- Category: Judge Karlin
- Published: 07 April 2016
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Williamson v. Roberson et al, 15-07011 (Bankr. D. Kan. Apr. 6, 2016) Doc. # 72
SIGNED this 6th day of April, 2016.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 15-40041
Tara Rene Roberson, Chapter 7
Darcy Williamson, Chapter 7 Trustee,
Plaintiff, Case No. 15-7011
v. Adversary Proceeding
Bradley Roberson and
Stacy T. Roberson,
Order Denying Defendants Bradley Roberson and Stacy Roberson’s
Motions to Dismiss/Motions for Extension of Deadlines
Defendant Bradley Roberson is currently representing himself in this adversary
proceeding, and ten months into the proceeding filed a motion to dismiss alleging that
Case 15-07011 Doc# 72 Filed 04/06/16 Page 1 of 25
this Court lacks personal jurisdiction over him.1 But Mr. Roberson’s counseled answer
to the complaint against him, and the pro se pleading the Court construed as an
answer to an amended complaint, did not raise this defense. And Mr. Roberson, both
when he had counsel and now that he is proceeding pro se, has actively participated
in the case against him throughout, without ever challenging the personal jurisdiction
of this Court over him. Mr. Roberson has, therefore, waived his personal jurisdiction
challenge under Rule 12(h)(1) of the Federal Rules of Civil Procedure, and his motion
to dismiss is denied.
Defendant Stacy Roberson, added to this adversary proceeding more recently via
an amended complaint and also proceeding pro se, filed her own motion to dismiss
alleging a lack of personal jurisdiction.2 This motion is Ms. Roberson’s first responsive
pleading to that amended complaint. Because, however, the Trustee has satisfied her
prima facie burden of showing this Court’s personal jurisdiction over Ms. Roberson,
and Ms. Roberson has not met her complimentary burden of establishing
constitutionally significant inconvenience in response, Ms. Roberson’s motion to
dismiss must also be denied.
Both Mr. and Ms. Roberson have also requested a one hundred twenty day
extension of all deadlines in the adversary proceeding, to enable the Robersons to
prepare their defense to the Trustee’s amended complaint. Because of the inordinate
1 Doc. 53.
2 Doc. 66.
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delay already encountered in this case due to the Robersons’ pro se status, the Court
will not further delay this litigation, and also denies these requests.
I. Procedural Background
The Chapter 7 Trustee, Darcy Williamson, filed a complaint against (only) Mr.
Roberson on May 5, 2015. That complaint stated two claims: Count 1 for avoidance of
fraudulent conveyances under 11 U.S.C. § 5483 and Count 2 for recovery of the avoided
interest under §§ 550, 551, and 542. Mr. Roberson was represented by counsel at that
time, and his counsel filed an answer to the complaint, wherein he generally admitted
or denied the allegations of the complaint and then raised several affirmative defenses.
Those affirmative defenses included that his sister, Tara Roberson—the Debtor in this
case—herself held some of the property alleged to be in Mr. Roberson’s possession, that
other persons had possession of certain of the property, and that certain property was
transferred to an auction service. The answer did deny that service of the complaint
was “completed to the defendant” because the address given for Mr. Roberson was
incorrect. A scheduling order was then entered and discovery commenced.
Shortly thereafter, however, Mr. Roberson’s counsel withdrew from the
proceeding. Discovery deadlines were extended to give Mr. Roberson, now proceeding
pro se, additional time to answer the discovery propounded to him and retain new
counsel if he chose. After receiving leave from the Court, the Trustee then filed an
amended complaint on December 18, 2015, adding new counts and one new defendant,
3 All future statutory references are to title 11 of the United States Code,
unless otherwise specified.
Case 15-07011 Doc# 72 Filed 04/06/16 Page 3 of 25
Stacy Roberson. The additional counts are: Count 3 for accounting and turnover of
documents under § 542 and Kansas statutory sections 58-651 and 58-662, Count 4 for
conversion of property and turnover, and Count 5 for breach of fiduciary duty. Plaintiff
appropriately served the amended complaint on both defendants, but neither answered
or filed a timely dispositive motion.
This is where the procedural history gets complicated. On January 5, 2016, the
Trustee filed a request for a Clerk’s entry of default against Mr. Roberson, and on
January 8, 2016, the Clerk entered default. On January 11, 2016, the Court received
lengthy correspondence from Mr. Roberson, generally setting out his version of the
facts of the case and disputing the claims made against him in the amended complaint.
As a result, the Court liberally treated the correspondence as an answer to the
amended complaint, and directed the Clerk to so file it on January 12, 2016. Via letter
from the Clerk’s Office, Mr. Roberson was instructed to file an amended answer within
fourteen days that—paragraph by paragraph—explained why he felt the Trustee’s
position was incorrect factually and as a matter of law. He was also instructed that his
wife and co-defendant, Ms. Roberson, must also file a proper answer to the amended
The correspondence construed by the Court as Mr. Roberson’s answer to the
amended complaint also makes no mention of this Court’s jurisdiction. Nevertheless,
on January 26, 2016, rather than file an amended answer to the amended complaint,
Mr. Roberson filed the motion to dismiss for lack of personal jurisdiction that is the
subject of this order. Mr. Roberson’s motion also requests a one hundred twenty day
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extension of all deadlines for Stacy Roberson to obtain counsel and prepare an
adequate defense. The Trustee responded to Mr. Roberson’s motion, alleging that Mr.
Roberson had waived any argument that the Court lacked personal jurisdiction against
him by not including the argument in his answer to the complaint. The Trustee also
filed a request for Clerk’s entry of default against Ms. Roberson, who had not filed an
answer to the amended complaint. Soon thereafter, Ms. Roberson filed a motion to
dismiss that is identical to Mr. Roberson’s; it also seeks the lengthy extension of all
deadlines. Pending resolution of the motions to dismiss, the Court directed the Clerk
to not enter default against Ms. Roberson.
II. Factual Allegations
The amended complaint, highly summarized, generally alleges an all too
common scenario: older parents become deceased or infirm, no formal probate or
accounting of caretaker expenditures is undertaken, and some years later the adult
children dispute what happened with the funds from the parents’ estate. Fortunately,
the Roberson family tree is not as complicated as some—William Roberson was
married to Betty Roberson, and they had two children, namely Bradley Roberson and
Tara Roberson. A brief time line of events as alleged by the Trustee is necessary to the
4 The facts laid out in this section are taken from the Trustee’s amended
complaint, as those facts have not been controverted by either Bradley or StacyRoberson in their motions to dismiss. See Ten Mile Indus. Park v. W. Plains Serv.
Corp., 810 F.2d 1518, 1524 (10th Cir. 1987) (“In ascertaining the facts necessary toestablish jurisdiction, the district court must accept as true the allegations set forthin the complaint to the extent they are uncontroverted by defendant’s affidavits.
Case 15-07011 Doc# 72 Filed 04/06/16 Page 5 of 25
William Roberson owned real property at 431 Westchester Road, in Topeka, KS.
In 2009, a transfer on death deed was recorded on that property by William and Betty
Roberson, conveying the property to Tara Roberson at their death. At the same time,
Betty Roberson executed a power of attorney, designating William Roberson as her
attorney-in-fact and Tara Roberson as the alternate. Years later, on August 20, 2013,
William Roberson passed away. At that point, title to the 431 Westchester property
transferred to Tara Roberson via the transfer on death deed, and she held title in fee
simple. Two days later, on August 22, 2013, Tara Roberson listed the property for sale,
as Betty Roberson required assisted care and could no longer stay in the home. No sale
of the property was made at that point, however.
About five months later, on January 18, 2014, Betty Roberson executed a new
power of attorney in Topeka. The 2014 power of attorney appointed Bradley and Stacy
Roberson as her co-attorneys-in-fact, authorizing them to make financial and health
care decisions in Kansas and in the state of Washington on Betty’s behalf. At some
point thereafter, Betty Roberson relocated to Washington, where Bradley and Stacy
Roberson lived. On January 31, 2014, Tara Roberson quit claimed the 431 Westchester
property to Bradley Roberson for no consideration. Shortly thereafter, on February 20,
2014, Bradley and Stacy Roberson sold the 431 Westchester property for $245,000 to
unrelated buyers. (The Trustee alternatively alleges that the 431 Westchester property
was sold, and that Defendants received funds in their capacity as co-attorneys-in-fact
However, only the well pled facts of plaintiff’s complaint, as distinguished frommere conclusory allegations, must be accepted as true.” (internal citations omitted)).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 6 of 25
for Betty Roberson.) After payment of the first and second mortgages, closing costs, and
taxes, Bradley and Stacy Roberson received the net sum of $38,430.17. This entire
amount was deposited into Bradley and Stacy Robersons’ joint account at Twin Star
Credit Union in Olympia, Washington. The Trustee alleges that these funds were used,
disbursed, converted, and spent for Bradley and Stacy Robersons’ personal expenses,
wants, and needs.
Betty Roberson had a bank account at CoreFirst Bank in Topeka and at
Cottonwood Valley Bank in Cottonwood Falls, Kansas. At all times relevant, two
monthly deposits were made into the Cottonwood Valley account:5 $1984 from Social
Security and $946.75 from KPERS, the Kansas retirement system. Beginning on
February 1, 2014, Bradley and Stacy Roberson executed checks, drawn on Betty
Roberson’s Cottonwood Valley bank account, and deposited the funds in their Twin
Star Credit Union account for their own personal expenses, wants, and needs. The
checks were executed by Bradley Roberson and made payable to Stacy Roberson.
On June 30, 2015, Betty Roberson passed away. Between February 1, 2014 and
January 2015, Bradley and Stacy Roberson drew checks on Betty Roberson’s account
for a total of $32,084. The Trustee estimates $46,737.75 was spent in this manner
through June 2015. Bradley and Stacy Roberson continued to draw checks on the
5 The Trustee’s amended complaint discusses Betty Roberson’s two accountsand then states “this account . . . had two regular deposits . . .” As a result, it isunclear which account the Trustee is referring to. It is assumed from context clues,
however, that the Trustee refers to the account at Cottonwood Valley Bank.
Regardless, it is immaterial for analysis of the motions to dismiss which of the twoBetty Roberson accounts had the monthly deposits.
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Cottonwood Valley bank account until August 2015. The Trustee’s amended complaint
alleges additional facts concerning Tara Roberson’s transfer of certain personal
property to Bradley Roberson within the two years proceeding her bankruptcy petition,
but these additional facts appear irrelevant to resolution of the current motions.
On January 15, 2015, Tara Roberson filed a Chapter 7 bankruptcy petition. The
Trustee is now pursuing causes of action against Bradley and Stacy Roberson on Tara
Roberson’s behalf, alleging those causes of action are property of the bankruptcy estate.
A. Personal Jurisdiction Generally
The concept of personal jurisdiction requires that “the court must have
jurisdiction over the defendant’s person, his property, or the res that is the subject of
the suit.”6 “[A] court without jurisdiction over the parties cannot render a valid
judgment.”7 “Although plaintiff bears the burden of establishing personal jurisdiction
over defendant, in the preliminary stages of litigation this burden is ‘light’ . . . [and] the
plaintiff need only make a prima facie showing that jurisdiction exists.”8 “The plaintiff
may make this prima facie showing by demonstrating, via affidavit or other written
materials, facts that if true would support jurisdiction over the defendant. In order to
6 4 Charles Alan Wright et al., Federal Practice & Procedure § 1063 (4th ed.).
7 OMI Holdings, Inc. v. Royal Ins. Co. of Canada, 149 F.3d 1086, 1090 (10thCir. 1998).
8 Intercon, Inc. v. Bell A. Internet Cols., Inc., 205 F.3d 1244, 1247 (10th Cir.
2000) (internal citations and quotations marks omitted).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 8 of 25
defeat a plaintiff’s prima facie showing of jurisdiction, a defendant must present a
compelling case demonstrating that the presence of some other considerations would
render jurisdiction unreasonable.”9 Although both of the Robersons challenge this
Court’s personal jurisdiction over them, because of the unique procedural posture of
this adversary proceeding, the analysis for each differs, and each will be addressed
9 OMI Holdings, Inc., 149 F.3d at 1091 (internal quotation marks omitted).
To make her prima facie case, the Trustee submitted an affidavit in supportof her opposition to Stacy Roberson’s motion to dismiss. The affidavit did not,
however, include a statement that it was “made on personal knowledge” or “showthat the affiant . . . is competent to testify on the matters stated.” Fed. R. Civ. P.
56(c)(4); see also Thompson v. Chambers, 804 F. Supp. 188, 191 (D. Kan. 1992)
(stating that if there are affidavits filed in support of contested facts whenconsidering a motion to dismiss based on personal jurisdiction, those affidavits“must be made on personal knowledge, set forth such facts as would be admissiblein evidence, and show affirmatively that the affiant is competent to testify to thematters stated therein”). As a result of these facial defects, the Court does notconsider the Trustee’s affidavit for resolving Ms. Roberson’s motion to dismiss.
Because the Trustee’s amended complaint is sufficiently detailed, however,
and the facts therein are not controverted by the Robersons’ motions, the Courtrelies on the facts alleged in the amended complaint to assess the motions todismiss. See Pytlik v. Prof. Resources, Ltd., 887 F.2d 1371, 1376 (10th Cir. 1989) (“Inascertaining the facts necessary to establish jurisdiction, the court must accept astrue the allegations set forth in the complaint to the extent they are uncontrovertedby the defendant's affidavits.” (internal citations omitted)); Behagen v. Amateur
Basketball Ass’n of USA, 744 F.2d 761, 733 (10th Cir. 1984) (“The allegations in thecomplaint must be taken as true to the extent they are uncontroverted by thedefendant's affidavits.”); Am Land Program, Inc. v. Bonaventura Uitgevers
Maatschappii, N.V., 710 F.2d 1449, 1454 (10th Cir. 1983) (analyzing the factsalleged in plaintiff’s complaint, when assessing defendant’s motion to dismiss basedon personal jurisdiction, and noting that “the allegations of the complaint are takenas true to the extent they are not contradicted by affidavits;” if the defendant doescounter with a sworn affidavit, then the plaintiff must support the allegations intheir complaint with an affidavit or some other evidence of their own).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 9 of 25
B. Waiver of the Personal Jurisdiction Argument by Mr. Roberson
The Trustee contends that Mr. Roberson has waived his personal jurisdiction
challenge, and it is true that “[a] defect in the district court’s jurisdiction over a party
. . . is a personal defense which may be asserted or waived by a party.”10 Rule 12(h)(1)
of the Federal Rules of Civil Procedure states that a party waives the defense of lack
of personal jurisdiction by “failing to either (i) make it by motion under this rule; or (ii)
include it in a responsive pleading or in an amendment allowed by Rule 15(a)(1) as a
matter of course.”11
As a result of Rule 12(h)(1)’s strictures, if the lack of personal jurisdiction
defense is not make in a preliminary motion under Rule 12, is omitted from the
answer, or is omitted from any permitted amendment to the answer, then the defense
is waived. As stated by the leading treatise on federal procedure, if a “party wishes to
raise any of these defenses [including lack of personal jurisdiction], that must be done
at the time the first significant defensive move is made—whether it be by way of a Rule
12 motion or responsive pleading.”12
10 Williams v. Life Sav. & Loan, 802 F.2d 1200, 1202 (10th Cir. 1986).
11 Am. Fid. Assur. Co. v. Bank of New York Mellon, 810 F.3d 1234, 1237
(10th Cir. 2016) (“Federal Rule of Civil Procedure 12(h)(1) provides that a partywaives the defenses listed in Rule 12(b)(2)–(5), including lack of personaljurisdiction, Rule 12(b)(2), by failing to assert them in a responsive pleading or anearlier motion.”). Rule 12 is made applicable to bankruptcy via Federal Rule ofBankruptcy Procedure 7012.
12 5C Charles Alan Wright et al., Federal Practice & Procedure § 1391 (3ded.).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 10 of 25
In this case, the Trustee filed her complaint against Mr. Roberson on May 5,
2015. On June 7, 2015, Mr. Roberson, represented by counsel, filed his answer to that
complaint. In his answer, Mr. Roberson asserted that service of the complaint had been
made to the wrong address, but he did not raise the matter of personal jurisdiction. Mr.
Roberson, through counsel, then participated in a scheduling conference with the
Trustee, submitted a report of parties’ planning meeting, and a scheduling order was
entered. Discovery commenced by both parties (the docket notes indicate that initial
disclosures were made in mid-July 2015, and subpoenas were issued in August 2015),
and again, no personal jurisdiction defense was ever mentioned. Mr. Roberson’s
counsel then withdrew from his representation. The Trustee then filed an amended
complaint two months later, on December 18, 2015, adding Ms. Roberson and
additional counts to the complaint. After the Trustee requested and obtained a Clerk’s
entry of default against Mr. Roberson for his failure to answer that amended
complaint, Mr. Roberson then submitted a lengthy, pro se “answer” to the amended
complaint, setting out his version of the facts. Out of consideration to Mr. Roberson’s
pro se status,13 the Court construed this pleading as an answer to the amended
complaint, filed January 12, 2016. Yet again, however, no mention of personal
jurisdiction was made in this pleading.
Mr. Roberson, therefore, either through counsel or proceeding pro se, actively
13 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991) (“A pro se litigant’spleadings are to be construed liberally and held to a less stringent standard thanformal pleadings drafted by lawyers.”).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 11 of 25
participated in this litigation for eight months without raising personal jurisdiction.
As a result, he has waived that defense under Rule 12(h).
The case law supports this result. The Tenth Circuit has explicitly found the
defense of personal jurisdiction waived when a defendant fails to either timely file a
motion to dismiss asserting that ground or raise the defense in an answer, even when
the defendant later attempts to raise the defense.14 And even if Mr. Roberson had not
waived personal jurisdiction by not including the defense in his answer to the
complaint or in his answer to the amended complaint, a party can implicitly waive the
defense by participating in discovery and hearings or by waiting a significant period
to submit a Rule 12(b)(2) motion.15 The amended complaint did not raise anything that
would give rise to a personal jurisdiction defense that was not available before16—and
14 United States v. 51 Pieces of Real Property, Roswell, New Mexico, 17 F.3d
1306, 1314 (10th Cir. 1994) (concluding that by filing a response to a motion fordefault judgment, the defendant waived its personal jurisdiction defense, and couldnot raise lack of personal jurisdiction in a later filed motion to dismiss).
15 Fabara v. GoFit, LLC, 308 F.R.D. 380, 393 (D.N.M. 2015), as amended(Aug. 20, 2015).
16 See 5B Charles Alan Wright et al., Federal Practice & Procedure § 1347 (3ded.) (“[I]f the plaintiff has raised new matter in the amended complaint that may bevulnerable to one of the defenses enumerated in Rule 12(b), the defendant mayassert that defense by a pre-answer motion or in the responsive pleading even if shedid not assert it initially.”); Artistic Stone Crafters, Inc. v. Safeco Ins. Co. of Am., No.
CV 108-153, 2010 WL 317472, at *3 (S.D. Ga. Jan. 25, 2010) (holding that anamended complaint gave rise to a Rule 12(b)(3) venue defense for the first time, andthe defendants could therefore assert the defense in response to that amendment);
Sohns v. Dahl, 392 F. Supp. 1208, 1220 n.7 (W.D. Va. 1975) (raising the issue, butnot addressing, whether the defendant had waived a Rule 12(b)(3) venue objectionprior to an amended complaint, as “the alleged defect of improper venue was notcreated by the new matter raised in plaintiff’s amended complaint”).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 12 of 25
even if it had, Mr. Roberson answered the amended complaint without raising personal
jurisdiction. No matter how you look at it, the personal jurisdiction defense is waived
as to Mr. Roberson.
C. The Court’s Personal Jurisdiction Over Ms. Roberson
Ms. Roberson was just brought in to this lawsuit via the amended complaint on
December 18, 2015, and is raising personal jurisdiction in her motion in lieu of an
answer.17 As a result, the Trustee does not argue that Ms. Roberson waived her
assertion of the personal jurisdiction defense. The Court must therefore assess this
Court’s personal jurisdiction over Ms. Roberson through a multi-step process.
Bankruptcy cases, because they derive from a comprehensive, nationwide federal
statute, have a more expansive view of personal jurisdiction than some other types of
cases18 The Bankruptcy Code, via Federal Rule of Bankruptcy Procedure 7004, confers
17 The amended complaint was filed on December 18, 2015, and Ms.
Roberson was served with an alias summons on January 13, 2016. Ms. Roberson’sanswer to the amended complaint was due, therefore, on February 12, 2016. Ms.
Roberson did not timely file an answer, and the Trustee filed a request for a Clerk’sentry of default against Ms. Roberson on February 17, 2016 (but did not show anyservice on either defendant of that request). The Court asked for that request to bemailed to both Mr. and Ms. Roberson, and the Trustee complied by filing acertificate of service showing the same. Shortly thereafter, on February 26, 2016,
Ms. Roberson filed her motion to dismiss. The Court has requested the Clerk’sOffice to hold off on entering the Clerk’s entry of default against Ms. Roberson whileit assesses the current motion.
18 See Christensen v. Madsen (In re Madsen), No. UT-13-094, 2014 WL
4180846, at *4 (10th Cir. BAP Aug. 25, 2014) (“Congress has exerted federal controlover various aspects of economic relations by enacting comprehensive securities,
antitrust, ERISA , and bankruptcy laws. These statutory schemes typically providefor nationwide service of process. In bankruptcy, Rule 7004 specifically permitsservice of a summons and complaint in an adversary proceeding anywhere in the
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personal jurisdiction with a nationwide service of process provision, assuming its
requirements are met. Rule 7004 states:
(d) Nationwide service of process
The summons and complaint and all other process except a subpoena may
be served anywhere in the United States.
. . .
(f) Personal jurisdiction
If the exercise of jurisdiction is consistent with the Constitution and laws
of the United States, serving a summons or filing a waiver of service in
accordance with this rule or the subdivisions of Rule 4 F.R.Civ.P. made
applicable by these rules is effective to establish personal jurisdiction
over the person of any defendant with respect to a case under the Code
or a civil proceeding arising under the Code, or arising in or related to a
case under the Code.
Despite this broad personal jurisdiction directive, however, the Tenth Circuit’s
case law requires more than just compliance with Rule 7004. Rather, the Tenth Circuit
“requires that before ‘a federal court can assert personal jurisdiction over a defendant
in a federal question case, the court must determine (1) whether the applicable
[federal] statute potentially confers jurisdiction by authorizing service of process on the
defendant and (2) whether the exercise of jurisdiction comports with due process.’”19
The first step then is to determine whether Ms. Roberson was properly served
under Rule 7004. Rule 7004 permits service by first class mail upon individuals at “the
individual’s dwelling house or usual place of abode.”20 Ms. Roberson was served by both
19 Klein v. Cornelius, 786 F.3d 1310, 1317 (10th Cir. 2015) (quoting Peay v.
BellSouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th Cir. 2000)).
20 Fed. R. Bankr. P. 7004(b)(1).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 14 of 25
first class and certified mail at 427 Milroy Street SW, Olympia, WA 98502. An alias
summons was also served on Ms. Roberson at an alternate address at 4526 N. Larson
Drive, Oak Harbor, WA 98277. Ms. Roberson was therefore served by first class and
certified mail—a step above and beyond what is required by Rule 7004. The Trustee
has, therefore, complied with the provisions of Rule 7004 for service.
Because Rule 7004’s nationwide service of process applies, the Court moves to
the second step in determining Ms. Roberson’s personal jurisdiction challenge: namely,
“‘whether the exercise of jurisdiction comports with due process’”21 The due process
question asks whether the forum is “fair and reasonable to the defendant.”22 The
primary focus is “protecting an individual’s liberty interest in avoiding the burdens of
litigating” in an unfair or unreasonable forum.”23 The Tenth Circuit has addressed this
issue in detail, and stated:
To establish that jurisdiction does not comport with Fifth Amendmentdue process principles, a defendant must first demonstrate that hisliberty interests actually have been infringed. The burden is on thedefendant to show that the exercise of jurisdiction in the chosen forumwill make litigation so gravely difficult and inconvenient that he unfairlyis at a severe disadvantage in comparison to his opponent.
However, . . . given the practical considerations emanating from therealities of contemporary litigation, any constitutional due processlimitations upon a federal extraterritorial (nationwide) service of processstatute must be broadly defined. Thus, in evaluating whether thedefendant has met his burden of establishing constitutionally significant
21 Klein, 786 F.3d at 1317 (quoting Peay, 205 F.3d at 1209).
22 Peay, 205 F.3d at 1212.
23 Id. at 1211 (internal quotation marks omitted).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 15 of 25
inconvenience, courts should consider the following factors: (1) the extentof the defendant’s contacts with the place where the action was filed; (2)
the inconvenience to the defendant of having to defend in a jurisdictionother than that of his residence or place of business, including (a) thenature and extent and interstate character of the defendant’s business,
(b) the defendant’s access to counsel, and (c) the distance from thedefendant to the place where the action was brought; (3) judicialeconomy; (4) the probable situs of the discovery proceedings and theextent to which the discovery proceedings will take place outside the stateof the defendant’s residence or place of business; and (5) the nature of theregulated activity in question and the extent of impact that thedefendant’s activities have beyond the borders of his state of residence orbusiness.
We emphasize that it is only in highly unusual cases that inconveniencewill rise to a level of constitutional concern. Certainly, in this age ofinstant communication and modern transportation, the burdens oflitigating in a distant forum have lessened.
If a defendant successfully demonstrates that litigation in the plaintiff’schosen forum is unduly inconvenient, then jurisdiction will comport withdue process only if the federal interest in litigating the dispute in thechosen forum outweighs the burden imposed on the defendant. Todetermine whether infringement on the defendant’s liberty is justifiedsufficiently by government interests, courts should examine the federalpolicies advanced by the statute, the relationship between nationwideservice of process and the advancement of these policies, the connectionbetween the exercise of jurisdiction in the chosen forum and the plaintiff’svindication of his federal right, and concerns of judicial efficiency and
There are several takeaways from this Tenth Circuit jurisprudence. First, it is
the defendant, Ms. Roberson’s, burden to show that this Court’s exercise of jurisdiction
will place her at a severe disadvantage. Second, it is not mere inconvenience that must
24 Id. at 1212–13 (internal citations and quotation marks omitted). The Peay
reasoning was followed by the Tenth Circuit BAP in In re Madsen, 2014 WL
4180846, at *3–5 (reviewing the holing in Peay and instructing the bankruptcy
court to apply its reasoning upon remand).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 16 of 25
be shown, but rather the “highly unusual” case where the burden of litigating in this
forum causes “constitutionally significant inconvenience.” And third, even if this
burden is met, the exercise of jurisdiction may still be justified if there is a sufficient
Ms. Roberson’s motion to dismiss simply states that she lives outside the state
of Kansas, that if she did have contacts with Kansas, they were not related to the
claims against her, and that she made non annual visits to Kansas “only for a week or
two.” Notwithstanding the matter that these “facts” are not made by affidavit,25 these
assertions are nowhere near the level needed to meet Ms. Roberson’s burden of proof.
Ms. Roberson has not alleged, let alone shown, how her liberty interests will be
infringed by participating in this adversary proceeding in Kansas. Merely stating that
she does not live here and has not visited regularly is not sufficient. Ms. Roberson must
instead show this Court that litigation here, as opposed to her home state, will be
“gravely difficult and inconvenient.”26 She has not even attempted to do so.
But even if she had made such an attempt, addressing the factors urged by the
Tenth Circuit for considering “whether the defendant has met his burden of
establishing constitutionally significant inconvenience,”27 Ms. Roberson has not carried
25 Ms. Roberson could meet her burden through an affidavit or by putting onevidence at an evidentiary hearing. Black & Veatch Constr., Inc. v. ABB Power
Generation, Inc., 123 F. Supp. 2d 569, 572 (D. Kan. 2000).
26 Peay, 205 F.3d at 1212.
27 Id. (internal quotation marks omitted).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 17 of 25
her burden. Regarding the first factor, Ms. Roberson’s contacts with Kansas, the
Trustee’s amended complaint alleges causes of action stemming from the sale of the
431 Westchester property in Kansas, the use of the funds withdrawn monthly from
Betty Roberson’s Kansas bank accounts, and Ms. Roberson’s exercise of fiduciary duty
under the Kansas power of attorney she was granted. And while Stacy Roberson was
not living in Kansas while engaged in these activities, they all originate in Kansas and
deal with Kansas property, real and personal. Simply because they occurred
electronically does not mean that they did not impact Kansas property and people.
The second factor, the inconvenience to Stacy Roberson of having to litigate in
Kansas, rather than in her home state of Washington, is more sympathetic to Ms.
Roberson. It would certainly be more convenient for Ms. Roberson to attend hearings
in her home state. But, as Ms. Roberson presumably did when she was allegedly
withdrawing funds from Betty Roberson’s accounts in Kansas, many things can be
done electronically. Most, if not all, discovery can be conducted via emailed documents
or telephone, and many hearings at this Court can also be conducted with the parties
appearing telephonically. As a result, the distance to a courthouse is not as large of a
concern to the Court as it once was. And the fact that Ms. Roberson does not have an
attorney would be just as true in Washington as in Kansas.
Regarding the third factor—judicial economy, it appears that conducting the
adversary proceeding in this forum may be more efficient, as Tara Roberson’s
bankruptcy case has already been proceeding in this forum for some time. Even more
importantly, the judge assigned to this matter has been managing the adversary
Case 15-07011 Doc# 72 Filed 04/06/16 Page 18 of 25
proceeding since its initial filing in May 2015 (including entering a Scheduling Order,
granting authority to amend, granting some continuances, allowing counsel to
withdraw, construing a letter as an answer, directing the Clerk not to enter default as
to Ms. Roberson, reviewing the motions and briefs concerning jurisdiction, etc.), and
thus has already developed some familiarity with the matter.
Regarding the fourth factor, the probable site of discovery proceedings, as noted
above, most discovery can be handled electronically, whether by sending scanned
documents back and forth by email, or conducting a deposition by telephone or video.
And finally, the fifth factor, the nature of Ms. Roberson’s activity and the impact of
that activity beyond Ms. Roberson’s home state of Washington, is closely related to the
“contacts” question. Again, Ms. Roberson was not physically located in Kansas while
she sold the 431 Westchester property or conducted Betty Roberson’s affairs through
her Kansas bank accounts, but these activities affected the real property in Kansas and
were done under the Kansas power of attorney authority she was given. When
analyzing these factors, Ms. Roberson has not carried her burden of showing the
constitutional inconvenience required.
And out of an abundance of consideration for Ms. Roberson’s pro se status, even
if she had met her burden of showing constitutionally significant inconvenience, the
federal interest in litigating this adversary proceeding in this forum is strong. The
Bankruptcy Code strives to treat debtors and creditors fairly, and to do so it must have
a national reach for property and persons affecting the bankruptcy estate, no matter
Case 15-07011 Doc# 72 Filed 04/06/16 Page 19 of 25
where situated.28 Further, the amended complaint against Ms. Roberson is filed by the
Trustee, in furtherance of garnering assets for Tara Roberson’s bankruptcy estate
creditors. Conducting the adversary proceeding in this forum assists the Trustee in
that effort, and as noted above, is more efficient for the judiciary. “Where . . . Congress
has provided for nationwide service of process, courts should presume that nationwide
personal jurisdiction is necessary to further congressional objectives,”29 and this Court
so presumes here.
Even after all this, there is one more step. Another requirement for Rule 7004(f)
to apply, is that the Court must also be assured that it has subject matter jurisdiction
over this adversary proceeding, i.e., is this “a case under the Code or a civil proceeding
arising under the Code, or arising in or related to a case under the Code.”30 The
Trustee’s amended complaint states five claims: 1) avoidance of fraudulent conveyance
under § 548, 2) recovery of the avoided interest under §§ 550, 551, and 542, 3)
accounting and turnover of documents under § 542 and Kansas statutes, 4) conversion
of property and turnover, and 5) breach of fiduciary duty.
28 See Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626, 635 (6thCir. 1986) (stating that “Congress wisely chose a broad jurisdictional grant and abroad abstention doctrine over a narrower jurisdictional grant so that the districtcourt could determine in each individual case whether hearing it would promote orimpair efficient and fair adjudication of bankruptcy cases.”).
29 Peay, 205 F.3d at 1213 (internal quotation marks omitted).
30 Fed. R. Bankr. P. 7004(f); see also Redhawk Global, LLC v. World Projects
Int’l, 495 B.R. 368, 373 (S.D. Ohio 2013) (stating that the Court must determinewhether it has proper subject matter jurisdiction to hear the proceeding whenapplying Rule 7004’s nationwide service of process).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 20 of 25
First, Rule 7004 applies to core proceedings, i.e., those “arising under the Code”.
Section 157(b)(2) of title 28 defines core proceedings, and the Trustee’s amended
complaint cites subsections A, E, H, and O of that statute. Those subsections state that
core proceedings are: “(A) matters concerning the administration of the estate,” “(E)
orders to turn over property of the estate,” “(H) proceedings to determine, avoid, or
recover fraudulent conveyances,” and “(O) other proceedings affecting the liquidation
of the assets of the estate or the adjustment of the debtor-creditor or the equity
security holder relationship, except personal injury tort or wrongful death claims[.]”
In addition, the Tenth Circuit BAP has stated that core proceedings have no existence
outside of bankruptcy, depend on bankruptcy laws for their existence, and could not
proceed in another court.31
Second, Rule 7004 also applies to “related to” proceedings, which are those that
“could have been commenced in federal or state court independently of the bankruptcy
case, but the outcome of that proceeding could conceivably have an effect on the estate
being administered in bankruptcy.”32 To determine whether a matter is related to a
bankruptcy case, courts focus on “whether the action potentially impacts
administration of the bankruptcy estate.”33 “Although the proceeding need not be
31 Santander Consumer, USA, Inc. v. Houlik (In re Houlik), 481 B.R. 661, 674
(10th Cir. BAP 2012).
32 Personette v. Kennedy (In re Midgard), 204 B.R. 764, 771 (10th Cir. BAP1997) (internal quotations omitted).
33 In re Houlik, 481 B.R. at 674.
Case 15-07011 Doc# 72 Filed 04/06/16 Page 21 of 25
against the debtor or his property, the proceeding is related to the bankruptcy if the
outcome could alter the debtor’s rights, liabilities, options, or freedom of action in any
way, thereby impacting on the handling and administration of the bankruptcy
The first two of the Trustee’s claims —for fraudulent conveyance under § 548,
and her derivative claim for recovery of the avoided transfer under §§ 550, 551, and
542—undoubtedly arise under the Code and are core proceedings. These claims are
directly dependent on Bankruptcy Code sections for their existence and are designated
as core under 28 U.S.C. § 157(b)(2)(H).
The Trustee’s third claim is for an accounting of funds during the time Ms.
Roberson acted as Betty Roberson’s power of attorney under K.S.A. §§ 58-651 and 58662,
and for turnover of those account records under § 542. As the daughter of Betty
Roberson, Debtor Tara Roberson is “an adult member of the principal’s family” who
may petition for an accounting by the attorney-in-fact (Stacy Roberson) if the principal
(Betty Roberson) is deceased.35 As the Trustee of Tara Roberson’s bankruptcy estate,
the Trustee may, therefore, pursue this claim on Tara Roberson’s behalf. The claim is
related to the Trustee’s fourth and fifth claim: for conversion of property and breach
of fiduciary duty, both again directed at Stacy Roberson’s actions against Betty
Roberson’s property. The Trustee, standing in the shoes of Betty Roberson’s heir, Tara
34 Gardner v. United States (In re Gardner), 913 F.2d at 1518 (internalcitations and quotations omitted).
35 K.S.A. § 58-662(a).
Case 15-07011 Doc# 72 Filed 04/06/16 Page 22 of 25
Roberson, is attempting to expand the scope of the funds held by the bankruptcy
estate, and if she is successful, then Debtor Tara Roberson’s creditors will directly
benefit. This potential distribution to creditors would certainly have an impact on the
handling and administration of the bankruptcy estate. As a result, the Court finds that
the Trustee’s final three claims are related to Debtor Tara Roberson’s bankruptcy case.
The Court’s analysis is lengthy, but it is confident of its result. Ultimately, the
Court is satisfied that Rule 7004’s nationwide service of process applies to Ms.
Roberson, and that, as a result, her motion to dismiss should be denied.36
The Court denies Mr. Roberson’s motion to dismiss,37 because the argument
upon which it is based has been waived. Likewise, the Court denies Ms. Roberson’s
36 The Trustee contends that Ms. Roberson is subject to this Court’sjurisdiction in two ways: 1) the Kansas power of attorney statute states thatpersons acting pursuant to a power of attorney governed by that statute “withrespect to matters relating to acts and transactions of the attorney in fact . . .
performed in this state, performed for a resident of this state, or affecting propertyof this state” are subject to personal jurisdiction in Kansas, K.S.A. 58-663(b), and 2)
the Kansas long-arm statute grants this Court personal jurisdiction because of Ms.
Roberson’s minimum contacts with Kansas. Because the proper analysis does notrequire resort to Kansas law, but instead originates under Rule 7004, this Courtwill not address the Trustee’s arguments. See Redhawk Global, LLC v. World
Projects Intern’l, 495 B.R. 368, 372 (S.D. Ohio 2013) (stating that the personaljurisdiction analysis “does not require a state long arm statute analysis when adistrict court exercises federal question jurisdiction and the underlying action stemsfrom a federal statute providing for nationwide service of process”); see also In re
Madsen, 2014 WL 4180846, at *4 (applying Rule 7004’s nationwide personaljurisdiction analysis on appeal rather than the analysis utilized by the parties andbankruptcy court).
37 Doc. 53.
Case 15-07011 Doc# 72 Filed 04/06/16 Page 23 of 25
motion to dismiss,38 because she has not carried her burden to show constitutionally
significant inconvenience from litigating in this forum.
In the alternative to the dismissal of the Trustee’s Amended Complaint, both
Mr. and Ms. Roberson have requested a one hundred and twenty day extension of all
deadlines for Ms. Roberson to obtain counsel and prepare her defense. But the Court
sees no reason to further delay this adversary proceeding. Mr. Roberson has been
involved in this litigation for eleven months, and Ms. Roberson was served with the
amended complaint three months ago. The Court therefore denies their alternate
request for an extension of deadlines. Under Rule 12(a)(4)(A), both Mr. and Ms.
Roberson should file a detailed answer to the Trustee’s amended complaint within
fourteen days of the date of this Order.39 The Court further requests that the Trustee
email a copy of this Order to the Robersons at the email addresses contained in their
most recent pleadings since as unrepresented Defendants and non-debtors, they are
38 Doc. 66.
39 As this Court has previously stated, a proper answer addresses head oneach factual assertion made in a complaint, answering numbered paragraph bynumbered paragraph and by specifically indicating whether the defendant admits,
denies, or has insufficient knowledge to admit or deny each allegation. If either Mr.
Roberson or Ms. Roberson do not timely file such an answer to the amendedcomplaint by April 20, 2016, then the Clerk will at that time enter default againstMs. Roberson and the Trustee is permitted to seek default judgment against bothdefendants by filing a motion for default judgment against each. The Robersonsmay file a joint answer, signed by each, that complies with this directive. Sinceneither of the Robersons have disclosed they are admitted to practice law, they areprevented from answering or filing pleadings on behalf of the other pursuant to D.
Kan. LBR 9010.1. Copies of all local rules can be found on the Court’s website, andthese Defendants are required to know and follow those rules, as well as the Rulesof Civil Procedure and Bankruptcy Procedure.
Case 15-07011 Doc# 72 Filed 04/06/16 Page 24 of 25
not able to receive electronic mail from the Court.40
It is so ordered.
# # #
40 These are the addresses shown on recent pleadings:
Case 15-07011 Doc# 72 Filed 04/06/16 Page 25 of 25
- Category: Judge Karlin
- Published: 31 March 2016
- Written by Judge Karlin
- Hits: 271
Hamilton v. Livingston, 15-07046 (Bankr. D. Kan. Mar. 30, 2016) Doc. # 12
SIGNED this 30th day of March, 2016.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 13-41672
Patricia K. Stamatson, Chapter 7
Patricia E. Hamilton,
Chapter 7 Trustee,
Plaintiff, Adversary No. 15-7046
Order Denying Defendant’s Motion to Dismiss
Plaintiff Patricia E. Hamilton (“Trustee”), Trustee for the Chapter 7 bankruptcy
estate of Debtor Patricia K. Stamatson, seeks to avoid the postpetition transfer Debtor
made of her home to Defendant Jerry Livingston (“Livingston”). The Trustee also seeks
Case 15-07046 Doc# 12 Filed 03/30/16 Page 1 of 18
to avoid a lien she contends Debtor granted Livingston on that property (the “Emporia
property”). Livingston moves to dismiss the complaint, asserting that the Trustee has
failed to state a claim upon which relief can be granted, relying on Fed. R. Civ. P.
12(b)(6).1 He argues that because Debtor amended her Schedule C to add the Emporia
property as an exempt asset after she transferred it to him, and the Trustee did not
object to the amendment, the Emporia property was no longer property of the estate
on the day the Trustee filed her complaint. As a result, he argues the Trustee cannot
prevail on her claim under 11 U.S.C. § 549.2 As to the Trustee’s lien avoidance claim,
Livingston asserts that because the Trustee has not yet, at the complaint stage,
produced the purported missing mortgage, she cannot prevail as a matter of law on her
§ 544 claim. Because the Court finds that the Trustee’s complaint states a claim under
Rule 12(b)(6) for both claims, it denies Livingston’s motion.
I. Factual and Procedural History
The following facts are taken from the complaint, exhibits attached thereto, and
the record in this adversary proceeding and the underlying bankruptcy case.3 Debtor
and her husband purchased the Emporia property for $190,000 in August, 2012.
1 Fed. R. Civ. P. 12 is made applicable to bankruptcy by Fed. R. Bankr. P. 7012.
2 All future statutory citations and all references to the “Code” are to the Bankruptcy
Code, 11 U.S.C. §§ 101 et seq., unless otherwise stated.
3 See Banker v. Gold Res. Corp. (In re Gold Res. Corp. Secs. Litig.), 776 F.3d 1103, 1108(10th Cir. 2015) (“[W]e ‘must consider the complaint in its entirety, as well as other
sources,’ including ‘documents incorporated into the complaint by reference, and matters of
which a court may take judicial notice.’”) (quoting Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322 (2007)).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 2 of 18
Livingston paid the $188,306.61 required to close the sale via a cashier’s check dated
August 9, 2012.
Contemporaneously with the closing, someone apparently notified the Armed
Forces Insurance Exchange to add the newly acquired Emporia property to Debtor’s
insurance policy. Effective August 10, 2012, the insurance policy on the Emporia
property listed Debtor and her spouse as owners and Livingston as “mortgagee.”4 When
Debtor filed her bankruptcy petition sixteen months later, on December 12, 2013, she
indicated the Emporia property was her residence and also listed it on Schedule A
(“Real Property”), noting it had a fair market value of $169,900 with a “$0.00” secured
claim. At this time, she elected not to exempt the Emporia property (or any other real
estate), but did exempt many items of personal property on Schedule C (“Property
Claimed as Exempt”).
Debtor originally listed Livingston as an unsecured creditor on Schedule F
(“Creditors Holding Unsecured Nonpriority Claims”) with a claim of $200,000. She
included the following explanation in the column that asked for the date she incurred
the Livingston debt and the consideration for the claim: “11/2013 Personal
Loan/Creditor loaned the Debtor and her husband the money to purchase their home.
There is no promissory note.”5
4 Adversary Compl., Ex. D.
5 Main bankruptcy Case No. 13-41672, Doc. 1, Schedule F, Creditor # 14 at p. 23. TheCourt cannot explain the discrepancy between the “11/2013” date and the date ofLivingston’s cashier’s check dated August 2012, or the $200,000 balance due compared tothe $188,306.61 check, especially when coupled with Debtor’s Amended Statement ofFinancial Affairs—made under penalty of perjury—that “within 90 days immediately
Case 15-07046 Doc# 12 Filed 03/30/16 Page 3 of 18
On December 30, 2013, eighteen days after filing her Chapter 7 petition, Debtor
and her husband executed a promissory note to Livingston in the amount of $200,000
at 4.25% interest “for the property purchased” in Emporia, Kansas—the property
purchased more than a year earlier.6 Attached to the note was a copy of the August
2012 cashier’s check from Livingston. The note required Debtor and her husband to
pay $750 monthly until the note was paid in full. A few days prior to the execution of
the promissory note, Debtor executed a will stating that in the event of her death,
Livingston should be given the deed to the Emporia property.7
Several months later, in March 2014, Livingston executed an affidavit claiming
an interest in the Emporia property, and he filed it with the Lyon County Register of
Deeds on May 1, 2014. The affidavit stated that “by instrument dated August 10,
2012”—the day after the date on the cashier’s check he provided for purchase of the
Emporia property—Livingston had “an interest” in the Emporia property.8 The
preceding the commencement of this case” she had made four monthly payments of $750
each to Livingston on the debt. Compare Doc. 1, Schedule J (“Expenses”), Line 1 (“Rent or
home mortgage payment”), p. 28, and Doc. 1, Form B22A (“Chapter 7 Statement of CurrentMonthly Income and Means-Test Calculation”), Line 42 (“Future payments on secured
claims”), p. 40, with Question 3 (“Payments to creditors”) on p. 2 of Doc. 21 (“Statement ofFinancial Affairs–Amended”). The Court notes that Debtor originally disclosed she madeno payments to creditors within 90 days of her petition aggregating in excess of $600. Doc.
1, Form B7 (“Statement of Financial Affairs”), Question 3 (“Payments to creditors”), p. 5.
6 Adversary Compl., Ex. D.
7 Although the will’s terms are not entirely clear, it also provided that if the Emporiaproperty’s equity exceeded $200,000, the amount in excess of $200,000 would be payable totwo people with the same last name Debtor used before her recent divorce (presumably herchildren).
8 Adversary Compl., Ex. G.
Case 15-07046 Doc# 12 Filed 03/30/16 Page 4 of 18
Affidavit further states “[t]hat by virtue of said above-mentioned instrument, an
unrecorded documents (sic) being held by the undersigned, the undersigned hereby
claim (sic) an equitable estate in and to said real property from and after the date of
said above-mentioned instrument.”9 Also in May 2014, the county issued a real estate
tax statement listing Livingston as a “contract buyer.”10
Almost a year after Debtor filed her bankruptcy petition, on November 4, 2014,
she and her husband executed a warranty deed for the Emporia property to Livingston,
for no apparent consideration. Neither Debtor nor Livingston notified the Trustee of
the conveyance, notwithstanding that the Trustee had contacted Livingston before the
conveyance, on October 16, 2014, to advise him that the Emporia property was now
estate property and that he could take no action to enforce his secured claim or any
equitable interest without obtaining Bankruptcy Court approval on written notice.11
Even at a special meeting of creditors held November 17, 2014, a meeting attended by
both Livingston and Debtor, neither advised the Trustee of this recent deed although
the Emporia property was apparently a subject of that meeting. At the meeting, Debtor
admitted signing a promissory note to Livingston soon after her bankruptcy filing and
that the Emporia property secured the loan Livingston had made to her.
10 Id. at Ex. I.
11 It is unclear when and how the Trustee ultimately became aware of the conveyance. Inthe Trustee’s brief (Doc. 7), she states that “had the Debtor disclosed the existence of theDeed at the time she amended her exemptions, the Trustee would have been on notice ofthe § 549 transfer by the Debtor.”
Case 15-07046 Doc# 12 Filed 03/30/16 Page 5 of 18
A week after the special meeting, on November 25, 2014, and almost a year after
filing bankruptcy, Debtor finally amended Schedule C in an attempt to exempt her
interest in the Emporia property. On the same day, she amended her Schedule D
(“Creditors Holding Secured Claims”), describing the “nature of [Livingston’s] lien” as
a “Mortgage,” and tying his mortgage to the Emporia property by listing that address
with the same value she had included in her original Schedules.12 The instructions for
Schedule D clearly state the information is to be true “as of the date of filing of the
The Trustee filed her adversary complaint against Livingston on December 29,
2015, alleging that the warranty deed executed by Debtor to Livingston on November
4, 2014 was a postpetition transfer prohibited by § 549, and also that Livingston’s
purported security interest in the Emporia property was unperfected and therefore
subject to avoidance under § 544. The Trustee has requested the Court avoid
Livington’s security interest in the Emporia property and for other related relief.
Livingston, in his motion to dismiss, argues that the Trustee has not alleged,
and cannot demonstrate, an essential element of a § 549 claim based on this reasoning:
1) because Debtor amended Schedule C to exempt her interest in the Emporia property
12 Main bankruptcy Case No. 13-41672, Doc. 54, p. 6.
13 The instructions on Schedule D require debtors to “State the name, mailing address,
including zip code, and last four digits of any account number of all entities holdingclaims secured by property of the debtor as of the date of filing of the petition. . . . List
creditors holding all types of secured interests such as judgment liens, garnishments,
statutory liens, mortgages, deeds of trust, and other security interests.” Id.
Case 15-07046 Doc# 12 Filed 03/30/16 Page 6 of 18
a year after filing bankruptcy; 2) because the Trustee did not object to that exemption
within the 30 days allowed by Rule 4003(b)(1) of the Federal Rules of Bankruptcy
Procedure; and 3) because the exemption then relates back to the date of petition, the
property was no longer property of the estate when Debtor conveyed it to Livingston
in November 2014. Livingston also suggests that the Trustee’s § 544 claim must be
dismissed—before discovery has even begun—because the Trustee has not yet
discovered or attached (as an exhibit to her complaint) a document that constitutes the
purported security interest in the real property.
II. Burden of Proof and Standards for Dismissal Under Rule 12(b)(6)
To survive a Rule 12(b)(6) motion to dismiss, a plaintiff’s complaint must allege
sufficient facts to support a plausible claim for relief.14 A claim must be supported by
factual assertions “‘that allow the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.’”15 When a court considers a motion to
dismiss, factual allegations contained in the complaint are accepted as true and the
plaintiff has the burden of showing that those facts support a finding in its favor.16
14 Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007).
15 Williams v. Meyer (In re Williams), 438 B.R. 679, 683 (10th Cir. BAP 2010) (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
16 See Cressman v. Thompson, 719 F.3d 1139, 1144 (10th Cir. 2013) (holding that the court
must accept as true all well-pleaded factual allegations in a complaint and it must viewthose allegations in the light most favorable to plaintiff at the motion to dismiss stage)
(citing Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1178 (10th Cir. 2012)).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 7 of 18
A. Avoidance of a Postpetition Transfer, § 549
To successfully avoid a postpetition transfer, the Trustee must prove that: (1)
a transfer of property occurred; (2) the property transferred was property of the estate;
(3) the transfer occurred after the commencement of the case; and (4) the transfer was
not otherwise authorized by the Bankruptcy Code or the bankruptcy court.17 If the
Trustee fails to allege in her complaint facts supporting any one of these elements, the
Court must dismiss the case.18
Livingston’s motion to dismiss challenges the Trustee’s showing on only the
second factor, contending that the Emporia property was not property of the estate
when Debtor executed the deed to him in November 2014 because of the retroactive
effect of Debtor’s amended Schedule C. The Trustee counters with several arguments.
First, the Trustee argues that because Debtor had not claimed the Emporia
property as exempt at the time she voluntarily conveyed it to Livingston, the property
was property of the estate for the purposes of the Trustee’s rights under § 549. Second,
the Trustee argues that even if the property was exempt at the time of the conveyance,
17 Section 549 (“[T]he trustee may avoid a transfer of property of the estate . . . that occursafter the commencement of the case and . . . that is not authorized under this title or by the
court.”); Sender v. Love Funeral Home (In re Potter), 386 B.R. 306, 308 (Bankr. D. Colo.
18 See Hamilton v. CitiMortgage, Inc. (In re Lieurance), 458 B.R. 757, 762, 765 (Bankr. D.
Kan. 2011) (dismissing part of the trustee’s complaint for failing to state a claim under §
549 because complaint failed to provide that the actual note and mortgage documents wereproperty of the debtors, and thus property of the bankruptcy estate, at the commencementof the case).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 8 of 18
Livingston has no standing to raise Debtor’s claim of exemption as a defense against
a trustee’s avoidance power. Finally, the Trustee argues that § 522(g),19 which dictates
when a debtor may exempt property recovered by a trustee, would bar Debtor from
claiming the property as exempt because she voluntarily conveyed it to Livingston.
In response, Livingston generically relies on the right of debtors to freely amend
their schedules at any time, and the fact that amendments relate back to the filing of
the petition. Second, Livingston denies he lacks standing to raise Debtor’s late-filed
exemption of the Emporia property as a shield against the Trustee’s avoidance powers.
Instead, he claims that his argument merely demonstrates that as a matter of law,
because of the relation back of the amended Schedule C, the Emporia property is
deemed to have been exempt—and thus no longer property of the estate—almost a full
year before Debtor conveyed the property to him in November 2014. Finally,
Livingston disputes the applicability of § 522(g) because he contends the Trustee has
failed to meet the necessary prerequisite for its application—that the trustee “recover”
the property before the debtor seeks to exempt it, noting the Trustee did not file the
avoidance action until after the exemption was allowed.
Livingston primarily relies on In re OBrien,20 a Western District of Michigan
bankruptcy case, to support his argument. In OBrien, the debtors amended their
19 Section 522(g) (“[T]he debtor may exempt . . . property that the trustee recovers undersection 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor couldhave exempted such property . . . if such property had not been transferred if . . . suchtransfer was not a voluntary transfer of such property by the debtor and . . . the debtor didnot conceal such property . . . .”).
20 443 B.R. 117 (Bankr. W.D. Mich. 2011).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 9 of 18
schedules to exempt a tax refund after they had already spent it.21 The trustee objected
to the exemption and filed a motion for turnover of the refund.22 The trustee’s main
argument against allowing the exemption of the refund was that because the refund
had already been spent, it could not, as a matter of law, be exempted as the property
was “already gone.”23 The court allowed the exemption and overruled the trustee’s
motion for turnover, finding that the amended exemption related back to the date of
filing, at which point the money eventually spent by the debtors was “removed or
reclaimed” from the estate.24
But OBrien provides no real support for Livingston’s position under our facts.
First, the OBrien case was not a trustee avoidance action. Instead, it was a turnover
motion directly against the debtor. By contrast, the Trustee here is seeking to avoid
what the complaint avers is an unauthorized transfer that occurred at a time when
apparently no one disputes Debtor’s interest in the Emporia property was property of
the bankruptcy estate.
Ironically, the instant case is much more similar to another case decided by the
same judge who decided O’Brien. In Lasich v. Wickstrom (In the Matter of Wickstrom), 25
the trustee sought to avoid three prepetition preferential or fraudulent transfers by the
21 Id. at 124.
22 Id. at 123.
23 Id. at 122.
24 Id. at 135.
25 113 B.R. 339 (Bankr. W.D. Mich. 1990).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 10 of 18
debtors to one of their creditors. The transferees sought summary judgment, arguing
that the property transferred was ultimately exempted by the debtors, and thus the
trustee could not avoid the transactions. The Wickstrom court labeled this
defense—which boils down to an argument that the debtors’ other creditors would not
have benefitted from the property anyway since the property was exempt and not
available for execution by unsecured creditors—the “no harm, no foul” argument. Other
courts refer to it as the “diminution of the estate” doctrine.26
As the Wickstrom court notes, this doctrine was used primarily under the
Bankruptcy Act of 1898 to determine whether a preference could be avoided. The
doctrine focused on the “issue of whether a given transfer diminished or depleted the
debtor’s estate” and dictated that “if the transfer (of exempt property) did not diminish
or deplete the debtor’s estate, the trustee would not be able to avoid the transfer.”27
Thus, under this doctrine, any exempt or exemptible property, whether transferred
pre- or postpetition, was not subject to the trustee’s avoidance powers. This result was
based primarily on the fact that, under the Bankruptcy Act, exempt property was never
part of the bankruptcy estate.28
This doctrine has been rejected by a majority of courts, including by the Tenth
26 Id. at 346.
27 Covey v. United Fed. Sav. & Loan Ass’n of Ill. (In re Owen), 104 B.R. 929, 931 (C.D. Ill.
28 See Bankruptcy Act of 1898 § 70 (“All property, wherever located, except insofar as it is
property which is held to be exempt . . . vest[s] in the trustee . . . as of the date of the
bankruptcy.”) (emphasis added).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 11 of 18
Circuit BAP29 and even more recently by Judge Somers in a § 548 fraudulent transfer
case,30 primarily due to the 1978 change in the Bankruptcy Code defining what
constitutes the estate at the time of filing.31 In In re Taylor, the debtors filed
bankruptcy several months after granting a security interest in their car to a bank
creditor.32 The bank failed to perfect its security interest prior to the petition date, and
the trustee was allowed to avoid the bank’s interest under § 544(a)(1) for the benefit
of all unsecured creditors notwithstanding that debtors had properly exempted the car
in their original schedules. The court held that exemptions are a personal right of the
debtor, and that a creditor may not assert that right as a defense in an avoidance
29 See Morris v. First Nat’l Bank & Trust (In re Taylor), No. 97-064, 1998 WL 123027, at*2, n.2 (10th Cir. BAP 1998) (holding that “the law has changed under the BankruptcyCode in that exempt property is no longer excluded from the bankruptcy estate as it wasunder the Bankruptcy Act” and thus prior precedent adhering to the diminution of theestate doctrine “no longer has any effect.”).
30 See Rajala v. Nat’l Ass’n of Postal Supervisors Branch 458 (In re Krouse), 513 B.R. 598,
604 (Bankr. D. Kan. 2014) (declining to follow the “no harm, no foul” doctrine and findingthat life insurance proceeds paid to a creditor in violation of § 548(a)(1)(B) were property ofthe estate, regardless of their exempt status).
31 See In re Taylor, 1998 WL 123027, at *2, n.2; see also Fox v. Smoker (In re Noblit), 72
F.3d 757, 758 (9th Cir. 1995) (“Although the Smokers’ theory—known in the caselaw as the‘diminution of the estate’ doctrine—has been adopted in the past, the majority of recentcases has rejected it in favor of the principle that an exemption ‘is personal to the
debtor.’”); In re Owen, 104 B.R. at 931 (“This Court believes that the Bankruptcy Court
erred in applying the ‘diminution of the estate’ doctrine.”); Warsco v. Ryan (In re Richards),
92 B.R. 369, 371 (Bankr. N.D. Ind. 1988) (“To the extent this principle [diminution of theestate] was correctly decided, we do not believe it has survived the enactment of thecurrent Bankruptcy Code.”). Pursuant to § 541, the bankruptcy estate under theBankruptcy Code of 1978 now includes “all legal or equitable interests of the debtor inproperty as of the commencement of the case.”
32 1998 WL 123027, at *1.
Case 15-07046 Doc# 12 Filed 03/30/16 Page 12 of 18
action—regardless whether the exemption was allowed by the court.33
The Tenth Circuit BAP in Taylor also cited favorably to a Ninth Circuit case, In
re Noblit,34 which, in turn, adopted the rationale of a case from the Northern District
of Indiana, In re Richards.35 The Richards court illustrated the importance of the
debtor’s personal right to exemptions:
The right and the opportunity to claim property as exempt is personal to thedebtor. It is a right which exists only for the benefit of the debtor and hisdependents and it may not be asserted by others, on behalf of the debtor. To
permit a creditor to raise the issue of exemptability [sic], as a defense to apreference, would violate both the nature and theory of exemptions. Theopportunity to claim an exemption would no longer be personal to the debtor,
neither would it exist only for his benefit. Instead, the right would be shared bythe debtor with certain preferred creditors. Furthermore, the purpose of an
exemption is to keep property out of the hands of a creditor. Where a debtor
makes a conscious choice to voluntarily transfer exemptible property to acreditor, the debtor has, at least impliedly, also made the choice not to claimthat property as exempt. The exemption is thus waived.36
Accordingly, Livingston does not have standing to raise Debtor’s exemption as
a defense to this action, and as a matter of policy, to give credence to Livingston’s
defense (that Debtor’s exemption of the property allows her to prefer him—an allegedly
unsecured creditor—over her other unsecured creditors) would result in an inequitable
33 Id. at *2.
34 72 F.3d 757.
35 92 B.R. 369.
36 Id. at 372 (internal citations omitted) (emphasis added). The Richards court also noted
that it makes no difference whether it is the creditor who is attempting to use theexemptibility of the property as a defense to an avoidance proceeding as opposed to thedebtor doing so. Either way, the result is to rob the debtor (or the estate) of property that
otherwise could not have gone to these preferred creditor(s). Id. at 371-72.
Case 15-07046 Doc# 12 Filed 03/30/16 Page 13 of 18
distribution of property, including a preferential payment to one creditor at the
expense of other creditors. This would subvert the spirit as well as the mandate of the
Bankruptcy Code and undermine federal policy by allowing some creditors to avoid the
This analysis applies equally to the Trustee’s avoidance power under § 549.
While debtors may, at any time, freely (in good faith) exempt property in which they
retain an interest under § 522,38 a creditor is not entitled to appropriate this right to
defend against an otherwise avoidable transfer. This case proves the point. If the Court
prohibited the Trustee from seeking to avoid the transfer here because the Debtor has
now elected to exempt it, Livingston could enjoy a windfall to the detriment of other
unsecured creditors and administrative claimants.
Thus, the Court finds that the Trustee has, at the pleading stage, satisfied the
37 See Reed v. McIntyre, 98 U.S. 507, 512 (1878) (“We have often declared that the pro ratadistribution of the property of the bankrupt was the main purpose of the bankrupt statute.
A serious defect in the statute would be developed if its provisions received such aconstruction as would enable the appellant to defeat that purpose by obtaining anadvantage over other creditors.”).
38 The Court need not at this juncture decide the ultimate exemptibility of the Emporiaproperty, but will make two points. First, two fairly recent Tenth Circuit decisions make itclear that a debtor is not entitled to claim an exemption in property he voluntarilytransferred, which the trustee then recovered in an adversary proceeding, notwithstandingthe trustee’s failure to object within the thirty day period of Fed. R. Bankr. P. 4003(b).
Zubrod v. Duncan (In re Duncan), 329 F.3d 1195, 1203-04 (10th Cir. 2003); Russell v.
Kuhnel (In re Kuhnel), 495 F.3d 1177, 1182 (10th Cir. 2007). Alternatively, while theTrustee did not object within the thirty days allowed by Fed. R. Bankr. P. 4003(b)(1) toDebtor’s belated attempt to exempt a house in which the Trustee alleges Debtor had nointerest to exempt (because by then, she had already conveyed her interest to Livingston),
this would not preclude the Trustee, if appropriate facts existed, from objecting undersubsection (b)(2) of that rule. That subsection allows a trustee to file an objection to a claimof exemption “at any time prior to one year after the closing of the case if the debtorfraudulently asserted the claim of exemption.”
Case 15-07046 Doc# 12 Filed 03/30/16 Page 14 of 18
second element she must show to avoid the transfer under § 549. As Livingston does
not challenge that the complaint supports each of the other requirements for a claim
under § 549, the Court finds that the Trustee has stated a claim, and Livingston’s
motion to dismiss this claim pursuant to Rule 12(b)(6) must be denied.39
Avoidance of an Unperfected Security Interest, § 544
To prevail on an avoidance action under § 544, the Trustee must show that the
creditor has a valid lien on the subject property and that the lien was not properly
perfected under applicable state law when the bankruptcy was filed.40 Here, the
Trustee’s complaint alleges that, in August 2012, when Debtor purchased the Emporia
property with her non-filing spouse, Debtor obtained a loan from Livingston to enable
her to purchase the property.
The Trustee’s complaint then supports her § 544 claim with an abundance of
factual allegations and supporting exhibits, including:
the cashier’s check remitted by Livingston used to purchase the Emporiaproperty in 2012;
the insurance policy amended contemporaneously with Debtor’s purchase of theEmporia property in 2012 listing Livingston as “mortgagee;”
Livingston’s March 2014 affidavit claiming that “by virtue of said
39 Both parties address in their pleadings whether the conveyance is void or voidable bythe Trustee. As these arguments address the remedy of a § 549 action, and not whether theTrustee has properly stated a § 549 claim in the first instance, the Court declines toaddress this argument here.
40 See Morris v. St. John Nat’l Bank (In re Haberman), 516 F.3d 1207, 1210 (10th Cir.
2008) (“In Section 544(a)(1), Congress afforded trustees the power to avoid any transfer orobligation that a hypothetical creditor with an unsatisfied judicial lien on the debtor’sproperty could avoid under relevant state nonbankruptcy law.”); K.S.A. § 84-9-317(a)(2)(A)
(2013 Supp.) (“A security interest . . . is subordinate to the rights of . . . a person thatbecomes a lien creditor before . . . the security interest . . . is perfected . . . .”).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 15 of 18
above-mentioned instrument, an unrecorded documents (sic) being held by theundersigned, the undersigned hereby claim (sic) an equitable estate in and tosaid real property from and after the date of said above-mentioned instrument;”
Livingston’s recording of the affidavit in the county real estate records;
the real estate tax assessment from Lyon County listing Livingston as a“contract buyer;”
the promissory note Debtor and her husband executed only a few weekspostpetition to Livingston “for the property purchased at . . . Emporia” forallegedly no additional consideration; and
Debtor’s testimony at the special meeting of creditors admitting her obligationto Livingston was secured by the Emporia property.41
Additionally, the Trustee alleges that Livingston’s interest was unperfected as of the
petition date, as evidenced by the failure of Livingston or the Debtor to follow
procedures required by Kansas law to perfect an interest in real property. The Court
also notes Debtor’s Amended Schedules A and D, filed within a week after the special
meeting of creditors, acknowledged under penalty of perjury that Livingston was a
secured creditor as of the date of petition and that the collateral securing his claim was
the Emporia property.42
As a preliminary matter, the Court notes that Livingston’s reply brief is
completely silent regarding the Trustee’s § 544 count, apparently conceding the
arguments contained in the Trustee’s response to his motion to dismiss on this count.
The Court will nevertheless review why the argument contained in his original motion
41 Adversary Compl., Exs. C, D, E, G, and I.
42 Main bankruptcy Case No. 13-41672, Doc. 48, is Amended Schedule A filed November25, 2014. In the instructions, it directs debtors “If an entity claims to have a lien or hold asecured interest in any property, state the amount of the secured claim.” Debtor amendedthis Schedule to show $200,000 (instead of $0.00 in her original Schedule A) in the columnentitled “Amount of Secured Claim.” Similarly, in Amended Schedule D, Doc. 45, sheadmitted that Livingston was a secured creditor with a mortgage on the Emporia propertyin the amount of $200,000 when she filed her bankruptcy petition.
Case 15-07046 Doc# 12 Filed 03/30/16 Page 16 of 18
to dismiss on this count does not justify dismissal.
Livingston argued that because Kansas law requires mortgages to be in writing
to be enforceable, and because the Trustee failed to attach to her complaint a copy of
the written instrument purporting to be the mortgage, that her complaint fails to state
a claim. In so arguing, Livingston misunderstands both Kansas law regarding lien
interests as well as the standard for granting a motion to dismiss an avoidance action
under § 544 at this stage of the proceedings.
First as to Kansas law. One of the very cases upon which Livingston relies,
EllaMae Investments, LLC v. Terra Firma Development, LLC,43 notes that there may
not even need to be a document entitled “mortgage” for Livingston to have an
enforceable lien (that a trustee could avoid) on the Emporia property:
‘The form of an agreement by which security is given for a debt isunimportant. If the purpose and intention behind a transaction is
to secure a debt, equity will consider the substance of the
transaction and give effect to that purpose and intention. A courtsitting in equity is not governed by the strict rules of law indetermining whether a mortgage has been created. The lienfollows if the evidence discloses an intent to charge real propertyas a security for an obligation.’44
The Court thus finds that at this stage of the pleadings, the failure of the Trustee to
produce a mortgage is simply immaterial in light of all the factual allegations of her
complaint—which must be taken as true upon evaluating a motion to dismiss—that
43 No. 107,027, 2012 WL 4937470, at *8 (Kan. Ct. App. Oct. 12, 2012).
44 Id. (quoting Fuqua v. Hanson, 222 Kan. 653, 655, 567 P.2d 862, 866 (1977)).
Case 15-07046 Doc# 12 Filed 03/30/16 Page 17 of 18
the parties intended to create a lien.45
Accordingly, the Court finds that the allegations of the complaint meet the
standard of Rule 12(b)(6) for stating a claim under § 544(a), and the Trustee is entitled
to conduct discovery in an attempt to now prove these allegations.
The Court finds that because the Trustee has met her burden to state a claim
under Rule 12(b)(6) for both her § 549 and § 544 claims, Livingston’s motion to
dismiss46 is denied. The Trustee’s complaint demonstrates that there is plenty of
smoke; the Trustee will be given the opportunity to prove it is truly a fire.
It is so ordered.47
45 Even if Livingston’s contention was legally accurate (that failure to produce a documententitled “mortgage” means the Trustee cannot ultimately prevail on the merits), the Courtwould still decline to dismiss this case on that basis at the complaint stage. Judge Nugentrecently faced a similar argument raised by a creditor’s Rule 12(b)(6) motion to dismiss a
Chapter 7 trustee’s § 544(a) action. See In re Gracy, No. 13-11917, 2014 WL 5500028, at *3
(Bankr. D. Kan. Oct. 30, 2014). Judge Nugent denied the motion, holding that “[w]hile itmight have been preferable to attach the mortgages upon which the trustee's claim isfounded to the adversary complaint, he (the trustee) has nonetheless sufficiently pled a
claim to avoid and preserve the purported lien.” Id.
46 Adversary Case No. 15-7046, Doc. 6.
47 On March 25, 2016, in contemplation of the issuance of this decision, the Court issued anorder requiring Livingston to file an answer, if he elects to defend against the complaint,
no later than April 8, 2016. See Order For And Notice Of Scheduling Conference AndRequiring Defendant Livingston To File Answer By April 8, 2016. Adversary Case No. 157046,
Case 15-07046 Doc# 12 Filed 03/30/16 Page 18 of 18
- Category: Judge Karlin
- Published: 08 February 2016
- Written by Judge Karlin
- Hits: 276
BAP WO-15-035 In Re Grant, Feb. 4, 2014
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
February 4, 2016
Blaine F. Bates
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE JERRY GRANT,
Bankr. No. 14-13199
Appeal from the United States Bankruptcy Courtfor the Western District of Oklahoma
Submitted on the briefs:1
Before KARLIN, Chief Judge, CORNISH, and MICHAEL, Bankruptcy Judges.
KARLIN, Chief Judge.
This case involves a debtor who unlawfully converted over $1,000,000 worth
* This unpublished opinion may be cited for its persuasive value, but is notprecedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8026-6.
Pursuant to this Court’s December 28, 2015 Order [Bap ECF No. 26], theCourt has determined unanimously that oral argument would not significantly aidin the determination of this appeal. See Fed. R. Bankr. P. 8019(b)(3). The case is
therefore submitted without oral argument.
of property and was denied his discharge as a result of failing to satisfactorily
account for the loss of the property. The issue presented is whether a bankruptcy
court has the equitable power to allow the judgment lien of the true owner of the
converted property to impair that debtor’s homestead exemption. Because the
bankruptcy court, relying upon a recent decision of the United States Supreme
Court, properly held it does not have that authority, we affirm.
In June 2005, Appellant June Clabaugh rented a safety deposit box from
First American Bank and Trust (“First American”) and placed in the box a large
coin collection and a variety of jewelry and family heirlooms. Some of the coins
were contained in a prescription bottle bearing the name “Ar. Jones,” which
referred to Artibus Jones, Clabaugh’s deceased mother. Clabaugh paid the box rent
each year, but never attempted to access the contents until 2010.
In 2008, First American accidently expunged its safety deposit box
ownership records. In an attempt to identify the owner of Clabaugh’s box, First
American opened it and found the only distinguishing information was the bottle
holding the coins with the name “Ar. Jones.” After searching its records, First
American found a closed account in the name of Arley Jones. Their records
reflected that Jerry Grant, the debtor in this case and the nephew of Arley Jones,
had previously been appointed personal representative of Arley Jones’ estate, and
had closed the account upon his death.
First American contacted Grant, who falsely represented that he was still the
personal representative of the Arley Jones’ estate.2 At First American’s request,
Grant produced letters of administration dated May 2006 appointing him as
Opinion at 7, in Appellant’s App. at 111.
personal representative. What Grant failed to disclose was that he had long since
been released as the estate’s personal representative. First American, unaware of
this fact, transferred the contents of the safety deposit box to Grant.
In 2010, when Clabaugh accessed the box and discovered the contents
missing, she confronted First American. First American contacted Grant, who then
claimed he had sold the contents of the safety deposit box for less than $500. He
admitted that, although he was the former personal representative of his uncle’s
estate, he was not entitled to any inheritance from the estate. Grant was also not
related to, and did not know, Artibus Jones or June Clabaugh.
When First American did not reimburse her for the value of the property it
had incorrectly given to Grant, Clabaugh sued First American in Oklahoma state
court, seeking judgment for the value of the missing property. She added Grant as a
defendant when she learned his identity. Clabaugh settled with First American, but
proceeded to trial against Grant. Clabaugh’s expert witness testified the contents of the
box were valued between one and two million dollars. The jury found Grant liable to
Clabaugh for conversion and fraud, and awarded Clabaugh $1.25 million in
damages against Grant. Grant appealed to the Oklahoma Court of Civil Appeals.
That court reversed the jury’s determination regarding fraud, but affirmed the
conversion judgment and the damage award.3
Clabaugh recorded her judgment in the Oklahoma County Clerk’s office in
December 2012.4 Her recorded judgment attached by operation of state law to
3 Clabaugh v. Grant, 347 P.3d 1044 (Okla. Civ. App. 2014), reh’g denied
(Aug. 5, 2014), cert. denied (Mar. 30, 2015). The Oklahoma Court of Civil
Appeals set aside the fraud claim because the evidence did not support a finding
that Grant had made false statements to Clabaugh.
4 Motion to Avoid Judicial Lien on Real Estate at 1, in Appellant’s App. at
various tracts of real property that Grant owned in Oklahoma County. One of those
properties was Grant’s home on 59th Street where he had continuously lived for
over twenty years (the “Residence”). When Grant filed a Chapter 7 bankruptcy in
July 2014, he listed the Residence as his exempt homestead on Schedule C.
Clabaugh filed an adversary proceeding to determine dischargeability of the
debt Grant owed pursuant to 11 U.S.C. § 523(a)(6),5 claiming Grant had willfully
and maliciously converted the contents of the safe deposit box. She also objected to
his general discharge under § 727(a)(5) on the basis that he had failed to
satisfactorily explain the loss of the contents of the safety deposit box or proceeds
Clabaugh also objected to Grant’s homestead exemption, arguing that Grant
used the Residence for business purposes and claiming that, under Oklahoma law, a
homestead exemption amount cannot exceed five thousand dollars where twenty-
five percent of the total square foot area of the property for which a homestead
exemption is claimed is used for business purposes. Grant responded to Clabaugh’s
objection, maintaining that he had never used the Residence for business purposes.
Ultimately, Clabaugh withdrew her objection.
After Clabaugh withdrew her objection to the homestead exemption, Grant
filed a motion to avoid Clabaugh’s judicial lien on his home (the “Avoidance
Motion”). The Avoidance Motion noted that the lien was a judicial lien against
Grant’s homestead, and because that lien impaired his homestead exemption, it
could be avoided pursuant to § 522(f). Clabaugh objected (“the Avoidance
At the hearing on the Avoidance Motion, Clabaugh essentially argued that
All future references to “Code,” “Section,” and “§” are to the BankruptcyCode, Title 11 of the United States Code, unless otherwise indicated.
because Grant had unlawfully converted her property, the court, as a court of
equity, could allow him to live in the house as long as he desired, but that the court
should decline to entirely avoid her lien and instead preserve the lien until he died
or elected to sell his home. Relying on the recent Supreme Court decision, Law v.
Seigel,6 the bankruptcy court found that because Clabaugh’s lien was a judicial lien
that attached to and impaired Grant’s admittedly exempt homestead, it had no
choice but to avoid her lien. The court further noted that the Bankruptcy Code does
not confer a “general equitable power in bankruptcy courts to deny exemptions
based on a debtor’s bad-faith conduct of . . . fraudulent concealment of an [exempt]
asset.”7 The bankruptcy court specifically found that “bad-faith conduct sufficient
to deny a discharge under [§] 727 is not a basis for denying a homestead
Clabaugh now appeals the Avoidance Order, arguing that Grant “is asking the
Bankruptcy Court to allow him to use the bankruptcy code to build a habitation of
injustice to shield a bandit.”9 Clabaugh asserts that the bankruptcy court erred in
avoiding her judgment lien because (1) Grant’s homestead exemption was not truly
impaired by her lien; (2) Grant was not eligible to be a debtor under the Code; (3)
Clabaugh’s debt is nondischargeable; and (4) given the facts and circumstances
surrounding Clabaugh’s lien, equity precludes avoidance of the lien.
judgment in favor of Clabaugh on her § 727 claim, deemed the § 523 claim moot,
6 134 S.Ct. 1188 (2014).
7 Tr. at 8, in Appellant’s App. at 274.
8 Tr. at 12, in Appellant’s App. at 278. The Court later granted summary
and denied Grant a discharge.
Appellant’s Br. at 14.
II. Standard of Review
The bankruptcy court’s findings regarding the elements of § 522(f) are factual
determinations. We review the bankruptcy court’s findings of fact for clear error.10
Whether a judicial lien is avoidable, as impairing an exemption to which a debtor would
otherwise be entitled, is a question of law.11 We review the bankruptcy court’s conclusions
of law de novo.12
A. Oklahoma Homestead Exemption
A “homestead exemption is presumed to be valid, and the objecting [party] bear[s]
the initial burden of producing evidence to rebut the presumption.”13 Grant listed the
Residence as exempt on Schedule C, and Clabaugh objected to that exemption on the basis
Grant used a portion of the Residence for business purposes. But she then withdrew her
objection. Because she did not file, timely or otherwise, any other additional objections to
the homestead exemption, the exemption is valid.14
When Grant later filed his motion to avoid Clabaugh’s lien, Clabaugh properly and
10 Copper v. Lemke (In re Lemke), 423 B.R. 917, 919 (10th Cir. BAP 2010)
(“We review the factual findings of the bankruptcy court for clear error and its
legal findings de novo.”) (citing Fowler Bros. v. Young (In re Young), 91 F.3d
1367, 1370 (10th Cir. 1996)).
11 In re Parsons, 233 B.R. 176, *2 (10th Cir. BAP 1999).
12 McCart v. Medline Serv. Corp. (In re Jordana), 232 B.R. 469, 473 (10thCir. BAP 1999), aff’d on other grounds, 216 F.3d 1087 (10th Cir. 2000).
13 In re Robinson, 295 B.R. 147, 152 (10th Cir. BAP 2003).
14 Taylor v. Freeland & Kronz, 503 U.S. 638, 642-44 (1992) (holding that
§ 522(l) and Bankruptcy Rule 4003(b) bar contesting the validity of an exemptionafter the 30-day period for objecting has expired where no extension has beengranted, even though a valid objection could have been made if the party actedpromptly).
expressly conceded the validity of the homestead exemption.15 Notwithstanding this record,
Clabaugh now raises on appeal for the first time that Grant is not entitled to the Oklahoma
homestead exemption because he is single (claiming the exemption is only for families).
Because Clabaugh is precluded from contesting the exempt status of the Residence,16 the
bankruptcy court did not err in finding the Residence exempt—the first element required
by § 522(f) to avoid a judicial lien.
B. Impairment of Exemption
Clabaugh next argues that the bankruptcy court erred in avoiding her
judgment lien under § 522(f) because she claims her lien does not actually impair
Grant’s homestead exemption because of the operation of the Oklahoma exemption
statute. Her argument is essentially this: (1) under Oklahoma law, while her lien
attaches, she cannot foreclose on it until Grant moves or otherwise tries to sell the
Residence; and (2) because her lien thus does not deprive him of a place to live, it
does not really impair the exemption.
Pursuant to § 522(f)(1)(A), a judicial lien, other than one securing alimony,
15 The record clearly indicates that Clabaugh did not contest the homesteadexemption. Tr. at 6, in Appellant’s App. at 272. “We’re not arguing that [Grant]
doesn’t have an exemption.” Tr. at 8, in Appellant’s App. at 274. “I would noteven begin to say that [Grant’s Residence] is not exempt. The Court has alreadyruled . . . [t]hat the [Residence] is exempt under Oklahoma law.” Tr. at 9, in
Appellant’s App. at 275.
16 The Tenth Circuit has held that additional legal theories addressed for thefirst time on appeal fall into two categories: waiver and forfeiture. Clabaugh’sfailure to specifically raise this issue below would constitute a forfeiture, whichthis Court may hear on appeal, but only reverse the findings of the bankruptcycourt “if failing to do so would entrench a plainly erroneous result.” Richison v.
Ernest Grp., Inc., 634 F.3d 1123, 1127-28 (10th Cir. 2011). Clabaugh has not mether burden to show that such error exists. Even if an objection had been filed andthe issue preserved on appeal, she would not have prevailed since Oklahoma’shomestead exemption does not require the home be occupied by a family butinstead only requires that the home be the principal residence of “a person.” Okla.
Stat. tit. 31 § 1.
maintenance, or support obligations, may be avoided if it impairs an exemption to
which the debtor would otherwise be entitled, including an exemption “under . . .
[the] State . . . law that is applicable on the date of the filing of the petition.”17
Before the bankruptcy court, neither party contested that the lien is a judicial lien
created under state law, that Oklahoma law controls the availability of the
homestead exemption,18 or that the Residence is exempt under Oklahoma law.19
Further, while state law controls the availability of the homestead exemption,
federal bankruptcy law controls whether a debtor can avoid a lien as impairing the
state law homestead exemption to which he or she would otherwise be entitled.20
This Court has already ruled, in In re Coats,21 that judicial liens in Oklahoma
that attach to an exempt homestead impair the exemption and can thus be avoided
under § 522(f), notwithstanding the fact that such liens cannot be foreclosed under
state law while the property remains the debtor’s homestead.22 For example, if left
unavoided, Clabaugh’s lien would prevent Grant from selling his Residence and
buying another with the proceeds. This would impair his ability to retain a roof over
17 11 U.S.C. § 522(b)(3).
18 Clabaugh argued on appeal that Oklahoma has opted out of the homesteadexemption found in section § 522(f). This is not accurate as § 522(b)(3)(A)
specifically incorporates exemptions under applicable state law, which wouldinclude Oklahoma state law.
19 Tr. at 6, in Appellant’s App. at 272.
20 McCart v. Medline Serv. Corp. (In re Jordana), 232 B.R. 469, 473 (10th
Cir. BAP 1999), aff’d on other grounds, 216 F.3d 1087 (10th Cir. 2000).
21 232 B.R. 209 (10th Cir. BAP 1999).
22 Id. at 214. Regrettably, Clabaugh’s opening brief failed to even mention
this controlling precedent. Her reply brief cited this case, but for a different
his head—something the Oklahoma legislature deemed appropriate when it enacted
the homestead law. Because we are bound by the Coats decision (and agree with it),
we hold that the bankruptcy court did not err when it found that Grant’s exemption
was impaired and avoided the lien pursuant to § 522(f).
C. Prepetition Bad Faith Conduct
Clabaugh argues on appeal that Grant is ineligible to be a debtor under the
Bankruptcy Code as a result of his prepetition bad faith conduct and, as such, the
bankruptcy court should not have even reached the issue of lien avoidance. As a
threshold issue, Clabaugh has forfeited this argument because she did not raise this
issue with the bankruptcy court.23 There is nothing in the record to suggest
Clabaugh, instead of objecting to discharge, tried to get Grant’s petition dismissed
for lack of eligibility or for any other reason.
Even if this Court were to consider the issue, the Supreme Court has very
recently held, in Law v. Siegel,24 that the Bankruptcy Code, in general, and § 522, in
particular, does not give a bankruptcy court discretion to deny an exemption on a
ground not specified in the Code. It further held that bad faith conduct, including
conduct sufficient to deny a discharge, is not a ground Congress elected to specify
in the Code.25
Clabaugh suggests we should look past Law v. Siegel’s clear mandate by
23 See infra note 16 (Clabaugh again did not meet her burden to show that anerror exists sufficient to allow review of an issue she failed to initially raise).
24 Law v. Siegel, 134 S.Ct. 1188, 1196-97 (2014).
considering another recent Supreme Court decision, Harris v. Viegelahn,26 which
she claims would authorize a bankruptcy court “to ignore plain language in the
bankruptcy code where there is an atypical case.”27 But Harris had nothing to do
with allowance of exemptions, and we thus decline to consider it when Law v.
Siegel is directly on point.
As a result, we agree with the bankruptcy court that even when an underlying
debt is nondischargeable, neither the Bankruptcy Code in general, nor § 522(f) in
particular, restricts or limits the debtor’s right to avoid a judicial lien emanating
from that nondischargeable debt.28 We also agree that the Code does not confer a
general, equitable power on bankruptcy courts to deny a homestead exemption,
even when a debtor has engaged in conduct sufficient to deny a discharge.29
Accordingly, the bankruptcy court correctly concluded it did not have the discretion
to withhold exemptions based on equitable considerations and did not err in
avoiding the lien pursuant to § 522(f).
We affirm the bankruptcy court’s decision granting the Avoidance Motion
because Clabaugh’s judicial lien impairs Grant’s homestead exemption and because
neither Grant’s bad faith conduct nor the debt’s nondischargeabililty under § 727
precludes avoidance of the lien.
correctly noted, a debtor may bring an action to avoid a lien under . . . § 522(f)
26 135 S.Ct. 1829 (2015).
27 Appellant’s Br. at 13.
28 In re Liming, 797 F.2d 895, 898 (10th Cir. 1986) (“As the bankruptcy court
even if the debt secured by that lien is declared nondischargeable.”).
Siegel, 134 S.Ct. at 1196-97.
- Category: Judge Karlin
- Published: 08 March 2016
- Written by Judge Karlin
- Hits: 259
BAP WYO-15-023 In Re Lane, Mar. 7, 2016
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
March 7, 2016
Blaine F. Bates
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE ROBERT M. LANE, also knownas Bob Lane,
ROBERT M. LANE,
GARY A. BARNEY, Chapter 7Trustee,
BAP No. WY-15-023
Bankr. No. 11-20398
Appeal from the United States Bankruptcy Courtfor the District of Wyoming
Robert M. Lane, pro se Appellant.
John C. Smiley, (Theodore J. Hartl with him on the brief) of Lindquist & VennumLLP, Denver, Colorado, for Appellee.
Before KARLIN, Chief Judge, CORNISH, and MICHAEL, Bankruptcy Judges.
KARLIN, Chief Judge.
Robert Lane appeals an order of the bankruptcy court imposing monetary
sanctions against him for interfering with the sale of estate assets. The order
required that the sanctions be deducted from the money that would otherwise be
available to distribute to Lane after payment of all claims and completion of final
administration of his bankruptcy estate. The issue is whether the bankruptcy court
abused its discretion in imposing sanctions, notwithstanding Lane’s main
argument that he does not have the present ability to pay those sanctions.
When Robert Lane filed his Chapter 7 bankruptcy petition in April 2011,
his statements and schedules disclosed no nonexempt assets for the Trustee to
administer. Over the next (almost) five years, following a tip received from
Lane’s former wife detailing significant undisclosed assets, the Trustee uncovered
millions of dollars of assets including numerous pieces of art, valuable coins, and
two multi-million dollar homes located in California and Wyoming. Lane now
admits it is a “40+ million bankruptcy estate.”1
The Trustee filed multiple adversary proceedings against Lane, his family
members, and family-controlled entities, seeking to revoke Lane’s discharge and
to recover assets for the benefit of the estate. In April 2013, the Trustee reached
two settlements (collectively, the “Settlement Agreements”). One was with Lane
and the other with several close family members. The Settlement Agreements
allowed Lane to retain significant assets, including retirement accounts in an
amount up to $2.5 million; continued use of both homes until the Trustee could
sell them; and retention of some artwork, valuable coins, furnishings, and three
One term of the Settlement Agreement with Lane that was especially
valuable to the Trustee was a requirement that Lane stand down and stop
interfering with the further administration of the estate. The purpose of this
provision was to allow the Trustee to more expeditiously liquidate significant
Appellant’s [sic] Opposition to Trustee’s Bill of Costs at 2, in Appellee’s
Appendix (the “Supp. App.”) at 954. In this pleading, which Lane filed in his
bankruptcy case (not in one of his appeals), Lane incorrectly refers to himself as
the “appellant” instead of as the “debtor.”
assets and pay creditors without further litigation and interference from Lane.2
That “no interference” promise came in the form of a paragraph where Lane
expressly waived standing in his bankruptcy and further agreed to “not take any
action, directly or indirectly, to obtain standing . . . .”3 Lane also agreed that he
not have any standing to object, join, or otherwise be heard on any
matter or proceeding in any pending or future matter in connection
with administering Debtor’s Bankruptcy Case; this shall include,
but not be limited to, approval of settlements, sale of assets,
allowance or payment of administrative expenses, and allowance or
payment of claims.4
But Lane did not stand down. Instead, Lane filed numerous pro se
pleadings (to which the Trustee had an obligation to respond), including a
pleading essentially objecting to the Trustee’s compromise of a creditor’s claim,
objecting to the sale of estate property, objecting to the Trustee’s fees, objecting
to the sale of art, and objecting to relief regarding the sale of assets located in
2 As this Court previously stated in another decision emanating from this
bankruptcy, “Lane’s waiver of standing to object was valuable to the Trustee and
the estate, as Lane has filed numerous objections and other pleadings that have
apparently slowed down asset sales and increased administrative costs for the
estate. See, e.g., docket for Case No. 11-20398 (“Docket”), Lane’s supplemental
appendix (“Lane App. 2") at PDF pp. 23 (Docket No. 981—Opposition to
Trustee’s Motion to Sell Estate’s Interest in Bullion Coins Free and Clear); 33
(Docket No. 889—Objection to Application for Writ of Execution for Possession
of Real Property); 46 (No. 778—Objection to Trustee’s Motion to Sell Wilson,
Wyoming Property Free and Clear); 60 (Docket No. 650—Opposition to Trustee’s
Motion to Turnover Post-Petition Insurance Proceeds on Debtor’s Post-Petition
State Farm Insurance Coverages); 68 (Docket No. 589—Opposition to Proposed
Sale of Art); 112 (Docket No. 229—Opposition to Proposed [Family]
Settlement).”In re Lane, Nos. WY–14–053, WY–14–054, 2015 WL 1285976, at
*1 n.5 (10th Cir. BAP Mar. 20, 2015).
3 Order Approving Settlement Agreement Between the Trustee and the
Debtor (the “Settlement Order”) at 9, in Appellant’s Appendix (“Appellant’s
App.”) at 70.
4 Id. at 9-10, in Appellant’s App. at 70-71.
California.5 In addition, Lane proceeded to file seventeen appeals from orders of
the bankruptcy court, and then nine appeals to the Tenth Circuit Court of
Appeals—all of which the Trustee was required to defend.6 This is one of those
appeals, and it centers around just two of his efforts to interfere with the smooth
administration of his estate.
To give context to this dispute, it is important to note that on April 4,
2014, the Trustee, understandably fatigued with Lane’s attempts to interfere with
the estate’s administration, filed his first motion for contempt (the “First
Contempt Motion”). He alleged that the estate had suffered $16,897 in fees and
costs as a result of the breach of Lane’s promise, contained in the Settlement
5 Opinion on Trustee’s Motion for Contempt Sanctions Against Robert M.
Lane (the “First Contempt Decision”) at 4, in Supp. App. at 344. The bankruptcy
court cited these additional pleadings Lane filed that “violated the order
approving the Debtor Settlement Agreement:” (1) Status Report on Proposed
Settlement Agreement Between Trustee Gary Barney and Dr. Galo Tan and
Request to Reject Settlement (Dkt. #391); (2) Opposition to Proposed Sale of
Coins (Dkt. # 409); (3) Debtor’s Objection to Trustee’s Counsel’s Excessive Fee
Request (Dkt. # 479); (4) Debtor’s Opposition to Trustee’s Motion to Strike
Debtor’s Opposition to Proposed Sale of Art (Dkt. # 655); and (5) Debtor’s
Response to Trustee’s Motion for Turnover of California Assets (Dkt # 601).
6 BAP Cases 11-99 (filed 10/2011); 14-7 (filed 02/2014); 14-30 (filed
07/2014); 14-36 (filed 07/2014); 14-39 (filed 07/2014); 14-53 (10/2014); 14-54
(filed 10/2014); 14-61 (filed 11/2014); 15-7 (filed 01/2015); 15-9 (filed 2/2015);
15-23 (filed 06/2015); 15-49 (filed 11/2015); 15-50 (filed 11/2015); 15-51 (filed
11/2015); 15-52 (filed 11/2015); 15-53 (filed 11/2015); and Wyoming District
Court Case No. 15-114 (filed 07/2015). Lane filed all these appeals pro se except
for three. The two attorneys who brought those three appeals withdrew from
representing Lane at the early stages of those appeals. Although final orders have
not been issued in all appeals, to date, the vast majority have been dismissed or
relief denied to Lane. The one exception is In re Lane, Nos. WY–14–053,
WY–14–054, 2015 WL 1285976 (10th Cir. BAP Mar. 20, 2015), in which this
Court remanded to eliminate $3,013 of the $26,139 in fees and costs the
bankruptcy court had allowed the Trustee when he was required to enforce a writ
of execution to evict Lane from the two homes he had been allowed to use
pending their sale.
Agreement.7 The Trustee requested the bankruptcy court award $12,000 as an
“appropriate sanction[ ].”8 Lane defended by saying he did not have $12,000.
The bankruptcy court nevertheless, after a hearing, entered its First
Contempt Decision listing six separate acts that justified the finding of contempt
and the finding that the Trustee had been harmed as a result of Lane’s violation
of the Settlement Order. The bankruptcy court noted that the Trustee and his
counsel had been required to address Lane’s “numerous pleadings rather than
pursue assets of the estate” and that the estate had, as a result, incurred
unnecessary expenses.9 The bankruptcy court awarded a $12,000 money judgment
against Lane. “Taking [Lane’s] financial condition into consideration,”10 the
bankruptcy court further ordered the sanctions be deducted from any surplus
distribution that might be payable to Lane at the conclusion of estate
administration or from further undisclosed assets the Trustee might find, rather
than ordering Lane to immediately pay.
The bankruptcy court found “incredulous” Lane’s testimony that he was
not intentionally being obstructive and was only trying to “help.”11 The
bankruptcy court then ordered filing restrictions be placed on Lane similar to
those that had been placed on him by the United States District Court for the
District of Wyoming12 (in an order dismissing one of his numerous appeals). Lane
7 Settlement Order, Exhibit 1, in Appellant’s App. at 72.
8 First Contempt Motion at 6, in Supp. App. at 110.
9 First Contempt Decision at 4, in Supp. App. at 344.
10 Id. at 5, in Appellant’s App. at 345.
11 Id. at 6, in Appellant’s App. at 346.
12 Order Granting Motions to Dismiss of Gary A. Barney, As Chapter 7
Trustee and Vikki Lane at 3, in Supp. App. at 357 (stating that Lane had waived
did not appeal the First Contempt Decision.
Although the Trustee had filed his First Contempt Motion in early April,
2014, thus officially putting Lane on notice that similar actions in violation of the
Settlement Agreement could result in sanctions against him, this did not stop
Lane. On April 11, 2014, following an evidentiary hearing, the bankruptcy court
entered an order (the “Art Sale Order”) authorizing the sale of artwork (“the
Estate Art”) that had not been set over to Lane in the Settlement Agreements. The
Art Sale Order specifically noted the Estate Art would be sold free and clear of
liens, and the court had previously authorized the employment of Heather James
Fine Art (“Heather James”) to effectuate the sale.13 As Heather James was
attempting to market the Estate Art, in May 2015, Lane emailed Heather James
stating, “If you cho[o]se to sell any of this art between now and the Court’s
ruling (for which a has not yet been determined), you may be required to
purchase it back . . . . I do not think this would be advisable.”14
After receiving this email, representatives of Heather James contacted the
Trustee and expressed concern about the legal ramifications if they continued to
market and sell the Estate Art. After consulting with the Trustee and confirming
that the bankruptcy court had, in fact, approved the sale of the Estate Art,
Heather James continued its work. Lane then sent Heather James a second email.
This time he indicated that the Estate Art was subject to numerous liens and
standing to contest the bankruptcy court order he appealed, noting that Lane “has
a history of abusive and frivolous filings with the Bankruptcy Court and the
District Court, as well as various state courts,” recounting some of Lane’s
“prolonged history of abusing the judicial process,” and incorporating discussions
of “Lane’s abusive history of vexatious and frivolous litigation” from other
13 Art Sale Order at 3, in Supp. App. at 196.
14 Trustee’s Second Contempt Motion, Exhibit E, at 2, in Supp. App. at 211.
falsely stated that the Art Sale Order did not permit the sale free and clear of
liens. He also suggested that the sale would create “unnecessary liability for your
firm or yourself personally.”15
Lane’s interference with the Trustee’s attempts to sell estate assets did not
end there. In July 2014, the bankruptcy court entered its order authorizing the
sale of the California property for $6.9 million. Before the sale closed, Lane filed
a notice of lis pendens in the California real estate records. As a result of the
notice, the purchaser refused to close. Ultimately, following further negotiations
and a loss of several months, the purchaser closed on the sale but at a purchase
price of $6.5 million, or $400,000 less than the original purchase price.
Immediately upon learning of the second of the two emails in late May
2014, the Trustee filed his second motion for contempt seeking monetary
sanctions in an amount to be determined after the Trustee provided an accounting
of fees and costs incurred. After hearing evidence, the bankruptcy court found
that Lane had interfered both with the sale of the Estate Art by sending the May
2015 email to Heather James and with the sale of the California property by
recording the lis pendens.
As a result of its findings that Lane had violated the Lane Settlement
Agreement, the Art Sale Order, and his duties as a debtor under 11 U.S.C. § 521,
the bankruptcy court held that monetary sanctions were necessary (the “Second
Contempt Decision”). The bankruptcy court stated that Lane “displays a complete
disregard for the Bankruptcy Code and procedures. The court finds his actions to
be in bad faith, reckless, abusive and grossly disobedient.”16 It also noted that
15 Trustee’s Exhibit 7 at 2, in Supp. App. at 271.
16 Second Contempt Decision at 7, in Appellant’s App. at 255.
Lane’s email to Heather James reflected “a pattern of intimidation.”17 The
bankruptcy court directed the Trustee to submit a Bill of Costs.
The Trustee’s Bill of Costs requested $455,125 in attorneys’ fees plus
$400,000 in additional damages (the “Sale Reduction Damages”) based on the
alleged diminution in value of the California property that resulted after Lane
filed the lis pendens notice. After Lane objected to the Bill of Costs, the
bankruptcy court conducted another evidentiary hearing (the “Sanctions
Hearing”) to determine the appropriate amount of sanctions.18
During the trial, the court inquired whether the attorneys’ fees sought as a
sanction would ultimately become part of the administrative claims, thus possibly
reducing the recovery of Lane’s prepetition unsecured creditors, or whether the
Trustee was asking for Lane to pay it, personally. The Trustee’s counsel agreed
that the sanctions would be payable only from any surplus funds that Lane might
be entitled to receive, after payment of all claims, and not from assets of the
estate needed to pay other claims.19
At trial, Lane’s main defense to the award of sanctions was that he was
17 Id. at 6, in Appellant’s App. at 254.
18 During opening arguments at the Sanctions Hearing, the Trustee’s counsel
specifically requested a judgment in favor of the estate for the Sale Reduction
Damages but asked for a judgment in favor of Lindquist & Vennum (the law firm
retained by the Trustee) for the requested attorneys’ fees. It appears Lindquist &
Vennum sought a judgment in its favor (rather than in the estate’s favor) both
because its fees were capped by agreement and because sanctions paid to the
estate would create no deterrence against further sanctionable conduct. For
example, if the surplus was $400,000 and Lane was required to repay the estate
$321,659 from that sum, he would receive $78,341 of the surplus funds. Lane’s
$321,659 payment to the estate would then create a new surplus, since by
definition all claims would have already been paid in order for a surplus to exist.
He would then be entitled to the newly created surplus he had just paid to the
19 Tr. at 51, in Appellant’s App. at 702.
unable to pay any amount. He argued that any award would, therefore, be
improper. He also claimed that because he was “sorry”20 his actions had caused
damages and because he is not an attorney, no sanctions should be awarded.
The bankruptcy court awarded the requested sanctions for attorneys’ fees,
but reduced the amount to $321,659. The bankruptcy court denied approximately
$133,466 in fees it determined that the Trustee had either failed to prove were
directly attributable to Lane’s contemptible conduct, or that were not adequately
described in the Bill of Costs. The bankruptcy court also denied the Trustee’s
request for the Sale Reduction Damages, finding that the Trustee failed to meet
his burden to prove that Lane’s actions (in filing the lis pendens notice) caused
the reduction in the sale price of the California property.
Although the order awarding sanctions (the “Second Sanctions Decision”)
did not make specific findings regarding Lane’s ability to pay, it expressly noted
that Lane had “argued monetary sanctions may not be entered against him due to
his lack of income.”21 In addition, the bankruptcy court had, just six months
earlier in its First Contempt Decision, discussed Lane’s financial circumstances.
The Second Sanctions Decision stated that, despite Lane’s alleged inability
to pay, his “behavior is not without ramifications and the Court finds the
sanctions appropriate.”22 It then prohibited the Trustee from collecting the
sanctions from Lane personally, without further order of the court—just as it had
done earlier for the $12,000 sanctions award. It instead again ordered that the
sanctions could be deducted from any surplus ultimately available to Lane at the
conclusion of the administration of his estate or from any further undisclosed
20 Appellant’s Br. at 38.
21 Second Sanctions Decision at 4, in Appellant’s App. at 940.
assets that might be recovered.23
Standard of Review
We review a bankruptcy court’s decision to issue monetary sanctions under
an abuse of discretion standard.24
The bankruptcy court did not abuse its discretion in orderingsanctions against Lane notwithstanding his claim he has nopresent ability to pay them.
Lane argues that the bankruptcy court abused its discretion in ordering
sanctions because it failed to consider his ability to pay and failed to make
express findings on that issue.25 The Trustee counters that the bankruptcy court
admitted—and obviously considered—the evidence of Lane’s alleged inability to
pay, as it ultimately declined to require Lane to pay the sanctions forthwith but
23 Neither the Second Sanctions Decision nor the Amended Judgment on
Trustee’s Bill of Costs mentions Lindquist & Vennum’s request for a separate
judgment in its favor. Instead, judgment is simply granted on the “Trustee’s
request for monetary sanctions against Debtor [ ] in the amount of $321,659.”
Amended Judgment on Trustee’s Bill of Costs at 1, in Appellant’s App. at 941.
24 In re Nursery Land Dev., Inc., 91 F.3d 1414, 1415 (10th Cir. 1996)
(bankruptcy court’s decision to impose sanctions reviewed for abuse of
25 Lane also raises on appeal that the Second Sanctions Decision was
erroneous because it conflicted with an order issued by a Wyoming state court
that had recently found him insolvent in a matter involving child support. The
record indicates that the bankruptcy court did admit into evidence and consider
the state court’s order finding him insolvent. The bankruptcy court was obviously
not bound by the insolvency finding because the issues were not identical in the
two cases, and more importantly, the Trustee was not a party to the state court
litigation. Sierra Club v. Two Elk Generation Partners, Ltd. P’ship, 646 F.3d
1258, 1265 (10th Cir. 2011) (collateral estoppel applies to preclude litigation of
factual issues only if (1) the same issues were necessary to a prior final judgment
on the merits, and (2) the party against whom estoppel is sought was a party to
the prior proceeding and had a full and fair opportunity to litigate).
instead only required they be paid from any estate surplus or newly discovered
In support of his position, Lane relies almost entirely on case law
addressing sanctions imposed under Federal Rule of Civil Procedure 11 (“Rule
11"). Case law interpreting Rule 11 provides that courts must consider (1) the
opposing party’s reasonable expenses incurred as a result of the violation,
including reasonable attorneys’ fees; (2) the minimum amount necessary to
adequately deter future misconduct; (3) and “[t]he offender’s ability to
pay . . . .”26 At the time the bankruptcy court issued the Second Sanctions
Decision, however, the Tenth Circuit had declined to apply the Rule 11
requirements to other available sanctions specifically authorized by rule or
statute, or sanctions that a court may impose inherent to its authority.27
Approximately one month after the Second Sanctions Decision was issued,
however, the Tenth Circuit decided Farmer v. Banco Popular of North America.28
For the first time, the Tenth Circuit applied the Rule 11 factors set forth in White
26 White v. Gen. Motors Corp., 908 F.2d 675, 685 (10th Cir. 1990). Although
the bankruptcy court did not specify under which rule or by what authority it was
assessing sanctions in the Sanctions Decision, we note the decision quickly
followed the First Contempt Decision, which clearly indicated the sanction was
based on the court’s inherent power to hold a party in civil contempt and to award
sanctions under 11 U.S.C. § 105(a). In addition, the record demonstrates that the
sanctions clearly were neither requested nor assessed pursuant to Rule 11.
27 See Hamilton v. Boise Cascade Express, 519 F.3d 1197, 1205 (10th Cir.
2008) (noting that precedents concerning Rule 11 would not be applied to the
context of sanction awards under 28 U.S.C. § 1927); Hutchison v. Pfeil, 208 F.3d
1180, 1186 (10th Cir. 2000) (recognizing that sanctions under the court’s inherent
powers and the court’s authority under 28 U.S.C. § 1927 are not governed by the
same standards as Rule 11).
28 791 F.3d 1246, 1259 (10th Cir. 2015).
v. Gen. Motors Corp.29 to an award of sanctions made under 28 U.S.C. § 1927 or
the court’s inherent powers. The Tenth Circuit specifically held that, as in White,
[f]irst, the amount of fees and costs awarded must be reasonable.
Second, the award must be the minimum amount reasonably
necessary to deter the undesirable behavior. And third, because the
principal purpose of punitive sanctions is deterrence, the offender’s
ability to pay must be considered. Depending on the circumstances,
the court may consider other factors as well, including the extent to
which bad faith, if any, contributed to the abusive conduct.30
Under Farmer, courts must now consider ability to pay when considering
sanctions under 28 U.S.C. § 1927 or the court’s inherent powers.31
The record here indicates the bankruptcy court did properly admit and
consider evidence offered by Lane regarding his ability to pay. The Trustee also
introduced evidence suggesting that Lane might well have the ability to pay.32
29 White v. Gen. Motors Corp., 908 F.2d 675, 684-85.
30 Farmer, 791 F.3d at 1259 (citations omitted) (emphasis added).
31 If the person against whom sanctions is sought will not have to pay the
sanctions until assets sufficient to pay them become available to him, as is the
case here, he obviously does (or will) have the ability to pay. As a result, the
court’s obligation to consider the availability of other assets is lessened or
For example, the bankruptcy court was well aware that Lane had been
allowed to retain assets valued in excess of $2.5 million as a result of the
Settlement Agreements, which assets included “assets in Lane’s IRA and
Penobscot Pension Plan in an amount not to exceed $2.5 million,” certain
“collectibles” including books, wine, baseball memorabilia, numismatic coins, a
collection of fountain pens, and some art, three automobiles, and furnishings
located in his two multi-million dollar homes. Settlement Order at 4-5, in Supp.
App. at 36-37; Opinion on Debtor’s Motion to Compel Trustee to Comply with
Terms of Settlement at 2-9, in Supp. App. at 279-86 (referencing gold and silver
coins held as pension assets, exchanged postpetition by Lane’s pension for
artwork valued at $470,700 and finding that “Debtor failed to properly disclose
the value of his Pension Assets upon filing his bankruptcy petition and schedules .
. . .”) Id. at 8, in Supp. App. at 285. In addition, the record before the bankruptcy
Although the bankruptcy court did not make a specific factual finding regarding
Lane’s ability to pay, the bankruptcy court did state that it had “carefully
considered the applicable pleadings, evidence and legal arguments presented”
before concluding that sanctions were appropriate notwithstanding Lane’s defense
he lacked regular income. In addition—and perhaps the most telling proof that the
bankruptcy court considered Lane’s poverty defense—is that the court specifically
prohibited the Trustee from any attempts to collect the sanctions from Lane
personally, unless it sought and received further order of the court, and directed
that the sanctions be paid only from any surplus distribution or any additional
undisclosed assets recovered by the Trustee.
Finally, consideration of ability to pay is just one factor that a bankruptcy
court must consider in imposing sanctions. The other factors, including the
history of the parties and the severity of the sanctionable conduct, all support the
bankruptcy court’s decision to impose sanctions. As a result, we hold that the
bankruptcy court did not abuse its discretion in imposing sanctions against Lane,
and in deferring collection of those sanctions until surplus estate assets are
available to pay them.
The bankruptcy court did not abuse its discretion in ordering
that the sanctions could be paid from any estate surplus or newlyfound assets.
Lane next argues that the bankruptcy court abused its discretion in
awarding sanctions because he claims the bankruptcy court “deceived him” when
court demonstrated that when Lane wants to buy something, he seems to be able
to raise the money to do so, notwithstanding his claimed impoverished state. For
example, in April 2014, Lane sought to purchase over thirty separate pieces of art
worth $540,740 from the estate, apparently from his retirement funds. Trustee’s
Second Contempt Motion, Exhibit B in Supp. App. at 199-201.
it elected to order those sanctions be paid from any surplus assets.33 He apparently
believes the court was required to warn him this was a possibility so he could
more clearly address it. Substantively, Lane’s argument seems to be that the
surplus distribution, if there is one, would be derived from “prepetition” assets,
and that the court cannot satisfy a sanctions award entered against him after the
petition was filed from those assets.
As a preliminary matter, Lane appears not to have been deceived at all; in
fact, he made the identical argument in his initial pleading opposing the Bill of
Costs—months before the conversation he had with the judge who he now
contends deceived him.34 Second, case law supports the proposition that a
postpetition creditor is entitled to execute against any surplus from the estate of
its debtor to pay its postpetition claim.35 Accordingly, the bankruptcy court did
33 Appellant’s Br. at 31. Lane alternatively argues that because there may not
be surplus funds, the bankruptcy court was not authorized to order the sanctions
paid from those surplus funds if any exist. At oral argument, the Trustee admitted
that it was more likely than not that there would be money in the estate after
payment of all claims (assuming Lane stops efforts to impede administration), and
as a result, that Lane may well be entitled to receive surplus assets. The Trustee
also committed the estate to never seeking relief against Lane, personally, if it
turns out there are no surplus assets.
34 Appellant’s [sic] Opposition to Trustee’s Bill of Costs, at 9, in Supp. App.
at 961 (Lane argues “no legal authority has been cited for permitting post-petition
sanctions to be paid out of the pre-petition bankruptcy estate.”) He cited no
authority then, and continues to cite no authority for this position.
35 See In re Rocky Mountain Refractories, 208 B.R. 709, 714 (10th Cir. BAP
1997) (if debtor ultimately proves solvent, creditors may receive any surplus,
specifically claims for interest arising postpetition, ahead of payment to debtor);
In re Yan, No. 04–33526 TEC, 2010 WL 4791839, at *3 (Bankr. N.D. Cal. Nov.
18, 2010) aff’d In re Yan, Nos. NC–10–1476–JuHPa, 2011 WL 2923855, at *7
(9th Cir. BAP July 11, 2011) (finding that two postpetition creditors who had
obtained writs of attachment against the estate could collect against a debtor’s
surplus estate assets); cf. Flanders v. Lawrence (In re Flanders), 517 B.R. 245,
not abuse is discretion in ordering that the sanctions award could be paid from the
amount that Lane will receive if there are surplus funds.
The bankruptcy court did not abuse its discretion in imposingsanctions in spite of Lane’s contention the Trustee’s motion wasfiled for an improper purpose.
Lane contends that the bankruptcy court erred in imposing sanctions
because he claims the evidence showed that the Trustee’s efforts to sanction him
were part of a “campaign of harassment.”36 The Trustee counters that the
bankruptcy court considered Lane’s arguments and testimony presented at the
Sanctions Hearing, and rejected those arguments when it awarded sanctions. We
agree. The record supports a finding that the Trustee sought sanctions due to
Lane’s well-documented history of interference with the Trustee’s sale of estate
assets and administration of the estate, much of which is in direct breach of the
commitment he made in the Settlement Agreement to not interfere with the sale of
In addition, Lane had leveled much the same accusations at the Trustee
earlier in the case, and on November 5, 2014, after an evidentiary hearing, the
court entered an order denying Lane’s motion for sanctions against the Trustee.37
The bankruptcy court at that time dismissed Lane’s claim that the Trustee
continued to “demonize” him. Accordingly, the bankruptcy court had already
251 (Bankr. D. Colo. 2014) aff’d Flanders v. Lawrence (In re Flanders), No.
CO–14–055, 2015 WL 4641697, at *1 (10th Cir. BAP Aug. 5, 2015) (noting that
surplus funds from the estate distributed to the debtor, either actually or
constructively, were no longer estate property and were subject to garnishment for
collection of a postpetition federal criminal judgment).
Tr. at 14, in Appellant’s App. at 665.
37 Order Denying Debtor’s Motion for Sanctions Against Trustee Gary Barney
for Making False Statements to the Court at 1, in Supp. App. at 351.
ruled against Lane on many, if not all of his claims, and the bankruptcy court
simply did not believe that the Trustee, in bringing the sanctions motion, was
proceeding with an improper purpose. The record amply supports that conclusion.
The bankruptcy court did not abuse its discretion in assessing $321,659 in
sanctions against Lane, which amount represented the reasonable attorneys’ fees
incurred by the Trustee caused by Lane’s improper interference in the sale of
estate assets. The bankruptcy court clearly took Lane’s financial situation into
account when ordering the sanctions, and thus did not abuse its discretion in
ordering that these sanctions be paid from any surplus distribution that may be
available at conclusion of the administration of his estate. Finally, the bankruptcy
court did not abuse its discretion in declining to find the Trustee’s request for
sanctions was brought for any improper purpose. Accordingly, the Second
Sanctions Decision is affirmed.
- Category: Judge Karlin
- Published: 21 January 2016
- Written by Judge Karlin
- Hits: 284
State of Kansas Department of Labor v. Oliver, Jr., 15-07038 (Bankr. D. Kan. Jan. 20, 2016) Doc. # 9
SIGNED this 20th day of January, 2016.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 15-40880
Dan Henry Oliver, Jr., Chapter 13
State of Kansas, ex rel,
Lana Gordon, Secretary of Labor,
Plaintiff, Adv. No. 15-7038
Dan Henry Oliver, Jr.,
Order Denying Defendant’s Motion to Dismiss
Plaintiff Kansas Department of Labor (“KDoL”) seeks a declaratory judgment
that its claim against Defendant/Debtor Dan Henry Oliver, Jr., arising from an
administrative determination that Debtor fraudulently received unemployment
insurance benefit overpayments (“unemployment benefit overpayments”), is
Case 15-07038 Doc# 9 Filed 01/20/16 Page 1 of 13
nondischargeable. Debtor moves to dismiss KDoL’s complaint under Fed. R. Civ. P.
12(b)(6)1 for failure to state a claim upon which relief can be granted, arguing that the
statute of limitations governing KDoL’s claim has expired. The Court concludes that
the Kansas unemployment benefit statute2 does not contain a statute of limitations
barring KDoL from seeking nondischargeability of its debt. Therefore, Debtor’s motion
to dismiss KDoL’s complaint is denied.
I. Factual and Procedural History
KDoL filed its complaint on November 28, 2015, alleging that Debtor engaged
in intentional and willful misrepresentations regarding his employment status, and,
by doing so, obtained improper unemployment benefits from the state of Kansas. KDoL
requested the Court find its claim arising from Debtor’s receipt of unemployment
benefit overpayments to be nondischargeable under 11 U.S.C. § 523(a)(2)(A)3 due to the
According to KDoL, over a period of three months in 2008, Debtor applied for
and received approximately $5000 in unemployment benefits from the state. KDoL’s
records reflect that during this time, Debtor reported $0.00 wages per week, when he
was actually employed by Shawnee County, Kansas. Relying on Debtor’s reporting,
KDoL paid out $385 a week for fourteen weeks. About six months later, KDoL
1 Rule 12 is made applicable to bankruptcy by Fed. R. Bankr. P. 7012.
2 K.S.A. §§ 44-701 to 770.
3 For the remainder of this decision, all references to the Bankruptcy Code (Title 11) will be
to section number only.
Case 15-07038 Doc# 9 Filed 01/20/16 Page 2 of 13
investigated whether Debtor had fraudulently obtained those benefits. In June, 2009,
KDoL issued a final administrative order finding that Debtor willfully and knowingly
failed to report his correct earnings while requesting unemployment benefits and had
thus fraudulently received those benefits.4
KDoL then sent a letter informing Debtor of this determination and stated that
Debtor would be disqualified from receiving benefits from April 12, 2009 to April 17,
2010. KDoL also informed Debtor that he had sixteen days to appeal the determination
before it became final. Debtor did not appeal the determination, nor has it been
reversed, modified, or set aside.
Debtor filed his bankruptcy case on September 1, 2015, over six years after
KDoL’s final order. During that time, KDoL took no further actions to pursue its claim
against Debtor. Debtor listed KDoL on Schedule F as a nonpriority, unsecured claim,
and KDoL seeks a determination that its claim (which it indicates now stands at
$10,583.88)5 is nondischargeable.6
4 KDoL’s complaint states that the examiner’s determination establishing the overpaymentwas “made and entered” on June 1, 2009. Doc. 1, at p. 8. However, the letter attached to thecomplaint is dated June 30, 2009. Doc. 1, Ex. B. The complaint nor any of the subsequentpleadings in this adversary clarify which date the examiner’s determination was actuallymade. However, in a pleading in Debtor’s main case, Case No. 15-40880, KDoL references afinal administrative order issued June 30, 2009 and does not allege any action takenagainst Debtor on June 1, 2009. Doc. 23, at p. 2. As the date of the letter is not dispositive ofthe statute of limitations issue, the Court declines to decide for KDoL which date marks the
final order establishing Debtor’s liability for overpayments.
5 This amount represents Debtor’s outstanding balance consisting of principal ($4,872) andinterest through the end of October, 2015 ($5,711.88).
6 Subsequent to the filing of KDoL’s complaint, Debtor objected to KDoL’s proof of claim inhis main case. See Case. No. 15-40880, Doc. 22. KDoL’s proof of claim reflects $24,592.73total in benefit overpayments, partially secured by a statutory lien on Debtor’s real and
Case 15-07038 Doc# 9 Filed 01/20/16 Page 3 of 13
Debtor responded to KDoL’s complaint by filing a motion to dismiss alleging that
the statute of limitations had run on the underlying debt. Debtor’s motion does not
dispute the relevant facts at issue.
The Court has jurisdiction to hear this motion under 28 U.S.C. §§ 157, 1334. The
determination of dischargeability of a debt is a core proceeding under 28 U.S.C. §
157(b)(2)(I) and this district is the proper venue under 28 U.S.C. § 1409.
A. Standard for Considering a Rule 12(b)(6) motion to dismiss
To survive a Rule 12(b)(6) motion to dismiss on statute of limitations grounds,
a complaint must contain sufficient facts to allow a court to reasonably infer that a
defendant’s liability is not time-barred.7 The Court’s analysis is limited to those facts
personal property located in Leavenworth County, Kansas. In its response to Debtor’sobjection to its proof of claim, KDoL refers to two final administrative orders determiningDebtor’s liability for benefit overpayments—one from June 26, 2009 for the weeks startingNovember 8, 2008 and ending May 16, 2009; the other from June 30, 2009, described above.
See Doc. 23. KDoL’s complaint limits its request for relief to the actions leading to and thedebt following the June 30, 2009 letter, and the Court will not consider any extrinsic factsalleged in pleadings in Debtor’s main case. See Thompson v. Ill. Dep’t of Prof’l Regulation,
300 F.3d 750, 753 (7th Cir. 2002) (“The consideration of a 12(b)(6) motion is restricted solelyto the pleadings, which consist generally of the complaint, any exhibits attached thereto,
and supporting briefs.”) (cited by Janes v. Lyons (In re Lyons), No. 09-22773, 2010 WL
1257746, at *2 (Bankr. D. Kan. Mar. 26, 2010)).
7 See Harris v. City of New York, 186 F.3d 243, 251 (2d Cir. 1999) (“[T]he survival of a Rule12(b)(6) motion to dismiss on statute of limitations grounds requires only allegationsconsistent with a claim that would not be time-barred.”); In re Lyons, 2010 WL 1257746, at
*2 (“To survive a Rule 12(b)(6) motion to dismiss, . . . a complaint must contain sufficientfactual allegations to state a plausible claim to relief. A claim is plausible when plaintiffpleads sufficient facts to allow the court to reasonably infer the defendant is liable for thealleged conduct.”).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 4 of 13
contained in the pleadings, including exhibits,8 and the Court accepts all well-pleaded
facts as true and construes them in the light most favorable to KDoL.9
Section 523(a)(2)(A) excepts from discharge any debt for money, property, or
services obtained by false pretenses, false representations, or actual fraud.10 In an
action for a determination of nondischargeability under § 523(a)(2)(A), a complaint
must include facts showing that: “(1) the debtor made a false representation; (2) the
debtor intended to deceive the creditor; (3) the creditor relied on debtor’s conduct; (4)
the creditor’s reliance was justifiable; and (5) the creditor was damaged as a proximate
Statute of Limitations Determination in a Nondischargeability
Action under § 523(a)(2)(A)
To assess whether a statute of limitations bars KDoL’s complaint, the Court
must first determine whether an established debt exists. The Tenth Circuit, in
Resolution Trust Corp. v. McKendry (In re McKendry), formulated the issue in this
8 See Thompson, 300 F.3d at 753 (“The consideration of a 12(b)(6) motion is restricted solelyto the pleadings, which consist generally of the complaint, any exhibits attached thereto,
and supporting briefs.”) (cited by In re Lyons, 2010 WL 1257746, at *2).
9 See In re Lyons, 2010 WL 1257746, at *2 (citing Lawrence Nat’l Bank v. Edmonds (In re
Edmonds), 924 F.2d 176, 180 (10th Cir. 1991)) (“In considering a motion to dismiss, theCourt accepts all well-pleaded factual allegations, as opposed to conclusory legalallegations, as true and construes them in the light most favorable to the plaintiff.”).
10 § 523(a)(2)(A).
11 Ez Loans of Shawnee v. Hodges (In re Hodges), 407 B.R. 415, 419 (Bankr. D. Kan. 2009)
(citing In re Davis, 246 B.R. 646, 652 (10th Cir. BAP 2000)).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 5 of 13
“We . . . find two distinct issues in a nondischargeabilityproceeding. The first, the establishment of the debt itself, isgoverned by the state statute of limitations—if suit is not broughtwithin the time period allotted under state law, the debt cannot beestablished. However, the question of the dischargeability of thedebt under the Bankruptcy Code is a distinct issue governed solelyby the limitations periods established by bankruptcy law.”12
The question facing the Tenth Circuit in McKendry was “where a debt has been
reduced to judgment in state court, can the bankruptcy court be barred by a state
statute of limitations from considering the underlying nature of the debt in
determining whether the debt is dischargeable.”13 In that case, the creditor had
obtained a deficiency judgment from a state court a week prior to the debtor filing for
bankruptcy, then sought to have the judgment debt determined nondischargeable by
the bankruptcy court under § 523(a)(2).14 The debtor argued that the creditor’s
nondischargeability action was barred by the state statute of limitations for fraud
actions, which had expired. The Tenth Circuit concluded that “the debt ha[d] already
been established, so the state statute of limitations [was] immaterial.”15
The crux of Debtor’s motion to dismiss KDoL’s complaint relates to the first
prong of the McKendry analysis: was the debt “established” prior to the expiration of
time under the applicable Kansas statute of limitation? To answer, the Court must
discern what, if any, statute of limitations applies to the collection of debt incurred by
12 40 F.3d 331, 337 (10th Cir. 1994).
13 Id. at 334.
14 Id. at 333.
15 Id. at 337.
Case 15-07038 Doc# 9 Filed 01/20/16 Page 6 of 13
an unemployment benefit overpayment.
KDoL argues that the Kansas unemployment benefit statute does not include
a “statute of limitations to time-bar the collection or recovery of UI [unemployment
insurance] overpayments.”16 KDoL does not contend that the Kansas unemployment
benefit statute explicitly states that there is no time limit to the recovery of an
overpayment, but argues that the absence of any mention of a time limitation
evidences the legislature’s intention to allow recovery of overpayment indefinitely. To
support this interpretation, KDoL points to other time-based process deadlines (length
of time to appeal, etc.) included in the Kansas unemployment benefit statute. In other
words, the creation of time limits for some actions under the Kansas unemployment
benefit statute necessarily implies that the absence of limitations for collection actions
allows for collection at any time now or in the future.
Debtor argues that KDoL’s claim arises out of the penalty section for benefit
overpayments in K.S.A. § 44-719(a), which reads, in pertinent part: “Any person who
makes a false statement or representation knowing it to be false . . . to obtain or
increase any benefit or other payment under this act, . . . shall be guilty of theft and
shall be punished in accordance with the provisions of K.S.A. 2013 Supp. § 21-5801 .
. . .” Section 21-5801 is a statute outlining the punishment for criminal theft.17 As the
penalty for unemployment benefit overpayments is criminal, so Debtor argues, it must
16 Doc. 7, at p. 11.
17 K.S.A. § 21-5801(b)(3) (“Theft of: . . . property or services of the value of at least $1,000but less than $25,000 is a severity level 9, nonperson felony . . . .”).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 7 of 13
be controlled by the time limitations for prosecution, which is five years.18 As an initial
matter, the Court rejects Debtor’s theory that the criminal prosecution statute of
limitations applies in this case. Dischargeability determinations concern only civil
liability, and thus the Court’s analysis is narrowed to those limits placed on civil
Debtor’s reply also argues that KDoL is barred from collecting benefit
overpayments by the statute of limitations for civil actions, as applied to public bodies
through K.S.A. § 60-521. Section 60-521 states that the statutes of limitation for civil
actions19 apply to “any cause of action accruing to the state, . . . which . . . arises out of
any proprietary function or activity . . . .”20 Debtor’s reply cites to three cases
purporting to establish that KDoL’s pursuit of unemployment benefit overpayments
constitutes a proprietary function under K.S.A. § 60-521.21 In fact, Debtor cites to cases
that point to the opposite conclusion. For example, Debtor cites to State ex rel. Schneider
v. McAfee22 which defines governmental functions and distinguishes them from
proprietary functions, which “are exercised when an enterprise is commercial in
18 K.S.A. § 21-5107(d) (“[A] prosecution for any crime . . . shall be commenced within fiveyears after it is committed.). Defendant also argues that prosecution under K.S.A. § 44719(
f)(4)(A) is barred by the statute of limitations on prosecutions. Subsection (f)(4)(A),
however, applies only to “an employing unit” subject to the requirements of K.S.A. § 44710a
(“Employer contributions, liability for and payment of . . . .”) and therefore would notapply to Debtor. K.S.A. § 44-719(f)(4)(A).
19 See generally K.S.A. §§ 60-511 to 516 (Kansas statutes of limitation for civil actions).
20 K.S.A. § 60-521.
21 See Doc. 8, at p. 2.
22 578 P.2d 281, 283, 2 Kan. App. 2d 274, 276 (Kan. Ct. App. 1978).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 8 of 13
character or is usually carried on by private individuals.”23 The Kansas Court of
Appeals found in McAfee that “[g]overnmental functions are those which are performed
for the general public with respect to the common welfare.”24 The management of the
unemployment benefit system in Kansas is undoubtedly a function performed by the
government to benefit the public welfare. Thus, as KDoL is not performing a
proprietary function when collecting unemployment benefit overpayments, K.S.A. § 60521
does not apply and KDoL is not barred by the statute of limitations for civil
Liability for benefit overpayments is determined by an examiner appointed
under K.S.A. § 44-709. Examiners are responsible for both the initial determination
that a claim is valid and for any reconsideration of the claim.26 A decision by an
examiner is final unless the claimant files an appeal within sixteen days.27
Section 44-719 describes the penalties for unemployment benefits ineligibly
received. Subsection (d)(1) establishes civil liability for “any person who has received
24 Id.; see also Kansas Pub. Emps. Ret. Sys. v. Reimer & Koger Assocs., 941 P.2d 1321,
1328–43, 262 Kan. 635, 644–669 (1997) (finding that the investment activity performed bythe Kansas Public Employees Retirement System for the benefit of qualifying employeeswas a governmental function under § 60-521); City of Lakin v. Kansas Sec. Bd. of Review,
865 P.2d 223, 225, 19 Kan. App. 2d 188, 190 (Kan. Ct. App. 1993) (finding that the Kansasunemployment benefit statute “articulates our public policy to be concerned withinvoluntary unemployment as a serious menace to the health, welfare, and morals ofKansans”).
25 K.S.A. § 60-521.
26 K.S.A. § 44-709(b)(1) and (2).
27 Id.; K.S.A. § 44-709(b)(3).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 9 of 13
any amount of money as benefits under this act while any conditions for the receipt of
benefits . . . were not fulfilled.”28 Any such person is liable either “to have such amount
. . . deducted from any future benefits” or “to repay to the secretary . . . an amount of
money equal to the amount so received.”29 The Secretary of Labor has sole discretion
to choose not just how the debt arising from the above-mentioned liability is collected,
but also when.30 Section 44-719(d)(1) is devoid of a period within which the Secretary
of Labor must make a determination on how to collect on a debt arising from
unemployment benefit overpayments.31
Indeed, it is telling that the only restriction included in this subsection impedes
the Secretary of Labor’s equitable power to waive collection for those overpayments not
due to fraud, misrepresentation, or willful nondisclosure: the Secretary of Labor, after
five years, may waive collection of unemployment benefit overpayments so long as they
were not obtained through fraud and the collection would be against equity or would
cause extreme hardship.32 The Secretary of Labor may, at any time, waive collection
of unemployment benefit overpayments if, at the time those payments were received,
the person met all the eligibility requirements under the law.33 The option to waive
28 K.S.A. § 44-719(d)(1).
31 See id.
32 See id.
33 See id.
Case 15-07038 Doc# 9 Filed 01/20/16 Page 10 of 13
collection is left to the sole discretion of the Secretary of Labor. Thus, though the
Secretary of Labor may choose to waive collection for some overpayment liability, the
statute provides she may never waive collection on those payments obtained by
fraud—further supporting a reading that the legislature intended to give the Secretary
of Labor broad rights in collecting unemployment benefit overpayments obtained
In addition, K.S.A. § 44-719(d)(3) describes the ways in which the Secretary of
Labor can collect from a liable individual. This subsection refers to K.S.A. § 44-717,
which describes, in detail, the manner in which the Secretary of Labor can collect
employer payments.34 Included in this section are: state court collection actions, liens,
levies, and seizures of property.35 The authority granted under K.S.A. § 44-717 is self-
effectuating and absent time limitations.36
Put together, the separate sections of the Kansas unemployment benefit statute
do not limit the time in which an examiner can affix liability for unemployment benefit
34 Though K.S.A. § 44-717 was not written to apply explicitly to individuals who havereceived overpayments, K.S.A. § 44-719(d) provides that overpayments “shall be collectiblein the manner provided in K.S.A. 44-717.”
35 See §§ 44-717(b), (e)(1)–(3). Section 44-717(b)(1) (“Collection”) refers to a five year timeperiod within which “[a]ll liability determinations of contributions due . . . shall be made . . .
except such determinations may be made for any time when an employer has filedfraudulent reports with intent to evade liability.” (Emphasis added.) The term “liabilitydeterminations” is not defined, but stands in contrast to the phrase “collection by civilactions” referred to earlier in the section. Thus, the Court interprets the term “liabilitydetermination” to refer to the administrative process wherein an examiner validates aclaim. See K.S.A. § 44-709(b) (describing the process through which claims are validated byan examiner). In addition, any liability based on fraudulent activity is not subject to a timelimitation.
36 See id.
Case 15-07038 Doc# 9 Filed 01/20/16 Page 11 of 13
overpayments obtained through fraud nor do they limit the ability of the Secretary of
Labor to collect on said debt.
The complaint alleges that, in June, 2009, KDoL issued an order, pursuant to
K.S.A. § 44-709(3), finding Debtor liable for approximately $5000 in unemployment
benefit overpayments. Debtor declined to appeal this final order. Debtor argues that
the order does not create liability for the amount owed without a state court judgment.
The Court disagrees. Under K.S.A. § 44-717(b), KDoL is given the express right to
collect on a liability determination by an examiner without first asking a state court
for a judgment that an overpayment recipient is liable. Similarly, the legislature has
authorized KDoL to record liens and levies and even seize property in order to satisfy
a liability determination.37 Thus, the legislature must have intended that an
examiner’s final liability determination for fraudulently received unemployment
benefits be treated akin to a state court judgment establishing a debt. The basis for
KDoL’s claim, therefore, is identical in nature to the creditor’s claim in McKendry—a
state court judgment establishing a debt. In light of this analysis, the Court finds that
the first prong of the McKendry test is satisfied.
The second prong of the McKendry analysis requires a court to dismiss a
nondischargeability complaint if it is filed more than 60 days after the first scheduled
meeting of creditors.38 The first meeting of creditors in Debtor’s underlying bankruptcy
37 § 44-717(d)(1)–(3).
38 40 F.3d at 337; Fed. R. Bankr. P. 4007(c).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 12 of 13
case was set for October 1, 2015.39 Thus, the deadline for filing KDoL’s complaint was
November 30, 2015. As KDoL’s complaint was filed on November 28, 2015, it was
timely filed and satisfies the second prong of the McKendry analysis.
KDoL’s debt is established under state law and KDoL’s complaint was timely
filed under the Bankruptcy Code. The Court therefore denies Debtor’s motion to
dismiss for failure to state a claim. In his motion to dismiss, Debtor also requests the
Court assess his attorney’s fees against KDoL pursuant to § 523(d). As awards for
attorney’s fees are only available to a debtor if the Court discharges the debt and finds
that the creditor’s position was not substantially justified, the Court denies Debtor’s
request for attorney’s fees.40 Defendant is directed to file an answer to Plaintiff’s
complaint by February 3, 2016 pursuant to Fed. R. Bankr. P. 7012(a).
It is so ordered.
39 Case No. 15-40880, unnumbered docket entry on September 1, 2015.
40 § 523(d); see KC Coring & Cutting Constr., Inc. v. McArthur (In re McArthur), 391 B.R.
453, 459 (Bankr. D. Kan. 2008) (“Damages under 11 U.S.C. § 523(d) are available only fordischarged consumer debts and only if the court finds the creditor’s position was notsubstantially justified.”).
Case 15-07038 Doc# 9 Filed 01/20/16 Page 13 of 13