHAEL MORRIS, Trustee,
vs. ) Adv. No. 14-5002
ARK VALLEY CREDIT UNION; )
and JEFFREY KENT GRACY )
ORDER DENYING ARK VALLEY CREDIT UNION’S MOTION TO DISMISS
Can the trustee avoid an unperfected lien in a mobile home when the creditor
denies that it took a lien in the home as security for a revolving line of credit extended
to debtor? Debtor Jeffrey Gracy lives in a 1994 Fuqua manufactured home that is set
Case 14-05002 Doc# 46 Filed 10/30/14 Page 1 of 7
on real estate he owns. He granted two separate mortgages to Ark Valley Credit
Union – the first in 2009 in the amount of $21,000 and the second in 2010 in the
amount of $26,000 – to secure a revolving line of credit. Both mortgages legally
describe the subject real estate at 617 W. Avenue G, Caldwell, Kansas, together with
all improvements and fixtures; the mortgages do not describe, specifically or
generally, the manufactured home. The trustee seeks to avoid the alleged lien in the
mobile home under 11 U.S.C. § 544(a) claiming the mobile home is property subject
to the mortgage lien and was unperfected on the date of the petition. Ark Valley
moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), made applicable to
adversary proceedings by Fed. R. Bankr. P. 7012(b), asserting that it claims no lien
in the mobile home and attaching exhibits and evidentiary material to its motion.
Limiting my review to the allegations of the trustee’s avoidance complaint, the Court
concludes that it satisfies the facial plausibility standard of Twombly1 and Iqbal2 and
therefore, Ark Valley’s motion to dismiss for failure to state a claim must be DENIED.
Because material factual questions remain regarding the revolving line of
credit transactions between debtor and Ark Valley, whether the mortgage lien
attached to the mobile home, the home’s worth, and whether non-parties may claim
an interest in the home, I direct that this matter proceed to a status conference on
November 7, 2014 in advance of the evidentiary hearing, currently set for November
1 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L.Ed. 2d 929 (2007) (plaintiff must
allege sufficient facts to render the claim “plausible on its face.”).
2 Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed. 2d 868 (2009).
Case 14-05002 Doc# 46 Filed 10/30/14 Page 2 of 7
Debtor filed his chapter 7 petition on July 25, 2013. The trustee filed this
adversary complaint on January 6, 2014 seeking to avoid and preserve Ark Valley’s
alleged lien in the debtor’s Fuqua manufactured home under § 544(a). After first filing
an answer to the complaint, Ark Valley moved to dismiss the complaint, contending
that because it did not claim a lien in the mobile home, the trustee had failed to state
a claim upon which relief could be granted under Fed. R. Civ. P. 12(b)(6), incorporated
in adversary proceedings by Fed. R. Bankr. P. 7012(b). In its supporting
memorandum, Ark Valley set forth a separate statement of facts, supported by copies
of the mortgages referenced in the complaint and attached other documents that were
not part of the pleadings in the case. In his response, the trustee did not admit or
deny Ark Valley’s statement of facts, but alleged his own facts, also supported by the
mortgages and materials outside the pleadings, including the affidavit of debtor that
purports to describe the manner in which the mobile home is affixed to the real estate.
I decline to convert Ark Valley’s motion to dismiss to one for summary
judgment as Fed. R. Civ. P. 12(d) permits, and except for the mortgages which are
referenced in the complaint, copies of which both parties have attached to their
memoranda, I do not consider any of the non-pleading materials that the parties have
presented in evaluating whether the trustee’s complaint states a claim pursuant to
3 The chapter 7 trustee J. Michael Morris appears on his own behalf. Ark Valley Credit Union appearsby its counsel Eric D. Bruce. Pro se debtor Jeffrey Gracy does not appear and a default judgment was
entered against him on February 28, 2014. See Adv. Dkt. 20.
Case 14-05002 Doc# 46 Filed 10/30/14 Page 3 of 7
Rule 12(b)(6).4 Converting the motion would be futile because there are genuine
disputes of material fact that cannot be determined in a summary proceeding--the
intent of the parties in granting the mortgages and entering into the revolving line of
credit transaction, the value of the manufactured home, and the value of the avoided
lien should the trustee’s avoidance claim be established.
The Trustee’s Complaint
The trustee’s complaint is brought under § 544(a) and § 551 to avoid and
preserve an alleged unperfected lien in the manufactured home for the benefit of the
estate. Section § 544(a)(1) grants the trustee the status of a hypothetical lien creditor
as of the date of the bankruptcy petition. The trustee can avoid liens that were
unperfected on that date. Under Kansas law, the rights of the person who became a
lien creditor prior to perfection have priority over the person holding an unperfected
security interest.5 Thus, to prevail on an avoidance complaint, the trustee must show
that the creditor has a valid lien in the subject property and that the lien is not
properly perfected as of commencement of the bankruptcy case. If the creditor’s lien
never attaches, there is no lien for the trustee to avoid and it has no value to the
4 Fed. R. Bankr. P. 7012(b) incorporates Fed. R. Civ. P. 12(d). Rule 12(d) does not require the Court toconvert the motion to one for summary judgment unless it considers matters that are outside the
pleadings and are not public records. The court has broad discretion in determining whether or not to
accept materials beyond the pleadings. Lowe v. Town of Fairland, 143 F.3d 1378, 1381 (10th Cir. 1998).
However, in certain circumstances, a court may consider documents that are referenced in the
complaint, but not attached, without converting the motion to one for summary judgment. See Thomas
v. Kaven, 765 F.3d 1183, 1197 (10th Cir. 2014) (when documents are referenced in a complaint that are
central to plaintiff’s claims and indisputably authentic, court may consider such documents when
resolving a motion to dismiss without converting the motion to summary judgment); GFF Corp. v.
Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384-85 (10th Cir. 1997) (on motion to dismiss incontract dispute, court’s consideration of letter that purported to satisfy the statute of frauds was noterror where letter was referred to in the complaint, authenticity of the letter was not disputed, andletter was attached to and discussed in plaintiff’s brief in opposition to the 12(b)(6) motion).
5 KAN. STAT. ANN. § 84-9-317(a) (2013 Supp.); In re Haberman, 516 F.3d 1207 (10th Cir. 2008).
Case 14-05002 Doc# 46 Filed 10/30/14 Page 4 of 7
Here, the trustee alleges that debtor granted two prepetition mortgages to Ark
Valley on January 27, 2009 and on January 19, 2010 respectively, on Lots 32, 34, 36
and 38, Block 85 in Caldwell, Kansas. He alleges that the debtor’s 1994 Fuqua
manufactured home is part of the mortgaged property. And finally he alleges that the
security interest or lien in the manufactured home was not perfected as of the date of
the bankruptcy filing, subjecting it to the trustee’s avoidance powers under § 544(a).
These allegations meet the Twombly facial plausibility standard for stating a
claim for avoidance of the alleged lien on the manufactured home under § 544(a). The
complaint alleges the execution of an instrument (the mortgages) by the debtor to Ark
Valley. Ark Valley admits that the debtor executed them in its answer.7 The trustee’s
allegation that the mortgaged property includes the manufactured home effectively
asserts that a security interest attached to the manufactured home by virtue of the
mortgages.8 Taken together the trustee asserts that debtor granted a lien in the
While Ark Valley suggests that it did not intend to take a security interest in
the mobile home and therefore the lien never attached, there is no need to decide that
6 Rajala v. Buerge (In re Buerge), 2013 WL 4409698 at *7 (Bankr. D. Kan. Aug. 13, 2013) (under §
544(a), the trustee seeks to avoid unperfected – but otherwise valid – liens that are attached to
property of the debtor; a lien that never attaches to property is not only unperfected but also invalid
and entirely worthless to the estate).
7 Adv. Dkt. 5, ¶ 1.
8 See In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011) (mortgage that creates or provides for a
security interest in fixtures and is signed by debtor constitutes an authenticated security agreement
necessary for attachment of security interest in mobile home under KAN. STAT. ANN. § 84-9-203,
Kansas’ version of the Uniform Commercial Code); See also, KAN. STAT. ANN. § 84-9-102(a)(73)
(defining term ‘security agreement’).
Case 14-05002 Doc# 46 Filed 10/30/14 Page 5 of 7
ultimate issue at this stage. I only need to determine if the trustee stated a facially
plausible claim. He did. He alleged facts from which a court might conclude that a
lien attached to the mobile home by virtue of the mortgage. That raises the trustee’s
right to relief above the speculative level.9 Only at trial will I interpret the mortgage
instruments and consider any other extrinsic evidence the parties may offer about
what they mutually intended when the mortgages were granted.10
Finally, the trustee alleges that the alleged lien on the manufactured home
was unperfected on the bankruptcy petition date, the key element for the trustee to
exercise his avoiding power under § 544(a). While it might have been preferable to
attach the mortgages upon which the trustee’s claim is founded to the adversary
complaint, he has nonetheless sufficiently pled a claim to avoid and preserve the
purported lien of Ark Valley in the debtor’s home.11 Ark Valley’s motion to dismiss is
Other Necessary Parties
9 Twombly, 550 U.S. 544, 555. A claim has facial plausibility when factual content is pled that allowsthe court to draw the reasonable inference that the defendant is liable for the misconduct alleged.
Iqbal, 556 U.S. at 678.
10 See In re Mahan, 2007 WL 4387420 at *3-4 (Bankr. N.D. Okla. 2007) (In addition to satisfying the
technical requirements of UCC Article 9 (§ 9-203) for a security agreement and attachment, court must
satisfy itself that the parties intended to create a security interest in the subject property; like all
contracts, there must be a meeting of the minds that a security interest attach to the collateral at
issue.); Barkley Clark and Barbara Clark, 1 THE LAW OF SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE § 2.02[b] (3rd Ed. 2014) (court’s role is to determine the mutual intent of the
parties; security agreement is no different from any other contract); Baldwin v. Hays Asphalt Const.,
Inc., 20 Kan. App. 2d 853, 857, 893 P.2d 275 (1995) (In determining whether security interest exists,
the intent of the parties controls; that intent is determined by the language used in the instrument
and considering the conditions and circumstances when the contract was made); First Nat. Bank and
Trust Co. of Oklahoma City v. Atchison County Auction Co., Inc., 10 Kan. App. 2d 382, 386, 699 P.2d
1032 (1985) (where ambiguity in a security agreement results from inclusion of the location of the
collateral, parol evidence is admissible to determine the intent of the parties; evidence that both bankand debtor intended security agreement to cover all of debtor’s livestock, despite security agreement’sdescription of collateral that included location of some of the cattle).
11 See Fed. R. Civ. P. 10(c).
Case 14-05002 Doc# 46 Filed 10/30/14 Page 6 of 7
Ark Valley provided an exhibit suggesting that the manufactured home was
last titled to Leonard and Gladys Tomlin and that Green Tree Financial Corporation
claimed a security interest in it.12 The title appears to have been issued in August of
1994. Neither the Tomlins nor Green Tree are parties to this adversary proceeding.
Their interests in the mobile home, if any, cannot be determined or protected in their
absence because they have no notice of the proceeding. The Court may not be able to
render complete relief among debtor, the Trustee, and Ark Valley without them and,
if the present parties do not join them or explain their failure to do so, the Court is
obligated to do so.13
Conclusion and Orders
Ark Valley’s motion to dismiss is DENIED. Trial counsel are directed to appear
for a final pretrial status conference in this matter on November 7, 2014 at
11:00 a.m. at which time they should be prepared to address whether all necessary
parties have been properly joined in this adversary proceeding as well as any other
matters typically considered at final pretrial conference.14 Trial of this matter
remains scheduled for November 18, 2014, subject to further order of the Court.
# # #
12 Adv. Dkt. 34, p. 40.
13 See Fed. R. Civ. P. 19(a)(1) and (2); Fed. R. Bankr. P. 7019.
14 The Court entered the Final Pretrial Order in this matter on October 20, 2014. Adv. Dkt. 40.
Case 14-05002 Doc# 46 Filed 10/30/14 Page 7 of 7
- Category: Judge Nugent
- Published on 10 November 2014
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- Hits: 55
In Re Dynamic Drywall Inc, 14-11131 (Bankr. D. Kan. Oct. 22, 2014) Doc. # 112
SIGNED this 22nd day of October, 2014.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
DYNAMIC DRYWALL, INC. ) Case No. 14-11131
) Chapter 11
ORDER ON JOINT MOTION OF BUILDING CONSTRUCTION
ENTERPRISES, INC. AND HARTFORD FIRE INSURANCE CO.
FOR RELIEF FROM THE AUTOMATIC STAY
Dynamic Drywall Inc.’s bankruptcy petition stayed any actions against it.
Building Construction Enterprises (BCE) and Hartford Fire Insurance Company
(Hartford) claim that they should receive relief from the stay for cause so they can
continue pre-petition state court litigation in Johnson County, Kansas District Court.
In general, pre-petition litigants can be granted that relief if they can show that
Case 14-11131 Doc# 112 Filed 10/22/14 Page 1 of 12
judicial economy would be served by allowing the non-bankruptcy court to complete its
work, the parties are ready for trial, the non-bankruptcy proceedings may resolve
issues critical to the bankruptcy case, the non-debtor parties are reasonably likely to
succeed on the merits, and that the debtor will not be burdened by its defense costs
during the pendency of its bankruptcy case.1
After lengthy contract litigation among these parties, Dynamic received a
judgment in Johnson County court awarding it attorneys fees against BCE, but not
Hartford, on April 4, 2014 (the Fee Award). The judgment was entered in a reasoned
opinion in which the district court judge invited BCE to file a motion for a “subsequent
hearing” at which the parties could present more evidence about whether some of the
fees awarded were for services rendered on issues not related to the BCE-Drywall
dispute. BCE filed nothing. Then, on May 5, 2014, Drywall appealed the Fee Award to
the Kansas Court of Appeals and, on May 21, filed its voluntary petition here.2
Now Hartford and BCE seek relief from the stay to defend Dynamic’s state court
appeal of the Fee Award and to file a motion to “reconsider” the Fee Award in Johnson
County District Court.3 When they argued their motion on August 6, 2014, I granted
limited relief to allow all of the parties to pursue their rights in the Fee Award appeal
1See In re Curtis, 40 B.R. 795, 799-800 (D. Utah 1984) (citing 12 factors to beconsidered in lifting stay to allow pre-petition non-bankruptcy litigation tocontinue).
2 Because the thirtieth day, May 4, fell on a Sunday, the notice of appeal wasdue on May 5, 2014. See KAN. STAT. ANN. § 60-206(a)(1)(C) (2013 Supp.).
3 Dkt. 24.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 2 of 12
through the entry of final judgment.4 I also invited them to brief whether there was
cause to grant stay relief to allow the post-trial state court motion to be filed.5 After
carefully reviewing the Fee Award and the briefs, I conclude that the contemplated
post-trial motion for “subsequent hearing” is stayed and that, because BCE and
Hartford failed to show cause for any relief, the balance of their motion should be
denied. The state trial court has lost jurisdiction of the case because of the pending
appeal. Granting stay relief to allow a motion to be filed there would be futile.6
The pre-petition state court litigation between Dynamic, BCE, and Hartford
arises from a construction contract. BCE was a general contractor that subcontracted
with Dynamic to supply labor and materials for building an adult detention facility
being erected by the Johnson County, Kansas Public Building Commission (the
Commission). Hartford issued the public works statutory payment bond for the project
as required by Kansas law. After BCE sued the Commission for breach of contract in
4 See TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th
Cir. 2011) (automatic stay provision stays all appeals in proceedings that wereoriginally brought against the debtor, regardless of whether the debtor is theappellant or appellee); In re Horizon Womens Care Professional LLC, 506 B.R. 553
(Bankr. D. Colo. 2014) (pending appeal of state court’s attorney fee award againstphysician arising from the LLC debtor’s lawsuit for breach of employmentagreement was not subject to the automatic stay).
5 Dkt. 38.
6 Debtor Dynamic Drywall, Inc. appears by its attorney Mark J. Lazzo.
Movant Building Construction Enterprises, Inc. appears by its attorneys Scott C.
Long and Burke D. Robinson. Movant Hartford Fire Insurance Company appearsby its attorneys Greta A. McMorris and Lawrence Lerner.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 3 of 12
2006, Dynamic intervened and asserted its own breach of contract and bond claim
against BCE and Hartford.7 In October of 2009, BCE prevailed on its contract claims
against the Commission. In May of 2010, BCE, Hartford, and Dynamic settled their
remaining disputes by BCE and Hartford agreeing to pay Dynamic $325,000 and
stipulating to a partial dismissal that reserved to Dynamic the right to seek attorney’s
fees under its subcontract and the settlement agreement. In July of 2010, Dynamic
filed its motion for those attorney’s fees and costs, seeking an award of $619,313. In
November of 2011, the Johnson County district judge conducted a three day trial on
the attorney’s fees motion. While that matter was pending, the Commission appealed
the judgment entered against it in the contract dispute between it and BCE and
Hartford. BCE cross appealed. That appeal was concluded in October of 2013.
On April 4, 2014, two and half years after the 2011 fee application trial, the
district judge entered the Fee Award, granting Dynamic judgment against BCE for
attorney’s fees and expenses of $378,662.10. But, in his summary of the ruling, the
judge said that this amount could be adjusted for “legal work not related to the claims
and issues involved in the dispute between BCE and DDI [Dynamic], which shall be
determined at a subsequent hearing.”8 The opinion contains several other statements
7 Building Construction Enterprise, Inc. v. Public Building Commission of
Johnson County, Case No. 06cv3708 in the District Court of Johnson County,
8 Dkt. 24-2 at p. 17, Journal Entry of Judgment and Memorandum filed April4, 2014 and attached as Exhibit B to movants’ motion for relief from the automatic
stay, hereafter referred to as the Fee Award.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 4 of 12
suggesting that the judge doubted whether BCE should be answerable for all of the
fees he assessed. For example, “such attorney fee statement contains significant
amounts of time and expense relating to claims and issues for which DDI is not
entitled to recover attorney fees . . . .”9 He noted various inconsistencies in the
testimony of the attorney who represented Dynamic in the previous proceedings and
whose fees were at issue. Likewise, he questioned the credibility of Dynamic’s expert’s
The judge also stated that he had “not examined each line of each billing
statement” to determine whether the time spent was related to a Dynamic-BCE
disputed issue and that “no specific evidence was provided . . . by either party in order
for the Court to discern which entries apply to issues unrelated to the dispute between
DDI and BCE.”10 Even so, the judge ruled that Dynamic was entitled to recover fees
from BCE11 in the amount of $378,662.10, “less those items of billing that do not relate
to the litigation between BCE and DDI which BCE may bring to the court’s attention
by a motion to reduce the judgment at a later hearing.”12 Noting that BCE was
9 Fee Award, p. 7.
10 Id. at p.15.
11 The judge concluded that Hartford was not obligated to pay Dynamic’sattorney fees and expenses by virtue of bonding the project or the settlement
agreement. See Fee Award, pp. 10-13. Presumably, Hartford seeks stay relief hereto challenge the fee award there in case the Court of Appeals reverses or alters thatpart of the judge’s ruling exonerating it from liability for attorneys fees under thecontract and settlement agreement.
12 Fee Award, p. 16.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 5 of 12
allegedly “judgment proof,” the judge further directed that if “BCE wishes to pursue
the reduction of attorney’s fees and expenses . . . , BCE must bring [unrelated
expenses] to the Court’s attention by a motion to reconsider. . . .”13 The decretal
paragraph of the journal entry provides for a judgment in the above amount, minus
any fees and expenses that might be disallowed in a subsequent “later hearing.”
Because BCE never filed a motion, that hearing never occurred.
Dynamic appealed the Fee Award to the Kansas Court of Appeals, filing its
timely notice of appeal on May 5, 2014. Neither BCE nor Hartford cross appealed. The
28-day period in which to file a motion to alter or amend a judgment under KAN. STAT.
ANN. § 60-259(f) expired on May 2, 2014 without any motions being filed.14 Not
surprisingly, on June 5, 2014, the Court of Appeals issued a sua sponte order directing
the parties to show cause why the appeal should not be dismissed as interlocutory,
focusing on the “subsequent hearing” language in the journal entry and questioning
whether the Fee Award was final.15 Both parties briefed the issue and, on July 2, 2014,
the Court of Appeals entered the following order, quoted in its entirety, “Appeal
14 Kansas law does not recognize a “motion to reconsider” per se. The courts
have construed such a motion as a post-trial motion to alter or amend the judgmentbrought under KAN. STAT. ANN. § 60-259(f) (2013 Supp.). Honeycutt v. City of
Wichita, 251 Kan. 451, 460, 836 P.2d 1128 (1992); Hundley v. Pfuetze, 18 Kan.App.
2d 755, 756, 858 P.2d 1244 (1993).
15 Dkt. 33-2.
16 Dkt. 33-5.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 6 of 12
Dynamic filed its chapter 11 petition on May 21, 2014. BCE and Hartford jointly
moved for stay relief on June 30 seeking (1) to file a post-trial motion in Johnson
County District Court to pursue the “subsequent hearing” mentioned in the Fee Award
order; and (2) to defend their interests in the Fee Award appeal.17
BCE and Hartford argue that their participation in the ongoing attorney’s fee
dispute is not stayed because they are defending against Dynamic’s affirmative action
against them. They also argue that the Johnson County District Court retains
jurisdiction to reduce the Fee Award notwithstanding the pending appeal because
attorney’s fee requests are simply requests for costs that can be decided after the
merits of a case have been determined even if the court’s decision on the merits has
been appealed. They argue that their requesting a “subsequent hearing” is not stayed
and that the District Court may hear it at any time. Drywall views this effort as an
attack on a property interest of the debtor and further suggests that when BCE and
Hartford failed to seek relief from the Fee Award within 28 days, they lost the right to
seek its reduction forever.
A. The “subsequent hearing” is stayed by 11 U.S.C. § 362(a).
The automatic stay imposed by § 362(a)(1) restrains the commencement or
continuation of proceedings against the debtor while subsection (a)(3) stays actions to
obtain possession or control over debtor’s property. While the movants are correct that
17 Dkt. 24.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 7 of 12
defensive actions in cases brought by a debtor are not stayed,18 this situation is
different. The Fee Award is a final order that has been appealed.19 Asking the district
court to reconsider it by reducing the amount of Drywall’s judgment is not merely
“defensive.” It is a collateral attack on a final judgment and having to defend it will
burden Drywall by requiring it not only to prosecute its appeal, but also to concurrently
defend this motion in the trial court. BCE’s and Hartford’s effort to reduce the amount
of a final judgment owned by the debtor and to require the debtor to fight on multiple
fronts would be contrary to the purpose and intent of the automatic stay which was
designed to protect a reorganizing debtor’s property from acquisitive creditors while
it rearranges its affairs.
The Fee Award is a final judgment that has been appealed; lifting
the stay to allow further trial court proceedings regarding the
Fee Award would be futile because the state district court has
lost jurisdiction of the case.
BCE is correct in noting that the Kansas Supreme Court has held that a pending
merits appeal does not deprive a trial court of jurisdiction to award costs, including
18 See Riviera Drilling and Exploration Co. v. Gunnison Energy Corp., 412
Fed. Appx. 89 (10th Cir., Jan. 25, 2011) (bankruptcy automatic stay did not voidtrial court’s dismissal of debtor’s antitrust lawsuit against defendants for failure toprosecute); TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th
Cir. 2011) (automatic stay provision stays all appeals in proceedings that wereoriginally brought against the debtor, regardless of whether the debtor is theappellant or appellee).
19 As noted supra at page 2-3, this Court has previously granted partial relieffrom the automatic stay for the parties to pursue and defend the appeal of the FeeAward. See Dkt. 66.
Case 14-11131 Doc# 112 Filed 10/22/14 Page 8 of 12
attorney’s fees, in a case.20 But, the only appeal on the merits in the state court
litigation was the appeal of the court’s judgment concerning the contract dispute
between BCE and the Commission. That appeal was concluded in October of 2013,
before the Fee Award was ever entered. The merits of the contract and bond claims
among Dynamic, BCE, and Hartford were settled by stipulation and agreed dismissal
orders. In the settlement agreement and agreed dismissal order, the parties expressly
reserved the issue of Dynamic’s right to claim attorney’s fees. When these parties
settled the remaining claims in the litigation, BCE’s judgment against the Commission
became a final judgment from which the Commission appealed while the trial court
retained jurisdiction to assess Dynamic’s attorney’s fees.21
The trial court entered its Fee Award as a judgment after a trial on the
application. That judgment became final and appealable when BCE and Hartford
failed to file post-trial motions.22 Dynamic appealed the Fee Award and neither BCE
nor Hartford have cross-appealed. Once Dynamic filed its notice of appeal and the
20 Moritz Implement Co., Inc. v. Matthews, 265 Kan. 179, 189-90, 959 P.2d
886 (1998) (foreclosure judgment did not preclude the trial court from determiningamount due for attorney fees in the sale confirmation order); Snodgrass v. State
Farm Mut. Auto. Ins. Co., 246 Kan. 371, 377-78, 789 P.2d 211 (1990) (decision onmerits is a final decision for purposes of appeal and does not require determinationof motion for attorney fees attributable to case before filing a timely notice ofappeal; claim for attorney’s fees is not part of the merits of the action to which thefees pertain).
21 This procedure is wholly consistent with Snodgrass, supra.
22 Filing post-trial motions would have tolled the appeal time. KAN. STAT.
ANN. § 60-2103(a) (2013 Supp.).
Case 14-11131 Doc# 112 Filed 10/22/14 Page 9 of 12
appeal was docketed, the district court lost jurisdiction of the Fee Award controversy.23
To conclude otherwise would be to conclude that two state courts could simultaneously
exercise jurisdiction over the merits of the Fee Award - the district court and the
appellate court. That would risk the two courts’ reaching conflicting determinations
and would completely disregard the respective statutory jurisdictional grants of each
court.24 No work remains for the trial court to do on the Fee Award unless or until the
Court of Appeals remands it for further proceedings.
Because of this lack of jurisdiction, there is no cause to lift the automatic stay
under § 362(d)(1) to allow the parties to pursue further litigation in district court.
Bankruptcy courts in the Tenth Circuit look to the factors originally listed in In re
Curtis in determining whether to lift the stay to allow pending litigation to go
23 Dkt. 33-4, p. 28 showing that Dynamic’s appeal was docketed on June 3,2014. See Martin v. Martin, 5 Kan. App. 2d 670, 623 P.2d 527 (1981) (trial court canre-examine its rulings only within time allotted by rule for relief from judgment andbefore appeal is docketed; trial court was without jurisdiction to consider motion forrelief from judgment where it was not filed until after appeal from judgment wasdocketed in the Court of Appeals); Harsch v. Miller, 288 Kan. 280, 200 P.3d 467
(2009) (trial court does not have jurisdiction to modify a judgment after it has beenappealed and the appeal docketed at the appellate level); Matter of Robinson’s
Estate, 232 Kan. 752, 754, 659 P.2d 172 (1983) (noting general rule that trial courtdoes not have jurisdiction to modify a judgment after it has been appealed and theappeal docketed but the rule does not stay other proceedings before the lower court).
24 See In re Horizon Womens Care Professional LLC, 506 B.R. 553 (Bankr. D.
Colo. 2014) (even if automatic stay applied to pending appeal of state court’s feeaward against physician in state court litigation brought by debtor for breach ofemployment agreement containing a prevailing party provision, allowingcompletion of fee appeal would not interfere with administration of bankruptcycase; pending appeal was properly venued in state appellate court and state courtsystem was the only forum for final determination of the issue).
Case 14-11131 Doc# 112 Filed 10/22/14 Page 10 of 12
forward.25 Applying these factors allows the bankruptcy court to assess and balance the
benefits and burdens to each party of permitting or blocking ongoing prepetition
litigation while a bankruptcy case is pending. Among the factors that are relevant in
this matter are judicial economy, the potential resolution of issues critical to the
bankruptcy case, trial readiness, the likelihood that the non-debtor will succeed on the
merits, and the burden of defense costs on the debtor during its reorganization.
Judicial economy will not be served by allowing the non-debtors BCE and
Hartford to belatedly attempt to invoke the state trial court’s non-existent jurisdiction
to consider subject matter identical to that which is under review in the Fee Award
appeal – whether and to what extent Dynamic was entitled to attorney’s fees and from
whom it could recover them. The statutory time in which to seek to alter or amend a
judgment, 28 days, has long since expired. Despite the district judge’s repeated
invitation to do so, BCE never filed the motion. As noted above, my permitting the
motion to alter and amend a judgment that is on appeal would allow a second and
inferior court to revisit a judgment that is on appeal to the court of appeals. That is the
opposite of judicial economy.
The validity and amount of the Fee Award is not a critical issue in the
bankruptcy case at this time. Even if it were, the court of appeals must first pass on
25 In re Curtis, 40 B.R. 795, 799-800 (D. Utah 1984) (citing 12 factors to beconsidered). See also Busch v. Busch (In re Busch), 294 B.R. 137, 141 (10th Cir. BAP
2003) (noting that Curtis factors have been widely adopted by bankruptcy courts);
Carbaugh v. Carbaugh (In re Carbaugh), 278 B.R. 512, 525 (10th Cir. BAP 2002)
(“Cause” for relief from the automatic stay is a discretionary determination made ona case-by-case basis).
Case 14-11131 Doc# 112 Filed 10/22/14 Page 11 of 12
the validity of the judgment and the bankruptcy court is bound to give full faith and
credit to the state courts’ final order on that issue.
There is no suggestion that the parties are “trial ready.” BCE had 28 days in
which to file a motion to alter and amend this past May, but didn’t. The fee application
was tried for three days in November of 2011, nearly three years ago. Even if the stay
were lifted to allow this motion to proceed, the parties would require considerable time
to gear up to retry a case that they appear to have already tried once before.
Because the district court lacks jurisdiction to alter or amend the appealed
judgment, BCE and Hartford cannot hope to succeed on the merits. Allowing them to
file the motion now would be untimely and futile. There is no reason to tax the district
court with hearing it or Drywall with the costs defending it.
The joint motion of BCE and Hartford for relief from the automatic stay is
DENIED, except as previously granted to allow the parties to respectively prosecute
and defend the Fee Award appeal.
# # #
Case 14-11131 Doc# 112 Filed 10/22/14 Page 12 of 12
- Category: Judge Nugent
- Published on 11 September 2014
- Written by Judge Nugent
- Hits: 170
In Re Bowling, 12-10635 (Bankr. D. Kan. Aug. 28, 2014) Doc. # 90
SIGNED this 28th day of August, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
Case No. 12-10635Chapter 13
ORDER ON DEBTOR’S COUNSEL’S FIRST FEE APPLICATION FOR
ADDITIONAL COMPENSATION (Dkt. 77)
A chapter 13 debtor’s lawyer may be granted reasonable fees for representing
the debtor in the case, but the lawyer’s work must be necessary and beneficial to the
case’s completion and not duplicative. The reasonableness of the fees requested must
be measured against the provisions of 11 U.S.C. § 330(a)(3)(A)–(F). In this small
case,1 Eron Law Office (the “Firm”), applied for fees of $11,855, nearly quadrupling
the presumptive chapter 13 attorney’s fee of $3,000 that is customarily awarded in
1 The debtor listed assets of $4,140 and debts of $38,094. Filed claims totaled $21,473.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 1 of 13
this division.2 I independently reviewed the Firm’s fee application and its itemized
billing statements and applied the various provisions of § 330(a)(3), taking particular
notice of how much time the Firm’s members spent on various activities, the necessity
and benefit of the services at the time they were rendered, and lack of complexity this
case presented. Based on that review, I allow the application in part and deny the
Charles Timothy Bowling filed this case after the Kansas Department of
Revenue (KDOR) seized personal property associated with his operation of a gift shop
pursuant to tax warrants on March 19, 2012.3 He owed KDOR unpaid sales taxes in
excess of $20,000. The following day, after consultation with David Eron, Bowling
filed a pro se chapter 13 petition. Eron began acting on Bowling’s behalf on March 21
and entered his appearance on March 23. Bowling agreed to pay the Firm $3,350 for
representation in the chapter 13 over 12 months. The Firm’s Fed. R. Bankr. P. 2016(b)
disclosure referred to the $3,000 fee as the “base fee – additional charges may apply”
as governed by the retainer agreement. The retainer agreement is not in the record.
In return for the $3,000 base fee, Eron agreed to render legal service “for all aspects
2 Of the $11,855 total, all was attributable to attorney fees save $30 in expenses for which
reimbursement is sought.
3 According to the statement of financial affairs (SOFA), item 18, the gift shop ceased operation
December 31, 2011. But item 1 of the SOFA reflects that debtor ran the gift shop as a sole
proprietorship in 2012 (generating income of about $3,400) until the KDOR executed its tax
warrants on the personal property at the gift shop. The billing statements suggest that debtor
continued to operate the gift shop during the pendency of the bankruptcy, at least through July of
2012 when it appears he vacated the leased premises at Chisholm Trail. See Dkt. 77-1, p. 6.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 2 of 13
of the bankruptcy case,” including “preparation and filing of any petition, schedules,
statements of affairs and plan which may be required” and “representation of the
debtor at the meeting of creditors and confirmation hearing, and any adjourned
The schedules filed in this case reflect assets of $4,140.50 and debts of
$38,094.12. Bowling is a conductor/engineer for the Union Pacific railroad, is married,
and has three dependent children.
Within days of the bankruptcy filing, Eron negotiated an agreed adequate
protection order with the KDOR which provided that the pre-confirmation adequate
protection payments would be paid to the chapter 13 trustee upon confirmation of
Bowling’s plan.5 Eron’s associate Justin Leck then completed and filed the remaining
bankruptcy schedules and Bowling’s chapter 13 plan on June 13, 2012.6 The plan
proposed to pay $450 for 60 months for a total of $27,000 and provided for payment
of the KDOR’s tax claim in full. Debtor’s disposable income calculation on Form 22C
yielded a negative $27.87.7 Bowling had no other debts secured by real estate or a
principal residence. He had no debts secured by vehicles or other personal property.
Only one objection to confirmation of the chapter 13 plan was filed – that of the
chapter 13 trustee. 8 She asserted feasibility, disposable income, and bad faith
4 Dkt. 17.
5 Dkt. 11.
6 Dkt. 18.
7 Dkt. 17, p. 41, line 59.
8 Dkt. 26.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 3 of 13
objections as well as debtor’s failure to provide his 2011 tax returns.
Six months later, in late 2012, the trustee filed a motion to compel under local
rule seeking debtor’s compliance with the trustee’s request for information and
documentation supporting his claimed transportation expense and charitable
contributions, information that was relevant to the trustee’s disposable income
objection.9 The trustee had requested this information from debtor at the § 341
meeting and followed up with written requests to the debtor or debtor’s counsel on at
least five more occasions after the § 341 meeting. After numerous continuances of the
confirmation hearing, Bowling’s chapter 13 plan and the trustee’s objection were
announced as resolved at the March 19, 2013 confirmation hearing and an order
confirming the plan as modified was entered on April 25, 2013.10 The confirmed plan,
as modified, provided for an increase of $145 in the monthly plan payment to pay
disposable income of $8,373.11
On April 17, 2014, the Firm filed this First Application for Compensation for
the period March 1, 2012 to March 31, 2014 in the amount of $11,855 (which included
$30 of expenses), together with the itemized monthly billing statements generated
during the period.12 Bowling objected to the Application and requested a hearing, but
9 Dkt. 48. See D. Kan. L.B.R. 4002.2(a) requiring compliance with the trustee’s requests for
information within 14 days.
10 Dkt. 70. Those continuances of the confirmation hearing were due in large part to debtor’s failure
or lengthy delay in responding to the trustee’s requests for information and documentation. Two of
the continuances were due to the terminal illness of debtor’s wife.
11 An amended confirmation order entered on July 15, 2013, specified that the Firm’s attorney fees
paid through the plan were $3,000, plus an additional $350 closing fee. Dkt. 72.
12 Dkt. 77.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 4 of 13
did not specify the nature of his objection.13 He appeared at the hearing held on July
9, 2014. His chief complaint was that the fees are unreasonable because he
continually dealt with a different person in the Firm and he had to bring them “up to
speed” when he communicated with them. He believes that a standard fee in a
chapter 13 case should be around $4,000.
Bankruptcy courts independently evaluate the propriety of fees requested by
debtor’s counsel.14 Section 330(a)(4)(B) of the Code authorizes the court to allow
“reasonable compensation” to a debtor’s attorney for “representing the interests of
the debtor in connection with the bankruptcy case.” To determine whether the fees
requested are indeed “reasonable,” we consider the benefit and necessity of the
services rendered along with the nonexclusive factors listed in § 330(a)(3).15 The
applicant bears the burden of establishing the reasonableness of the compensation
sought.16 Section 330(a)(3)(C) requires that we consider not only whether the services
were “necessary,” but whether they were necessary or beneficial to completion of the
case at the time they were rendered. The factors listed in §330(a)(3) are substantially
similar to those applied to attorney fee applications in every other forum. They are –
(A) the time spent on such services;
(B) the rates charged for such services;
13 Dkt. 79.
14 In re Tahah, 330 B.R. 777, 780-81 (10th Cir. BAP 2005).
15 In re Rogers, 401 B.R. 490, 492-93 (10th Cir. BAP 2009).
16 Id. at 493-94.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 5 of 13
(C) whether the services were necessary to the administration of, or beneficial
at the time at which the service was rendered toward the completion of, a case
under this title;
(D) whether the services were performed within a reasonable amount of time
commensurate with the complexity, importance, and nature of the problem,
issue, or task addressed;
(E) with respect to a professional person, whether the person is board certifiedor otherwise has demonstrated skill and experience in the bankruptcy field;
(F) whether the compensation is reasonable based on the customary
compensation charged by comparably skilled practitioners in cases other than
cases under this title.17
Contested chapter 13 fee applications are rare in this court because, in 2009, I
increased the presumptive fee in a chapter 13 case in this Division from $2,500 to
$3,000.18 As I noted then, the presumptive fee is the maximum allowable fee a
debtor’s lawyer can receive without submitting a detailed fee application. It is
intended to cover routine legal services in chapter 13 cases from initial consultation
and preparation of the petition through plan confirmation. Never have I barred
counsel who believe they are entitled to more than the presumptive fee from seeking
further fee allowance provided a proper fee application is submitted.19
All but $200 of the requested fees were billed before confirmation of the plan
over a year ago. Other than the instant Application, there have been no other
17 11 U.S.C. § 330(a)(3). See also In re Permian Anchor Services, Inc., 649 F.2d 763 (10th Cir.
1981)(adopting the lodestar analysis and twelve Johnson factors set forth in Johnson v. Georgia
Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974) for determining the reasonableness of
fees); In re Lederman Enterprises, Inc., 997 F.2d 1321, 1323 (10th Cir. 1993).
18 See In re Hueser, No. 09-10601, 2009 WL 2849607 (Bankr. D. Kan. Aug. 31, 2009) (three
companion cases involving consumer chapter 13 cases).
19 In Rogers, supra, the BAP held that once the attorney files a fee application, they are no longer
entitled to the “standard fee.” 401 B.R. at 494 (noting that the presumptive fee is designed to be the
maximum fee allowed without a detailed fee application and not a minimum fee to be awarded in all
Case 12-10635 Doc# 90 Filed 08/28/14 Page 6 of 13
substantive post-confirmation proceedings or motions in the case. The itemized
statements do not contain a recapitulation of time spent and fees billed for each
timekeeper that contributed to the total fee. The Court’s own summary allocates the
time and fees among the attorneys and law Firm staff as follows:
Attorney or Legal Assistant Hours Fees
Attorney DPE 8.80 1,850.00
Attorney EKW 4.50 900.00
Attorney JRL 22 2,800.00
Attorney JWR 25.40 5,120.00
Legal Assistant ECD 12.10 907.50
Legal Assistant BAM 2.8 210.00
Legal Assistant AB .50 37.50
Total Fees Billed $11,825.00
The hourly rates charged are not excessive. They compare favorably to what
attorneys in this area charge for work done outside of bankruptcy. Both Mr. Eron and
Mr. Rockett have considerable experience in this court and, while neither Mr. Leck
nor Ms. Wilson is as experienced, they both could handle a routine chapter 13 case
like this one.
This case calls for the application of subparagraphs (a)(3)(C), (a)(3)(D), and
(a)(4). Section 330(a)(4)(A) disallows compensation for unnecessary duplication of
services or services that were neither likely to benefit the estate or necessary to its
administration. Subparagraph (a)(3)(C) requires that the work done must have been
necessary or beneficial to the completion of the case at the time it was done.
Subparagraph (a)(3)(D) requires that the time spent be reasonable “commensurate
with the complexity, importance, and nature of the problem.”
What made this case so expensive? There are some general causes. The Firm’s
Case 12-10635 Doc# 90 Filed 08/28/14 Page 7 of 13
minimum billing increment appears to be .2, or 12 minutes, potentially inflating fees
for routine work like leaving a phone message on the recipient’s phone or sending a
brief e-mail to the intended recipient. There are a few instances of “batched entries”
that I ordinarily disallow, but, in general, the vast majority of time entries are less
than .4 hours and when describing multiple tasks within a single time entry, those
tasks tend to be closely related.20 There are instances of duplication of services that
are attributable to two or three lawyers and/or staff participating in intraoffice
conferences or reporting case status or progress to one another. Indeed, all of the
attorneys and three legal assistants in the Firm touched the Bowling case at various
times.21 While these communications may have been expedient, they increased the
bill. That said, the Firm exercised billing judgment by reducing or deleting charges
for some services, including several of the types of entries just noted, writing off
$3,127.50 in fees before submitting this Application.22
This is neither a big nor a complex case. Mr. Eron worked out the KDOR issues
without formally seeking court relief from the seizure or the turnover of the
property.23 Bowling hoped to halt further enforcement of the KDOR’s claim against
20 See In re Recycling Industries, Inc., 243 B.R. 396, 406 (Bankr. D. Colo. 2000) (practice of “lumping”
[or batching] tasks into a single time entry is “universally disapproved” by bankruptcy courts.)
21 Attorney Leck’s involvement in the case ended in December of 2012 and Attorney Rockett’s
participation began in January of 2013. Attorney Wilson’s involvement in the case was fairly limited
to court appearances for continuing the hearing on confirmation and for attending the § 341 meeting
22 This figure is comprised of services that were “no charge” and fees that were written off or
reduced. The bulk of the write-offs were attributable to attorneys Leck ($1,137.50) and Rockett
23 As noted previously, debtor apparently continued operation of the gift shop as a sole
proprietorship to some degree until the end of July, 2012. At that point, he vacated the leased
Case 12-10635 Doc# 90 Filed 08/28/14 Page 8 of 13
him and to enable him to repay the liquidated tax claim over a 5-year period. The
KDOR’s claim against debtor was resolved and its treatment in the bankruptcy was
negotiated three days after the petition date by a joint motion for adequate protection
providing for monthly payments of $362.44.24 The total charge for this work was
$440.25 There were no continuing operating issues.
After the adequate protection agreement was reached with KDOR, the Firm
proceeded to prepare the schedules, statement of financial affairs, creditor matrix,
and the plan. Time entries related to these tasks from April to early July, 2012 total
approximately 17 hours and $1,955. 26 Some of the time entries involve office
conferences between multiple law office staff and unnecessarily increased the time
and costs. Time and fees related to the § 341 meeting are approximately 3.3 hours for
$597.50.27 Some of the time entries on June 20, 2012 appear to be duplicative and
one time entry of attorney Leck is a batched entry of 1.5 hours. By September 30,
2012, the Firm had billed Bowling $5,732 even though the plan had never been
Much additional time was spent on responding to informational requests made
by the trustee in addressing her feasibility, disposable income, and good faith
premises. See note 3, supra.
24 As the joint motion represented, the monthly payment “represents full payment of KDOR’s claim
over 60 months with interest at 3% per annum.” Dkt. 6, p. 2, ¶ 7.
25 Per the March 2012 fee statement, the agreed upon treatment of the KDOR’s tax claim was
accomplished in 2.20 hours and $440 in attorney fees. Dkt. 7-1, p. 1.
26 Dkt. 77-1, pp. 2-6. The figure for total fees takes into account the reductions made by counsel
exercising billing judgment. See Dkt. 77-1, p. 6.
27 Dkt. 77-1, pp. 2, 4.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 9 of 13
objections. Because she received no responses to her informal requests for
information, the trustee filed a motion to compel the delivery of the information, most
of which related to transportation expenses claimed by Bowling and charitable
contributions. It’s worth noting that the Bowlings have previously filed jointly for
chapter 13 relief in this court and Mr. Bowling should have some level of expectation
about what he would be required to tell the trustee about their expenses.28 Counsel
was certainly obligated to remind them of that obligation.
The Firm’s statements for the period from late September of 2012 through
February of 2013 reflect one lawyer’s attending the initial confirmation hearing on
September 12, 2012, followed by several months of the Firm’s attempts to secure
transportation expense information from Bowling in order to satisfy the trustee’s
requests. Then, in February, the Firm expended some $1,762 in time in further
dealing with the trustee’s eminently reasonable request for income tax returns and
expense information supporting the debtor’s claimed transportation and charitable
contribution expenses. The Firm also sought and twice secured a continuance of the
evidentiary hearing on confirmation because Mrs. Bowling was ill with cancer. It is
unclear whether the trustee got the information she sought in February.
The final push to confirmation occurred in March. I set an evidentiary hearing
for March 19 and the Firm, principally Mr. Rockett, geared up for trial, billing more
than $2,500 for that work. The trial did not happen, though, because the parties
28 See Case No. 07-11205, filed in May of 2007 and converted to chapter 7 in May of 2008. The
debtors received a chapter 7 discharge in 2010.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 10 of 13
reached an agreement that they announced on trial day. In April, the trustee
withdrew the Motion to Compel.
The nearly year-long passage of time between filing the chapter 13 plan and
confirming the plan was largely due to Mrs. Bowling’s illness and the debtor’s delay
in responding to the trustee’s request for information and documentation that
supported the debtor’s projected disposable income calculation. After she filed a
motion to compel, the trustee either got what she sought or Bowling was unable to
substantiate his expenses, and the parties quickly settled the trustee’s confirmation
objection by the debtor increasing his plan payment $145 per month.
As noted, there were no formal proceedings begun to cause KDOR to turn over
the seized business assets – that was accomplished without Court intervention. But
considerable time appears to have been spent on the trustee’s document requests, due
in large part to the debtor’s failure to provide them timely. And, once the matter was
finally set for trial, counsel certainly had to prepare for trial and, to the extent that
time was commensurate with the complexity and novelty of the tasks at hand, it
should be compensated. Only three claims were filed in the case and debtor made no
claims objections. The trustee objected to debtor’s claim of exemption in two vehicles
but debtor amended Schedule C the same date as the trustee’s objection to delete one
of the vehicles, and the trustee withdrew her objection. Debtor was not required to
defend any motions for relief from the automatic stay nor motions to dismiss for
nonpayment of plan payments. In short, the anticipated trial boiled down to the
amount of Bowling’s disposable income, the issue that the trustee had raised from
Case 12-10635 Doc# 90 Filed 08/28/14 Page 11 of 13
The Firm charged for a total of 45 hours and $5,922 from October of 2012
through April of 2013.29 Not much was accomplished compared to the time spent;
there were several appearances at confirmation hearings and continuances. Some of
the delay was attributable to debtor’s failure to provide information. Numerous
attorneys billed time regarding confirmation and much time was devoted to
interoffice conferences and requests to the debtor. Given the primary issue driving
confirmation of the plan and the lone objection to confirmation filed by the trustee,
the time incurred on confirmation is simply not reasonable.30
The Firm spent more time than was necessary to complete this case. Some of
this is due to the inefficiencies and inevitable duplication of services that occurs when
four lawyers and several staff members “touch” a file. Some of it is due to Bowling’s
failure or inability to respond timely to the trustee’s information requests. Some of it
is simply duplicative. In the absence of any other evidence justifying these charges
individually, I am left to balance the Firm’s right to recover reasonable compensation
for the benefit it conferred on the debtor and the estate with the debtor’s right to be
assessed a fair fee, consistent with the Bankruptcy Code.31 In striking that balance,
29 Dkt. 77-1, pp. 4, 6, 8-19.
30 The Court notes that approximately one-fourth of attorney Rockett’s time was attributable to
preparation of the evidentiary hearing on confirmation, which hearing of course, was never held.
31 In applying the Code’s fee provisions, I take no notice that (1) the trustee believes the allowance of
the application in full would render the plan unfeasible; or (2) that the Firm has since moved towithdraw. Neither point bears on the reasonableness, necessity or benefit of the Firm’s services
Case 12-10635 Doc# 90 Filed 08/28/14 Page 12 of 13
I am mindful that some of the fees here were caused by the debtor’s circumstances in
being unable, for whatever reason, to provide the information the trustee requested.
Considering what §330(a)(3) requires me to consider, I conclude that the $5,732
charged from the outset of the case through September of 2012 should be reduced by
50%, or $2,866, because of duplication of services and excessive time spent
assembling the schedules and the plan, viewed in light of the lack of complexity of
the case. Likewise, I reduce the fees claimed from October of 2012 through April of
2013 of $5,922 by 50%, or $2,961, for the same reasons. These reductions total $5,827.
The remainder of the fees charged, $5,998, and the $30 filing fee for an amended
creditor matrix, are approved. The Firm’s fee and expense application is therefore
allowed in the amount of $6,028; the balance of the application is denied.
# # #
under § 330.
Case 12-10635 Doc# 90 Filed 08/28/14 Page 13 of 13
- Category: Judge Nugent
- Published on 15 October 2014
- Written by Judge Nugent
- Hits: 143
In Re Vanlandingham, 13-12642 (Bankr. D. Kan. Oct. 1, 2014) Doc. # 56
SIGNED this 30th day of September, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
JOHANNA VANLANDINGHAM, ) Case No. 13-12642
) Chapter 13
Chapter 13 provides an orderly means for debtors to resolve financial
difficulties by repaying their unsecured creditors, at least in part, over the life of their
plans. Under 11 U.S.C. § 1325(b)(1)(B), (b)(2) and (b)(3), above-median-income
debtors must pay their projected disposable income, as calculated under 11 U.S.C. §
707(b)(2)(A) and (B), to the unsecured pool during the applicable commitment period
which is usually five years. The question presented here is whether a debtor’s
Case 13-12642 Doc# 56 Filed 09/30/14 Page 1 of 19
voluntary contributions to a 401(k) plan that first began after debtor filed her
bankruptcy petition may be excluded from the calculation of disposable income.
Contributions for 401(k) or other defined contribution retirement plans are not among
the enumerated deductions in § 707(b)(2)(A), but § 541(b)(7) excludes wages withheld
for that purpose from property of the estate and further provides that these
withholdings “shall not constitute disposable income” as it is defined in § 1325(b)(2).
Shortly before she filed this chapter 13 bankruptcy, Johanna Vanlandingham
submitted paperwork to enroll in her employer’s 401(k) plan, but her 401(k)
contributions via payroll deduction did not actually commence until after she filed
her case. She had not previously participated in her employer’s plan. On Official Form
22C, she deducted those 401(k) contributions from her disposable income as Line 55
invites her to do. The trustee objects to confirmation of her plan and contends that
the § 541(b)(7) safe harbor only applies to retirement contributions that were
established before the petition date; as a result, debtor is not entitled to exclude the
401(k) contributions from the calculation of disposable income and she is not
contributing all of her projected disposable income to the plan. I conclude that, while
the § 541(b)(7) exclusion from disposable income is oddly placed, nothing in the Code
requires that a debtor have established 401(k) contributions prior to filing a chapter
13 case. Consistent with the “forward looking approach” of projected disposable
income articulated by the Supreme Court in Lanning and in the absence of a lack of
Case 13-12642 Doc# 56 Filed 09/30/14 Page 2 of 19
good faith objection under § 1325(a)(3), the debtor’s plan should be confirmed.1
On the same date that Ms. Vanlandingham filed her chapter 13 bankruptcy
and chapter 13 plan, her prepetition enrollment in her employer’s 401(k) retirement
plan was confirmed.2 She elected to contribute $68.13 to her 401(k) plan by payroll
deduction each paycheck, or 4%. Ms. Vanlandingham was paid on a bi-weekly basis
and the first payroll deduction for her 401(k) contribution covered the post-petition
pay period of October 12-25, 2013. She has been employed by Cox Communications
since 2003, but had not been enrolled in Cox’s 401(k) plan prior to October 10, 2013.
Ms. Vanlandingham is an above-median-income debtor, divorced, and has no
On Form 22C – the Chapter 13 Statement of Current Monthly Income and
Calculation of Commitment Period and Disposable Income, Ms. Vanlandingham
deducted on Line 55 her monthly 401(k) contribution of $151.67 from her disposable
income calculation.3 This exclusion, along with the allowed expense deductions from
current monthly income [CMI] under § 707(b)(2), yields negative projected disposable
income of <$45.25> on Line 59 of Form 22C, resulting in no distribution to unsecured
1 The debtor Johanna Vanlandingham appears in person and by her attorney William Fields.
The chapter 13 trustee Laurie B. Williams appears by her attorney Karin Amyx.
2 Ex. 1.
3 Ex. A. Extrapolating the amount of debtor’s bi-weekly 401(k) contribution to a monthly
amount yields $147.62. Debtor has overstated her monthly 401(k) contribution on Form 22C
Case 13-12642 Doc# 56 Filed 09/30/14 Page 3 of 19
Ms. Vanlandingham originally proposed to pay $320 for 60 months. 5 Plan
payments would be applied to her attorney’s fees of $2,783, tax claims of about $7,500,
and a 910-car loan creditor. Unsecured creditors would receive nothing. The plan
provided that her home mortgage loan would be paid outside the plan. The chapter
13 trustee objected to confirmation of this plan on grounds of feasibility and that
debtor was not committing all of her projected disposable income to paying unsecured
creditors under § 1325(b)(1)(B). The trustee objected to debtor’s deduction of her
401(k) contribution from the calculation of disposable income.
Ms. Vanlandingham filed an amended plan in April 2014.6 This plan proposed
to make $320 monthly payments for 6 months and $218 payments for the remaining
54 months. This was prompted by the debtor’s post-petition surrender of a vehicle
and purchase of a 2010 Mustang with borrowed money. The new car loan (approved
by the trustee) would be paid outside the plan at $380 per month. 7 The trustee
reiterated her objections to confirmation. Under either plan, the unsecured creditors,
who hold claims totaling $71,347 would receive no distribution.
4 Because Ms. Vanlandingham is an above median income debtor, her reasonably necessary
expenses for purposes of calculating her disposable income are determined by reference to
the means test in § 707(b)(2)(A) and (B). See § 1325(b)(3).
5 Ex. B.
6 Ex. D.
7 Contemporaneous with the amended plan, debtor filed an amended Schedule J which
reflected the Mustang loan payment amount and increased debtor’s monthly expenses from
$2,484 to $2,592. See Dkt. 34.
Case 13-12642 Doc# 56 Filed 09/30/14 Page 4 of 19
With respect to feasibility, the trustee demonstrated that the amended plan
was short approximately $1,100 of paying the administrative expenses and tax claims
in full.8 However, debtor is willing to pay an additional $20 per month to cover the
shortfall and make the plan feasible. Thus, confirmation of Ms. Vanlandingham’s
amended plan turns on the disposable income objection – whether the 401(k)
contribution should be excluded from the disposable income calculation. The chapter
13 trustee completed an adjusted Form 22C – removing the deduction for debtor’s
401(k) contribution on Line 55 (i.e. including it in disposable income), together with
other unspecified minor adjustments, and arrived at monthly projected disposable
income of $145.65 rather than <$45.25>.9 This change in disposable income yields
payment of $5,956 on unsecured claims, or an 8.348% dividend. 10 Thus, if the
trustee’s legal objection is sustained and her disposable income calculation is correct,
Ms. Vanlandingham’s amended plan cannot be confirmed.
Determining whether voluntary retirement contributions may be excluded
from a chapter 13 above-median-income debtor’s projected disposable income
8 Ex. G.
9 Ex. H. The Court observes that the trustee’s version of Form 22C does not take into account
the future secured debt payments on the 2010 Ford Mustang on Line 28 or 47. The monthlycar loan payment is $380, compared with the average monthly payment of $105.19 listed bythe trustee. As noted previously, the 910-car securing the previous car loan payment wassurrendered under the amended plan and replaced with the post-petition purchase of the2010 Mustang.
10 Ex. I.
Case 13-12642 Doc# 56 Filed 09/30/14 Page 5 of 19
calculation starts with the statutory language. Section 1325(b)(1)(B) requires that a
debtor’s plan pay all of her projected disposable income received during the applicable
commitment period to unsecured creditors. As pertinent here, § 1325(b)(2)(A) defines
‘disposable income’ as “current monthly income received by the debtor . . . less
amounts reasonably necessary to be expended” for the maintenance or support of the
debtor or debtor’s dependents that first becomes payable after the date the petition
is filed. The expense side of the disposable income equation—“amounts reasonably
necessary to be expended for the maintenance or support of the debtor”—is not a
defined phrase, but when the debtor is an above-median-income debtor as here, §
1325(b)(3) requires that those deductions or expenses be determined in accordance
with certain of the means test components, § 707(b)(2)(A) and (B). That statute
enumerates a number of allowed deductions or expenses from current monthly
income and how the amount is determined. 11 Some expenses such as housing,
transportation, and food are standardized amounts determined by reference to IRS
tables given the debtor’s locale and household size (i.e. applicable monthly
expenses). 12 Other allowed deductions for “Other Necessary Expenses” such as
health insurance expense are not standardized amounts but are determined by the
11 § 707(b)(2)(A)(ii)-(iv). Section 707(b)(2)(B) covers additional necessary and reasonable
expenses that qualify as “special circumstances.” The debtor does not contend that her
voluntary 401(k) contributions are allowable deductions under the special circumstances
12 § 707(b)(2)(A)(ii)(I).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 6 of 19
actual monthly expense incurred by the debtor.13 There is no specific allowance for
voluntary retirement contributions in § 707(b)(2)(A) or (B) and the only provision
possibly covering such contributions is the category of “Other Necessary Expenses”
in § 707(b)(2)(A)(ii)(I). But the case law interpreting this category consistently
disallows voluntary payroll deductions for retirement plan contributions as an Other
Necessary Expense. 14 In short, nothing in § 1325(b)(2) or by incorporation, §
707(b)(2)(A) and (B), explicitly authorizes voluntary retirement contributions as an
allowable expense or deduction in calculating disposable income in a chapter 13 case.
If this were the only statute in play, my analysis would end and the trustee would
14 In re Maura, 491 B.R. 493, 507 (Bankr. E.D. Mich. 2013) (chapter 7 case; voluntary 403B
retirement contributions are like voluntary 401(k) contributions, not required by employer
and not deductible); In re Prigge, 441 B.R. 667, 677 (Bankr. D. Mont. 2010) (chapter 13 case;
voluntary 401(k) contributions are not allowable expenses in disposable income calculation);
In re Parks, 475 B.R. 703 (9th Cir. B.A.P. 2012) (chapter 13 above-median income debtor;
deduction for voluntary postpetition 401(k) contributions not allowed in calculating
disposable income); In re Scarafiotti, 375 B.R. 618, 635 (Bankr. D. Colo 2007) (chapter 7 case;
for purposes of bankruptcy statute, other necessary expenses specified by IRS are exclusive
and retirement plan contributions do not qualify). The IRS guidelines listing “Other
Necessary Expenses” are nonexclusive but do not include voluntary deductions for retirementcontributions. See Internal Revenue Manual (“Manual”), Financial Analysis Handbook §
18.104.22.168 (Oct. 2, 2012) at http://www.irs.gov/irm/part5/irm_05-015-001.html#d0e1954. If the
claimed expense is not encompassed by one of the listed categories, it must meet the
necessary expense test: the expense is necessary to provide for the health and welfare of the
taxpayer and his family or the production of income. See Manual § 22.214.171.124(1). Further, the
IRS guidelines expressly state that voluntary contributions to retirement plans are not
necessary expenses. See Manual § 126.96.36.199(2). In a chapter 13 case, line 31 of Official Form22C is the line for deducting Other Necessary Expenses under § 707(b)(2)(A)(ii)(I) and it
allows “deductions that are required for your employment, such as mandatory retirement
contributions, union dues, and uniform costs. Do not include discretionary amounts,
such as voluntary 401(k) contributions.”
Case 13-12642 Doc# 56 Filed 09/30/14 Page 7 of 19
prevail on her objection to confirmation. But it isn’t.
In what has been described as an “oddly-worded ‘hanging paragraph,’” 15
“awkward,”16 and a “Gordian knot,”17 Congress amended § 541 in 2005 with the
enactment of BAPCPA and directly spoke to voluntary retirement contributions when
determining disposable income under § 1325(b)(2). Much of the interpretative dispute
results from the placement of the chapter 13 “disposable income” concept in a statute
that defines what constitutes “property of the estate.” Section 541(a) defines, in part,
property of the estate in a chapter 13 case; it includes all legal or equitable interests
of debtor in property as of the commencement of the case, unless excluded by §
541(b).18 In a chapter 13 case property of the estate is supplemented by § 1306(a).
Specifically, § 1306 also includes as property of the estate § 541 property that is
acquired postpetition and postpetition earnings. Section 541(b) describes property
that is excluded from property of the estate. Section 541(b)(7) provides in part:
(b) Property of the estate does not include –
. . .
(7) any amount –
(A) withheld by an employer from the wages of employees for payment
as contributions –
(i) to –
(I) an employee benefit plan that is subject to title I of theEmployee Retirement Income Security Act [ERISA] of 1974 or under an
15 In re Drapeau, 485 B.R. 29, 34 (Bankr. D. Mass. 2013).
16 Id. at 36.
17 In re Jensen, 496 B.R. 615, 620 (Bankr. D. Utah 2013) (noting the cumbersome grammar
courts have sought to unweave).
18 Section 541(a)(1).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 8 of 19
employee benefit plan which is a governmental plan under section
414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the
Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the
Internal Revenue Code of 1986;
except that such amount under this subparagraph shall not
constitute disposable income as defined in section 1325(b)(2); . . .19
The courts are divided on the meaning of § 541(b)(7)’s hanging paragraph and
its interplay with § 1325(b)(2)’s calculation of disposable income in a chapter 13 case.
Three lines of cases have developed, though the fact patterns in each differ. The first,
articulated in In re Johnson20 concludes that both prepetition and postpetition 401(k)
contributions are excluded from the calculation of disposable income, whether or not
debtor was making contributions at commencement of the case.21 This view purports
19 11 U.S.C. § 541(b)(7)(A). Emphasis added.
20 346 B.R. 256 (Bankr. S.D. Ga. 2006).
21 Cases following Johnson view: In re Drapeau, 485 B.R. 29 (Bankr. D. Mass. 2013) (lack of
plan contributions on petition date will not necessarily bar debtor, on good faith grounds,
from deducting retirement contribution from disposable income); In re Hall, 2013 WL
6234613 (Bankr. N.D. Ill. Oct. 22, 2013) (agreeing with the Seafort dissent; case involved
continuing prepetition 401(k) contributions); In re Egan, 458 B.R. 836 (Bankr. E.D. Pa. 2011)
(no reference in § 541(b)(7) to petition date being determinative; post-petition retirement
contributions may exceed prepetition contributions and are excluded); In re Devilliers, 358
B.R. 849 (Bankr. E.D. La. 2007) (retirement contributions excluded from calculation of
disposable income and are not modified by necessary and reasonable limitation); In re
Njuguna, 357 B.R. 689 (Bankr. D. N.H. 2006) (below-median income case); In re Leahy, 370
B.R. 620 (Bankr. D. Vt. 2007) (chapter 7 case; § 541(b)(7) exclusion from property of estatenot limited to “gap” period amounts, but applied to all amounts withheld from debtor’s wagesas contributions to retirement annuity without regard to the timing of the contributions); In
re Garrett, 2008 WL 6049236 (Bankr. M.D. Fla. 2008) (401(k) contributions not included in
disposable income without regard to whether a debtor is below- or above-median income); In
re Glisson, 430 B.R. 920 (Bankr. D. Ga. 2009); In re Melander, 506 B.R. 855 (Bankr. D. Minn.
2014) (post-petition continuation of voluntary retirement contributions that debtor had made
for the last 14 years allowable expense excluded from disposable income where no suggestion
Case 13-12642 Doc# 56 Filed 09/30/14 Page 9 of 19
to look to the plain meaning of § 541(b)(7)’s hanging paragraph to find that “Congress
has placed retirement contributions outside the purview of a Chapter 13 plan,”
subject only to nonbankruptcy law limitations on allowable contribution amounts and
the Code’s good faith requirement for confirmation. 22 These courts reason that
because debtors are not required to contribute income withheld for qualified
retirement contributions to their chapter 13 plans under § 541(b)(7), they may
commence or increase those contributions postpetition as the Johnsons sought to do.
A second view was expressed by the Sixth Circuit Court of Appeals in In re
Seafort23 where it held that if chapter 13 debtors repaid their 401(k) loans before
completing their plan, the resulting surplus income was disposable income that could
not be used to make voluntary retirement contributions to their 401(k) plans. Instead,
that surplus was to be committed to the distribution to unsecured creditors. In
Seafort, the debtors filed their bankruptcy petitions while repaying 401(k) loans but
that debtor was motivated by bad faith); In re Gibson, 2009 WL 2868445 (Bankr. D. Idaho
Aug. 31, 2009) (debtors had decided prepetition to begin contributions to their employer-
sponsored 401(k) plan but first contribution withheld from paycheck occurred 10 days after
petition filed; whether debtor had been making contributions prepetition “is of no moment”
in the disposable income analysis because the Code expressly excepts them).
22 In re Johnson, 346 B.R. at 263 (quoted language). Section 1325(a)(3) requires that the plan
be proposed in good faith and not by any means forbidden by law. In this Circuit, the test ofgood faith as set forth in Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983) (adopting Eighth
Circuit Estus factors) generally governs. But see In re Cranmer, 697 F.3d 1314 (10th Cir. 2012)
(because Bankruptcy Code § 101(10A)(B) excludes social security income benefits from
“current monthly income” and the calculation of disposable income in chapter 13 plan, theirexclusion by debtor cannot constitute lack of good faith); In re Shelton, 370 B.R. 861, 866
(Bankr. N.D. Ga. 2007) (excluded income could be considered in determining whether chapter
13 plan was proposed in good faith).
23 Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 10 of 19
not making contributions to their 401(k) plans. They proposed to complete their loan
payments and then resume contributing to the retirement plan. The Sixth Circuit
concluded that the surplus created after their loans were repaid was disposable
income and not covered by § 541(b)(7)’s hanging paragraph and that only those 401(k)
payments or contributions being made on the petition date were excluded from
projected disposable income.24 Under the Seafort view, a debtor may not exclude
401(k) contributions that began after commencement of the case, nor can a debtor
increase the amount of prepetition contributions after filing. Instead, debtors must
“step up” their plan payments to account for the funds realized after the 401(k) loan
A third view expressed in In re Prigge,26 holds that no voluntary post-petition
contributions to debtor’s 401(k) plan, whatever the amount, are excluded from
disposable income.27 Had Congress intended to exclude postpetition voluntary 401(k)
contributions from disposable income, it would have placed the provision within the
24 Cases following Seafort view: In re Read, __ B.R. __, 2014 WL 4104736 (Bankr. E.D. Wis.
Aug. 19, 2014) (because debtor was not making retirement contributions at the time she filed
her case, retirement contributions started post-petition not excluded from disposable
income); In re Melander, 506 B.R. 855 (Bankr. D. Minn. 2014) (post-petition retirement
contributions protected and not included in projected disposable income where debtor had
voluntarily contributed same amount prepetition for past 14 years).
25 Seafort, 669 F. 3d at 673; In re Afko, 501 B.R. 202, 206-07 (Bankr. S.D. N.Y. 2013) (debtors
sought to use retirement loan repayment savings as a cushion for unanticipated living
26 441 B.R. 667 (Bankr. D. Mont. 2010).
27 Cases following Prigge view: In re Parks, 475 B.R. 703 (9th Cir. BAP 2012); In re McCullers,
451 B.R. 498 (Bankr. N.D. Cal. 2011).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 11 of 19
confines of chapter 13 itself, as it did for retirement loan repayments in § 1322(f). The
fact that it didn’t was deliberate. The Prigge court focuses on 401(k) contributions as
an “allowable necessary expense” under § 707(b)(2)(A) of the disposable income test.28
Only in a footnote does the court cite § 541(b)(7) and conclude that its intent was to
protect prepetition retirement withholding in the hands of employer’s at the time of
filing, by excluding them from property of the estate and post-petition disposable
My examination of the case law on this issue suggests that the majority of
courts follow Johnson. While the Tenth Circuit Court of Appeals has yet to consider
this issue, two bankruptcy courts in this District have concluded that 401(k)
contributions do not constitute disposable income or satisfy the good faith
requirement for confirmation, though several other bankruptcy courts in the Circuit
have held to the contrary.29 I conclude that the Johnson view, as explained and
28 Prigge predates Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed 2d 23 (2010)
and its forward-looking approach in calculating disposable income.
29 In re Puetz 370 B.R. 386, 387, 392-93 (Bankr. D. Kan. 2007) (chapter 13 debtors’
contributions to their employee retirement plans were not disposable income that debtorswere required to contribute to plan); In re Jensen, 496 B.R. 615 (Bankr. D. Utah 2013)
(adopting the Seafort BAP view in part; retirement contributions being made as of the
petition date do not constitute disposable income and debtor may continue making thecontributions; debtor’s plan was proposed in good faith even though contributions started less
than three months before petition filed); In re Rodriguez, 487 B.R. 275 (Bankr. D. N.M. 2013)
(considering debtor’s voluntary retirement contributions in the context of good faith
requirement); In re Jones, No. 07-10902, 2008 WL 4447041 (Bankr. D. Kan. Sept. 26, 2008)
(postpetition commencement of retirement contributions viewed under good faith test; court
states that contributions not disposable income).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 12 of 19
articulated in Drapeau 30 and Hall, 31 is the better reasoned rule excluding
postpetition voluntary 401(k) or other qualified retirement contributions from the
calculation of disposable income and adopt it here.
Statutory interpretation requires that the plain language of a statute be given
effect. 32 Section 541(b)(7)’s hanging paragraph language does not distinguish
between prepetition and postpetition amounts withheld for 401(k) contributions.
Section 541(b)(7) explicitly excludes these contributions from disposable income.
Section 1306 says that property of the chapter 13 estate consists of § 541 property “as
of” and after commencement of the case, plus postpetition earnings. Contending that
only prepetition retirement withholdings from earnings can be excluded from the
property of a chapter 13 estate seems inconsistent with the forward- and backward-
reaching scope of §1306.
It is much more congruent to read the § 541(b)(7) hanging paragraph as
applying to 401(k) withholding from postpetition wages because the § 541(b)(7)
exclusion from property of the estate refers to “any amount withheld,” without any
30 485 B.R. 29 (Bankr. D. Mass. 2013).
31 2013 WL 6234613 (Bankr. N.D. Ill. Oct. 22, 2013).
32 In re Puetz, 370 B.R. 386, 389-90 (Bankr. D. Kan. 2007) (citing United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), when language of
statute is plain, court’s function is to enforce it according to its terms). See also, Kelly v.
Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 93 L.Ed. 2d 216 (1986) (the court looks not only to
a single sentence or part of a sentence, but to the provisions of the whole law as to its object
Case 13-12642 Doc# 56 Filed 09/30/14 Page 13 of 19
temporal limitation. Moreover, § 1306 incorporates all of § 541, not just § 541(a),
reading into the former section all of §541(b)’s inclusions and exclusions from
property of the estate including the hanging paragraph of § 541(b)(7). Similarly, the
term “projected disposable income” is a postpetition concept in the sense that §
1325(b)(1)(B) requires that all of debtor’s disposable income “to be received” be
devoted to the payment of creditors under the confirmed plan.33 Amounts withheld
from prepetition income for retirement contributions and paid to the retirement plan
can never be “disposable income” under § 1325(b)(1)(B). Nothing in either § 541(b)(7)
or § 1325(b) expressly conditions these exclusions on the debtor having begun to
contribute before filing. Limiting the effect of the § 541(b)(7) exclusion to prepetition
contributions or conditioning the exclusion of postpetition contributions upon the
existence of pre-existing contributions would effectively nullify the exclusion in
chapter 13 cases.
Prior to 2005, voluntary 401(k) contributions were part of “disposable
income.”34 BAPCPA added two related exclusions from disposable income as it is
defined in § 1325(b)(2), although neither exclusion was located within that
33 Section 1325(b)(1)(B).
34 Behlke v. Eisen (In re Behlke), 358 F.3d 429, 435-36 (6th Cir. 2004); Taylor v. United States,
212 F.3d 395, 396 (8th Cir. 2000); In re Puetz, 370 B.R. 386, 392-93 (Bankr. D. Kan. 2007)
(noting that § 541(b)(7) was a new BAPCPA provision that changed the law; qualified
retirement plan contributions are no longer included in calculating disposable income and
are not required to be contributed toward their chapter 13 plan).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 14 of 19
subsection. First, § 541(b)(7) excluded 401(k) and other qualified retirement
contributions from “disposable income as defined in § 1325(b)(2)” and, second, §
1322(f) excluded 401(k) loan repayments as “disposable income under section 1325.”
Official Form 22C recognizes and implements these two exclusions as allowable
deductions from disposable income at line 55.
When Congress enacted BAPCPA, it sought to protect debtors’ retirement
resources and to encourage them to voluntarily save for retirement. 35 Other
provisions enacted at the same time demonstrate this. Section 362(b)(19) excepts
withholding of income for loan repayments to a qualified retirement plan from the
automatic stay. Generous exemptions of retirement funds may be claimed under §
522(b)(3)(C) and § 522(d)(12). And, as noted above, certain retirement loan
repayments are excluded from disposable income by § 1322(f). The fact that
Congress’s exclusion of qualified retirement contributions appears in § 541 rather
than § 1325(b)(2) may best be explained by the fact that as excluded income, the
contributions were never included in disposable income in the first instance.36 This
also explains why the “exclusion” from disposable income appears at the end of Form
22C on line 55, rather than along with all of the allowed expense “deductions” from
35 In re Jensen, 496 B.R. 615, 621 (Bankr. D. Utah 2013) (Congress sought to strike a balance
between protecting chapter 13 debtors’ ability to save for their retirement and requiring
debtors to pay their creditors the maximum amount they can afford to pay).
36 See In re Devilliers, 358 B.R. 849, 864-65 (Bankr. E.D. La. 2007) (noting that unlike other
expense deductions allowed by §§ 707(b)(2) and 1325(b)(2), there is no requirement that
retirement contributions be reasonable or necessary; they are so by their very nature.).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 15 of 19
disposable income at Part IV, lines 24A-52 of Form 22C. 37 In short, Johnson’s
interpretation of § 541(b)(7)’s hanging paragraph is most consistent with promoting
the legislative policy of protecting and encouraging retirement savings. There is no
reason to protect postpetition 401(k) loan repayments, but not postpetition 401(k)
contributions in chapter 13.
In its report on BAPCPA, the House Judiciary Committee made its intentions
concerning employee retirement contributions very clear--
Sec. 323 Excluding Employee Benefit Plan ParticipantContributions and Other Property from the Estate
Section 323 of the Act amends section 541(b) of the Bankruptcy Code
to exclude as property of the estate funds withheld or received by an
employer from its employees' wages for payment as contributions tospecified employee retirement plans, deferred compensation plans,
and tax-deferred annuities. Such contributions do not constitute
disposable income as defined in section 1325(b)(2) of the Bankruptcy
Code. Section 323 also excludes as property of the estate funds
withheld by an employer from the wages of its employees for
payment as contributions to health insurance plans regulated by
State law.38 [emphasis added].
Like the statute itself, there are no temporal or other limitations made on retirement
contributions. This House Report’s direct statement is further support for concluding
37 See In re Johnson, 346 B.R. at 266 (Instructions for completion of Form 22C are entitled
to considerable deference as the practical means by which above-median income debtorscompute disposable income.).
38 H.R. Rep. No. 109-31, Pt. 1, 109th Cong., 1st Sess., 2005 WL 832198 at *82, 2005
U.S.C.C.A.N. 88, 149 (Apr. 8, 2005). See also, H.R. Rep. No. 109-31, 2005 WL 832198 at *2(BAPCPA allows debtors to shelter from the claims of creditors certain education IRA plansand retirement pension funds).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 16 of 19
that Congress sought to foster a policy of protecting and encouraging retirement
savings over the competing policy of making debtors pay their creditors the maximum
they can afford to pay.39
The Johnson view is also consistent with the Supreme Court’s “forward looking
approach” to the definition of “projected disposable income” as announced in
Hamilton v. Lanning.40 The Supreme Court held that when calculating an above-
median-income debtor’s projected disposable income under § 1325(b)(1)(B), the
bankruptcy court could allow for changes in the debtor’s income or expenses that are
known or virtually certain at the time of confirmation. 41 Excluding known or
ascertainable employee retirement contributions or loan repayments from disposable
income is entirely consistent with Lanning’s reasoning even when the debtor first
commences 401(k) withholding postpetition after not having participated in her
employer’s 401(k) plan prior to filing. Ms. Vanlandingham’s contribution to her 401(k)
39 Cf. § 541(b)(7) with § 541(b)(6). Like (b)(7), § 541(b)(6) excludes contributions to 529
accounts (college tuition savings) from property of the estate. But unlike (b)(7), those 529
contributions are not excluded from the calculation of disposable income. Moreover, unlike
(b)(7), § 541(b)(6) does have a temporal limitation on the exclusion from property of the estate.
It only excludes contributions made in the 365 days before the bankruptcy petition date.
40 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed 2d 23 (2010).
41 130 S. Ct. at 2478. See also, Ransom v. FIA Card Services, N.A., 562 U.S. 61, 131 S. Ct.
716, 178 L.Ed. 2d 603 (2011) (applying Lanning to the expense side and disallowing autoownership expense deduction where debtor did not own a car at the petition date); Morris v.
Quigley (In re Quigley), 673 F.3d 269, 273 (4th Cir. 2012) (even though Lanning involved
known changes in debtor’ income, the Lanning reasoning also applies to known changes in
Case 13-12642 Doc# 56 Filed 09/30/14 Page 17 of 19
plan through wage withholding was fully disclosed prior to confirmation.
No doubt some debtors might try to distort their projected disposable income
calculation by starting or substantially increasing their retirement contributions or
loan repayments after filing at the expense of their creditors. But Ms.
Vanlandingham is not one of them. She seeks to contribute a modest 4% of her
income, well below what she could lawfully withhold for tax purposes. She testified
that with the rearrangement of her debts through her chapter 13 bankruptcy, she
could participate in her company’s 401(k) plan for the first time in her 10-year
employment with Cox Communications. Saving or providing for eventual retirement
is a laudable step toward financial security and is part of an honest debtor’s fresh
And when an “abusive” case presents itself, the trustee and unsecured
creditors are well-armed with the ability to object to confirmation for lack of good
faith under §1325(a)(3).43 Indeed, lack of good faith permeates many of the cases
interpreting § 541(b)(7).44 The trustee did not make that objection here and based on
42 Devilliers, 358 B.R. at 865.
43 Section 1325(a)(3). See In re Jensen, 496 B.R. 615, 622-24 (Bankr. D. Utah 2013)
(discussing continued vitality of good faith inquiry of debtor’s voluntary retirement
contributions); In re Hall, 2013 WL 6234613 at *11 (Bankr. N.D. Ill. Oct. 22, 2013) (fear ofabuse not well-grounded due to § 1325(a)(3) good faith requirement).
44 Indeed, in both Prigge and Johnson, objections to confirmation were made both on the
basis of the disposable income calculation and lack of good faith. See also In re Jensen, 496
B.R. 615 (Bankr. D. Utah 2013); In re Rodriguez, 487 B.R. 275 (Bankr. D. N.M. 2013).
Case 13-12642 Doc# 56 Filed 09/30/14 Page 18 of 19
the debtor’s demeanor at trial and the motivation and sincerity she demonstrated, I
doubt that such an objection would have been sustained. There likely are
circumstances in which the voluntary postpetition commencement of 401(k)
contributions may constitute a lack of good faith, but none is present in this case.
The exclusion of debtor’s voluntary postpetition 401(k) contributions from
disposable income on Form 22C at line 55 is proper and provided for by the hanging
paragraph of § 541(b)(7). The trustee’s disposable income objection to confirmation is
OVERRULED. The plan, as modified to make it feasible, is CONFIRMED.
# # #
Case 13-12642 Doc# 56 Filed 09/30/14 Page 19 of 19
- Category: Judge Nugent
- Published on 17 July 2014
- Written by Judge Nugent
- Hits: 340
Morris v. GreenPoint Credit LLC et al, 13-05196 (Bankr. D. Kan. Jul. 8, 2014) Doc. # 77
SIGNED this 7th day of July, 2014.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MARK ROBERT KOLARIK, ) Case No. 13-11985
KELLY LYNN KOLARIK, ) Chapter 7
J. MICHAEL MORRIS, Trustee,
vs. ) Adv. No. 13-5196
GREENPOINT CREDIT, LLC; )
GREEN TREE SERVICING, LLC; )
ROBERT E. ST. CLAIR and )
R. ANNE ST. CLAIR; )
MARK R. KOLARIK and )
KELLY L. KOLARIK, and )
BANK OF AMERICA, N.A., )
Case 13-05196 Doc# 77 Filed 07/07/14 Page 1 of 7
ORDER DENYING ST. CLAIR DEFENDANTS’ CROSS MOTION TO
DISMISS OR FOR SUMMARY JUDGMENT (Dkt. 53)
The defendants Robert and Anne St. Clair have filed their separate cross
motion to dismiss the chapter 7 trustee’s strong arm complaint to avoid GreenPoint
Credit, L.L.C.’s allegedly unperfected lien on a manufactured home that the St. Clairs
sold to the debtors Mark and Kelly Kolarik under a 2004 installment contract.1 The
St. Clairs move for relief under Fed. R. Civ. P. 12(b)(6), but proffer material outside
the complaint which allows the court to consider their motion as one for summary
Exercising his strong-arm powers as a hypothetical lien creditor under §
544(a), the trustee alleges that the Kolariks entered into a prepetition contract of
purchase and sale with the St. Clairs in July 2004 for the purchase of a 1997 Skyline
mobile home. He further alleges that GreenPoint may claim a lien on the mobile
home that was granted by the St. Clairs’ to secure their purchase money indebtedness
to GreenPoint and that this lien was unperfected on the date of the Kolariks’
bankruptcy filing, July 31, 2013.
The Applicable Legal Standard
1 On March 18, 2014 Green Tree Servicing, LLC previously filed a motion to dismiss or
alternatively for judgment on the pleadings under Fed. R. Civ. P. 12(b)(6) and (c). See Adv.
Dkt. 19. The Court issued its Order Denying Green Tree’s motion (Green Tree Order) on
July 2, 2014 at Dkt. 75.
2 Adv. Dkt. 53 and 54. The St. Clairs appear by their attorney Samantha M.H. Woods. The
chapter 7 trustee J. Michael Morris personally appears.
Case 13-05196 Doc# 77 Filed 07/07/14 Page 2 of 7
As the Court explained in the Green Tree Order, a Rule 12(b)(6) motion to
dismiss for failure to state a claim upon which relief may be granted is generally
governed by the facial plausibility standard enunciated in the Supreme Court’s
Twombly and Iqbal decisions and is confined to the allegations contained in the
complaint.3 But where, as here, the litigants have presented exhibits and materials
outside the complaint in their motion papers, the Court may treat the motion as one
for summary judgment.4 The St. Clairs attached the Contract of Purchase and Sale
between them and the Kolariks bankruptcy Schedules C and G, and a Title and
Registration Receipt for the subject mobile home. As with the Green Tree Order, we
consider these additional documents and treat the motion as one for summary
judgment. That requires me to determine whether material facts are in dispute and
whether the undisputed facts entitle the St. Clairs to judgment as a matter of law on
the trustee’s complaint.
Most of the undisputed facts in this matter are set forth in the Green Tree
Order and need not be repeated here. In support of their motion, and in addition to
the documents I’ve already considered in the Green Tree Order, the St. Clairs offer a
copy of a Title and Registration Receipt dated January 22, 2004 and related title
documents that refer to the manufactured home. These are found at Exhibit C to their
3 Fisher v. Lynch, 531 F. Supp. 2d 1253, 1260 (D. Kan. 2008); Wagner Equip. Co. v. Wood,
893 F. Supp. 2d 1157, 1159-60 (D. N.M. 2012).
4 Fed. R. Civ. P. 12(d).
Case 13-05196 Doc# 77 Filed 07/07/14 Page 3 of 7
motion.5 The trustee presumably joined the St. Clairs as party defendants because
they claim an interest in the subject mobile home as owners of legal title, a fact which
is not disputed by any party. As such, their interest must be adjudicated relative to
the other parties in this action who claim an interest in the mobile home. The St.
Clairs have not pleaded any cross claims against their purchasers, the Kolariks, or
any other defendants. Based upon their bankruptcy schedules, the Kolariks remain
in possession of the mobile home, but the record is silent on the status of the Kolariks’
payments under the Contract of Purchase and Sale.
As did Green Tree Servicing, the St. Clairs assert that the mobile home in
question is not property of the estate because the Contract of Purchase and Sale for
the mobile home between them and the Kolariks is an executory contract that was
not timely assumed or rejected and is therefore deemed rejected by operation of §
365(d)(1) and that, as a consequence of that, the mobile home is no longer property of
the estate under § 365(p). Thus the trustee has no avoidance rights. I rejected this
argument in the Green Tree Order because I concluded that the Contract of Purchase
and Sale is neither a lease nor an executory contract, but is instead an installment
sales contract that falls outside of § 365(d)(1). I reached this conclusion because,
under the Contract, the Kolariks, as buyers, received the right to possess the mobile
home and incurred the attendant burdens of ownership including being responsible
5 Adv. Dkt. 54-3, Ex. C.
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for paying property taxes and insurance premiums, and for maintaining the property.
In describing the terms and effect of the Contract between the St. Clairs and the
Kolariks in his brief on this motion, the trustee correctly notes that “the [Kolariks]
acquired all the ‘beneficial incidents of ownership’ upon entering into the Contract,
and were clearly the ‘equitable owners,” with the St. Clairs being the ‘legal owners.’”6
Thus, the Kolariks’ equitable ownership interest became property of the estate upon
their bankruptcy filing. A more thorough treatment of this issue can be found in the
Green Tree Order and need not be repeated here.
Likewise, in the Green Tree Order, I also addressed whether GreenPoint’s or
Bank of America’s purported lien on the mobile home was properly perfected. I
rejected Green Tree’s attempt to extend the substantial compliance doctrine to perfect
a lien described by the Tenth Circuit in In re Charles7 because neither GreenPoint
nor Bank of America is identified anywhere on the Kansas Department of Revenue
title search report for the mobile home, making this case factually different from
But with the St. Clairs’ submission of Exhibit C -- a Title and Registration
Receipt on the mobile home, I must consider whether its content should change my
6 Adv. Dkt. 60, p. 9. See also Roberts v. Osburn, 3 Kan. App.2d 90, 94-589 P.2d 985 (1979),
rev. denied 225 Kan. 845 (discussing effect of 15-year contract for sale of real estate where
deed placed in escrow and legal title remained in the sellers).
7 Morris v. The CIT Group/Equip. Financing, Inc. (In re Charles), 323 F.3d 841 (10th Cir.
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prior conclusion.8 The St. Clairs do not attempt to authenticate the documents in
Exhibit C or explain their meaning. The exhibit contains one title and registration
receipt that indicates it is a “reissue title” dated January 22, 2004 upon which the St.
Clairs are identified as the owners and “BAHS Bank of America FSB” is the
lienholder. The document does not provide a registration expiration date but instead
notes: “DISPOSED VEHICLE.” Another title and registration receipt contained in
Exhibit C is a duplicate title dated March 22, 2002 again showing the St. Clairs as
owners and “BAHS Bank of America FSB” as lienholder. Exhibit C also contains what
appear to be inquiry or search reports from the KDOR on the mobile home. These
reports reflect different title numbers and issuance dates. All refer to the St. Clairs
as owners but not all refer to “BAHS Bank of America FSB” as the lien holder. None
of these documents comprising Exhibit C necessarily show that GreenPoint or BAHS
Bank of America FSB was the lienholder as of the date of the Kolariks’ bankruptcy
filing, July 31, 2013.9 Indeed one of the KDOR search reports dated January 10, 2014
shows no lien on the mobile home.10 And the trustee’s search report on the mobile
home appears to show no lienholder as of September 3, 2013.11 In short, whether
Bank of America’s lien was perfected by notation on the mobile home’s title as of the
date of the bankruptcy remains a factual dispute that cannot be resolved by summary
8 Adv. Dkt. 54-3.
9 The Contract of Sale and Purchase between the St. Clairs and the Kolariks was entered
into on July 20, 2004.
10 Adv. Dkt. 54-3, p. 3.
11 Adv. Dkt. 60-1 (Ex. 1).
Case 13-05196 Doc# 77 Filed 07/07/14 Page 6 of 7
Finally, the St. Clairs argue that if their sale to the Kolariks is secured, their
lien is also perfected by applying the In re Charles substantial compliance doctrine.
But the trustee in this avoidance action is not seeking to avoid a lien on the mobile
home held by the St. Clairs to secure the Kolariks’ purchase. As between the St.
Clairs and the Kolariks, that sale and purchase is an unsecured transaction. There
is no factual dispute that the St. Clairs hold legal title to the mobile home. The mobile
home, however, is subject to the purported lien of GreenPoint (or Bank of America)
granted by the St. Clairs. The trustee is seeking to avoid the alleged unperfected lien
of GreenPoint (or Bank of America), the lien that secured the St. Clairs’ original
purchase of the mobile home from the dealer.
Because material facts remain in dispute regarding the existence of a lien on
the mobile home and its perfection as of the date of the Kolariks’ bankruptcy filing,
the St. Clairs’ motion must be DENIED.
# # #
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