13-05204 Nielsen et al v. Pollan (Doc. # 55)

Nielsen et al v. Pollan, 13-05204 (Bankr. D. Kan. Jan. 14, 2014) Doc. # 55

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SIGNED this 13th day of January, 2015.




IN RE: )
MARY DONNA POLLAN, ) Case No. 13-12513
) Chapter 13
Debtor. )


Plaintiffs, )
vs. ) Adv. No. 13-5204

Defendant. )


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. §
523(a)(2)(A) provides.

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
Mary’s expectation.

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

False Representation

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).

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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

False Pretenses

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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summer 2011.30

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

Actual Fraud

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
under §1328(a)(2).


Case 13-05204 Doc# 55 Filed 01/13/15 Page 14 of 14

14-05002 Morris v. Ark Valley Credit Union et al (Doc. # 57)

Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Jan. 7, 2015) Doc. # 57

PDFClick here for the pdf document.

SIGNED this 6th day of January, 2015.




IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7

Debtor. )

Plaintiff, )
vs. ) Adv. No. 14-5002

Defendants. )


When Jeffrey Gracy took two home equity loans from Ark Valley Credit Union,

he signed mortgages that described the real estate upon which he lives, along with


Case 14-05002 Doc# 57 Filed 01/06/15 Page 1 of 16

any improvements and fixtures. He intended to grant and Ark Valley intended to
take liens in his land as well as his residence, a manufactured home. Neither he nor
Ark Valley took measures to eliminate the certificate of title on his manufactured
home, allowing it to remain personal property that is subject to the Uniform
Commercial Code and, specifically, Article 9. An Article 9 security interest only
attaches when, among other things, the security agreement reasonably identifies the

In this case, the trustee seeks to avoid an alleged unperfected lien in a
manufactured home by virtue of a mortgage that describes the lender’s security as
both the debtor’s real property and any “fixtures” upon the property. Mortgages can
be “security agreements” if they satisfy the three requirements of KAN. STAT. ANN. §
84-9-203 (2013 Supp.), but when the transaction is a “consumer transaction” that
involves “consumer goods,” § 84-9-108(e)(2) renders a generic collateral description
by UCC type insufficient as a matter of law.

As discussed below, Gracy’s home equity lines of credit from Ark Valley Credit
Union were consumer transactions and the manufactured home—his residence—is a
consumer good. The liens that Ark Valley sought never attached to the manufactured
home leaving the trustee nothing to avoid.1

Findings of Fact

In the mid-1990’s debtor Jeff Gracy bought the land commonly described as

1 The trustee J. Michael Morris appeared in person. Ark Valley Credit Union appeared by its counsel
Eric Bruce. The debtor Jeffrey Gracy appeared as a witness at trial, but is in default of answering thecomplaint and the trustee obtained a default judgment against Gracy. Adv. Dkt. 20 (Ex. 10).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 2 of 16

617 W. Avenue G in Caldwell, Kansas and moved a new 1994 Fuqua manufactured
home that he had purchased from his father-in-law onto the property. Mr. Gracy and
his wife lived there; she has since passed, but he continued to live there. He paid off
the manufactured home’s purchase money loan in 2007, leaving it free and clear of
liens at the time of the subsequent transactions with Ark Valley that are the subject
of this proceeding.2 While the title to the home was never transferred to Mr. Gracy of
record, he located the certificate of title among papers in his home after this case was
filed. Neither party offered it in evidence. Kansas law permits manufactured
homeowners or lienholders to “eliminate” certificates of title, thus changing the
character of the manufactured home from personal property to an improvement to
the real estate.3 That was not done in this case.

In January of 2009, Mr. Gracy borrowed $21,000 from Ark Valley Credit Union
on a home equity line of credit to refinance what he described as personal bills or
expenses.4 The line of credit was secured by a 15-year Revolving Credit Mortgage
granted on the Caldwell property. It provides:

TO SECURE to Lender:

(1) The repayment of all indebtedness due and to become due under
the terms and conditions of the . . . Credit Agreement . . .
(2) The payment of all other sums advanced
. . . to protect the
security of this Mortgage . . .
(3) The performance of Borrower’s covenants and agreements of
Borrower herein contained;
BORROWER does hereby mortgage, grant and convey to Lender the

2 The purchase money lender, Green Tree Financial Corp., never released the lien of record, see Exhibit

3 See KAN. STAT. ANN. § 58-4214 (2005).
4 The credit agreement – a LOANLINER Home Equity Plan Credit Agreement and Truth-in-Lending
Disclosures – referenced in the mortgage instrument was not offered into evidence at trial.
Case 14-05002 Doc# 57 Filed 01/06/15 Page 3 of 16

following described property located in the County of Sumner, Stateof Kansas:

Lots 32, 34, 36, and 38, Block 85, New Caldwell Addition, City ofCaldwell, Sumner County, Kansas which has the address of 617 W.
Ave. G, Caldwell, Kansas 67022 (herein “Property Address”);

TOGETHER with all the improvements now or hereafter erected
on the property, and all easements, rights, appurtenances and
fixtures, all of which shall be deemed to be and remain a part of the
property covered by this Mortgage; . . . .5

No reference was made in the mortgage to the manufactured home located on the

A year later, on January 19, 2010 Mr. Gracy obtained a second line of credit
from Ark Valley in the amount of $26,000 and executed another Revolving Credit
Mortgage on an identical form to secure repayment of the indebtedness. He used this
money to build a detached garage on the property.6 The 2010 mortgage had a 20-year
term but the collateral description was identical to that on the 2009 Revolving Credit
Mortgage as were the granting and habendum clauses. The 2010 mortgage also made
no reference to a manufactured home being located on the realty.

Mr. Gracy thinks that the Ark Valley lending officer knew the described
property was his “home,” but testified that there was no discussion of it being a
manufactured home. When he executed the mortgages, he believed that he had
granted a lien on his land, the manufactured home, and the detached garage. Mr.
Gracy did not recall any specific discussion with Ark Valley about the mortgage form

5 Ex. B, emphasis added.
6 Ex. E.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 4 of 16

or its meaning.

Mary Gillette is the retired manager for Ark Valley. She dealt with Mr. Gracy
on these credit transactions. She testified that credit union employees received
training on documenting mobile home loans. In particular, the credit union’s policy
was that manufactured homes offered as security for a home equity loan were
required to be set on a permanent foundation and the home’s certificate of title was
to be eliminated.7 She did not elaborate on what makes a foundation “permanent.”
Ms. Gillette knew there was a “house” on the property and that Gracy lived there, but
she did not know that Gracy’s home was a manufactured home.

The credit union didn’t obtain an appraisal of the property to support either
loan, but it did rely on the 2008 Sumner County real estate tax valuation in making
the 2009 loan.8 According to Ms. Gillette, the credit union could loan up to 70% of the
property’s appraised value - $75,410. Before it made the second loan in 2010, Ark
Valley obtained a title insurance commitment from abstractor Security 1st Title to
make sure no other liens were placed against the real estate.9 Neither the tax
valuation nor the title insurance certificate reference a manufactured home or any
other improvement on the real estate.10 Ms. Gillette also testified that Ark Valley

7 Ms. Gillette was referring to Kansas law that requires elimination of a manufactured home’s
certificate of title to change the character of a home permanently affixed to the land from personalproperty to an improvement to real property. See KAN. STAT. ANN. § 58-4214(a) (2005). Subsection (b)
sets forth the process and requirements of an application to eliminate title.
8 Ex. G.
9 Ex. H.
10 A 2013 two-page printout from the online Sumner County Information System regarding this parcelshows the property’s use is that of a “single family residence (detached).” The second page of theprintout shows the structure as a “detached SFR [single family residence] unit” and the architectural
style is identified as “Mod/MH [modular/manufactured home]” with a crawl space as the basement.
See Ex. 6. There is no evidence, however, that Ark Valley ever referred to Sumner County’s online


Case 14-05002 Doc# 57 Filed 01/06/15 Page 5 of 16

employees were trained to take a mortgage “on everything.” With respect to Mr.
Gracy’s loans, she intended to obtain a lien on the property as a whole, including the

Neither party offered any photographic evidence of how the manufactured
home was set on the ground, leaving me only Mr. Gracy’s testimony on that topic. On
direct examination, he testified that the home was set on “concrete slabs” spaced
every 2-3 feet running the length of the home. On cross-examination, Mr. Gracy
expanded on this description, testifying that the home is set on cement block piers
running the length of the home. Mr. Gracy’s description is consistent with the
existence of concrete footings as opposed to a solid concrete foundation under the
home. It is likely that the piers are set on the concrete slab footings. The home
remains on its chassis and is anchored to the surface with what Mr. Gracy called
metal straps. These straps are stanchions that tie down and provide support for the
home. The manufactured home is skirted with brick, but there is no evidence to
suggest that it is load-bearing. Utility service is connected to the home from
underneath the home. At some point, Mr. Gracy added a concrete patio and steps to
the back side of the mobile home and the detached garage was built on the property
in 2010. The front porch and steps were constructed of wood. At trial, neither party
elicited whether the manufactured home could be removed intact from the real estate.

Gracy filed this chapter 7 bankruptcy on July 25, 2013. He claimed the
property exempt as his homestead.11 On the date of his petition, the combined balance

Information System at the time of making the loans to Gracy.
11 The Court observes that Gracy did not separately schedule the manufactured home as personal

Case 14-05002 Doc# 57 Filed 01/06/15 Page 6 of 16

of the home equity loans was $43,426.12 Gracy continues to make monthly principal
and interest payments of $347 on the Ark Valley debt.

The trustee filed this adversary proceeding to avoid Ark Valley’s alleged lien
in the manufactured home as unperfected under 11 U.S.C. § 544(a) because Ark
Valley’s lien is not indicated on the home’s certificate of title as KAN. STAT. ANN. § 584204
(2013 Supp.) requires. Ark Valley denies that it took a lien in the home, leaving
no lien to be avoided. The Court denied its motion to dismiss for failure to state a
claim on this basis.13

Conclusions of Law

The trustee invokes his § 544(a) lien creditor avoiding powers, requiring the
Court to navigate the intersection of Kansas property law, Kansas’s version of Article
9 of the Uniform Commercial Code, and the Kansas Manufactured Housing Act, KAN.
STAT. ANN. § 58-4201 et seq. (2005 and 2013 Supp.) to determine whether Ark Valley
received enforceable security interests on Gracy’s manufactured home under the
mortgages and whether those security interests were properly perfected. As noted in
my ruling on Ark Valley’s motion to dismiss, the first issue is one of attachment. Only
if the credit union’s liens attached will I need to assess whether the lien was properly

The trustee says that a lien attached to the manufactured home because the
collateral description in the mortgages included the term “fixtures.” He further

property on Schedule B.
12 Ex. 8.
13 Adv. Dkt. 33, 34, and 45 (order).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 7 of 16

asserts that the evidence establishes that the manufactured home was a fixture
under the common law of fixtures because it was permanently affixed to the real

In the face of its own witness’s credible testimony, Ark Valley counters that it
did not intend to create a lien on the manufactured home and, therefore, no lien
attached. It further contends that the manufactured home is personal property, not
a fixture, because the certificate of title was never eliminated as provided under KAN.
STAT. ANN. § 58-4214, and the common law of fixtures is inapplicable under the Tenth
Circuit Bankruptcy Appellate Panel’s decision in In re Thomas.14 Finally, even if the
common law of fixtures applies, Ark Valley submits that the trustee has failed to meet
its burden of proof that the manufactured home is a fixture encumbered by the

Development of the Law on Manufactured Home Secured

Article 9 of the Uniform Commercial Code, codified in Kansas at KAN. STAT.
ANN. § 84-9-101 et seq. (2013 Supp.), governs security interests in personal property
and fixtures.15 Secured transactions involving manufactured homes are governed in
part by Article 9; such homes are generally personal property though they may
become fixtures if they become sufficiently related to real property.16

Section 84-9-203 governs the attachment of a security interest to collateral and
its enforceability, including a security interest in a manufactured home. Subsection

14 362 B.R. 478 (10th Cir. BAP 2007).
15 See § 84-9-109(a)(1) (scope); § 84-9-101, Official UCC Comment 1.
16 § 84-9-102(a)(53) and (54) (defining manufactured homes and manufactured home transactions).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 8 of 16

(b) requires that value be given, that debtor have rights in the collateral, and that the
debtor have authenticated a security agreement that provides a description of the
collateral. No particular form of a security agreement is required; instead the
agreement must create a security interest as defined in § 84-1-201(b)(35).17 A
mortgage may qualify as an authenticated security agreement.18 But if the formal
requisites of § 84-9-203 are met, the Court must satisfy itself that the parties
mutually intended a security interest to attach to the manufactured home,
particularly where, as here, Ark Valley, denies such intention.19
If the attachment criteria are met, we turn to perfection. In most cases, a
security interest is perfected by the filing of a financing statement.20 Section 84-9311(
a)(2) addresses perfection of a security interest in collateral covered by a state
certificate of title statute and generally provides that indicating the security interest
on the certificate of title or otherwise complying with the non-uniform statute’s other
perfection requirements has the effect that filing a financing statement has.21 In the
case of certificate of title property like a manufactured home, filing a financing
statement is unnecessary and ineffective to perfect a security interest.22

Prior to 1991, the state statute governing perfection of a security interest in
manufactured homes or mobile homes was found in the motor vehicle statutes,

17 § 84-9-102(a)(73) (defining a “security agreement”); § 84-1-201(b)(35) (defining “security interest” as
an interest in personal property or fixtures which secures payment or performance of an obligation).
18 See In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011).
19 Adv. Dkt. 45, n. 10 at p. 6.
20 § 84-9-310(a).
21 Section 84-9-109(c)(2) provides that Article 9 does not apply to the extent another statute of this
state expressly governs the creation, perfection, priority or enforcement of a security interest.
22 § 84-9-310(b)(3).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 9 of 16

specifically KAN. STAT. ANN. § 8-135(c), because a manufactured home was defined as

a vehicle.23 In 1991, Kansas enacted the Manufactured Housing Act (KMHA), KAN.

STAT. ANN. § 58-4201 et seq. Section 58-4204 is now the certificate of title statute

governing manufactured homes. The method of perfection, however, remained

generally unchanged – notation of the lien on the certificate of title.24 For KMHA

purposes, a manufactured home is deemed to be personal property and § 58-4204 is

the exclusive means of perfecting a security interest in one.25

Section 58-4204(i) of the KMHA addresses perfection of non-purchase money

security interests in a manufactured home after the original certificate of title has

been issued and applies to the Ark Valley transactions. That section provides, in part:

When a person acquires a security agreement on a manufactured home or
mobile home subsequent to the issuance of the original title on such
manufactured home or mobile home, such person shall require the holder
of the certificate of title to surrender the same and sign an application for a
mortgage title in such form as prescribed by the director. Upon such
surrender, the person shall immediately deliver the certificate of title,
application and a fee of $10 to the division. Upon receipt thereof the
division shall issue a new certificate of title, showing the liens or
encumbrances so created, but not more than two liens or encumbrances
may be shown upon a title. The delivery of the certificate of title,
application and fee to the division shall perfect such person's security
interest in the manufactured home or mobile home described in the
certificate of title, as referenced in K.S.A. 84-9-311, and amendments
In 2002, the legislature amended the KMHA to add § 58-4214. This statute

provided a mechanism to convert the legal character of a manufactured home from

23 See Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan. App. 2d 150, 737 P.2d 52 (1987),
rev. denied 241 Kan. 838 (1987).
24 See § 58-4204(i) (2013 Supp.) governing a party who acquires a non-purchase money security interest
in a manufactured home after issuance of the original certificate of title on the manufactured home.
25 See § 58-4204(a); In re Jackson, 358 B.R. 412, 416 (Bankr. D. Kan. 2007).
26 § 58-4204(i) (2013 Supp.), emphasis added.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 10 of 16

personal property to “an improvement to real property” for all purposes. 27 There are
two requirements to effect this change: (1) the home must be affixed to a permanent
foundation; and (2) the certificate of title must be eliminated pursuant to § 584214(
b). In short, the KMHA provides that a manufactured home is personal property
unless the certificate of title is eliminated. It remains subject to the provisions of
Article 9, and for purposes of perfection, the certificate of title statute, § 58-4204 until
the title is eliminated. If the requirements of § 58-4214 are satisfied, the
manufactured home is treated as real property to which the lien of valid real estate
mortgage covering the real property attaches.

There is no question in this case that even if Ark Valley’s liens attached to the
manufactured home, they are not perfected. The certificate of title has not been
eliminated, the manufactured home remains personal property, and Ark Valley’s
liens needed to be indicated on the certificate of title to be properly perfected. The
critical inquiry here is whether the mortgages sufficed to create security interests
that attached to the manufactured home at all.


The trustee argues that the mortgages create security interests in the
manufactured home because, notwithstanding the lack of a general or specific

27 The legislative history to HB 2723 (adding § 58-4214 to the KMHA) reflects that the purpose for
enacting an elimination of certificate of title provision was to enable title insurance to be obtained onmanufactured homes placed on permanent foundations. Without the elimination of the mobile hometitle, title insurers viewed the home as personal property and would not insure the transfer of
ownership of manufactured or mobile homes. Kansas’s elimination statute was modeled after similarstatutes in Colorado and Washington. See Minutes of the Senate Committee on Financial Institutions
and Insurance dated March 26, 2002, Hearing on HB 2723 on March 20, 2002 (with attachments and
written testimony); Kansas Summary of Legislation, 2002 Reg. Sess. H.B. 2723 (elimination ofcertificates of title on manufactured homes makes them eligible for title insurance).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 11 of 16

reference to the manufactured home in the mortgages, the habendum clause refers to
“fixtures.” Thus, the trustee reasons, if the evidence shows that the manufactured
home is a fixture, it is sufficiently described so that Article 9 security interests
attached to it by virtue of the mortgages.

Section 84-9-203 governs the requirements for attachment and
enforcement of a security interest in collateral.

A security interest attaches and becomes enforceable upon the satisfaction of
three conditions: (1) value has been given; (2) the debtor has rights in the collateral;
and (3) the debtor has authenticated a security agreement that provides a description
of the collateral. The first two conditions are easily met. Ark Valley gave value to the
debtor in the form of loan proceeds. The debtor has rights in the manufactured home
as, at a minimum, the equitable owner. As for the third requirement, the mortgages
granted by Gracy to Ark Valley qualify as authenticated security agreements because
they “mortgage, grant and convey” an interest in the real property legally described,
together with improvements and fixtures that “secure” the repayment of the
indebtedness under the home equity credit agreements.

But, two questions remain. First, did Gracy and Ark Valley mutually intend to
grant a security interest in the manufactured home located on the real property?
And, second, does the use of the term “fixtures” sufficiently describe the otherwise
unidentified collateral -- the manufactured home?

As to the first question, because Ark Valley denies that it took a security
interest in the manufactured home, we look beyond the technical requirements of §

Case 14-05002 Doc# 57 Filed 01/06/15 Page 12 of 16

84-9-203(b) to determine whether the parties intended to create a security interest in
the manufactured home.28 Mr. Gracy unequivocally testified that Ark Valley knew
his “home” was located on the land and in executing the mortgages he believed he
was granting a lien on his land, the manufactured home, and the detached garage.
The Ark Valley witness largely corroborated Mr. Gracy’s testimony. Ms. Gillette
knew that Gracy lived in a “house” on the described realty but didn’t know that it was
a manufactured home. Gracy and Gillette had no discussion that the “home” or
“house” on the property was a manufactured home. She had been trained to obtain
mortgages “on everything” to secure loans and acknowledged that her intent was to
obtain a mortgage on the property as a whole. All of the evidence suggests that the
parties mutually intended to grant a security interest in the manufactured home.29

The security agreement must describe the collateral in which
a security interest is granted.

The sufficiency of the description of the collateral in a security agreement is
governed by § 84-9-108 which requires that the collateral be reasonably identified.
The purpose of the collateral description is evidentiary, and the test of sufficiency is
“that the description do the job assigned to it: Make possible the identification of the
collateral described.”30 While supergeneric descriptions in security agreements are
prohibited under subsection (c), § 84-9-108(b) generally authorizes describing

28 Adv. Dkt. 45, n.10 at p. 6.
29 Based upon Ms. Gillette’s testimony, she recognized that if the collateral was a manufactured home,
special requirements were necessary for Ark Valley to be properly perfected by the recorded mortgage.
But the inquiry here is not whether Ms. Gillette intended to perfect a security interest in the
manufactured home; the inquiry is whether she, on behalf of Ark Valley, intended to obtain a lien on
Mr. Gracy’s home.
30 See Official UCC Comment 2, § 84-9-108.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 13 of 16

collateral by category or type such as goods, inventory, equipment, accounts, etc.31
The UCC recognizes several categories or types of collateral. Most relevant here,
“goods” are broadly defined in § 84-9-102(a)(44) as all things that are movable at the
time a security interest attaches; “goods” specifically subsumes “fixtures” and
“manufactured homes.” “Fixtures” are also a UCC-defined type of collateral.32
Likewise, “consumer goods” defined in § 84-9-102(a)(23), are “goods” that are used
primarily for personal, family, or household purposes.33 Because Gracy uses his
manufactured home as his residence, it is a “consumer good” and the transactions it
secures are “consumer transactions.”

A more specific description of collateral is required in a
consumer transaction involving consumer goods.

Consumer goods are an exception to the general rule permitting description by
collateral type. Subsection (e)(2) of § 84-9-108 renders descriptions of consumer goods
by collateral type insufficient in consumer transactions; a more specific description is
required.34 Gracy’s home equity loans from Ark Valley are consumer transactions
involving consumer goods. Section 84-9-102(a)(26) defines a consumer transaction as
“a transaction in which (i) an individual incurs an obligation primarily for personal,
family, or household purposes, (ii) a security interest secures the obligation, and (iii)
the collateral is held or acquired primarily for personal, family, or household

31 § 84-9-108(b); See § 84-9-102, Official UCC Comments 3 and 4.
32 § 84-9-102(a)(41).
33 Revised Article 9 retained the four mutually exclusive “types” of goods: inventory, equipment, farm
products and consumer goods. See § 84-9-102, Official UCC Comment 4.
34 In re Cunningham, 489 B.R. 602 (Bankr. D. Kan. 2013) (recognizing rule that property type
descriptions of collateral are not sufficient for consumer goods; a collateral description of “goods
purchased on Account” or “goods purchased with Card” was insufficient to allow attachment and
enforceability of a security interest in the goods purchased).


Case 14-05002 Doc# 57 Filed 01/06/15 Page 14 of 16

purposes. “Consumer-goods transactions” are subsumed under “consumer

Gracy testified that he used the proceeds of the 2009 home equity loan to pay
unspecified personal expenses. He used the proceeds of the 2010 home equity loan to
construct a detached garage on the property. These obligations were incurred for
primarily personal, family, or household purposes. Gracy lives in the manufactured
home–another personal, family, or household use. Therefore, the home equity loans
are consumer transactions as defined in § 84-9-102(a)(26). The manufactured home
is a “good” under § 84-9-102(a)(44) that is also a “consumer good” under § 84-9102(
a)(23). This makes § 84-9-108(e)(2) apply to these lines of credit transactions with
Ark Valley. Therefore, the collateral “type” descriptions in the mortgages are
insufficient to attach security interests in the manufactured home.36 Here, the
collateral is generically described as a fixture, a UCC-defined collateral type.37 A
specific reference to a “manufactured home” on the real property might have
reasonably identified the consumer goods in which a security interest was being
granted as § 84-9-108(e)(2) requires. But here, neither of Gracy’s mortgages referred
to a “manufactured home,” whether generically or specifically. The collateral
description in the security agreements is insufficient to attach a security interest in

35 Consumer-goods transactions are defined in § 84-9-102(a)(24).
36 Cf. In re Pizzano, 439 B.R. 445, 450-53 (Bankr. W.D. Mich. 2010) (collateral type description of
“goods” was sufficient for security interest to attach to debtor’s Corvette where the financing
transaction between debtor and creditor was a commercial transaction to finance debtor’s business
and the Corvette was both a “good” and “consumer good”).
37 Id. at 452 (calling party’s argument that fixtures are not a “type” of collateral defined in the UCC “a
dubious proposition”). Section 84-9-102(a)(41) defines fixtures as “goods that have become so related
to particular real property that an interest in them arises under real property law.”

Case 14-05002 Doc# 57 Filed 01/06/15 Page 15 of 16

the manufactured home as a matter of law.38 Because there is no lien in the
manufactured home to avoid, the trustee’s § 544(a) complaint necessarily fails.39 This
adversary proceeding should be dismissed.


Because Ark Valley’s mortgages insufficiently described Mr. Gracy’s
manufacture home, the liens that Mr. Gracy sought to grant and Ark Valley tried to
obtain never attached, leaving the trustee with nothing to avoid. Judgment shall be
entered for Ark Valley accordingly and a judgment on decision will issue this day.40

# # #

38 Cf. In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011) (granting clause of mortgage described
two tracts of real estate and specified that one of the tracts also included a “mobile home”).
39 See In re Seibold, 351 B.R. 741 (Bankr. D. Idaho 2006) (The trustee cannot preserve a nonexistent
lien; where a security agreement did not exist under applicable state law, there is nothing for thetrustee to avoid.); Rajala v. Buerge (In re Buerge), 2013 WL 4409698 at *7 (Bankr. D. Kan. Aug. 13,2013) (Section 544(a) of the Bankruptcy Code empowers the trustee to avoid unperfected but otherwise
valid liens that are attached to property of the debtor; a lien that never attaches is not only
unperfected, it is invalid and entirely worthless to the estate.)
40 Having concluded that no lien attached by virtue of the mortgages, we do not reach the questionwhether the manufactured home was in fact a fixture based upon the evidence presented at trial. Nor
is it necessary to consider whether the enactment of § 58-4214 of the KMHA rendered the Kansas
common law of fixtures inapplicable to manufactured housing secured transactions as the TenthCircuit Bankruptcy Appellate Panel concluded in In re Thomas, 362 B.R. 478 (10th Cir. BAP 2007).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 16 of 16

14-11131 Dynamic Drywall Inc (Doc. # 112)

In Re Dynamic Drywall Inc, 14-11131 (Bankr. D. Kan. Oct. 22, 2014) Doc. # 112

PDFClick here for the pdf document.

SIGNED this 22nd day of October, 2014.




IN RE: )
DYNAMIC DRYWALL, INC. ) Case No. 14-11131
) Chapter 11
Debtor. )



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

13 Id.

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

14-05002 Morris v. Ark Valley Credit Union et al (Doc. # 46)

Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Oct. 30, 2014) Doc. # 46

PDFClick here for the pdf document.

SIGNED this 30th day of October, 2014.




IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7

Debtor. )

Plaintiff, )
vs. ) Adv. No. 14-5002

Defendants. )


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

18, 2014.3

Procedural Background

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
mobile home.

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[3][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

13-12642 Vanlandingham (Doc. # 56)

In Re Vanlandingham, 13-12642 (Bankr. D. Kan. Oct. 1, 2014) Doc. # 56

PDFClick here for the pdf document.

SIGNED this 30th day of September, 2014.



IN RE: )
) Chapter 13
Debtor. )



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
by $4.00.


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

13 Id.
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 § (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 § Further, the
IRS guidelines expressly state that voluntary contributions to retirement plans are not
necessary expenses. See Manual § 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

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
and policy).


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.

Legislative History

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
debtor’s expenses).


Case 13-12642 Doc# 56 Filed 09/30/14 Page 17 of 19

plan through wage withholding was fully disclosed prior to confirmation.

Preventing Abuse

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

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