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Nazar v. Garcia, 14-05039 (Bankr. D. Kan. Mar. 16, 2015) Doc. # 39
SIGNED this 16th day of March, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
PAUL A. GARCIA,
) Case No. 12-10393
) Chapter 7
EDWARD J. NAZAR, Trustee )
) Adv. No. 14-5039
WILLIAM B. GARCIA Successor )
Trustee of the Revocable Inter Vivos )
Trustee of Lenora Garcia, u/a/d )
November 18, 2008 )
ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
Case 14-05039 Doc# 39 Filed 03/16/15 Page 1 of 3
Defendant William Garcia, Trustee of the Lenore Garcia Revocable Inter Vivos
Trust, moves for summary judgment on bankruptcy trustee Steven Speth’s complaint
to avoid and recover a preference.1 Speth filed that complaint on February 26, 2014
in his capacity as Paul A. Garcia’s bankruptcy trustee.2
The facts underlying his complaint are virtually identical to those supporting
bankruptcy trustee J. Michael Morris’s adversary complaint for similar relief in
Paul’s brother’s case (Alex Garcia).3 In this proceeding, Speth’s avoidance complaint
initially alleged some elements of both a fraudulent transfer under § 548 and a
preference under § 547. Early on, William moved to dismiss the complaint for failure
to state a claim under Fed. R. Civ. P. 12(b)(6).4 On June 16, 2014, the Court granted
William’s motion with respect to the fraudulent transfer claim, leaving only the
preference claim for trial.5
Then, on November 6, 2014 and after completion of discovery, William filed
this summary judgment motion and an identical motion in the Morris adversary in
1 Adv. Dkt. 22. Defendant William Garcia, as Trustee of the Revocable Intervivos Trust of
Lenore Garcia, appears by his attorney Elizabeth Carson. The bankruptcy trustee, now the
successor bankruptcy trustee, Edward J. Nazar, appears by special counsel Timothy J. King.
2 On December 3, 2014, subsequent to the commencement of this adversary proceeding, Spethresigned as Paul Garcia’s bankruptcy trustee and Edward J. Nazar was appointed assuccessor trustee. Mr. Nazar should be substituted as the plaintiff in this adversary
proceeding and the Court has amended the case caption accordingly. But for ease of reference,
the Court may continue to refer to Speth as the bankruptcy trustee. On February 26, 2015
Nazar’s application to employ Timothy J. King as special counsel for the bankruptcy trustee
in this adversary was approved. Dkt. 260.
3 J. Michael Morris v. Lenore Garcia Intervivos Trust, et al (In re Alex Garcia), Adv. No. 14-5042; Case
No. 12-10394 (Bankr. D. Kan.).
4 Adv. Dkt. 8.
5 Adv. Dkt. 14.
Case 14-05039 Doc# 39 Filed 03/16/15 Page 2 of 3
Alex’s case.6 The bankruptcy trustee here adopts trustee Morris’s response brief in
Alex’s case as his own.7 William argues that because the Lenore Garcia Trust is not
an insider, the bankruptcy trustees may not avoid and recover preferential payments
made more than 90 days but within one year of Alex’s and Paul’s bankruptcy filings
as 11 U.S.C. § 547(b)(4)(B) allows.
In a reasoned order I entered on March 11, 2015 in the Morris adversary in
Alex’s case, I concluded that while the Trust itself may not be a statutory insider
under § 101(31)(A), the transfer alleged was made to it for the benefit of the Trust
beneficiaries, all of whom are relatives of Alex (and of Paul).8 Because relatives are
statutory insiders, I denied William’s (the Trust’s) summary judgment motion. For
the same reasons set out in that Order, I DENY it in this one as well.
This adversary proceeding is presently hard set and shall proceed to trial on
the bankruptcy trustee’s complaint on March 18, 2015 at 9:00 a.m.
# # #
6 Adv. Dkt. 22, 23. Cf. Adv. No. 14-5042, Dkt. 32, 33 (William’s motion and supporting
memorandum of law).
7 Adv. Dkt. 28; See Adv. No. 14-5042, Dkt. 39 (Morris’s response brief).
8 Adv. No. 14-5042, Dkt. 56, Order on Defendant Lenore Garcia Inter Vivos Trust’s Motion
for Summary Judgment. See also 11 U.S.C. § 547(b)(1) (the bankruptcy trustee may avoid
transfers “to or for the benefit of a creditor”).
Case 14-05039 Doc# 39 Filed 03/16/15 Page 3 of 3
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Morris v. Lenore Garcia Inter Vivos Trust et al, 14-05042 (Bankr. D. Kan. Mar. 12, 2015) Doc. # 56
SIGNED this 11th day of March, 2015.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
ALEX J. GARCIA,
) Case No. 12-10394
) Chapter 7
J. MICHAEL MORRIS, Trustee,
vs. ) Adv. No. 14-5042
LENORE GARCIA INTER VIVOS )
TRUST, by William B. Garcia Successor )
Trustee; the lineal blood descendants )
JEFFREY D. GARCIA, )
(Shane D. Massell, Matthew Garcia, )
a/k/a Matthew Garcia Fry, Derek A. )
Duncan); WILLIAM B. GARCIA; )
the lineal blood descendants of )
JONATHAN GARCIA, (Nathan A. )
Garcia, Jonathan Scott Garcia, Jesse )
Douglas Garcia, Rachel Lynne Garcia, )
Case 14-05042 Doc# 56 Filed 03/11/15 Page 1 of 8
Kaleb Garcia a/k/a Kalieb Stone )
Garcia); and the lineal blood )
descendants of VICTOR M. GARCIA, )
(Victor M. Garcia, II, Melissa Garcia, )
And Elizabeth Garcia), )
ORDER ON DEFENDANT LENORE GARCIA INTER VIVOS
TRUST’S MOTION FOR SUMMARY JUDGMENT
Whether someone or some entity is an “insider” of the debtor is a core concept
in the Bankruptcy Code because transactions between debtors and their insiders are
more closely scrutinized than those between debtors and strangers. The Code
recognizes and embraces the idea, familiar in non-bankruptcy law, that a debtor’s
dealing with persons of affinity may not necessarily be at arm’s length or in good
faith. Thus, while the trustee can only avoid preferential transfers made within 90
days of the petition date to or for the benefit of non-insiders, insider transfers made
within one year are vulnerable.1
Alex Garcia is one of Lenore Garcia’s sons. Before she died in 2008, Ms. Garcia
executed a living trust that settled upon two of her sons all of her assets and provided
for the administration and distribution of those assets to all of her sons or, if any of
them predeceased her, their children. Among these assets was a limited liability
company, Lenore’s La Casita, L.L.C. The L.L.C. operated a restaurant in Salina.
Under the terms of the Trust, Alex and his brother Paul Garcia had an option to buy
the restaurant business from the Trust by making a series of annual payments to the
1 11 U.S.C. § 547(b)(4)(B).
Case 14-05042 Doc# 56 Filed 03/11/15 Page 2 of 8
Trust for the benefit of certain Trust beneficiaries. When they defaulted on the option,
the Trust sued and obtained a partial judgment against Alex and Paul for the first
two past-due payments. Alex and Paul paid $35,000 on the judgment seven days after
its entry and within a year of Alex’s chapter 13 filing. Now Alex’s bankruptcy trustee
seeks to avoid and recover that payment as a preference and the Trust moves for
summary judgment, claiming that because trusts are not enumerated as one of the
named classes of insiders in 11 U.S.C. § 101(31), the bankruptcy trustee cannot avail
himself of the expanded look back period.2 This argument ignores the reality that the
Trust was established to distribute the dying Lenore’s assets to her sons and their
children and that the payment was made for the sons’ and their children’s benefit.
Because all of the Trust beneficiaries are Alex’s relatives, they are statutory insiders
under 11 U.S.C. §§ 101(31) and (45). The motion for summary judgment must
therefore be denied.3
Summary Judgment Standards
William Garcia, in his capacity as successor trustee of the Trust, moves for
summary judgment under Fed. R. Civ. P. 56, as made applicable in adversary
proceedings by Fed. R. Bankr. P. 7056. He argues that the Trust, the recipient of the
debtor’s transfer, is not an insider. Many of the material facts relate to the terms of
the written Trust instrument and are beyond dispute. The bankruptcy trustee agrees
2 Adv. Dkt. 32, 33.
3 The Court has subject matter jurisdiction over this preference action as a core proceeding.
See 28 U.S.C. § 157(b)(1) and (b)(2)(F) and § 1334. J. Michael Morris, the chapter 7
bankruptcy trustee appears on his own behalf. The Lenore Garcia Intervivos Trust, by its
trustee William B. Garcia, appears by attorney Elizabeth Carson.
Case 14-05042 Doc# 56 Filed 03/11/15 Page 3 of 8
that there are no facts in dispute and relies solely on the Trust’s beneficiaries’
statutory insider status. Summary judgment is proper where there is no genuine
dispute as to any material fact and the moving party is entitled to judgment as a
matter of law.4 A preference case based upon a statutory insider is particularly suited
for disposition by summary judgment because the issue revolves around the legal
conclusion drawn from the undisputed facts against the backdrop of a definitional
statute that enumerates certain positions or relationships as insiders and does not
depend on actual control.5 At the summary judgment stage then, the Court is tasked
with determining whether or not the uncontroverted facts establish as a matter of
law that the Trust beneficiaries occupy the requisite relationship to the debtor to
qualify as a statutory insider under § 101(31)(A).6
Lenore Garcia’s six sons are Paul, William, Victor, Jeffrey, Jonathan and Alex
Garcia. On November 18, 2008, Lenore settled a living trust on herself and Paul and
Alex as co-trustees for the benefit of all six of her sons and one grandson, Matthew
Garcia Frye, along with her other unnamed grandchildren.7 Among the Trust’s assets
was the limited liability company that held her restaurant, Lenore’s La Casita.
4 Fed. R. Civ. P. 56(a).
5 See In re Parks, 503 B.R. 820, 830-31 (Bankr. W.D. Wash. 2013). Cf. In re Kunz, 489 F.3d
1072, 1079 (10th Cir. 2007) (determination of non-statutory insider, as opposed to the Code’sper se insider classification, requires the weighing of evidence and cannot properly be madeon summary judgment).
6 See In the Matter of Wescorp, Inc., 148 B.R. 161, 162-63 (Bankr. D. Conn. 1992) (question to
be decided is whether the nondisputed facts establish that FNEC is an insider).
7 For ease of reference the Lenore Garcia Intervivos Trust shall be referred to as the Trust.
Unless otherwise specified, references to William Garcia shall be in his capacity as successortrustee of the Trust. William and the Trust may be used interchangeably in this Order as the
Case 14-05042 Doc# 56 Filed 03/11/15 Page 4 of 8
Under the Trust, Paul and Alex had the option to buy the restaurant within 90
days of Lenore’s death. She died on November 25, 2008 and they exercised that option
on February 23, 2009. Under the terms of the purchase option, Paul and Alex were to
pay $200,000 for the restaurant business in ten equal, interest-free annual
instalments, the first coming due on November 1, 2009. Those annual payments were
to be distributed to their other four brothers, equally, per stirpes.8 They tendered a
partial payment of $5,000 each to their two other brothers (William and Victor) on
November 1, 2009, but those payments were returned by William and Victor’s
attorneys in January of 2010. That August, Paul and Alex resigned as trustees and
William and Victor were appointed successor trustees. In October of 2010, Paul and
Alex’s counsel tendered the $5,000 payments again.
In November, the new trustees sued Paul and Alex individually in state court
to enforce the terms of the purchase option, sued them in their capacity as former
trustees of the Trust for breach of trust, and sued Lenore’s L.L.C. for an accounting.
Then Victor died, leaving William as the lone successor trustee. In July of 2011,
William was granted partial summary judgment in his trustee capacity on the breach
of contract claim against Paul and Alex for $30,000 plus pre- and post-judgment
interest, representing the two missed annual $20,000 payments less the two $5,000
payments mentioned above. On July 22, 2011, Paul and Alex paid the Trust $35,000
in satisfaction of the judgment. Thereafter, the Trust refunded them an overpayment
Trust is the named party defendant in this preference action and the motion for summaryjudgment is brought by William in his capacity as the successor trustee of the Trust.
8 See Trust, ¶ 7.1(f).
Case 14-05042 Doc# 56 Filed 03/11/15 Page 5 of 8
of $1,805. The remaining claims in the case never went to trial because, on February
28, 2012, one day before the scheduled trial in state court, Alex and Paul each filed
chapter 13 bankruptcy cases.
William alleges that the Trust is not an insider and that, because the July 22,
2011 payment occurred more than 90 days before Alex’s filing date, the bankruptcy
trustee cannot avoid that transfer as a preference. 11 U.S.C. § 547(b)(4)(B) extends
the look back period for preferences to one year when the recipient is an “insider.”
Thus, the question here is whether the Trust or its beneficiaries are insiders of the
debtor as a matter of law.
The Code defines a statutory insider in detail at 11 U.S.C. § 101(31). That
statue reads, in pertinent part—
(31) The term “insider” includes—
(A) if the debtor is an individual--(i) relative of the debtor or of a general
partner of the debtor; (ii) partnership in which the debtor is a general
partner; (iii) general partner of the debtor; or (iv) corporation of whichthe debtor is a director, officer, or person in control;9
William’s argument is entirely premised on the absence of the word “trust” from this
statutory definition. This observation is accurate, but superficial. Lenore settled her
Trust on two of her sons as trustees for the benefit of all of her sons and her
grandchildren. She conveyed the restaurant to the Trust and granted two of her sons
the option to purchase it after she died. Under paragraph 7.1(f) of the Trust, Alex and
Paul’s annual purchase payments were to be distributed equally to the other brothers
9 11 U.S.C. § 101(31).
Case 14-05042 Doc# 56 Filed 03/11/15 Page 6 of 8
Victor, Jeffrey, William and Jonathan or, if they were deceased, to their children.
When Paul and Alex failed to make full payments, Victor and William were appointed
as new trustees of the Trust and sued Paul and Alex to enforce the purchase option
on behalf of the Trust beneficiaries.
Section 547(b)(2) renders transfers made “to or for the benefit of a creditor”
avoidable.10 Looking past the form of the purchase option transaction to its substance,
the actual beneficiaries of the option payments under the Trust are statutory insiders
because they are “relatives” of the debtors, Alex and Paul.11 The Trust was created by
Lenore to hold and distribute her assets for the benefit of her heirs. As trustee,
William was its agent. He had fiduciary duties to those heirs (including himself).
Each brother who was named a beneficiary of the option payment, or his children (if
deceased), stands within three degrees of consanguinity or affinity of the debtors,
Alex and Paul. These individuals are not only blood relatives of Alex and Paul
(brothers or nieces and nephews), but they are “relatives” as that term is defined in
the Bankruptcy Code.12 The Trust’s beneficiaries, for whose benefit the purchase
option payments were made, are Alex’s brother William and the children of his three
10 The quoted phrase contemplates that either the initial transferee “or the transferbeneficiary,” or both, can be sued for avoidance under § 547(b)(1). In re Connolly North
America, LLC, 340 B.R. 829, 838 (Bankr. E.D. Mich. 2006).
11 The Court finds persuasive the bankruptcy trustee’s distinction of this case from the facts
of the Trust’s sole legal authority In re Anderson, 165 B.R. 482 (Bankr. D. Or. 1994) (mother’sprobate estate, which obtained a judgment lien against debtor son for sums debtor converted
from the estate, was not a statutory insider of debtor son). See Plaintiff’s Response to Motionfor Summary Judgment, Adv. Dkt. 39, pp. 4-5.
12 See 11 U.S.C. § 101(45) (a relative is defined as an “individual related by affinity or
consanguinity within the third degree as determined by the common law, or individual in astep or adoptive relationship within such third degree”).
Case 14-05042 Doc# 56 Filed 03/11/15 Page 7 of 8
deceased brothers (Jeffrey, Jonathan and Victor). They are all relatives of the debtors
and, therefore, statutory insiders.13
The Trust’s successor trustee recovered the $35,000 as part of his duties to the
beneficiaries of the restaurant purchase (including himself). Apart from the insider
issue, the Trust has pleaded no § 547(c) affirmative defenses to the bankruptcy
trustee’s claim and appears to rely entirely upon meeting and besting the statutory
presumption of the debtor’s insolvency under § 547(b)(3) and § 547(f). If the transfer
meets the other criteria of § 547(b), it is a transfer by Alex “to or for the benefit of”
his creditors, the Trust’s beneficiaries. As noted above, those individuals are his
“relatives,” extending the applicable look back period to one year before filing, a year
that easily embraces the date the payment was made.
Summary judgment is therefore DENIED. This adversary proceeding was
previously set for a pretrial scheduling conference on April 30, 2015 to allow the
plaintiff time to serve the parties he added after this motion was filed.14 I note that
each of these new parties has been served and is in default of answer. The April 30,
2015 setting will remain in force and the plaintiff should proceed to secure the entry
of default judgment against any non-answering defendants.
# # #
13 See In re Ruel, 457 B.R. 164 (Bankr. D. Mass. 2001) (debtor’s siblings who were
beneficiaries of family trust to which debtor gave a mortgage to secure debtor’s debt to family
trust, were statutory insiders).
14 Adv. Dkt. 53.
Case 14-05042 Doc# 56 Filed 03/11/15 Page 8 of 8
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Ledin v. Thompson et al, 14-05193 (Bankr. D. Kan. Feb. 10, 2015) Doc. # 52
SIGNED this 10th day of February, 2015.
DESIGNATED FOR ONLINE PUBLICATION BUT NOT PRINT PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
JONATHAN EDWARD LEDIN, ) Case No. 14-12347
) Chapter 7
JONATHAN EDWARD LEDIN, )
) Adv. No. 14-5193
COMMERCE BANK, AMY WHITE, )
FINANCECO OF KANSAS, INC., and )
RICHARD K. THOMPSON, )
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS
FOR FAILURE TO STATE A CLAIM (Dkt. 26 and 32)
Case 14-05193 Doc# 52 Filed 02/10/15 Page 1 of 17
The Bankruptcy Code contains two provisions that protect debtors from
collection activity during a case and shield certain exempt assets from administration
as part of the debtor’s bankruptcy estate. 11 U.S.C. § 362(a) stays collection activity
during a case and § 522(d)(10) exempts social security and other government
payments from the reach of the trustee. Neither takes effect unless and until a debtor
actually files a bankruptcy case, though, and, except in limited circumstances, neither
forms the basis for an independent cause of action. The same is true for the provisions
of the Code of Federal Regulations found at 31 C.F.R. §§ 212.6 and 212.7 that govern
how financial institutions respond to garnishments of accounts that may contain
social security or other government payments. Nor do “violations” of procedural
statutes and court rules -- KAN. STAT. ANN. § 60-211(a) and KAN. S. CT. RULE 170(d)
- create independent, substantive claims.
FinanceCo of Kansas took a deficiency judgment on a defaulted car loan owed
by debtor Jonathan Ledin sometime in 2008. In 2013, FinanceCo transcribed that
judgment on the Chapter 60 appearance docket of the Reno County District Court
and, in June of 2014, garnished Ledin’s savings accounts at Commerce Bank. Ledin
replied, claiming that the accounts contained funds traceable to social security
payments, but the Reno County court concluded that the funds were not exempt,
granting judgment and entering a pay order on the garnishment. In September of
2014, FinanceCo garnished Ledin’s checking account at Commerce. This time, Ledin
replied, additionally claiming that he was in the process of preparing a bankruptcy
filing. The state court allowed that garnishment as well, after conducting a hearing
Case 14-05193 Doc# 52 Filed 02/10/15 Page 2 of 17
on Ledin’s objection. Ledin then filed the present chapter 7 case here on October 14,
2014. He filed this adversary proceeding against judgment creditor FinanceCo, its
counsel Richard Thompson, garnishee Commerce Bank, and its Hutchinson branch
manager, Amy White, seeking over a million dollars in damages (the garnishments
netted $1,066) and demanding a jury trial. All four defendants move to dismiss the
complaint as failing to state a claim for relief under Rule 12(b)(6).1
Ledin’s claims for damages under §§ 362(a) and 522(d)(10) fail because he was
not a debtor in bankruptcy when either of the garnishments occurred and because
neither of those sections support a private right of action under the circumstances
that he alleges. His tort claims under the “CFRs” fail because those regulations also
do not supply a right of private action and because the facts alleged in the complaint
do not support a plausible claim for relief. KAN. STAT. ANN. § 60-211(a) and KAN. S.
CT. RULE 170(d) are state procedural rules that do not give rise to causes of action.
Finally, Ledin’s remedy in the state garnishment case was to timely appeal the Reno
County court’s orders after the garnishment hearings instead of seeking collateral
relief from those final orders in this Court in the form of a wrongful garnishment
lawsuit. The complaint should therefore be dismissed.2
Rule 12(b)(6) Standards
1 Fed. R. Civ. P. 12(b)(6), as made applicable to adversary proceedings by Fed. R. Bankr. P.
7012. See Adv. Dkt. 26 (Motion to Dismiss of defendants FinanceCo of Kansas, Inc. and
Richard Thompson); Adv. Dkt. 32 (Motion to Dismiss of defendants Commerce Bank and Amy
2 Plaintiff Jonathan Ledin appears pro se. Defendants Commerce Bank and Amy White
appear by their attorney Jack C. Marvin. Defendants FinanceCo of Kansas, Inc. and RichardThompson appear by their attorney Samantha M.H. Woods.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 3 of 17
In determining whether Ledin’s complaint states a claim upon which relief
may be granted, I assess whether these factual allegations give rise to a cause of
action against defendants for violation of the statutes and regulations alleged. The
question is whether the complaint contains facts sufficient to support these claims,
not whether Ledin will ultimately prevail on those claims.3 The plaintiff must allege
enough facts to support a claim that is plausible on its face.4 The plausibility standard
is less than a probability but more than a sheer possibility that Ledin is entitled to
the relief requested.5 For purposes of this motion, I take the facts pled in the
complaint as true.6
Ledin seeks cumulative damages in excess of $1.1 million dollars against the
defendants for violation of the exemption statute, 11 U.S.C. § 522(d)(10)(A) [Count I];
violation of certain federal banking regulations dealing with garnishment of accounts
containing direct deposit federal benefit payments, 31 C.F.R. §§ 212.6 and 212.7
[Counts II and III]; violation of the automatic stay, 11 U.S.C. § 362; violation of KAN.
STAT. ANN. § 60-211(a) (2013 Supp.) for failure to sign unspecified court documents;
3 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to dismiss
the judge must accept all allegations as true and may not dismiss on the basis that it appears
unlikely the allegations can be proven.).
4 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (enough facts must be alleged to
nudge the claim across the line from conceivable to plausible).
5 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
6 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In reviewing
the sufficiency of the complaint, the court assumes the truth of the plaintiff’s well-pleaded
factual allegations and views them in the light most favorable to the plaintiff.); Mobley v.
McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion tests the sufficiency of
the allegations within the four corners of the complaint after accepting as true all well-
pleaded factual allegations.).
Case 14-05193 Doc# 52 Filed 02/10/15 Page 4 of 17
and violation of KAN. S. CT. RULE 170(d)(2) for failure to make reasonable effort to
resolve Ledin’s objections to proposed orders submitted to the state court regarding
the garnishments.7 These claims arise from two prepetition state court garnishments
that attached a total of $1,066.15 in funds from Ledin’s savings and checking accounts
at Commerce Bank which he claimed were exempt social security disability benefits.
Ledin demands a jury trial on all claims – claims that he characterizes as actions in
Summary of Facts Pled in Complaint8
FinanceCo obtained a chapter 61 state court limited actions judgment in the
amount of $6,023 against Ledin sometime in 2008. FinanceCo transcribed its limited
actions judgment to Reno County District Court sometime in November 2013, thus
imposing a chapter 60 judgment lien on Ledin’s real property in the county where
recorded.9 Ledin does not dispute the validity of FinanceCo’s underlying judgment.
In early September 2013 Ledin opened a checking account and two savings
accounts at Commerce Bank. Initially, his monthly social security disability benefit
check of $1,323 was directly deposited in the checking account. He would then
withdraw $100 cash from the checking account each month and deposit $50 in each
7 Ledin asserts the exemption and “CFR” claims against all defendants. He asserts the stay
violation against FinanceCo and Thompson, and the remaining § 60-211(a) and Rule 170(d)
claims against Thompson only.
8 These facts are common to all of the claims alleged. None of the pleadings, orders, or
documents pertaining to the subject garnishments were attached to Ledin’s complaint.
9 See KAN. STAT. ANN. § 60-2418(a) and § 60-2202(b). Upon transcribing the limited actions
judgment (Case No. 09 LM 0731) to a code of civil procedure chapter 60 judgment (Case No.
14 CV 2) and recording it, execution to satisfy the judgment proceeds in the same fashion as
though it were an original chapter 60 judgment.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 5 of 17
savings account. Ledin characterizes the savings accounts as his “emergency fund”
and says he opened them because of Commerce Bank’s Rewards program.
On June 12, 2014, FinanceCo garnished Ledin’s savings accounts at Commerce
and attached $688.05. This garnishment depleted both savings accounts. Ledin
asserted that the funds were exempt as his social security disability benefit. Ms.
White told Ledin that his disability benefit was not protected from garnishment once
he transferred the funds out of his checking account to his savings account. It is
unclear from the face of the complaint whether Ledin requested a court hearing to
assert his claim of exemption or otherwise filed a reply contesting the garnishee’s
answer as provided by Kansas garnishment procedures.10 In any event, the state
court apparently rejected Ledin’s claim of exemption of the garnished funds leading
to this complaint.11
In July or August of 2014 Ledin changed the direct deposit method for his social
security disability benefit. Instead of the funds being directly deposited to his bank
account, the monthly benefit was now transferred to a stored value card called a
Direct Express® Debit Card – apparently available to certain federal benefit program
recipients. Ledin would take a cash advance from the Debit Card and deposit it in his
checking account to supplement his “emergency fund.”
On or about September 9, 2014, FinanceCo garnished Ledin’s checking account
10 See KAN. STAT. ANN. §§ 60-735(b) and 60-738.
11 In other pleadings that Ledin filed in this adversary proceeding, he attached some of the
documents pertaining to the June 2014 garnishment, including a copy of the state court’s
Order to Pay Money to Judgment Creditor entered August 14, 2014. See Adv. Dkt. 42-1, p.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 6 of 17
and attached $378.10, causing the account to be overdrawn. On or about September
12, 2014, Ledin “contested” this garnishment by submitting an affidavit claiming the
funds protected as social security disability income and stating that he “intends to
file for Chapter 7 Bankruptcy . . . .” The affidavit was not attached to Ledin’s
adversary complaint, but was attached to his “response” to the Motion to Dismiss.12
Reno County District Court Judge Chambers conducted a hearing on the second
garnishment on September 29, 2014. Nothing in the pleadings tells me what
happened at that hearing.
After Commerce closed Ledin’s bank accounts on October 10, 2014, he filed his
bankruptcy petition on October 14, 2014 and commenced this adversary proceeding
on November 17, 2014.
1. The Exemption Claim under § 522(d)(10)(A)
Ledin alleges that the defendants “violated” § 522(d)(10)(A), the Bankruptcy
Code provision that allows bankruptcy debtors to claim exempt the right to receive a
“social security benefit.” Section 522(d) lists the so-called federal exemptions in
bankruptcy. Because Kansas has opted out of the federal exemption scheme Kansas
bankruptcy debtors must generally use the state law exemptions, but KAN. STAT.
ANN. § 60-2312(b), expressly authorizes an “individual debtor under the federal
bankruptcy reform act” to claim the § 522(d)(10)(A) federal exemption in addition to
12 See Adv. Dkt. 31, pp. 15-16.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 7 of 17
the state law exemptions.13 In order to claim the §60-2312(b)/§522(d)(10) exemption,
the claimant must be a debtor in bankruptcy.
When he contested the state court garnishment proceedings, Ledin claimed
that his Social Security disability benefit was exempt. A person’s future right to the
payment of Social Security benefits is generally exempt from execution under 42
U.S.C. § 407(a). Ledin has not alleged that any of the defendants sought to garnish
his benefits in the hands of the Government or that they sought to execute on his
future right to claim them. The state court, not the defendants, determined that the
garnished funds—cash that he withdrew from his checking account and deposited
into his savings account—were not in any way exempt. Section 522(d)(10) did not
apply to Ledin when this determination was made because he was not yet in
bankruptcy. Even if there were a private right of action under § 522(d)(10)(A), the
state court garnishment proceedings occurred before Ledin filed his bankruptcy case,
rendering § 522 of the Bankruptcy Code inapplicable to those proceedings. Finally,
as the defendants note, there is no private cause of action in tort for damages in § 522
when a court disallows an exemption claim – inside or outside of a bankruptcy case.14
Ledin’s damage claim for “violating” this exemption statute fails to state a claim upon
which relief may be granted.
2. Violation of Federal Regulations, 31 C.F.R. §§ 212.6 and 212.7
Ledin also seeks damages for defendants’ withholding or freezing funds as the
13 KAN. STAT. ANN. § 60-2312(a) (2005).
14 See Adv. Dkt. 33, p. 5. Adv. Dkt. 27, pp. 5-6.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 8 of 17
state court garnishment order directed. Part 212 of Title 31 of the Code of Federal
Regulations, adopted in 2011, deals with garnishment of accounts containing federal
benefit payments. Its purpose is to protect federal benefits from garnishment by
establishing procedures for financial institutions when served with a garnishment
order against an account holder “into whose account a [protected] Federal benefit
payment has been directly deposited.”15 It applies to financial institutions as defined
in § 212.3, not their individual officers or employees. That alone protects defendant
White from liability here.16 The regulations require that a financial institution, as
garnishee, conduct an account review and follow certain procedures when served with
a garnishment order.17 Section 212.3 defines a “[f]inancial institution” as “a bank,
savings association, credit union, or other entity chartered under
Federal or State law to engage in the business of banking.” Ledin does not allege that
defendants FinanceCo or Thompson are financial institutions within the meaning of
§ 212.3. As with his claims against defendant White, this kills Ledin’s alleged claim
against FinanceCo and Thompson for violating the garnishment regulations.
Thompson is an individual engaged in the practice of law, not a financial institution
or other entity engaged in banking. There is no allegation that FinanceCo is an entity
chartered to engage in the business of banking. Because the judgment creditor and
its attorney are not financial institutions and were not served with an order of
garnishment, they are not subject to these regulations, are not obligated to conduct
15 31 C.F.R. § 212.1 (2011). Emphasis added.
16 31 C.F.R. § 212.2.
17 31 C.F.R. § 212.2, § 212.3 (defining an “account review”); § 212.5.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 9 of 17
an “account review,” and are not obligated to adhere to the procedures enumerated
in Part 212. The regulations govern a financial institution who is served with an order
of garnishment on its depositor’s accounts and as garnishee must evaluate whether
the garnishment seeks to attach protected federal benefit payments. Ledin’s
complaint fails to state a claim for damages against White, FinanceCo, and Thompson
for violation of 31 C.F.R. §§ 212.6 and 212.7.18
Commerce is a financial institution under the regulations. A “benefit payment”
is specifically defined as one that is paid electronically by direct deposit to the account
and contains certain encoded characters in the record of the direct deposit entry.19 In
general, when a financial institution receives a garnishment order, it must review
the transactions over the preceding 2 months in any account held by the judgment
debtor to determine whether a benefit payment was deposited into the account by a
benefit agency in that time and determine what the “protected amount” of the account
is. That “protected amount” as determined by the financial institution is “conclusively
considered to be exempt from garnishment under law.”20 If a benefit payment was
electronically deposited, a protected amount established, and funds exist in excess of
the protected amount, the financial institution is required to send notice to the
account holder.21 If there was no benefit payment deposited during the look back
period, the financial institution is not required to give notice. While § 212.10 of the
18 31 C.F.R. § 212.2.
19 31 C.F.R. § 212.3.
20 See §§ 212.3, 212.5, 212.6.
21 Section 212.7.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 10 of 17
regulations provide a safe harbor against both the judgment creditor and the account
holder to financial institutions that act in good faith, Part 212 does not create or
expressly authorize a private cause of action by an account holder against the
financial institution. Even if they did, Ledin’s complaint fails to state a claim against
On its face, Ledin’s complaint does not state a claim for relief with respect to
the first garnishment. The garnishment order applied to Ledin’s savings accounts –
accounts that Ledin says contained funds from cash deposits, not electronic direct
deposits. He alleges that he took cash withdrawals from his checking account and
deposited them into his savings accounts.22 He does not allege that any direct deposits
of social security payments were made electronically to his savings accounts by a
benefit agency. Thus, the savings account did not contain a “benefit payment” as
defined in § 212.3 and the federal regulations do not apply.
Nor were the funds caught by the second garnishment protected. Ledin says
he took a cash advance from his Direct Express Debit Card that he then deposited in
his checking account. He does not allege that the second garnishment attached a
“benefit payment” made by a “benefit agency.” This part of Ledin’s complaint fails to
state a claim for relief against Commerce.23 Because no benefit payments as defined
in § 212.3 were deposited by a benefit agency, Commerce was not obligated to comply
22 Only electronic deposits made by a “benefit agency” are protected from garnishment. See §
212.3 and § 212.5(b) and (c).
23 See § 212.3 which defines a “benefit agency” as the Social Security Administration and
requires the “benefit payment” to be paid by direct deposit electronically into the account
Case 14-05193 Doc# 52 Filed 02/10/15 Page 11 of 17
with the procedures in the regulations nor provide the notice referenced in § 212.6(e)
and § 212.7 to Ledin.24 The “CFR” claim against Commerce must be dismissed for
failure to state a claim.
3. Alleged Stay Violation, 11 U.S.C. § 362
Ledin alleges that FinanceCo and Thompson violated the automatic stay by
requesting garnishment orders in June and September of 2014. Specifically, he
alleges in the complaint that FinanceCo:
. . . did intentionally and illegally obtain a Court Order to garnish
Plaintiff’s savings and checking account for a total of $1,066.15 with
the intention, knowledge and purpose of harming Plaintiff by
attempting to collect, assess, or recover on a claim for a debt; a
deficiency judgment that increased to the amount of $15,551.47,
from a court hearing held . . . on September 29, 2014 in violation of
11 U.S.C. § 361(a)(1), (2), and (6), of the automatic stay. . . .
FinanceCo . . . had knowledge that Plaintiff was preparing to file for
bankruptcy Chapter 7 protection through said Affidavit mentioned
in paragraph 22. Defendant FinanceCo . . . is therefore liable in tort
to Plaintiff for violation of: (1) 11 U.S.C. § 362(a)(1), (2), and (6), of
the automatic stay . . .25
The referenced paragraph 22 provides:
Plaintiff submitted an Affidavit signed September 12, 2014 to the
trial court, in Ref: Case No. 14 CV 2 that he was filing for
bankruptcy Chapter 7. Defendant FinanceCo . . . continued to
conduct the hearing held on September 29, 2014 in Division II, the
Honorable Judge Timothy Chambers presiding.26
Like allegations are made against defendant Thompson, including that Thompson
24 See 31 C.F.R. § 212.5(b) (where no benefit payment is deposited during the look back
period, the financial institution is not required to follow the procedures in § 212.6); § 212.6
(the provisions of § 212.6 apply only if an account review shows that “a benefit agency
deposited a benefit payment into an account during the look back period.”).
25 Adv. Dkt. 1, ¶ 26.
26 Id. at ¶ 22.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 12 of 17
knew “Plaintiff was preparing to file for bankruptcy . . . .”27 Ledin did not file his
chapter 7 case here until October and this alone is fatal to his stay violation claim.
The sum of the stay violations alleged against FinanceCo and Thompson are
that (1) they obtained garnishment orders which were issued and served on
approximately June 12, 2014 and September 9, 2014;28 and (2) that they continued
forward with a hearing on September 29, 2014 despite knowing that Ledin was
preparing to file bankruptcy. These allegations do not state a claim for relief because
the automatic stay was not in effect at any point during this timeframe.
The automatic stay is triggered by the filing of a bankruptcy petition.29 Section
362(a) provides that: “. . . a petition filed under section 301, 302, or 303 of this title .
. . operates as a stay, applicable to all entities . . .” Intent to file bankruptcy in the
future does not trigger the automatic stay.30 Ledin did not file his bankruptcy petition
until October 14, 2014. Thus, no stay was in effect during the complained-of conduct
that can possibly give rise to a violation of the automatic stay. Ledin’s affidavit
submitted on September 12, 2014 in response to the second garnishment and to
apparently halt the September 29 hearing did not cause the stay to go into effect.
Because Ledin has not alleged the commencement or continuation of any
garnishment activity or proceedings by FinanceCo or Thompson after October 14,
2014, he has failed to state a claim for violation of the automatic stay under 11 U.S.C.
27 Id. at ¶ 40
28 Id. at ¶s 20-21.
29 In re Calder, 907 F.2d 953, 956 (10th Cir. 1990).
30 In re Nelson, 335 B.R. 740, 749 (Bankr. D. Kan. 2004). See also In re Bush, 169 B.R. 34
(W.D. Va. 1994).
Case 14-05193 Doc# 52 Filed 02/10/15 Page 13 of 17
4. Failing to Sign Orders and Court Documents, KAN. STAT. ANN. § 60-211(a)
Ledin vaguely alleges that Thompson is liable in tort for “fail[ing] to sign court
documents related to the Court Order of garnishment” with the intention of harming
him in violation of § 60-211.31 As a consequence, he asserts that all “Orders,
Judgments and Garnishment Orders” signed by the state court trial judge since 2009
are null and void.32 He also alleges that Thompson failed on three occasions to sign
proposed Orders submitted to the state trial court under Kansas Supreme Court Rule
170(d)(2), rendering him liable for violation of § 60-211.33 These allegations are the
sum total of Ledin’s attempt to state a cause of action under § 60-211.
Section 60-211(a) (2013 Supp.) of the Kansas Code of Civil Procedure provides:
(a) Signature. Every pleading, written motion, and other paper must
be signed by at least one attorney of record in the attorney’s name,
or by a party personally if the party is unrepresented. The paper
must state the signer’s address, e-mail address, telephone numberand fax number. Unless a rule or statute specifically states
otherwise, a pleading need not be verified or accompanied by anaffidavit or a declaration pursuant to K.S.A. 53-601, andamendments thereto. The court must strike an unsigned paperunless the omission is promptly corrected after being called to the
attorney’s or party’s attention.
Ledin makes no effort to identify the specific pleadings, motions, or papers that
Thompson failed to sign. His complaint is that Thompson did not sign Orders,
Judgments, and Garnishment Orders, all of which were entered by judges and which
31 Adv. Dkt. 1, ¶s 41-44
32 Id. at ¶ 44.
33 Id. at ¶ 46.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 14 of 17
attorneys are not necessarily required to sign. Section 60-211(a) does not support a
private cause of action in tort. This is a procedural, not substantive provision.34 The
more commonly invoked provisions (not pled by Ledin here), § 60-211(b) and (c),
supply a basis for courts to sanction lawyers and parties who file frivolous or false
pleadings. Ledin’s allegation of noncompliance with subsection (a) that merely
parrots the language of the statute is not sufficient to show that there are facts that
support a plausible claim for relief.35 Nothing alleged here shows that Ledin is
entitled to relief. The alleged violation of § 60-211(a) does not state a claim for relief
against Thompson and must be dismissed.
5. Failing to Comply with KAN. S. CT. RULE 170(d)(2)
Ledin claims that Thompson failed to comply with KAN. S. CT. RULE 170(d)(2),
a procedural rule governing proceedings in Kansas district courts (state trial courts)
titled “Preparation of Order” and that he should be answerable in damages. Rule 170
specifies the procedure for memorializing a court’s order when a state trial court
directs that it be prepared by a party. If the opposing party objects to the order, the
parties are to attempt to resolve the dispute before submitting the order to the court
to settle. Ledin says that on three occasions, Thompson failed to make a reasonable
effort to resolve Ledin’s objections to proposed orders submitted to the state trial
34 See Christenson Media Group, Inc. v. Lang Industries, Inc., 782 F. Supp. 2d 1213, 1221 (D.
Kan. 2011) (an unsigned pleading is a technical defect that does not affect the substantial
rights of the adverse party under § 60-211).
35 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007) (Plaintiff
must plead the grounds of his entitlement to relief with more than labels and conclusions or formulaic
recitation of the elements of a cause of action).
Case 14-05193 Doc# 52 Filed 02/10/15 Page 15 of 17
court.36 He does not allege any facts concerning the efforts attempted or the nature
of the objections. He does not even identify the proposed orders.
Rule 170(d)(2) and (3) provide:
(d)(2) If there is an objection, the parties must make a reasonable
effort to confer to resolve the objection and, if agreement is reached,
the drafter must submit the agreed journal entry to the court for
approval. A “reasonable effort to confer” requires more than sending
a communication to the opposing party. It requires that the parties
in good faith converse, compare views, and deliberate, or in good
faith attempt to do so.
(d)(3) If – after reasonable effort to confer – the parties have not
agreed on the terms of the order, the drafter must submit the
original draft and the objection to the court and the court mustsettle the order, with or without a hearing.
This purported claim against Thompson fails for the same reasons as Ledin’s claim
under § 60-211(a). No right to tort damages arises from the parties’ inability to resolve
an objection to a proposed order or a party’s noncompliance with the procedure for
drafting and submitting orders to the state trial court. Ledin’s allegation, pled solely
in paragraph 45 of the complaint, fails to state a claim for relief and must be
6. Lack of Subject Matter Jurisdiction
Ledin’s complaint is really no more than a collateral attack on a state court’s
final order. Ledin should have (and apparently did) raise his exemption claim in reply
to both FinanceCo garnishments as KAN. STAT. ANN. §§ 60-735(b) and 60-738(a) (2013
Supp.) allow.37 When the judgment debtor replies, objecting to the requested
36 Adv. Dkt. 1, ¶ 45.
37 See Adv. Dkt. 31, pp. 15-16 (Affidavit submitted in reply to September garnishment).
Case 14-05193 Doc# 52 Filed 02/10/15 Page 16 of 17
garnishment, the state court holds a hearing at which the objecting party bears the
burden of proving a claimed exemption and the facts alleged in his objection.38 Ledin
did that and lost; his remedy was to appeal that final order to the Kansas Court of
Appeals.39 When he didn’t, the garnishment order and order to pay became final.
This Court must give those orders full faith and credit. Even if an independent action
were proper under the circumstances, a wrongful garnishment action based upon a
prepetition garnishment proceeding would properly lie within the jurisdiction of the
state court, not the bankruptcy court, particularly where the garnished funds are
claimed exempt and not property of the bankruptcy estate. Moreover, such a cause of
action would be property of Ledin’s bankruptcy estate and the only proper party
plaintiff would be, in the first instance, the chapter 7 trustee. This Court is simply
without jurisdiction to grant the relief Ledin seeks.
For all of the foregoing reasons, Ledin’s complaint fails to state a claim for
relief against defendants Commerce Bank, Amy White, FinanceCo of Kansas, Inc.,
and Richard Thompson. The defendants’ motions are granted; the complaint is
dismissed. A judgment on decision shall issue this day.
# # #
38 See KAN. STAT. ANN. § 60-735(c) and § 60-738(b).
39 See e.g., LSF Franchise REO I v. Emporia Restaurants, Inc., 283 Kan. 13, 152 P.3d 34
(2007) (after judgment debtor successfully quashed garnishment of bank accounts, judgment
Case 14-05193 Doc# 52 Filed 02/10/15 Page 17 of 17
- Category: Judge Nugent
- Published on 20 March 2015
- Written by Judge Nugent
- Hits: 89
In Re Stewart, 13-13038 (Bankr. D. Kan. Mar. 6, 2015) Doc. # 81
SIGNED this 6th day of March, 2015.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
DOUGLASS RYAN STEWART,
SHAWNEA MARIE STEWART,
Case No. 13-13038
ORDER ON MOTION FOR TURNOVER OF INCOME TAX REFUND
The State of Kansas has determined that the earned income tax credit
(EIC) portion of a bankrupt debtor’s federal and state income tax for one year
is exempt, except for collection of child support. Bankruptcy trustees may not
recover that part of a debtor’s prepetition federal or state income tax refund
for the benefit of the estate. Here, the debtors made a general assignment of a
portion of their refunds to their attorney to cover his fees and the filing fee in
this case. They argue that these fees should be collected solely from the non
Case 13-13038 Doc# 81 Filed 03/06/15 Page 1 of 9
exempt portion of the refunds; the trustee says that the EIC portion may bear
part of that burden as well. Because the debtors’ assignment didn’t
discriminate between the exempt and non-exempt portions, and because
nothing in Kansas or federal law precludes a debtor from encumbering
otherwise exempt property, the assignment, after being allocated between the
state and federal refunds, may be deducted from the whole tax refund (net of
the child support setoff), not just the nonexempt portion.1
Debtors Douglass and Shawnea Stewart filed their chapter 7
bankruptcy case on November 26, 2013. Shortly before filing, debtors granted
an assignment of their 2013 federal and state income tax refunds to their
bankruptcy attorney Martin Peck for his attorney fees in the amount of $1,175
and their filing fee in the amount of $306.3 They also assigned their refunds to
two former spouses of Mr. Stewart to pay back child support obligations that
accrued during 2013. The assignment made no distinction between the EIC
portion and non-EIC portion of their refunds.
1 Debtors appear by their attorney Martin J. Peck. The chapter 7 trustee J.
Michael Morris appears on his own behalf.
2 The parties submit this matter to the Court on stipulations and briefs. See
Dkt. 61 and 64 (Stipulations and supporting Exhibits A-F).
3 The assignment in this case assigns the 2013 tax refunds and does not restrict
the assignment to the pre-petition portion of their refunds.
Cf. In re Hunter, No. 09-12270, 2011 WL 1749933 (Bankr. D. Kan. May 5,
Case 13-13038 Doc# 81 Filed 03/06/15 Page 2 of 9
The debtors’ 2013 tax returns reflect a federal refund of $7,932 of which
$6,044 is an earned income tax credit and a state refund of $1,063 of which
$1,027 is an earned income tax credit. The Kansas Department of Children and
Families (KDCF) setoff these refunds to collect Mr. Stewart’s child support
arrearage. It setoff $1,119 from the federal refund (but refunded $1,084.25
back to debtors) and setoff $884.73 from the state refund. Debtors received the
balance of their refunds in February of 2014 – a total of $8,075.52 comprised
of a net federal refund of $7,897.25 and a net state refund of $178.27. From
these refunds, debtors paid $1,481 to Mr. Peck for his attorney fees and the
bankruptcy filing fee pursuant to the assignment.
In May of 2014 the trustee filed the subject motion for turnover of the
2013 tax refunds.4 He sought the estate’s share (330/365ths = .9041095) of the
net refunds after application of the EICs and attorney fees assignment, and
the KDCF set off, or $1,354.77. The trustee asserts that the EIC portion of the
refunds must share ratably with the non-EIC portion with regard to the
amount of the attorney fees assignment. The trustee also sought turnover of
the $200 sanction previously ordered against debtors for failing to timely
provide their tax returns to the trustee.5
4 Dkt 49 and 55.
5 The trustee abandoned his request for turnover of non-exempt wages. See
Dkt. 61, ¶ 8.
Case 13-13038 Doc# 81 Filed 03/06/15 Page 3 of 9
This case presents a slight variation on an otherwise common theme:
reconciling a trustee’s turnover rights with a debtor’s lawyer’s tax refund
assignment for fees. The variation results from these debtors’ refunds having
been set off by the Kansas Department of Children and Families to pay child
support arrearage claims against Douglas Stewart and the fact that these
debtors’ earned income credit accounts for such a large portion of their refunds.
The setoff issues have been resolved by agreement between the trustee and the
debtors, so the remaining question is whether the debtors’ general assignment
of their refund for attorney fees includes the EIC portion of the refund or
whether the fees should be withheld solely from the non-exempt, non-EIC
portion. Doing the latter burdens the estate while doing the former burdens
the debtors’ KAN. STAT. ANN. § 60-2315 EIC exemption.
Kansas exempts the federal and state EIC portion of a bankruptcy
debtor’s tax refunds for one tax year.6 Typically, debtors exempt that part of
their state and federal refunds for the year preceding the one in which they
file. The exemption statute also says that nothing in § 60-2315 should be read
to limit the state or federal government’s rights to offset or attach the EIC
portion for payment of support or maintenance. Accordingly, in this case,
KDCF’s intercept of the debtors’ 2013 refund does not impair the debtors’
exemption and doesn’t factor into today’s decision.
6 KAN. STAT. ANN. § 60-2315 (2013 Supp.).
Case 13-13038 Doc# 81 Filed 03/06/15 Page 4 of 9
I have issued a series of orders dealing with attorney fee assignments
and trustee turnover. These orders can be distilled to several principles that
guide my decision here. First, I have previously ruled that depending upon the
nature of the assignment, an assignment for attorney’s fees or costs (including
filing fees advanced) should be prorated between the debtor’s federal and state
tax refunds based upon the proportion each refund’s amount bears to the sum
of the refund amounts. Those fees should then be deducted from the refunds
before the trustee attempts to allocate them between the pre- and post-petition
Likewise, I have held that a set off for a tax debt should not be taken
from either the exempt or post-petition portion of a debtor’s refund; instead,
burdening the estate’s share of the refund with a tax set off is entirely
consistent with the priority scheme of the Bankruptcy Code. Just as the tax
debt would be paid before general unsecured creditors in a chapter 7
distribution, the funds a taxing authority withheld from the prepetition refund
should reduce the estate’s take from the refund.8 Finally, I have held that a
7 Redmond v. Carson (In re Carson), 374 B.R. 247 (10th Cir. BAP 2007).
Allocating the debtor’s tax refund between the pre- and post-petition years is
required by In re Barowsky, 946 F.2d. 1516, 1518 (10th Cir. 1991) (determiningthat the pre-petition portion of a debtor’s tax refund is property of thebankruptcy estate when the relevant tax year ended post-petition). See also In
re Roy, No. 12-11246, Dkt. 39 at pp. 7-8 (Bankr. D. Kan. Sept. 24, 2013)
(Unpublished) (prorating refund assignment for attorney fees between federal
and state refund prior to Barowsky pre- and post-petition allocation).
8 In re Roy, No. 12-11246, Dkt. 39 at pp. 8-10 (Bankr. D. Kan. Sept. 24, 2013).
Case 13-13038 Doc# 81 Filed 03/06/15 Page 5 of 9
specific pre-petition assignment of that portion of the debtor’s refund that
accounts for the prepetition portion of the filing year is enforceable against the
trustee in a turnover proceeding because the debtor’s making that assignment
is conceptually identical to the debtor paying a retainer from funds that would
otherwise wind up in the estate.9
In this case, the Stewarts seek to further refine this rule by asking me
to hold that a general assignment of a refund for attorney’s fees cannot be
charged against the EIC portion of their tax refund because it is exempt. They
rely not on my ruling in In re Roy, but on its math. In Roy, I overruled the
trustee’s assertion that the debtor’s EIC refund could be apportioned between
the pre- and post-petition periods.10 Following the BAP’s and Judge Karlin’s
decisions in In re Westby, I instead held that any apportionment of the EIC
that resulted in part of it being subject to turnover improperly burdened the §
60-2315 exemption.11 I further held in Roy that deducting a debtor’s attorney
fee assignment from the entire refund (including the EIC portion) before
apportioning it between the pre- and post-petition periods is proper. There, the
debtor made a consensual assignment of the refund. Nothing in § 60-2315
prevents a debtor from waiving his or her EIC exemption by assigning it.12 The
9 See In re Hunter, No. 09-12270, 2011 WL 1749933 at *5 (Bankr. D. Kan. May
10 In re Roy, No. 12-11246, Dkt. 39 at pp. 10, 13. See also In re Westby, 486
B.R. 409 (10th Cir. B.A.P. 2013).
11 Roy, supra at 10.
12 Id. at pp. 13-14.
Case 13-13038 Doc# 81 Filed 03/06/15 Page 6 of 9
trustee relies on that statement in Roy to advocate that the debtor’s exempt
EIC portion of the refund should bear a ratable share of his or her attorney’s
fees assignment. I disagree with both parties.
In Roy, I first deducted the fee assignment (after allocating it between
the state and federal refunds) from each refund and then deducted the EIC
from each, granting the trustee’s turnover application for the estate’s
apportioned share of the remainder of each.13 Because the tax-based portion of
the Roy refund was considerably larger than the EIC portion, no part of the
debtors’ EIC was affected by the attorney’s fee assignment. That will not
necessarily occur in every case. Here, for example, the Stewarts’ EIC portion,
$6,044, is significantly larger than the tax-based portion of their federal
refund, $1,888, and all but $36 of their gross state refund is comprised of EIC.
And, it is certainly possible that other debtors will have no tax-based refund,
but still receive a substantial EIC refund. Whatever the case, however, the
same principles upon which I decided Hunter and Roy apply.
The debtor may, in all cases, assign some or all of his or her prepetition
income tax refund to the debtors’ lawyer as a fee for work done preparing the
bankruptcy case. This assignment is, as I have stated in other cases, not much
different than debtors paying their lawyers a retainer from cash they have on
hand prepetition.14 The end result is that the attorney, not the estate, gets the
13 Id. at p. 14.
14 In re Hunter, 2011 WL 1749933 at *5 and *7.
Case 13-13038 Doc# 81 Filed 03/06/15 Page 7 of 9
money. A debtor’s consensual tax refund assignment for fees and expenses that
impairs the EIC portion of their refund is also entirely consistent with Kansas
exemption law. Therefore I refuse to hold that an EIC refund can never be
impaired by an attorney’s fee assignment. I likewise decline to impose the
proration scheme advocated by the trustee.
For better or worse, the Legislature has made a debtor’s EIC-based tax
refund exempt. Long-standing bankruptcy court authority and years of
practice and custom have allowed debtors to assign their income tax refunds
to their bankruptcy lawyers for fees and expenses. Nothing prevents the
exempt portions from being consensually assigned, therefore nothing should
prevent the deductions of both the EIC and the fees from the entire refund
before applying the Barowsky apportionment of it between the pre- and post-
petition year. This method is simple, straightforward, and consistent with
Kansas and federal bankruptcy law and practice.
Therefore, the appropriate calculation of the estate’s share of the
debtors’ 2013 tax refunds is as follows:
Gross Refund 7932.00 1063.00
Less: KDCF Support Setoff 34.75 884.73
Net Refund 7897.25 178.27
Case 13-13038 Doc# 81 Filed 03/06/15 Page 8 of 9
Less: Attorney Fee/Filing Fee Assignment ($1,481) proratedbetween federal and state refunds15
Less: EIC exempt portion of refund 6044.00 1027.00
Net Refund Available for Turnover before Barowsky allocation 547.30 0.00
Estate’s share of Refund (330/365 = .90410) 494.81 0.00
As this calculation demonstrates, because nearly all of the gross state refund
is EIC-based, the fee assignment burdens the EIC portion and no remainder
subject to turnover exists; but a remainder of the federal tax refund in excess
of the fee assignment and EIC portion exists and is subject to turnover. The
trustee’s motion for turnover is granted in part and debtors are ordered to
turnover $494.81 to the trustee, together with the $200 sanction previously
ordered by this Court.16
# # #
15 The federal refund comprises 88.18% of the total gross refund ($7,932 ÷
$8,995); the state refund comprises 11.82% of the total gross refund ($1,063 ÷
16 Dkt. 47.
Case 13-13038 Doc# 81 Filed 03/06/15 Page 9 of 9
- Category: Judge Nugent
- Published on 27 January 2015
- Written by Judge Nugent
- Hits: 284
Nielsen et al v. Pollan, 13-05204 (Bankr. D. Kan. Jan. 14, 2014) Doc. # 55
SIGNED this 13th day of January, 2015.
DESIGNATED FOR ONLINE PUBLICATION
BUT NOT PRINT PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
MARY DONNA POLLAN, ) Case No. 13-12513
) Chapter 13
SHERI NIELSEN and )
JACKIE NIELSEN, )
vs. ) Adv. No. 13-5204
MARY DONNA POLLAN, )
Mary Pollan offered Sheri Nielsen a hand up in a time of need; she borrowed
money from two banks to buy Sheri a car and fund Sheri’s nursing school
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enrollment while permitting her to live in a rental home Mary owned in Wichita.
Sheri was to make the payments on the debts that Mary incurred for her. When
Sheri failed to repay her, Mary resorted to self-help to collect from Sheri. After
convincing Sheri’s mother, Jackie, to refinance the car loan in her own name, Mary
reclaimed the (Kia) Soul that she had purchased for Sheri and sold it. Now Sheri
and Jackie allege that Mary defrauded them. After they sued her in state court, she
filed a chapter 13 case here. Sheri and Jackie filed this dischargeability complaint
alleging that Mary’s debt to them should be excepted from her discharge because it
was incurred by false representations, false pretenses or actual fraud as 11 U.S.C. §
To prevail in this proceeding, Sheri and Jackie Nielsen must show that
Mary’s representations were false when she made them or that she intentionally
fostered a false impression to defraud Sheri and Jackie. Merely demonstrating that
Mary took property in which Sheri and Jackie claimed an interest is not sufficient
to support their fraud-based claims—the only exceptions to her discharge that Sheri
and Jackie pled.1
This is the unhappy story of the misplaced affections and misunderstandings
that often begin with the best intentions. When Sheri Nielsen met Mary Pollan in
2004, she was a single mother. Mary and her husband (now deceased) ranched in
the Cambridge area of southeastern Kansas and Sheri lived nearby with her
daughter, America, and her boyfriend, Abel. Until he left Sheri, Abel helped Mr.
Pollan with miscellaneous work on the ranch. Mary became attached to Sheri and
1 Plaintiffs Sheri and Jackie Nielsen appeared by their attorney Barry L. Arbuckle of Wichita,
Kansas. Defendant and debtor Mary Pollan appeared by her attorney Carl B. Davis of Wichita,
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America acting almost as a mother and grandmother to them. Sheri’s mother Jackie
worked at the café in town, helping to support herself and Sheri’s father who was ill
and on Social Security. Mary frequently cared for America and helped Sheri in
various other ways.
By 2011, Sheri wanted to become a nurse so Mary, now widowed, offered
Sheri three kinds of material assistance.2 She offered to borrow money from her
bank, the Emerald Bank, on her personal vehicle, and lend it to Sheri to pay for
nurses training and some lingering personal debts. She offered to assist Sheri in
purchasing a more reliable car (Sheri was driving a junker) so she could safely get
to Wichita for school. And, Mary offered Sheri a place to live in her rental house in
Wichita. Sheri was a nursing assistant at a nursing home at this time. Even so, she
agreed that if Mary would take these loans out, Sheri would carry the payments so
that Mary’s credit would not be periled.
On July 11, 2011, Sheri and Mary went to the Steven dealership in Wichita
to look at cars for Sheri. When they found a suitable vehicle, a used 2010 Kia Soul,
they applied for financing as co-makers. But, when the dealer told them that the
interest rate would be lower if only Mary were on the note (apparently owing to
Sheri’s bad credit), Mary alone signed a retail installment contract that Steven
assigned to TD Auto Finance and the car was titled to her.3 This was a 72-month
obligation with a $309 monthly payment. Sheri agreed that she would make the
The next day, July 12, Mary signed a note to Emerald Bank for $10,000,
secured by a lien on her 1995 Ford Mustang.4 This note was payable over two years
at $456 per month. The loan proceeds were deposited in her checking account and
2 At the time of the events in this proceeding, Sheri was 33-34 years of age.
3 Ex. C, Ex. D, and Ex. P.
4 Ex. A.
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from there, a $2,000 down payment was made on the Kia Soul by check dated July
19, a $1,700 cash withdrawal was made on July 22, and $6,000 was paid for Sheri’s
nursing school fees by check dated July 20.5 Mary wrote the $6,000 check, leaving
the payee line blank, and gave it to Sheri for nursing school; on the memo line of
the check, Mary noted “Loan Sheri.”6 Mary said she left the payee line blank
because she didn’t know the name of the school; Sheri says Mary actually gave her
the check to cash, that she did so at a Bank of America branch, and gave the money
back to Mary who took it instead to the casino. Someone wrote the name “Kari
Einerson” on the payee line and Ms. Einerson appears to have endorsed the check.
Ms. Einerson was an acquaintance of Sheri’s and according to Sheri used Bank of
America to cash the check (where Einerson banked), because Sheri had no bank
account and could not cash the check on her own.7 Sheri’s version lacks credibility
not least because Sheri concedes she agreed to repay the Emerald debt and because,
as Sheri testified, she was denied admission to nurses training after failing an
entrance examination or course prerequisite. Sheri wouldn’t have agreed to pay
(and, in fact, make payments) if she never received the benefit of the money.
At about the same time, Mary evicted a troublesome tenant from her rental
home on Sheridan Street in Wichita and allowed Sheri and America to move in.
5 See Ex. I. As the cancelled checks on Mary’s bank account demonstrate, she routinely filled out the
memo line of her checks identifying the purpose of the check. The $2,000 down payment to StevenKia (check no. 2100) was dated July 19 and cleared July 21. The $6,000 for nursing school (check no.
2101) was dated July 20 and cleared the bank on July 21. The cash withdrawal was purportedly for
unpaid bills and expenses of Sheri (including to repay loans from family members), but she deniesreceiving the $1,700 withdrawal. Sheri claims that she received a total of $2,700 from the $10,000
Emerald loan – the $2,000 car down payment and $700 cash for unspecified bills. In any event, Sheri
admitted receiving some amount for bills and expenses from Mary and acknowledged her obligation
to make payments on the Emerald loan.
6 Ex. H.
7 Sheri’s story that she was merely cashing the check for Mary is not believable. Mary’s bank account
records show that Mary made cash withdrawals in $50-$100 increments fairly regularly (which shepersonally signed for). See Ex. I, J, K. She needed neither to write a check to obtain cash nor Sheri’s
assistance. If Mary had intended to obtain cash via a check drawn on her account, she could have
made the check payable to “cash” and presented it.
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Sheri was to have free rent for three months, then begin paying $450 rent each
month. Mary intended this arrangement to run for at least six months. While it’s
difficult to understand how Sheri would be able to service $765 each month in debt
while paying $450 in rent, a total of $1,215 monthly, on her minimum wage job and
while she attended school, that appears to have been Sheri’s understanding and
Sheri defaulted. She missed the first several Emerald payments. She also
missed and was late from the outset on the TD Auto car loan payments, regularly
incurring late fees, while she was off work due to a shoulder injury.8 And, after the
free three months expired, she didn’t pay the rent on the Sheridan property. Mary
addressed this situation by repeatedly asking for the money. When that didn’t work,
in January of 2012, she took the car briefly as a “wake up call” to Sheri that she
expected repayment and in an effort to thwart a possible repossession of the Kia by
TD Auto.9 Not surprisingly, their relationship deteriorated and Sheri stopped
communicating with Mary. Sheri called TD Auto to see about taking the car loan on
herself, but, because TD Auto apparently thought Sheri was Mary’s daughter, they
sent the application to Mary’s Cambridge address. No application was made.
In April, Mary approached Jackie at Jackie’s workplace, the 160 Café in
Cambridge. She told Jackie about the two loans and Sheri’s default. She told Jackie
she wanted them all paid and that she didn’t want to hazard her credit rating. She
specifically asked Jackie to take on the TD Auto loan by refinancing it at her own
bank, Citizens Bank of Kansas. On April 24, 2012, someone representing either
Mary or Citizens Bank called TD Auto to get a payoff amount and, on April 30,
8 See Ex. F, TD Auto Account History showing a total of 4 loan payments on the TD Auto Loan:
October 12, 2011, January 24, 2012, February 6, 2012, and March 13, 2012.
9 Ex. L. TD Auto sent a notice of default addressed to Mary at the Sheridan property but Mary never
received the correspondence because she was not residing at the Sheridan property at the time. Sheri
was living there.
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Jackie closed a loan from Citizens for $17,709, enough to pay off the TD Auto loan
in full.10 Citizens forwarded the funds to TD Auto who, in turn, released its lien
against the Kia Soul on May 22.11 On June 2, the Kansas Department of Revenue
issued a clear certificate of title for the Soul to Mary, its record owner.12
Between May and September, Mary continued to ask Sheri and Jackie for
payment on the Emerald loan. When Sheri stopped taking Mary’s calls, Mary wrote
her letters, stating in one that she was “sorry I didn’t keep the car when I came
after it the first time.”13 Mary also approached Jackie at work, resulting in Jackie
calling the sheriff to remove her. Meanwhile, Citizens needed to complete its
documentation of the Nielsen car loan and, to that end, Citizens requested of Mary
to bring the Soul’s certificate of title to the bank. Mary brought the title to the
Winfield branch office and met with branch president Dennis Knackstedt. She
showed him the title, but took it back, saying she wished to consult with a lawyer
about how she might best proceed to preserve her rights in connection with the
Emerald loan. She then left the bank, never to return. Knackstedt wrote her on
September 28 requesting delivery of the title or repayment of what Citizens Bank
had advanced to pay off TD Auto.14
After receiving the Citizens Bank letter, Mary acted quickly. On October 2,
she and friend drove to Wichita and secured a duplicate key to the Soul from the
Steven dealership. They then went to Andover, Kansas where Sheri worked, and
stopped at the police department to seek assistance in taking the car. When the
police declined to assist, Mary and her friend went to Sheri’s place of employment
and took the car. They returned with it to Steven but, according to Mary, were told
10 Ex. 13, 9.
11 Ex. F and Ex. G. The TD Auto loan was paid off by Citizens on May 9, 2012 (Ex. F).
12 Ex. B.
13 Ex. T.
14 Ex. 16.
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the car was in too poor condition for Steven to buy it. In the intervening months
between July of 2011 and October of 2012, some 34,000 miles had been put on the
car. Sheri’s two dogs had ridden in it a lot; the windshield was cracked, and the car
was filled with toys, clothes, and trash. Nevertheless, when Mary and her friend
went to Carmax, that dealer offered her $8,000.15 Mary accepted and took the
money, signed over her title, and deposited the proceeds in Emerald Bank on
October 3 after paying, at least in part, the Emerald note.16
Sheri reported the car stolen, but because Mary had legal title to it, the
Andover police declined to pursue the complaint. Likewise, Sheri’s parents, who had
apparently insured the car, made a stolen car claim to Farm Bureau. Like the
police, Farm Bureau concluded that Mary’s legal title to the car supported her
taking it, thus denying the claim.17 Jackie and Sheri consulted their counsel and
sued Mary in Sedgwick County District Court.
The state court litigation has been eventful and expensive. Sheri and Jackie
sued not only Mary, but also Carmax, TD Auto, and Citizens Bank on a plethora of
theories. A proposed settlement between them and Citizens Bank was never
consummated. Carmax was dismissed from the case, as was TD Auto. TD Auto
received an award of KAN. STAT. ANN. § 60-211 attorney’s fee sanctions against
Sheri and Jackie’s counsel as part of its dismissal order. Their Kansas Consumer
Protection Act claims against Citizens were likewise dismissed and the Bank’s
“prevailing party” attorneys’ fees were also assessed against them. Their motion to
reconsider that award was denied and their counsel was sanctioned for his conduct
in connection with that matter as well. There are many copied court documents in
15 Ex. E.
16 Ex. M shows that Mary deposited the $8,000 sale proceeds in her savings account, net of $4,890
applied to the Emerald loan. Mary bagged up the personal property in the car and left it at the back
door of the 160 Café for Jackie to return to Sheri.
17 Ex. N.
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evidence, but the status of the remainder of the state court case remains unclear.
Whatever its status is, all that matters in this adversary proceeding is whether
Mary made false representations, employed false pretenses, or committed actual
fraud to obtain the Soul or its value and whether Mary’s debt to Sheri and Jackie
should be excepted from her chapter 13 discharge.18 Mary filed this chapter 13 case
on September 27, 2013. Neither Sheri nor Jackie filed a proof of claim in that
The plaintiffs’ theory of recovery in this case has evolved from a
broad-brushed allegation that Mary committed “fraud” under 11 U.S.C. § 1328(a)(2)
which incorporates § 523(a)(2)(A), to the more narrow issues presented at trial. In
his opening statement, plaintiffs’ counsel (who is also their lawyer in state court)
claimed his clients relied on Mary’s two alleged false statements: (1) that Mary
would assist Sheri in buying the Soul and, when Sheri had completed the payments,
Mary would sign it over to her; and (2) that if Sheri and Jackie would refinance the
car loan, Mary would let them have the car to secure that loan. In addition, counsel
stated that Mary’s conduct as a whole demonstrated false pretenses. Thus, this case
proceeded and will be decided on whether Mary’s statements were knowingly false,
made with intent to deceive, and justifiably relied upon by Sheri and Jackie to their
detriment under § 523(a)(2)(A). Likewise, I will consider whether the plaintiffs
proved that Mary’s conduct demonstrated false pretenses or actual fraud. Those are
the only theories of recovery the plaintiffs pleaded. Exceptions to discharge are
narrowly construed in favor of the debtor to promote the “fresh start” policy of the
Bankruptcy Code and therefore, where there is doubt it is resolved in the debtor’s
18 Nor did Plaintiffs present evidence of the extent of their claimed loss caused by Mary’s fraud.
19 The claims bar date ran on January 28, 2014. Sheri and Jackie are listed on Schedule F as
unsecured creditors with unliquidated claims.
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favor.20 The plaintiffs, as creditors, have the burden of proving their alleged
exception to discharge by a preponderance of the evidence.21
A representation is false for § 523(a)(2)(A) purposes if the speaker knows its
falsity when she utters it, that she intended to deceive the creditor by uttering it,
that the creditor relied on the statement to her detriment, and that the reliance was
justifiable.22 The intent to deceive can be inferred from the totality of the
circumstances.23 Sheri and Jackie allege that Mary made two sets of false
statements: first, that while Mary’s name would be on the TD Auto financing and
the Soul’s title, Sheri would own it; and second, that if Jackie and Sheri took out a
new loan to refinance Mary’s TD Auto car loan, the she would let them have the
vehicle as security.
The facts do not support the first alleged false representation. There is
simply no evidence that Mary undertook the purchase of the Soul for Sheri’s use
with the intention of getting someone else to pay for the car or with designs on
ultimately keeping it for herself. She already had two cars, the Mustang on which
she borrowed from Emerald and a 2010 Ford Fusion. Mary and Sheri shared the
understanding that Sheri would complete the payments and eventually receive the
vehicle. If Mary formed the intention to mulct Sheri and Jackie into paying for the
Soul so she could keep it, she did so after she purchased it from Steven and
borrowed the purchase price from TD Auto and after Sheri defaulted on payments.
Mary’s pre-purchase representation that Sheri would own the car once she’d made
the loan payments was not false and was not made with the intent to deceive. There
20 Jones v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir. 1993); Herman v. White (In re White), 519
B.R. 832, 834-35 (Bankr. N.D. Okla. 2014); In re Coates, 519 B.R. 842, 848 (Bankr. D. Utah 2014).
21 In re White, 519 B.R. at 835.
22 Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222 (10th Cir. B.A.P. 2013).
23 Copper v. Lemke (In re Lemke), 423 B.R. 917, 922 (10th Cir. B.A.P. 2010).
Case 13-05204 Doc# 55 Filed 01/13/15 Page 9 of 14
was no evidence that Mary had no intention of fulfilling her promise to transfer the
car to Sheri upon repayment of the loans when the agreement was struck in July of
2011.24 Only when Sheri breached the agreement by not repaying the loans did
Mary’s intent change.25
The second representation allegation also lacks factual support. The evidence
is less than clear whether Mary’s conversations with Jackie at the café referred to
the Emerald loan. Jackie says Mary said nothing to her about it until after Jackie
and Sheri had signed the Citizens Bank note that refinanced the TD loan. Mary
says that she did in fact discuss the Emerald note with Jackie because she
considered the Emerald loan, the TD Auto loan, and the lease of the Sheridan
property a coordinated effort to help Sheri. The plaintiffs’ evidence of the second
representation is iffy at best. Jackie and Sheri had the burden to prove that Mary
made the false statement; I cannot conclude that they met that burden. Rather,
given Mary’s continuing belief that the loans and lease transaction were elements of
one arrangement between her and Sheri, it seems more likely that she would have
discussed the Emerald loan with Jackie. Repayment of the Emerald loan (secured
by Mary’s Ford) was, at least in Mary’s mind, a condition precedent to the Nielsens
getting the Kia.26 Mary’s subsequent conduct also suggests no misrepresentation
was made. The Citizens Bank loan, payoff of TD Auto, and lien release on the Soul
occurred in April and May of 2012. Mary took no steps to seize the Soul until
October, after Citizens Bank made demand upon her and after months of Mary
24 See In re Borschow, 454 B.R. 374, 395 (Bankr. W.D. Tex. 2011) (Mere promise, to be executed inthe future, is insufficient to make debt nondischargeable under § 523(a)(2)(A) unless debtor had no
intention of fulfilling the promise when made.).
25 This first representation is not in any event actionable by Jackie as Mary made no representationsto Jackie prior to purchase of the Kia. Jackie learned of Mary’s 2011 loans to Sheri after the fact.
26 In re Bird, 224 B.R. 622, 627 (Bankr. S.D. Ohio 1998) (If there is room for inference of honest
intent, nondischargeability must be resolved in favor of debtor.).
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asking Sheri and Jackie for repayment of the Emerald Bank loan. Indeed, Mary’s
correspondence with both Jackie and Sheri in August, evidences Mary’s insistence
on Sheri’s timely payments of the Emerald Bank loan or getting it out of Mary’s
name so as not to damage her credit.27 That was the premise of Mary’s and Sheri’s
“deal” from the outset. Had Sheri made the Emerald payments, Mary likely would
not have seized the Kia.28
While false representation claims require express statements, false pretense
claims involve “implied representations intended to create and foster a false
impression.”29 This can include conduct and material omissions. As with the
Nielsens’ false representation claims, their proof falls short here. They failed to
prove that Mary’s initial conduct in borrowing money for Sheri to get her a car and
help finance her nursing school ambitions was done to create and foster a false
impression. The evidence demonstrates that, based largely on their friendship and
trust, Mary undertook to help Sheri, and through her, Sheri’s daughter, find a way
to a better life. Indeed, Sheri testified to her understanding that she would receive
the car when she had completed the payments on the TD loan. She also testified
that she attempted to keep the Emerald payments current until she was hurt and
unable to work. Sheri contacted TD Auto about moving the loan into her own name
and asked her mother about it. Sheri also knew that she would be obligated to pay
rent on the Wichita house at some point. Sheri and Jackie failed to demonstrate
that Mary’s conduct or speech “fostered a false impression” at least during the
27 Ex. T, U.
28 See also Ex. 15 – interrogatory answers nos. 10 and 11 indicate Mary’s intent and Sheri’s promise
that she would repay both the Emerald Bank loan and the TD Auto loan before ownership would be
transferred to Sheri.
29 In re Sturgeon, 496 B.R. 215, 223.
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Whether Mary fostered a false impression in her dealings with Jackie and
Citizens Bank is a much closer call. While it is not clear to me that Mary expressly
and falsely represented to Jackie that the Nielsens would get the Kia once they
refinanced the TD Auto loan, some of her conduct after that time might suggest that
she “fostered a false impression” about that. Whether she in her discussions with
Jackie made payment of Emerald loan a condition precedent to Sheri and Jackie
obtaining the Kia or not, Mary clearly understood that no third bank would likely
make a car loan without receiving a lien on the car. Indeed, she had to give Emerald
Bank a lien on her Ford to secure the nursing home loan. Mary wanted out from
under the TD Auto loan, but she also wanted the Emerald loan repaid. She showed
the Kia title to Mr. Knackstedt at Citizens Bank knowing that the TD Auto loan
had been paid off, but then refused to sign it over and carried it off. Then, in
October of 2012, after Citizens wrote and demanded that either the title be turned
over or that Mary take over the loan, Mary and her friend took possession of the Kia
and sold it.
In the end, Mary’s obligation to TD Auto was repaid by Jackie and Sheri’s
refinance at Citizens and her liability to Emerald was reduced when she sold the
Soul and applied its proceeds to that debt.31 But the issue in this proceeding was
whether that was the outcome she had in mind when she approached Jackie about
the TD Auto refinance.32 The record is simply unclear. Mary saw these transactions
as one: she incurred credit that Sheri couldn’t have gotten from a legitimate
30 The evidence established that Jackie was not even privy to Mary’s and Sheri’s dealings until after
the car was purchased.
31 The record is unclear on this point. Ex. M shows that Mary applied $4,890 to the Emerald Bank
loan but it is unclear whether this paid off the loan in full.
32 There was no evidence that Mary had any direct communication with Citizens Bank as to the
refinance transaction until after it was consummated.
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financial institution, credit that Sheri agreed to repay. While a banker or lawyer
might understand that retaining the Kia to “secure” Sheri’s paying Mary back for
the Emerald loan wasn’t legally proper, none of these three parties had either the
education or training to understand that. That taking the car to pay the Emerald
loan made sense to Mary suggests that she lacked requisite wrongful intent.33 In
her mind, even after the TD Auto loan had been repaid, Mary still had a debt to
collect and the Kia was the only means to do it, because Sheri had stopped making
payments. She took the asset to pay a debt. And as noted under the false
representations section herein, Mary continued to pursue Sheri’s timely loan
payment on the Emerald Bank loan after TD Auto was paid off and before she
resorted to the Kia.34 That is not enough to support a finding of false pretenses
To prevail on an actual fraud claim, the Nielsens had to show that Mary
deliberately engaged in a scheme to deprive them of property or a legal right. As
discussed above, they did not prove that Mary had any such plan or motive in mind
in July of 2011 when she purchased the Kia. Nor did they show that Mary had a
malign plan in mind when she approached Jackie about refinancing the Kia. What
appears to have happened here is that Sheri’s failure to maintain the payments
that Mary generously incurred in her behalf led to hurt feelings and distrust
leading her to take matters into her hands. After Mary realized that Sheri and
Jackie couldn’t or wouldn’t repay her for the Emerald loan, she repossessed a car to
which she had received clear title, sold it, and paid the Emerald loan herself. The
33 In correspondence to both Jackie and Sheri in August 2012, Mary lamented not keeping the car
when she repossessed it the first time. Ex. T, U. This negates the suggestion that she intended all
along to keep the car when she first approached Jackie to refinance the TD Auto loan.
34 See Ex. T, U.
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Nielsens failed to prove the existence of a scheme to deprive or cheat them. Mary’s
only “scheme” was to collect from the Nielsens what she felt she was owed and what
Sheri had promised to pay.
What transpired in this case is unfortunate at best. Well-intended loans
between close friends or relatives frequently go awry when emotions cloud a
person’s lending judgment. Mary Pollan’s judgment was thus clouded. But her
conduct in this case is consistent with her belief that Sheri had agreed to repay her
for the credit she extended – the TD Auto loan and the Emerald loan. Once Sheri
and Mary’s communication broke down, Mary collected what she could by
repossessing and selling the car titled in her name. While discrete pieces of this
transaction show Mary in a negative light, Sheri and Jackie have failed to
demonstrate by a preponderance of the evidence that she falsely represented her
intentions to them, that she fostered a false impression, or that she made the Kia
purchase as part of a scheme to retain the car. Nor does it appear that Mary
intended to take the car at the time she approached Jackie about refinancing it. The
plaintiffs failed to demonstrate Mary’s bad intent; their complaint fails.35
Mary is entitled to judgment on the plaintiffs’ complaint and judgment will
be entered this day accordingly.
# # #
35 The Court does not condone Mary’s self-help initiative and notes that, in a non-bankruptcy
setting, Jackie and Sheri might be able to show that they had equitable title to the Kia and that
Mary converted it when she repossessed and sold the Soul. That was pled in state court, but not here.
Conversion can form the basis for a Chapter 7 discharge exception under § 523(a)(6) (willful and
malicious damage to property) when the converter is shown to have the requisite malicious intention.
That exception is not incorporated as one of the exceptions to a chapter 13 full payment discharge
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