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- Published on 03 March 2015
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BAP WY-14-035 In Re Rael, Feb. 27, 2015
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
February 27, 2015
Blaine F. Bates
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE ROBERT ALYN RAEL and
LISA LYNN RAEL,
*NIONROBERT ALYN RAEL and LISA
WELLS FARGO BANK, N.A.,
IN RE ROBERT ALYN RAEL and
LISA LYNN RAEL,
ROBERT ALYN RAEL and LISA
WELLS FARGO BANK, N.A.,
Appeal from the United States Bankruptcy Courtfor the District of Wyoming
* This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8026-6.
Before KARLIN, SOMERS, and JACOBVITZ, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
Debtors Robert and Lisa Rael (the “Raels”) contend that after their case
was closed and they defaulted on their confirmed individual Chapter 11 plan,
their main creditor Wells Fargo Bank, N.A. (“Wells Fargo”) was required to
return to the bankruptcy court to enforce its preserved lien rights rather than
proceed in state court. They contend Wells Fargo violated the stay when it f ailed
to do so. Because we agree with the bankruptcy court’s decision that there was
no violation of the automatic stay, and that the bankruptcy court did not have
exclusive jurisdiction to enforce the terms of the Raels’ confirmed plan, we affirm
the decisions of the bankruptcy court.1
I. Procedural Timeline
The timeline and procedural posture of the Raels’ case, while not unique to
individual Chapter 11 proceedings generally, lead to the underlying disputes. The
bankruptcy court confirmed the Raels’ individual Chapter 11 plan, and the Raels
elected to close their case prior to receipt of a discharge. Wells Fargo
subsequently filed two state court actions: one to enforce the terms of the
confirmed Chapter 11 plan based on the Raels’ plan default and one to determine
lien priorities. The state court entered judgment against the Raels in the first case
(without objection by the Raels as to the state court’s jurisdiction or power to
hear the matters). Sometime later, the Raels reopened their Chapter 11 case and
filed a motion to show cause and/or for contempt against Wells Fargo.
The parties did not request oral argument, and after examining the briefs
and appellate record, the Court has determined unanimously that oral argumentwould not significantly aid in the determination of this appeal. See Fed. R.
Bankr. P. 8019(b)(3). The case is therefore ordered submitted without oral
The Raels argued both that: 1) Wells Fargo violated the automatic stay of
11 U.S.C. § 362(a)2 because of its enforcement actions against property of the
estate, and 2) that Wells Fargo violated the terms of the Raels’ confirmed Chapter
11 plan by seeking relief in state court, rather than in the bankruptcy court. The
bankruptcy court ruled that there was no stay violation. It cited both § 362(c)(2),
which states that “the stay of any other act . . . continues until . . . the time the
case is closed,” 3 and Houlik, 4 a Tenth Circuit BAP opinion applying § 362(c) to
an individual Chapter 11 case and holding that the automatic stay terminated as to
estate property upon plan confirmation under § 362(c)(1) and as to all other
property upon the closing of the case under § 362(c)(2). 5 The bankruptcy court
also rejected the Raels’ argument that the bankruptcy court had exclusive
jurisdiction to enforce the provisions of their plan and that the state court actions
were, therefore, improper. It again relied on Houlik, which held that when there
is no automatic stay or discharge injunction violation to support jurisdiction, a
bankruptcy court does not have jurisdiction to determine a post-confirmation
wrongful possession action.6
After the bankruptcy court denied their motion to show cause and/or for
contempt, the Raels requested reconsideration, this time focusing their argument
on § 362(c)(1). The bankruptcy court again denied the motion, this time ruling
that it was inappropriate for the Raels to advance new arguments in a motion for
reconsideration. The Raels appealed both orders in their first appeal. But they
2 All future statutory references are to Title 11 of the United States Code,
unless otherwise specified.
3 11 U.S.C. § 362(c)(2)(A).
4 In re Houlik, 481 B.R. 661 (10th Cir. BAP 2012).
5 Id. at 669-70.
6 Id. at 676.
were not done; advancing a “continuing violation” theory, they then filed yet
another motion to show cause and/or for contempt, presenting the same
arguments. The bankruptcy court again denied the motion on the same bases,
resulting in a second appeal. The Raels’ appeals were companioned by this Court
and are resolved by this opinion.
II. Background Facts
The Raels filed an individual Chapter 11 bankruptcy petition in 2008, and
their plan was confirmed in January 2010. The plan provided they would not
receive a discharge until they completed all payments under their plan. About a
year after their plan was confirmed, they filed a final report and motion for final
decree, seeking to close their case to avoid paying the United States Trustee’s
quarterly fee assessments. Over objections by both the United States Trustee and
Wells Fargo, the bankruptcy court entered a Final Decree and Order Closing Case
in March 2011. Neither the motion requesting case closing nor the resulting order
addressed any aspect of the automatic stay or suggested the closing was anything
but a full and complete closure of the case.
Several months after the case was closed, Wells Fargo filed a motion to
dismiss or convert the bankruptcy case based on the Raels’ default. The Raels
objected, arguing that because their case was closed, the bankruptcy court did not
have jurisdiction to grant relief. The motion remained undecided, and the
bankruptcy court later noted it had not ruled on Wells Fargo’s motion because the
case was closed.
Finding no relief at the bankruptcy court, Wells Fargo filed a complaint in
state court in November 2011, alleging the Raels had breached their contract
when they defaulted on the terms of the confirmed plan. The Raels answered the
state court complaint, failing to raise any jurisdictional defense to that court
hearing the matter, and the state court entered judgment for Wells Fargo in
A few months later, in December 2012, Wells Fargo next filed a state court
action seeking a determination that Wells Fargo had a superior lien over lien
rights of other defendants/creditors in certain property that the Raels acquired
before they commenced their Chapter 11 bankruptcy case. Wells Fargo then
installed a locked fence around one of the properties in February 2013.
More months passed. On May 28, 2013, the Raels moved to reopen their
bankruptcy case to enforce the terms of their confirmed plan and to bring a
contempt action for Wells Fargo’s alleged violation(s) of the automatic stay. The
court reopened the Raels’ bankruptcy case in June 2013. Several months later, in
September 2013, the parties filed a stipulated motion for relief from automatic
stay to allow Wells Fargo to foreclose on the subject properties (i.e., the
properties that were the subject of the state court proceedings). The order
approving that stipulated motion was entered on October 21, 2013.
Notwithstanding their stipulation to the bankruptcy court granting stay
relief, the Raels filed their first motion to show cause and/or for a finding of
contempt by the bankruptcy court on October 15, 2013. They alleged that Wells
Fargo was in contempt for violating §§ 362(a)(3), (5), and (6) based on the state
court actions filed before the stipulated stay relief, and for violating terms of the
Raels’ confirmed Chapter 11 plan, generally alleging that the property at issue
remained property of the estate and subject to the automatic stay. While this
motion was pending—but after the stipulated relief order was entered, Wells
Fargo proceeded to change the locks at two of the properties, and, in January
2014, foreclosed on them.
Several months later, in April 2014, the bankruptcy court denied the Raels’
contempt motion, finding there was no stay violation and that Wells Fargo was
entitled to enforce its rights under the confirmed plan in state court. As stated
above, the bankruptcy court also denied a subsequent motion for reconsideration
and a second motion for an order to show cause and/or for contempt. The appeals
that are the subject of this opinion followed.
III. Jurisdiction and Standard of Review
This Court has jurisdiction to hear timely-filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
unless one of the parties elects to have the district court hear the appeal. 7 Neither
party elected to have this appeal heard by the United States District Court. The
parties have therefore consented to appellate review by this Court. The orders of
the bankruptcy court (i.e., denying the Raels’ first motion to show cause and/or
for contempt, motion for reconsideration, and second motion to show cause and/or
for contempt) fully and finally resolved the parties’ disputes and are therefore
final orders for purposes of appeal. 8 The Raels timely appealed those orders and
this Court, therefore, has jurisdiction over the appeals.
The issues raised in these appeals are legal issues, which this Court reviews
de novo. 9 “De novo review requires an independent determination of the issues,
giving no special weight to the bankruptcy court’s decision.”10
7 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002 (now also
at Fed. R. Bankr. P. 8005, effective Dec. 1, 2014); 10th Cir. BAP L.R. 8001-3
(now codified at 10th Cir. BAP L.R. 8005-1, effective December 1, 2014).
8 See In re Eneco, Inc., No. UT-09-013, 2010 WL 744351, at *4 (10th Cir.
BAP Mar. 2, 2010) (bankruptcy court order denying motion for contempt is finalfor purposes of review).
9 Jantz v. Karch (In re Karch), 499 B.R. 903, 906 (10th Cir. BAP 2013)
(interpretation of statutory language is reviewed de novo) (citing Pierce v.
Underwood, 487 U.S. 552, 558 (1988)); Diviney v. Nationsbank of Tex., N.A. (In
re Diviney), 225 B.R. 762, 769 (10th Cir. BAP 1998) (“Whether a party’s actions. . . violated the automatic stay is a question of law [that] is reviewed de novo.”)
(quoting Barnett v. Edwards (In re Edwards), 214 B.R. 613, 618 (9th Cir. BAP
1997)); Korngold v. Loyd (In re S. Med. Arts Cos., Inc.), 343 B.R. 250, 254 (10thCir. BAP 2006) (bankruptcy court’s subject matter jurisdiction is an issue of lawthat is reviewed de novo) (citing Salt Lake Tribune Pub. Co., LLC v. AT & T
Corp., 320 F.3d 1081, 1095 (10th Cir. 2003)).
10 AG New Mexico, FCS, ACA v. Borges (In re Borges), 510 B.R. 306, 321
(10th Cir. BAP 2014) (citing Salve Regina Coll. v. Russell, 499 U.S. 225, 238
Application of the Automatic Stay in Individual Chapter 11Cases Post-confirmation
The filing of a petition in bankruptcy automatically imposes a stay that
prohibits most attempts by a debtor’s creditors to enforce their claims. 11 The
duration of that stay is generally defined in § 362(c). The issue in this appeal is
whether the stay in the Raels’ case remained in effect when Wells Fargo initiated
state court proceedings or otherwise enforced its rights under the Raels’
The relevant subsections of § 362(c), which are subject to specific
exceptions not applicable here, provide:
(1) the stay of an act against property of the estate under subsection (a)
of this section continues until such property is no longer property of the
(2) the stay of any other act under subsection (a) of this section
continues until the earliest of–
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case . . . under chapter 9, 11, 12, or 13 of this
title, the time a discharge is granted or denied[.]12
The Raels contend that Wells Fargo’s enforcement actions were taken against real
property that constituted property of the estate and, therefore, § 362(c)(1) is the
applicable subsection. But the bankruptcy court concluded that the stay
terminated as to all of the Raels’ property when they elected to close their case in
March 2011. All of Wells Fargo’s disputed conduct occurred between November
2011 (when it filed the first state court complaint) and February 2013 (when it
fenced in and locked one of the disputed properties). Thus, if the stay terminated
when the bankruptcy court closed the case in March 2011, there was no stay in
place that Wells Fargo’s subsequent enforcement efforts could violate.
11 U.S.C. § 362(a).
11 U.S.C. § 362(c)(1)-(2) (emphasis added).
On appeal, the Raels argue that the automatic stay remains in effect in
individual Chapter 11 cases post-confirmation because of the interplay between
§§ 362(c)(1), 1141(b), and 1115(a). The Raels, as the party alleging a stay
violation, bear the burden to prove Wells Fargo violated the stay.13
As noted above, § 362(c)(1) expressly states that the automatic stay “of an
act against property of the estate . . . continues until such property is no longer
property of the estate.” 14 Section 1141(b) then states that “[e]xcept as otherwise
provided in the plan or the order confirming the plan, the confirmation of a plan
vests all of the property of the estate in the debtor.” 15 Because the plan and
confirmation order the Raels drafted did not elect to provide otherwise, the simple
reading of these two statutes resulted in all property of the estate, at least as it
existed on the date of confirmation, vesting in the Raels at confirmation. As a
result, the automatic stay protecting that property—which included the property
the Raels had pledged to Wells Fargo—terminated upon confirmation of the
Raels’ plan in January 2010.
The Raels argue that § 1115(a) conflicts with § 1141(b), because § 1115(a)
states that in individual Chapter 11 cases, property of the estate includes property
“acquire[d] after the commencement of the case . . .” and “earnings from services
perf ormed by the debtor after the commencement of the case . . . ,” as long as that
property was acquired or earned “before the case is closed, dismissed, or
converted . . . .” 16 The Raels then analogize these Chapter 11 sections to similar
Chapter 13 sections, and discuss the split of authority in Chapter 13 cases over
See Johnson v. Smith (In re Johnson), 501 F.3d 1163, 1171-72 (10th Cir.
11 U.S.C. § 362(c)(1).
11 U.S.C. § 1141(b).
11 U.S.C. § 1115(a)(1)-(2).
whether the property of the estate remains property of estate after confirmation
until discharge, and is therefore protected by the automatic stay. In the Chapter
13 context, there is no Tenth Circuit or BAP opinion deciding this issue,17 and
there are no opinions at all on the issue in the Chapter 11 context.
There is no real dispute that the bankruptcy court did not address this
argument (analogizing Chapter 11 provisions to Chapter 13 cases and the split in
the case law in those cases). And Wells Fargo responds to this argument, and the
Raels’ appeal, by arguing that the Raels waived this argument on appeal by
failing to make the same argument at the bankruptcy court. It is true that the
Raels’ briefing and advocacy on this issue at the bankruptcy court are not clear.
In their first motion for an order to show cause and/or for contempt, the Raels
only generally argued that the real property at issue was property of the estate and
subject to the automatic stay. In their motion for reconsideration, in response to
the bankruptcy court’s ruling that § 362(c)(2) and Houlik defeated their claims,
however, the Raels then pushed the issue that § 362(c)(1), rather than § 362(c)(2),
should be considered by the bankruptcy court.
The bankruptcy court, in ruling on the motion for reconsideration, held that
it was not appropriate for the Raels to advance the § 362(c)(1) argument, because
the Raels could have raised the argument in their prior briefing and did not. It
was not until briefing in support of their second motion for show cause and/or
contempt that the Raels fully briefed their argument about the interplay between
The Tenth Circuit has recognized the split in the Chapter 13 case law
concerning the Chapter 13 vesting provisions and property of the estate, but hasnot indicated which approach it will f ollow. See United States v. Richman (In re
Talbot), 124 F.3d 1201, 1207 n.5 (10th Cir. 1997) (acknowledging question overthe vesting provisions of § 1327(b) and its impact on estate property uponconfirmation of a Chapter 13 plan). The Tenth Circuit BAP has done the same.
See In re Vannordstrand, 356 B.R. 788, No. KS-05-091, 2007 WL 283076, at *2(10th Cir. BAP Jan. 31, 2007) (noting the “disputed issue” of whether “the‘vesting’ of estate property in the debtor [in a Chapter 13 case] acts to terminate
§ 1306’s inclusion of post-petition acquired property in the estate” butdetermining it need not decide the issue in that case).
§§ 362(c)(1), 1141(b), and 1115(a) and their analogy to the Chapter 13 case law.
Ultimately, it is a close call whether the Raels sufficiently and timely
raised the argument at the bankruptcy court that they now press on appeal. 18 But
because the Raels’ argument is without merit based on the simple application of
the plain language of the Bankruptcy Code to the facts of this case, and based on
binding precedent, we elect to dispose of it.
Debtors do not satisfactorily address the Tenth Circuit BAP opinion in
Houlik, 19 which has facts and issues similar to those at hand. In Houlik, after the
individual Chapter 11 debtors’ plan was confirmed, the court administratively
closed the case prior to debtors’ receipt of their discharge. 20 The debtors’
confirmed plan expressly vested all property in the debtors at confirmation. 21 The
debtors reopened their bankruptcy case several months later, alleging a violation
of the automatic stay as well as a violation of the discharge injunction and the
plan confirmation order. 22 Regarding the alleged violation of the automatic stay,
the Houlik panel applied § 362(c) and held the f ollowing:
Pursuant to § 362(c)(1), the stay of an act against property of the estatecontinues only until such property is no longer property of the estate.
As a result, in this case [ where the plan itself vested property in thedebtors upon confirmation], the automatic stay imposed with respect tothe [property] when the [debtors] filed their Chapter 11 petition
terminated upon Plan confirmation. Additionally, § 362(c)(2) provides
that the stay of any other act against the [ debtors] to collect on aprepetition claim continues only until the case is closed, the case is
The review applicable on appeal would change if the Raels had not
properly raised the issue at the bankruptcy court. See Barber v. T.D. Williamson,
Inc., 254 F.3d 1223, 1227 (10th Cir. 2001) (noting that when an appellant failedto timely raise an issue in the lower court, then the only review available is forplain error) (citing Giron v. Corrections Corp. of Am., 191 F.3d 1281, 1289 (10th
Houlik, 481 B.R. at 661.
Id. at 664.
dismissed, or a discharge is granted or denied, whichever occurs first.
Thus, any stay of actions against the [debtors] terminated when theircase was closed . . . . As a result, [the creditor] cannot be sanctioned forrepossession of the [property] as a violation of the automatic stay.23
The Houlik decision did not address the Raels’ current argument about the
interplay between §§ 362(c)(1), 1141(b), and 1115(a), likely because that court
did not believe it needed to. The Houlik decision applies the plain language of
§ 362(c) and concludes that the automatic stay terminated as to property of the
estate upon plan confirmation, and terminated as to all other property upon case
The Raels attempt to distinguish Houlik by emphasizing that the Chapter 11
plan in Houlik expressly vested property of the estate in the debtors upon plan
confirmation, while their plan is silent as to vesting. But that is a distinction
without a difference, since the plan in Houlik did only what the Bankruptcy Code
dictates for all cases—i.e., vesting property of the estate with all debtors upon
plan confirmation under § 1141(b) (unless the plan provides otherwise). As Wells
Fargo argues, the vesting language in Houlik was essentially redundant because
the Code provides the same result. As a result, the Raels’ argument finds no
support in the Tenth Circuit. 25 Just as in Houlik, the stay of actions against
property of the estate terminated upon the Raels’ plan confirmation under
§ 362(c)(1) and § 1141(b). As such, their argument that Wells Fargo violated the
23 Id. at 669-70 (internal citations omitted).
25 The Raels also contend that the bankruptcy court’s interpretation of
§ 362(c)(2), as ending any automatic stay upon closure of the case, renders
subsection (c)(1) “surplusage” because closure is irrelevant to (c)(1). However,
(c)(1) terminates the stay when estate property no longer belongs to the estate.
That happens upon confirmation under § 1141(b), which is prior to termination ofthe stay under (c)(2). Moreover, § 1141(b) specifically allows debtors to controlwhether or not estate property vests with them upon confirmation by allowingthem to “provide otherwise.” As a result, the Raels could have preserved theautomatic stay for a time by simply including such a provision in their plan.
automatic stay when it began its state court enforcement actions is misplaced, as
the property pledged to Wells Fargo was not estate property at that point.
Likewise, the stay that applies to all other acts terminated under § 362(c)(2) when
the Raels voluntarily elected to close their case prior to discharge. Thus, there
was no automatic stay violation at all.
The addition of § 1115(a) by BAPCPA,26 and the interplay of that section
with §§ 362(c)(1) and 1141(b), although not addressed by Houlik, also have no
impact here. The Raels analogize these sections to similar provisions in the
Chapter 13 context, and rely on cases outside the Tenth Circuit27 that essentially
ignore § 1327(b) (which, like § 1141(b), vests estate property with the debtor
upon confirmation unless otherwise provided) on the basis of a perceived
“conflict” between re-vesting estate property with the debtor and § 1306(a)
(which, like § 1115(a), includes an individual debtor’s post-petition assets in the
bankruptcy estate). The “conflict” that some courts have found between
§ 1327(b) and § 1306(a) is that, although estate property “vests” in a debtor upon
plan confirmation under § 1327(b), an individual debtor’s property and wages
acquired post-petition are considered to be “estate property” under § 1306(a) until
“the case is closed, dismissed, or converted.” 28 Thus, in the event that 1) neither
the plan nor the confirmation order provides that estate property shall remain
26 BAPCPA refers to the Bankruptcy Abuse Prevention and Consumer
Protection Act, Pub. L. 109-8, 119 Stat. 23, a major statutory revision of theBankruptcy Code in 2005.
27 The Raels cite United States v. Harchar, 371 B.R. 254 (N.D. Ohio 2007)
and In re Kolenda, 212 B.R. 851 (W.D. Mich. 1997) as cases finding that, in spiteof § 1327(b), estate property remains estate property (and therefore protected bythe automatic stay) after confirmation.
28 See, e.g., United States v. Harchar, 371 B.R. 254, 264 (N.D. Ohio 2007)
(noting the “contradiction” between § 1306 providing “that earnings and propertyare property of the estate until the case is closed, dismissed or converted, whileplan confirmation occurs before any of these events and “vests all of the propertyof the estate in the debtor” under [ §] 1327”); In re Kollenda, 212 B.R. 851,852–53 (W.D. Mich. 1997) (describing “conflict” between § 1306 and § 1327).
vested in the estate upon confirmation, and 2) the debtor acquires property or
wages between confirmation and the closure, dismissal, or conversion of his case,
what was previously estate property will be vested with the debtor and property
acquired by the debtor after confirmation (that would not have been estate
property except for application of § 1306(a) or § 1115(a)) is estate property by
virtue of those provisions. These courts then conclude that the property is
protected by the automatic stay set forth in § 362(c)(1).29
But even if there was controlling Tenth Circuit precedent on this issue,
which there is not, 30 § 1115(a) is simply inapplicable to the Raels. Again,
§ 1115(a) states that in individual Chapter 11 cases, property of the estate
includes property “acquire[d] after the commencement of the case . . .” and
“earnings from services performed by the debtor after the commencement of the
case . . . ,” as long as that property was acquired or earned “before the case is
closed, dismissed, or converted . . . .” 31 The logical reading of this statute is,
then, that it governs only what property enters the estate; it has no effect on the
termination of the automatic stay under § 362(c) in this case. The property that
was the subject of Wells Fargo’s actions was property on which Wells Fargo had
a prepetition lien. Thus, by definition, this was not property the Raels acquired or
earned after they filed their case and before case closure, as required for the
express terms of § 1115(a) to apply.
29 See, e.g., In re Kollenda, 212 B.R. at 855 (concluding “even if the property
in the estate at the time of confirmation is transf erred to the debtor under §
1327(b), the estate continues to exist, and property acquired post-confirmation isadded to the estate until the case is ‘closed, dismissed, or converted’) (quoting In
re Fisher, 203 B.R. 958, 962 (N.D. Ill. 1997)).
30 Obviously, the issue as it arises in Chapter 13 cases is very far afield f rom
what is squarely presented here. We express or imply no opinion on the split inauthority found in the Chapter 13 case law; this is not the proper case to weighthe differing approaches.
31 11 U.S.C. § 1115(a)(1)-(2).
As a result, the stay of Wells Fargo’s actions against property of the estate
had long since terminated—in January 2010 when the plan was
confirmed—pursuant to the plain language of § 362(c)(1) and § 1141(b). The
Raels could have chosen a different vesting time, as permitted by § 1141(b), but
they elected not to do so. Therefore, the confirmation of their plan vested all
property of the estate in them (under § 1141(b)) and the automatic stay ceased as
to that property at plan confirmation (under § 362(c)(1)). The stay against all
other acts terminated, by the express language of § 362(c)(2), when the Raels
elected to close their case.32
Once again, the Raels made this choice; they voluntarily sought the closing
of their case after plan confirmation in order to avoid further Chapter 11 fees.
And they used the fact the case was closed as a shield when Wells Fargo
attempted to dismiss or convert the Chapter 11 case after the Raels failed to
perf orm under the confirmed plan. They will not now be heard to suggest the
closing was something less than is contemplated by the express words of
Based on the timeline outlined herein, the Wells Fargo actions about which
Because of this, the Raels’ passing argument about the applicability of
§ 362(a)(5) is misplaced. Section 362(c)(2) terminated any stay under § 362(a).
The Raels also argue their Chapter 11 case was closed as a mereadministrative matter so they could avoid paying fees to the United StatesTrustee, and that, therefore, § 362(c)(2) is somehow inapplicable. Regardless ofthe Raels’ motive for closure, however, the Bankruptcy Code does not distinguishamongst motives for case closure. The Raels further argue that the automatic staywas reinstated when they reopened their Chapter 11 case. But, again, the onlyactions Wells Fargo took after the case was reopened occurred after entry of the
stay relief order to which the Raels had agreed. The Raels then argue that thereopening of their case somehow retroactively restored the automatic stay. Even
if the Raels had made this argument more than superficially, which they did not,
we need do no more than mention here that the Code does not provide for suchretroactivity. Cf. In re Singleton, 358 B.R. 253, 261 (D. S.C. 2006) (analyzingautomatic stay in Chapter 13 case, and noting that “[w]hile the Bankruptcy Code[may grant] a bankruptcy court the power to retroactively grant relief f rom a
stay . . . ,” there is no authority in the Code “that grants the bankruptcy courtpower to retroactively impose a stay. . . .”) (internal citations omitted).
the Raels complain occurred between November 2011 and February 2013. The
Raels’ Chapter 11 plan was confirmed in January 2010, and their Chapter 11 case
was closed in March 2011. Under § 362(c)(1), the stay of acts against property of
the estate terminated in January 2010 upon confirmation, and “the stay of any
other act . . .” terminated in March 2011 upon case closure. 33 The bankruptcy
court was correct to conclude there were no automatic stay violations by Wells
Fargo and to deny the Raels’ motions alleging violations.
Jurisdiction to Enforce the Terms of the Confirmed Chapter 11Plan
The Raels also argue on appeal that the bankruptcy court had exclusive
jurisdiction to enforce the provisions of their Chapter 11 plan, and that, therefore,
Wells Fargo’s state court action f or breach of the plan provisions was improper.
The bankruptcy court rejected this argument, again based on Houlik. The
majority in Houlik held that when there is no automatic stay or discharge
injunction violation to support jurisdiction, and there is no issue involving
noncompliance with or interpretation of a confirmed plan, a bankruptcy court
does not have jurisdiction to determine a post-conf irmation wrongful repossession
In Houlik, the majority opinion considered whether a bankruptcy court has
authority to sanction a creditor for violating a confirmation order when there is no
violation of the automatic stay or the discharge injunction. 35 The majority
opinion first noted that jurisdiction retention language in a plan “cannot broaden a
bankruptcy court’s jurisdiction . . . ,” and found any attempt to do so with such
11 U.S.C. § 362(c)(2).
Houlik, 481 B.R. at 676.
Id. at 672-73.
language to be irrelevant. 36 The majority then analyzed 28 U.S.C. § 157(b), and
concluded that the debtors’ claim in that case was not a core proceeding, and was,
in fact, a non-core proceeding that could have been brought in state court for
breach of contract or wrongful repossession. 37 As a non-core proceeding, the
bankruptcy court could only have jurisdiction if the action was “sufficiently
related to the [debtors’] Chapter 11 bankruptcy case.” 38 Based on the Tenth
Circuit’s definition of “related to” jurisdiction, and cases from outside the Tenth
Circuit applying that definition, the majority opinion in Houlik held that, no
matter how the “related to” definition is interpreted, the post-confirmation
jurisdiction of a case—where assets have re-vested in debtors, the plan is
substantially consummated and administered, and the creditor retains its rights in
the collateral pursuant to the plan—does not extend to the bankruptcy court to
sanction a plan violation. 39 The majority opinion concluded:
Even though it is brought by the debtors, the action affects neither anintegral aspect of the bankruptcy process, nor the interpretation,
implementation, consummation, execution, or administration of the
confirmed plan. That is, of course, not to say there is no remedy for the[debtors] in this situation—only that it is a state court remedy and nota bankruptcy court remedy. . . . [T]he bankruptcy court’s jurisdictionfollowing confirmation . . . is reserved for matters that impact thebankruptcy process directly or involve interpretation or execution of theplan of reorganization.40
The concurring opinion in Houlik agreed that the creditor’s exercise of its
lien rights retained under the plan did not require either interpretation or
enforcement of the plan, which would have been something over which the
Id. at 672 n.72 (internal citation omitted). Likewise, the jurisdiction
retention language in the Raels’ plan is irrelevant in the same way.
37 Id. at 674.
39 Id. at 675-76.
40 Id. at 676-77.
bankruptcy court retained jurisdiction, but it objected to the majority’s failure to
acknowledge the importance of such post-confirmation jurisdiction (whether it be
core or ancillary) by considering it only under a “related to” analysis.41
Regarding state court jurisdiction, the concurrence specif ically noted that “[t]he
state court would have concurrent jurisdiction to enforce the Plan as a contract
between the Debtors and [creditor],” but the bankruptcy court would retain
authority to prevent certain collection eff orts as part of its enforcement of the
The Raels first argue on appeal that Houlik is distinguishable because there
was, in fact, an automatic stay violation, and that, therefore, the action here would
be a core proceeding, not a non-core proceeding. As discussed above, however,
the bankruptcy court was correct in finding there was no automatic stay violation,
and this holding forecloses the Raels’ argument. The Raels then argue that
because their plan provided that the bankruptcy court “shall retain jurisdiction”
over their plan, that the bankruptcy court must have continuing jurisdiction over
the plan—questioning how the bankruptcy court could do anything further in their
Chapter 11 case if it has no jurisdiction at that stage. But the Houlik decision
does not state that bankruptcy courts have no post-confirmation jurisdiction.
Instead, the majority opinion concluded only that bankruptcy courts do not have
“related to” jurisdiction to issue sanctions in non-core post-confirmation actions
alleging a violation of the plan for state court enforcement of the plan. Applying
the concurring opinion from Houlik further reiterates that the bankruptcy court is
not left without jurisdiction entirely. Instead, exclusive bankruptcy court
jurisdiction did not arise based on those particular facts—facts that are nearly
identical to those found here. As a result, the Raels’ arguments also fail as to this
41 Id. at 678–79.
42 Id. at 679.
portion of the bankruptcy court’s orders.
Because we conclude that the bankruptcy court properly found Wells Fargo
did not violate the automatic stay, and that the bankruptcy court did not have
exclusive jurisdiction to enforce the terms of the Raels’ Chapter 11 plan, we
affirm the bankruptcy court’s orders denying relief to the Raels.
- Category: Judge Karlin
- Published on 13 January 2015
- Written by Judge Karlin
- Hits: 253
In Re MacMillan, 14-40965 (Bankr. D. Kan. Jan. 9, 2015) Doc. # 37
SIGNED this 9th day of January, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40965
Colin Edward MacMillan, and Chapter 7
Cassandra Grace MacMillan,
Memorandum Opinion and Order
Denying Trustee’s Objection to Debtors’ Amended Exemption
of Digital Photos and Business Website
Debtors Colin Edward MacMillan and Cassandra Grace MacMillan
filed a voluntary Chapter 7 Bankruptcy Petition in August 2014.1 The
Chapter 7 Trustee (Trustee) objected to their attempt to exempt, as a tool-of
the-trade, a website and a number of digital images, arguing both that theitems were not required for Colin’s primary occupation and that they were not
1 Doc. 1.
2 Doc. 22.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 1 of 11
tangible means of production, as the Trustee contends the Kansas tools-ofthe-
trade exemption requires. After receiving evidence, the Court determines
that the digital photographs and the website are electronic documents eligible
for exemption under K.S.A. § 60-2304(e), and that because these items are
necessary for Cassandra’s primary occupation, the Debtors are entitled to
claim the exemption. As a result, the Court overrules Trustee’s objection.
I. Findings of Fact
The parties agree with most of the facts necessary to resolve this issue.
Colin is a photographer and is employed as a manager of photography at
ImageMakers. He also runs his own personal photography business,
MacMillanWorks, on the side; this business focuses primarily on selling his
digitally manipulated landscape photographs directly to the public.
Debtors started MacMillanWorks in December 2012 and their jointly
filed 2013 tax returns reflected gross business income from MacMillanWorks
of $4,173. The reported gross business income for MacMillanWorks for the
period January 1, 2014 to August 18, 2014 was $5,042. Colin takes the
pictures and videos for MacMillanWorks, and digitally manipulates the
images before offering them for sale. Debtor Cassandra also works for
MacMillanWorks, handling all the accounting, some promotional work, and
most of the purchasing of supplies that the business requires. Although she
Case 14-40965 Doc# 37 Filed 01/09/15 Page 2 of 11
also earns income by providing nanny services each week, no evidence was
offered either about the value of her work for MacMillanWorks compared to
her nanny work, nor about her relative time commitment to each endeavor.
Debtors listed on Schedule B filed with their petition “Digital Images;
MacMillanWorks.net,” but they did not seek to exempt the website or the
digital images in their initial filing. After the first creditor meeting under 11
U.S.C. § 341 and a second special creditor meeting, where the Trustee’s
inquiry focused specifically on the digital images and the domain name,
Debtors filed an Amended Schedule C and now seek to claim the digital
images and the website as exempt pursuant to K.S.A. § 60-2304(e), the
Kansas tools-of-the-trade exemption. The Trustee objected to this exemption.
Section 60-2304(e) provides that a Kansas resident may exempt the
“books, documents, furniture, instruments, tools, implements and
equipment, the breeding stock, seed grain or growing plants stock, or
the other tangible means of production regularly and reasonably
necessary in carrying on the person’s profession, trade, business or
occupation in an aggregate value not to exceed $7,500.”
Debtors stored the digital images for MacMillanWorks, together with
thousands of personal images, on an external hard drive; the drive contains
over three terabytes of data.
3 Doc. 1.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 3 of 11
II. Conclusions of Law
This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order. A debtor’s right to anexemption is determined as of the date the bankruptcy petition is filed.6 “In
determining whether a debtor is entitled to claim an exemption, ‘the
exemption laws are to be construed liberally in favor of exemption.’”7 “Once a
debtor claims an exemption, the objecting party bears the burden of proving
the exemption is not properly claimed.” As a result, Trustee bears the burdenof proving that neither Debtor may claim the exemption.
The Trustee raises two objections to Debtors’ claimed exemptions.
First, Trustee notes that § 60-2304(e) only allows a Kansas resident to
exempt the “books, documents, furniture, instruments, tools, implements and
equipment, the breeding stock, seed grain or growing plants stock, or the
other tangible means of production regularly and reasonably necessary in
5 See 28 U.S.C. § 157(b)(2)(B) (stating that “exemptions from property of the
estate” are core proceedings); § 157(b)(1) (granting authority to bankruptcy judges
to hear core proceedings).
6 In re Ginther, 282 B.R. 16, 19 (Bankr. D.Kan. 2002) (citing In re Currie, 34
B.R. 745, 748 (D. Kan.1983)).
7 Lampe v. Iola Bank and Trust (In re Lampe II), 331 F.3d 750, 754 (10th Cir.
2003) (quoting In re Ginther, 282 B.R. at 19).
8 Id. See also Fed. R. Bankr.Proc. 4003; Robinson v. Sanchez (In re Robinson),
295 B.R. 147, 152 (10th Cir. BAP 2003).
Case 14-40965 Doc# 37 Filed 01/09/15 Page 4 of 11
carrying on the person’s profession, trade, business or occupation in an
aggregate value not to exceed $7,500." The Trustee argues that the digital
images and website are not a “tangible means of production,” which Trustee
argues is required by § 60-2304(e). Second, Trustee argues that these assets
do not relate to Debtor Colin’s primary occupation as the manager of
photography at ImageMakers, noting that this Court has previously held that
only the tools related to a debtor’s primary occupation may be exempted
under the tools-of-the-trade exemption.10 Debtor Colin admitted at trial that
MacMillanWorks is a side business and that while he serves as a
photographer at both businesses, the majority of his income comes from his
employment at ImageMakers.
Both of Trustee’s arguments fail. Trustee’s first argument suggests §
9 Emphasis added. The Court notes the extensive briefing and testimony on
the value of the domain name associated with MacMillanWorks and on the value of
Debtor Colin's digital photographs related to that business, but the value of these
items is immaterial to the specific objections Trustee raised to Debtors' claim of
exemption. Because Trustee does not argue that the value of the property in
question exceeds the $7500 cap on the tools-of-the-trade exemption, the Court will
not further address this issue.
10 In re Wilkinson, Case No. 09-41059, 2010 WL 821345 (Bankr. D. Kan Mar.
5, 2010). The denial of the exemption in Wilkinson was in large part based on the
fact that debtor had filed tax returns and other documents, under penalty of
perjury, stating he had no income from the skid loader he was trying to
exempt—thus he could not meet the “regular use” criteria. That fact pattern does
not exist here. Colin is a photographer in both jobs, and earned income as a
photographer in both jobs.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 5 of 11
60-2304(e) must be read to require all items a debtor seeks to exempt as tools
of the trade be tangible. Although the state could be susceptible to such a
reading, the Court reads the statute more broadly in light of the mandate to
construe exemptions liberally. The purported tangibility requirement comes
from the catch-all portion of the statute, which allows a debtor to exempt,
“the other tangible means of production,” beyond the items enumerated
earlier in the sentence. One could read this sentence as Trustee
proposes—placing the emphasis on “other,” which would suggest that all
items must be tangible means of production. But the sentence could just as
easily be read to require that only the other means of production be tangible,
with no such requirement imposed on the enumerated items.
Again, because “exemption laws are to be construed liberally in favor of
exemption,”11 the Court will embrace the latter reading of the statute and
hold that only the additional items, not those enumerated in the list, must be
tangible items. This reading is especially appropriate given the nature of
many of the “books, documents, . . . instruments, [and] tools” in today’s
electronic era, which are entirely digital and thus likely not tangible items. In
this case, the digital images and the website are electronic documents and, as
11 In re Lampe II, 331 F.3d at 754. See In re Massoni, 67 B.R. 195, 197
(Bankr. D.Kan. 1986) (“The Kansas exemption laws are to be liberally construed ‘so
as to effect the humane purposes of the legislature in enacting them.’”).
Case 14-40965 Doc# 37 Filed 01/09/15 Page 6 of 11
such, are amenable to exemption under § 60-2304(e).
Trustee’s second argument, that the website and digital images are not
related to Debtor Colin’s primary occupation, fails to address Debtors’
argument that Debtor Cassandra could exempt the items herself. Trustee
provided no evidence to suggest that the items in question were not tools of
the trade for Debtor Cassandra’s primary occupation, as Debtors argued
during the evidentiary hearing. Generally, both debtors in a joint debtor case
may claim the exemptions available under Kansas law.12 More specifically,
the Court notes the long line of “farmer’s wife” cases, which establish that a
spouse, engaged together in an occupation with the other spouse, is able to
claim the Kansas tools-of-the-trade exemption for property used to run that
business if that business is the primary occupation for the spouse claiming
The Tenth Circuit BAP described the general theme in these cases:
The factual scenario running through those cases is
that of a farmer’s wife who has claimed an exemption
in farming equipment when the husband is primarily
responsible for the farming. The wife is either
employed part-time off the farm or not at all,
although she assists in the farming operation in one
way or another. Those courts have consistently found,
based on a litany of farming activities in which she
12 Lampe v. Iola Bank and Trust (In re Lampe I), 278 B.R. 205, 215 (10th Cir.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 7 of 11
participated, that the wife’s primary occupation was
farming and permitted her to claim the exemption.13
This case presents an analogous situation. Here, Debtor Cassandra handles
all the accounting and some promotional work for MacMillanWorks, and she
also purchases most of the supplies the business requires. Debtor Colin
testified that he could not make sense of the books, and that Debtor
Cassandra exclusively handles that side of the business.
Trustee bears the burden of establishing that Debtor Cassandra cannot
claim this exemption, but Trustee submitted virtually no evidence on this
point. Debtor Cassandra testified that she does work part time as a nanny
each week, in addition to her work with MacMillanWorks, but Trustee did not
elicit, and no witness volunteered, testimony reflecting her relative income
from each job, nor her time commitment to each endeavor. As a result, there
is no evidence that the work she does for MacMillanWorks is not her primary
Trustee noted in her written objection that MacMillanWorks is a sole
proprietorship owned by Debtor Colin, and Debtor Colin agreed that he
organized the company as a sole proprietorship. Trustee appears to be
arguing that Debtor Cassandra thus has no ownership interest in the
13 Dunivent v. Bechtoldt (In re Bechtoldt), 210 B.R. 599, 602, n.2 (10th Cir.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 8 of 11
business or the website and images, but Trustee never makes this argument
explicit. Even if she did, however, the argument would fail under existing
Circuit precedent. The test for co-ownership between a husband and wife
engaged in an enterprise like this is not the form of the business or whose
name appears on the business documents.
The Tenth Circuit addressed this very issue in In re Lampe, 14 where the
Court concluded that a wife had an ownership interest in farm implements
sufficient to support the tools-of-the-trade exemption, even though the farm
was a sole proprietorship in her husband’s name and only her husband
reported self-employment income and self-employment taxes for the farm
enterprise. In In re Lampe, the Court established the test for determining
whether a spouse has sufficient ownership interests to support this
the test for co-ownership for purposes of the tools of the
trade exemption is not whether a spouse can
demonstrate he or she acquired an ownership interest
by purchase with separate property, gift or inheritance
. . . . Instead, the debtors' intent and conduct controls.15
The Court went on to consider evidence that the wife worked on the farm and
14 331 F. 3d 750.
15 Id. at 755. See also Estate of Lane, 39 Kan.App.2d 1062, 1068–69 (Kan. Ct.
App. 2008) (approving of the spousal ownership interest test as stated in In re
Case 14-40965 Doc# 37 Filed 01/09/15 Page 9 of 11
operated some of the equipment, that all proceeds from the farming operation
were placed in a joint account, that funds to pay for the equipment came out
of the account, that the wife also deposited her outside employment income
into the joint account, and that she co-signed on the notes and security
agreements to obtain operating loans for the farm. Based on this evidence,
the Court concluded that, “the Trustee failed to meet its burden of proving
[the wife] lacked an ownership interest in the farm equipment.”16
Here, similar evidence supports this Court’s determination that Trustee
has been unable to show that Debtor Cassandra lacks the necessary
ownership interest in these documents. The evidence shows that Debtor
Cassandra handles all the accounting and some promotional work for
MacMillanWorks, and that she does most of the purchasing for the business.
Debtor Cassandra is not paid for that work. It is clear, then, that the Debtors
consider Debtor Cassandra not an employee of her husband’s business, but
rather a co-owner engaged in building the business. Even absent this finding,
because Trustee bears the burden of demonstrating that Debtor Cassandra
cannot claim this exemption, the failure to submit evidence on this question
beyond simply noting that the business is a sole proprietorship under Debtor
Colin, or to submit any other evidence suggesting that Debtor Cassandra
16 Id. at 756.
Case 14-40965 Doc# 37 Filed 01/09/15 Page 10 of 11
cannot claim the exemption, requires the Court to find that Debtor Cassandra
may claim the tools-of-the-trade exemption for the digital images and the
Because the digital images and the website fall within the meaning of
documents under §60-2304(e), and because Debtor Cassandra is entitled to
claim these documents as her tools of the trade, the Court overrules Trustee’s
Objection to Debtors’ Amended Schedule C.18
It is so ordered.
# # #
17In re Lampe I, 278 B.R. at 215.
18 Doc. 22. And to clean up the docket sheet, the Court grants the only other
motion shown as pending —Doc. 27, a Motion filed by Trustee on November 17,
2014, seeking a status conference. The Court granted that motion when it set and
conducted that status conference on November 25 and December 1, 2014,
Case 14-40965 Doc# 37 Filed 01/09/15 Page 11 of 11
- Category: Judge Karlin
- Published on 19 November 2014
- Written by Judge Karlin
- Hits: 460
In Re Ungerer, 13-41131 (Bankr. D. Kan. Oct. 17, 2014) Doc. # 72
SIGNED this 17th day of November, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 13-41131
Terry Lee Ungerer Chapter 7
Delores Jean Ungerer,
Debtors’ Motion to Refund Postpetition Mortgage Payments
Debtors Terry and Delores Ungerer filed a chapter 13 bankruptcy petition and about eight
months later converted their case to one under chapter 7 of the Bankruptcy Code. Post-conversion,
Debtors requested refund of a significant portion of the plan payments they made to the chapter 13
trustee (the “Trustee”), because those payments were intended for a mortgage creditor that never
filed a proof of claim, and because they no longer wished to retain the related real property. The
Trustee resisted, arguing that the funds should instead be disbursed to creditors pursuant to the
confirmed chapter 13 plan.
This debate—the subject of a current Circuit Court split, but one that the Tenth Circuit has
not yet weighed in on—has reasonable arguments on both sides. After considering these arguments,
Case 13-41131 Doc# 72 Filed 11/17/14 Page 1 of 19
this Court holds that Debtors do not have a right to refund of the payments reserved for payment of
the mortgage note, as their confirmed chapter 13 plan controls disbursements and requires the
chapter 13 Trustee pay those funds to creditors. Debtors’ motion for return of the money held by the
Trustee at conversion is denied.
I. Procedural and Factual Background
The parties have stipulated to the following facts or they are part of the record in this case.
Debtors filed a chapter 13 bankruptcy petition in August 2013. Their chapter 13 plan proposed
payments of $1025 per month for at least 36 months, and indicated the following would be paid:
filing fees, attorney fees for their bankruptcy attorney, home mortgage arrearage to Ocwen Loan
Servicing, and ongoing mortgage payments and “conduit administrative expenses” associated with
the home mortgage pursuant to this Court’s Standing Order 11-3 (the “conduit mortgage rule”).
Paragraph 14 of the District’s form plan also states that “[g]eneral unsecured claims will be paid
after all other unsecured claims, including administrative and priority claims, from Debtor’s
projected disposable income in an amount not less than the amount those creditors would receive
if the estate of Debtor were liquidated under Chapter 7 on the date of confirmation. . . .”1
The chapter 13 plan was confirmed on November 20, 2013, after Debtors agreed to raise
their monthly plan payment to $1093 to assure the plan’s feasibility. Debtors’ mortgage creditor
never filed a proof of claim.2
1 Doc. 2 (Plan).
2 This failure of a mortgagee to file a claim— an increasingly common
situation—presents difficult problems for debtors and trustees, alike. Counsel entered an
appearance for the mortgage creditor in September 2013 (Doc. 17), so lack of notice is clearly
not the cause.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 2 of 19
About eight months after they filed their chapter 13 petition, Debtors filed a notice to convert
their case to chapter 7, and the case was converted a few days later. Debtors have since received
their chapter 7 discharge, and the chapter 7 trustee has claimed no interest in these funds.
On the date of conversion (and to date), the chapter 13 Trustee held $8007.56 in plan
payments in his account. While the chapter 13 case was pending, each time the chapter 13 Trustee
made a disbursement, he retained a portion of the plan payments he had received, in anticipation of
receiving a proof of claim from the mortgage creditor. As of the date of conversion, and pursuant
to the plan terms and this District’s conduit mortgage rule, the Trustee had reserved $7184 for the
ongoing mortgage payments and $166.75 for the mortgage administrative claim. The remainder of
the funds would typically have been disbursed as follows: $624.59 to the chapter 13 Trustee for his
statutory fees (pursuant to 28 U.S.C. § 586(e)(2)), and $32.22 to Debtors’ attorney. Based on the
timely filed claims, if the Court orders the chapter 13 Trustee to stop holding the funds for the
mortgage claim and to disburse these funds to the remaining creditors Debtors’ plan provides to pay,
in full or in part, the funds would be disbursed as follows: $624.59 to the Trustee, $2587.24 to
Debtors’ attorney, and $4795.73 to allowed unsecured claims.
After converting their case, Debtors filed the motion to require the Trustee return the money
being held for the mortgage creditor to them, as opposed to having the Trustee disburse the funds
in the normal course of a confirmed plan.3 The chapter 13 Trustee objected, arguing that Debtors do
not have a right to control the funds after they pay them to the trustee, and that the funds received
prior to conversion should be disbursed by the chapter 13 Trustee pursuant to the confirmed chapter
3 Doc. 59 (seeking order requiring Trustee “to disburse the proceeds . . . directly to the
Case 13-41131 Doc# 72 Filed 11/17/14 Page 3 of 19
13 plan. The parties have now fully briefed this matter on the above stipulated facts. This matter
constitutes a core proceeding over which the Court has the jurisdiction and authority to enter a final
Debtors’ motion to disburse, and the Trustee’s opposition thereto, are the subject of divided
rulings from two Circuit Courts of Appeal: the Third Circuit and Fifth Circuit have reached different
conclusions on whether undistributed payments held by a chapter 13 trustee after the conversion of
a case from a chapter 13 to a chapter 7 should be returned to the debtor or distributed to creditors.
There are no pertinent rulings on this matter from the Tenth Circuit or Tenth Circuit BAP, and no
Judge in this District has yet decided the issue.5
A. Third Circuit: In re Michael6
The Third Circuit was the first Circuit Court to hear this issue, and it held that if the chapter
13 trustee is holding funds acquired from the debtor postpetition at the time of conversion from a
chapter 13 to a chapter 7, the chapter 13 trustee must return those funds to the debtor.7 In In re
4 See 28 U.S.C. § 157(b)(2)(A) (stating that “matters concerning the administration of
the estate” are core proceedings); § 157(b)(1) (granting authority to bankruptcy judges to hear
5 There is an older bankruptcy case from this District that concluded that funds held by a
chapter 13 trustee at the time of conversion to chapter 7 were not property of the chapter 7 estate
but should instead be distributed to creditors pursuant to the chapter 13 plan, In re Simmons, 286
B.R. 426, 427, 430–31 (Bankr. D. Kan. 2002) (Flanagan, J.). But apparently no party in that case
argued that the funds should be returned to the debtors. Rather, it was an argument about which
trustee was entitled to administer the funds. The Simmons case also addresses no arguments that
aren’t thoroughly addressed by the Third and Fifth Circuit cases, so the Court finds it more
instructive to focus on the Circuit Court opinions.
6 699 F.3d 305 (3d Cir. 2012).
7 Id. at 307.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 4 of 19
Michael, the debtor filed a chapter 13 bankruptcy, and his plan was later confirmed.8 The plan
required the debtor to pay $277 per month to the chapter 13 trustee for 53 months, with funds to be
distributed to secured and priority creditors, and any remaining funds to be distributed to unsecured
creditors pro rata.9 GMAC held the mortgage on the debtor’s home, and the plan provided that its
prepetition delinquency would be paid by the trustee inside the plan, with debtor continuing to make
postpetition mortgage payments directly to GMAC outside the plan.10
Soon after plan confirmation, however, GMAC filed a motion for relief from stay because
the debtor had failed to make ongoing mortgage payments outside the plan. The court granted
GMAC’s motion to allow it to foreclose on the home.11 But because the debtor did not amend his
plan or modify the wage order that required his employer make the $277 plan payments, the
employer continued to send the plan payments to the chapter 13 trustee.12 The chapter 13 trustee
attempted to pay funds to GMAC, but GMAC refused to accept them to avoid possible estoppel or
waiver defenses regarding its foreclosure action. As a result, the funds continued to accumulate.13
Approximately three years later, the debtor moved to convert his case to chapter 7.14 Shortly
after the conversion of his case, the debtor filed a motion seeking return of the accumulated
Case 13-41131 Doc# 72 Filed 11/17/14 Page 5 of 19
funds—then totaling $9181.62—from the chapter 13 trustee.15 The chapter 13 trustee objected,
arguing that the funds should be distributed pro rata to unsecured creditors as provided by the
confirmed chapter 13 plan.16
The Third Circuit began its analysis with 11 U.S.C. § 348(f)(1)(A),17 which states that
“property of the estate in the converted case shall consist of property of the estate, as of the date of
filing the petition, that remains in the possession of or is under the control of the debtor on the date
of conversion.” In the case of a bad faith conversion, “the property of the estate in the converted case
shall consist of the property of the estate as of the date of conversion.”18 The In re Michael court
“Prior to the addition of § 348(f), courts considering the disposition of funds held by a
Chapter 13 trustee at the time of conversion reached three different results: the funds were
(i) property of the new Chapter 7 estate, (ii) property of the debtor, or (iii) property of
creditors under a confirmed Chapter 13 plan. . . . Section 348(f) removed the first result, but
did not resolve explicitly whether the Chapter 13 trustee should give the funds to the debtor
or distribute them to creditors under the confirmed Chapter 13 plan.”19
The Third Circuit ultimately concluded that the funds should be returned to the debtor.
First, the Third Circuit noted that § 1327(b) vests all property of the chapter 13 estate in the
debtor upon plan confirmation. Section 1327(b) states: “Except as otherwise provided in the plan
or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in
17 All future statutory references are to title 11 of the United States Code (the
“Bankruptcy Code”) unless otherwise specified.
18 § 348(f)(2).
19 In re Michael, 699 F.3d at 308–09.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 6 of 19
the debtor.” According to the Third Circuit, this implies that property held by the Chapter 13 trustee
after plan confirmation is “under the control of the debtor as of the date of a later conversion” for
purposes of § 348(f)(1).20 According to the Third Circuit, there is no provision in the Bankruptcy
Code that classifies any property, including post-petition wages, as belonging to creditors, and the
debtor loses no vested interest until the trustee affirmatively transfers the funds to creditors.21
Because the debtor retains this vested interest, the Third Circuit reasoned, the funds should revert
to the debtor.22
Second, the Third Circuit concluded that returning the funds to the debtor better aligns with
§ 348(e). Section 348(e) states that after the conversion of the case, the services of the chapter 13
trustee are terminated, and this “seemingly renders [the chapter 13 trustee] powerless to make
payments to creditors under a Chapter 13 plan.”23 The Third Circuit reasoned that the chapter 13
trustee has limited post-conversion duties, and returning undistributed funds better aligns with those
duties as “their return should be considered part of the Chapter 13 trustee’s short list of remaining
Third, the Third Circuit concluded that returning the funds to the debtor furthers the
legislative intent of encouraging debtors to attempt chapter 13 cases. The Third Circuit noted that
the legislative history of § 348(f) shows that Congress revised § 348(f) to its current state based on
20 Id. at 310.
21 Id. at 312–13.
23 Id. at 310.
24 Id. at 314.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 7 of 19
the reasoning of In re Bobroff 25—a case holding that a postpetition tort cause of action did not
become part of the chapter 7 estate after conversion of the chapter 13 case to chapter 7—to
encourage debtors to attempt to pay their creditors something under chapter 13 before resorting to
a chapter 7 liquidation.26 The Third Circuit concluded that Congress was concerned that losing
postpetition earnings to the chapter 7 estate would dissuade debtors from attempting chapter 13.27
Additionally, to account for “game the system” behavior, Congress enacted § 348(f)(2), giving the
court discretion if the debtor has converted in bad faith.28
Fourth, the Third Circuit concluded that distributing the funds to creditors, rather than
returning them to the debtor, would weaken the disincentive of § 348(f)(2)’s bad faith provisions.
The Third Circuit reasoned that by allowing property that would normally be excluded from the
chapter 7 estate to be included and thereby distributed to creditors, § 348(f)(2) provides a
punishment for converting in bad faith.29 It concluded the disincentive provided by § 348(f)(2)
would be weakened if funds that would be returned to the debtor are instead distributed to creditors
Finally, the Third Circuit concluded that returning the funds to the debtor is not unjust to
creditors. The Third Circuit specifically rejected the argument that returning undistributed plan
25 766 F.2d 797 (3d Cir. 1985).
26 Id. at 803.
27 In re Michael, 699 F.3d at 314–15.
28 Id. at 315.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 8 of 19
payments would be “unjust,” and cited case law noting that creditors will most likely receive as
much, if not more, than they would have if the debtor originally filed under chapter 7 based on the
fact that under chapter 13, creditors have had the benefit of a debtors’s wage contributions, and these
funds are not available under chapter 7.31
B. Fifth Circuit: Viegelahn v. Harris (In re Harris)32
The Fifth Circuit in In re Harris has just recently addressed this issue.33 In In re Harris, the
debtor also initially filed for chapter 13 relief, and his confirmed plan required monthly payments
of $530 for 60 months.34 Of that monthly payment, $352 was to repay Chase for the debtor’s home
mortgage arrearage.35 The debtor was also required to directly pay Chase $960/month for his
ongoing mortgage payment.36 About six months after the debtor’s plan was confirmed, Chase moved
to lift the automatic stay with respect to the debtor’s home, stating that the debtor had failed to make
payments to Chase as the plan required.37 The debtor moved out of the home and “it was presumably
31 Id. at 312 (citing In re Boggs, 137 B.R. 408, 410 (Bankr. W.D. Wash. 1992)).
32 757 F.3d 468 (5th Cir. 2014).
33 The In re Harris case has been appealed to the United States Supreme Court (petition
for certiorari filed October 6, 2014), although as of the date of this order, no decision has been
issued on that certiorari petition.
34 Id. at 471.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 9 of 19
Despite this, the debtor continued to make $530 monthly payments to the chapter 13 trustee
for approximately the next year, at which point the debtor converted to chapter 7.39 When the case
was converted, the chapter 13 trustee distributed all the funds she held, including the money
intended for Chase, as follows: $397.68 to another secured creditor, $3583.78 to unsecured creditors,
and $267.79 to herself as a statutory commission.40 The debtor moved to compel her to return these
The Fifth Circuit rejected much of the In re Michael analysis and reversed the bankruptcy
and district courts, concluding that fairness required the funds instead be distributed to creditors.42
The Fifth Circuit addressed § 348, and quickly held it bore little weight in its analysis. It found little
merit to the argument that § 348(e) terminates the chapter 13 trustee’s services and thus the trustee
has no power to disburse funds.43 It reasoned that if that premise were to follow, then the chapter 13
trustee would also have no authority to return the funds to the debtor.44 The chapter 13 trustee also
has the duty to issue a final report and account, and turn over necessary records and property to the
chapter 7 trustee, the Fifth Circuit reasoned, and therefore the language of § 348(e) should not be
taken “too literally.”45
42 Id. at 480–81 (noting that strong considerations of fairness support holding).
43 Id. at 474.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 10 of 19
Second, the Fifth Circuit concluded that the Third Circuit had erred in applying § 1327(b).
Although the Fifth Circuit agreed that § 1327(b) typically vests all property in the debtor upon
confirmation of the plan,46 it found that the Third Circuit erred by ignoring the clear exception to
that rule: “except as otherwise provided in the plan or the order confirming the plan.”47 If the plan
required the debtor to make payments to be distributed to creditors, it follows that the debtor does
not retain any possession of, or control over, these payments after they are paid to the trustee.48
Third, the Fifth Circuit concluded that distributing funds to creditors does not weaken the
disincentive created by § 348(f)(2), noting that the Third Circuit failed to take into account that if
the conversion is found to be in bad faith, all of a debtor’s postpetition property would go into the
chapter 7 estate, and in most cases, this would be more than just the attached wages held by the
chapter 13 trustee.49 “Accordingly, distributing the remaining payments held by the trustee at the
time of the conversion [to creditors] neither renders § 348(f)(2) superfluous nor removes the
disincentive for bad faith in most cases.”50
Fourth, the Fifth Circuit determined that the legislative intent to encourage debtors to attempt
chapter 13 is not harmed by distributing funds to creditors rather than returning them to debtors. The
Fifth Circuit acknowledged that Congress enacted § 348(f) to further the policy of encouraging
46 Id. at 477.
48 Id. at 478 (confirmation divests the debtor of any interest).
Case 13-41131 Doc# 72 Filed 11/17/14 Page 11 of 19
debtors to attempt chapter 13.51 The Fifth Circuit, however, held that the knowledge that payments
made under a chapter 13 plan will not be returned would not meaningfully deter a debtor from
attempting chapter 13.52 The Fifth Circuit’s reasoning was based on the facts that (1) the debtor can
voluntarily end chapter 13 payments at any time by converting to chapter 7, and (2) it is the debtor
who proposes the chapter 13 plan in the first place with the explicit provision that the funds will be
used to pay creditors.53
Finally, the Fifth Circuit reasoned that distributing funds to creditors was supported by strong
considerations of fairness, because if the funds were to revert to the debtor, the debtor would receive
a “windfall.”54 The Fifth Circuit also supported its fairness analysis with the idea that the attached
wages in the chapter 13 plan are “quid pro quo that the debtor has given up” for the benefit of the
automatic stay.55 The conversion does not undo the benefits the debtor receives from the automatic
stay nor does it undo the distinct disadvantages creditors suffer from that stay, which prevents them
from attempting to collect money or foreclose on, or repossess, property. Therefore, the Fifth
Circuit reasoned it would be unfair to return the funds to the debtor.56
C. This Court’s Analysis
Both the Third Circuit and Fifth Circuit concede that there is no clear answer as to whether
51 Id. at 479.
53 Id. at 479–80.
55 Id. at 480.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 12 of 19
funds should be returned to the debtor or distributed to creditors after conversion of a case from
chapter 13 to chapter 7,57 and this Court agrees. Unfortunately, despite the rule of statutory
construction that courts should begin by looking to the plain language of the Bankruptcy Code,58
there is no direct answer in the Bankruptcy Code. For example, the Third Circuit concluded that the
return of the funds to the debtor better aligns with § 348(e) and the chapter 13 trustee’s limited
post-conversion duties,59 but the Fifth Circuit countered that if the chapter 13 trustee had no post-
conversion power then he or she would be powerless to return the funds to the debtor.60 On the other
hand, the Third Circuit’s argument is not that the chapter 13 trustee is completely powerless, simply
noting the limited duties the chapter 13 trustee has post-conversion.61 But the Fifth Circuit counters
that the chapter 13 trustee’s many statutory duties post-conversion are not “limited.”62
This example shows how the Code does not anticipate, let alone answer, the question at
hand. The argument that returning funds to the debtor better aligns with the chapter 13 trustee’s
57 Id. at 473 (noting that “no statute explicitly states what should happen to these
funds”); In re Michael, 699 F.3d at 308 (“We have a pure question of law—what does the
Bankruptcy Code require a Chapter 13 trustee to do with undistributed funds received pursuant
to a confirmed Chapter 13 plan when that Chapter 13 case is converted to Chapter 7? Not only
does the Code provide no clear answer to this question, in reading it one finds an internal
tension, as separate provisions seemingly lead to divergent results.”).
58 See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240–41 (1989)
(instructing courts with Bankruptcy Code questions to begin “with the language of the statute
59 In re Michael, 699 F.3d at 314.
60 In re Harris, 757 F.3d at 474.
61 In re Michael, 699 F.3d at 310–12.
62 In re Harris, 757 F.3d at 474.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 13 of 19
limited duties63 is persuasive. The chapter 13 trustee’s duties post-conversion are typically in the
nature of wrapping up the chapter 13 estate, and it is reasonable that simply returning the funds to
the debtor better aligns with the Code’s wrapping up function of the chapter 13 trustee—as opposed
to distributing the funds among creditors. Distribution to creditors is admittedly a more active role
than the other more passive post-conversion duties of returning funds.
On the other hand, however, the argument that disbursing funds to a creditor is no more
active than disbursing funds back to the debtor64 is also persuasive. If the chapter 13 Trustee has no
power to write a check to a creditor to distribute funds already held by him—in a distribution
scheme governed by the order of priorities set out in § 507—how does the chapter 13 Trustee have
the power to write a check to Debtors?
A similar quandary results when assessing the parties’ arguments on how confirmation and
the vesting of property impacts the right to the funds. As stated above, the Third Circuit noted that
§ 1327(b) vests all property of the chapter 13 estate in the debtor upon plan confirmation, and that
this implies that property held by a Chapter 13 trustee after plan confirmation is “‘under the control
of the debtor [on] the date of conversion.’”65 The Third Circuit reasoned that because there is no
provision in the Bankruptcy Code that classifies any property as belonging to creditors, and the
debtor retains a vested interest in the funds, the debtor does not lose his or her vested interest until
the trustee affirmatively transfers the funds to creditors.66 The Fifth Circuit, however, concluded that
64 In re Harris, 757 F.3d at 474.
65 In re Michael, 699 F.3d at 310 (quoting § 348(f)(1)).
66 Id. at 312–13.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 14 of 19
the Third Circuit erred in its application of § 1327(b). The Fifth Circuit agreed that § 1327(b) vests
all property in the debtor upon confirmation of the plan, but concluded that the Third Circuit erred
by ignoring the clear exception to that rule: “except as otherwise provided in the plan or the order
confirming the plan.”67
And regardless, here, Debtors’ plan (and the confirmation order for that plan), provides that
property of the estate vests with Debtors only upon receipt of a discharge under their Chapter 13
plan or dismissal.68 So even if § 1327(b) somehow directed who has control over this property— by
defining when property of the estate is vested in the debtor—Debtors specifically provided the
property would not vest in them at confirmation, a choice they could have exercised when drafting
the plan. Accordingly § 1327(b) does not seem to help here.
Because the Bankruptcy Code provides no clear answer, it is reasonable to try to determine
legislative intent.69 By specifically adopting the reasoning from In re Bobroff that a postpetition tort
cause of action did not become part of the chapter 7 estate after conversion of the chapter 13 case
to chapter 7, to encourage debtors to attempt chapter 13 before chapter 7,70 it does seem clear that
Congress intended, in enacting § 348(f), to encourage debtors to attempt chapter 13 before
67 In re Harris, 757 F.3d at 477. Although this discussion in both the Third and Fifth
Circuit cases is really only about the Code’s vesting of property of the estate, and neither case
explicitly addresses the factual circumstances of the plans in those cases or how they addressed
vesting, the Fifth Circuit does note in a footnote that the debtor’s plan in that case had
conflicting terms about the timing of the vesting of property in the debtor. Id. at 478 n.8. The
factual timing of the plan’s vesting of property in Michael is not addressed.
68 Doc. 2 at ¶ 16.b (plan); Doc. 36 at ¶ 13 (order confirming plan).
69 See Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989) (“If the statute’s plain
language is ambiguous . . ., we look to the legislative history and the underlying public policy of
the statute [to determine Congressional intent].”).
70 766 F.2d 797, 803 (3d Cir. 1985).
Case 13-41131 Doc# 72 Filed 11/17/14 Page 15 of 19
proceeding under chapter 7.71 But again, the legislative history of § 348(f) does not necessarily help
here. The Third Circuit persuasively argues that if a debtor was to lose postpetition earnings to the
chapter 7 estate, it would dissuade the debtor from attempting a chapter 13 plan before resorting to
a straight liquidation in chapter 7, and it should therefore follow that losing those earnings to
creditors through the chapter 13 trustee after converting would have the same effect on the debtor
as losing those earnings to the chapter 7 estate.72 Under this reasoning, returning the funds to the
debtor seems to be in accordance with the legislative intent of § 348(f). But the Fifth Circuit’s equity
and fairness arguments are equally well-founded. It is troubling that a debtor could receive the
benefits of the automatic stay by making required payments to the chapter 13 trustee under the
confirmed plan (while creditors are disadvantaged by the automatic stay), but when the debtor
converts to chapter 7 the creditors are still disadvantaged in the same way without a corresponding
“hurt” to the debtor.73
Debtors in this case argue that the facts here are different: the specific funds at issue—paid
in pursuant to this District’s conduit mortgage rule—are designated for a specific purpose, and thus
these funds are different than “normal” plan payments. Debtors contend that a conduit creditor
receives special benefits under the conduit mortgage rule, and that the conduit creditor’s failure to
file a proof of claim to enjoy those special benefits does not create an alternate right for other
creditors to receive them—a result Debtors contend would be unfair.
71 See In re Michael, 699 F.3d at 314 (“The legislative history of § 348(f) supports that
Congress’s intended outcome is that payments held by the Chapter 13 trustee revert to the debtor
on conversion. Congress stated that it was . . . “adopting the reasoning” of our decision in
72 Id. at 314–15.
73 In re Harris, 757 F.3d at 480–81.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 16 of 19
To the contrary, however, nothing in the Bankruptcy Code, or this Court’s conduit mortgage
rule, changes the presumption that Debtors’ monthly payment is made pursuant to their plan, and
that Debtors’ plan, as supplemented by the conduit mortgage rule, controls. The conduit mortgage
rule does not somehow transform the monthly plan payment so that it is not a “normal” plan
payment. Rather, the purpose of the conduit mortgage rule is to define what needs to be included in
the plan payment. The mortgage creditor is just one of the parties impacted by the plan, and Debtor’s
confirmed plan dictates how each creditor is to be treated.
This Court finds that, although there is no clear answer, the strongest arguments favor the
chapter 13 Trustee disbursing the accumulated funds to creditors, pursuant to the confirmed plan.
As the Fifth Circuit noted, the wages that the chapter 13 Trustee is holding have already been
“attached” under Debtors’ plan and were “paid to the trustee for distribution to the creditors.”74
Debtors made these payments to the chapter 13 Trustee under their confirmed plan, with the intent
that they then be distributed. The fact that the mortgage creditor did not file a proof of claim does
not change the fact that Debtors made these payments to fulfill their obligations under the plan in
exchange for the benefit of the protections derived from that plan. This Court agrees with the Fifth
Circuit that Debtors enjoyed the benefits of the chapter 13 proceeding, and as such, the only fair
result is that those payments be distributed to creditors for that privilege.
Also, this Court agrees with the Fifth Circuit that distributing funds to creditors in the
situation at hand would not generally deter debtors from attempting chapter 13 cases. As the Fifth
Circuit stated, “it is unlikely a debtor would be meaningfully deterred by the knowledge that
payments made under a confirmed Chapter 13 plan will not be returned to him if he chooses to
74 In re Harris, 757 F.3d at 480.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 17 of 19
convert to Chapter 7.”75 The reasoning of the Fifth Circuit is sound:
It is the debtor who proposes the payment plan in the first place, with the explicit
provision that the funds are to be used to pay creditors. Because the funds are out of
the hands of the debtor after payment and under the control of the trustee, it is
essentially fortuitous whether any undistributed funds are still in the hands of the
trustee at the time of conversion. And if the undistributed funds revert to the debtor,
instead of being distributed to the creditors in accordance with the plan’s terms, the
debtor would receive a windfall.76
As a result, this Court sees no conflict with the legislative history of § 348(f) by requiring
distribution to creditors, rather than return of the funds to Debtors. As the Fifth Circuit notes, if a
debtor is concerned about a chapter 13 trustee distributing funds on hand to creditors at conversion,
the debtor could time his or her conversion and payments to “prevent any additional wages from
going into the hands of creditors.”77
Finally, debtors can generally prevent the situation presented here by modifying their plan
to surrender a home and reduce their plan payment by the amount of their house payment. The plan
in this case had only been in effect a few months when these Debtors converted, but in both the
Michael and Harris cases, the debtors continued to voluntarily pay in amounts for a creditor who
had been granted stay relief. As the chapter 13 Trustee notes here, the money a debtor pays to the
Trustee is not a personal savings account that the debtor can have returned if he changes his mind.
Once a debtor makes a plan payment under a confirmed plan, he no longer has the right to direct the
75 Id. at 479.
76 Id. (internal footnote, quotations, and alterations omitted).
77 Id. at 480. Debtors here could have modified their plan to surrender their interest in the
subject real property to the mortgage creditor, and modified the wage order to their employer to
stop the higher plan payment. Admittedly, this would have resulted in their having more excess
income (if they were able to continue to live in the home until foreclosure and ultimate sale),
which excess income might have been the basis for the Trustee seeking the return of the higher
payment for the benefit of other creditors.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 18 of 19
Trustee how to disburse the payment (so long as the Trustee is disbursing the payment as the plan
requires). Because the mortgage creditor here elected not to receive payment under the plan by
failing to file a claim, the money on hand then trickled down to the remaining creditors who had
timely filed a claim, and the chapter 13 Trustee is required to disburse the money in accordance with
the confirmed plan.
Because the Court concludes the balance of factors weighs in favor of distributing the
remaining plan payments held by the Trustee to creditors, rather than returning them to Debtors, the
motion to refund postpetition mortgage payments78 is denied. The chapter 13 Trustee is authorized
to disburse these funds to the remaining creditors in Debtors’ case, pursuant to Debtors’ confirmed
It is so ordered.
# # #
78 Doc. 59.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 19 of 19
- Category: Judge Karlin
- Published on 25 November 2014
- Written by Judge Karlin
- Hits: 517
Williamson v. Bank of America, N.A. et al, 14-07033 (Bankr. D. Kan. Nov. 24, 2014) Doc. # 35
SIGNED this 24th day of November, 2014.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 12-41444
Eva M. Rodriguez, Chapter 7
Darcy Williamson, Trustee,
Plaintiff, Case No. 14-7033
v. Adversary Proceeding
Bank of America, N.A.,
Robert A. Johnson, Jr., and
Order Granting in Part and Denying in Part
Defendant Bank of America’s Motion to Dismiss
The chapter 7 Trustee, Darcy Williamson (hereinafter, the “Trustee”), filed this
adversary proceeding against Defendants Bank of America, N.A. (hereinafter “Bank
of America”), Anthony Abeyta, Robert Johnson, Jr., and Erlinda Johnson, to avoid
Case 14-07033 Doc# 35 Filed 11/24/14 Page 1 of 17
allegedly fraudulent transfers under 11 U.S.C. § 548 and to recover those transfers for
the bankruptcy estate under 11 U.S.C. §§ 550, 551, and 542. The Trustee alleges that
the debtor in the underlying bankruptcy case, Eva Rodriguez, sold real property to
Defendants Robert and Erlinda Johnson for less than fair market value, and used a
portion of the proceeds of that sale to pay off a second mortgage on the real property
and other debts to Defendant Bank of America, despite the fact her ex-husband,
Defendant Anthony Abeyta, was obligated by their divorce decree to pay the second
mortgage loan and the other debts.
Defendant Bank of America has moved to dismiss the counts against it, arguing
that the payment of the second mortgage loan is not constructively fraudulent because
it gave reasonably equivalent value in the form of a lien release in exchange for the
payment. Defendant Bank of America also argues that the Trustee’s complaint does
not allege actual intent to defraud sufficient to state a claim for actual fraud under §
Because the Court concludes that the payment of the second mortgage loan was
not constructively fraudulent as a matter of law, and that the Trustee did not allege
sufficient facts to support a claim of actual fraud, the Court finds that the Trustee has
failed to state a claim upon which relief can be granted as to those portions of her
complaint. Accordingly, the Court grants Defendant Bank of America’s motion to
dismiss as to those specific claims. The remainder of the alleged claims, however—that
payment of unsecured debts by the debtor to Bank of America resulted in a
constructively fraudulent transfer—do state a claim for relief, although just barely. As
Case 14-07033 Doc# 35 Filed 11/24/14 Page 2 of 17
a result, Bank of America’s motion to dismiss is denied as to this small portion of the
I. Background and Procedural History
The factual allegations of the Trustee’s complaint, which are assumed true for
the consideration of this motion, are included herein. Other procedural facts are
included from the docket of this adversary case.
Defendant Anthony Abeyta and Debtor Eva Rodriguez received title to real
property located at 1113 Safford, Garden City, Kansas ( the “Safford property”) via
general warranty deed in May 2001. Two years later, they granted Defendant Bank of
America a mortgage on the Safford property, and this first mortgage was recorded with
the Finney County Register of Deeds in October 2003.
Although the time of the next action on the Safford property is unclear, the
Trustee alleges that either in May 2005 or August 2008, Defendant Abeyta and Debtor
executed a second mortgage in favor of Bank of America on the Safford property.1 The
second mortgage was recorded with the Finney County Register of Deeds in September
2008. Defendant Abeyta and Debtor were the absolute owners of the Safford property
at the time they made, executed, and delivered both the first and second mortgages.
Shortly after the second mortgage was recorded, in November 2008, Defendant
Abeyta and Debtor divorced in Finney County and title to the Safford property was
1 The second mortgage, attached to the memorandum in support of Bank ofAmerica’s motion to dismiss, states the date as May 14, 2005. Regardless, theprecise date of the second mortgage appears to be immaterial to the disputesdiscussed herein, and neither party raises an issue with regard to that date.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 3 of 17
awarded to Debtor. The parties’ settlement agreement further required Defendant
Abeyta to pay the debt to Bank of America for the second mortgage and to hold Debtor
harmless for the payment of that debt. The Trustee alleges that the amount due on the
second mortgage loan from Defendant Abeyta was $15,377.13. There is apparently a
third loan between Defendant Abeyta and Debtor with Bank of America, and the
property settlement agreement also required Debtor to pay that third loan. As of May
2012, the amount due under this third loan was $7474.57.
Several years later, in May 2012, Debtor entered into an agreement with
Defendants Robert and Erlinda Johnson to sell them the Safford property for $53,000.
Of the $53,000 gross sale proceeds, $27,000.66 was paid to Bank of America to satisfy
the first mortgage, and $15,377.13 was paid to Bank of America to satisfy the second
mortgage. After costs, Debtor received $9198.31 from the closing. Shortly after closing,
Debtor paid $5000 and $4202 from her checking account to unknown sources. The
Trustee alleges that Defendant Abeyta and Bank of America “may have been paid by
the Debtor on unsecured debts including, but not limited to, credit card obligations.”2
On May 29, 2012, Bank of America executed a real estate mortgage release
acknowledging full satisfaction of the second mortgage on the Safford property, and the
next day that release was filed with the Finney County Register of Deeds. On May 31,
2012, Bank of America executed a real estate mortgage release acknowledging full
satisfaction of the first mortgage on the Safford property, and that release was filed
2 Doc. 1 ¶ 19.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 4 of 17
with the Finney County Register of Deeds a week later.
In 2012, the Finney County Appraiser’s Office valued the Safford property at
$77,700. At the time Debtor sold the Safford property to the Johnson Defendants, she
did not offer it for sale to any third party buyers to test its value. About three and a
half months after the sale of the property—on September 7, 2012—Debtor filed for
chapter 7 bankruptcy relief, and her Schedule A discloses no ownership interest in any
Safford property. Her Schedule D, however, lists a secured debt to Bank of America on
property listed as 704 Safford.3
The Trustee’s complaint states three claims. Count 1, against Defendants
Abeyta and Bank of America, is for avoidance of a fraudulent conveyance under § 548.
The Trustee alleges that Defendant Abeyta was responsible for paying the second
mortgage loan, and that Debtor’s payment of that loan “or potential other unsecured
obligations, at the time she closed the sale of 1113 Safford” was a transfer of an
interest of the Debtor in property within the two-year period preceding the date of
Debtor’s bankruptcy petition. The Trustee alleges that the transfers were made to
satisfy a debt obligation that Defendant Abeyta owed, and that the transfers were for
the benefit of Defendant Abeyta and Bank of America. The Trustee alleges that Debtor
made the transfers with the actual intent to hinder, delay, or defraud any entity to
which Debtor was indebted, or that Debtor received less than the reasonably
3 No explanation is given to the parties as to this property (i.e., 704 Saffordversus 1113 Safford). Debtor’s Schedule D lists her as a codebtor on the propertyand her Schedule H states that she is co-liable with her ex-husband, Defendant
Abeyta, on this debt.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 5 of 17
equivalent value in exchange for the transfers. The Trustee alleges that Debtor
received no consideration for the transfers from either Defendant Abeyta or Bank of
America. And finally with regard to Count 1, the Trustee alleges that Debtor was
insolvent or became insolvent as a result of the transfers, as Debtor’s bankruptcy
schedules reflect $6760 in assets and $116,421 in liabilities.
Count 2 of the Trustee’s complaint is against Defendants Robert and Erlinda
Johnson and is also for avoidance of fraudulent transfer under § 548. The Trustee
alleges that when Debtor sold the Safford property to Defendants Johnson, Debtor
received $24,700 less than the appraised value for the property. The Trustee alleges
that this below-appraisal sale is a transfer of an interest of Debtor in property, made
within the two-year period preceding Debtor’s bankruptcy. Again, the Trustee alleges
that Debtor made the transfer with the actual intent to hinder, delay, or defraud any
entity to which Debtor was indebted, or that Debtor received less than the reasonably
equivalent value in exchange for the transfer, and that Debtor was insolvent or became
insolvent as a result of the transfer.
And finally, Count 3 of the Trustee’s complaint, against all Defendants, is for
recovery of the avoided interests under §§ 550, 551, and 542. The Trustee alleges she
is entitled to recover the transfers, or the value of such property, from Defendants
under § 550(a), that she is entitled to preserve the transfers, or the value of the
property, for the benefit of the bankruptcy estate under § 551, and that she is entitled
to turnover of the transfers under § 542.
Defendants Robert and Erlinda Johnson answered the Trustee’s complaint,
Case 14-07033 Doc# 35 Filed 11/24/14 Page 6 of 17
admitting they purchased the Safford property from Debtor for $53,000, but otherwise
generally denying the remaining allegations against them.4 While a motion to extend
time to answer was pending as to Defendant Abeyta, the Trustee and Defendant
Abeyta jointly moved to dismiss the complaint against him, and an order was entered
dismissing the claims against Abeyta on October 21, 2014.5 Defendant Bank of
America, in lieu of answering, filed the motion to dismiss that is the subject of this
A. Standards for Motions to Dismiss
Bank of America moves to dismiss the Trustee’s complaint under Federal Rule
of Civil Procedure 12(b)(6), for “failure to state a claim upon which relief can be
granted.”6 The requirements for a legally sufficient claim stem from Rule 8(a), which
requires “a short and plain statement of the claim showing that the pleader is entitled
to relief.”7 To survive a motion to dismiss, a complaint must present factual allegations,
that when assumed to be true, “raise a right to relief above the speculative level.”8 The
4 Doc. 15.
5 Doc. 26. Notwithstanding this dismissal and the deletion of his name in thecaption of the case, this decision will continue to refer to Abeyta as a defendant.
6 Rule 12 is made applicable to adversary proceedings via Federal Rule ofBankruptcy Procedure 7012(b).
7 Rule 8 is made applicable to adversary proceedings via Federal Rule ofBankruptcy Procedure 7008(a).
8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 7 of 17
complaint must contain “enough facts to state a claim to relief that is plausible on its
face.”9 “[T]he complaint must give the court reason to believe that this plaintiff has a
reasonable likelihood of mustering factual support for these claims.”10 The Court must
accept the nonmoving party’s factual allegations as true and may not dismiss on the
ground that it appears unlikely the allegations can be proven.11
While the Trustee has repeatedly referred to the Bank of America second
mortgage within her complaint, she did not attach a copy of it. Bank of America has
attached a copy of the second mortgage to its memorandum in support of its motion to
dismiss. In the Tenth Circuit, “[i]t is accepted practice that, if a plaintiff does not
incorporate by reference or attach a document to its complaint, but the document is
referred to in the complaint and is central to the plaintiff’s claim, a defendant may
submit an indisputably authentic copy to the court to be considered on a motion to
dismiss.”12 Otherwise, “a plaintiff with a deficient claim could survive a motion to
dismiss simply by not attaching a dispositive document upon which the plaintiff
9 Id. at 570. The plausibility standard does not require a showing ofprobability that a defendant has acted unlawfully, but requires more than “a sheerpossibility.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). However, “mere ‘labels andconclusions,’ and ‘a formulaic recitation of the elements of a cause of action’ will not
suffice; a plaintiff must offer specific factual allegations to support each claim.”
Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting
Twombly, 550 U.S. at 555).
10 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir.
11 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
12 Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001)
(internal quotations omitted).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 8 of 17
relied.”13 Generally stated:
The Court may consider documents outside of the complaint on a motionto dismiss in three instances . . . First, the Court may consider outsidedocuments pertinent to ruling on a motion to dismiss pursuant to Fed. R.
Civ. P. 12(b)(1) [relating to subject-matter jurisdiction]. Second, the Courtmay consider outside documents subject to judicial notice, including courtdocuments and matters of public record. Third, the Court may consideroutside documents that are both central to the plaintiff’s claims and towhich the plaintiff refers in his complaint.14
Despite these three exceptions, a court is not obligated to consider extraneous
documents; the decision to do so is discretionary.15
Here, the second mortgage is absolutely central to a portion of the claims the
Trustee has made against Bank of America, and the Trustee (in her response to the
motion to dismiss) does not dispute the authenticity of the copy of the second mortgage
Bank of America attached to its memorandum in support of its motion to dismiss. As
a result, the Court will consider the second mortgage provided by Bank of America.16
B. Section 548 Fraudulent Transfer
The Trustee’s complaint raises two types of fraudulent transfer claims against
Bank of America: for contractive fraud and for actual fraud. The relevant portions of
13 GFF Corp. v. Assoc. Wholesale Grocers, Inc., 130 F.3d 1381, 1385 (10th Cir.
14 Driskell v. Thompson, 971 F. Supp. 2d 1050, 1057 (D. Colo. 2013) (internalcitations omitted).
15 Prager v. LaFaver, 180 F.3d 1185, 1189 (10th Cir. 1999).
16 See Jacobsen v. Deseret Book Co., 287 F.3d 936, 941–42 (10th Cir. 2002)
(noting holding of GFF Corp. that a court “may consider documents referred to inthe complaint if the documents are central to the plaintiff’s claim and the parties donot dispute authenticity”).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 9 of 17
§ 548 state:
(a)(1) The trustee may avoid any transfer . . . of an interest of the debtorin property . . . that was made or incurred on or within 2 years before thedate of the filing of the petition, if the debtor voluntarily or involuntarily-
(A) made such transfer . . . with actual intent to hinder, delay, ordefraud any entity to which the debtor was or became, on or after thedate that such transfer was made or such obligation was incurred,
(i) received less than a reasonably equivalent value inexchange for such transfer . . . ; and
(I) was insolvent on the date that such transfer wasmade . . . , or became insolvent as a result of such
transfer . . . [.]
The Trustee will ultimately bear the burden of proof as to each element of a § 548(a)
To prove constructive fraud under § 548(a)(1)(B), the Trustee must allege that
Debtor: (1) transferred property within two years of the bankruptcy filing; (2) received
less than reasonably equivalent value for the transfer; and (3) was insolvent as a result
thereof.18 Regarding the Trustee’s constructive fraud claim, Bank of America focuses
its motion to dismiss on the issue of “reasonably equivalent value” and the second
mortgage. Although the phrase “reasonably equivalent value” is not defined by the
Bankruptcy Code, the word “value” is defined in § 548(d)(2)(A) as “property, or
17 In re Adam Aircraft Indus., Inc., 510 B.R. 342, 352 (10th Cir. BAP 2014).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 10 of 17
satisfaction or securing on a present or antecedent debt of the debtor.”19
Bank of America argues that Debtor’s payment of $15,377.13 to Bank of America
to satisfy its second mortgage loan is not constructively fraudulent because when a
fully secured creditor releases its lien in exchange for payment, the fully secured
creditor gives reasonably equivalent value to the payor. Bank of America cites two
cases for this proposition: In re Vinzant20 and In re C.W. Mining Co.21
In In re Vinzant, the “value” question arose regarding release of judgment liens
in exchange for payment.22 Regarding whether release of a lien in exchange for
payment is reasonably equivalent value, the bankruptcy court stated:
In determining fair consideration the Court must look at what thedebtors received regardless of what the creditor may have gained or lost.
At the time of the transfer defendant held a valid judgment lien ondebtors’ property. The transfer (i.e., the release of the lien given inexchange for the payment to the defendant) satisfied an antecedent debtof the debtors. This transfer constituted value under § 548(d)(2). . . . Thevalue was roughly equal and so the Court finds reasonably equivalentvalue was received by the debtors.23
Likewise, the In re C.W. Mining Co. decision also stated: “If a fully secured creditor
releases its lien in exchange for payment, the fully secured creditor gives value in
19 A “debt” is then defined in § 101(12) as “liability on a claim,” and “claim” isdefined by § 101(5) to include the “right to payment, whether or not such right isreduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
20 108 B.R. 752 (Bankr. D. Kan. 1989).
21 465 B.R. 226 (Bankr. D. Utah 2011).
22 108 B.R at 759.
23 Id. (internal citations omitted).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 11 of 17
exchange for the payment and the transfer is not fraudulent.”24 The case here is not
distinguishable. Bank of America released its lien in exchange for payment of the
secured mortgage, and therefore gave reasonably equivalent value in exchange for the
Bank of America also contends that because the Debtor was jointly obligated
under the second mortgage, there was an exchange of reasonably equivalent value
when Bank of America released its lien in response to payment of the second mortgage
loan, regardless whether her divorce settlement's division of debts and assets required
someone else—here, Defendant Abeyta—to repay the loan that both parties signed.
The second mortgage defines the borrowers (the “Grantors”) as both Anthony Abeyta
and Eva M. Abeyta.26 There is also a clause in the second mortgage stating: “Joint and
Several Liability. All obligations of Grantor under this Mortgage shall be joint and
several, and all references are to Grantor shall mean each and every Grantor. This
means that each Grantor signing below is responsible for all obligations in this
Mortgage.”27 The Trustee’s complaint acknowledges both that Bank of America was a
24 465 B.R. at 232–33.
25 Although the Tenth Circuit has not expressly weighed in on the matter, “anumber of courts have held that ‘a dollar-for-dollar reduction in debt constitutes
—as a matter of law—reasonably equivalent value for purposes of the fraudulent-
transfer statutes.’” Gonzales v. Liberman (In re Brutsche), Case No. 11-13326-7,
2013 WL 501666, at *6 (Bankr. D.N.M. Feb. 11, 2013) (quoting In re Southeast
Waffles, LLC, 702 F.3d 850, 857 (6th Cir. 2012) (citing additional cases)).
26 Doc. 17 Ex. A p.1.
27 Doc. 17 Ex. A p.7.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 12 of 17
properly perfected secured creditor and that Bank of America released its lien in
exchange for payment of the second mortgage debt. As a result, reasonably equivalent
value was exchanged when Bank of America released its fully secured lien in exchange
for payment by Debtor, despite the divorce settlement division of debts. The Court
must grant Bank of America’s motion to dismiss this portion of the Trustee’s
constructive fraud claim; the Trustee has failed to “state a claim upon which relief can
But there is a second portion of the Trustee’s claim: namely, that Debtor’s
payment of “potential other unsecured obligations, at the time she closed the sale of
1113 Safford” was also a fraudulent transfer under § 548. The Trustee alleges that this
transfer for the unsecured debt was within the two-year period preceding the date of
Debtor’s bankruptcy petition, that the transfer was made to satisfy a debt obligation
held or co-held by Defendant Abeyta, and that the transfer was for the benefit of
Defendant Abeyta and Bank of America. The Trustee alleges that Debtor received
$9198.31 at closing of the sale of the Safford property, and that shortly after closing,
Debtor paid $5000 and $4202 from her checking account to an unknown source(s). The
Trustee also specifically alleges a third loan between Defendant Abeyta and Debtor
with Bank of America (with a balance of $7474.57 as of May 2012), and that Defendant
Abeyta and Bank of America “may have been paid by the Debtor on unsecured debts
28 Fed. R. Civ. P. 12(b)(6).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 13 of 17
including, but not limited to, credit card obligations.”29
The motion to dismiss filed by Bank of America ignores this transfer and the
allegations with respect to it. As stated above, to prove constructive fraud under §
548(a)(1)(B), the Trustee must allege that Debtor: (1) transferred property within two
years of the bankruptcy filing; (2) received less than reasonably equivalent value for
the transfer; and (3) was insolvent as a result thereof.30 Although not a model of clarity,
the Trustee’s complaint does satisfy this bare minimum. The Trustee alleges that
Debtor made two transfers—of $5000 and $4202—after the sale of the Safford property
to unknown sources. She then also alleges, however, a loan between Debtor and Bank
of America for $7474.57, and that Bank of America may have been paid on credit card
obligations (which are presumably this third loan). The transfers occurred within two
years of Debtor’s bankruptcy petition, and the Trustee alleges Debtor was insolvent at
the time of filing her petition, which was only three months after the payments were
made. Again, Bank of America’s motion to dismiss fails to address this claim at all, and
gives no explanation for the conflicting amounts of the debt versus the alleged
payments, or what value was given in exchange.
Although not many details are given, the Trustee’s complaint does have “enough
facts to state a claim to relief that is plausible on its face”31 with respect to these
29 Doc. 1 ¶ 19.
30 In re Adam Aircraft Indus., Inc., 510 B.R. 342, 352 (10th Cir. BAP 2014).
31 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 14 of 17
allegations. It is unclear the exact amount and date of transfer that is at issue
here—the $5000 or $4202 payments were made to unknown sources and the Trustee
does not expressly state that Bank of America was the “unknown source” of the
transfers. These links can be implied, however, because the Trustee also alleges that
Bank of America was paid on unsecured loan obligations. As a result, the Court finds
that this portion of the Trustee’s complaint survives, and denies Bank of America’s
motion to dismiss this portion of the Trustee’s constructive fraud claim.
2. Actual Fraud
Finally, with respect to the last substantive portion of the Trustee’s § 548
complaint against Bank of America—a claim for actual fraud under § 548(a)(1)(A)—
the Trustee must allege actual fraudulent intent. And a claim for actual fraud is
subject to heightened pleading requirements found in Federal Rule of Civil Procedure
Rule 9(b) requires the party to “state with particularity the circumstances
constituting fraud,” with general allegations only allowed for “malice, intent,
knowledge, and other conditions of a person’s mind.” The party alleging fraud must
“‘set forth the time, place, and contents of the false representation, the identity of the
party making the false statements and the consequences thereof.’”33 In other words, the
32 Rule 9(b) is applicable in bankruptcy pursuant to Federal Rule ofBankruptcy Procedure 7009.
33 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997)
(quoting Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 982, 987 (10thCir. 1992)).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 15 of 17
alleging party must specify the “‘who, what, where, and when of the alleged fraud.’”34
The Trustee here has not met this pleading burden as to Bank of America with
respect to any of the payments alleged in the complaint. The only allegations made by
the Trustee are a recitation of the “actual intent to hinder, delay, or defraud” language
from § 548(a)(1)(A). The complaint alleges no facts by which this Court could
reasonably infer that Bank of America acted with actual intent to defraud anyone, let
alone the who, what, where, or why of such alleged fraud. There are simply no facts in
the complaint to satisfy the pleading requirements for an actual fraud claim under §
548(a)(1)(A), let alone the heightened pleading requirements of Rule 9(b). This portion
of Bank of America’s motion to dismiss is granted.
C. The Trustee’s Claims for Recovery and Turnover
The Trustee’s remaining claims against Defendant Bank of America are for
recovery of any avoided interest under §§ 550, 551, and 542. The Trustee alleges she
is entitled to recover the transfers, or the value of such property, from Defendants
under § 550(a), that she is entitled to preserve the transfers, or the value of the
property, for the benefit of the bankruptcy estate under § 551, and that she is entitled
to turnover of the transfers under § 542. These claims are, of course, dependent on
success on the fraudulent transfer claims. Because of the above rulings, Defendant
Bank of America’s motion to dismiss these derivative claims is also granted in part and
34 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan.
2007) (quoting Plastic Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201,1203 (D. Kan. 2001)).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 16 of 17
denied in part. Only the Trustee’s claim for constructive fraud based on the “other
payments” for the unsecured debt could support these derivative claims.
Defendant Bank of America’s motion to dismiss35 is granted in part and denied
in part. Bank of America has shown that the Trustee has failed to state claims as to:
1) any actual fraud, or 2) constructive fraud based on the payment and release of the
second mortgage. Bank of America’s motion to dismiss is also granted as to the
derivative claims based on those allegations. The Trustee’s remaining constructive
fraud claim based on payment of unsecured debt to Bank of America, is, however
sufficient to state a claim for relief, and Bank of America’s motion to dismiss as to this
portion of the Trustee’s complaint, and the derivative claims based thereon, is denied.
It is so ordered.
35 Doc. 16.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 17 of 17
- Category: Judge Karlin
- Published on 13 November 2014
- Written by Judge Karlin
- Hits: 368
In Re Hagans, 14-40750 (Bankr. D. Kan. Nov. 10, 2014) Doc. # 42
SIGNED this 10th day of November, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40750
Deedric Oliver Hagans, Chapter 7
Order Sustaining Trustee’s Objection to Exemption
Debtor Deedric Hagans seeks to exempt a 1997 Chevrolet truck as a “tool of the
trade” under Kansas exemption law, but the chapter 7 Trustee has objected to that
exemption, arguing that because the truck was not modified to specifically suit
Debtor’s occupation, it could not be claimed exempt as a tool of the trade.
The Court concludes that, based on the stipulated facts presented, Debtor is not
entitled to a tool of the trade exemption for the 1997 Chevrolet truck, and the Trustee’s
objection to exemption is sustained.
I. Procedural and Factual Background
The following facts have been stipulated by the parties or are part of the record
Case 14-40750 Doc# 42 Filed 11/10/14 Page 1 of 9
in this case. Debtor, who is not represented by counsel, filed a chapter 7 bankruptcy
petition on July 1, 2014. Debtor exempted a 1999 GMC Suburban as a “means of
conveyance” under K.S.A. § 60-2304(c),1 and the Trustee did not object to Debtor’s
exemption of the 1999 GMC Suburban. Debtor also exempted a 1997 Chevrolet truck
as a “tool of trade” under K.S.A. § 60-2304(e), to which exemption the Trustee timely
objected. The total value of all assets Debtor seeks to exempt as tools of trade is less
Debtor is a self-employed metal fabricator. He testified at his § 341 meeting of
creditors that the 1997 Chevrolet truck is a ½ ton pickup with 4-wheel drive and a
trailer hitch. Debtor also testified that the 1997 Chevrolet truck is used in his metal
fabrication business, and that the truck had not been modified in any way to
specifically suit his occupation as metal fabricator. The parties have stipulated that a
pickup truck is necessary to perform Debtor’s work. Debtor depreciates the 1997
Chevrolet truck as a “work only” vehicle on this federal income taxes, and those taxes
have been processed and accepted by the IRS.
This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order.2
1 Section 60-2304(c) provides debtors an exemption for “[s]uch person’sinterest, not to exceed $20,000 in value, in one means of conveyance regularly usedfor the transportation of the person or for transportation to and from the person’sregular place of work.” This exemption need not be discussed further, as the Trusteedoes not object to its use.
2 See 28 U.S.C. § 157(b)(2)(B) (stating that “allowance or disallowance of . . .
exemptions from property of the estate” are core proceedings); § 157(b)(1) (granting
Case 14-40750 Doc# 42 Filed 11/10/14 Page 2 of 9
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,
an estate is created,3 and that bankruptcy estate consists of “all legal or equitable
interests of the debtor in property as of the commencement of the case.”4 The
Bankruptcy Code does, however, permit the exemption of certain property from the
estate,5 and permits a state to “opt-out” of the federal exemptions in favor of state-law
exemptions when that state specifically excludes the use of the federal exemptions.6
Kansas has opted out of the federal exemption scheme,7 and a debtor in Kansas may
exempt from the estate those “State or local law” exemptions that are “applicable as
of the filing date.”8
The Kansas statute dealing with tools of trade exemptions is K.S.A. § 60-2304(e).
Section 60-2304(e) grants an exemption for: “The books, documents, furniture,
authority to bankruptcy judges to hear core proceedings).
3 11 U.S.C. § 541(a) (“The commencement of a case under . . . this titlecreates an estate.”).
4 Id.§ 541(a)(1).
5 Seeid.§ 522(b)(1) (“Notwithstanding section 541 of this title, an individualdebtor may exempt from property of the estate the property listed in eitherparagraph (2) or, in the alternative, paragraph (3) of this subsection.”).
6 Id.§ 522(b)(2).
7 K.S.A. § 60-2312 (prohibiting, with exception, individual debtors fromelecting federal exemptions).
8 11 U.S.C. § 522(b)(3)(A); K.S.A. §§ 60-2301 through 60-2315 (Kansasexemptions).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 3 of 9
instruments, tools, implements and equipment, the breeding stock, seed grain or
growing plants stock, or the other tangible means of production regularly and
reasonably necessary in carrying on the person’s profession, trade, business or
occupation in an aggregate value not to exceed $7500.”
In a challenge to a claimed exemption, the objecting party—here the
Trustee—has the “burden of proving that the exemptions are not properly claimed.”9
Under Kansas law, exemption statutes are to be liberally construed for the benefit of
the debtor.10 Whether or not a vehicle qualifies as a tool of the trade must be decided
on a case by case basis after considering all of the facts and circumstances. 11
In Kansas, the test for property to qualify as a tool of the trade is that it must
be “reasonably necessary, convenient, or suitable for the production of work.”12 Because
K.S.A. § 60-2304 includes both a tool of the trade exemption and a means of conveyance
exemption, it was not intended for an automobile to automatically qualify as a tool of
9 Fed. R. Bankr. P. 4003(c).
10 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004)
(“Under Kansas law, exemption statutes are to be liberally construed in favor ofthose intended by the legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730
(Bankr. D. Kan. 2008) (stating that “the Kansas Supreme Court has directed thatexemption claims are to be liberally construed in favor of debtors”).
11 In re Bondank, 130 B.R. 586, 587 (Bankr. D. Kan. 1991); In re Meany, 35
B.R. 3, 4 (Bankr. D. Kan. 1982).
12 In re Bondank, 130 B.R. at 587; In re Currie, 34 B.R. 745, 748 (D. Kan.
1983) (citing Reeves v. Bascue, 91 P. 77 (Kan. 1907)); In re Frierson, 15 B.R. 157,
159 (Bankr. D. Kan. 1981).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 4 of 9
the trade.13 Therefore, a debtor must show that the vehicle is in fact a tool of the trade
and not just a means of conveyance to qualify for this exemption.14 A vehicle may be
a tool of the trade if it is “uniquely suited” for its uses15 or if the debtor’s work is
“uniquely dependent” on it.16 If the debtor primarily uses the vehicle for transportation
purposes, it is exempt only as a means of conveyance and not as a tool of the trade.17
The case law interpreting this exemption is highly fact dependent. In In re
Rice, 18 a truck used for the debtor’s home remodeling business did not qualify as a tool
of the trade because, “simply [held,] the truck is used and is exempt as a means of
conveyance for the debtor’s transportation.”19 This finding was based on the fact the
truck was primarily used for hauling materials and transporting employees, and it was
not “uniquely suited for these uses.”20 Additionally, the bankruptcy court noted that
it was “immaterial that the truck is only used in connection with work.”21
13 In re Bondank, 130 B.R. at 587; In re Rice, 35 B.R. 431, 432 (Bankr. D. Kan.
14 In re Rice, 35 B.R. at 432.
16 In re Currie, 34 B.R. at 748; In re Meany, 35 B.R. at 4.
17 In re Rice, 35 B.R. at 433.
18 35 B.R. 431 (Bankr. D. Kan. 1982).
19 Id. at 433.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 5 of 9
In In re Bondank, 22 the bankruptcy court held that a real estate appraiser’s
vehicle was not a tool of the trade because it was primarily a source of transportation.23
While the debtor was able to prove that he needed a vehicle to perform his duties for
his employer, he was unable to prove that he needed that particular vehicle.24 For
similar reasons, the bankruptcy court in In re Meany found that a real estate agent’s
vehicle was not a tool of the trade.25
On the other side of the coin, in In re Currie, 26 a truck used for the debtor’s cattle
operation did qualify as a tool of the trade.27 The district court affirmed the bankruptcy
court’s holding that the truck fit within the “reasonably necessary, convenient, or
suitable” test because the debtor “could not continue her cattle operation without the
means to haul cattle to and from market.”28 Additionally the debtor used the four-wheel
drive truck to haul hay for the cattle in the winter.29 The debtor’s other vehicle (a Ford
Torino) was not a tool of the trade because the debtor’s cattle operation was not
22 130 B.R. 586 (Bankr. D. Kan. 1991).
23 Id. at 588.
25 35 B.R. 3, 4 (Bankr. D. Kan. 1982) (“[D]ebtors have not demonstrated that[debtor] cannot continue in her occupation without the use of this car.”).
26 34 B.R. 745 (D. Kan. 1983).
27 Id. at 748.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 6 of 9
“uniquely dependent” on it.30 In In re Kobs, 31 similar to In re Currie, the bankruptcy
court found a truck used on a farm to haul irrigation pipe, haul and feed cattle, fuel
other farm vehicles, and perform other various tasks did qualify as a tool of the trade.32
The Trustee’s sole argument supporting his objection to exemption is that
Debtor’s truck is not specially modified to specifically suit his metal fabrication
business. While a special modification to a vehicle is a factor that courts have
mentioned would favor the vehicle qualifying as a tool of the trade,33 it is not a
conclusive factor in the required case by case analysis.34 Debtor, however, in support
of his claimed exemption, relies on Kansas case law from the time before the enactment
of a means of conveyance exception in Kansas.35 Cases before the enactment of the
means of conveyance exception have no persuasive effect when determining whether
a vehicle qualifies as a tool of the trade.36
Additionally, Debtor has failed to stipulate to any evidence indicating the truck
31 163 B.R. 368 (Bankr. D. Kan. 1994).
32 Id. at 372.
33 In re Bondank, 130 B.R. at 588; In re Rice, 35 B.R. at 432–33.
34 See In re Currie, 34 B.R. at 748 (making no mention of any special
modifications when finding that a truck qualified as a tool of the trade).
35 Doc. 30 at ¶ 6 (citing Dowd v. Hueson, 122 Kan. 278 (1927)). The Kansasexemption statutes were not amended to include a specific exemption for a means ofconveyance until 1965. In re Rice, 35 B.R. at 432.
36 See In re Rice, 35 B.R. at 432 (noting how the analysis has changed afterinclusion of the means of conveyance exception).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 7 of 9
is “uniquely suited” for his metal fabrication business or that his business is “uniquely
dependent” on the truck. While the parties stipulate that “a pick-up truck is necessary
to perform Debtor’s work,”37 Debtor introduced no further stipulations expanding on
this statement. And the fact that “a pick up truck” is “necessary” will not qualify a
specific vehicle as a tool of the trade.38 Debtor argues that “the bed and tailgate serve
as an adequate welding bench.”39 Even if this argument were a stipulated fact, which
it is not, this would not be enough. The truck is neither “uniquely suited” for Debtor’s
business nor is Debtor’s business “uniquely dependent” on the truck—presumably, the
same work could be done with an actual welding bench. With nothing more than
argument that the truck serves as an “adequate welding bench,” this Court is left to
conclude that the truck’s main purpose is transportation from job to job. As a result,
it cannot be exempt as a tool of the trade.40
Debtor is proceeding pro se in this case, and although his pleadings are “to be
construed liberally,” the Court cannot “assume the role of advocate for the pro se
litigant.”41 Debtor has not put forth sufficient facts for this Court to find that the truck
37 Doc. 39 at ¶ 13.
38 See In re Bondank, 130 B.R. at 588 (concluding that there was no evidencethe specific vehicle at issue “had been modified to specifically suit the debtor’soccupation” and that just because the debtor needs ‘a vehicle” does not mean thedebtor needs the specific vehicle claimed).
39 Doc. 30 at ¶ 4.
40 In re Rice, 35 B.R. at 433.
41 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 8 of 9
is exempt as a tool of the trade, and the Trustee’s objection to exemption is therefore
For the reasons stated more fully herein, the Trustee’s objection to exemption42
It is so ordered.
# # #
42 Doc. 18.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 9 of 9