KSB

11-06236 Redmond, Brooke Trustee v. CJD & Associates a/k/a Davidson-Babcock (Doc. # 70)

Redmond, Brooke Trustee v. CJD & Associates a/k/a Davidson-Babcock, 11-06236 (Bankr. D. Kan. Mar. 10, 2014) Doc. # 70

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SO ORDERED.
SIGNED this 10th day of March, 2014.

 

Designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

BROOKE CORPORATION, et al.,
DEBTORS.

CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation, and Brooke Investments,
Inc. ,

PLAINTIFF,

v.
CJD & ASSOCIATES, LLC, a/k/a
DAVIDSON-BABCOCK,

DEFENDANT.

CASE NO. 08-22786
(jointly administered)
CHAPTER 7

ADV. NO. 11-6236

MEMORANDUM OPINION AND ORDER DENYING
DEFENDANT’S MOTION FOR LEAVE TO FILE AMENDED ANSWER


Case 11-06236 Doc# 70 Filed 03/10/14 Page 1 of 22


Defendant CJD & Associates, LLC (CJD), moves under Bankruptcy Rule 7015
and Civil Rule 15(a)(2)1 to file an amended answer denying the Plaintiff’s allegation that
CJD is an insider of Debtors, which CJD admitted in its previously filed answer.2
Plaintiff opposes the motion primarily on the ground that the amendment would be futile
since CJD satisfies the statutory definition of a per se insider.3 For the reasons examined
below, the Court denies the motion.
BACKGROUND FACTS.

The background facts are undisputed and not complex. Brooke Corporation
(Brooke Corp) and Brooke Capital Corporation (Brooke Capital) filed voluntary Chapter
11 petitions on October 28, 2008. Prior to that date, CJD (a Kansas limited liability
company) was a wholly-owned subsidiary of Brooke Brokerage Corporation, which, in
turn, was wholly owned by Brooke Corp. Brooke Capital was a majority-owned
subsidiary of Brooke Corp.

On February 2, 2012, the Trustee filed his Amended Complaint against CJD. It
seeks to avoid preferential or fraudulent transfers made by Brooke Capital to CJD, and to

1 Fed. R. Bankr. P. 7015 adopts Fed. R. Civ. P. 15 for adversary proceedings.

2 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District
of Kansas that exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) and (H). There is no
objection to venue or jurisdiction over the parties.

3 Plaintiff appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP. CJD
appears by Paul D. Sinclair, Jason L. Bush, and Brendan L. McPherson of Posinelli PC.

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recover the value thereof. Paragraph 8 of the Amended Complaint alleged:

CJD & Associates, LLC d/b/a Davidson-Babcock (“CJD”) is
a Kansas limited liability company. Prior to Debtors’
bankruptcy filing on October 28, 2008, CJD was a wholly-
owned subsidiary of Brooke Brokerage Corporation who, in
turn, was wholly-owned by Debtor Brooke Corporation.
Thus, for all times relevant to this lawsuit, CJD was an
“insider” (as that term is defined by 11 U.S.C. § 101(31)) of
one of [sic] more of the Debtors because CJD constituted an
“affiliate” (as that term is defined by 11 U.S.C. § 101(2)).4

CJD’s answer to the Amended Complaint, filed on April 2, 2012, in response to

paragraph 8 stated,

Defendant admits that prior to the Debtors’ bankruptcy filing
on October 28, 2008, CJD was a wholly-owned subsidiary of
Brooke Brokerage Corporation who, in turn, was wholly-
owned by Debtor Brooke Corporation. As stated, Defendant
denies that it is a Kansas limited liability company as it was
administratively dissolved. The remainder of the allegations
in paragraph 8 consist of legal conclusions to which no
response should be required. To the extent a response is
required, the remaining allegations are denied.5

 Paragraph 120 of the Trustee's Amended Complaint, included in Count I, which

seeks to recover preferential transfers, alleged, “At all times relevant to this matter,

Defendant was an insider of the Debtors.”6 CJD’s answer stated, “Defendants [sic]

admits paragraph 120 of the Complaint.”7 None of the affirmative defenses raised by

4 Doc. 5, 2, ¶ 8.

5 Doc. 10, 2, ¶ 8.

6 Doc. 5, 21, ¶ 120.

7 Doc. 10, 7, ¶ 120.

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CJD alleged that it was not an insider of any of Debtors.

CJD filed its motion for leave to file an amended answer on December 19, 2013.
It proposes to amend its response to paragraph 8 by deleting the sentence, “The remainder
of the allegations in paragraph 8 consist of legal conclusions to which no response should
be required,” and adding the following sentence: “Defendant denies that it is an ‘insider’
(as that term is defined by 11 U.S.C. § 101(31)) of one or more of the Debtors because
CJD constituted an ‘affiliate’ as that term is defined by 11 U.S.C. §101(2).”8 CJD also
proposes to amend its response to the allegations of paragraph 120 of the Amended
Complaint to read, “Defendant denies paragraph 120 of the Complaint.”9 The proposed
amended answer also includes as an affirmative defense that CJD was not a insider of
Debtors.
DISCUSSION.

A. The Applicable Standard.
Civil Rule 15(a)(2), applicable to amendments other than those permitted as a
matter of course, provides that “a party may amend its pleading only with the opposing
party’s written consent or the court’s leave. The court should freely give leave when
justice so requires.” But “[t]he liberal amendment policy prescribed by Rule 15(a) does
not mean that leave will be granted in all cases.”10 In the Tenth Circuit, leave to amend

8 Doc. 66-2, 2, ¶ 8.

9 Id., 7, ¶ 120.

10 6 Charles AlanWright, et al., Federal Practice and Procedure, § 1487 at 699 (3d ed. 2010).

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may be refused when there is “‘a showing of undue delay, undue prejudice to the
opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments
previously allowed, or futility of amendment.’”11 The futility analysis determines
whether the proposed “claim or defense . . . is legally insufficient on its face.”12 “[I]f a
complaint as amended could not withstand a motion to dismiss or summary judgment,
then the amendment should be denied as futile.”13

B. The Parties’ Positions.
CJD argues that the Trustee is unable to show undue delay, prejudice, bad faith, or
dilatory motive. The case is in the early stages of litigation, with written discovery in
progress and no depositions having been taken. Further, according to CJD, the
amendments are not futile since the Trustee’s allegation that CJD is a statutory or per se
insider fails because insider status, on which the Trustee relies, applies to corporations,
but not to limited liability companies, such as CJD.

The Trustee first responds that leave should be refused because CJD delayed for
over 21 months before requesting leave to amend to its answer and the Trustee would be
unduly prejudiced by such amendment. In addition, and as his primary objection, the
Trustee argues that the amendment would be futile as a matter of law because CJD is a

11 Duncan v. Manager, Dep’t of Safety, 397 F.3d 1300, 1315 (10th Cir. 2005) (quoting Frank v.

U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993)).
12 6 Wright, et al., Federal Practice and Procedure, § 1487 at 733.
13 Id. at 743 (citing Bauchman ex rel. Bauchman v. West High School, 132 F.3d 542 (10th Cir.
1997) and other cases).
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statutory insider of Brooke Corp and Brooke Capital.14

C. The Court Rejects the Trustee’s Contention that Leave Should Be Denied
Because of Undue Delay or Undue Prejudice.
Although over 21 months passed since CJD filed the answer which it now seeks to
amend, undue delay is not measured by time alone. The circumstances of the case must
be considered. This litigation has not progressed significantly. If the defense to the
insider allegation is allowed at this time, the course of the litigation will not be
significantly different from what it would have been if CJD had denied insider status in
its original answer. For the same reason, the Trustee’s contention that he would be
unduly prejudiced by the amendment is unpersuasive. It is true that allowing the defense
would cause the Trustee to spend additional time and incur additional expense. But CJD
should not be bound by an admission because the other party relied upon it when the
litigation was in its early stages.

D. The Court Finds that the Proposed Amendment Would Be Futile.
The parties agree that the motion for leave should be denied if the defense to be
added by the amended answer could not survive a motion for summary judgment. In
support of his futility contention, the Trustee argues that CJD is a per se insider of Brooke
Corp under § 101(31)(E) because it constitutes an “affiliate” under § 101(2)(B) and (C).
CJD responds that because it is a limited liability company (LLC) rather than a

14 The Trustee also objected that CJD’s addition of an affirmative defense denying insider status
would be futile, since the assertion that a defendant is not an “insider” is not an affirmative defense but
rather simply an attack on a prima facie element of the Trustee’s case. Doc. 67, 11-12. In its rely brief,
CJD agreed with this position and no longer seeks leave for this particular amendment. Doc. 68, 9.

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corporation, it is not an “affiliate” and therefore not an “insider.” The legal issue
presented by the Trustee’s opposition to the motion is therefore whether CJD is a
corporation for purposes of the definition of “affiliate,” and therefore an “insider” of
Brooke Corp and Brooke Capital.

1. CJD is an “affiliate” of Brooke Corp under § 101(2)(B), and therefore an
“insider” of Debtors Brooke Corp and Brooke Capital under § 101(31)(E).
a. Arguments and authorities supporting the Trustee’s position.
Section 101(31) states the term “insider” “includes” those categories of persons
enumerated in the definition, such as a director, officer, or other person in control of a
corporate debtor, and a relative or general partner of an individual debtor. Courts agree
that the use of the word “includes” in the definition indicates that Congress did not intend
for the statutory list to be exclusive, and that there are two types of insiders: (1) those
entities specifically mentioned in the definition, and (2) those not listed but who have a
sufficiently close relationship with the debtor that their conduct is made subject to close
scrutiny.15 The first category constitutes statutory or per se insiders, those “‘whose
affinity or consanguinity gives rise to a conclusive presumption that the individual or
entity commands preferential treatment by the debtor.’”16 The second category is present
when it is shown “that the person or entity in fact had a relationship with the debtor that

15 Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1078-79 (10th Cir. 2007) (quoting
Miller Avenue Prof'l & Promotional Servs. v. Brady (In re Enterprise Acquisition Partners), 319 B.R.
626, 631 (9th Cir. BAP 2004)).

16 Id., 489 F.3d at 1079 (quoting Enterprise Acquisition Partners, 319 B.R. at 631).

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was sufficiently close that the two were not dealing at arm’s length.”17

Even though an LLC controlled by a corporate debtor is not included in the list of
persons in § 101(31)(B), the Trustee contends that CJD is a per se insider of Brooke Corp
and Brooke Capital under § 101(31)(E), which defines “insider” to include an “affiliate,
or insider of an affiliate as if such affiliate were the debtor.” “Affiliate” is defined by
§ 101(2)(B) to mean a “corporation 20 percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with power to vote, by the
debtor.” The Trustee contends, and CJD does not dispute, that if CJD were a corporation,
under these definitions, it would be an insider of Debtors Brooke Corp and Brooke
Capital. This is because before Debtors’ bankruptcies, CJD was a wholly-owned
subsidiary of Brooke Brokerage Corporation (Brooke Brokerage) and Brooke Brokerage
was majority owned by Brooke Corp. Thus, if it were a corporation, CJD would have
been an “affiliate” of Brooke Corp, since 100% of its securities would have been
indirectly owned or controlled by Brooke Corp because of Brooke Corp’s majority
ownership of Brooke Brokerage. Moreover, since Brooke Capital was a majority-owned
subsidiary of Brooke Corp, Brooke Capital was an “affiliate” of Brooke Corp under
§ 101(2)(B), and CJD (as a corporate “insider” of Brooke Corp) would also have been an
“affiliate” and therefore a per se insider of Brooke Capital under § 101(31)(E).

The Trustee further contends, but CJD disputes, that although CJD was in fact a

17 Id., 489 F.3d at 1079.
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limited liability company, it was nevertheless a “corporation” as defined by § 101(9) for
purposes of the definition of “affiliate.” Section 101(9) provides:

The term “corporation” —

(A) includes —
(i) association having a power or privilege that a
private corporation, but not an individual or a
partnership, possesses;
(ii) partnership association organized under a
law that makes only the capital subscribed
responsible for the debts of such association;
(iii) joint-stock company;
(iv) unincorporated company or association; or
(v) business trust; but
(B) does not include limited partnership.
Although LLCs are not included in the enumerated entities, this omission does not
preclude finding that LLCs are “corporations” for purposes of the Code. The term
“corporation” only “includes” the entities enumerated in the statute. Under the Code’s
rules of construction as stated in § 102(3), the terms “‘include’ and ‘including’ are not
limiting.” The clear meaning of the definition of “corporation” is that entities not
enumerated in the statute may also be considered “corporations.”
Although the construction of the definition of “corporation” is a matter of federal
law, applicable state law defines the powers and privileges of the entity. Under Kansas
law, an LLC is a business organization “which offers the possibility of combining the
limitation on individual liability normally associated with the corporate form with the
conduit tax treatment of items of income, gain, loss, deduction and credit normally

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associated with the partnership form.”18 Like a corporation, a “limited-liability company
may own property in its own name, and members have no ownership interest in specific
limited-liability company property.”19 Like a corporation, an LLC’s “liabilities in tort are
solely those of the LLC and . . . no member or manager may be liable solely based on
their status as a member or manager.”20 Members of LLCs, like stockholders of
corporations, are authorized to bring derivative suits.21 The Court concludes that a
Kansas LLC has powers and privileges that a corporation, but not an individual or
partnership, possesses.

In the bankruptcy context, an LLC has been found to fit within the definition of a
“corporation” for purposes other than the definition of an “affiliate.” There is no question
that an LLC may file a petition under Title 11.22 As one court has stated, this is because
“an LLC, by virtue of its structure and limited liability features, fits comfortably within
the Bankruptcy Code’s definition of ‘corporation’ and, hence, is a ‘person’ eligible to be a

18 Edwin W. Hecker Jr., Limited Liability Companies in Kansas, 63 J. Kan. B. Ass’n 40, 40
(1994).

19 In re App. for Tax Exemption of Kouri Place, L.L.C., 44 Kan. App. 2d 467, 470, 239 P.3d 96,
99 (2010) (citing K.S.A. 17-76,111).

20 University of Kansas v. Sinks, 565 F. Supp. 2d 1216, 1239 (D. Kan. 2008).

21 Halley v. Barnabe, 271 Kan. 652, 661-62, 24 P.3d 140, 146-47 (2001).

22 See In re Midpoint Development, L.L.C., 466 F.3d 1201, 1203-07 (10th Cir. 2006) (upholding
dismissal of Oklahoma LLC’s Chapter 11 petition because under Oklahoma law, debtor ceased to exist
when it filed articles of dissolution several months prior to filing bankruptcy); In re Lovell’s Amer. Car
Care, LLC, 438 B.R. 355 (table), unpub. op. available at 2010 WL 2769056, *3-6 (10th Cir. BAP 2010)
(Wyoming LLC eligible to file bankruptcy when certificate of dissolution had not been filed before date
of filing of bankruptcy petition).

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debtor.”23 An LLC is considered a “corporation” under Bankruptcy Rule 7007.1, which
requires a corporation that is a party to an adversary proceeding to file an ownership
statement.24

Several courts considering per se insider status have held that LLCs fit within the
definition of a “corporation.” These include Longview Aluminum, L.L.C., 25 a decision by
the Seventh Circuit Court of Appeals. In that case, the Chapter 11 trustee brought an
adversary proceeding to set aside, as preferential transfers, prepetition payments that the
debtor LLC had made to one of its managing members, who was alleged to be an insider.
The court noted that “[t]he Bankruptcy Code’s definition of a corporation includes
unincorporated limited liability companies.”26 The court then analogized the position of a
member of an LLC to the director of a corporation and concluded that “a member of an
LLC can be a statutory insider within the meaning of 11 U.S.C. § 101(31)(B).”27

In Barman, 28 the court sustained the Trustee’s objection to discharge of the
debtors, Harold and Evelyn Barman, on the ground that they had refused to obey a court

23 Gilliam v. Speier (In re KRSM Props., LLC), 318 B.R. 712, 717 (9th Cir. BAP 2004). Section
109 provides that only certain “persons” may be debtors under Chapters 7 and 11. “The term ‘person’
includes individual, partnership and corporation.” 11 U.S.C. § 101(41).

24 See Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003).

25 In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011).

26 Id. at 509, n.1.

27 Id. at 510.

28 Solomon v. Barman (In re Barman), 237 B.R. 342 (Bankr. E.D. Mich. 1999).

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order in another bankruptcy case concerning an insider, BHB Enterprises, LLC (BHB),
organized under South Carolina law. Harold Barman was a member of BHB. The
debtors admitted that they were insiders of BHB, but denied that BHB was an insider of
theirs. The court examined § 101(31), which provides that an “insider includes [,] . . . if
the debtor is an individual[,] . . . [a] corporation of which the debtor is a director, officer,
or person in control . . . [and an] affiliate, or insider of an affiliate as if such affiliate were
the debtor.”29 It also examined § 101(2)(B), which defines “affiliate” to mean a
“corporation 20 percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by the debtor.” It then
concluded, based upon an examination of the characteristics of limited liability companies
under South Carolina law, “that a limited liability company, such as BHB, is sufficiently
analogous to a corporation” for purposes of determining insider status.30 The court held
that “BHB is an ‘affiliate’ (and thus an insider) of Harold Barman because he owned, or
directly or indirectly controlled, one third of the voting rights in BHB [and that] BHB is
also within the statutory definition of an ‘insider’ of Harold Barman because he is one of
its three members and thus holds a position that is analogous to that of a ‘director, officer
or person in control’ of BHB.”31

29 Id. at 348 (quoting 11 U.S.C. § 101(31)(A)(iv) and (E)) (emphasis added by the court).

30 Id. at 348.

31 Id. at 349.

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In Lull, 32 a 2009 decision, the court relied on KRSM Properties and Barman to

hold that a member-managed Hawaii LLC should be treated as a corporation for purposes

of the definition of “insider.” In that case, the debtor and Zapara were each 50% owners

of interests in JWL, LLC. More than 90 days prepetition, the debtor made transfers to

Zapara which the trustee sought to recover as preferential transfers. The court held:

Under the Barman reasoning, and because an LLC is within
the Code’s definition of “corporation” under § 101(9)(A),
JWL may be treated like a corporation for the purposes of
insider analysis, and under 11 U.S.C. § 101(31)(A)(iv) its
insiders include “director(s), officer(s) or person(s) in
control.”

. . . As the only members of an LLC, Debtor and
Zapara had co-equal rights in the management and conduct of
the company’s business as a matter of law. . . . JWL is an
“affiliate” of Debtor because Debtor controlled or held fifty
percent of the “voting securities” of JWL (and because an
LLC fits within the Code’s definition of “corporation” under
§ 101(9)(A)). Zapara is also an “insider” of JWL and thus an
insider [of] the debtor under § 101(31)(E) because she also
controlled or held 50% of the “voting securities” of JWL.33

Very recently, the Parks34 court thoroughly examined the question of whether an

LLC, organized under Washington law, was a “corporation” for purposes of the definition

of “insider.” The court began its analysis with the principles of statutory construction. It

noted that the definition of “corporation” uses the expansive word “includes,” and was

32 Kotoshirodo v. Zapara (In re Lull), 2009 WL 3853210 (Bankr. D. Haw. Nov. 17, 2009).

33 Id. at *4.

34 Sherron Assocs. Loan Fund XXI (Lacey) L.L.C. v. Thomas (In re Parks), 503 B.R. 820 (Bank.

W.D. Wash. 2013).
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“persuaded that ‘corporation’ as used in § 101(9)(A) is not limited to those entities
specifically itemized in statute.”35 It found this approach to be consistent with that taken
by the Seventh Circuit in Longview Aluminum, discussed above, when it held that “a
member of an L.L.C. was equivalent in relationship to a director of a corporation, thereby
expanding the definition of ‘director’ in § 101(31) [defining insider] to include other

L.L.C. members.”36 Next, the court applied the “presumption that equivalent words have
equivalent meaning when repeated in same statute,”37 and observed that in the non-insider
context it has been “found that an L.L.C. ‘fits comfortably within the Bankruptcy Code’s
definition of “corporation.”’”38 The state law treatment of LLCs further supported the
court’s conclusion that an LLC was included in the broad definition of “corporation” for
purposes of the definition of “insider.”39
b. Authorities supporting CJD’s position.
In support of it motion to amend, CJD anticipates the Trustee’s argument that the
amendment would be futile and asserts that the “problem with the Trustee’s allegations as
to the insider status of CJD is that CJD was not a corporation, but a limited liability

35 Id. at 827-28.
36 Id. at 828.
37 Id. (citing Cohen v. de la Cruz, 523 U.S. 213, 220 (1998)).
38 Id. (quoting Gilliam v. Speier (In re KRSM Props., L.L.C.), 318 B.R. 712, 717 (9th Cir. BAP


2004) (considering whether LLC was a “person” for purposes of the Code and therefore eligible to file a
petition) and also citing Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003)).
39 Id. at 828-29.
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company.”40 It then discusses several cases to support its argument.

The first case is Enterprise Acquisition Partners, a decision of the Ninth Circuit
BAP, which did not concern the status of an LLC, but observed that “[p]articularly in
light of the conclusive presumption of preferential treatment that arises from a
determination that an entity is a per se insider, there is no justification for expanding the
definition of per se insider beyond what is plainly contained in the statute.”41 CJD then
relies upon several cases which apply the Enterprise caution.

The first cited case relying on Enterprise is Weddle, 42 in which the Chapter 7
trustee brought an adversary action to avoid the recording of a judgment against the
individual debtors that was done more than 90 days prepetition by a limited liability
company controlled by the father of one of the debtors. The debtors were members of the
LLC and each held a 5% ownership interest in 100 common units. Because neither
membership in, nor management or control of an LLC is specifically addressed in the
definition of “insider” in § 101(31), the plaintiff, relying on Barman, argued that
“insider” status should be found because the debtors were persons in control of the LLC,
and the “insider” definition concerning “corporations” found in § 101(31)(A)(iv)
applied.43 The court cited the Enterprise instruction not to enlarge the list of per se

40 Doc. 66, 4.
41 Enterprise Acquisition Partners, 319 B.R. at 632.
42 Elsaesser v. Cougar Crest Lodge, L.L.C. (In re Weddle), 353 B.R. 892 (Bankr. D. Idaho 2006).
43 Id. at 897.


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insiders beyond those in the statute, and held that “[s]ince a[n] LLC of which debtor is a
member, director, officer or person in control is not among the list of per se, statutory
insiders, Plaintiff’s argument fails.”44

Next, CJD relies upon Lull, 45 a 2008 bankruptcy decision from the District of
Hawaii. In this preference action, the bankruptcy trustee contended that Tipaldi had
received an avoidable transfer from debtor Lull more than 90 days prepetition. Both Lull
and Tipaldi were members and managers of Tower Creek, LLC. The trustee (like the
Plaintiff-Trustee in this case) contended that Tipaldi was a per se insider of the debtor
because § 101(31)(E) defines “insider” to include an “affiliate, or insider of an affiliate as
if such affiliate were the debtor,” and the LLC was an “affiliate” of the debtor under the
corporate portion of § 101(2)(B). Although acknowledging that some courts have found
that an LLC is “sufficiently analogous to a corporation to permit a court to apply the
corporate provisions of § 101(31) to a LLC,”46 the court noted that the Ninth Circuit had
not decided the question, but the Ninth Circuit BAP had instructed that the definitions
should not be expanded. The court therefore concluded that the “Weddle court’s holding
that a limited liability company is not a per se insider of a debtor who is a member of the
company is the more sound result.”47

44 Id.
45 Kotoshirodo v. Dorland and Assocs., Inc. (In re Lull), 2008 WL 3895561 (Bankr. D. Haw.


2008).

46 Id. at *8.

47 Id. at *9.

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In its reply brief, CJD argues that the Tenth Circuit would adopt its argument over
that of the Trustee. The case relied on is Kunz, 48 where the court held that the debtor’s
title of “director emeritus” of a bank did not make him a “director” of the bank or a per se
insider of the debtor, for the purpose of avoidance of allegedly preferential transfers from
the debtor to the bank. The court determined that the meaning of “director” as used in the
definition of “insider” is “a person who is a member of the governing board of the
corporation and participates in corporate governance.”49 This meaning was found to
contrast with that of “emeritus,” which refers to a person “‘holding after retirement . . . an
honorary title corresponding to that held last during active service’” or “‘retired from an
office or profession.’”50 The court therefore held that the debtor was not an “insider” of
the bank, and that a director emeritus was not equivalent to a director for the purposes of
insider status. The court rejected the trustee’s argument that the term “director” must be
construed to included any kind of director, which would equate a managing director with
a former director. The court’s construction was found to be more consistent with the
“overall understanding of the function of the statutory definition of ‘insider’ — as well as
true to the actual language.”51 According to CJD, this analysis demonstrates that “the
Tenth Circuit understands, like the Enterprise line of cases, that an expansion of the

48 In re Kunz, 489 F.3d 1072.

49 Id. at 1077.

50 Id. at 1078 (quoting Webster's Third New Internat'l Dictionary 741).

51 Id. at 1079.

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definition of an insider beyond what is plainly stated in the statute is unnecessary.”52

c. The Court finds the Trustee’s arguments and authorities to be more
persuasive than CJD’s.
The Court finds that the Trustee’s position is fully supported by the plain meaning
of the applicable definitions. The cases cited by the Trustee holding that an LLC is
within the statutory definition of a “corporation” for purposes of the definition of
“affiliate” are persuasive. The Code defines a “corporation” to include an “association
having a power or privilege that a private corporation, but not an individual or a
partnership, possesses.”53 A Kansas LLC has such powers and privileges, and CJD does
not argue to the contrary.

Once it is determined that a Kansas LLC fits within the Code’s definition of
“corporation,” CJD’s status as an “insider” of both Debtors Brooke Corp and Brooke
Capital follows from the definitions of “affiliate” and “insider.” An “affiliate” is defined
to mean a corporation “20 percent or more of whose outstanding voting securities are
directly or indirectly owned [or] controlled . . . by the debtor.” Debtor Brooke Corp
owned Brooke Brokerage Corporation, which in turn owned CJD. Brooke Corp therefore
indirectly controlled CJD, making CJD an “affiliate” of Brooke Corp, and therefore an
“insider” of Brooke Corp since “insider” is defined by § 101(31)(e) to include an
“affiliate.” Further, Debtor Brooke Capital was a majority-owned subsidiary of Brooke

52 Doc. 68, at 7.

53 11 U.S.C. § 101(9).

18

Case 11-06236 Doc# 70 Filed 03/10/14 Page 18 of 22


Corp and therefore an “affiliate” of Brooke Corp under § 101(2)(B). Since CJD is an
“insider” of Brooke Corp, which is an “affiliate” of Brooke Capital, CJD also is an
“insider” of Brooke Capital under § 101(31)(E).

Contrary to the Enterprise line of cases relied upon by CJD, the foregoing analysis
is not an expansion of the definition of per se insider by analogizing an LLC to a
corporation; it is a straightforward application of the Code definitions. The Weddle
decision on which CJD relies characterized the plaintiff’s argument in support of insider
status as requesting the court to “apply by analogy the insider definition concerning
corporations found in § 101(31)(A)(iv).”54 Rather than examining whether the LLC
satisfied the Code’s definition of “corporation,” which is the linchpin of the Trustee’s
argument in this case, the Weddle court followed the Ninth Circuit BAP’s admonition not
to expand the definition of per se insider. Further, the 2008 Lull decision, also relied
upon by CJD and which followed Weddle, arose in the same bankruptcy proceeding and
was decided by the same judge as the 2009 Lull decision which supports the Trustee’s
argument, a development that casts doubt upon that judge’s earlier analysis.

The Court finds the Trustee’s analysis to be consistent with the Tenth Circuit’s
decision in Kunz, which, contrary to CJD’s implication, did not adopt the Enterprise
directive to limit per se insiders to those enumerated in § 101(31) without regard to the
Code’s statutory definition of “corporation.” Rather Kunz was decided, as is this case,

54 Weddle, 353 B.R. at 897.
19


Case 11-06236 Doc# 70 Filed 03/10/14 Page 19 of 22


upon the plain meaning of the statutory definitions. As observed by the Kunz court, “it
was the legislative intent that a person with a relationship designated in the statute be
treated as an insider because of the high potential for control inherent in those
relationships.”55 For purposes of per se insider status in preferential transfer litigation,
this Court sees no relevant distinction between a corporate and an LLC subsidiary of a
debtor; there is an equally high potential for control inherent in both relationships. If the
presumption of preferential treatment applies to a corporation, it should also apply to a
similarly-situated LLC.

2. CJD is not a per se insider of Brooke Corp under § 101(31)(E) because of
the operating agreement between CJD and Brooke Brokerage.
In addition to the foregoing argument, the Trustee argues that CJD is an insider of
Brooke Corp based upon the allegation that CJD was being operated under an operating
agreement with Brooke Brokerage.56 Section 101(2)(C) defines an “affiliate” an a
“person whose business is operated under a lease or operating agreement by a debtor.”
The Court agrees with the Trustee that an LLC is a “person” for purposes of this

55 Kunz, 489 F.3d at 1079.

56 A Certificate of Amendment and Restatement of the Operating Agreement of CJD &
Associates, L.L.C. dated December 31, 2004 (Doc. 67-1) is included in the record with a supporting
affidavit of the Trustee (Doc. 67-2). The Operating Agreement provides that the business and affairs of
the company shall be managed by its manager, which for purposes of the agreement is referred to as the
board of directors. Doc. 67-1, 1. The directors are elected by the members, (Doc. 67-1, 7), and Brooke
Brokerage Corporation is named as holding 100% of the membership interests (Doc. 67-1, 5). CJD’s
objection to the Trustee’s arguments premised upon the Operating Agreement relies in part upon the fact
that there is no evidence that the Operating Agreement was in effect when the transfers in issue were
made. Although the Court agrees there is no such evidence, it prefers to address the Trustee’s arguments
based upon the construction of the Bankruptcy Code, rather than the fact-question of the effective dates of
the Operating Agreement.

20

Case 11-06236 Doc# 70 Filed 03/10/14 Page 20 of 22


definition. The Code defines “person” to include an “individual, partnership, and
corporation.”57 Although an LLC is not included in the list, courts find an LLC is a
“person” for purposes of determining its eligibility under § 109 to file a petition.58

But the Court finds that the operating agreement relied upon by the Trustee does
not satisfy the “affiliate” definition. To qualify as the basis for “affiliate” status, the
operating agreement must be with a debtor; here the operating agreement was with
Brooke Brokerage, a non-debtor. To overcome this deficiency, the Trustee argues that
the “debtor” means Brooke Brokerage because “[i]n applying § 101(31)(E) [which
defines “insider” to mean “affiliate, or insider of an affiliate as if such affiliate were the
debtor]” to § 101(2)(C) [defining “affiliate” to mean a “person whose business is operated
under a lease or an operating agreement by a debtor”], the term ‘debtor’ means Brooke
Brokerage because it is ‘as if’ Brooke Brokerage (i.e., “such affiliate’) ‘were the
debtor.’”59 But this argument misconstrues § 101(31)(E), which provides for two routes
to “insider” status: (1) being an “affiliate” of the debtor; and (2) being an “insider” of an
“affiliate” of the debtor, as if such affiliate were the debtor. For purposes of the first
route, CJD is not an “affiliate” of a debtor based upon the operating agreement with non-
debtor Brooke Brokerage. For purposes of the second route, there is no Bankruptcy Code
definition providing that CJD is an “insider” of Brooke Brokerage, an affiliate of Brooke

57 11 U.S.C. § 101(41).

58 See note 22.

59 Doc. 67, at 10.

21

Case 11-06236 Doc# 70 Filed 03/10/14 Page 21 of 22


Corp, because of the operating agreement. Under the Code definitions, an “insider” of an
“affiliate” of the debtor is treated the same as an “insider” of the debtor. This does not
mean that the “affiliate” is a debtor. The Trustee’s argument misconstrues the phrase “as
if such affiliate were the debtor” in the definition of “insider.” The Court therefore finds
that CJD cannot be an “affiliate” of Brooke Corp under § 101(2)(C) based upon an
operating agreement with Brooke Brokerage.

CONCLUSION.

For the foregoing reasons, the Court denies CJD’s motion to file an amended
answer denying the Trustee’s allegations that CJD is a per se insider of Debtors Brooke
Corp and Brooke Capital. The proposed amendment would be futile because, under the
uncontroverted facts as to the relationship of CJD with the Brooke entities, CJD is a
statutory or pe se insider.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this proceeding.

IT IS SO ORDERED.
# # #


22

Case 11-06236 Doc# 70 Filed 03/10/14 Page 22 of 22

09-06043 Posl-Bendsen et al v. Leonard et al (Doc. 216)

Posl-Bendsen et al v. Leonard et al, 09-06043 (Bankr. D. Kan. Feb. 3, 2014) Doc. 216

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 3rd day of February, 2014.

 

For on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
DEBTORS.

JANICE POSL-BENDSEN, by John R.
Kurth, guardian and conservator; and
JOHN R. KURTH, Trustee of the Janice
Posl-Bendsen Revocable Living Trust,

PLAINTIFFS,

v.
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
DEFENDANTS.

CASE NO. 09-20190
CHAPTER 7

ADV. NO. 09-6043

MEMORANDUM OPINION AND ORDER
DENYING DEFENDANTS’ MOTION TO DISMISS


Case 09-06043 Doc# 216 Filed 02/03/14 Page 1 of 4


In this adversary proceeding creditors Janice Posl-Bendsen, by John R. Kurth,
guardian and conservator, and the Trustee of the Janice Posl-Bendsen Revocable Living
Trust object to the discharge of their claim against Debtors David Todd Leonard and
Michelle Leigh Leonard under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6) and also seek an
order denying discharge under 11 U.S.C. §§ 727(a)(3), (a)(4), and (a)(5). Debtors, who
appear pro se, move to dismiss under Bankruptcy Rule 7012(b)(6). Plaintiffs, who appear
by Patrick E. Henderson, oppose the motion. The Court has jurisdiction.1 For the reasons
discussed below, the Court denies the motion.
THE MOTION TO DISMISS.

A. The applicable standard.
Defendants move to dismiss under Federal Bankruptcy Rule 7012(b), which
incorporates Federal Rule 12(b). It provides for presentation by motion of the defense of
“failure to state a claim upon which relief can be granted.” As recently stated by Judge
Karlin of this Court, that rule requires that

the complaint must contain “a short and plain statement of the
claim showing that the pleader is entitled to relief.” The
complaint must present factual allegations, that when assumed

1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of
Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I) and (J). There is no objection
to venue or jurisdiction over the parties.

2

Case 09-06043 Doc# 216 Filed 02/03/14 Page 2 of 4


to be true, “raise a right to relief above the speculative level,”
and the complaint must contain “enough facts to state a claim
to relief that is plausible on its face.” “Determining whether a
complaint states a plausible claim for relief is a context-
specific task that requires the reviewing court to draw on its
judicial experience and common sense. This contextual
approach means comparing the pleading with the elements of
the cause(s) of action.” A plaintiff must include in the
complaint “either direct or inferential allegations respecting
all the material elements necessary to sustain a recovery under
some viable legal theory.” “[T]he complaint must give the
court reason to believe that this plaintiff has a reasonable
likelihood of mustering factual support for these claims.”2

Defendants, in addition to relying upon this standard under Bankruptcy Rule 7012, also

cite Bankruptcy Rule 9(b) which states, “in alleging fraud or mistake, a party must state

with particularity the circumstances constituting fraud or mistake. Malice, intent,

knowledge, and other conditions of a person’s mind may be alleged generally.”

B. The motion is not granted because the Defendants’ arguments are not
sufficient.
After discussing the applicable standard, Defendants’ memorandum in support of

their motion includes a long section labeled “uncontroverted facts.” These facts are a

quotation of the uncontroverted facts found by the Court when denying the Plaintiffs’

motion for summary judgment.3 Next, the memorandum includes an analysis of the

elements of the various claims of the complaint, with the exception of Count I. In

2 Farmway Credit Union v. Eilert (In re Eilert), 2014 WL 23744, *1 (Bankr. D. Kan. Jan. 22,

2014) (footnotes omitted). Defendants’ statement of the applicable standard is consistent with this

quotation. See dkt. 214 at 2.

3 Dkt. 195.

3

Case 09-06043 Doc# 216 Filed 02/03/14 Page 3 of 4


conclusion of their argument, Defendants state, “The Plaintiffs’ adversary complaint
merely makes conclusory allegations, therefore, it fails to state a claim upon which relief
can be granted and it fails to show that the debtors discharge should be denied.”4

The Court declines to grant the motion because the arguments in support fail to
address the controlling standard. The only facts set forth are from the summary judgment
ruling.5 There is no discussion whether the allegations of the complaint contain enough
facts to state a claim to relief that is plausible on its face.
CONCLUSION.

For the foregoing reasons, the motion to dismiss the complaint is denied.

IT IS SO ORDERED.
###


4 Dkt. 214 at 11.

5 Applicability of the findings of uncontroverted facts made by the Court when ruling on a motion
for summary judgment is limited to the specific motion under consideration when the findings were made.

4

Case 09-06043 Doc# 216 Filed 02/03/14 Page 4 of 4

12-11662 Likins (Doc. # 64)

In Re Likins, 12-11662 (Bankr. D. Kan. Feb. 14, 2014) Doc. # 64

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 12th day of February, 2014.

 

Designated for print publication

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
CHRISTIE LYNN LIKINS, CASE NO. 12-11662
CHAPTER 7
DEBTOR.

MEMORANDUM OPINION AND JUDGMENT DENYING DEBTOR’S CLAIM
OF EXEMPTION OF AMERICAN OPPORTUNITY TAX CREDIT

Debtor Cristie Likins filed an amended Schedule C, “Property Claimed as

Exempt,” that included $1,0001 for her “2012 American Opportunity Credit” under 20

U.S.C. § 1095a(d). The Chapter 7 Trustee, Linda S. Parks, objected. The case has been
1 The $1,000 exemption amount is inconsistent with the parties’ joint Stipulation of Facts (doc.
58) and their briefs. The joint stipulation states, “Debtor’s AOC was $1,117.00. Of that, $534.00 was a
refundable credit and $583.00 was a non-refundable credit.” Debtor seeks to exempt both the refundable
and non-refundable credits, and the Trustee opposes both exemptions. The Court will decide the
controversy using the exemption amounts stated in the stipulated facts.

Case 12-11662 Doc# 64 Filed 02/12/14 Page 1 of 13


submitted for decision2 on a joint stipulation of facts and the briefs.3 For the reasons
discussed below, the Court denies the exemption.

SUMMARY OF STIPULATED FACTS.4

Debtor filed a petition under Chapter 7 on June 2012. Linda S. Parks is the
appointed and acting Chapter 7 Trustee. Debtor’s federal income tax return for 2012
reflects a refund $7,912, and her state income tax return reflects a refund of $1,349. The
Trustee is entitled to 172/366ths of the nonexempt refunds.

In her 2012 federal income tax return, Debtor received an education tax credit
called the American Opportunity Credit.5 “The . . . credit is allowed up to $2,500 per
student per year for qualified tuition, related expenses and course materials for each of the
first four years of a student’s post-secondary education in a degree or certificate
program.”6 The credit can be received regardless of whether the expenses are paid by

2 The Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b) and the Standing
Order of the United States District Court for the District of Kansas that exercised authority conferred by
§ 157(a) to refer to the District’s bankruptcy judges all matters under the Bankruptcy Code and all
proceedings arising under the Code or arising in or related to a case under the Code, effective July 10,
1984. The allowance of exemptions from property of the estate is a core proceeding which this Court
may hear and determine as provided in 28 U.S.C. § 157(b)(2)(B). There is no objection to venue or
jurisdiction over the parties.

3 Debtor is represented by Martin J. Peck. The Trustee is represented by Rachel Lomas of Hite,
Fanning & Honeyman, L.L.P.

4 The following facts are from the Stipulation of Facts, doc. 58, unless another source is stated.

5 26 U.S.C. § 25A(i).

6 8 Carina Bryant, Mertens Law of Federal Income Taxation, § 32:39 (database updated January
2014), available on Westlaw at MERTENS § 32:39.

2

Case 12-11662 Doc# 64 Filed 02/12/14 Page 2 of 13


cash, check, credit card, debit card, borrowed funds, or a third party.7 The credit can be a
refundable credit, a non-refundable credit, or both.

Debtor’s Amended Schedule C claimed as exempt her refundable and nonrefundable
American Opportunity Credits under 20 U.S.C. § 1095a(d). Her total credit
was $1,117. Of that $1,117, $583 was non-refundable; it reduced her tax liability to zero.
The remaining $534 of the credit was refundable and made up part of her $7,912 federal
tax refund. Debtor’s qualification for the credit was based upon the fact that she was a
student in 2012 and paid tuition with her federal student loan proceeds.
DISCUSSION.

1. The American Opportunity Tax Credit.
The Taxpayer Relief Act of 1997 added two non-refundable tax credits for the
costs of higher education, the Hope Scholarship Credit and the Lifetime Learning Credit.8
For tax years 2009 through 2017, the Hope Scholarship Credit has been modified and
these modifications have been renamed the American Opportunity Credit (AOC). Under
the modifications, forty percent of the AOC is refundable, except in limited
circumstances.9 The source of the funding used to pay the costs of the higher education is

7 See Doc. 63-2, 2-3, Exhibit B to Trustee’s brief (2012 Instructions for IRS Form 8863,
“Education Credits (American Opportunity and Lifetime Learning Credits)”).
8 8 Mertens Law of Federal Income Taxation at § 32:2, “Education Credits.”
9 Id. at § 32:39.
3

Case 12-11662 Doc# 64 Filed 02/12/14 Page 3 of 13


not a factor in determining the credit.10

2. Applicable exemption statutes.
So long as they have lived in Kansas for two years or more, debtors filing
bankruptcy here are allowed the exemptions permitted under Kansas state law and non-
bankruptcy federal law.11 There is no Kansas exemption applicable to AOC refunds. The
non-bankruptcy federal exemptions available to Kansas debtors include one for “federally
insured or guaranteed student loans, grants, and work assistance” under 20 U.S.C.
1095a(d),12 which provides:

No attachment of student assistance. Except as
authorized in this section, notwithstanding any other provision
of Federal or State law, no grant, loan, or work assistance
awarded under this title, or property traceable to such
assistance, shall be subject to garnishment or attachment in
order to satisfy any debt owed by the student awarded such
assistance, other than a debt owed to the Secretary and arising
under this title.13

“This title” refers to Title 20 of the United States Code, “Education.” Most federal
student assistance is authorized by 20 U.S.C. § 1070, et seq. 14 Hence, federal student

10 See Doc. 63-2, 2-3, Exhibit B to Trustee’s brief (2012 Instructions for IRS Form 8863,
“Education Credits (American Opportunity and Lifetime Learning Credits)).
11 11 U.S.C. § 522(b)(3) and K.S.A. 60-2312.
12 4 Collier on Bankruptcy, ¶ 522.02[3] at 522-18 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2013).
13 20 U.S.C. § 1095a(d) (emphasis added).
14Deanne Loonin, Student Loan Law, National Consumer Law Center, App. A at 193 (3rd ed.
2006).
4

Case 12-11662 Doc# 64 Filed 02/12/14 Page 4 of 13


grants, loans, and work assistance, and property traceable to such assistance are exempt.

3. Neither the refundable nor the non-refundable portion of Debtor’s AOC is
exempt under 20 U.S.C. § 1095a(d).
In this case, Debtor contends that both the refundable and the non-refundable
portions of her AOC are exempt because they are traceable to her student loan assistance.
The factual basis for the position is the parties’ stipulations that Debtor “was able to take
the AOC because of tuition paid during 2012” and that Debtor “paid that tuition using
student loan proceeds.”15

Whether the exemption of the AOC refunds is permitted therefore turns on the
meaning of the phrase “property traceable to such assistance” in 20 U.S.C. § 1095a(d).
The statute does not define the phrase. “Tracing” is defined in Black’s Law Dictionary as
“[t]he process of tracking property’s ownership or characteristics from the time of its
origin to the present.”16 Tracing is expressly allowed for purposes of the exemptions
enumerated in 11 U.S.C. § 522(d)(11). For these exemptions, a leading bankruptcy
treatise defines tracing as “the right to preserve an exemption as the exemptable property
changes form, . . . for example, from the right to receive an exempt payment, to payment
in the form of a check, to a bank deposit, and ultimately to cash proceeds.”17

Cases finding the proceeds of student loans to be exempt under 20 U.S.C.

15 Doc. 58, 2.
16 Black’s Law Dictionary (9th ed. 2009), available on Westlaw at BLACKS, “tracing.”
17 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice 3d,


§ 56:9 at 56-29 (Thomson Reuters 2013).
5

Case 12-11662 Doc# 64 Filed 02/12/14 Page 5 of 13


§ 1095a(d) utilize generally accepted methods of tracing cash proceeds. For example, in
Brindle v. Arata, 18 the Indiana Court of Appeals held that the proceeds of a student loan
deposited into the student’s personal checking account retained their exempt status. It
reasoned that Congress intended to allow students to deposit loan proceeds in their
checking accounts without fear of attachment by judgment creditors.19 In Perkins, 20 the
bankruptcy court applied the lowest-intermediate-balance method of tracing to sustain a
debtor’s claim of exemption of student loan proceeds garnished from her savings account
prepetition and returned to the bankruptcy estate. In Drescher, 21 the court sustained the
debtor’s claimed exemption of garnished funds which were traceable, using the first-infirst-
out method the parties agreed was appropriate, to her deposit of student loan
proceeds into her savings account.

Debtor points to no case law supporting her contention that the AOC refunds are
traceable to her student loans, but she argues that “the [tax] credit was the direct result of
the debtor’s use of student loan proceeds.”22 As stated above, the legal or technical
meaning of tracing of property is the identification of specific property as it changes
form. “Result” as Debtor uses it here, on the other hand, means the consequence of a

18 Brindle v. Arata, 940 N.E.2d 320 (Ind. App. 2010).

19 Id. at 322.

20 In re Perkins, 2011 WL 4458961 at *5 (Bankr. N.D. Ohio Sept. 23, 2011).

21 In re Drescher, 2013 WL 4525232 at *4 n. 7 (Bankr. D. Or. Aug. 27, 2013).

22 Doc. 61, 2.

6

Case 12-11662 Doc# 64 Filed 02/12/14 Page 6 of 13


particular action. Although the common usage meanings of “result” and “tracing” are
similar, they are entirely different legal concepts. The Court finds that the legal or
technical meaning of “tracing” should be adopted when construing 20 U.S.C. § 1095a(d).
It is the meaning used by the decisions cited above that found the exemption to be
applicable to the proceeds of student loans, and the meaning applied when construing the
exemptions allowed by 11 U.S.C. § 522(d)(11).23 To construe “property traceable to” a
student loan as used in 20 U.S.C. § 1095a(d) to include a tax refund which is the result of
a student loan would expand the meaning of the exemption. Debtor’s student loan
assistance did not change form; the AOC is a new property interest having its source in
the student loan assistance.

An argument, similar to Debtor’s, to apply the wage garnishment exemption for
25% of a person’s aggregate disposable income under the Consumer Credit Protection
Act to a tax refund having its source in wages was rejected by the United States Supreme
Court in Kokoszka v. Belford. 24 The Court characterized the debtor’s position as being
“that a tax refund, having its source in wages and being completely available to the
taxpayer upon its return without any further deduction, is ‘disposable earnings’ within the
meaning of the statute.”25 The Supreme Court agreed with the lower court that the terms
in the exemption statute “were limited to periodic payments of compensation” and did

23 See 3 Norton Bankr. Law & Prac. 3d, § 56:9 at 56-29.

24 417 U.S. 642 (1974).

25 Id. at 649.

7

Case 12-11662 Doc# 64 Filed 02/12/14 Page 7 of 13


“not pertain to every asset that is traceable in some way to such compensation.”26 The
Tenth Circuit27 cited Kokoszka when holding that a tax refund derived from wages was
not “earnings from personal services” for purposes of an Oklahoma exemption statute. It
reasoned that when an employer withheld funds from earnings, the withheld funds
changed form and became a tax, which was not exempt as “earnings from personal
services.”28 Judge Berger, another bankruptcy judge in this District, in Rangel29 relied in
part upon Kokoszka when holding that the Kansas exemption for “compensation paid or
payable for personal services” was not broad enough to include a federal income tax
refund simply because the refund could be traced to wages. He held that the exemption
required “a direct link between the compensation and the personal services,” and that the
link had been severed when wages were withheld and became a “tax.”30

The Court finds that the exemption for “property traceable to” student assistance is
limited to property which was at one time student assistance.31 Debtor’s tax refund was
never in the form of student assistance. A tax refund under the AOC results from or
follows from the expenditure of funds, including student loan proceeds, for specified

26 Id., 417 U.S. at 651.
27 In re Annis, 232 F.3d 749, 753 (10th Cir. 2000).
28 Id. at 752.
29 In re Rangel, 317 B.R. 553, 555 (Bankr. D. Kan. 2004).
30 Id. at 555-56.
31 In so holding, the Court is not implying that all property traceable to student loan proceeds is


exempt.
8

Case 12-11662 Doc# 64 Filed 02/12/14 Page 8 of 13


educational purposes, but the refund is not a different form of the assistance.

4. If Debtor’s AOC were covered by 20 U.S.C. § 1095a(d), the exemption
would apply only to the refundable portion of the credit.
The Trustee agrees that if the AOC refund is exempt, then the refundable portion
of the AOC, $534, should belong to Debtor. But Debtor argues that if the AOC refund is
exempt under 20 U.S.C. § 1095a(d) because it is traceable to Debtor’s student loan
proceeds, then she also may exempt the non-refundable portion, $583, “because had the
debtor not received the non-refundable portion of the credit, her $7,912 federal refund
would have been reduced by the $583.00 credit, to $7,329.”32 The Trustee responds that
“a non-refundable tax credit is not even property of the estate and so cannot be
exempted.”33 The Court agrees with the Trustee.

An examination of Debtor’s 2012 Form 1040A34 illustrates the difference between
the refundable and non-refundable portions of Debtor’s AOC. First, Debtor computed her
taxable income based on her wages. Since Debtor had no adjustments to gross income,
her tax liability of $583 was computed based upon her taxable income, less exemptions
and deductions. Then $583, the non-refundable portion of the AOC, was applied,
reducing her tax liability to zero. Next, her total tax payments and credits of $7,912 were
calculated as the sum of her wage withholdings, the earned income credit, the child tax

32 Doc. 61, 3.

33 Doc. 63, 7.

34 Doc. 63-4.

9

Case 12-11662 Doc# 64 Filed 02/12/14 Page 9 of 13


credit, and the AOC credit of $534. Since she owed no taxes, the full amount of the
payments and credits were determined to be the amount of her refund. Hence, the $543
AOC is referred to as a refundable credit.

Debtor provides no case authority allowing an exemption of a non-refundable tax
credit. The Trustee cites several cases holding non-refundable credits to be ineligible for
exemption. These cases include a decision holding that the debtors’ 1999 non-refundable
Hope Education Credit was not a “public assistance” benefit exempt under Idaho law.35
The court distinguished the Hope credit from the earned income credit, which it had held
was exempt under the Idaho public assistance exemption statute, on several bases,
including the fact that the Hope credit, unlike the earned income credit, was nonrefundable.
“[W]hile the Hope credit offsets, dollar for dollar, a taxpayer’s liability for
tax, the earned income credit is treated in the same fashion as a tax payment.”36 This
distinction between refundable and non-refundable credits is persuasive, since the AOC
for 2012 on which Debtor relies is a modified version of the 1999 Hope credit.

The Tenth Circuit has held that the non-refundable portion of a debtor’s federal
child tax credit was not within a Colorado statute exempting “[t]he full amount of any
federal or state income tax refund attributed to an earned income tax credit or a child tax
credit.”37 The court noted that non-refundable tax credits “are subtracted from the tax, but

35 In re Crampton, 249 B.R. 215 (Bankr. D. Idaho 2000).

36 Id. at 217-18.

37 Cohen v. Borgman (In re Borgman), 698 F.3d 1255, 1257 (10th Cir. 2012).

10

Case 12-11662 Doc# 64 Filed 02/12/14 Page 10 of 13


can only reduce the tax to zero.”38 It then stated,

We agree with the bankruptcy court that the
nonrefundable portion of the CTC — i.e. the portion claimed
in the “tax and credits” section of Form 1040 — never gives
rise to a “refund.” A reduction in tax liability, standing alone,
will never result in a refund. Only items treated as
“payments” — such as the earned income tax credit or the
Additional CTC — can give rise to a refund, and then only to
the extent that they exceed tax liability. Accordingly, the
nonrefundable portion of the CTC, which is not treated as a
“payment” under the Internal Revenue Code, is outside the
scope of [the Colorado statute], which exempts only
“refunds.”39

In a decision pre-dating the Tenth Circuit’s ruling, the Colorado bankruptcy court

held that the non-refundable component of the federal child tax credit was not property of

the estate, and therefore could not be exempted under the Colorado statute exempting any

federal or state income tax refund attributable to a child tax credit.40 It agreed with the

following language from another decision:

“The non-refundable child tax credit is not treated as an
overpayment and, therefore, does not constitute any portion of
a taxpayer’s income tax refund. As such, the non-refundable
child tax credit is not property of Debtors’ bankruptcy estate
and cannot be subject to collection and distribution by the
Trustee. Debtors have already obtained the benefit of the
entire child tax credit when they used the credit to reduce
their tax liability. They cannot also use the credit to insulate
part of their tax refund from use by the Trustee for the benefit

38 Id. at 1260.

39 Id. at 1261 (citations omitted).

40 In re Landgrebe, 2009 WL 3253933 (Bankr. D. Colo. Sept. 23, 2009).

11

Case 12-11662 Doc# 64 Filed 02/12/14 Page 11 of 13


of their unsecured creditors.”41

The court also reasoned, in the alternative, that the non-refundable credit was not an
exempt refund for purposes of the Colorado exemption laws.42 The intent of such
exemptions is to keep certain property of a debtor protected from levy and sale under a
writ of attachment or garnishment. A non-refundable credit never puts property into the
hands of the debtor. In addition, although a creditor could attach or levy against the
refundable tax credit, it could never do so as to the non-refundable portion.

The Court finds the foregoing authorities persuasive. The distinctions between
refundable and non-refundable credits demonstrate that the non-refundable portion of the
AOC would not be within the exemption from garnishment and attachment of student
loan proceeds under 20 U.S.C. § 1095a(d), even if the refundable portion were. Debtor
fully realized the value of the non-refundable credit when it was applied to reduce her tax
liability to zero. Debtor could never receive the credit; its only function was to reduce her
tax liability. The non-refundable portion of the AOC is therefore not property of Debtor’s
bankruptcy estate. It could not be attached by Debtor’s creditors. The exemption of 20

U.S.C. § 1095a(d) does not apply to it.
CONCLUSION.

For the forgoing reasons, the Court sustains the Trustee’s objection to Debtor’s

41 Id. at *2 (quoting In re Klostermeier, 2009 WL 1617090, at *4 (Bankr. N.D. Ohio May 29,

2009)).
42 Id. at 3.
12

Case 12-11662 Doc# 64 Filed 02/12/14 Page 12 of 13


claim of exemption of the refundable and non-refundable portions of her AOC.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.
JUDGMENT.

Judgment is hereby entered granting the Trustee’s Objection to Exemption. The
judgment based on this ruling will become effective when it is entered on the docket for
this case, as provided by Federal Rule of Bankruptcy Procedure 9021.

IT IS SO ORDERED.
# # #


13

Case 12-11662 Doc# 64 Filed 02/12/14 Page 13 of 13

12-22394 Eland (Doc. # 70)

In Re Eland, 12-22394 (Bankr. D. Kan. Feb. 25, 2014) Doc. # 70

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 24th day of February, 2014.

 

For on-line use but not print publication

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
DAVID ROBERT ELAND and CASE NO. 12-22394
ALLENE DONNIS ELAND, CHAPTER 13
DEBTORS.

MEMORANDUM OPINION AND JUDGMENT
GRANTING IN PART THE POST-CONFIRMATION APPLICATION OF
DEBTORS’ COUNSEL FOR ATTORNEY FEES


The matter before the Court is the application of Debtors’ counsel, William P.
Turner, for approval of attorney fees of $2,980, in addition to $1,000 Debtors paid him
prepetition and $3,000 they paid through their confirmed Chapter 13 plan, and expenses
of $66.03.1 The Chapter 13 Trustee, W.H. Griffin, objects in part to the request for

1 Doc. 53.

Case 12-22394 Doc# 70 Filed 02/24/14 Page 1 of 9


additional fees.2 The Court has jurisdiction.3 Having considered the pleadings and the

arguments of counsel, the Court grants the application in part.

Debtors’ Chapter 13 bankruptcy petition was filed on August 30, 2012. Debtors’

Schedules listed Quicken Loans as the holder of their home mortgage loan. The

Disclosure of Compensation of Attorney for Debtor(s) required by 11 U.S.C. § 329(a)4

and Bankruptcy Rule 2016(b) (the Initial Disclosure)5 was filed the same day. In it,

Debtors’ counsel states, “For legal services, I have agreed to accept $4,000.00. Prior to

the filing of this statement I have received $1,000.00,” and “Balance Due $3,000.00.” It

further states,

5. In return for the above-disclosed fee, I have agreed to
render legal service for all aspects of the bankruptcy case,
including:
a. Analysis of the debtor’s financial situation, and
rendering advice to the debtor in determining whether to file a
petition in bankruptcy;
b. Preparation and filing of any petition, schedules,
statement of affairs and plan which may be required;
c. Representation of the debtor at the meeting of
2 Doc. 55.

3 This Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b) and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s bankruptcy judges all cases under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. An application for allowance of attorney fees is a core proceeding which this Court may hear
and determine as provided in 28 U.S.C. § 157(b)(2)(A). There is no objection to venue or jurisdiction
over the parties.

4 Future references to title 11 in the text shall be to the section number only.

5 Fed. R. Bankr. P. 2016(b). Future references to the bankruptcy rules in the text shall be to
“Rule” and the rule number only.

2

Case 12-22394 Doc# 70 Filed 02/24/14 Page 2 of 9


creditors and confirmation hearing; and any adjourned

hearings thereof;

d. [Other provisions as needed]
Negotiations with secured creditors to reduce to
market value; exemption planning; preparation
and filing of reaffirmation agreements and
applications as needed; preparation and filing of
motions pursuant to 11 U.S.C. 522(f)(2)(A) for
avoidance of liens on household goods.
6. By agreement with the debtor(s), the above-disclosed fee
does not include the following service:
Representation of the debtors in any
dischargeability actions, judicial lien
avoidances, relief from stay actions or any other
adversary proceeding.6

By signing the Initial Disclosure, Debtors’ counsel stated, “I certify that the foregoing is a

complete statement of any agreement or arrangement for payment to me for

representation of the debtor(s) in this bankruptcy proceeding.”

Debtors’ proposed Chapter 13 plan was filed with the petition. It provided for

payment of the $3,000 balance due for attorney fees through the plan and stated, “Counsel

for Debtor reserves the right to submit additional fee applications, but payment is subject

to Court approval. Debtor consents to such increases in Plan payments as may be

necessary to pay any approved additional fees.”7 Objections to the proposed plan were

filed by the Chapter 13 Trustee,8 who contended that Debtors should propose a 100%

6 Doc. 1, 42.

7 Doc. 3, 2.

8 Doc. 13, filed September 27, 2012.

3

Case 12-22394 Doc# 70 Filed 02/24/14 Page 3 of 9


repayment plan, and Bank of America,9 who contended that its claim was improperly
omitted, apparently because it claimed to be the holder of the home mortgage note. Bank
of America’s objection was resolved by an agreed order filed on November 27, 2012.10 A
proposed amendment to Debtors’ plan addressing the Chapter 13 Trustee’s objection was
filed on March 12, 2013,11 and the plan as amended was confirmed on April 2, 2013.12

On October 3, 2013, Debtors’ counsel filed his application for post-confirmation
attorney fees. It alleges that counsel has spent a total of 34.9 hours representing Debtors
and that he should be compensated at the rate of $200.00 an hour, which would result in a
fee of $6,980.00. A detailed listing of the time spent is included. It shows 20.5 hours
spent before filing Debtors’ petition, 12.4 hours from the date of filing to the date of plan
confirmation, and 2.0 hours after confirmation.

The Chapter 13 Trustee objects to the request for fees, but does not challenge the
requested expenses. He contends that the Initial Disclosure limits counsel’s
compensation to $4,000 for work up to and including confirmation, with the exception of
the types of work excluded from the flat fee stated in the Initial Disclosure. Using this
standard, the Trustee contends that the only additional compensation which should be
allowed is for 3.5 hours spent on the objection of Bank of America to Debtors’ proposed

9 Doc. 14, filed October 9, 2012.

10 Doc. 20.

11 Doc. 36.

12 Doc. 44.

4

Case 12-22394 Doc# 70 Filed 02/24/14 Page 4 of 9


plan, and for 2 hours of post-confirmation work.

Debtors’ counsel responded to the objection by filing his Disclosure of
Compensation of Attorney for Debtor(s) - Amended (the Amended Disclosure).13 It
states, “For legal services, I have agreed to accept $6,980.00. Prior to the filing of this
statement I have received $4,000.00,” and “Balance Due $2,980.00.” Paragraphs 5(a)
through (5)(c), pre-printed on the form, are identical to the Initial Disclosure, but
paragraph 5(d), Other provisions as needed, states, “Negotiations with secured creditors
to reduce to market value; exemption planning. Note all fees are earned on hourly basis
of $200 an hour for Mr. Turner’s time, per the attached fee agreement.” Paragraph 6 is
identical to that in the Initial Disclosure. Attached to the Amended Disclosure is a fee
agreement between Mr. Turner and Debtors for representation in a Chapter 13 case, dated
April 27, 2012. The fee agreement is ambiguous as to whether the fee is to be a straight
hourly rate, or a flat fee for the general bankruptcy representation, with additional
services to be provided at the hourly rate.14

The Court finds that Mr. Turner’s compensation must be determined using the
terms stated in the Initial Disclosure, without consideration of the Amended Disclosure

13 Doc. 56.

14 Paragraph 1, labeled “Attorneys Fees,” states in part, “The Firm’s standard fee for a Chapter 13
bankruptcy petition is $3,000. The Firm will be charging an additional $500 due to the Debtors being
above median income and the Wife being self-employed. These fees will be charged off at the rate of
$200 an hour for Mr. Turner’s time, which includes the time spent in the initial consultation.” In
Paragraph 2, labeled “Proceedings Not Included,” the fee agreement describes matters subject to an
“additional fee” at the rate of $200 per hour as if the first paragraph is describing services for a flat fee.
The Initial Disclosure describes a flat-fee agreement for general bankruptcy representation, with
compensation at $200 per hour for additional services.

5

Case 12-22394 Doc# 70 Filed 02/24/14 Page 5 of 9


and the attached fee agreement. Rule 2016(b) provides for the filing of an initial
disclosure within 14 days of the order for relief and of a supplemental disclosure “within
14 days after any payment or agreement not previously disclosed.” The latter
requirement imposes a continuing duty to disclose.15 Here, there was no change in the
agreement between Debtors and their counsel to be reflected in a supplemental disclosure.
Rather, the Amended Disclosure represents an amended interpretation of the fee
arrangement which had been disclosed in the Initial Disclosure as an agreement for a flat
fee for general representation and an hourly rate for additional services.

Finding that the Initial Disclosure controls is consistent with the purpose and
importance of complete and accurate disclosures. “The disclosure requirements of § 329
are ‘mandatory, not permissive.’”16 “They enable the Bankruptcy Court to carry out its
traditional role of scrutinizing carefully the compensation paid to the debtor’s attorney.”17
The Court, the Chapter 13 Trustee, and creditors must rely upon the completeness and
accuracy of the disclosures, since they are the only information provided about the
compensation of the debtor’s counsel. “The disclosure rules are applied literally, even if
the results are sometimes harsh.”18 “A fee applicant must disclose ‘the precise nature of

15 9 Collier on Bankruptcy, ¶ 2016.17 at 2016-21 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2013).

16 In re Smitty’s Truck Stop, Inc., 210 B.R. 844, 848 (10th Cir. BAP 1997) (quoting Turner v.
Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993)).

17 Id.

18Neben & Starrett, Inc.v. Chartwell Financial Corp. (In re Park-Helena Corp.), 63 F.3d 877,
881 (9th Cir. 1995).

6

Case 12-22394 Doc# 70 Filed 02/24/14 Page 6 of 9


the fee arrangement.’”19 When ruling on a Chapter 13 trustee’s motion requesting the

court to examine the fees of a debtor’s attorney and to find the attorney in contempt for

charging and receiving fees in addition to those disclosed on his Rule 2016 statement, a

bankruptcy court summarized the importance of the disclosures as follows:

Section 329(a) requires a debtor’s attorney to “file with
the court a statement of the compensation paid or agreed to be
paid . . . and the source of such compensation.” Bankruptcy
Rule 2016(b) establishes when the statement is to be filed and
includes a provision requiring such disclosure “after any
payment or agreement not previously disclosed.” Fee
disclosure under § 329 and the Rules is mandatory, not
permissive. Timely disclosure under § 329 and Bankruptcy
Rule 2016(b) is central to the integrity of the bankruptcy
process. Failure to disclose (in this case fully disclose) is
sanctionable and can include partial or total denial of
compensation, as well as partial or total disgorgement of fees
already paid. The extent to which compensation should be
denied rests with the Court’s sound discretion. Many courts,
perhaps the majority, punish defective disclosure by denying
all compensation.20

In this case, the issue is what additional compensation should be allowed, not

sanctions or fee disgorgement.21 Nevertheless, the Court must apply the disclosure rules

literally. The motion requires the Court to construe the Initial Disclosure and the report

of the time devoted to the case to determine the extent to which the services provided are

19 Id. (quoting In re Glenn Elec. Sales Corp., 90 B.R. 596, 600 (D.N.J. 1998)).

20 In re Gage, 394 B.R. 184, 191 (Bankr. N.D. Ill. 2008) (citations omitted).

21 Given the ambiguity in the fee agreement, the Court finds that the Initial Disclosure may have

been inaccurate. But, if the Initial Disclosure was erroneous, the Court finds the error was inadvertent

and not made with the intent to mislead the Trustee or the Court.

7

Case 12-22394 Doc# 70 Filed 02/24/14 Page 7 of 9


covered by the flat fee of $4,000, and which services are within paragraph 6 of the
disclosures and therefore not included in the flat fee. The Court agrees with the Chapter
13 Trustee that compensation for the 2 hours spent post-confirmation is outside the flat-
fee agreement. The Court also agrees with the Trustee that additional compensation for

3.5 hours of services related to Bank of America’s objection to Debtors’ proposed plan
should be allowed in addition to the flat fee. The objection was because Bank of America
claimed ownership of a note, secured by a mortgage on Debtors’ homestead, which had
been executed in favor Quicken Loans and was included in Debtors’ Schedules as still
held by Quicken Loans. The objection was unexpected and apparently contrary to
Debtors’ records. A review of counsel’s time entries shows 3.5 hours of time was spent
on this matter between October 19, 2012, when Bank of America filed its objection, and
November 27, 2012, when the agreed order resolving the objection was filed.
The Court will therefore allow additional compensation for Debtors’ counsel for

5.5 hours of services at $200 per hour, but deny the balance of his request. The Court
finds the compensation to be reasonable and appropriate under the criteria stated in § 330
and the lodestar approach applicable in the Tenth Circuit.22 There is no objection to the
request for reimbursement of $66.03 in expenses, and the Court will allow such payment.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a)

22 See In re Market Center East Retail Property, Inc., 730 F.3d 1239, 1245-49 (10th Cir. 2013).
8

Case 12-22394 Doc# 70 Filed 02/24/14 Page 8 of 9


of the Federal Rules of Civil Procedure applicable to this matter.
JUDGMENT.

Judgment is hereby entered allowing Debtors’ counsel, William P. Turner,
additional attorney fees of $1,100 and expenses of $66.03, and denying the balance of the
fees sought in his application. The judgment based on this ruling will become effective
when it is entered on the docket for this case, as provided by Federal Rule of Bankruptcy
Procedure 9021.

IT IS SO ORDERED.
# # #


9

Case 12-22394 Doc# 70 Filed 02/24/14 Page 9 of 9

13-06072 TMBC, LLC v. McGuire et al (Doc. # 40)

TMBC, LLC v. McGuire et al, 13-06072 (Bankr. D. Kan. Jan. 29, 2014) Doc. # 40

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 28th day of January, 2014.

 

Designated for online use but not print publication

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

JAMES TODD MCGUIRE,
DEBTOR.

TMBC, LLC,
PLAINTIFF,

v.
JAMES TODD MCGUIRE; KANSAS
CITY SOUTH PROPERTY GROUP,
LLC; and DAVID TARTER;

DEFENDANTS.

CASE NO. 13-21054
CHAPTER 7

ADV. NO. 13-6072

MEMORANDUM OPINION AND ORDER

GRANTING IN PART AND DENYING IN PART

DAVID TARTER’S MOTION TO DISMISS

This adversary proceeding arises out of a prepetition lease transaction between
Plaintiff TMBC, LLC, and Defendant Kansas City South Property Group, LLC. Defendants


Case 13-06072 Doc# 40 Filed 01/28/14 Page 1 of 12


James Todd McGuire and David Tarter are members of Kansas City South Property Group.
TMBC filed an eleven-count complaint seeking to except its claim against Debtor McGuire
from discharge under § 523(a)(2), (a)(4), and (a)(6), and asserting various tort claims against
all three defendants. Defendant David Tarter moves to dismiss the complaint as to him for
lack of subject matter jurisdiction and questions the Court’s subject matter jurisdiction over
the claims against Defendant Kansas City South Property Group. This court has
jurisdiction to determine the motion to dismiss.1 The Court grants Tarter’s motion to
dismiss in part and denies it in part.

THE ALLEGATIONS OF THE COMPLAINT AND RELEVANT PROCEEDINGS.

Plaintiff TMBC, LLC, a Delaware limited liability company with its principal place
of business in Springfield, Missouri, operates the Tracker Marine Boat Center, subleasing
space in the Bass Pro Outdoor World Store in Independence, Missouri (Bass Pro). TMBC
also subleases space to store its merchandise on Bass Pro’s leased property or chooses to
lease elsewhere, if Bass Pro’s available space is too limited.

In January 2007, Defendant James Todd McQuire (Debtor) began employment with
Bass Pro as the store’s general manager. In late July 2007, Defendant David Tarter (Tarter)

1 A court necessarily has jurisdiction to decide if a case is properly before it. Amoco Pipeline Co.

v. Admiral Crude Oil Corp., 490 F.2d 114, 116 (10th Cir. 1974) (citing United States v. Shipp, 203 U.S.
563, 573 (1906), and United States v. Mine Workers, 330 U.S. 258, 291 (1947)). This Court’s jurisdiction
over the parties and the subject matter derives from 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. Furthermore, this Court may hear and finally adjudicate the portions of the Complaint which
are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B) and (I). There is no objection to venue or
jurisdiction over the parties.
2

Case 13-06072 Doc# 40 Filed 01/28/14 Page 2 of 12


began employment as the Bass Pro receiving manager. In January 2010, Debtor and Tarter
formed Defendant Kansas City South Property Group, LLC (KC South), for the purpose of
entering into a commercial lease agreement with TMBC.

In the spring of 2010, Debtor and Tarter, on behalf of KC South, negotiated a lease
agreement dated April 1, 2010, with TMBC, with Debtor having authority to act on behalf of
TMBC, wherein TMBC leased 2.5 acres of real property located on East U.S. 40 Highway
in Blue Springs, Missouri, from KC South to store boats. TMBC alleges that the lease was
pursuant to a scheme of Debtor and Tarter to cause TMBC to lease additional storage away
from the Bass Pro store although no such storage was needed. TMBC further alleges that
Debtor and Turner represented to TMBC that KC South was the title owner of the leased
property, when in fact KC South did not own the property at any time and did not have an
estate or other right in the property at any time sufficient to grant TMBC a leasehold
interest. TMBC has paid approximately $110,000 to KC South, but TMBC alleges that KC
South has failed to perform its obligations under the lease.

On June 13, 2012, TMBC brought suit against KC South, Tarter, and Debtor in the
Circuit Court of Jackson County, Missouri, at Independence.2 The petition is comprised of
eight counts. They are fraud (KC South), fraud (Debtor and Tarter), negligent
misrepresentation (KC South), negligent misrepresentation (Debtor and Tarter), civil
conspiracy (Debtor and Tarter), breach of lease (KC South), unjust enrichment (KC South),
and breach of fiduciary duty (Debtor and Tarter). Debtor and KC South filed a joint answer.

2Dkt. 24-1 at 7-17.
3


Case 13-06072 Doc# 40 Filed 01/28/14 Page 3 of 12


Tarter answered separately and filed a crossclaim against Debtor. Written discovery was
served and answered.

Debtor filed a voluntary petition under Chapter 7 on April 29, 2013. The eleven-
count adversary complaint was filed on July 26, 2013. Although it is similar to the Missouri
state court petition, it differs in material respects. The first three counts are against Debtor
only and seek to except Debtor’s alleged debt to TMBC from discharge under 11 U.S.C.
§ 523(a)(2)(A), (a)(4), and (a)(6). The remaining counts are as follows: Count IV - Fraud
(KC South); Count V - Fraud (Debtor and Tarter); Count VI - Negligent misrepresentation
(KC South); Count VII - Negligent misrepresentation (Tarter); Count VIII - Civil conspiracy
(Tarter); Count IX - Breach of lease (KC South); Count X - Unjust enrichment (KC South);
and Count XI - Breach of fiduciary duty (Debtor and Tarter). Debtor and KC South jointly
answered the complaint on August 29, 2013. They did not question the Court’s jurisdiction.
Tarter’s Motion to Dismiss for Lack of Subject Matter Jurisdiction (Motion) was filed on
September 10, 2013. On October 15, 2013, TMBC voluntarily dismissed the Jackson
County, Missouri action without prejudice.

THE MOTION TO DISMISS, THE RESPONSE, AND THE REPLY.

Defendant Tarter’s Motion is premised upon mandatory abstention, codified in 28

U.S.C. § 1334(c)(2), which provides:
Upon timely motion of a party in a proceeding based
upon a State law claim or State law cause of action, related to a
case under title 11 but not arising under title 11 or arising in a
case under title 11, with respect to which an action could not
have been commenced in a court of the United States absent
jurisdiction under this section, the district court shall abstain

4

Case 13-06072 Doc# 40 Filed 01/28/14 Page 4 of 12


from hearing such proceeding if an action is commenced, and
can be timely adjudicated, in a State forum of appropriate
jurisdiction.

Tarter contends that the five factors for mandatory abstention are present as to the claims
against Tarter and KC South because: (1) The claims are state law claims or causes of
action; (2) the claims would lack a federal jurisdictional basis absent Debtor’s bankruptcy;

(3) the claims were commenced in the Circuit Court of Jackson County, Missouri; (4) the
claims are capable of timely adjudication in the state court; and (5) the claims are non-core
proceedings.3 TMBC opposes the Motion, asserting that supplemental jurisdiction under 28
U.S.C. § 1367 provides an independent basis for federal jurisdiction of the claims and that
the claims cannot be timely adjudicated in state court because the petition filed in Jackson
County, Missouri, has been dismissed.4 Tarter’s reply raises for the first time the
contentions that the claims against Tarter and KC South are not within the “related to”
jurisdiction of this Court and that if mandatory abstention does not apply, the Court should
abstain under the permissive abstention doctrine codified at 28 U.S.C. § 1334(c)(1).5 Tarter
also argues that the dismissal of the Jackson County litigation does not defeat mandatory
abstention because the factors for abstention should be applied as of the time the adversary
proceeding was filed.
THE BANKRUPTCY COURT HAS JURISDICTION OVER COUNTS I, II, III, V,
AND XI, BUT LACKS JURISDICTION OVER COUNTS IV, VI, VII, VIII, IX, and X.

3 Dkt. 24.
4 Dkt. 30.
5 Dkt. 34.


5

Case 13-06072 Doc# 40 Filed 01/28/14 Page 5 of 12


Mandatory and permissive abstention are applicable only to claims within the subject
matter jurisdiction of the Court. Analysis of the Motion must therefore start with an
examination of the Court’s jurisdiction over the adversary complaint. This examination
must include the claims against all the parties, including KC South, even though KC South
admitted in its answer that this Court has jurisdiction over the claims against it. The subject
matter jurisdiction of federal courts, and particularly bankruptcy courts, is limited. “[T]o
ensure its . . . power is exercised properly, a federal court must ‘in every case and at every
stage of the proceeding, satisfy itself as to its own jurisdiction.’”6 This principle is codified
in Civil Rule 12(h)(3),7 which provides that “[i]f the court determines at any time that it
lacks subject-matter jurisdiction, the court must dismiss the action.”

In 28 U.S.C. § 1334(b), Congress granted the district courts “original but not
exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to
cases under title 11.” Authority to refer such matters to the bankruptcy courts is found in 28

U.S.C. § 157(a). Matters which arise under title 11 are those created by title 11.8
Exceptions to discharge are created by title 11 and therefore are within the “arising under”
jurisdiction. This Court therefore has jurisdiction of Counts I through III of the complaint.
“Arising in” proceedings are administrative matters which arise only in bankruptcy cases.9
6 Mires v. United States, 466 F.3d 1208, 1211 (10th Cir. 2006) (quoting Citizens Concerned for
Separation of Church and State v. City and County of Denver, 628 F.2d 1289, 1301 (10th Cir. 1980)).
7 Fed. R. Civ. Pro. 12(h)(3), made applicable here by Fed. R. Bankr. P. 7012(b).
81 Collier on Bankruptcy ¶ 3.01[3][e][i] at 3-14 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2013).
9 Id., ¶ 3.01[e][iv] at 3-20 to 3-21.
6


Case 13-06072 Doc# 40 Filed 01/28/14 Page 6 of 12


None of the claims in the complaint are within the “arising in” jurisdiction.

Counts IV through XI of the complaint are state law claims which are within the
bankruptcy court’s jurisdiction only if they are “related to” the bankruptcy case. “[A] civil
proceeding is related to a bankruptcy case when ‘the outcome of that proceeding could
conceivably have any effect on the estate being administered in bankruptcy.’”10 Count V,
fraud against Debtor and Tarter jointly, and Count XI, breach of fiduciary duty against
Debtor and Tarter jointly, may have an effect on the bankruptcy case, since a judgment
against Debtor would constitute a claim against the estate. They are therefore within the
“related to” jurisdiction of the Court.

However, TMBC does not argue that the claims asserted solely against KC South
(Counts IV, VI, IX, and X) or the claims asserted solely against Tarter (Counts VII and
VIII) are related to the bankruptcy case. This is clearly correct, since resolution of these
claims will not have any effect on Debtor’s bankruptcy proceeding.

TMBC argues that these claims are nevertheless within the jurisdiction of this Court
under 28 U.S.C. § 1367, “Supplemental Jurisdiction.” In any civil case of which a district
court has original jurisdiction, § 1367 grants the district court supplemental jurisdiction
“over all other claims that are so related to claims in the action within such original
jurisdiction that they form part of the same case or controversy under Article III of the
United States Constitution.”11 The statute only grants such supplemental jurisdiction to

10 Id., ¶ 3.01[3][e][ii] at 3-16 (quoting Pacor, Inc., v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)).

11 28 U.S.C. § 1367.

7

Case 13-06072 Doc# 40 Filed 01/28/14 Page 7 of 12


district courts, and there is no reference to bankruptcy courts. Also, it applies only to “civil
cases,” without mentioning bankruptcy cases or proceedings. There is no Tenth Circuit
Court of Appeals case on the question whether a bankruptcy court may exercise
supplemental jurisdiction, but the majority of courts have held that a bankruptcy court, being
a court whose jurisdiction is more limited than that of a district court, does not have such
authority.12 A holding that a bankruptcy court has supplemental jurisdiction would in
essence expand the “related to” jurisdiction of the bankruptcy court “to encompass
proceedings that share a factual or logical ‘nexus’ with a core bankruptcy proceeding, even
if the outcome will not affect the bankruptcy estate.”13 Those courts finding that bankruptcy
courts do not have supplemental jurisdiction are influenced by the rules that jurisdictional
statutes are to be read narrowly and that bankruptcy courts cannot exceed their “related to”
jurisdiction.14 The Supreme Court’s decision in Stern v. Marshall persuasively supports this
view. As one commentator has stated, “The Ninth and Second Circuit’s view that
bankruptcy courts may exercise supplemental jurisdiction is precisely what Stern disavows.
By exercising supplemental jurisdiction pursuant to § 1367(a), bankruptcy judges would
exercise the Article III judicial power to determine state claims affecting third parties that do

12 Eric C. Surette, Annotation, Exercise of Supplemental Jurisdiction by Bankruptcy Courts
Pursuant to 28 U.S.C.A. § 1367, 52 A.L.R. Fed.2d 243, § 2 (2011), available on Westlaw at 52 A.L.R.
Fed.2d 243.

13 Scully v. Danzig (In re Valley Food Services, Inc.), 400 B.R. 724, 728-29 (Bankr. W.D. Mo.
2008).

14 See id. at 729-30.

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not impact the bankruptcy estate.”15 The Court predicts that the Tenth Circuit would follow
the majority consensus and hold that a bankruptcy court cannot exercise supplemental
jurisdiction, particularly in light of Stern v. Marshall.

The Court therefore dismisses Counts IV, VI, IX, and X against KC South and
Counts VII and VIII against Tarter for lack of subject matter jurisdiction. The Court
recognizes that this ruling means that if TMBC wishes to pursue the dismissed claims while
simultaneously pursuing the objection to discharge, it will need to litigate the same facts and
similar claims in two courts. The judicial structure dictates this somewhat unfortunate
result.
THE ELEMENTS FOR MANDATORY ABSTENTION ARE NOT PRESENT AS TO
COUNTS I, II, III, V, AND XI.

Mandatory abstention applies only to “a State law claim or State law cause of action,
related to a case under title 11 but not arising under title 11 or arising in a case under title
11.”16 Counts I through III arise under title 11 and are not subject to mandatory abstention.
The only two claims within the “related to” jurisdiction, and therefore possibly within the
mandatory abstention statute, are Counts V and XI against Debtor and Tarter jointly for
fraud and breach of fiduciary duty. But as to these claims, mandatory abstention does not
apply since there is no parallel state court action in which they are asserted and can be
timely adjudicated.

15 Natallie J. Santana, A Statutory and Constitutional Analysis of Whether Bankruptcy Courts May
Exercise Supplemental Jurisdiction Pursuant to 28 U.S.C.A. § 1367, 22 Norton J. Bankr. L & Prac. 1,
Art. 5 (2013), available on Westlaw 22 JBKRLP 1 Art. 5.

16 28 U.S.C. § 1334(c)(2).

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The Court rejects Tarter’s argument that for purposes of mandatory abstention, the
pendency of the state court action must be determined as of the date of filing of the
adversary complaint, which in this case was before the dismissal of the Jackson County,
Missouri proceeding. Tarter is correct that subject matter jurisdiction, such as that based
upon diversity of citizenship, “‘ordinarily depends on the facts as they exist when the
complaint is filed,’”17 and is determined as of the date of filing. “But like most rules, ‘this
one is susceptible to exceptions.’”18 Although the parties have not cited and the Court has
not found any cases applying an exception in connection with mandatory abstention, the
plain meaning of abstention compels this result. The foundation of mandatory abstention is
the existence of a parallel action in state court which can timely adjudicate the issues
pending in the bankruptcy court. Congress’s intent when enacting the mandatory abstention
provision was the striking of “a balance between the competing interests of bankruptcy and
state courts.”19 Abstaining because of a state court interest that existed as of the
commencement of the bankruptcy proceeding but not at the time of the exercise of
abstention would not effectuate a balance of interests.

In this case, there is currently no pending state court proceeding and therefore no
competing state court interest. TMBC has elected to dismiss the state court proceeding. If

17 Mires, 466 F.3d at 1212 (quoting Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 830
(1989)).


18 Id.

19 Christo v. Padgett, 223 F.3d 1324, 1331 (11th Cir. 2000) (citing 130 Cong, Rec. S8, 8889
(daily ed. June 29, 1984) (statement of Sen. Dole)).


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this Court were to abstain, there would be no pending claims against KC South and the
number of claims pending against Tarter would be significantly reduced. Mandatory
abstention was not designed to compel a plaintiff to litigate matters which are within the
bankruptcy court’s jurisdiction in state court. Mandatory abstention gives precedence to the
state court litigation of state-law “related to” matters only when the state court litigation is
pending and abstention will result in a timely adjudication in state court. The conditions for
mandatory abstention are not present.

THE COURT DECLINES TO ABSTAIN FROM RULING ON COUNTS V AND XI.

Tarter suggests that even if the conditions for mandatory abstention are not present,
the Court should decline to hear the claims against Tarter under the permissive abstention
provision of 28 U.S.C. § 1334(c)(1). It permits the Court, “in the interest of justice, or in the
interest of comity with State courts or respect for State law [to abstain] from hearing a
particular proceeding arising in title 11 or arising in or related to a case under title 11.”

The Court finds no basis for abstention in this case. This Court is uniquely qualified
to determine dischargeability. Resolution of the claims of TMBC against Debtor is
necessary to determine whether in fact Debtor has liability to TMBC and, if so, the amount
of that liability. Severance of the claim and dischargeability litigation would result in
wasteful multiple proceedings. The state law issues of fraud and breach of fiduciary duty
are not complex. There is no parallel state court proceeding to which this Court could defer.

CONCLUSION.

The Court lacks subject matter jurisdiction over Counts IV, VI, VII, VIII, IX, and X,

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which are hereby dismissed. The Court has jurisdiction over Counts I, II, III, V, and XI.
The Court shall not abstain from hearing these counts under either mandatory abstention or
permissive abstention.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052
of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the Federal Rules
of Civil Procedure applicable to this proceeding. A judgment based upon this ruling,
dismissing Counts IV, VI, VII, VIII, IX, and X, will be entered on a separate document.

IT IS SO ORDERED.
# # #


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