KSB

12-40906 Beach (Doc. # 43)

In Re Beach, 12-40906 (Bankr. D. Kan. Apr. 29, 2013) Doc. # 43

Click here for the pdf document.

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SO ORDERED.
SIGNED this 29th day of April, 2013.

 

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re: Case No. 12-40906
Courtney Jane Beach Chapter 7
John Edward Beach,

Debtors.

Memorandum Opinion and Order Overruling the
Trustee’s Objection to Exemption

This matter is before the Court on Trustee Robert L. Baer’s objection to
exemption of the earned income tax credit (“EIC”), claimed by Debtors Courtney and
John Beach pursuant to K.S.A. § 60-2315.1 Under this exemption, a Kansas debtor in
bankruptcy is entitled to exempt from the bankruptcy estate the right to receive the
federal and state EIC. A general debtor in Kansas not proceeding in bankruptcy,
however, is not entitled to this protection. The Trustee argues that his avoidance
powers under 11 U.S.C. § 544(a)(2) defeat the Debtors’ exemption. Because the

1 Doc. 9.

Case 12-40906 Doc# 43 Filed 04/29/13 Page 1 of 10

exemption claimed does not conflict with the Trustee’s rights and powers as a

hypothetical executing creditor under § 544(a)(2), the Trustee’s objection is overruled.

I. Factual and Procedural History
The Debtors filed a Chapter 7 bankruptcy petition on June 13, 2013. The

Debtors’ Schedule C claimed as exempt their “Earned Income Credit,” pursuant to the

Kansas exemption statutes, and the Trustee objected to that exemption.2

The Court originally placed the objection to exemption under advisement, based

on ripeness concerns stemming from the exemption of a tax refund that was neither

certain to occur nor certain in amount.3 Because the Debtors have now received their

2012 tax refund, the matter is now ripe.4 Their federal EIC was $2078, and the Kansas

EIC was $375.5

2 Doc. 9.

3 See Doc. 10 (Order Placing the Trustee’s Objection to Exemption UnderAdvisement and Setting Case Management Deadlines) and Doc. 28 (General Order In re:
Objections to 2012 Exemption of the Earned Income Tax Credit).

4 See Tarrant Reg’l Water Dist. v. Herrmann, 656 F.3d 1222, 1250 (10th Cir. 2011)
(“In evaluating ripeness the central focus is on whether the case involves uncertain orcontingent future events that may not occur as anticipated, or indeed may not occur atall.”); Salt Lake Tribune Publ’n Co. v. Mgmt. Planning, Inc., 454 F.3d 1128, 1140 (10th Cir.
2006) (“Determining whether the issues presented by this case are ripe for review requiresus to evaluate both the fitness of the issues for judicial decision and the hardship to theparties of withholding court consideration. We have described the fitness inquiry aswhether the case involves uncertain or contingent future events that may not occur asanticipated, or indeed may not occur at all. We have described the hardship inquiry aswhether the challenged action creates a direct and immediate dilemma for the parties.”
(internal quotations and citations omitted)).

5 Doc. 38 (Stipulation By and Between Robert L. Baer and Debtors); Doc. 39 (Noticeof Receipt of Intercepted Federal Tax Refund). The issue before the Court has been fullybriefed, and the Court has considered all briefs. See In re Murray, Case No. 12-41579 (casedesignated as lead case for administrative simplicity; briefs filed in that case as follows:

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 2 of 10

II. Analysis
A. Objections to Exemptions
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,
an estate is created.6 That bankruptcy estate consists of “all legal or equitable interests
of the debtor in property as of the commencement of the case.”7 The Bankruptcy Code
does, however, permit the exemption of certain property from the estate.8 The
Bankruptcy Code includes a list of federal exemptions available to the debtor,9 but
permits a state to “opt-out” of the federal exemptions in favor of state-law exemptions,
when that state specifically prohibits the use of the federal exemptions.10

Kansas is an “opt-out” state, meaning that it has opted out of using the federal

Doc. 29 (Amicus Curiae Brief of Trustee Robert L. Baer in Support of Objection toExemption of Earned Income Credit); Doc. 30 (Trustee Williamson’s Memorandum inSupport of Objection to Debtor’s Exemptions); Doc. 32 (Debtor’s Memorandum inOpposition to Trustee’s Objection to Earned Income Credit Exemption); Doc. 36 (Brief ofAmicus Curiae National Association of Consumer Bankruptcy Attorneys in Support ofDebtor); Doc. 37 (Kansas Attorney General’s Memorandum in Opposition to the Trustee’sObjection to Debtor’s Exemption and in Defense of the Constitutionality of K.S.A. 60-2315);
Doc. 41 (Response to Amicus Curiae Brief of Robert L. Baer in Support of Objection toExemption of Earned Income Credit Filed on Behalf of Debtors Edinger (12-40904) andBeach (12-40906)); Doc. 50 (Trustee Williamson’s Reply Brief to Responsive Briefs of theDebtor and the State of Kansas)).

6 11 U.S.C. § 541(a) (“the commencement of a case under . . . this title creates anestate.”).

7 Id. § 541(a)(1).

8 See id. § 522(b)(1) (“Notwithstanding section 541 of this title, an individual debtormay exempt from property of the estate the property listed in either paragraph (2) or, in thealternative, paragraph (3) of this subsection.”).

9 Id. § 522(d).

10 Id. § 522(b)(2).

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 3 of 10

Bankruptcy Code exemptions in favor of its state-created exemptions.11 The exemptions
in Kansas, specifically K.S.A. § 60-2315, permit a debtor to “exempt the debtor’s right
to receive tax credits allowed pursuant to” the federal and state EIC for “one tax
year.”12 The exemption also states: “Nothing in this section shall be construed to limit
the right of offset, attachment or other process with respect to the earned income tax
credit for the payment of child support or spousal maintenance.”13

The Trustee objected to the Debtors’ exemption under K.S.A. § 60-2315.14 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.”15 Under Kansas law,
exemption statutes are to be liberally construed for the benefit of the debtor.16 The
Court has jurisdiction to decide contested matters such as the Trustee’s objection to

11 11 U.S. C. § 522(b)(2); K.S.A. § 60-2312 (prohibiting, with exception, individualdebtors from electing federal exemptions).

12 K.S.A. § 60-2315.

13 Id.

14 There is no dispute that the Trustee’s objection was timely filed. See Fed. R.
Bankr. P. 4003(b)(1) (requiring objections to claims of exemptions be filed “within 30 daysafter the meeting of creditors held under § 341(a) is concluded”).

15 Fed. R. Bankr. P. 4003(c).

16 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004) (“UnderKansas law, exemption statutes are to be liberally construed in favor of those intended bythe legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730 (Bankr. D. Kan. 2008)
(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 4 of 10

exemption.17 This matter constitutes a core proceeding.18

B. The Trustee’s Powers Under § 544 of the Bankruptcy Code
The Trustee bases his objection on 11 U.S.C. § 544(a)(2). That section, titled
“Trustee as lien creditor and as successor to certain creditors and purchasers,” states:

(a) The trustee shall have, as of the commencement of the case, andwithout regard to any knowledge of the trustee or of any creditor, therights and powers of, or may avoid any transfer of property of the debtoror any obligation incurred by the debtor that is voidable by– –
. . .

(2) a creditor that extends credit to the debtor at the time of thecommencement of the case, and obtains, at such time and with
respect to such credit, an execution against the debtor that isreturned unsatisfied at such time, whether or not such a creditor
exists[.]
Generally stated, this section of the “strong-arm statute” permits a trustee to exercise
his strong-arm powers to gain remedies under state law that would be available to
creditors holding executions remaining unsatisfied as of the commencement of the
bankruptcy case.

The Trustee argues that because an individual outside of bankruptcy is not
given the exemption of the EIC from creditors as is the debtor in bankruptcy, a
judgment creditor outside of bankruptcy could gain access to an EIC in the individual’s
hands, limiting the powers of a hypothetical Kansas execution creditor. The Trustee’s
reliance on this section of the Bankruptcy Code stems from selectively quoted language

17 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)–(b); see also Standing Order datedAugust 1, 1984, effective July 10, 1984, referenced in D. Kan. Rule 83.8.5 (reference fromthe United States District Court for the District of Kansas of all cases and proceedings in,
under, or related to Title 11 to the District’s bankruptcy judges).

18 28 U.S.C. § 157(b)(2)(B).

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 5 of 10

from a Tenth Circuit BAP case, Rupp v. Duffin (In re Duffin). 19 In Duffin, the BAP
considered whether a trustee could object to an exemption under 11 U.S.C. § 544(a),
utilizing his “rights and powers” under that statute as a hypothetical creditor. The
BAP analyzed a Utah exemption that excluded from its reach prepetition payments
debtor made on life insurance policies within one year of filing bankruptcy.

Regarding § 544(a)(2), the Duffin Court discussed a split in authority over the
breadth of a trustee’s hypothetical powers under § 544(a)(2).20 The Court ultimately
concluded that “the powers given to a trustee under § 544(a)(2) are not limited to
avoidance of transfers but specifically include broader ‘rights and powers.’”21 The Court
quoted with approval a Tenth Circuit case stating that:

Simply stated, from the reservoir of equitable powers granted to thetrustee to maximize the bankruptcy estate, Congress has fashioned alegal fiction. Not only is a trustee empowered to stand in the shoes of adebtor to set aside transfers to third parties, but the fiction permits thetrustee also to assume the guise of a creditor with a judgment against thedebtor. Under that guise, the trustee may invoke whatever remediesprovided by state law to judgment lien creditors to satisfy judgmentsagainst the debtor.22

Under this rubric, the Duffin panel applied § 544(a)(2). The Court stated that the
statute granted the Trustee “the guise of a creditor with an execution returned

19 457 B.R. 820 (10th Cir. BAP 2011).
20 Id. at 827–28.
21 Id. at 828.
22 Id. (quoting Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990)).

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 6 of 10

unsatisfied against the Debtors.”23 Therefore, the BAP held, the Trustee could invoke
the remedies provided by state law to creditors holding executions returned
unsatisfied.24 Therefore, the BAP concluded, “[t]hrough the use of a trustee’s
hypothetical powers” under § 544, the trustee could stand as a creditor would, and gain
access to the non-exempt funds.25

The important point in the Duffin BAP Court’s analysis is that the property at
issue was non-exempt. There was no bankruptcy specific exemption at issue in Duffin.
A trustee exercising § 544(a)(2) rights stands in the shoes of a hypothetical executing
creditor only to the extent the creditor could attach the property outside of bankruptcy.
Based on the applicable state law, the creditor in that case would have had access to
payments made by the debtors on life insurance policies in the year prior to the
bankruptcy petition date, because such payments were excluded from the applicable
exemption.26 The Duffin analysis is simply inapplicable because it is limited to the facts
of that case.27

This Court has had prior occasion to consider the Duffin BAP decision, albeit

23 Id. at 829.

24 Id.

25 Id.

26 Id. at 821–22.

27 By analogy to Duffin, if the Debtor in this case had failed to file two years of taxreturns before the date of her petition, and was entitled to EIC refunds for each year, theTrustee may well be entitled to the EIC refunds for one of those years since the statutelimits the exemption to one year. In that instance, the Trustee would be pursuingstatutorily non-exempt property, as was the case in Duffin.

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 7 of 10

only briefly. In In re Westby, 28 the trustee challenged the same exemption addressed

herein on myriad grounds. One of those challenges was based on 11 U.S.C. § 549, based

on an alleged unauthorized transfer. In a footnote to the analysis of § 549, the Court

addressed the Duffin case. The Court stated:

[T]he Tenth Circuit BAP opinion in Rupp v. Duffin (In re Duffin), . . .
upon which the Trustee relies, is inapplicable. In Duffin, the BAP
considered whether a trustee could object to an exemption under 11

U.S.C. § 544(a), utilizing his “rights and powers” under that statute as ahypothetical creditor. The BAP analyzed a Utah exemption that excludedfrom its reach prepetition payments on life insurance policies. The BAPconcluded that, “[t]hrough the use of a trustee’s hypothetical powers”
under § 544, the trustee could stand as a creditor would, and gain accessto the non-exempt funds. As should be abundantly clear from thediscussion herein, Senate Bill No. 12 makes a debtor’s EIC exempt, andno creditor of a debtor in bankruptcy could reach that exempt asset, justas the Trustee may not.29
Section 544(a)(2) grants its hypothetical powers to a trustee “as of the commencement

of the case.” Therefore, § 544(a)(2) permits a trustee to stand in the shoes of a creditor

to claim that creditor’s hypothetical priority only as to property of the estate. As

discussed above, the commencement of a case creates the bankruptcy estate—the

exercise of an exemption removes property from the bankruptcy estate.

The Trustee’s argument was more extensively addressed in a decision from

Judge Nugent, In re Earned Income Tax Credit Exemption Constitutional Challenge

28 473 B.R. 392 (Bankr. D. Kan. 2012), aff’d, In re Westby, 486 B.R. 509 (10th Cir.
BAP 2013), appeal dismissed, Williamson v. Westby (In re Westby), Case No. 13-3044 (10thCir. Mar 29, 2013). The Sixth Circuit recently affirmed the constitutionality of, and rejectedvarious challenges to, a Michigan bankruptcy specific exemption in In re Schafer, 689 F.3d
601 (6th Cir. 2012), cert denied, Richardson v. Schafer, 133 S. Ct. 1244 (2013).

29 Id. at 419 n.189 (internal citations omitted).

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 8 of 10

Cases30—the opinion in the jointly administered, similar EIC cases in the Wichita

division of the District of Kansas Bankruptcy Court. Judge Nugent rejected the

Trustee’s § 544 argument as follows:

The Trustees suggest that because a debtor outside of bankruptcy cannottake this exemption, a judgment creditor outside bankruptcy could attachthe EIC in the debtor’s hands, limiting the powers of a hypotheticalKansas execution creditor. But § 544 grants these hypothetical powers toa trustee “as of the commencement of the case,” meaning that the trusteemay stand in the shoes of a creditor to claim that creditor’s hypotheticalpriority in property of the estate. The exercise of the exemption removesthat property from the estate, depriving the trustee of the right toadminister it. The same is true for all property claimed as exempt inbankruptcy.31

Judge Nugent’s reasoning applies equally well to the Trustee’s argument in this case.
The Trustee’s § 544 rights do not extend to property that is not property of the estate.

III. Conclusion
The Court concludes that the Trustee has not carried his burden to prove that
the exemption is not properly claimed.32
It is, therefore, by the Court Ordered that the Trustee’s objection to
exemption33 is overruled.
It is further Ordered that this Memorandum Opinion and Order shall be

30 477 B.R. 791 (Bankr. D. Kan. 2012). The trustee appealed Judge Nugent’sdecision to the United States District Court for the District of Kansas, but no decision has
yet been rendered.

31 Id. at 804.

32 See Fed. R. Bankr. P. 4003(c) (placing burden of proof regarding exemptions on“the objecting party”).

33 Doc. 9.

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 9 of 10

placed on the Court’s website. Additional objections to exemption filed by Trustee Baer
asserting the same basis rejected herein are held under advisement, pending resolution
of any appeal the Trustee may elect to file.34 In the event no appeal is taken, the Court
will set for hearing Trustee Baer’s other objections to exemption and determine, after
input from the parties, how to proceed.

# # #

34 These additional cases are: In re Hill, Case No. 12-40587; In re Graham, Case No.
12-40610; In re Jackson, Case No. 12-40623; In re Griffith, Case No. 12-40643; In re Torres,
Case No. 12-40659; In re Maendele, Case No. 12-40673; In re Belk, Case No. 12-40697; In re
Edinger, Case No. 12-40904; In re Orlando, Case No. 12-40916; and In re Sandquist, Case
No. 12-41157.

In the Hill and Graham cases, extended briefing deadlines were set due to the latefiling of the parties’ Joint Stipulation caused by late-filed tax returns. The Court finds thatadditional briefing on these matters is unnecessary, and cancels the previously set briefingschedules. In addition, in both the Hill and Graham cases, the Joint Stipulation required bythe General Order entered in those cases has never been filed. Both cases (Hill and
Graham) remain set for hearing on April 30, 2013 at 1:30 p.m. so the Court can monitor thefiling of the required Joint Stipulation.

In the following cases of Trustee Baer, a motion to compromise the Trustee’sobjection to exemption of the EIC has been filed, but the objection deadline has not yet run,
so no final order has been entered: In re Orlando, Case No. 12-40916 (objection deadlineMay 14, 2014); In re Cagle, Case No. 12-41075 (objection deadline May 8, 2013), and In re
Ramirez, Case No. 12-41955 (objection deadline May 7, 2013). The Court does not enter thisorder in these pending compromised cases, and leaves the parties to their bargain.

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Case 12-40906 Doc# 43 Filed 04/29/13 Page 10 of 10

 

BAP UT-12-090 In Re Isho

BAP UT-12-090 In Re Isho, Apr. 5, 2013

Click here for the pdf document.

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FILED

 

U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
April 5, 2013
Blaine F. Bates

NOT FOR PUBLICATION

Clerk
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT

IN RE MANIER H. ISHO,
Debtor.

MANIER H. ISHO,

Appellant,

v.
ELIZABETH R. LOVERIDGE, Chapter7 Trustee, LEWIS HANSON &
COMPANY, INC., an Oregoncorporation, HVS, INC., a Missouricorporation, doing business as HopkinsAppraisal Services, EDWARD JOYCE,
MALDEN CAPITAL, an Oregonlimited liability company, SOHAILKHAN, FARZANA KHAN, andUNITED STATES TRUSTEE,

Appellees.

BAP No. UT-12-090

Bankr. No. 11-30284
Chapter 7

OPINION*

Appeal from the United States Bankruptcy Courtfor the District of Utah

Before MICHAEL, KARLIN, and JACOBVITZ, Bankruptcy Judges.

KARLIN, Bankruptcy Judge.

The appellant asks this Court to find error in the bankruptcy court’s
resolution of a dispute between him and the Chapter 7 trustee over the handling of
a lawsuit that he had filed against various defendants prior to filing his petition in

* This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8018-6.

bankruptcy. 1 The trustee obtained approval from the bankruptcy court to settle
the suit upon payment of $15,000 by those defendants, which will be used to pay
creditors of appellant’s bankruptcy estate. Appellant contends that the settlement
amount is insuf f icient. As approval of the settlement was not an abuse of
discretion, we affirm.

I. BACKGROUND
Appellant Manier Isho (“Debtor”) purchased two Sinclair gas
station/convenience stores in Salt Lake City in 2008. In June of 2011, he filed a
state court lawsuit against several parties who had been involved in the sale,
asserting that they had defrauded him. The complaint principally alleged that the
defendants misrepresented both the property values and their earnings in order to
induce his purchase.

Less than a month later, on July 13, 2011, Debtor filed a voluntary Chapter
11 petition. He amended his schedules twice, ultimately claiming assets of
$444,600, 2 and liabilities in the amount of $1,547,845. Three months later, the
bankruptcy court held a status conference and indicated by minute entry that
Debtor’s Chapter 11 case was at risk of either dismissal or conversion to Chapter
7 unless he filed required monthly operating reports for his two stores. Although
Debtor did not file the reports, the bankruptcy court neither dismissed nor
converted his case sua sponte. However shortly thereafter, in November, 2011,
one of the state court defendants, Lewis Hanson & Co., Inc., filed a motion to
convert the Debtor’s case to Chapter 7. Debtor opposed this motion. After a

1 The parties did not request oral argument, and after examining the briefs
and appellate record, the Court has determined unanimously that oral argumentwould not materially assist in the determination of this appeal. Fed. R. Bankr. P.
8012. The case is therefore ordered submitted without oral argument.

2 See Appellee’s Brief at 5, and 6 n.2 (explaining calculation of this figure,
which takes Debtor’s ownership of properties by joint tenancy and as communityproperty into account). This asset f igure does not include the fraud claims, whichDebtor claims to be worth between $500,000 and $1,000,000.

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hearing, the bankruptcy court granted that motion to convert in December 2011.
Debtor did not appeal that conversion order, and Appellee Loveridge (“the
Trustee”) was appointed as the Chapter 7 trustee of Debtor’s estate.

After investigating Debtor’s state court fraud claims, the Trustee concluded
that settlement of the lawsuit was in the best interests of the estate. She
negotiated a settlement agreement (the “Settlement Agreement”) with the fraud
defendants, which required those defendants to pay the estate $15,000. In return,
the estate would dismiss the lawsuit, with prejudice.

In September 2012, the Trustee filed a motion seeking the bankruptcy
court’s approval of the Settlement Agreement (in which the other parties to the
Settlement Agreement ultimately joined). Debtor opposed the motion, principally
on the ground that Trustee had vastly undervalued the claims. A few days later,
Debtor filed a motion to dismiss the bankruptcy, asserting that he: 1) wanted to
pay “all meritorious creditors outside of bankruptcy;” 2) preferred to dismiss
rather than pursue a Chapter 7 discharge; and 3) wanted to pursue his
“meritorious” pending civil case, which he claimed had a potential value of over
$1,000,000.3

On October 10, 2012, the bankruptcy court conducted a hearing on both the
Trustee’s settlement motion and Debtor’s motion to dismiss, at which a proffer of
evidence was received and Debtor apparently withdrew his motion to dismiss.4
The bankruptcy court granted the settlement motion by order entered on October

3 See Motion to Dismiss Chapter 7 Bankruptcy, in Appellant’s Appendix
(“Appx”) at 28.

4 Debtor appeared pro se at this hearing, his previous counsel having been
allowed to withdraw in January 2012. Regarding the motion to dismiss, thecourt’s minute entry states only “Motion withdrawn.” On appeal, Debtor assertsthat the bankruptcy court’s approval of the settlement agreement prior toconsideration of his motion to dismiss left him with no choice but to withdraw the
motion since the settlement eliminated his only asset. This, he claims, deprived
him of due process. See Notice of Appeal and Appeal at 3, in Appx at 62.

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23, 2012, and Debtor filed a timely notice of appeal. No party has elected to have
the district court hear the appeal.

II. ISSUES
Debtor states the issues on appeal as whether: 1) his Chapter 11 case
should have been dismissed rather than converted; 2) conversion was proper over
his objection; 3) he should have been allowed to proceed with the fraud case
“instead of allowing the perpetrators of fraud to convert the matter to an
involuntary Chapter 7”; and 4) approval of the settlement was proper when
Debtor had both objected to it and f iled a motion to dismiss the case.5

III. DISCUSSION
A. The Conversion Order
The parties did not raise the issue of this Court’s appellate jurisdiction to
consider Debtor’s challenges to the December 9, 2011 conversion order.
Nonetheless, an appellate court has an independent duty to ensure that it has
jurisdiction over an appeal, even if the parties fail to raise the issue. 6 It is well-
established that orders converting a Chapter 11 case to Chapter 7 are final for
purposes of appeal. 7 As such, the proper time for Debtor to appeal the bankruptcy
court’s conversion order was in 2011. Because Debtor failed to timely file an
appeal of that conversion order, this Court is precluded from now considering the

5 See Designation of Issues on Appeal in Appx at 64-65. Debtor restates
essentially the same issues in his appeal brief. See Appellant’s Opening Brief at

3.
6 In re Am. Ready Mix, Inc., 14 F.3d 1497, 1499 (10th Cir. 1994); Ries v.
Sukut (In re Sukut), 380 B.R. 577, 582 (10th Cir. BAP 2007).

7 See, e.g., Mason v. Young (In re Young), 237 F.3d 1168, 1173 (10th Cir.
2001) (order converting from Chapter 13 to Chapter 7 is “necessarily more finalin nature than an order converting to Chapter 13” from Chapter 7); In re Vista
Foods U.S.A., Inc., 202 B.R. 499, 500 (10th Cir. BAP 1996) (order convertingChapter 11 case to Chapter 7 is final and appealable).

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propriety of that order.8

B. Debtor’s Motion to Dismiss
Debtor contends that the only reason he withdrew his motion to dismiss in
the bankruptcy court was because the court’s decision to approve the settlement
of his fraud lawsuit deprived him of his only potential source of income with
which to pay his creditors. Based on this premise, Debtor asserts that the
bankruptcy court’s timing of its consideration of the two motions deprived him of
due process. However, because Debtor withdrew the motion, this Court is lef t
without a decision to review.

Significantly, the appellate record is devoid of any indication that Debtor
raised his timing concerns to the bankruptcy court, which might have handled the
hearing differently if he had. The record does show that the Trustee filed her
notice of hearing on September 17, 2012, setting the motion to approve the
settlement for hearing on October 10, 2012. Two weeks later, Debtor filed his
motion to dismiss; he then filed a notice setting his motion for hearing on the
same date and time. At no time prior to the October 10 hearing did Debtor, by
motion or objection, raise any issue regarding timing of the court’s consideration
of the two motions. If he did so at the hearing itself, we do not have a record of it
because Debtor did not provide a transcript of the hearing as part of the appellate
record. Debtor also did not raise the timing issue after the hearing, although the
order approving the settlement was not entered for nearly two weeks, which gave
Debtor adequate time to assert it. His failure to do so constitutes a waiver of the
issue on appeal.9

8 In re K.D. Co., Inc., 254 B.R. 480, 490 (10th Cir. BAP 2000) (final orders
may only be attacked by filing a timely appeal). See also, 28 U.S.C. § 158(a)(1)
(appellate courts have jurisdiction over “final” judgments and orders issued bybankruptcy judges).

9 Farmers Ins. Co., Inc. v. Hubbard, 869 F.2d 565, 570 (10th Cir. 1989)
(continued...)

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In any event, this Court could not reverse a denial of Debtor’s motion to
dismiss, even if it had preceded consideration of Trustee’s motion. It is well-
established that a Chapter 7 debtor does not have a right to dismiss his case, but
must show “cause” for dismissal pursuant to 11 U.S.C. § 707(a), and the
determination of cause is within the discretion of the bankruptcy court.10
Dismissal factors that are often considered are: the best interests of both debtor
and creditors; trustee’s consent or objection; potential to delay creditor payments;
good or bad faith in seeking dismissal; and the possibility of payment priority
becoming reordered outside of bankruptcy. 11 Emphasis is typically given to any
prejudice that dismissal might cause the estate’s creditors. 12 Finally, a debtor’s
ability to pay debts outside of bankruptcy is not sufficient cause, by itself, to
dismiss.13

Debtor admitted that he could only afford to pay his creditors outside of
bankruptcy if he were to prevail in the fraud lawsuit and recover damages in
excess of the costs of pursuing the action. But the Trustee alleged, in seeking
approval of the settlement, that the fraud litigation would be costly to pursue, the
outcome was far from certain, and resolution of the lawsuit could take several
years, while creditors remained unpaid. Significantly, Debtor has not indicated
how he would finance the lawsuit, despite Trustee’s assertion that the bankruptcy
estate has insufficient assets with which to fund the lawsuit. Under these

9 (...continued)
(absent extraordinary circumstances, issues not raised below will not be heard on
appeal).

10 See, e.g., In re Schafroth, No. 7-11-13685, 2012 WL 1884895, at *2
(Bankr. D.N.M. May 23, 2012); In re Turpen, 244 B.R. 431, 433 (8th Cir. BAP
2000).

11 Schafroth, 2012 WL 1884895, at *2 n.8.

12 Id. at *2 n.10.

13 Turpen, 244 B.R. at 434.

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circumstances, denial of a debtor’s motion to dismiss would not constitute an

abuse of discretion.14

C. Approval of the Settlement Agreement
We likewise review a bankruptcy court’s decision to approve or disapprove
a proposed settlement for abuse of discretion. 15 On appeal, Debtor argues only
that the settlement should not have been approved because the claims asserted in
the lawsuit are meritorious, and the settlement amount is too low in light of the
amount of his damages. The factors that bankruptcy courts must consider with
respect to proposed settlements, often called the “Kopexa factors” after the Tenth
Circuit Bankruptcy Appellate decision in In re Kopexa Realty Venture Co., 16 are
“the probable success of the underlying litigation on the merits, the possible
difficulty in collection of a judgment, the complexity and expense of the
litigation, and the interests of creditors in deference to their reasonable views.”17
Debtor addresses only one of these factors, asserting that his claims are
meritorious and that his potential recovery in the lawsuit is between $500,000 and
$1 million, which could be used to pay his creditors in f ull.18

In discussing the Kopexa f actors in her motion, the Trustee partially
conceded Debtor’s contention about the merits of the fraud suit, stating that some

14 Id. at 433 (decision on motion to voluntarily dismiss is within the
discretion of the bankruptcy judge).

15 In re Kopexa Realty Venture Co., 213 B.R. 1020, 1022 (10th Cir. BAP
1997) (approval of settlement reversible only when it amounts to clear abuse ofdiscretion).

Chapter 7 bankruptcy, Debtor asserted that the lawsuit had “a potential value of

16 Id.
17 Id.
18 See Appellant’s Opening Brief at 4 and 6. In his motion to dismiss the

over $1,000,000,” which he would use to pay “all meritorious creditors outside ofbankruptcy.” See Appx. at 28. Debtor’s complaint in the fraud case did not statemonetary values f or his alleged damages, seeking only “unspecified damages” oneach count. See Verified Complaint at 31-32, in Appellee’s Appendix at 34-35.

-7

of the claims asserted in the fraud case “are founded in law and fact.” Despite
that admission, the Trustee concluded that the first Kopexa f actor–probable
success in the litigation–weighed in favor of settlement based on Debtor’s poor
record-keeping and unwillingness to cooperate, both of which made it unlikely
that his claims could ultimately be proven. She also noted that the defendants in
the fraud case had asserted counterclaims and offsets in the lawsuit, which could

also be meritorious.19

Regarding the difficulty of collection factor, the Trustee asserted that “the
costs of collecting the judgment may be greater than the amount the Trustee might
reasonably be able to collect.” 20 While no factual foundation for this statement
was stated in her motion, from the record bef ore us, it does not appear that Debtor
disputed this. The Trustee also considered that the fraud case would be complex
and costly to pursue, requiring the use of experts who the estate had no funds to
pay. Finally, the Trustee considered that settlement would be in the best interests
of creditors because it would provide immediate f unds to reduce the estate’s
outstanding unsecured claims. 21 Rather than respond to the Trustee’s analysis of
the Kopexa factors in any meaningful way, Debtor simply insisted that the fraud
case had merit and that an award of damages on his claims would far exceed the
proposed settlement amount.

It is an appellant’s burden to establish error on appeal and to provide the
appellate court with an adequate record for review. 22 As part of that duty, both

19 See Chapter 7 Trustee’s Motion to Approve Settlement at 3, in Appx. at 34.
See also Appellee’s Brief at 20-22.

20 Chapter 7 Trustee’s Motion to Approve Settlement at 4, in Appx. at 35.

21 It is also significant that the bankruptcy court docket reflects that no
creditor objected to the proposed settlement.

22 In re Nordin, CO-12-041, 2013 WL 936370, at *5 (10th Cir. BAP Mar. 12,
2013) (it is appellant’s burden to establish error); McEwen v. City of Norman, 926
(continued...)

-8

the Federal Rules of Bankruptcy Procedure and the Local Rules of this Court
require that the appellate record include all transcripts necessary for the appellate
court’s review. 23 Debtor’s failure to provide a transcript of the hearing in the
bankruptcy court, at which the Trustee made her proffer, and at which the court
stated its findings and conclusions, makes it impossible for this Court to conduct
a meaningful review of the bankruptcy court’s decision. As a result, we are
required to summarily affirm the decision.24

IV. CONCLUSION
For the foregoing reasons, the bankruptcy court’s order approving the
settlement proposed by the Trustee is AFFIRMED. 25 Debtor’s challenges to the
bankruptcy court’s December 9, 2011, conversion order are DISMISSED. The
arguments regarding Debtor’s motion to dismiss were waived by Debtor’s
withdrawal of the motion and, in any event, denial of the motion would not have
been an abuse of discretion.

22 (...continued)
F.2d 1539, 1550 (10th Cir. 1991) (appellant has duty to supply adequate record
for review).

23 Fed. R. Bankr. P. 8009(b)(9); 10th Cir. BAP L.R. 8009-3(f). The Federal
Rules of Appellate Procedure require the same. Fed. R. App. P. 10(b)(2).

24 See, e.g., McEwen, 926 F.2d at 1550; In re Castro, CO-11-040, 2012 WL
611437, at *2 (10th Cir. BAP Feb. 27, 2012), aff’d, No. 12-1087, 2012 WL
5935957 (10th Cir. Nov. 28, 2012); In re Kleinhans, CO-09-028, 2010 WL
1050583, at *3 (10th Cir. BAP Mar. 23, 2010).

25 The Trustee raised as an issue that this appeal may be equitably moot
because the parties’ settlement agreement has been fully consummated, including
the dismissal with prejudice of the underlying f raud lawsuit. Because resolution
of that issue is not necessary to this decision, we do not address it herein.

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12-41579 Murray (Doc. # 53)

In Re Murray, 12-41579 (Bankr. D. Kan. Apr. 29, 2013) Doc. # 53

Click here for the pdf document.

---

SO ORDERED.
SIGNED this 29th day of April, 2013.

 

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re: Case No. 12-41579
Connie Rae Murray Chapter 7

Debtor.

Memorandum Opinion and Order Overruling the
Trustee’s Objection to Exemption

This matter is before the Court on Trustee Darcy Williamson’s objection to
exemption of the earned income tax credit (“EIC”), claimed by Debtor Connie Rae
Murray pursuant to K.S.A. § 60-2315.1 Under this exemption, a Kansas debtor in
bankruptcy is entitled to exempt from the bankruptcy estate the right to receive the
federal and state EIC. A general debtor in Kansas not proceeding in bankruptcy,
however, is not entitled to this protection. The Trustee argues that her avoidance
powers under 11 U.S.C. § 544(a)(2) defeat the Debtor’s exemption, that the exemption

1 Doc. 14.

Case 12-41579 Doc# 53 Filed 04/29/13 Page 1 of 14

violates the Uniformity and Supremacy Clauses of the United States Constitution, and
that the exemption impermissibly reprioritizes the order in which bankruptcy claims
are to be paid under 11 U.S.C. § 507. Because the exemption claimed does not conflict
with the Trustee’s powers and rights as a hypothetical executing creditor under §
544(a)(2), and because the Trustee’s remaining arguments have previously been
invalidated, the Trustee’s objection to exemption of the EIC is overruled.

I. Factual and Procedural History
The Debtor filed a Chapter 7 bankruptcy petition on October 2, 2012. The
Debtor’s Schedule C claimed as exempt her “2012 Federal and State Refunds,”
pursuant to the Kansas exemption statutes. The Trustee objected to the exemption of
the EIC.2

The Court originally placed the objection to exemption under advisement, based
on ripeness concerns stemming from the exemption of a tax refund that was neither
certain to occur nor certain in amount.3 Because the Debtor has now received at least
part of her anticipated 2012 tax refund, the matter is now ripe.4 She expects to receive

2 Doc. 14.

3 Doc. 18 (General Order In re: Objections to 2012 Exemption of the Earned IncomeTax Credit).

4 See Tarrant Reg’l Water Dist. v. Herrmann, 656 F.3d 1222, 1250 (10th Cir. 2011)
(“In evaluating ripeness the central focus is on whether the case involves uncertain orcontingent future events that may not occur as anticipated, or indeed may not occur atall.”); Salt Lake Tribune Publ’n Co. v. Mgmt. Planning, Inc., 454 F.3d 1128, 1140 (10th Cir.
2006) (“Determining whether the issues presented by this case are ripe for review requiresus to evaluate both the fitness of the issues for judicial decision and the hardship to theparties of withholding court consideration. We have described the fitness inquiry aswhether the case involves uncertain or contingent future events that may not occur as

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 2 of 14

$2276 for her federal EIC, and has already received $410 for her Kansas EIC.5

II. Analysis
A. Objections to Exemptions
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,

an estate is created.6 That bankruptcy estate consists of “all legal or equitable interests

of the debtor in property as of the commencement of the case.”7 The Bankruptcy Code

does, however, permit the exemption of certain property from the estate.8 The

Bankruptcy Code includes a list of federal exemptions available to the debtor,9 but

anticipated, or indeed may not occur at all. We have described the hardship inquiry aswhether the challenged action creates a direct and immediate dilemma for the parties.”
(internal quotations and citations omitted)).

5 Doc. 28 (Joint Stipulation Required by Court’s General Order on Objections to2012 EIC Exemption); Doc. 32 at p.1–2. The issues before the Court have been fully briefed,
and the Court has considered all briefs. See Doc. 29 (Amicus Curiae Brief of Trustee Robert

L. Baer in Support of Objection to Exemption of Earned Income Credit); Doc. 30 (Trustee’sMemorandum in Support of Objections to Debtor’s Exemptions); Doc. 32 (Debtor’sMemorandum in Opposition to Trustee’s Objection to Earned Income Credit Exemption);
Doc. 36 (Brief of Amicus Curiae National Association of Consumer Bankruptcy Attorneys inSupport of Debtor); Doc. 37 (Kansas Attorney General’s Memorandum in Opposition to theTrustee’s Objection to Debtor’s Exemption and in Defense of the Constitutionality of K.S.A.
60-2315); Doc. 41 (Response to Amicus Curiae Brief of Robert L. Baer in Support ofObjection to Exemption of Earned Income Credit Filed on Behalf of Debtors Edinger (1240904)
and Beach (12-40906)); Doc. 50 (Trustee Williamson’s Reply Brief to ResponsiveBriefs of the Debtor and the State of Kansas).
6 11 U.S.C. § 541(a) (“[T]he commencement of a case under . . . this title creates anestate.”).

7 Id. § 541(a)(1).

8 See id. § 522(b)(1) (“Notwithstanding section 541 of this title, an individual debtormay exempt from property of the estate the property listed in either paragraph (2) or, in thealternative, paragraph (3) of this subsection.”).

9 Id. § 522(d).

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 3 of 14

permits a state to “opt-out” of the federal exemptions in favor of state-law exemptions,
when that state specifically prohibits the use of the federal exemptions.10

Kansas is an “opt-out” state, meaning that it has opted out of using the federal
Bankruptcy Code exemptions in favor of its state-created exemptions.11 The exemptions
in Kansas, specifically K.S.A. § 60-2315, permit a debtor to “exempt the debtor’s right
to receive tax credits allowed pursuant to” the federal and state EIC for “one tax
year.”12 The exemption also states: “Nothing in this section shall be construed to limit
the right of offset, attachment or other process with respect to the earned income tax
credit for the payment of child support or spousal maintenance.”13

The Trustee objected to the Debtor’s exemption under K.S.A. § 60-2315.14 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.”15 Under Kansas law,
exemption statutes are to be liberally construed for the benefit of the debtor.16 The

10 Id. § 522(b)(2).

11 11 U.S. C. § 522(b)(2); K.S.A. § 60-2312 (prohibiting, with exception, individualdebtors from electing federal exemptions).

12 K.S.A. § 60-2315.

13 Id.

14 There is no dispute that the Trustee’s objection was timely filed. See Fed. R.
Bankr. P. 4003(b)(1) (requiring objections to claims of exemptions be filed “within 30 daysafter the meeting of creditors held under § 341(a) is concluded”).

15 Fed. R. Bankr. P. 4003(c).

16 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004) (“UnderKansas law, exemption statutes are to be liberally construed in favor of those intended bythe legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730 (Bankr. D. Kan. 2008)

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 4 of 14

Court has jurisdiction to decide contested matters such as the Trustee’s objection to
exemption.17 This matter constitutes a core proceeding.18

B. The Trustee’s Powers Under § 544 of the Bankruptcy Code
The Trustee’s primary objection to Debtor’s exemption arises from 11 U.S.C. §
544(a)(2). That section, titled “Trustee as lien creditor and as successor to certain
creditors and purchasers,” states:

(a) The trustee shall have, as of the commencement of the case, andwithout regard to any knowledge of the trustee or of any creditor, therights and powers of, or may avoid any transfer of property of the debtoror any obligation incurred by the debtor that is voidable by– –
. . .

(2) a creditor that extends credit to the debtor at the time of thecommencement of the case, and obtains, at such time and with
respect to such credit, an execution against the debtor that isreturned unsatisfied at such time, whether or not such a creditor
exists[.]
Generally stated, this section of the “strong-arm statute” permits a trustee to exercise
her strong-arm powers to gain remedies under state law that would be available to
creditors holding executions remaining unsatisfied as of the commencement of the
bankruptcy case.

The Trustee argues that because an individual outside of bankruptcy is not

(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).

17 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)–(b); see also Standing Order datedAugust 1, 1984, effective July 10, 1984, referenced in D. Kan. Rule 83.8.5 (reference fromthe United States District Court for the District of Kansas of all cases and proceedings in,
under, or related to Title 11 to the District’s bankruptcy judges).

18 28 U.S.C. § 157(b)(2)(B).

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 5 of 14

given the exemption of the EIC from creditors as is the debtor in bankruptcy, a
judgment creditor outside of bankruptcy could gain access to an EIC in the individual’s
hands, limiting the powers of a hypothetical Kansas execution creditor. The Trustee’s
reliance on this section of the Bankruptcy Code stems from selectively quoted language
from a Tenth Circuit BAP case, Rupp v. Duffin (In re Duffin). 19 In Duffin, the BAP
considered whether a trustee could object to an exemption under 11 U.S.C. § 544(a),
utilizing his “rights and powers” under that statute as a hypothetical creditor. The
BAP analyzed a Utah exemption that excluded from its reach prepetition payments
debtor made on life insurance policies within one year of filing bankruptcy.

Regarding § 544(a)(2), the Duffin Court discussed a split in authority over the
breadth of a trustee’s hypothetical powers under § 544(a)(2).20 The Court ultimately
concluded that “the powers given to a trustee under § 544(a)(2) are not limited to
avoidance of transfers but specifically include broader ‘rights and powers.’”21 The Court
quoted with approval a Tenth Circuit case stating that:

Simply stated, from the reservoir of equitable powers granted to thetrustee to maximize the bankruptcy estate, Congress has fashioned alegal fiction. Not only is a trustee empowered to stand in the shoes of adebtor to set aside transfers to third parties, but the fiction permits thetrustee also to assume the guise of a creditor with a judgment against thedebtor. Under that guise, the trustee may invoke whatever remediesprovided by state law to judgment lien creditors to satisfy judgments

19 457 B.R. 820 (10th Cir. BAP 2011).
20 Id. at 827–28.
21 Id. at 828.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 6 of 14

against the debtor.22
Under this rubric, the Duffin panel applied § 544(a)(2). The Court stated that the
statute granted the Trustee “the guise of a creditor with an execution returned
unsatisfied against the Debtors.”23 Therefore, the BAP held, the Trustee could invoke
the remedies provided by state law to creditors holding executions returned
unsatisfied.24 The BAP concluded that, “[t]hrough the use of a trustee’s hypothetical
powers” under § 544, the trustee could stand as a creditor would, and gain access to the
non-exempt funds.25

The important point in the Duffin BAP Court’s analysis is that the property at
issue was non-exempt. There was no bankruptcy specific exemption at issue in Duffin.
A trustee exercising § 544(a)(2) rights stands in the shoes of a hypothetical executing
creditor only to the extent the creditor could attach the property outside of bankruptcy.
Based on the applicable state law, the creditor in that case would have had access to
payments made by the debtors on life insurance policies in the year prior to the
bankruptcy petition date, because such payments were excluded from the applicable
exemption.26 The Duffin analysis is simply inapplicable because it is limited to the facts

22 Id. (quoting Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990)).

23 Id. at 829.

24 Id.

25 Id.

26 Id. at 821–22.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 7 of 14

of that case.27

This Court has had prior occasion to consider the Duffin decision, although only

briefly. In In re Westby, 28 this Trustee challenged the same exemption addressed herein

on myriad grounds. One of those challenges was based on 11 U.S.C. § 549, based on an

alleged unauthorized transfer. In a footnote to the analysis of § 549, the Court

addressed the Duffin case. The Court stated:

[T]he Tenth Circuit BAP opinion in Rupp v. Duffin (In re Duffin), . . .

upon which the Trustee relies, is inapplicable. In Duffin, the BAP

considered whether a trustee could object to an exemption under 11

U.S.C. § 544(a), utilizing his “rights and powers” under that statute as ahypothetical creditor. The BAP analyzed a Utah exemption that excludedfrom its reach prepetition payments on life insurance policies. The BAPconcluded that, “[t]hrough the use of a trustee’s hypothetical powers”
under § 544, the trustee could stand as a creditor would, and gain accessto the non-exempt funds. As should be abundantly clear from thediscussion herein, Senate Bill No. 12 makes a debtor’s EIC exempt, andno creditor of a debtor in bankruptcy could reach that exempt asset, justas the Trustee may not.29
Section 544(a)(2) grants its hypothetical powers to a trustee “as of the commencement

of the case.” Therefore, § 544(a)(2) permits a trustee to stand in the shoes of a creditor

to claim that creditor’s hypothetical priority only as to property of the estate. As

27 By analogy to Duffin, if the Debtor in this case had failed to file two years of taxreturns before the date of her petition, and was entitled to EIC refunds for each year, theTrustee may well be entitled to the EIC refunds for one of those years since the statutelimits the exemption to one year. In that instance, the Trustee would be pursuingstatutorily non-exempt property, as was the case in Duffin.

28 473 B.R. 392 (Bankr. D. Kan. 2012), aff’d, In re Westby, 486 B.R. 509 (10th Cir.
BAP 2013), appeal dismissed, Williamson v. Westby (In re Westby), Case No. 13-3044 (10thCir. Mar. 29, 2013).

29 Id. at 419 n.189 (internal citations omitted).

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 8 of 14

discussed above, the commencement of a case creates the bankruptcy estate—the

exercise of an exemption removes property from the bankruptcy estate.

The Trustee’s argument was more extensively addressed in a decision from

Judge Nugent, In re Earned Income Tax Credit Exemption Constitutional Challenge

Cases30—the opinion in the jointly administered, similar EIC cases in the Wichita

division of the District of Kansas Bankruptcy Court. Judge Nugent rejected the

Trustee’s § 544 argument as follows:

The Trustees suggest that because a debtor outside of bankruptcy cannottake this exemption, a judgment creditor outside bankruptcy could attachthe EIC in the debtor’s hands, limiting the powers of a hypotheticalKansas execution creditor. But § 544 grants these hypothetical powers toa trustee “as of the commencement of the case,” meaning that the trusteemay stand in the shoes of a creditor to claim that creditor’s hypotheticalpriority in property of the estate. The exercise of the exemption removesthat property from the estate, depriving the trustee of the right toadminister it. The same is true for all property claimed as exempt inbankruptcy.31

Judge Nugent’s reasoning applies equally well to the Trustee’s argument in this case.
The Trustee’s § 544 rights do not extend to property that is not property of the estate.

C. The Trustee’s Additional Arguments Against K.S.A. § 60-2315
The Trustee also contends that the Kansas EIC exemption statute violates the
Uniformity and Supremacy Clauses of the United States Constitution.32 The Trustee’s

30 477 B.R. 791 (Bankr. D. Kan. 2012). The trustee appealed Judge Nugent’sdecision to the United States District Court for the District of Kansas, but no decision has
yet been rendered.

31 Id. at 804.

32 The Uniformity Clause reserves to Congress the duty to make “uniform Laws onthe subject of Bankruptcies.” U.S. Const. art. I, § 8, cl. 4. The Supremacy Clause provides

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 9 of 14

constitutional arguments were thoroughly addressed and rejected by this Court’s prior
opinion in In re Westby, 33 by the Tenth Circuit Bankruptcy Appellate Panel on appeal
of that decision,34 and by Chief Judge Nugent of this district in In re Earned Income
Tax Credit Exemption Constitutional Challenge Cases. 35 The Trustee appealed the
BAP’s Westby decision to the Tenth Circuit Court of Appeals, then dismissed her
appeal, abandoning these issues.36 The BAP’s Westby decision is now final and
controlling. Accordingly, these arguments will not be revisited here and are overruled
for the same reasons stated in those opinions.

Finally, the Trustee argues that the Kansas EIC exemption statute unlawfully
reprioritizes the order in which bankruptcy claims are to be paid under 11 U.S.C. §

507. The Kansas EIC exemption provides that “[n]othing in this section shall be
construed to limit the right of offset, attachment or other process with respect to the
earned income tax credit for the payment of child support or spousal maintenance.”
that the “Laws of the United States . . . shall be the supreme Law of the Land,”
notwithstanding any law enacted by a state. U.S. Const. art. VI, cl. 2. The Sixth Circuitrecently affirmed the constitutionality of, and rejected various challenges to, a Michiganbankruptcy specific exemption in In re Schafer, 689 F.3d 601 (6th Cir. 2012), cert denied,
Richardson v. Schafer, 133 S. Ct. 1244 (2013).

33 473 B.R. 392 (Bankr. D. Kan. 2012).

34 In re Westby, 486 B.R. 509, 515–16 (10th Cir. BAP 2013).

35 477 B.R. at 798–803.

36 Trustee Williamson filed her brief in this case, reasserting constitutionalarguments, on March 28, and the very next day dismissed her appeal of the BAP’s Westbydecision (upholding the constitutionality of the Kansas EIC exemption statute) to the TenthCircuit Court of Appeals. She has persisted in her constitutional arguments even in herreply brief filed a month after she dismissed her Tenth Circuit appeal.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 10 of 14

Section 507 provides the priority in which a bankruptcy trustee is to pay claims, and
§ 507(a)(1)(C) provides for payment of a trustee’s administrative expenses before
domestic support obligations “to the extent that the trustee administers assets that are
otherwise available for the payment of such claims.” The Trustee contends that the
Kansas exemption conflicts with § 507 because it eliminates the EIC as a source of
payment for administrative claims. The Trustee argues that it is impossible for her to
comply with both the Kansas exemption and § 507.

In Westby, this Court overruled the Trustee’s argument regarding the interplay
of the Kansas EIC exemption and § 507. The Court found no conflict between the state
and federal statute, because the Kansas EIC exemption statute worked to remove
property from the estate, and it was only estate property that the Trustee was charged
with distributing.37 Despite this holding, the Trustee once again argues that she is “in
the untenable position of choosing whether to comply with K.S.A. 60-2315 and pay the
child support or spousal maintenance claims, or comply with Section 507 and pay the
claims in the priority set forth by Congress.”

To the contrary, the Court finds no conflict between the state exemption statute
and § 507 priorities. As Chief Judge Nugent aptly noted, the language quoted above
from the Kansas EIC exemption “merely subjects the debtor’s right to receive the EIC
to setoff or attachment by governmental entities collecting and enforcing domestic

37 In re Westby, 473 B.R. at 418.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 11 of 14

support obligations under existing federal and state law.”38 But even if it did require

the Trustee to collect the EIC and distribute it “for the payment of child support or

spousal maintenance,” which this Court doubts, the Trustee again refuses to

acknowledge the nature of the exemption statute: it is only the non-exempt property

the Trustee is charged with distributing under § 507, not exempt property.39 Even if

the Trustee intercepted a debtor’s refund, and even if that debtor’s refund consisted

wholly of exemptible EIC, and then the Trustee paid part or all of that EIC “for the

payment of child support or spousal maintenance,” there would be no conflict with

§ 507 because she would have distributed no non-exempt property, which is all

§ 507 concerns.40

The Trustee’s original objection to exemption raised many additional arguments,

38 In re Earned Income Tax Credit Exemption Constitutional Challenge, 477 B.R. at

805.
39 In fact, courts have routinely disallowed attempts by trustees to execute againstexempt property on behalf of DSO creditors. See In re Vandeventer, 368 B.R. 50, 54 (Bankr.

C.D. Ill. 2007) (holding trustee would not be allowed to sell exempt homestead in order topay DSO creditor); In re Quezada, 368 B.R. 44, 49 (Bankr. S.D. Fla. 2007) (same); In re
Ruppel, 368 B.R. 42 (Bankr. D. Or. 2007 ); In re Covington, 368 B.R. 38, 40–41 (Bankr. E.D.
Cal. 2006).
40 See also In re Earned Income Tax Credit Exemption Constitutional Challenge, 477

B.R. at 805 (“The Trustees apparently contend that the EIC exemption effectively elevatespriority of domestic support obligations over the trustee’s administrative expenses incontravention of § 507(a)(1)(C). However, this argument fails to recognize and differentiatebetween estate property and exempt property. Exempt property is never distributed under
§ 507—because it is no longer available for administration by the trustee. Once anexemption of property is allowed, it is no longer property of the estate nor subject to thetrustee’s administration. Thus, if a debtor’s exemption of the right to receive the EIC isallowed, this property would be unavailable in any event to the trustee for payment ofclaims, including the trustee’s administrative expenses.” (internal footnotes omitted)).
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Case 12-41579 Doc# 53 Filed 04/29/13 Page 12 of 14

but she elected not to brief them.41 The Court treats these arguments as abandoned,
and declines to consider them.42

III. Conclusion
The Court concludes that the Trustee has not carried her burden to prove that
the exemption is not properly claimed.43

It is, therefore, by the Court Ordered that the Trustee’s objection to
exemption44 is overruled.

It is further Ordered that this Memorandum Opinion and Order shall be
placed on the Court’s website.

Additional cases with similar objections to exemption filed by Trustee
Williamson are held under advisement, pending resolution of any appeal the Trustee

41 See Doc. 14 (arguing: (1) that the Kansas EIC exemption is an unauthorizedtransfer under 11 U.S.C. § 549; (2) the Kansas EIC exemption does not apply to bankruptcycases filed under the current Bankruptcy Code; (3) a violation of the Due Process and EqualProtection Clauses of the Fourteenth Amendment of the United States Constitution; (4)
that the Kansas EIC exemption is subject to the pro rata distribution rules of In re
Barowsky, 946 F.2d 1516 (10th Cir. 1991); (5) that the EIC is payable only as a tax refundand is therefore not exempt under In re Montgomery, 224 F.3d 1193 (10th Cir. 2000); and

(6) the Kansas EIC exemption conflicts with portions of the Internal Revenue Code). Thesearguments are presumably waived, and rightly so, because this Court has alreadyaddressed and overruled them in Westby.
42 See Kannady v. City of Kiowa, 590 F.3d 1161, 1174–75 (10th Cir. 2010) (decliningto consider arguments on appeal that were not briefed).

43 See Fed. R. Bankr. P. 4003(c) (placing burden of proof regarding exemptions on“the objecting party”).

44 Doc. 14.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 13 of 14

elects to file.45 In the event no appeal is taken, the Court will set for hearing Trustee
Williamson’s remaining objections to exemption, and determine, after input from the
parties, how to proceed.

# # #

45 These additional cases are: In re Bond, Case No. 12-40869 and In re Gabrick,
Case No. 12-41875.

In the Bond case, extended briefing deadlines were set due to the late filing of theparties’ Joint Stipulation caused by late-filed tax returns. The Court finds that additionalbriefing on these matters is unnecessary, and cancels the previously set briefing schedule.

In the Gabrick case, although an amended Schedule C has been filed implyingDebtor Shaw will receive the EIC, no Joint Stipulation has been filed as required by theCourt’s General Order (Docket No. 20 in Gabrick). The Court sets the Gabrick case for
hearing on May 8, 2013 at 1:30 p.m. so that it may determine the best course of action.

In the following cases of Trustee Williamson, a motion to compromise the Trustee’sobjection to exemption of the EIC has been filed, but the objection deadline has not yet runor the order has not been submitted, so no final order has been entered: In re Mitchell, Case
No. 11-40608 (objections due May 6, 2013); and In re Harris, Case No. 12-40873 (objectionsdue April 25, 2013). The Court does not enter this order in these compromised cases, andleaves the parties to their bargain.

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Case 12-41579 Doc# 53 Filed 04/29/13 Page 14 of 14

 

12-40685 H D Gerlach Company Inc (Doc. # 206)

In Re H D Gerlach Company Inc, 12-40685 (Bankr. D. Kan. Mar. 27, 2013) Doc. # 206

Click here for the pdf document.

---

SO ORDERED.
SIGNED this 27th day of March, 2013.

 

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:
HD Gerlach Company, Inc., Case No. 12-40685
Chapter 11
Debtor.

Order Granting Second Motion to Use Cash Collateral

This chapter 11 bankruptcy petition was filed on May 9, 2012 by Debtor HD
Gerlach Company, Inc. (“HD Gerlach Co.”). This matter is before the Court on HD
Gerlach Co.’s second motion to use cash collateral, which is opposed by Creditor
Central National Bank.1 The parties filed a joint stipulation of facts, and have fully
briefed the issue.2 Because 11 U.S.C. § 541(a)(6) definitively states that the “proceeds,
product, offspring, rents, or profits of or from property of the estate” are considered

1 Doc. 107 (Debtor’s second motion to use cash collateral); Doc. 123 (objection ofCentral National Bank).

2 Doc. 161 (joint stipulation of facts with exhibits); Doc. 182 (opening brief of CentralNational Bank); Doc. 194 (response brief of HD Gerlach Co.); Doc. 200 (reply brief ofCentral National Bank).

Case 12-40685 Doc# 206 Filed 03/27/13 Page 1 of 17

property of the bankruptcy estate, the Court grants Debtor’s second motion to use cash
collateral.

Factual and Procedural History

Debtor owns and operates an apartment complex commonly known as
Wanamaker 22 Apartments. Central National Bank is a secured creditor of the Debtor
by virtue of a promissory note dated September 10, 2010. The promissory note is
secured by, among other things, a properly recorded real estate mortgage executed by
Debtor on Wanamaker 22 Apartments. Central National Bank obtained an appraisal
of the Wanamaker 22 Apartments on August 24, 2010, which estimated the as-is
market value of the property to be $2,020,000.

In addition to the promissory note and mortgage, Debtor executed two
assignment of rent agreements relating to the Wanamaker 22 Apartments: the first on
April 2, 1992, and the second on September 10, 2010. Both assignments were properly
recorded. The 1992 assignment of rents states it was entered “as further security for
the payment of the indebtedness and performance” of the agreements secured by the
parties’ mortgage.3

The second assignment was also entered “in consideration of the loan” entered
between Central National Bank and Debtor.4 The second assignment of rents further
states, in pertinent part:

3 Doc. 161 Exh. C at p.1.
4 Doc. 161 Exh. C at p.11.

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1.
ASSIGNMENT. . . . Grantor absolutely assigns to Lender all ofGrantor’s interest in the leased and tenancy agreements . . . nowor hereafter executed . . ., including all rents, income, and otherprofits . . . .
. . .

2.
PAYMENT TO LENDER. Upon a default . . . , Lender may providenotice to Grantor that all rents, income and profits arising fromthe Leases . . . shall be paid directly to Lender or its nameddesignee and applied to the payment of interest and principalowing Lender or Grantor’s Indebtedness to Lender.
. . .

6.
DEFAULT AND REMEDIES. Upon default . . ., Lender may at itsoption take possession of the Real Estate and the Improvementsthereon and have, hold, manage, lease and operate the premises onterms and for a period of time that Lender deems proper. Lendermay continue to collect and receive all rents, income and profitsfrom the Real Estate, and Lender shall have full power toperiodically make alterations, renovations, repairs or replacementsto the premises as Lender may deem proper. Lender may apply allrents, income and profits to the payment of the cost of suchalterations, renovations, repair and replacements and anyexpenses incident to taking and retaining possession of the RealEstate and the management and operation of the Real Estate.
Lender may keep the Real Estate properly insured and maydischarge any taxes, charges, claims, assessments and other lienwhich may accrue. . . .
. . .

9.
INDEPENDENT RIGHTS. This Assignment and the powers andrights granted are separate and independent from any obligationcontained in the Mortgage and may be enforced without regard towhether Lender institutes foreclosure proceedings under theMortgage. This Assignment is in addition to the Mortgage andshall not affect, diminish or impair the Mortgage. However, therights and authority granted in this Assignment may be exercised
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in conjunction with the Mortgage.5

On December 14, 2011, Central National Bank notified Debtor that the
indebtedness owed under the promissory note had been accelerated. Thereafter, on
March 28, 2012, Central National Bank instructed each tenant of the Wanamaker 22
Apartments to pay their monthly rent directly to Central National Bank. In addition,
on March 28, 2012, Central National Bank notified Debtor’s counsel of the delivery of
the tenant notifications, and also filed a lawsuit in state court against Debtor and its
principals, Harold and Paula Gerlach.

This lawsuit sought foreclosure of both the mortgage on Wanamaker 22
Apartments and of Central National Bank’s security interest in certain personal
property collateral owned by the Gerlachs. On April 24, 2012, all parties to the lawsuit
entered into an agreed order appointing Associated Management Services as the
property manager of the Wanamaker 22 Apartments. Central National Bank never
requested the appointment of a receiver in the foreclosure proceedings.

On May 9, 2012, Debtor filed its voluntary Chapter 11 bankruptcy petition. The
same day, Debtor filed a motion for turnover of the rents collected prepetition, a motion
for authorization to use all rents (both pre and postpetition) as cash collateral, and a
motion to approve rejection of executory contract. On June 7, 2012, an agreed order
was entered resolving these motions, and temporarily authorizing Debtor’s use of rents
from the Wanamaker 22 Apartments until November 5, 2012. Under the agreed order,

5 Doc. 161 Exh. C at pp.11–13.

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Debtor made five adequate protection payments to Central National Bank, each for
$11,500.

When the authorized period to use rents was about to expire, on October 30,
2012, Debtor filed the second motion to use cash collateral that is the subject of the
current dispute.6 Central National Bank objected to the motion,7 and the Court
conducted its first hearing on the motion on December 18, 2012. At that hearing, the
Court allowed Debtor to use cash collateral with the same terms as the parties’ prior
cash collateral order, and continued the hearing on the motion to January 9, 2013.8 At
the January 9 hearing, the Court required the parties to brief the cash collateral
motion, required Debtor to make monthly adequate protection payments of interest in
the interim, and implemented monthly reporting requirements.9 The parties thereafter
agreed on the amount of the interim interest payment, but ultimately not on the date
the first payment was due, and a subsidiary round of motions ensued.10 The Court was

6 Doc. 107.

7 Doc. 123.

8 Doc. 143.

9 Doc. 172. The parties could not agree on an order reflecting the terms discussed atthe conclusion of the January 9, 2013 hearing, so the Court drafted and entered an order onFebruary 11, 2013.

10 See Doc. 181 (Central National Bank’s motion to prohibit further use of rents);
Doc. 183 (Debtor’s objection to Central National Bank’s motion to prohibit further use ofrents); Doc. 184 (Debtor’s motion to amend previous order). To summarize the dispute, dueto an internal inconsistency on the date of payment in the Court’s February 11, 2013 Order,
the parties could not agree whether Debtor’s first payment was due on February 21st or25th. Counsel for Central National Bank demanded payment on the 21st, and when it wasnot received, rather than bringing the matter to the Court for clarification, or better yet,
simply waiting one additional business day to see if the payment was received, contacted

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again forced to intervene and set the date for the first interim payment.11

By virtue of 28 U.S.C. § 157(b)(2)(M), this is a core proceeding over which this
Court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a).

Analysis

Debtor seeks to use the rents from the Wanamaker 22 Apartments as cash
collateral under 11 U.S.C. § 363(c)(2), which states that a debtor “may not use, sell, or
lease cash collateral” unless “each entity that has an interest in such cash collateral
consents” or “the court, after notice and a hearing, authorizes such use . . . in
accordance with the provisions of this section.” For rents to constitute cash collateral
as that term in defined by § 363(a),12 the rents must be “property of the estate” under
11 U.S.C. § 541(a).

Generally, courts look to state law to determine what constitutes property of the
estate under § 541(a).13 The question here is whether Congress has modified that
general rule with respect to rents by enacting § 541(a)(6), which states:

Debtor’s counsel on a Friday afternoon, and filed his motion to further prohibit use of rentsthat same day, after the close of business.

11 Doc. 205.

12 Section 363(a) of title 11 defines cash collateral as “cash, negotiable instruments,
documents of title, securities, deposit accounts, or other cash equivalents wheneveracquired in which the estate and an entity other than the estate have an interest andincludes the proceeds, products, offspring, rents, or profits of property . . ., whether existingbefore or after the commencement of a case under this title.”

13 See Butner v. United States, 440 U.S. 48, 54–55 (1979) (“Congress has generallyleft the determination of property rights in the assets of a bankrupt’s estate to state law.
Property interests are created and defined by state law. Unless some federal interestrequires a different result, there is no reason why such interests should be analyzeddifferently simply because an interested party is involved in a bankruptcy proceeding.”).

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The commencement of a case under . . . this title creates an estate. Such
estate is comprised of all the following property, wherever located and bywhomever held: . . . Proceeds, product, offspring, rents, or profits of orfrom property of the estate, except such as are earnings from servicesperformed by an individual debtor after the commencement of the case.

This Court previously held, in In re Bryant Manor, LLC, 14 that federal bankruptcy
law—specifically § 541(a)(6)—controls the issue of whether post-petition rents of a
chapter 11 debtor are property of the estate: “Congress, in enacting § 541(a)(6), defined
the treatment of rents in this case, and that statute brings post-petition rents into the
bankruptcy estate, effectively preempting any state law that might provide for
different treatment.”15

In Bryant Manor, the Court was tasked with determining whether the debtor
retained an interest in postpetition rents following the appointment of a receiver in
prepetition foreclosure proceedings. Just like in this case, the debtor operated an
apartment complex, and its creditor held a perfected security interest in the debtor’s
real property and any rents or leases from the real property.16 Regarding the
assignment of rents, the Court characterized that assignment as follows:

Although the Assignment incorporated admittedly strong language of anabsolute nature, the Assignment was executed simultaneously with themortgage documents, the mortgage indicated that the Assignment wasincorporated into it, no independent consideration was given for theAssignment, the Assignment was effectively conditioned upon default(because Debtor could use the rents for any purpose until a default), theAssignment limited how the Assignee could use the rents (i.e., it could not

14 422 B.R. 278 (Bankr. D. Kan. 2010).
15 Id. at 289.
16 Id. at 280–81.

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distribute the money to its shareholders but had to be used in connectionwith the subject real property), the Assignment required Assignee toaccount to Debtor for the rents collected/received, and the Assignmentterminated upon satisfaction of the debt.17

The debtor Bryant Manor, although current on its loan obligations at the time,
contacted the creditor to pursue a loan modification. The creditor informed debtor that
if it “wanted to renegotiate the terms of the loan through a loan modification, it would
have to place itself in default.”18 Unsurprisingly, the debtor then defaulted on the loan,
and renewed attempts to negotiate a loan modification. The negotiations were not
fruitful, and the parties were unable to agree on the terms of a modification. At that
point, the creditor filed a foreclosure action and a receiver was appointed, as
authorized by the parties’ mortgage and security agreement. The appointed receiver
thereafter took control of all incoming rents.

The debtor then filed a bankruptcy petition, seeking to use its cash collateral
and to have the receiver removed. The evidence showed that the creditor was
significantly under secured on the property: the debtor owed more than $3.28 million
and the property was valued at $800,000.

The Court in Bryant Manor assessed whether federal bankruptcy law
automatically brought the rents into the bankruptcy estate, regardless of the state law
on the subject. The Court quoted the Supreme Court in Butner v. United States, 19

17 Id. at 281.
18 Id. at 282.
19 440 U.S. 48 (1979).

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wherein the Supreme Court stated that Congress had the power to define “the

mortgagee’s interest in the rents and profits earned by property in a bankrupt

estate.”20 At the time Butner was decided, there was no such federal statute (i.e.,§

541(a)(6) had not yet been enacted). Now, “the Bankruptcy Code unambiguously

defines the interests in the rents and profits earned by property in a bankrupt

estate.”21

Section 541(a)(6)’s “clear, unambiguous language”22 dictates that “rents derived

from [property of the bankruptcy estate] also constitute property of the bankruptcy

estate as a matter of federal bankruptcy law.”23 In strong language, the Bryant Manor

opinion states:

[T]here is no need to turn to state law for resolution of this issue.
Congress, in enacting § 541(a)(6), defined the treatment of rents in thiscase, and that statute brings post-petition rents into the bankruptcyestate, effectively preempting any state law that might provide fordifferent treatment. Thus, even if the Court had found that Kansas law
transferred complete legal title to the rents to [the creditor], § 541(a)(6)
would still operate to bring those rents into the bankruptcy estate.

. . . [T]his statutory scheme makes sense in light of the twin goalsof bankruptcy, which are (1) permitting the debtor to obtain a fresh start,
and (2) ensuring that claims are paid. Congress likely recognized that thebetter policy is to allow the estate to use the rents to reorganize whileadequately protecting the interest of the mortgagee in the rents. Acontrary decision would effectively deny Chapter 11 relief to any debtorwho is dependent on rents, such as hotels, apartment complexes,

20 Id. at 54.

21 Bryant Manor, 422 B.R. at 288 (internal quotations omitted).

22 Id.

23 Id. at 288–89.

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shopping centers, office buildings, senior residence facilities, and the

like.24

The Bryant Manor holding relies extensively on In re Amaravathi Ltd. P’ship, 25 a

similar case concerning the right to rents collected by a bankruptcy estate. In

Amaravathi, the bankruptcy court also concluded that § 541(a)(6) controlled the

outcome of the case, stating: “It mandates that rents generated from property of the

estate are included within the bankruptcy estate.”26 Other Circuit Court decisions

squarely addressing the matter have reached the same conclusion.27

Based on the express language of § 541(a)(6), the postpetition rents of the

Wanamaker 22 Apartments are property of the HD Gerlach Co. bankruptcy estate.

Debtor is thus authorized to use those rents, as cash collateral, under § 363(c)(2).

24 Id. at 289 (internal quotations omitted).

25 416 B.R. 618 (Bankr. S.D. Tex. 2009).

26 Id. at 638.

27 See In re Wheaton Oaks Office Partners Ltd. P’ship, 27 F.3d 1234, 1240 (7th Cir.
1994) (holding that rents are cash collateral and property of the estate under § 541(a)(6));
Vienna Park Props. v. United Postal Sav. Ass’n (In re Vienna Park Props.), 976 F.2d 106,
111, 114 (2d Cir. 1992) (holding that rents are property of the estate under § 541(a)(6).

The Sixth Circuit BAP identified the issue, but did not address § 541(a)(6) in In re
Buttermilk Towne Ctr., LLC, 442 B.R. 558, 562 n.2 (6th Cir. BAP 2010) (noting that Bryant
Manor suggests that the question of whether rent proceeds are estate property is not aquestion of state law, but federal law; not reaching issue).

As noted in the Amaravathi decision, two Third Circuit cases hold that state laws (inPennsylvania and New Jersey) require that postpetition rents are not property of theestate, but neither case addresses the effect of § 541(a)(6) upon postpetition rents. See
Sovereign Bank v. Schwab, 414 F.3d 450, 453 (3d Cir. 2005) (holding that assignment ofrents under Pennsylvania law resulted in the bank taking title to the rents and that debtorno longer possessed an interest in the rents upon filing bankruptcy); First Fid. Bank, N.A.

v. Jason Realty, L.P. (In re Jason Realty, L.P.), 59 F.3d 423. 428–29 (3d Cir. 1995) (holdingthat absolute assignment of rents under New Jersey law requires conclusion that rents arenot estate property under § 541(a)(1); subsection (a)(6) not addressed).
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“Congress, in enacting § 541(a)(6), defined the treatment of rents in this case, and that
statute brings post-petition rents into the bankruptcy estate, effectively preempting
any state law that might provide for different treatment.”28

Creditor Central National Bank argues to the contrary. It contends that the
assignment of rents (detailed in the parties’ stipulation of facts and described more
fully above) was absolute—that even if Debtor paid off its debt in full today, Central
National Bank would forever be entitled to keep the rents from Wanamaker 22 based
on the assignment. Therefore, Central National Bank argues, there was simply no
interest left for the Debtor at the time its bankruptcy petition was filed, and the rents
are not property of the bankruptcy estate under § 541.

Central National Bank relies on two authorities for its position: K.S.A. § 58-2343
and an unpublished Kansas Court of Appeals case, Leavenworth/Lansing Physicians
Bldg., LLC v. Cristiano. 29 Neither is persuasive. Section 58-2343 deals with the
assignment of rents of real property, and its subsection (c) states:

Upon default by a borrower under the terms of an assignmentinstrument, the lender shall be entitled to enforce the assignmentinstrument in accordance with its terms and applicable law, and mayapply to the district court having jurisdiction for appropriate relief to gainpossession and control of the rents in enforcement of the assignmentinstrument. Upon such application, the court shall enter such orders andtake such actions as appear necessary to collect, protect, and preserve thelender’s interest therein pending final disposition of an action upon theobligations secured by the assignment instrument.

28 Bryant Manor, 422 B.R. at 289.
29 No. 102,699, 2010 WL 4977144 (Kan. Ct. App. Nov. 12, 2010) (unpublished).

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In Leavenworth/Lansing Physicians Bldg., the Kansas Court of Appeals addressed this
statute, and stated: “Although no Kansas case has interpreted this language, it
appears that the statute creates a self-help right for the lender. The statute allows
lenders to contact tenants directly to collect assigned rents. . . . K.S.A. 58-2343 allows
the Bank to collect rents under the assignment without judicial enforcement. . .”30

The Kansas Court of Appeals was then tasked with determining whether the
assignor (also the lessor in that case) still maintained a cause of action to recover the
rents from a lessee when the assignee (the bank) had already collected the rents via
self help after the assignor/lessor defaulted.31 The Court of Appeals noted the general
rule in Kansas that “an assignment passes all the assignor’s title and interest under
a contract to the assignee and divests the assignor of all right of control over the
subject matter of the assignment.”32 The Court of Appeals then concluded that the
“extremely broad” language of the assignment in that case divested the assignor “of all
right to control over the subject matter of the assignment.”33 As a result, the Court of
Appeals concluded that the assignor did not retain standing to recover rents under the
lease from the lessee.34

Contrary to the assertion in Leavenworth/Lansing Physicians Bldg. and the

30 Id. at *9–10.
31 Id. at *10.
32 Id.
33 Id.
34 Id. at *11.

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argument made by Central National Bank, although K.S.A. § 58-2343 was enacted in
1991, subsequent cases have confirmed that Kansas is a lien theory state, and requires
judicial foreclosure to exercise rights under a mortgage. For example, in Premier Bank

v. J.D. Homes of Olathe, 35 a 2002 Kansas Court of Appeals case, the court reiterated
the Kansas position on mortgage law:

Kansas is a lien theory state, not a title theory state. In a titletheory jurisdiction, the mortgage is viewed as a form of title to property.
. . . In lien theory state, a mortgagee is not entitled to immediatepossession of the property upon default because the mortgage is merelya lien and not a form of title. . . .

Under Kansas law, a mortgagee does not acquire an interest in theproperty, either before or after the promise to pay is broken, but acquiresonly a lien securing the indebtedness described in the instrument.36

Also, in the 1993 Kansas Court of Appeals case Hoelting Enterprises v. Trailridge

Investors, L.P., 37 the court squarely addressed an assignment of rents under the lien

theory, without reference to K.S.A. § 58-2343. The published Hoelting Enterprises

opinion expressly rejected the position seemingly stated in the unpublished

Leavenworth/Lansing Physicians Bldg. decision:

Under Kansas law, therefore, a purely executory agreement aloneis not effective to vest in a mortgagee the right to rents and profits. Theright to rents and profits may vest in a mortgagee, however, if (1) themortgagor defaults and the court appoints a receiver, or (2) the mortgageassigns the rents and the mortgagee reduces the rents to his possessionby proper legal action. Proper legal action that may vest in a mortgageethe right to rents and profits pursuant to such an assignment includes a

35 50 P.3d 517 (Kan. Ct. App. 2002).
36 Id. at 519.
37 844 P.2d 745 (Kan. Ct. App. 1993).

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court’s appointment of a receiver, and a mortgagor’s voluntary consent to

the mortgagee obtaining possession of the rents.38
The Hoelting Enterprises opinion mentions K.S.A. § 58-2343, but only as it relates to
perfection of the security interest in the rents, not with regard to vesting of the right
to those rents in the mortgagee.39

The statute (K.S.A. § 58-2343) itself implies that judicial involvement is still
necessary:40 although the statute provides that the lender “shall be entitled to enforce
the assignment in accordance with [the assignment’s] terms,” the statute also seems
to imply that judicial involvement is necessary by stating that “the court shall” enter
orders and take actions necessary to “collect, protect, and preserve the rents.” On the
other hand, the statute does use the word “may” when referring to judicial
enforcement, implying that judicial involvement is not required.

Further complicating matters, however, is that the statute seems to require
court action for “final disposition.” Either interpretation of § 58-2343(c)—that judicial
involvement is or is not necessary—is far from clear, making the statute ambiguous.41

“If a statute is ambiguous, a court may seek guidance from [legislative] intent,

38 Id. at 749–50 (internal citations omitted).

39 Id. at 751–52.

40 See Office of Thrift Supervision v. Overland Park Fin. Corp. (In re Overland Park
Fin. Corp.), 236 F.3d 1246, 1251 (10th Cir. 2001) (“In any case of statutory construction, thestarting point of our analysis must begin with the language of the statute itself.”).

41 See Allen v. Geneva Steel Co. (In re Geneva Steele Co.), 281 F.3d 1173, 1178 (10thCir. 2002) (stating that “[a]n ambiguity exists when a statute is capable of being understoodby reasonably well-informed persons in two or more different senses” (internal quotationsomitted)).

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a task aided by reviewing the legislative history.”42 The legislative history of K.S.A.
§ 58-2343 sheds only minimal light on the Kansas legislature’s intent. The minutes of
the Senate Committee where the bill (that would later become K.S.A. § 58-2343) was
introduced indicate that the bill was intended as only a clarification of the law
regarding how lenders perfected their interest in an assignment of rents, and not a
change in the law regarding an enforcement of an assignment.43 Other portions of those
same minutes, however, state that the committee intended to study whether “the
language in the bill needs to be changed so as not to eliminate self-help,”44 which would
have been a change to how an assignment of rents was enforced by a lender. It does
seem clear, however, that the issue K.S.A. § 58-2343 sought to address (at least
initially) was the perfection of a rent assignment, not an assignment’s enforcement.

Regardless, apparently unlike the situation in the Leavenworth/Lansing
Physicians Bldg case (although not extensively addressed therein), the assignment of
rents that was executed between Central National Bank and Debtor and that was later
pursued by Central National Bank was not absolute in this case, despite Central
National Bank’s argument to the contrary. Here, the parties’ assignment requires that
rents be applied to the balance of the note, stating that all rents shall be paid to
Central National Bank and applied to the principal and interest owed by Debtor. The

42 Id.

43 S. Comm. on Financial Institutions & Insurance, at 1 (Kan. Feb. 14, 1991)
(minutes of committee meeting where bill introduced); Attach. 1 (proposal for legislation).

44 S. Comm. on Financial Institutions & Insurance, at 2 (Kan. Feb. 14, 1991).

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parties’ Assignment implies that the rights within the Assignment ride along with the
parties’ Mortgage, and the Assignment was conditioned upon default of that Mortgage.
Even the agreed order entered between the parties in the state court foreclosure
litigation stated that rents collected by Central National Bank were to be applied to
the balance of the note. Under the long-standing case law in Kansas discussed above,
the parties’ “purely executory agreement”45 was not effective to vest in Central
National Bank the right to the rents of the Wanamaker 22 Apartments.

Neither K.S.A. § 58-2343 nor the holding in the unpublished decision in
Leavenworth/Lansing Physicians Bldg. changes the outcome required by this Court’s
prior holding in Bryant Manor. There is no published Kansas decision stating that
Kansas has changed it’s long-standing position as a lien theory state, and the text of
the statute is not clear enough to require a holding that the facts of this case show an
absolute assignment of the rents from the Wanamaker 22 Apartments that would
defeat § 541(a)(6). To the contrary, the “clear, unambiguous language”46 of § 541(a)(6)
dictates that “rents derived from [property of the bankruptcy estate] also constitute
property of the bankruptcy estate as a matter of federal bankruptcy law.”47

Conclusion

The Court finds that 11 U.S.C. § 541(a)(6) controls the outcome of this case: the
“proceeds, product, offspring, rents, or profits of or from property of the estate” are

45 Hoelting Enterprises, 844 P.2d at 749.

46 Bryant Manor, 422 B.R. at 288.

47 Id. at 288–89.

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property of the bankruptcy estate. The Court grants the second motion to use cash
collateral48 of Debtor HD Gerlach Co.,49 and the Debtor’s offer, codified in the Court’s
orders of January 11, 2013 and January 19, 2013 (as modified), to pay interest and
provide certain reports to Central National Bank, remains in effect.

It is so ordered.

# # #

48 Doc. 107.

49 The April 10, 2013 hearing previously scheduled to announce this decision iscancelled.

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