KSB

13-41131 Ungerer (Doc. # 72)

In Re Ungerer, 13-41131 (Bankr. D. Kan. Oct. 17, 2014) Doc. # 72

PDFClick here for the pdf document.


SO ORDERED.
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.

Order Denying
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.

-2


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
Debtors.”).

-3


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
order.4

II. Analysis
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
core proceedings).

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.

-4


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

8 Id.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Id.


-5


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
noted that

“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

15 Id.

16 Id.

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.
-6


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
duties.”24

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.

22 Id.

23 Id. at 310.

24 Id. at 314.

-7


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
anyway.30

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.

29 Id.

30 Id.

-8


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
foreclosed upon.”38

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.

35 Id.

36 Id.

37 Id.

38 Id.

-9


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
funds.41

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

39 Id.

40 Id.

41 Id.

42 Id. at 480–81 (noting that strong considerations of fairness support holding).

43 Id. at 474.

44 Id.

45 Id.

-10


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.

47 Id.

48 Id. at 478 (confirmation divests the debtor of any interest).

49 Id.

50 Id.

-11


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.

52 Id.

53 Id. at 479–80.

54 Id.

55 Id. at 480.

56 Id.

-12


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
itself”).

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.

-13


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

63 Id.

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.

-14


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).

-15


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
Bobroff.”).

72 Id. at 314–15.

73 In re Harris, 757 F.3d at 480–81.

-16


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.
-17


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.

-18


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.

III. Conclusion
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
plan.

It is so ordered.

# # #

78 Doc. 59.

-19


Case 13-41131 Doc# 72 Filed 11/17/14 Page 19 of 19

14-40750 Hagans (Doc. # 42)

In Re Hagans, 14-40750 (Bankr. D. Kan. Nov. 10, 2014) Doc. # 42

PDFClick here for the pdf document.


SO ORDERED.
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
Debtor.

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
that $7500.

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

-2


Case 14-40750 Doc# 42 Filed 11/10/14 Page 2 of 9


II. Analysis
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).

-3


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).

-4


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.

1982).

14 In re Rice, 35 B.R. at 432.

15 Id.

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.

20 Id.

21 Id.

-5


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.
24 Id.


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.

28 Id.

29 Id.
-6


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

30 Id.
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).
-7


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).

-8


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
sustained.

III. Conclusion
For the reasons stated more fully herein, the Trustee’s objection to exemption42
is sustained.
It is so ordered.
# # #

42 Doc. 18.

-9


Case 14-40750 Doc# 42 Filed 11/10/14 Page 9 of 9

BAP WY-14-002 In Re Miller

BAP WY-14-002 In Re Miller, Oct. 8, 2014

PDFClick here for the pdf document.


FILED
U.S. Bankruptcy Appellate Panel of the Tenth Circuit
October 8, 2014 Blaine F. Bates
Clerk
PUBLISH


UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT
IN RE VEDE JACOB MILLER, alsoknown as Jake Miller,
Debtor.
VEDE JACOB MILLER, Appellant,
v.
UNITED STATES TRUSTEE, Appellee.
BAP No. WY-14-002
Bankr. No. 13-20384    Chapter 7
OPINION
Appeal from the United States Bankruptcy Courtfor the District of Wyoming
Submitted on the briefs:*
Brad T. Hunsicker of Winship & Winship, P.C., Casper, Wyoming, for Appellant.
Ramona D. Elliott, Deputy Director/General Counsel (P. Matthew Sutko,Associate General Counsel, and Robert J. Schneider, Jr., Trial Attorney, with heron the brief) Washington, D.C., and Patrick S. Layng, United States Trustee forRegion 19 (Daniel J. Morse, Assistant United States Trustee, with him on thebrief), Cheyenne, Wyoming, for Appellee.
Before NUGENT, KARLIN, and SOMERS, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
The issue we face is whether a debtor’s wages need to be both earned and
* The parties did not request oral argument, and after examining the briefsand appellate record, the Court has determined unanimously that oral argumentwould not materially assist in the determination of this appeal.  See Fed. R. Bankr. P. 8012. The case is therefore ordered submitted without oral argument.
received during the applicable six-month “look-back” period in order to be included as part of his “current monthly income” under 11 U.S.C. § 101(10A). Debtor Vede Jacob Miller (“Miller”) timely appealed the bankruptcy court’s order dismissing his Chapter 7 petition after the court determined that, when properly calculated, Miller’s current monthly income (“CMI”) disqualified him from proceeding under Chapter 7 of the Bankruptcy Code.1 When Miller declined to convert his bankruptcy case from Chapter 7 to Chapter 13, the bankruptcy court dismissed his petition.  We affirm the dismissal.
I. BACKGROUND
The relevant facts are undisputed. Miller filed his Chapter 7 bankruptcy petition in April 2013. He claimed the § 707(b) presumption of abuse did not apply to his bankruptcy filing, under § 707(b)(7)(A), which effectively exempts a filer from the presumption of abuse if his income is less that the median income for his state and family size.  When Miller filed his bankruptcy, he was paid bi­weekly (26 times annually) and reported gross annual income of $77,705 and $81,066 in 2011 and 2012, respectively. When he filed, the median income for a family of three in Wyoming was $73,688; it was $78,733 for a family of four.
Miller’s first Form B22A (the Chapter 7 means test) listed a family size of 3 and a CMI of $4,977, resulting in a calculated annual income of $59,721.  Three months later, Miller filed an amended B22A form, this time claiming a family size of 4 and a CMI of $6,112—$73,338 annually, still $300 below Wyoming’s median income for a family of three.  The figure was also $5,395 less than the $78,733 median income for a family of four, the family size Miller claimed on the amended form.2
1 Unless otherwise indicated, all statutory references in this decision will beto the Bankruptcy Code, Title 11 of the United States Code.
2 The UST suggests that Miller changed his family number from 3 to 4 (continued...)
The United States Trustee (UST) contested Miller’s CMI calculations,
which Miller based on his understanding of the term “current monthly income,” as
defined in § 101(10A). That definition includes, “income from all sources that
the debtor receives . . . without regard to whether such income is taxable income,
derived during the 6-month period.”  Miller argued that the “derived during”
language means “earned during,” such that his CMI only need include income he
both received and earned during the look-back period.3 The UST read the
definition to include all money received during the look-back period, regardless
when it was earned.
These differing definitions led the UST and Miller to dispute the inclusion
of one payment, which Miller received on October 10 in the amount of $2,942.
Those wages were in compensation for work he completed in the two weeks
before commencement of the look-back period—the “10/10 payment.”4
Eliminating this payment from Miller’s CMI calculation reduced his annualized
2 (...continued)because his income otherwise would have exceeded the Wyoming median annualincome, even using his calculation.  Brief of Appellee Patrick S. Layng, UnitedStates Trustee, at 8. The UST argument is inaccurate.  Miller’s amended calculation reflecting annual income of $73,338 was still below the $73,688median income for a family of 3 in Wyoming at the time his petition was filed.
http://www.justice.gov/ust/eo/bapcpa/20130401/bci_data/median_income_table.ht
m. Printed copies of this, and all other webpages cited herein, are provided as anattachment located at the end of this decision. The Court accepts noresponsibility for, and does not endorse, any product, organization, or content atany hyperlinked site, or at any site to which that site might be linked. The Courtaccepts no responsibility for the availability or functionality of any hyperlink.Thus, the fact that a hyperlink ceases to work or directs the user to some othersite does not affect the Opinion of the Court.
3 The defined look-back period was October 1, 2012, through March 31,2013.
4 The UST’s analysis of Miller’s pay advices indicates that the pay periodcovered by the 10/10 Payment was September 14-30, a period of 17 days.  See Appellant’s Appendix (“Appx”) at 67. Each of Miller’s other checks covered a 14-day period that ended 10 days prior to the payment date.  As the 10/10 payadvice is not contained in the appellate record, the Court assumes the UST’sstated pay period is simply a transcription error.
income to nearly $6,000 below the Wyoming annual median for a family of four. But when the UST included that payment, Miller’s income placed him at above-median income status.  As a result, Miller’s CMI would have resulted in Miller having to repay (under a 60-month repayment plan required of above median income debtors) approximately $42,000 to his unsecured creditors.  Since he listed total non-priority unsecured debt of $58,062, creditors would have potentially received payment of more than 70% of their claims.
Based on this calculation, the UST filed a Statement of Presumed Abuse pursuant to §§ 707(b) and 704(b)(2),5 and a motion to dismiss Miller’s case pursuant to § 707(b)(2) and (3).6  Miller then filed his own motion for partial summary judgment, claiming that because the 10/10 payment should be excluded, he should be allowed to proceed in Chapter 7.
The bankruptcy court agreed with the UST interpretation, holding that all income received by a debtor in the look-back period must be included in the calculation of CMI “without relation to when that income was earned.”7  As a result, the bankruptcy court dismissed Miller’s case pursuant to § 707(b)(2)8 when he declined to convert to a Chapter 13 proceeding.
II. APPELLATE JURISDICTION
This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
5 See Appx at 59.
6 Id. at 60. Section 707(b)(2) is based on a presumption of abuse that arisesfrom a mathematical calculation of income and expenses, whereas § 707(b)(3)requires a showing of bad faith but does not require the trustee (or other party ininterest) prove that the debtor exceeded the abuse threshold.
7 Opinion on Motion for Partial Summary Judgment at 7, in Appx at 131.
8 As a result, the bankruptcy court did not reach the UST’s § 707(b)(3) badfaith claim against Miller.
unless one of the parties elects to have the district court hear the appeal.9 A decision dismissing a bankruptcy case is a final order for purposes of appeal.10
Miller timely appealed the bankruptcy court’s dismissal of his case as well as the order denying him summary judgment.11 Neither party elected to have the appeal heard by the district court, and the parties have therefore consented to appellate review by this Court.
III. ISSUE AND STANDARD OF REVIEW
In calculating CMI pursuant to § 101(10A), is income that was
earned before the start of the six-month look-back period

included if it is received during that period?
The sole issue on appeal requires us to interpret a statute, a question of law
that we review de novo.12
IV. DISCUSSION
Under § 707(b)(1), “the court . . . may dismiss a case . . . or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Section 707(b)(2) sets out a means test that creates a presumption of abuse in many cases, but § 707(b)(7)(A) effectively exempts a debtor from the
9 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002; 10th Cir.BAP L.R. 8001-3.
10 In re Miller, 383 B.R. 767, 770 (10th Cir. BAP 2008) (order of dismissal isgenerally final and appealable under 28 U.S.C. § 158(a)).
11 The UST suggests that 10th Cir. BAP L.R. 8001-1 required Miller to paytwo filing fees in order to appeal both the order denying his motion for partialsummary judgment and the order dismissing his case.  This local rule is interpreted to require separate notices of appeal from separate final orders, whichthe December 5 order was not.  Moreover, an appellant may seek review of allinterim, non-final orders in conjunction with an appeal of the final order resolvingthe case. See Koch v. City of Del City, 660 F.3d 1228, 1237 (10th Cir. 2011),cert. den., 133 S.Ct. 211 (2012) (interlocutory orders merge into a final judgmentand are reviewable on appeal).
12 In re Woods, 743 F.3d 689, 693 (10th Cir. 2014); In re Ford, 574 F.3d1279, 1282 (10th Cir. 2009).
means test presumption of abuse “if the current monthly income of the debtor . . . and the debtor’s spouse combined . . . when multiplied by 12, is equal to or less than” the median income for the debtor’s family size in the applicable state. The term “current monthly income” is defined in § 101(10A) as follows:
(10A) The term “current monthly income”–
(A) means the average monthly income from all sourcesthat the debtor receives (or in a joint case the debtor andthe debtor’s spouse receive) without regard to whethersuch income is taxable income, derived during the6-month period ending on–
(i) the last day of the calendar monthimmediately preceding the date of thecommencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii)(emphasis added).
The parties offer differing interpretations of the term “current monthly income.”  Miller reads “derived during” to mean “earned during.”  As a result, he reads § 101(10A) to include only income that he both received and earned during the 6-month look-back period.  In other words, he contends the statute excludes both income received in the look-back period that he earned outside of that period and income he earned during the look-back period for which he received payment outside of it. The UST contends that all income received during the look-back period must be included in the calculation of CMI, regardless when it was earned.13
The Tenth Circuit Court of Appeals has not considered this issue, and our independent research has produced no other appellate decisions addressing the meaning of this language.  We are thus left to interpret the Code in the first instance. “[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries
The UST agrees with Miller that income earned in the look-back period—but received outside of that period—is not included in CMI (such as Miller’sApril 10, 2013 pay).
must begin:  with the language of the statute itself.’”14 “It is well established that ‘when the statute’s language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’”15  Further, “[i]t is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”16 “If the statute’s plain language is ambiguous as to Congressional intent, we look to the legislative history and the underlying public policy of the statute.”17
The most common definition of “derive” is “to take, receive, or obtain especially from a specified source,”18 and both parties rely on this definition.19 But this definition is actually defining the phrase “derive from.”  Using the term “derive,” as outlined in these definitions, requires the preposition “from.”  But Congress did not choose the phrase “derived from;” instead, it used the term “derived” in a temporal setting, that is, “derived during.”  And a dictionary definition analogous to the one for “derived from” for the phrase “derived during” would read as follows: “to take, receive, or obtain, especially during a specified period.” Using this definition in the statute, then, the primary dictionary meaning leads us to read “income derived during the look-back period” as “income taken, received, or obtained during the look-back period.” The meaning of the terms
14 Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 131 S.Ct. 716, 723 (2011)(quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)).
15 Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)).
16 Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989).
17 United States v. Manning, 526 F.3d 611, 614 (10th Cir. 2008) (citation andinternal quotation marks omitted).
18 See, e.g., Merriam-Webster Online Dictionary,http://www.merriamwebster.com/dictionary/derive.
19 See Appellant’s Brief at 11-12.
“taken” and “obtained” are subsumed in the broader term “received,”20 so we read the definition of “income derived during the look-back period” as “income received during the look-back period.” This appears to be the plain meaning of the statute.
Admittedly, construing the words “derived during” to be essentially synonymous with the word “received” presents a statutory interpretation challenge, given that Congress used the word “receives” earlier in the same sentence. If the legislature intended the words to have the same meaning, why would it use different words?
Miller makes just this argument, asserting that “if different language is used in different parts of a statute, then a court should presume the legislature intended a different meaning and effect with respect to each term.”21 This argument appears to rely on the idea that courts should not read a statute to render any portion of the statute redundant, and reading dissimilar terms to mean the same thing risks creating redundancy.  But there is little precedential support for the alleged rule that different words must have different meanings.
The United States Supreme Court has specifically recognized that Congress’s use of two different terms in a statute does not preclude the courts assigning the terms the same meaning, noting that Congress may have used the terms, “not as contrasting, but as synonymous or alternative terms.”22 And even if
20 If one takes or obtains money, one still receives that money; the termssimply provide additional information about how that money is received.
21 Appellant’s Brief at 12.
22 Wachovia Bank v. Schmidt, 546 U.S. 303, 314 (2006) (in reference to thewords “located” and “established” in a statute). Congress certainly does usesynonyms in its drafting, and courts should not strain to interpret wordsdifferently when their ordinary meaning is synonymous.  Thus, the rule againstsuperfluities cannot be used to override the “fundamental canon of statutoryconstruction . . . that, unless otherwise defined, words will be interpreted astaking their ordinary, contemporary, common meaning.”  Perrin v. United States,
(continued...)
this purported rule were a canon, “canons are not mandatory rules” but, rather, are “guides [] designed to help judges determine the Legislature’s intent as embodied in particular statutory language. And other circumstances evidencing congressional intent can overcome their force.”23
Nevertheless, Miller argues “derive” must have a different definition from “receive”, and so ultimately interprets “derived during” to require that “the income at issue must originate from, or be earned during, the applicable six-month “look-back” period (i.e., the “specified source” or “origin” of the income)” (emphasis added).  But there is simply no basis in the statute or the dictionary definitions for interpreting “derived” as “earned,” the latter being a word Miller adds to the definition without explanation. This unjustified addition twists the meaning of the term “derived” and would fundamentally alter the CMI definition. None of the dictionary definitions of “derive” uses the term “earn.”  Even if Miller is correct that Congress generally does not use two words to mean the same thing, there is simply no basis to substitute “earned” for “derived,” as Miller advocates.
Moreover, Miller’s general argument, that reading two different words to mean the same thing renders portions of the statute redundant, fails in this case. Careful consideration of this statute indicates that, even when “received” and “derived” are given the same meaning, every portion of the statute remains essential. We note that the first portion of the statute, containing the term “receives,” is in the present tense and explains what kind of income is included in a CMI calculation, without respect to its receipt. Thus, “income from all sources that the debtor receives . . . without regard to whether such income is taxable” is
22 (...continued)444 U.S. 37, 42 (1979).
23 Chickasaw Nation v. United States, 534 U.S. 84, 94 (2001) (citation andinternal quotation marks omitted).
included in CMI. The second part of the CMI definition sets the time period
applicable to that income; the income must have been “derived during” the look-
back period. When the statute is read as a whole, then, it contains no
surplusage—both portions of the definition of CMI are necessary to the
calculation.
After reviewing the accepted definitions for the term “derived,” in the
context of the phrase “derived during,” the Court concludes that the phrase
“income derived during the look-back period” has the plain meaning “income
received during the look-back period.” This reading does not raise the concerns
about redundancy or surplusage sometimes associated with reading dissimilar
terms to mean the same thing, and this reading directly applies the commonly
accepted dictionary definition of the term “derived” to the question at hand.
Because this is the only reasonable interpretation of the statutory language, the
language is not ambiguous.24
The Court is aware of the divided case law on this question,25 and Miller
24 Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., No. 12­3295, 2014 WL 4069137, at *31 (10th Cir. Aug. 19, 2014).
25 See, e.g., In re Strickland, 504 B.R. 542, 545-46 (Bankr. D. Minn. 2014)(holding that “current monthly income” under § 101(10A) means the amount ofincome earned during the six months, regardless of the date of receipt); In re Robrock, 430 B.R. 197, 204 (Bankr. D. Minn. 2010) (same); In re Cruz, No. 08­23419, 2008 WL 3346583, at *2 (Bankr. E.D. Wis. Aug. 11, 2008) (holding that“[w]hether income is included in CMI is determined by when the debtor receives funds, not when they are earned.”), relying on In re DeThample, 390 B.R. 716(Bankr. D. Kan. 2008); In re Burrell, 399 B.R. 620, 627 (Bankr. C.D. Ill. 2008)(holding that “derived during” was mere “surplusage adding nothing substantiveto the definition” of CMI); In re DeThample, 390 B.R. at 721 (holding that§ 101(10A) “include[s] every dime a debtor gets during the relevant period exceptfor those amounts specifically excluded”); In re Sanchez, No. 06-40886, 2006 WL2038616, at *2 (Bankr. W.D. Mo. July 13, 2006) (holding that “derived” islargely redundant of “received,” meaning “to take, receive, or obtain especiallyfrom a specified source,” and thus that CMI included all money received duringthe look-back period).
relies extensively on two prior Chapter 7 cases, Arnoux and Meade, 26 which merit additional discussion. First, Miller relies on Arnoux, but the definition of “derived” was not at issue in Arnoux, as both the Chapter 7 debtor and the UST apparently agreed that the term meant “earned.”  The only dispute was whether income the debtor received after the look-back period, for work performed during that period, must be included in CMI.  Debtor Arnoux argued (as does Miller) that income must be both received and earned in the look-back period, whereas the trustee argued (as does the UST here) that only the term “derived” is actually limited to the look-back period.  The debtor had included all income she received during the look-back period, but had excluded a two-week payment for work performed during that period, but received outside of it.
The Arnoux trustee argued that the “natural reading” of § 101(10A) imposed two conditions on income inclusion (only one of which was subject to a time parameter):  1) it was received by the debtor, and 2) it was “derived” (i.e., earned) during the look-back period. Contrary to that trustee’s plain language assertion, the Arnoux court determined § 101(10A) to be ambiguous.27  It then considered the statute’s legislative history, concluding that the drafters intended the look-back period to apply to both “receives” and “derived.”28 Thus, the court held that income must be both received and earned during the look-back period, so income the debtor received outside of the look-back period but earned during it was excluded from the debtor’s CMI.
26 In re Arnoux, 442 B.R. 769 (Bankr. E.D. Wash. 2010); In re Meade, 420
B.R. 291 (Bankr. W.D. Va. 2009).
27 In re Arnoux, 442 B.R. at 776 (but disagreeing with the Burrell court’s assessment that the phrase “derived during” was in the statute as the “result ofpoor sentence construction and inartful drafting”).
28 Id.
Miller also relies on In re Meade29 to support his position. In Meade, the
principal dispute centered around whether the entire $9,000 annual bonus
received by one of the debtors during the November 1, 2008 through April 30,
2009 look-back period—theoretically for work done throughout 2008—should be
included.30 As the entirety of the bonus was received during the look-back
period, the trustee argued that it should all be included in calculating the debtors’
CMI. The Meades countered that “a common sense approach” would be to divide
the bonus into twelve months, rather than six, since it was an annual bonus.31
Significantly, the Meades had stipulated to their above-median status, and that the
statutory presumption of ability to pay their creditors arose under § 727(b)(2).  As
such, the specific issue in Meade was whether debtors’ “disposable income”
(CMI, less allowed expenses, times sixty) exceeded the threshold for presumption
of abuse.32
The Meade court elected to include only half of the annual bonus in the
debtors’ CMI. It did so based in large part on the parties’ agreement that the term
29 In re Meade, 420 B.R. at 291.
30 The debtor had also received a similar bonus of $9,000 in February 2008,and $8,500 in February of 2007, corroborating that the debtor’s receipt of annualbonuses, in this range, was the norm.
31 In re Meade, 420 B.R. at 301. The Meades did not argue, as they mighthave, that the entirety of the annual bonus was “earned” in calendar year 2008, inwhich case, only two months of the bonus (November and December) were both“earned” (or “derived”) and received during the look-back period. At most, thebonus likely was earned in only three months of the look-back period (Novemberthrough January), as bonuses are not typically paid in advance. Although thisargument was not made, the fact that it could have been under Miller’s reading of§ 101(10A) helps illustrate the UST’s argument that requiring income to be bothearned and received in the look-back period would, in many instances, increasethe complexity of determining the amount of income to include in CMI.  Thus,although it is ordinarily simple enough to determine when regular pay (“earnedincome”) was “earned” as in the present case, other income, including bonuses,401(k) distributions, and other “passive income,” might be quite difficult to tie toa particular date other than when it was received.
32 See § 707(b)(2)(A)(i).
“derived,” as used in § 101(10A), meant “earned.”  This is apparent from the
court’s discussion regarding the difficulty of prorating a bonus that was paid prior
to the look-back period under the parties’ statutory reading.33 The court then
“acknowledge[d] the conceptual difficulties” of its holding, but found them to be
no greater than the problem of using past income to determine what a debtor will
pay in a future repayment plan.34  Ultimately, however, the court granted the
trustee’s motion to dismiss the Meades’ case, finding that they had failed to rebut
the statutory presumption.35 Thus, Meade neither supports Miller’s assertion that
income must be both received and earned in the look-back period, nor does it hold
that the term “derived” means “earned.”
Although the statute is unambiguous, its legislative history and underlying
public policy also support our interpretation of the statute. As several courts have
already noted, the word “derived” was never used in the legislative history of
33 The court noted that there was authority in a Chapter 13 context to includesuch a non-look-back period payment in CMI, citing In re Foster, No. 05-50448,2006 WL 2621080 (Bankr. N.D. Ind. Sept. 11, 2006). Meade, 420 B.R. at 306.Because Foster involved facts well beyond the ones presented by the present case,we do not discuss it here.
34 In re Meade, 420 B.R. at 306-07. It is significant to note that the Meade court did not have the benefit of the Supreme Court’s 2010 decision in Hamilton
v. Lanning, 560 U.S. 505, 517 (2010), which held that determinations of projecteddisposable income should involve a “forward looking approach” that takes intoconsideration “known or virtually certain changes to debtors’ income orexpenses.” Although the Lanning decision did not discuss the issue of “receives” and “derived” with respect to inclusion of income in CMI, its holding is at leastarguably supportive of the UST’s position that while all income received shouldbe included in CMI, the continued accuracy of that income going forward may beraised by a debtor (at least in Chapter 13 cases) in connection with thedetermination of projected income.  Thus, although the debtor in Lanning was treated as an above-median debtor based on her CMI, which included twosignificant, non-recurring buy-out payments from her former employer, theamount of her actual plan payment was based on her true income at the time ofplan confirmation.
35 One factor that led to dismissal of the Meades’ case was the court’s conclusion that debtor wife’s school teacher salary should not be prorated over 12months, but should instead be included in CMI as it had been actually received.
§ 101(10A), and very little was said about the statute at all.36 One of only two nearly identical legislative statements regarding CMI is found in a section-by­section discussion of BAPCPA’s 2005 overhaul of the Bankruptcy Code:
Section 102(b) of the Act amends section 101 of the Bankruptcy
Code to define “current monthly income” as the average monthly
income that the debtor receives (or in a joint case, the debtor and
debtor’s spouse receive) from all sources, without regard to whether
it is taxable income, in a specified six-month period preceding the
filing of the bankruptcy case.37 And as the Burrell court noted, “[t]he legislative history only makes reference to when income is received; nowhere is reference made to when the income is earned. The phrase ‘derived during’ is completely absent.”38 The legislative history thus supports a reading of the terms at issue here as merely synonymous.
Finally, the doctrine that we should be guided by the underlying public policy of the statute reinforces our interpretation of CMI as requiring inclusion of all income received by a debtor during the look-back period.  As a general matter, remedial legislation should be construed in a way that effectuates its remedial purpose:
[R]emedial legislation, like BAPCPA, should be construed broadly to
effectuate its purpose. The means test was intended to screen
Chapter 7 individual debtor filings to determine who could pay a
significant portion of their debts over time. . . . BAPCPA intended to
force these debtors into Chapter 13 filings if they wanted bankruptcy
relief. The impetus behind this law was to ‘combat perceived fraud
and abusive [Chapter 7] filings.’  Thus BAPCPA is remedial in
nature.39 This Court is well aware of the remedial concerns BAPCPA was intended to address, and Miller is precisely the type of debtor who the drafters sought to
Kucharz, 418 B.R.635, 642 (Bankr. C.D. Ill. 2009) and Tcherepnin v. Knight, 389
36  See, e.g., In re Burrell, 399 B.R. 620, at 627 (Bankr. C.D. Ill. 2008). 
37  H.R. Rep. No. 109-31, at 122, reprinted in 2005 U.S.C.C.A.N. 88. 
38  In re Burrell, 399 B.R. at 626. 
39  In re Gentry, 463 B.R. 526, 530 (Bankr. D. Colo. 2011), citing In re 

U.S. 332, 336 (1967).

screen from use of Chapter 7—higher income debtors who have the ability to repay a portion of their unsecured debt, yet seek to instead have that debt
discharged.40
Miller receives bi-weekly salary payments, a very common employer payment method.  Employees who are paid bi-weekly receive 13 paychecks in any six-month period.  However, Miller’s interpretation of CMI would reduce that number to 12, thereby reducing the look-back period income of all bi-weekly paid debtors by nearly 8%, since one of those payments will have been earned before the period and paid during it, while another will be earned during the period and paid after it. Reading the statute to only include 12 bi-weekly payments would be inconsistent with its purpose, as it would not fairly capture an entire six-month’s worth of income.  It was not Congress’s intent in enacting the BAPCPA “means test” to allow debtors to distort their actual income to avoid paying a fair share of their future income to their creditors.
Thus, even if we were to hold this statute ambiguous, an analysis of the legislative history, coupled with an appreciation of the statute’s remedial purpose, would dictate the same conclusion.
V. CONCLUSION
Although both parties present persuasive arguments on this difficult issue of statutory interpretation, we conclude that the plain meaning of § 101(10A) is that the term “current monthly income” includes all income a debtor receives in the look-back period, regardless when it was earned. Even were we to conclude that the statute was ambiguous, imposition of an additional requirement—that the
Although the math suggests Miller might have been able to pay as much as 72% of his unsecured debt ($42,000/$58,062), the UST contends, using data fromMiller’s own schedules I and J, that Miller could have paid his unsecuredcreditors as much as 50% of their claims over a 60-month repayment plan.  See
U.S. Trustee’s Analysis of the Debtor(s) Schedules I & J, in Appx at 73-75.Regardless whether it is 50% or 72%, it is a significant recovery for creditors.
income also be earned during the look-back period—is supported neither by the statute’s language nor by legislative history, and we would ultimately define the term in the same way.  Therefore, we affirm the bankruptcy court’s dismissal of Miller’s Chapter 7 case, pursuant to § 707(b)(2).

IOWA KANSAS KENTUCKY LOUISIANA MAINE MARYLAND MASSACHUSETTS MICHIGAN MINNESOTA MISSISSIPPI MISSOURI MONTANA NEBRASKA NEVADA NEW HAMPSHIRE NEW JERSEY NEW MEXICO NEW YORK NORTH CAROLINA NORTH DAKOTA OHIO OKLAHOMA OREGON PENNSYLVANIA RHODE ISLAND SOUTH CAROLINA $42,207 $42,577 $40,020 $37,967 $41,488 $58,269 $55,602 $45,029 $48,097 $36,240 $41,092 $42,301 $41,861 $44,924 $52,588 $61,146 $38,349 $47,790 $40,710 $41,557 $42,814 $40,665 $43,160 $47,439 $46,896 $39,238 $58,852 $56,851 $46,815 $47,731 $53,227 $73,685 $67,443 $52,621 $63,654 $43,095 $51,784 $54,362 $59,543 $55,674 $65,830 $69,697 $51,965 $59,308 $51,812 $61,492 $53,218 $51,575 $55,057 $55,210 $61,607 $50,548
$64,552 $78,366 $65,907 $76,402 $55,613 $67,783 $55,863 $70,347 $60,425 $79,931 $87,206 $108,915 $82,495 $103,624 $61,715 $73,864 $76,909 $89,126 $46,062 $59,248 $59,549 $72,150 $56,977 $67,055 $67,235 $77,057 $55,674 $66,562 $82,924 $99,457 $85,016 $103,786 $51,965 $61,617 $69,052 $83,209 $56,339 $64,983 $68,688 $86,653 $60,960 $74,270 $53,500 $64,374 $62,202 $67,315 $68,848 $82,078 $76,864 $83,785 $53,532 $61,388

SOUTH DAKOTA  $38,071  $57,188  $65,829  $73,960 
TENNESSEE  $39,891  $48,617  $55,080  $65,038 
TEXAS  $41,225  $55,895  $60,503  $67,296 
UTAH  $50,976  $56,089  $63,430  $66,590 
VERMONT  $46,019  $61,702  $67,774  $85,750 
VIRGINIA  $53,328  $65,930  $77,585  $91,661 
WASHINGTON  $52,724  $65,123  $71,289  $83,270 
WEST VIRGINIA  $41,499  $44,536  $54,790  $66,756 
WISCONSIN  $43,661  $58,668  $65,775  $81,296 
WYOMING  $45,336  $63,193  $73,688  $78,733 
* For cases filed on or before March 31, 2013, add $7,500 for each individual in excess of 4. 
For cases filed on or after April 1, 2013, add $8,100 for each individual in excess of 4. 

FAMILY SIZE COMMONWEALTH OR
U.S. TERRITORY 1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *
GUAM $38,410 $45,925 $52,334 $63,331 NORTHERN MARIANA ISLANDS $25,793 $25,793 $30,008 $44,137 PUERTO RICO $22,392 $22,392 $23,537 $28,180 VIRGIN ISLANDS $30,475 $36,627 $39,052 $42,785
* For cases filed on or before March 31, 2013, add $7,500 for each individual in excess of 4. For cases filed on or after April 1, 2013, add $8,100 for each individual in excess of 4.
FRIDAY, SEPTEMBER 27, 2013 10:49 AM

ABOUT
The Attorney General Budget & Performance Strategic Plans
AGENCIES

BUSINESS & GRANTS
Business Opportunities
Small & DisadvantagedBusiness Grants


RESOURCES
Forms Publications Case Highlights Legislative Histories Information for Victims Large
Cases
NEWS
Justice News The Justice Blog Videos Photo Gallery

CAREERS
Legal Careers
Interns, Recent Graduates, and Fellows Diversity Policy Veteran Recruitment
CONTACT

Site Map Archive Accessibility FOIA No FEAR Act Information Quality
Privacy Policy
Legal Policies &Disclaimers For Employees
Office of the InspectorGeneral
Government Resources
Plain Writing USA.gov BusinessUSA

Derive - Definition and More from the Free Merriam-Webster Dictionary


http://www.merriam-webster.com/dictionary/derive[10/8/2014 3:03:42 PM]

 

14-40543 Scott (Doc. # 49)

In Re Scott, 14-40543 (Bankr. D. Kan. Oct. 27, 2014) Doc. # 49

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 27th day of October, 2014.

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re: Case No. 14-40529
William Leroy McDonald Chapter 13
Bonnie Kaye McDonald,

Debtors.

In re: Case No. 14-40543
Kliffton Joseph Scott Chapter 13
Jeanette Lynn Scott,

Debtors.

Memorandum Opinion and Order Sustaining Trustee’s Objections to
Confirmation of Chapter 13 Plan and Objections to Exemption


Debtors, William and Bonnie McDonald and Kliffton and Jeanette Scott, have
filed chapter 13 plans that do not propose to pay any amount to satisfy the best interest
of the creditors test of 11 U.S.C. § 1325(a)(4) with regard to per capita payments they
receive from the Prairie Band Potawatomi Nation Indian Tribe (hereinafter “Prairie
Band” or the “Tribe”). Building on governing precedent, the Court concludes that despite

Case 14-40543 Doc# 49 Filed 10/27/14 Page 1 of 30


changes to the Prairie Band Per Capita Ordinance and Tribal Code since it last ruled
on these issues, the per capita payments remain property of the respective chapter 13
estates, and the Debtors’ plans have thus failed to satisfy the best interest of the
creditors test with respect to this contingent, unliquidated property.

Debtors William and Bonnie McDonald also seek to exempt the per capita
payments from the bankruptcy estate by arguing they are exempt under 11 U.S.C. §
522(b)(3)(A) as “local law that is applicable . . . at the place in which the debtor’s
domicile has been located for the 730 days immediately preceding the date of the filing
of the petition.” The McDonalds have stipulated that their domicile is in Topeka,
Kansas, however, and they are not domiciled on Prairie Band land. As a result, §
522(b)(3)(A)’s exemption based on “local law” is not applicable. The McDonalds’ other
exemption arguments likewise fail.

As a result of the conclusions discussed more fully herein, the Court sustains the
Chapter 13 Trustee’s objections to confirmation and objections to exemption in each
case.

I. Background and Procedural Facts
Both sets of Debtors filed joint bankruptcy petitions under chapter 13 of the
Bankruptcy Code.1 The Trustee objected to confirmation of plans filed in each case
because neither plan satisfied the best interest of the creditors test as to Debtors’ per

1 All future statutory references are to title 11 (the “Bankruptcy Code”), unlessotherwise specified herein.

-2


Case 14-40543 Doc# 49 Filed 10/27/14 Page 2 of 30


capita payments.2 The Trustee also objected in each case to the Debtors’ claimed
exemption of the per capita payments. In their joint stipulation and briefing, the Scott
Debtors abandoned their exemption claim, so only the McDonald Debtors still claim the
per capita payments as exempt.

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§
157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). The following
findings of fact are based upon the stipulations filed by the parties, including stipulated
exhibits.3

A. William and Bonnie McDonald
The McDonald Debtors filed their chapter 13 bankruptcy petition on May 14,
2014. Debtors are married and have below median income for their household size and
geographical region under § 1325(b)(3) and (4). Debtor Bonnie McDonald is a member
of the Tribe. As a member, Bonnie receives quarterly “per capita” gaming revenue
distributions in accordance with the Prairie Band Per Capita Ordinance. The McDonald

2 The McDonald Debtors make a fleeting one-sentence argument that because theircase has “not been consolidated for the purpose of administration,” only Bonnie McDonald,
and not also William McDonald, should be affected by the Trustee’s motion to dismiss andobjection to confirmation. But the McDonald Debtors have filed a joint petition and plan,
and have never moved to sever their jointly administered bankruptcy case. As such, theCourt will not further address this possible ‘argument.” If the McDonald Debtors wish tosever their joint bankruptcy case, they may file the proper motion to do so, which would beconsidered in due course after opportunity for objection and argument.

3 The parties filed a Joint Stipulation of Facts, and attached Title 4 of the“Potawatomi Law and Order Code” as Exhibit A, Doc. 33 in the McDonald Case No. 1440529
and Doc. 40 in the Scott Case No. 14-40543. The parties also filed a supplement tothat Stipulation with the Tribe’s “Per Capita Ordinance” attached as Exhibit B, Doc. 40 inthe McDonald Case No. 14-40529 and Doc. 41 in the Scott Case No. 14-40543. Hereinafter,
these will be referred to as the “Tribal Code” (cited as Exhibit A) and the “Per CapitaOrdinance” (cited as Exhibit B), respectively.

-3


Case 14-40543 Doc# 49 Filed 10/27/14 Page 3 of 30


Debtors claim an exemption in Bonnie’s per capita payments.

When Debtors filed their bankruptcy petition, they lived at an address in Topeka,
Kansas where they had resided for at least 730 days prior to filing. This residence is not
located on the Tribe’s reservation. In addition, Bonnie holds a non-transferable joint
tenancy interest in approximately 86 acres of Tribal trust agricultural land managed by
the Secretary of the Interior pursuant to 25 U.S.C. § 3701–3715. Bonnie values that
interest at zero.

Debtors’ Schedule I estimates Bonnie’s per capita payment at $361/mo. This
income is also listed on Debtors’ Form 22C. Debtors’ only other income is from Bonnie’s
receipt of Social Security disability payments. Debtors’ plan provides for monthly
payments of $130, paying attorney fees, a secured debt to the Shawnee County
Treasurer for real estate taxes, the filing fee, Trustee fees, and approximately $495 to
unsecured creditors. The plan is a 36 month base case, makes no specific reference to per
capita payments, and states the amount payable under paragraph 15’s “Best Interests
of Creditors Test” is zero.

B. Kliffton and Jeanette Scott
The Scott Debtors filed their chapter 13 bankruptcy petition filed on May 15,
2014. Debtors are married and have below median income for their household size and
geographical region under § 1325(b)(3) and (4). Debtor Jeanette Scott is a member of the
Tribe. As a member, Jeanette receives quarterly per capita gaming revenue
distributions in accordance with the Prairie Band Per Capita Ordinance. The Scott
Debtors originally claimed an exemption in Jeanette’s per capita payments but have

-4


Case 14-40543 Doc# 49 Filed 10/27/14 Page 4 of 30


now abandoned that exemption. Debtors had no per capita funds on hand when they
filed their bankruptcy petition.

When Debtors filed their bankruptcy petition, they lived in Topeka, Kansas, and
had lived in either Topeka or nearby Carbondale for at least 730 days prior to filing.
Neither the Topeka nor Carbondale residence is located on the Tribe’s reservation.
Debtors’ Schedule I estimates Jeanette’s per capita payment at $472.80/mo.4 This
income is also listed on Debtors’ Form 22C. Debtors’ plan provides for monthly payments
of $270, and proposes to pay the filing fee, attorney fees, a priority tax debt, and a
special class claim for unpaid rent. The plan proposes no distribution to unsecured
creditors and makes no specific reference to per capita payments. The plan provides a
zero amount under paragraph 15’s “Best Interests of Creditors Test.”

II. Analysis
A. Relevant Case Law From This District
This Court first addressed the issue of per capita payments from the Prairie Band
Tribe in In re McDonald. 5 In In re McDonald, the debtors did not deny that the per

4 Since both Debtors receive the same amount per quarter from the Tribe, the Courtcannot explain why the McDonalds’ and Scotts’ estimates of how the quarterly benefitstranslate into monthly amounts differ so substantially on their respective Schedules I ($361versus $472).

5 353 B.R. 287 (Bankr. D. Kan. 2006) (Karlin, J.). Coincidentally, the debtors in
McDonald are the same individuals as the McDonald Debtors herein. Although theStipulation of Facts does not reveal how long this Tribe has been making quarterly percapita distributions, the fact that Bonnie McDonald has apparently been receiving themsince at least 2005 (the year her Chapter 13 case was converted to Chapter 7 in the prior
McDonald decision, id. at 289) gives some credence to the argument that they may continueinto the years during which these Debtors’ plans will remain pending. The McDonald
decision reveals the payments ranged around $800 per quarter in 2005 and 2006. Id.

-5


Case 14-40543 Doc# 49 Filed 10/27/14 Page 5 of 30


capita payments were property of the estate, and instead argued that the per capita
payments were exempt.6 Before addressing the debtors’ exemption argument, the Court
first relied on two prior decisions from other jurisdictions, In re Kedrowski7 and Johnson

v. Cottonport Bank, 8 to affirmatively hold that the per capita distributions were property
of the estate.9
In their prior case, Debtors claimed the per capita payments were exempt under
the then-active Potawatomi tribal code provision providing that “per capita distributions
‘shall be exempt, from garnishment, attachment, execution, sale, and other process for
the payment of principal and interest, costs, and attorney fees upon any judgment of the
Tribal Court.’”10 The Court held that debtors were not “entitled to rely upon the
exemptions contained in the Potawatomi Tribal Code,”11 reasoning that because Kansas
is an opt-out state, debtors were limited to the exemptions allowed under Kansas law.12
Because Kansas law did not permit exemption based on the Potawatomi tribal code,
debtors could not thus rely.13

6 Id. at 290–91.
7 284 B.R. 439, 446 (Bankr. W.D. Wis. 2002).
8 259 B.R. 125, 131 (W.D. La. 2000).
9 In re McDonald, 353 B.R. at 291.
10 Id. at 292 (quoting then-current tribal code) (internal emphasis omitted).


11 Id.

12 Id.

13 This Court also noted that Kansas law permits debtors to claim the exemptionscontained in § 522(d)(10), which includes payments for social security benefits and

-6


Case 14-40543 Doc# 49 Filed 10/27/14 Page 6 of 30


The debtors in In re McDonald next argued that the per capita payments were

excluded from the property of the estate by § 541(c)(2), as trust funds protected by a

spendthrift provision.14 The Court again ruled against the debtors, holding that the

postpetition per capita payments were not held in trust because the Tribe’s per capita

ordinance placed no restrictions on the per capita payments to be made to competent,

adult members of the Tribe.15 Regarding the debtors’ argument that the tribal code

exemption somehow created a trust, the Court stated:

Although the Tribe, through the Ordinance, clearly indicates that the percapita distributions are not subject to garnishment, attachment, execution,
sale or other process under tribal law, it just as clearly does not impose atrust upon all of the per capita distributions. If the Court were to followDebtors’ argument in this case—that because the property is exempt, it isby definition also trust property, every piece of real or personal propertythat is exempt under state or federal law would have to likewise beconsidered trust property and excluded from the bankruptcy estatepursuant to § 541(c)(2), including wages, homesteads, automobiles, toolsof the trade, etc. Property is not subject to a trust simply because agovernmental entity has declared that property exempt from execution tosatisfy a judgment.16

The Court did find that the Tribe had expressly created a trust for per capita payments

to “incompetents and minors,” but that no other trust was created by the per capita

distributions which, per tribal code and ordinance, were to be made to all members,

disability payments, reasoning that the legislature obviously knew how to enumeratespecific exemptions when it chose to do so. Id. at 292 n.8.

14 Id. at 293.

15 Id. at 294.

16 Id.

-7


Case 14-40543 Doc# 49 Filed 10/27/14 Page 7 of 30


regardless of need or individual circumstances.17

In a decision issued the same day as In re McDonald, in the case of In re
Hutchinson, 18 the Court also addressed whether the per capita payments were exempt
as “a local public assistance benefit” under § 522(d)(10)(A).19 The Court adopted the
following definition of “public assistance benefit:” “government aid to needy, blind, aged,
or disabled persons and to dependent children.”20 Because the Tribe’s per capita
payments were not based on need, but were distributed simply on a per capita basis
(specifically, “in equal amounts to all enrolled tribal members regardless of need”), the
Court concluded they were not an exempt public assistance benefit.21

The In re Hutchinson case then addressed the § 1325(a)(4) best interest of the
creditors test. First, the Court clarified that the best interest of the creditors test of §
1325(a)(4) is a separate and distinct test from the “best effort” requirement of §
1325(b)(1). As such, the fact that the debtors were proposing to commit all of their
disposable income to plan payments during the life of their chapter 13 plan had no
bearing on the § 1325(a)(4) analysis.22 Second, the Court rejected the argument that the
per capita payments could not be valued because of their uncertain nature. The Court

17 Id. at 294–95.
18 354 B.R. 523 (Bankr. D. Kan. 2006) (Karlin, J.).
19 Id. at 529.
20 Id. at 530.
21 Id. at 530–31.
22 Id. at 531.


-8


Case 14-40543 Doc# 49 Filed 10/27/14 Page 8 of 30


concluded that the fact that “the present value of the per capita distributions might be
difficult to ascertain does not mean that those distributions have no value.”23 Because
the per capita payments were capable of being valued, the payments “must be provided
for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors
to satisfy the ‘best interest of the creditors test.’”24

Four years later, in In re Howley, 25 another judge from this District, Judge
Somers, addressed the same Prairie Band Tribe per capita payments. In In re Howley,
the debtors again attempted to exempt their Tribe per capita payments under the tribal
code, which was worded the same as it had been at the time both In re McDonald and
In re Hutchinson were decided.26 The Court, relying on In re McDonald, held that
because the debtors were domiciled in Kansas, they could only use Kansas’ state law
exemptions and were not entitled to use the exemptions of the tribal code.27 Judge
Somers also addressed the additional argument that the Tribe’s exemption was a “local
law” within the meaning of § 522(b)(3)(A)’s provision of an exemption for property

23 Id. at 532.

24 Id.

25 439 B.R. 535 (Bankr. D. Kan. 2010) (Somers, J.).

26 Id. at 538.

27 Id. at 539 (“Thus, the Kansas legislature, as authorized by Congress in §
522(b)(2), has provided that the exemptions of § 522(b)(1) are not available, and that the‘exemptions allowed under state law’ and § 522(d)(10) are available. Although it couldclearly do so, the Kansas legislature has not incorporated the tribal exemptions into statelaw.”).

-9


Case 14-40543 Doc# 49 Filed 10/27/14 Page 9 of 30


exempt under “State or local law.”28 Judge Somers concluded that, even if the Tribe’s
exemption could be considered a local law, the Tribe’s exemption could not apply because
§ 522(b)(3)(A) “expressly requires use of state or local law applicable at the place in
which the debtor’s domicile has been located for a specific period.”29 Because the debtors
in In re Howley did not live on the Tribe’s reservation, the Tribe’s exemption did not
apply because it had no extraterritorial effect.30

B. The Current Relevant Tribal Authority
The Indian Gaming Regulatory Act of 1988 generally governs the practice of
casino gambling on tribal lands.31 Pursuant to this Act, the Tribe has adopted a Per
Capita Ordinance. Some version of that Ordinance was approved by the Secretary of the
Interior on August 25, 2008.32 The Per Capita Ordinance directs that “every eligible
Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming

28 Id. at 540–42.

29 Id. at 541–42.

30 Id. at 542. In dicta, Judge Somers also noted that the exemption as worded alsoapplied only to judgments of the tribal court, and that, therefore, the limited scope of theexemption simply did not apply. Id. at 542–43. This language has been changed in thecurrent version of the Tribal Code, but that change is not relevant herein.

In a follow-up opinion, In re Howley, 446 B.R. 506 (Bankr. D. Kan. 2011), JudgeSomers addressed the debtor’s late argument that the per capita payments were not, infact, property of the estate. Judge Somers affirmatively found that the Prairie Band percapita payments were contingent interests that were property of the estate, and rejectedthe argument that the contingent nature removed future per capita payments from theChapter 7 trustee’s reach. Id. at 513–14.

31 25 U.S.C. §§ 2701–2721.

32 Exhibit B p.7. Again, the earlier McDonald case demonstrates that the same or a
similar per capita program by this Tribe was in existence at least by 2005. 353 B.R. at 289.

-10


Case 14-40543 Doc# 49 Filed 10/27/14 Page 10 of 30


revenues.33 The Per Capita Ordinance also states: “Every living person who is an
enrolled member of the Prairie Band of Potawatomi Indians on the eligibility
determination date is eligible to receive a Per Capita Payment.”34 The distribution is
solely “based on the latest membership list as of the eligibility determination date.”35
The per capita payments are to be disbursed within certain time periods, and are to be
made by “tribal check . . . payable to the eligible tribal member.”36 Each per capita
payment must be accompanied by a notice that federal law requires that the per capita
payments be subject to federal taxation and that the Tribe will withhold federal income
tax from each per capita payment.37 Both minors and legally incompetent tribal
members are the only individuals whose payments are treated differently.38

The Tribe has also enacted a “Law and Order Code” (the “Tribal Code”), with
section 4-14-1 of the Tribe’s Civil Procedure Code dealing specifically with “claims
against per capita.”39 Several terms are specifically defined within this section of the
Tribal Code. The term “per capita” means “the payment provided to all enrolled
members of the Prairie Band . . . which are paid directly from the Prairie Band . . . Net

33 Exhibit B p.5 (Article V, Section 1).
34 Exhibit B p.4 (Article IV, Section 1).
35 Exhibit B p.4 (Article IV, Section 2).
36 Exhibit B p.5 (Article V, Sections 2 and 3).
37 Exhibit B p.6 (Article V, Section 7).
38 Exhibit B p.5–6 (Article V, Sections 4 and 5).
39 Exhibit A p.4-41 to 4-44.


-11


Case 14-40543 Doc# 49 Filed 10/27/14 Page 11 of 30


Gaming Revenues pursuant to the . . . Per Capita Ordinance.”40

This section of the Tribal Code also defines the term per capita share as “a Tribal
member’s equal share of a Per Capita payment prior to a reduction for any withholding,
garnishment, or levy permitted by this Section, but after withholding at the source
required by federal income tax law.”41 The term per capita payment is then defined as
“a personal benefit to a Tribal member,” and “a periodic payment not a property right.”42
The same section also states that a per capita share “is property of the [Tribe] until such
time as a distribution is duly made.”43 The Tribal Code then states that a “distribution
of a Per Capita payment occurs when the Per Capita payments are placed in the U.S.
Mail or otherwise transferred to a Tribal member.”44

Two additional sections of the Tribal Code are pertinent. In a section titled
“Permitted Claims against a Per Capita Share,” the Tribal Code states: “A Per Capita
Share shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, seizure, attachment or other legal or equitable process.”45 Three
exceptions to this general rule are then listed: for debts owed by tribal members to the

40414243
Exhibit A p.4-42 (Section (D)(4)).
Exhibit A p.4-42 (Section (D)(6)).
Exhibit A p.4-43 (Section (E)).
Id.
4445
Exhibit A p.4-43 (Section (F)).
Exhibit A p.4-43 (Section (G)(1)).
-12


Case 14-40543 Doc# 49 Filed 10/27/14 Page 12 of 30


Tribe, for garnishments for child support, and for federal income tax levies.46 And
finally, in a section titled “Prohibited Claims,” the Tribal Code states again: “a Per
Capita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,]
pledge, encumbrance or charge, seizure, attachment or other legal or equitable process;
and any proceeding for those purposes shall not be recognized nor enforceable.”47 The
same exceptions for debts owed to the Tribe, child support, and federal tax levies apply
to this section as well.

The major changes to the Tribal Code and Per Capita Ordinance are three-fold.
First, the Tribal Code distinguishes between per capita shares and per capita payments,
and includes an anti-alienation provision for per capita shares. Second is the addition
of the language stating that a per capita payment “is a personal benefit” and “a periodic
payment not a property right,” while a per capita share “is property of the [Tribe] until
such time as a distribution is duly made.” Finally, the Per Capita Ordinance no longer
has a section on exemption, but instead the language of the Tribal Code includes the
anti-alienation language previously noted.48

46 Exhibit A p.4-43 (Section (G)(1)–(3)).

47 Exhibit A p.4-44 (Section (H)).

48 The Trustee mentions in his brief that the per capita provisions of the Tribal Codehave not been approved by the Secretary of Interior, as Per Capita Ordinances must be.
Case No. 14-40529, Doc. 41 at pp.22–23; see also 25 U.S.C. § 2710(b)(3)(B) (requiringapproval by the Secretary of the Interior of gaming ordinances for per capita payments tomembers of an Indian tribe). The Trustee states that the Tribe has “attempted to modifythe Tribal members’ interest in per capita payments [through the Tribal Code] withoutamending the Per Capita Ordinance and without obtaining approval of the Secretary of theInterior.” Case No. 14-40529, Doc. 41 at p.23. The Trustee has not squarely presented thisargument, however, or cited any authority for this Court to address a claim against thevalidity of the Prairie Band’s Tribal Code. Accordingly, the Court will not address it further.

-13


Case 14-40543 Doc# 49 Filed 10/27/14 Page 13 of 30


C. Analysis of the Arguments of the Parties
1. Property of the Estate
The Bankruptcy Code defines property of the estate in § 541. Under § 541(a),
property of the estate includes “all legal or equitable interests of the debtor in property
as of the commencement of the case,” except for property that is excluded from the
estate by § 541(b) and § 541(c)(2).49 While no party has argued that § 541(b) has any
applicability to this case, both the McDonalds and the Scotts rely on § 541(c)(2)—which
excludes from the bankruptcy estate “a debtor’s beneficial interest in a spendthrift
trust”50— to support their argument that the per capita payments are not property of
their respective bankruptcy estates.

To determine whether a debtor’s interest in a trust is excluded from the
bankruptcy estate, the Court must “analyze the nature of that interest, under applicable
state law.”51 Under Kansas law, a “spendthrift trust is a trust created to provide a fund
for the maintenance of a beneficiary and at the same time to secure the fund against his
improvidence or incapacity. Provisions against alienation of the trust fund by the

49 Section 1306 expands the definition of property of the estate in chapter 13 cases toalso include property rights a debtor “acquires after the commencement of the case butbefore the case is closed, dismissed, or converted.”

50 Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007). Section541(c)(2) excludes from the bankruptcy estate property upon which there is a “restriction onthe transfer of a beneficial interest of the debtor in a trust that is enforceable under
applicable nonbankruptcy law” by providing that the restrictive provision “is enforceable ina case under this title.” Id.

51 Id. at 468.

-14


Case 14-40543 Doc# 49 Filed 10/27/14 Page 14 of 30


voluntary act of the beneficiary or by his creditors are its usual incidents.”52

To exclude property from the bankruptcy estate under § 541(c)(2), Debtors must
satisfy three criteria. “First, they must show that they have a beneficial interest in a
trust. Second, they must show that there is a restriction on the transfer of that interest.
Third, they must show that the restriction is enforceable under nonbankruptcy law.”53
Debtors bear the burden of proof regarding whether property can be excluded from the
bankruptcy estate.54

As discussed above, this Court in In re McDonald previously considered the issue
of whether Prairie Band per capita payments could be excluded from property of the
estate by § 541(c)(2) as trust funds protected by a spendthrift provision. Because there
were no restrictions made on the per capita payments actually made to competent adult
members of the Tribe, and because the property’s Tribal exempt status did not
transform it into a trust, however, there was no spendthrift trust found.55 The In re
McDonald opinion also noted that the Tribe obviously knew how to create a trust via per
capita payments, because trust provisions were included for both minors and

52 In re Estate of Sowers, 1 Kan. App. 2d 675, 680, 574 P.2d 224, 228 (1977).

53 In re McDonald, 353 B.R. at 293.

54 See Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003)
(“Debtors bear the burden of demonstrating that all the requirements of § 541(c)(2) havebeen met before the property in question can be effectively excluded from the estate.”); In re
Robben, 502 B.R. 572, 577 (Bankr. D. Kan. 2013) (relying on Adams to conclude the same);
In re McDonald, 353 B.R. at 293 (same).

55 In re McDonald, 353 B.R. at 294.

-15


Case 14-40543 Doc# 49 Filed 10/27/14 Page 15 of 30


incompetent persons.56

The same remains true today, regardless of the changed state of the Prairie
Band’s Per Capita Ordinance and Tribal Code. The current Prairie Band Per Capita
Ordinance directs that “every eligible Potawatomi tribal member” receive an “equal
share” of the Tribe’s net gaming revenues.57 The distribution is not based on need,
disability, or any other qualifier, but is instead solely “based on the latest membership
list as of the eligibility determination date.”58 The Tribal Code elects to only treat per
capita payments for minors and legally incompetent tribal members differently.59

The Tribal Code dictates that the “per capita” is “the payment provided to all
enrolled members of the Prairie Band . . . which are paid directly from the Prairie Band”
from the Tribe’s net gaming revenues.60 So again, no restrictions or discretion is present
to transform the per capita into a trust. There is simply no trust created by the Per

56 Id. at 294–95.

57 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).

58 Exhibit B p.4 (Article IV, Section 2).

59 Exhibit B p.5–6 (Article V, Sections 4 and 5). The Per Capita Ordinanceestablishes the following general terms for the trust for minors: the trust is irrevocable andadministered by an independent trustee, all per capita payments, plus interest, are held ina trust account until the child reaches 18, and then the accrued per capita distributions,
with interest, are paid out at established percentages over the next 3 years. There is anexception, as is common for many trusts for minors, allowing the trustee to makedistributions for the minor’s health, education or welfare upon the request of a parent orlegal guardian if deemed necessary by the independent trustee. Exhibit B p.5–6 (Article V,
Section 5).

60 Exhibit A p.4-42 (Section (D)(4)).

-16


Case 14-40543 Doc# 49 Filed 10/27/14 Page 16 of 30


Capita Ordinance or Tribal Code; i.e., there is no “beneficial interest in a trust,”61 which
is a required element to find a spendthrift trust.

Debtors argue that other changes in the Per Capita Ordinance and Tribal Code
change this conclusion. The current Tribal Code—in the changes spawning this
litigation—distinguishes between a per capita share, which is the Tribal member’s share
of the per capita prior to distribution,62 and a per capita payment, which is the per capita
distribution made when the Tribe mails the per capita payment to each Tribal
member.63 The cited language is merely an anti-alienation provision against the per
capita share held by the Tribe before it is disbursed as a per capita payment. Although
the Tribe places restrictions on claims against the per capita share, 64 it is the per capita
payment ultimately distributed to these Debtors that is at issue.

Again, none of this word smithing does anything to satisfy the criteria for

61 In re McDonald, 353 B.R. at 293.

62 Exhibit A p.4-42 (Section (D)(6)). The term per capita share is defined as “a Tribalmember’s equal share of a Per Capita payment prior to a reduction for any withholding,
garnishment, or levy permitted by this Section, but after withholding at the source requiredby federal income tax law,” id., and is “property of the [Tribe] until such time as adistribution is made,” Exhibit A p.4-43 (Section (E)(3)).

63 Exhibit A p.4-43 (Section (E)). The per capita payment is “a periodic payment,”
Exhibit A p.4-43 (Section (E)(2)), and “distribution . . . occurs when the Per Capitapayments are placed in the U.S. Mail or otherwise transferred to a Tribal member,” ExhibitA p.4-43 (Section (F)).

64 See Exhibit A p.4-43 (Section (G)(1)) (“A Per Capita Share shall not be subject toanticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, seizure,
attachment or other legal or equitable process.”); Exhibit A p.4-44 (Section (H)) (“[A] PerCapita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,]
pledge, encumbrance or charge, seizure, attachment or other legal or equitable process; andany proceeding for those purposes shall not be recognized nor enforceable.”).

-17


Case 14-40543 Doc# 49 Filed 10/27/14 Page 17 of 30


excluding the per capita as a spendthrift trust under § 541(c)(2).65 The Tribal Code

simply fails to create a trust for payments made to anyone except minors and

incompetent adults, which is the basic requirement for § 541(c)(2) to apply to Debtors’

per capita payments here.

The post-In re McDonald changes to the Tribal Code simply do not alter this

Court’s analysis. They do not affect the right of any eligible member to receive a per

capita payment. Neither the Per Capita Ordinance, nor the Tribal Code, restrict or

prohibit the distribution of a per capita payment to a competent, adult Tribal member.

No trust is created by the per capita distributions that, per Tribal Code and Ordinance,

are to be made to all members, regardless of need or individual circumstances. And the

anti-alienation provision of the per capita share has no impact on this analysis: as stated

in McDonald, “[p]roperty is not subject to a trust simply because a governmental entity

has declared that property exempt from execution to satisfy a judgment.”66

65 As the Trustee notes, the Tribal Code suffers inconsistencies. On one hand, it
attempts to claim the per capita share as Tribal property until payment is made. But on theother hand, the definition of per capita share requires that the amount of the share bereduced by federal income taxes. But how can federal income tax be owed by the tribalmember unless and until the per capita—whether defined as a “share” or “payment”—isproperty of the Tribal member? Because the Trustee points out this inconsistency, theMcDonald Debtors argue that this Court should “ask the Tribal Council for clarificationbefore proceeding to decide these issues.” Case No. 14-40529, Doc. 45 at p.1. Although theCourt notes the inconsistency, it has no bearing on the holdings herein, is thus irrelevant,
and referral to the Tribe is unwarranted.

66 Id. at 294. Debtors attempt a round-a-bout sovereign immunity argument here byarguing that the Prairie Band Tribe, as a sovereign, has the right to determine what areproperty rights under its jurisdiction, relying on an Eighth Circuit BAP case that holds thata tribe and its tribal finance company could assert the tribe’s sovereign immunity as adefense to a chapter 7 trustee’s avoidance and turnover action. Bucher v. Dakota Fin. Corp.
(In re Whitaker), 474 B.R. 687 (8th Cir. BAP 2012); see also Ho-Cak Fed. v. Herrell (In re
DeCora), 396 B.R. 222 (W.D. Wis. 2008) (concluding chapter 7 trustee could not exercise

-18


Case 14-40543 Doc# 49 Filed 10/27/14 Page 18 of 30


The individual Debtors make a couple of additional arguments. The Scott Debtors
refer to per capita funds held in trust by the Secretary of the Interior under 25 U.S.C.
§ 117a, which governs “[f]unds held in trust by the Secretary of the Interior . . . for an
Indian tribe,” and argue that “by analogy, the per capita from Indian gaming, under the
Tribe’s current per capita ordinance and its code of procedure on per capita payments,
create a trust similar to that described in 25 U.S.C. § 117a.”67 But of course, this is not
the reality. The reality is that the Prairie Band has not elected to create a trust with
respect to per capita payments. The Per Capita Ordinance directs that “every eligible
Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming
revenues,68 and these payments are made regardless of need.

The McDonald Debtors then argue that their current financial situation dictates
a different result from their prior case because now Debtor Bonnie McDonald receives
Social Security disability income. Debtors argue that because she is disabled, her per
capita payment should be viewed as a public assistance benefit, and the Court should
thus infer the creation of a spendthrift trust as to her. But as discussed at length, the
per capita payments simply do not work that way. Just because Bonnie McDonald

avoidance powers against bank because “tribal law subordinates the lien creditor’s claim to[the tribe’s] and federal preemption and tribal sovereignty prevent state law form alteringthis result”). But the Trustee is not attacking the Tribe’s sovereign immunity here; theTribe is not a party, and what constitutes a spendthrift trust is determined by trust law,
not the Tribe’s exemption ordinance.

67 Case No. 14-40543, Doc. 43 at pp.6–7.

68 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).

-19


Case 14-40543 Doc# 49 Filed 10/27/14 Page 19 of 30


happens to be disabled, does not mean that the Prairie Band Tribe has in the past or is
presently treating her any differently than any other legally competent adult. There is
simply no evidence in the record that Bonnie McDonald has been adjudged incompetent
by a court of competent jurisdiction, or that she has a legal guardian appointed to
receive her per capita payments, or that her payments are received from an independent
trustee after meeting the stringent provisions in Section 4 of Article V of the Per Capita
Ordinance. Her disability for Social Security purposes is simply irrelevant to the
provisions of the Tribal Code and Per Capita Ordinance.

And finally, Debtors point to other courts outside of Kansas addressing tribal per
capita payments that have concluded that per capita payments are not property of the
estate. For example, in Dietz v. Barth (In re Barth), 69 the bankruptcy court concluded
that tribal per capita payments were not property of the bankruptcy estate where the
tribal ordinance at issue stated that the per capita payments were not a property right
but a personal benefit, did not vest until actually paid out, and were not subject to
alienation.70 The bankruptcy court concluded that the tribe had “the authority to limit
the definition of property right with respect to tribal property to exclude the per capita
payments of tribal funds paid by the tribe to qualified members,” and that there was “no
credible reason” why the tribe could not define property rights with respect to property
within its jurisdiction and exclude them from property of the estate.71

69 485 B.R. 919 (Bankr. D. Minn. 2013).

70 Id. at 921–22.

71 Id. at 922.

-20


Case 14-40543 Doc# 49 Filed 10/27/14 Page 20 of 30


But In re Barth did not address any of the above case law or assess the

Bankruptcy Code in any way. Instead, its rationale centered around the existence of

prior harms by the United States to Native Americans.72 And while those harms cannot

be denied, Congress has not seen fit to directly address those harms within its liberal

treatment of what constitutes “property” under the Bankruptcy Code.

As a result, this Court concludes that the Bankruptcy Code defines “property of

the estate” via § 541(a), and the scope of that definition is broad and equally applicable

to the per capita payments these Debtors receive.73 The controlling law in the Tenth

Circuit requires this Court to determine the existence and scope of Debtors’ interest in

property by reference to the underlying property law, and contingent interests fall

within the bankruptcy estate.74 Nothing in the changes to the Prairie Band’s legal

72 See id. at 922 n.2 (referring to “lessons learned from earlier tribal experience”).
An additional case concluding that a similar tribal code’s treatment of per capita paymentscaused the payments to not be property of the estate is In re Fess, 408 B.R. 793, 799 (Bankr.

W.D. Wis. 2009), which concluded that federal law and tribal law, not state law, defined theproperty interest, and that under the tribal law the debtors had only “an expectancy towhich no legal rights attach.” See id. at 798 (applying tribal law instead of state lawbecause the tribe’s interest in controlling its revenue outweighed the state’s interest in thesame).
73 See Weinman v. Graves (In re Graves), 609 F.3d 1153, 1156 (10th Cir. 2010)
(stating that § 541(a) “is deliberately broad in scope”).

74 See, e.g., Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204–05 (10th Cir.
2010) (stating that “property interests are created and defined by state law” and thatfederal law resolves the question of “the extent to which that interest is property of theestate;” holding that under Kansas law, “contingent interests are property interests”); see
also Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007) (noting that thenature of a property interest must be analyzed under applicable state law); In re Howley,
446 B.R. 506, 510–11 (Bankr. D. Kan. 2011) (“Kansas law recognizes contingent interests asproperty. The Court has no doubt that the Kansas courts would recognize Debtor’s interestin future Per Capita Payments as a property interest. The question is then whether thatinterest is property of the estate, as defined by federal law. Section 541(a) defines property

-21


Case 14-40543 Doc# 49 Filed 10/27/14 Page 21 of 30


definitions concerning per capita alter this result.

2. Best Interest of the Creditors Test of § 1325(a)(4)
Regarding the best interest of the creditors test under § 1325(a)(4), this Court in

In re Hutchinson stated:

The test, articulated under § 1325(a)(4), requires that the Chapter 13 planprovide distributions to each allowed unsecured creditor that are not lessthan what the unsecured creditor would have received if the debtor’s
estate were liquidated under a Chapter 7 proceeding. This provisionessentially allows Chapter 13 debtors to “buy-out” non-exempt, prepetitionassets by paying their value to unsecured creditors with increasedpayments (or payments over a longer term) to the Trustee over the life ofthe plan.
. . .

[I]n order to comply with this test, Debtors’ plan must propose to pay theirunsecured creditors an amount at least equal to what those creditorswould have received had the bankruptcy estate been liquidated under aChapter 7 proceeding. According to the parties’ stipulations, the amendedplan “does not propose to pay any money to unsecured creditors.”
Therefore, the plan can only be confirmed if Debtors can show that aliquidation of the estate would have resulted in no payments to unsecuredcreditors.

If the bankruptcy estate were liquidated, the trustee would collectand sell all non-exempt, unencumbered property of the estate ofconsequential value and divide the proceeds from the sale among theunsecured creditors.75

Debtors have the burden of proving that they have “met all of the requirements of §

of the estate as including all legal and equitable interests of the debtor in property as of thecommencement of the case. [T]he scope of § 541 is broad and should be generouslyconstrued. [A]n interest may be property of the estate even if it is novel or contingent.
Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, andderivative, is within the reach of 11 U.S.C. § 541.” (internal footnotes and quotation marksomitted)).

75 In re Hutchinson, 354 B.R. at 531.

-22


Case 14-40543 Doc# 49 Filed 10/27/14 Page 22 of 30


1325, including the ‘best interest of the creditors’ test under § 1325(a)(4).”76

Again, Debtors argue that the changes to the Tribal Code and Per Capita
Ordinance require a different result than the Court’s prior determination concerning
their per capita payments and the best interest of the creditors test. Debtors argue that
because of the anti-alienation provision as to the per capita share, and the Tribal Code’s
labeling of the per capita payment as “a personal benefit” and “a periodic payment not
a property right,” while the per capita share is labeled “property of the [Tribe] until such
time as a distribution is duly made,” that their per capita cannot be alienated and would
thus have no value in a chapter 7 proceeding that could be realized to pay claims of
unsecured creditors.

The Court disagrees with Debtors’ conclusion. The Tribal Code asserts anti-
alienation provisions as to the per capita shares while they are held by the Tribe prior
to disbursement to the Tribal member. Once the Tribe makes the decision to make a
disbursement, however, the per capita payment is automatically distributed to all Tribal
members on a per capita basis. As such, these Debtors continue to have an expectation
of payment, unchanged by the modifications to the Tribal Code. Once that payment is
received, it is transferable by Debtors. The interest is admittedly a contingent interest,
but as an interest that is property of the estate, it must be accounted for in the best
interest of the creditors test.

This Court has previously rejected the argument that the per capita payments
cannot be valued because of their uncertain nature. In In re Hutchinson, this Court

76 Id.

-23


Case 14-40543 Doc# 49 Filed 10/27/14 Page 23 of 30


concluded that the fact that “the present value of the per capita distributions might be
difficult to ascertain does not mean that those distributions have no value.”77 Because
the per capita payments are capable of being valued, the payments “must be provided
for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors
to satisfy the ‘best interest of the creditors test.’”78

Debtors also again contend they should not have to account for the per capita
payments in the best interest of the creditors test of § 1325(a)(4), because they are
already accounting for them in their disposable income and satisfying the best efforts
test of § 1325(b)(1)(B). As stated previously in In re Hutchinson, however, the best
interest of the creditors test of § 1325(a)(4) is a separate and distinct test from the best
effort requirement of § 1325(b)(1). Because of this, the fact that Debtors are proposing
to commit all of their disposable income to plan payments during the life of their chapter
13 plan has no bearing on the § 1325(a)(4) analysis.79 If the result of subtracting their
living expenses from their income demonstrates an inability to repay the value of this
contingent interest, that unfortunately means that their plan is not feasible, not that
they do not have to account for that interest in the first instance.

And finally, Debtors point to a line of cases that conclude per capita payments are
property of a bankruptcy estate, but that then conclude that in the chapter 7 setting, the
per capita payments are of inconsequential value to the estate for purposes of analyzing

77 Id. at 532.
78 Id.
79 Id. at 531.


-24


Case 14-40543 Doc# 49 Filed 10/27/14 Page 24 of 30


turnover to the chapter 7 trustee. In In re Meier, 80 the bankruptcy court first
presumed— without deciding— that tribal per capita payments were property of the
estate.81 The In re Meier decision then held that the per capita payments were
nevertheless not subject to turnover because § 542(a) sanctions non-turnover, even of
estate property, if “such property is of inconsequential value or benefit to the estate.”82

The Meier court followed a Ninth Circuit BAP case holding that an interest in a
future distribution “‘is only of value to the estate if it can be assigned, sold or reached
for the enforcement of judgments,’”83 and concluded that the per capita payments the
debtor expected to receive were nontransferable based on “the tribe’s clear intent to
preclude sale or transfer of the right to receive payments to anyone outside of the
tribe.”84 Because of this finding, the In re Meier court concluded the per capita payments

80 Case No. 13-02323-B-SWH, 2013 WL 6135085 (Bankr. E.D.N.C. Nov. 21, 2013).

81 Id. at *2.

82 Id. at *3.

83 Id. (quoting Brown v. Locke (In re Locke), Case No. NC-06-1101, 2006 WL
6810938 (9th Cir. BAP Sept. 28, 2006)).

The In re Locke case, relied on by In re Meier, affirmatively concluded that the tribalper capita payments at issue in the chapter 7 case were property of the estate. 2006 WL6810938, at *9–11 (holding that the per capita payments actually received prepetition werepersonal property and that the entitlement to future payments was a contingent, intangibleproperty interest; concluding both were property of the estate). The In re Locke case then
considered whether, because the per capita shares did not become the debtor’s personalproperty until each payment was made, the contingent interests in future payments wereprotected against transfer. Id. at *14–15. The Ninth Circuit BAP concluded that a remand
was appropriate for the bankruptcy court to consider whether the trustee’s motion forturnover was appropriate, because the “interest in future distributions is only of value tothe estate if it can be assigned, sold or reached for the enforcement of judgments,” and for adetermination of the asset’s value to the estate. Id. at *12, *15–16.

84 Id. at *4.

-25


Case 14-40543 Doc# 49 Filed 10/27/14 Page 25 of 30


were of negligible value to the estate.85 In addition, that court concluded that because
the per capita payments would be hard to market due to the variability of the payments
and the fact that the payments would cease immediately upon the death of a member,
and the fact that the bankruptcy case would have to be held open for a lengthy time for
the trustee to administer the payments, the chapter 7 trustee’s efforts would actually
be a burden to the estate, rather than a benefit.86

This line of cases, however, again does not help the Debtors here. These cases do
not change this Court’s analysis that the per capita payments are in fact property of the
estate. And as property of the estate, they must be accounted for in the best interest of
the creditors analysis. Obviously, the parties in interest will need to negotiate the
correct value of these admittedly contingent interests, and litigate that value if no
agreement can be reached. But no party has yet raised the valuation issue with any
specificity, and there is nothing in the record that would allow this Court to find that
these property interests have no value. That is an issue for another day if the parties are
unable to agree on the value.

3. Exemption Arguments
Finally, the McDonalds argue that if the per capita payments are property of the
estate, then under § 522(b)(3)(A) they are exempt as a “local law . . . that is applicable
. . . to the place in which the debtor’s domicile has been located for the 730 days

85 Id.
86 Id. at *5.


-26


Case 14-40543 Doc# 49 Filed 10/27/14 Page 26 of 30


immediately preceding the date of filing of the petition. . .”87 Counsel’s convoluted
argument in this respect appears to be that because the Tribal Code extends its
jurisdiction to “all Tribal Members, wherever located,”88 the Tribe therefore “retains
authority and jurisdiction over per capita payments and to its recipients living off the
reservation.”89 As a result, counsel argues that the Bankruptcy Code’s exemption for
local laws applicable to the place of a debtor’s domicile somehow requires that the Tribal
Code’s anti-alienation provisions for the per capita share exempt the McDonalds’ per
capita payments from the bankruptcy estate.90

The McDonald’s exemption argument is unpersuasive. First, as Judge Somers
held in In re Howley, even if the Tribal Code could be considered a “local law” under the
Bankruptcy Code, the Bankruptcy Code additionally requires the “use of state or local
law applicable at the place in which the debtor’s domicile has been located for a specific
period.”91 Because the Howley debtor was not domiciled on the Tribe’s reservation, the

87 11 U.S.C. § 522(b)(3)(A).

88 Exhibit A p.4-41 (Section B).

89 Case No. 14-40529, Doc. 42 at p.3.

90 The McDonald Debtors do not appear to be making a sovereign immunityargument here, although they do claim in their reply brief that allowing the Trustee to“take” Debtors’ per capita payments “would be to continence a violation” of federal and statetreaties with the Tribe. They also argue that the Tribal Code is entitled to respect as theTribe is a sovereign entity. Case No. 14-40529, Doc. 41 at p.4. There is no violation ofsovereign immunity here, however, because no claim is being made against the Tribe andsovereign immunity does not extend to Tribe members not representing the Tribe. See
Crowe & Dunlevy, P.C. v. Stidham, 640 F.3d 1140, 1153–54 (10th Cir. 2011) (describingsovereign immunity of Indian tribes and stating that the immunity extends to tribalofficials, “so long as they are acting within the scope of their official capacities”).

91 In re Howley, 439 B.R. at 541–42 (emphasis added).

-27


Case 14-40543 Doc# 49 Filed 10/27/14 Page 27 of 30


Tribe’s exemption did not apply.92

Second, domicile is a defined term. “Generally, the words and phrases contained
in a federal statute are defined by reference to federal law.”93 When the Supreme Court
defined the term “domicile” in reference to the Indian Child Welfare Act, it concluded
that domicile is “established by physical presence in a place in connection with a certain
state of mind concerning one’s intent to remain there.”94 A person can have only one
domicile at a time, even if that person has multiple residences.95

The McDonalds specifically stipulated that they lived in Topeka on the date they
filed their bankruptcy petition, and that they have lived in Topeka at the same address
for the 730 days prior to filing their petition. In other words, Debtors stipulated that
they were not at filing, and had not been for the last 730 days, living on Tribal land. If
that were not already crystal clear, Debtors additionally stipulated that their Topeka
residence is not located on the Tribe’s reservation. As a result, the McDonalds are not
domiciled on Prairie Band land but instead in Topeka, Kansas. The state or local law
applicable at the place of Debtor’s domicile is the law of Kansas.96

92 Id. at 542.

93 In re Hodgson, 167 B.R. 945, 949 (D. Kan. 1994) (citing Jerome v. United States,
318 U.S. 101, 104 (1943)).

94 Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 48 (1989).

95 In re Hodgson, 167 B.R. at 950 (citing Williamson v. Osenton, 232 U.S. 619
(1914)).

96 Regardless of all this, the McDonalds never do attempt to explain how the TribalCode’s anti-alienation provisions as to the per capita share somehow transform into aBankruptcy Code exemption of Debtors’ per capita payment. Regardless, the McDonalds’
“local law” exemption argument fails for so many other reasons, the Court need not address

-28


Case 14-40543 Doc# 49 Filed 10/27/14 Page 28 of 30


The McDonalds additionally argue that because Bonnie has a joint tenancy
interest in approximately 86 acres of Tribal trust agricultural land managed by the
Secretary of the Interior (pursuant to 25 U.S.C. § 3701–3715)—land upon which she
does not reside—that she should nevertheless be treated as being domiciled on the
Prairie Band land or that the Tribe somehow has jurisdiction over the funds in her
hands. As stated above, however, owning land, in trust or otherwise, does not equate to
a domicile. None of the stipulated facts even suggest that the McDonalds live or have
ever lived on Prairie Band land; the only facts before this Court are that they lived in
Topeka at filing and have lived at the same address therein for the 730 days prior to
filing. In addition, the Tribal Code itself states that once a per capita payment is made
to a Tribal member, it is a personal benefit to that member and is no longer property of
the Tribe. Accordingly, the fact that Debtor Bonnie McDonald holds an unrelated joint
tenancy interest in Prairie Band land held in trust is simply irrelevant to the analysis
under § 522(b)(3)(A).

And finally, although again not clear, the McDonalds may be arguing that
because Debtor Bonnie McDonald receives Social Security disability payments, her per
capita payments are somehow transformed into, and exempt as, “a local public
assistance benefit” under § 522(d)(10)(A). Citing In re Hutchinson, 97 which defined
“public assistance benefit” as “government aid to needy, blind, aged, or disabled persons

this lapse.
97 354 B.R. 523 (Bankr. D. Kan. 2006).

-29


Case 14-40543 Doc# 49 Filed 10/27/14 Page 29 of 30


and to dependent children,”98 the McDonald Debtors argue that “[n]one can deny that
Bonnie McDonald is disabled and that what she receives constitutes a de facto public
assistance benefit from her tribe.”99 But again, as stated repeatedly herein and as this
Court noted in In re Hutchinson, because the Tribe’s per capita payments are not based
on need, but are distributed simply on a per capita basis, they are not an exempt public
assistance benefit.100 Although Debtor Bonnie McDonald receives Social Security
disability income, her per capita payments are distributed to her by the Tribe without
regard to any disability.

III. Conclusion
The Trustee’s objections to confirmation and objections to exemption are
sustained, for the reasons stated more fully above. Debtors shall file amended plans that
comply with this opinion within 21 days. If Debtors choose not to amend their plans
within this time frame, the Trustee should submit orders granting his motions to
dismiss each case.

It is so ordered.

# # #

98 Id. at 530.
99 Case No. 14-40529, Doc. 42 at p.5.
100 In re Hutchinson, 354 B.R. at 530–31.


-30


Case 14-40543 Doc# 49 Filed 10/27/14 Page 30 of 30

11-41306 Officer (Doc. # 161)

In Re Officer, 11-41306 (Bankr. D. Kan. Oct. 1, 2014) Doc. # 161

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 1st day of October, 2014.

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re: Case No. 11-41306
Thomas Andrew Officer, III Chapter 7
Tiffani Danielle Officer,

Debtors.

Order Granting Debtors’ Motion to Convert Case to Chapter 13 and
Denying the United States Trustee’s Motion to Dismiss


Debtors filed a chapter 13 bankruptcy petition and two years later converted
their case to one under chapter 7 of the Bankruptcy Code. Having subsequently
realized they are not eligible for a chapter 7 discharge, Debtors now seek to convert
their case again, this time back to chapter 13. The bankruptcy courts that have
analyzed whether a debtor can, under 11 U.S.C. § 706, reconvert a chapter 7 case to
a reorganization chapter are split, and that is true even in this District. I conclude that
§ 706 gives me the discretion to reconvert this chapter 7 case to chapter 13, and
because Debtors have shown that such reconversion is appropriate here, Debtors’

Case 11-41306 Doc# 161 Filed 10/01/14 Page 1 of 10


motion to convert to chapter 131 is granted, and the United States Trustee’s motion to
dismiss2 is denied.

I. Procedural and Factual Background
The following facts have been stipulated by the parties or are part of the record
in this case. Debtors Thomas and Tiffani Officer have had two bankruptcy cases prior
to the filing of their current case. Debtors filed a chapter 13 case (Case No. 01-40913)
on April 10, 2001, and it was dismissed on January 14, 2002. Debtors then filed a
chapter 7 case (Case No. 05-40033) on January 8, 2005, from which they received a
discharge on May 2, 2005.

Debtors filed their current chapter 13 petition and plan on August 12, 2011.
After resolution of objections to confirmation by the Trustee and one creditor, Debtors’
plan was amended on September 25, 2011 and November 27, 2011, and ultimately
confirmed on January 25, 2012. Debtors’ monthly plan payment was $1575. Due to a
misunderstanding about when the plan payment was due, Debtors were late on their
initial payment, and filed a motion to abate that payment.

During the course of the bankruptcy, one of the Debtors became unemployed at
least twice. During the first period of unemployment, Debtors moved to amend their
plan to surrender their home, and on October 11, 2012, an order was entered
permitting surrender and lowering Debtors’ monthly payment to $430.

1 Doc. 153.

2 Doc. 148.
-2


Case 11-41306 Doc# 161 Filed 10/01/14 Page 2 of 10


Almost two years later, during the second period of unemployment, Debtors
requested that their counsel convert their case to chapter 7. Debtors’ counsel reviewed
Debtors’ case for eligibility for discharge under chapter 7 and misread the filing date
of Debtors’ previous chapter 7 case. On August 11, 2014, Debtors filed a notice of
voluntary conversion of their case under chapter 13 to a case under chapter 7. Quickly
thereafter, the United States Trustee filed a motion to dismiss under 11 U.S.C. §
727(a)(8), arguing that Debtors were not eligible for another Chapter 7 discharge
because they received a discharge in a case commenced within eight years of the
current bankruptcy.

Prior to the filing of the notice of conversion, the unemployed Debtor regained
employment, although Debtors did not immediately report the re-employment to their
attorney. Upon receipt of the United States Trustee’s motion to dismiss, Debtors’
counsel realized he had misread the filing date of the prior bankruptcy. Debtors’
counsel then also learned that the unemployed Debtor was re-employed, resulting in
Debtors’ household income being in excess of the median income for a family of their
size. Debtors ultimately responded to the motion to dismiss by stating they would
convert their case again, this time back to a case under chapter 13. They then filed the
motion to convert that is the subject of this order.

This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order.3

3 See 28 U.S.C. § 157(b)(2)(A) (stating that “matters concerning theadministration of the estate” are core proceedings); § 157(b)(1) (granting authority

-3


Case 11-41306 Doc# 161 Filed 10/01/14 Page 3 of 10


II. Analysis
Debtors’ motion to convert is filed pursuant to 11 U.S.C. § 706, which governs
conversion of a chapter 7 case to a case under another chapter. Section 706 states in
its entirety:

(a) The debtor may convert a case under this chapter to a case underchapter 11, 12, or 13 of this title at any time, if the case has not beenconverted under section 1112, 1208, or 1307 of this title. Any waiver ofthe right to convert a case under this subsection is unenforceable.
(b) On request of a party in interest and after notice and a hearing, thecourt may convert a case under this chapter to a case under chapter 11of this title at any time.
(c) The court may not convert a case under this chapter to a case underchapter 12 or 13 of this title unless the debtor requests or consents tosuch conversion.
(d) Notwithstanding any other provision of this section, a case may not beconverted to a case under another chapter of this title unless the debtormay be a debtor under such chapter.
Generally stated, § 706(a) gives a debtor the right to convert a chapter 7 case to a case
under chapter 11, 12, or 13 at any time, as long as the case commenced as one under
chapter 7 and was not previously converted from another chapter. Section 706(b) then
governs all other conversions from chapter 7, and permits a court, upon request from
a party in interest, to convert a chapter 7 case to another chapter. Section 706(c)
requires either a debtor’s request, or the debtor’s consent, before the debtor’s chapter
7 case can be converted to either chapter 12 or 13. And finally, § 706(d) reiterates that
a case cannot be converted to another chapter unless the debtor can be a debtor under

to bankruptcy judges to hear core proceedings).
-4


Case 11-41306 Doc# 161 Filed 10/01/14 Page 4 of 10


that chapter.

There have been two lines of cases interpreting § 706 and the ability of a debtor
to convert a previously converted case.4 Judge Nugent in In re Fry5 represents the first
line of cases in this District. The procedural set up in Fry is similar to that at hand: in
Fry, the debtor initially filed a chapter 13 petition but had difficulty making her
chapter 13 plan payments, and converted her case to one under chapter 7.6 After
converting, the United States Trustee filed a motion to dismiss because the debtor had
received a discharge in a prior chapter 7 case within the allowed time.7 The debtor then
moved to reconvert her case to chapter 13, which the chapter 13 trustee opposed,
arguing that § 706(a) barred the debtor from reconverting to chapter 13.8 Judge Nugent
noted the split in the bankruptcy court authority on this topic, stating:

Some courts hold that the debtor may only convert from chapter 7 tochapter 13 if the case has not been previously converted from chapter 13,
and bar[] the debtor from seeking any further reconversion. Others haveheld that while § 706(a) allows a debtor a one time ‘absolute’ right toconvert from chapter 7 to chapter 13, it does not bar a subsequent

4 A sample of cases outside this District permitting reconversion in theappropriate circumstances are: Povah v. Hansbury & Finn, Inc. (In re Povah), 455

B.R. 328 (Bankr. D. Mass. 2011); In re Johnson, 376 B.R. 763 (Bankr. D.N.M. 2007);
In re Anderson, 354 B.R. 766 (Bankr. D.S.C. 2006). Cases outside this Districtdenying reconversion are: In re Muth, 378 B.R. 302 (Bankr. D. Colo. 2007); In re
Hardin, 301 B.R. 298 (Bankr. C.D. Ill. 2003); In re Banks, 252 B.R. 399 (Bankr. E.D.
Mich. 2000).
5 Case No. 04-16887, 2008 WL 4682266 (Bankr. D. Kan. Oct. 14, 2008).
6 Id. at *1.
7 Id.
8 Id. at *1–2.


-5


Case 11-41306 Doc# 161 Filed 10/01/14 Page 5 of 10


discretionary conversion after notice and a hearing.”9
Judge Nugent sided with the line of cases holding that § 706(b) and (c) do not provide
the court a discretionary basis for the reconversion of a debtor’s chapter 7 case to
chapter 13, but only make clear that involuntary chapter 12 and 13 cases are
prohibited.10 Judge Nugent concluded that “[t]he language of § 706(a) clearly and
unambiguously states that a debtor may convert out of chapter 7 only if the case has
not been previously converted.”11

A more recent opinion, In re Bange,12 decided by Judge Somers, represents the
other line of thinking in this District. In Bange, the debtor originally filed a chapter 12
petition, and his case was converted to chapter 7.13 The court then assessed whether
it could convert the chapter 7 case back to a reorganization chapter case.14 Again, like
Judge Nugent had in Fry, Judge Somers recognized the two paths taken by bankruptcy
courts on this subsection under § 706. Judge Somers then reasoned:

[Section] 706(a) is phrased as a restriction on the debtor’s ability to

9 Id. at *2 (citing example cases).

10 Id.

11 Id. at *3. Although never discussed in the opinion, the facts of Frymaydemonstrate why Judge Nugent ruled the way he did. Judge Nugent referred to “aseries of motions to dismiss for delinquent plan payments” prior to the case’sconversion from chapter 13 to chapter 7, id.at *1, and there was no indication the
debtor in Frywould be successful if permitted to reconvert back to chapter 13.

12 Case No. 08-40156-7C, 2010 WL 3829632 (Bankr. D. Kan. Sept. 23, 2010).

13 Id. at *1.

14 Id. at *1–2.

-6


Case 11-41306 Doc# 161 Filed 10/01/14 Page 6 of 10


convert a case; it says nothing explicit about the court’s authority to doso. . . . Unlike subsection (a), [subsection (c)] is phrased as a limitation onthe bankruptcy court’s authority to convert a case. A leading bankruptcytreatise relies on this distinction to support the conclusion a court mayreconvert a case to a reorganization chapter. The wording of anothersubsection of § 706 supports the conclusion the identification of therelevant actor in subsections (a) and (c) was no accident. Section 706(d)
provides: “Notwithstanding any other provision of this section, a case maynot be converted to a case under another chapter of this title unless thedebtor may be a debtor under such chapter.” Unlike subsections (a) and(c), this provision is phrased as a limitation on any conversion, no matterwho is doing it. The Court concludes subsections (c) and (d) imposelimitations on its authority to convert a case, but subsection (a) does not.
Therefore, the Court joins those courts that have held a case previouslyconverted to Chapter 7 may nevertheless be reconverted to areorganization chapter. This result helps further the general bankruptcypolicy of encouraging debtors to choose to pay their debts to the extentthey can.15

Judge Somers ultimately concluded that reconversion to chapter 12 was appropriate

in that case.

Unfortunately, there are no Tenth Circuit or Tenth Circuit BAP cases discussing

this issue. In fact, there do not appear to be any appellate court decisions on this

matter. The parties are split, each urging opposite positions. The United States

Trustee relies on Fry to argue this case cannot be reconverted to chapter 13.16 Debtors

rely on Bange to argue that I have the discretion to allow reconversion, and that when

the reconversion would further the bankruptcy policy of allowing Debtors to pay their

creditors, the reconversion is justified.

15 Id. at *1 (internal footnotes omitted).

16 In response to Debtors’ motion to convert to chapter 13, the United States

Trustee merely argues that Debtors’ motion is moot, given the United States

Trustee’s motion to dismiss relying on Fry. Doc. 159.

-7


Case 11-41306 Doc# 161 Filed 10/01/14 Page 7 of 10


Because I find Judge Somers’ reasoning in Bange (and the line of cases in

agreement with Bange) more persuasive, I conclude that § 706 does not prohibit a

debtor from reconverting a chapter 7 case back to a reorganization chapter. Rather, I

find that the wording of § 706 gives me the discretion to determine whether

reconversion is appropriate upon a proper motion requesting same. I find persuasive

that § 706(a) refers to a debtor’s ability to convert his case, thereby placing limits on

a debtor’s ability to convert, while § 706(c)’s reference to the court’s conversion of a case

implies that judicial discretion and decision-making is allowed. Again, § 706(d)’s

restrictions on cases being converted reinforces my thinking that different types of

actors are at play in the different subsections of § 706. A leading bankruptcy treatise

underscores this conclusion. As stated in Collier on Bankruptcy:

A few courts have read [§ 706], and the absence of a specificauthorization for a motion to convert to . . . chapter 13 when there is noabsolute right to convert, to preclude reconversion to . . . chapter 13 aftera case has been converted from one of those chapters to chapter 7.
However, had Congress meant to bar such reconversions completely, itwould not have used the language it used. Unlike section 706(a), whichspeaks of the debtor converting a case when the debtor has a right toconvert, subsection 706(c), like subsection 706(b), speaks of the courtconverting the case. Both sections 706(b) and 706(c) refer to a decision ofthe court in its discretion, to permit conversion at the request of a party.
Section 706(c) serves simply to limit who may request conversion to . . .
chapter 13, permitting only the debtor to make such a request. If thecourt were not authorized to convert a case to chapter 13 in the firstplace, there would be no need for section 706(c). Therefore, the power ofthe court to convert a case to chapter 13 is implicit in section 706(c),
which limits that power.

Most courts have recognized that it would make little sense to denythe debtor any opportunity to convert back to . . . chapter 13 if the debtordecides an earlier conversion to chapter 7 was a mistake. While Congressdid not give debtors an absolute right to reconvert, so that debtors cannotfrustrate creditors by continually converting and reconverting, it did

-8


Case 11-41306 Doc# 161 Filed 10/01/14 Page 8 of 10


generally want to give debtors every opportunity to repay if they chose.
Moreover, a debtor who is denied the right to convert may still file achapter 13 case after the chapter 7 case is concluded, a fact recognized byeven those courts denying reconversion. . . . The courts permittingreconversion have properly recognized that the decision whether topermit reconversion should rest in the sound discretion of the court basedon what most inures to the benefit of the parties in interest. When noparty objects to the reconversion it should normally be granted.17

I agree with this assessment; I do not read § 706 as prohibiting me from exercising my
discretion to allow reconversion of a previously converted case back to chapter 13.
Rather, in the appropriate circumstances, and upon motion with an opportunity for
objection and hearing, such reconversion could be appropriate.

For courts following the Bange line of cases, the courts reiterate, however, that
discretion to permit reconversion should only be exercised in appropriate cases—the
debtor’s circumstances “must be closely scrutinized, and the debtor must also establish
both good faith and the feasibility of any plan of reorganization.”18 Here, the parties
have stipulated that the factors causing the first conversion—from chapter 13 to
chapter 7—were based on one Debtor’s loss of employment. That Debtor is now reemployed,
and is earning more that he was in his prior employment. The only missed
payment in this case resulted from a misunderstanding about the due date, and was
resolved with an abatement. In addition, during a prior period of unemployment,

17 6 Collier on Bankruptcy ¶ 706.04, at 706-10 to 706-11 (Alan N. Resnick &
Harry J. Sommer eds., 16th ed.) (internal footnotes omitted).

18 Povah v. Hansbury & Finn, Inc. (In re Povah), 455 B.R. 328, 341 (Bankr.

D. Mass. 2011). In Povah, the court held that the debtor had not carried her burden
to show that reconversion was appropriate, because she did not show that herchapter 13 case would be feasible. Id. at 342.
-9


Case 11-41306 Doc# 161 Filed 10/01/14 Page 9 of 10


Debtors surrendered their home and did what they needed to do in order to make their
chapter 13 plan work, showing their commitment to the chapter 13 repayment process.
Neither the United States Trustee, nor any other party, has argued that this
conversion would be in bad faith. I conclude, therefore, that Debtors have carried their
burden of proof to show that reconversion of their case to chapter 13 is appropriate.

III. Conclusion
Because I conclude that § 706 gives me the discretion to reconvert this chapter
7 case to chapter 13, and conclude that Debtors have met their burden to show that
such reconversion is appropriate under the facts of this case, Debtors’ motion to convert
to chapter 1319 is granted, and the United States Trustee’s motion to dismiss20 is
denied.

IT IS SO ORDERED.

# # #

19 Doc. 153.
20 Doc. 148.

-10


Case 11-41306 Doc# 161 Filed 10/01/14 Page 10 of 10

You are here: Home