KSB

11-05291 Gepner v. Kidd (Doc. # 104)

Gepner v. Kidd, 11-05291 (Bankr. D. Kan. Dec. 2, 2014) Doc. # 104

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SO ORDERED.
SIGNED this 2nd day of December, 2014.

 

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


In Re:

IRMA EILEEN KIDD,
DEBTOR.

PATRICIA A. GEPNER,
PLAINTIFF,

v.
IRMA EILEEN KIDD,
DEFENDANT.

CASE NO. 11-12357
CHAPTER 7

ADV. NO. 11-5291

MEMORANDUM OPINION AND ORDER

On July 28, 2005, Debtor Irma Kidd signed a loan agreement in which Debtor’s
husband, Terry Kidd, promised to pay Patricia A. Gepner (Plaintiff) $34,647.89, plus
interest. That agreement further provided that “[i]n the event of my [Terry’s] death prior

Case 11-05291 Doc# 104 Filed 12/02/14 Page 1 of 27


to completion of payment of this debt in full, the balance of the debt still outstanding will
be assumed by Irma Kidd.” Terry died before the debt was paid in full. The first
question before the Court is whether, outside the bankruptcy arena, Debtor was legally
obligated to pay Plaintiff the unpaid balance. If the answer to that question is yes, the
next question is whether Debtor engaged in conduct covered by either § 727(a)(2)(A) or
(a)(4)(A) so that her discharge should be denied.

While Plaintiff’s claim against Debtor was pending in state court, Debtor filed a
petition for relief under Chapter 7. Plaintiff filed a proof of claim for $49,772.75, to
which Debtor objected.1 Plaintiff also filed this adversary proceeding objecting to the
discharge of Debtor under 11 U.S.C. § 727(a)(2) and (a)(4). Debtor’s objection to
Plaintiff’s claim was consolidated with the adversary proceeding for purposes of trial,
which was held on May 6 and 7, 2014.2 Plaintiff appeared by Edward J. Nazar of
Redmond & Nazar, L.L.P. Debtor appeared by Ryan Hodge of Ray Hodge & Associates,

L.L.C. For the reasons stated below, the Court overrules Debtor’s objection to Plaintiff’s
proof of claim and denies Plaintiff’s objections to Debtor’s discharge.
1 Doc. 45.

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 Amended Standing Order of Reference 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 June 24, 2013. D. Kan. Standing Order
No. 13-1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). 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)(B) and (J). In the pretrial order, the parties stipulated to the jurisdiction of the Court and
consented to the entry of a final order by this Court. There is no objection to venue or jurisdiction over
the parties.

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FINDINGS OF FACT.

Witnesses at the trial were Plaintiff, Patricia Gepner (Pat); Vicki Larison (Vicki),
Pat’s daughter, who assisted her with her finances; Debtor Irma Kidd (Irma or Debtor);
David Kidd (David), Irma’s son, who assisted her with her financial affairs; Jennifer Kidd
(Jennifer), David’s wife; and Dana Milby, Debtor’s bankruptcy counsel. Although the
witnesses did not present consistent testimony about the events in issue, the Court finds
that each witness testified truthfully about his or her current recollection of events that
happened over ten years ago. Fortunately, resolution of the issues in the case does not
require the Court to accept one witness’s version over that of another witness, because the
inconsistencies related primarily to background dates and events. As to these matters, the
Court adopts the version which forms the most credible and likely scenario consistent
with the documentary evidence.

Commencing some time in the 1990’s, Terry Kidd, Debtor’s husband, was the
operator of a retail store in downtown Augusta, Kansas, known as Kidd’s Early Bird
Gifts. Pat believed that the store was a family business owned by Terry, Debtor, and their
children. Debtor was employed as a teacher and did not participate in the retail business
on a regular basis. Commencing in 1997 or 1998, Pat frequently but irregularly assisted
Terry at the store, but was not paid for her services. In 1998, the store was damaged by a
flood. Commencing on June 10, 1999, and from time to time through January 29, 2004,
Pat advanced funds to Terry for use in operating the store. On April 8, 2004, Terry
suffered a mild stroke, but Pat testified that she did not know this fact. Terry returned to

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the store, but the store was closed on May 1, 2004, because of Terry’s health and
financial concerns.
On July 28, 2005, Pat, Terry, and Irma executed a loan agreement which, with
handwritten changes included, provides:
I, Terry Kidd, promise to pay Patricia Gepner the sum of
$34,647.89 plus 5% interest from the date of last

disbursement on the amount borrowed from June 10, 1999
through January 29, 2004.
In the event of my death prior to completion of payment of

this debt in full, the balance of the debt still outstanding will

be assumed by Irma Kidd. The full amount of this debt shall

be paid back in full by August 1, 2010.

In the event Patricia Gepner passes before me, Terry Kidd, the

debt can’t be paid til my death.
The above loan agreement is signed by all agreeing parties
and witnesses on July 28, 2005.


This is referred to as the $34,000 Loan Agreement. The typewritten portions of the
$34,000 Loan Agreement were prepared by Vicki. When the document was presented to
the Kidds for execution, Debtor made various changes by handwritten interlineations,
including changing the amount owed from $38,147.89 to $34,647.89. That amount is
supported by a worksheet prepared by Pat entitled “Terry Owes Me.” It shows advances
by Pat to Terry in the amount of $38,147.89 from June 10, 1999, through January 29,
2004, reduced to $34,647.89 by a $3,500 payment on September 6, 2001. The record
includes cancelled checks corresponding to several of the advances. Notations on the
checks include “Loan,” “Store,” “Terry loan,” and “Terry.” The Early Bird balance sheet

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as of December 31, 2000, includes as a liability $23,332.00 owed to Pat Gepner.

Prior to the execution of the $34,000 Loan Agreement, there was no written note,
no understanding of when payment was due, and no agreement for the payment of
interest. Pat testified that the $34,000 Loan Agreement included Debtor because Pat
thought that Debtor was an owner of the store, but this was not discussed with Debtor.
Debtor denies that (1) she owned the business, (2) she discussed the store’s finances with
Terry, (3) she knew Terry was borrowing money from Pat until the $34,000 Loan
Agreement was presented, and (4) she took money out of the store. Debtor testified that
she objected to the $34,000 Loan Agreement, but she nevertheless signed it and never did
anything to repudiate it.

On November 5, 2005, a revised loan document, the November Loan Agreement,
was executed by Terry, Debtor, and Pat. The terms of the November Loan Agreement are
identical to the terms of the $34,000 Loan Agreement; the only differences are that the
November Loan Agreement, also prepared by Vicki, incorporates the handwritten
changes on the $34,000 Loan Agreement as typewritten terms and that it was
acknowledged before a notary public. The only payment on the $34,000 Loan Agreement
was in the amount of $500 made on November 9, 2005. The payment check sent to Pat
was accompanied by a note in Debtor’s handwriting stating that the payment was to be
applied to the $34,000 Loan Agreement. Pat’s claim against Irma’s bankruptcy estate is
for $49,772.75, the principal and interest alleged to be outstanding on the $34,000 Loan

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Agreement as of August 1, 2011, the date Irma filed for bankruptcy relief.3 Debtor denies
she owes the claim.

On or about July 20, 2000, Pat obtained a loan from Andover State Bank in the
sum of approximately $10,000, secured by her home. She in turn advanced these funds to
Terry for use in Early Bird. Sporadic payments were made from May 7, 2002, through
November 12, 2004, and monthly payments of $200 were made from January 2005
through June 2005. On November 5, 2005, the same date that the $34,000 Loan
Agreement was executed, Pat, Terry, and Debtor executed a second loan agreement for
$5,484, the balance then due on Pat’s loan from Andover State Bank. This is referred to
as the $5,484 Loan Agreement. In that agreement, Terry promised to pay Pat $200 per
month until the balance was paid in full. The $5,484 Loan Agreement contains the same
terms as the $34,000 Loan Agreement regarding Irma’s liability in the event of Terry’s
death.4

When Terry passed away on December 8, 2006, approximately $4,000 was owed
on the $5,484 Loan Agreement.5 When no payments were received in January or March,
2007, Vicki, on behalf of her mother, sent a default letter to Debtor.6 The $5,484 Loan

3 Proof of claim no. 1.

4 Exh. 9.

5 Exh. 10.

6 Exh. 12.

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Agreement was satisfied by a payment of $2,725.21 David made in June 2007.7

Debtor received substantial funds as a result of Terry’s illness, Terry’s death, and
the death of Nina Kidd, Terry’s mother. On September 1, 2006, Terry received
$26,607.00 in disability benefits. On February 16, 2007, Debtor received $66,892.15
from Ozark National Life Insurance, and on March 1, 2007, she received $34,918.64 from
Prudential Life Insurance Company. Debtor was the only beneficiary named on the life
insurance policies. Debtor and David testified that these funds were considered “family
money.” Terry had made known his wishes that after his death, his family — consisting
of Debtor, their daughter Margo, and their son David (and his wife Jennifer) — would be
taken care of through a sharing of insurance funds and other receipts. At the time of
Terry’s death, all members of the family knew they would share approximately equally in
the “family money,” notwithstanding the name in which the money was received or later
held. Because Margo had issues concerning her handling of financial affairs, her name
was never on any of the accounts holding this “family money,” but Debtor and David
made withdrawals for her benefit.

 The foregoing three items of income were initially deposited into Commerce Bank
account *7258, in the names of David or Jennifer Kidd. On December 20, 2007,
Commerce Bank account *0086 was opened. It is a joint-tenancy payable-on-death
account in the names of Irma, David, and Jennifer. Only Irma’s Social Security number

7 Exh. 10.
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is stated on the account card. The unused portion of the “family money” which had been
deposited into Commerce Bank account *7258 was transferred to account *0086. Debtor,
as the beneficiary of the estate of Nina Kidd, Terry’s mother, thereafter received
$83,130.29, which was deposited into Commerce Bank account *0086 by Debtor, for
convenience and not to indicate ownership. The foregoing receipts total $211,548.08.

Accountings prepared by David trace the use of the “family money” deposited in
Commerce Bank accounts *7258 and *0086 for the period from 2006 through 2010.8
According to the accounting, $70,827.08 of expenditures made on or before December 2,
2009, were attributed to Debtor. They were for funeral expenses, home improvements,
debt reduction, and repayment of a loan from her sister. Debtor did not use any of the
“family money” after December 2009. Expenditures of $61,644.15 were attributed to
David, primarily for home improvements and the purchase of a vehicle. Expenditures of
$22,699.68 were attributed to Margo, primarily for debt reduction and medical expenses.
This accounting shows the amount of “family money” in Commerce Bank account *0086
in early 2011 was $56,377.17.

On August 26, 2010, Pat commenced an action against Debtor in Sedgwick
County District Court to collect the $34,000 Loan Agreement. On January 14, 2011,
without seeking Debtor’s authorization, David withdrew substantially all of the funds in
Commerce Bank account *0086. Approximately $55,000 was transferred to Commerce

8 Exhs. 72 and 73.
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Bank account *8371 and $2,992.34 was transferred to Commerce Bank account *8370.
David and Jennifer were the joint owners and the only authorized signers of these two
accounts. Debtor’s name was not on either account. David testified that he closed the
*0086 account because he was concerned that if a judgment were entered against his
mother, collection might be attempted from Commerce Bank account *0086. As of
January 14, 2011, $70,827.08 of the previous withdrawals from account *0086 were
attributed to Debtor, so in David’s and Debtor’s views, Debtor had no interest in any of
the funds in account *0086 when David withdrew them, even though her name was on the
account. David closed the account the following month.

Irma filed for relief under Chapter 7 on August 1, 2011. She was assisted by
counsel, who testified at trial. Irma’s Schedule A lists two secured creditors, the holder of
a mortgage on her home and a mechanics lien holder, who has not participated in the
bankruptcy and whose time to foreclose has expired. Pat is the only unsecured creditor
listed on Schedule F. In response to Statement of Financial Affairs (SOFA) question 11,
inquiring about “financial accounts . . . held in the name of the debtor or for the benefit of
the debtor which were closed, sold, or otherwise transferred within one year immediately
preceding” the filing of the bankruptcy petition, Debtor listed a savings account at
Commerce Bank and stated, “Removed name from account in January, 2011. None of the
funds in the account belonged to Ms. Kidd.”9 This was a reference to David’s closing of

9 Exh. 55.
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Commerce Bank account *0086. Irma had a long discussion with her counsel about the
“family funds” and presented her with a worksheet prepared by David which showed that
Debtor’s share of the funds was $70,516.03 and that $70,837.01 of the funds had been
spent on her behalf. Question 7 of the SOFA, “Gifts,” lists only gifts to Irma’s church.
Based upon her inquiry, counsel understood that David’s and Margo’s interests in the
“family funds” were their inheritances and not gifts from Irma. Question 10 of the SOFA,
“Other transfers,” and question 14, “Property held for another,” are both answered
“none.” Debtor’s counsel testified that based upon her inquiry regarding the “family
funds,” she believed the answers were accurate.

In August 2011, Debtor had two accounts at Rose Hill State Bank, savings account
number *8920 and checking account number *8906.10 On March 4, 2011, a tax refund of
$2,480 was deposited into account *8906, and on March 8, 2011, a telephone transfer in
the same amount was made from that account to account *8920. On the date of her
bankruptcy filing, Debtor withdrew from the Rose Hill savings account seven cashier’s
checks totaling $1,060.83 for payments to creditors. Only the payment to her mortgage
holder exceeded $600. She also withdrew funds for a $952.29 cashier’s check payable to
her former trial counsel and for a $929.00 cashier’s check payable to her bankruptcy
counsel. On Schedule B, item 2, Debtor reported a value of $2,232.54 for checking,
savings, or other financial accounts, which is the sum of the balances of the two Rose Hill

10 Additional facts concerning the title to these accounts are included in the Discussion and
incorporated into the facts by this reference.

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accounts after the foregoing withdrawals. On question 3 of the SOFA, “Payments to
creditors,” Debtor listed the mortgage holder, who received monthly payments. Line 13
of Debtor’s Schedule B lists a “½ interest in Prudential Financial Inc Common Stock”
valued at $2,000.

On December 5, 2011, Pat filed her proof of claim, and on December 27, 2011, she
filed Adversary No. 11-5291 against Debtor, seeking to have her discharge denied under
§ 727. On April 16, 2012, the Chapter 7 Trustee, Steven L. Speth, filed a Complaint to
Avoid and Recover Fraudulent Transfer against David and Jennifer, seeking to recover
the $55,000 withdrawn by David on January 14, 2011, from Commerce Bank account
*0086, owned in part by Debtor, and deposited into accounts not owned by Debtor.11 In
March 2014, a notice of intended compromise of the claim for $14,000 was filed.12 Pat
objected to the compromise, and the parties agreed the Court would decide later whether
to approve the settlement.
DISCUSSION.

A. Debtor’s objection to Pat’s proof of claim is denied.
Pat timely filed a proof of unsecured claim for $49,772.75, the amount that she
claims Debtor owed under the $34,000 Loan Agreement on July 29, 2011, three days
before Irma filed for relief under Chapter 7. Debtor objected to the claim “for multiple
reasons including but not limited to the fact that [Debtor] does not believe that this debt is

11 Adversary no. 12-5067, doc. 1.

12 Case no. 11-12357, doc. 75.

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valid true and owing.”13 The pretrial order14 states the following defenses to the claim:

(1) The statute of limitations expired on the verbal agreement to repay the advances
before the oral agreement was reduced to writing on July 28, 2005; (2) no consideration
was given for Debtor’s promise to pay; and (3) the payments by Pat were investments, not
loans. Pat refutes these arguments.
The Court denies Debtor’s objection to the claim. The $34,000 Loan Agreement,
signed by Terry and Debtor, provides, “I, Terry Kidd promise to pay Patricia Gepner the
sum of $34,647.89.” It also provides “[i]n the event of my [Terry’s] death prior to the
completion of payment of this debt in full, the balance of the debt still outstanding will be
assumed by Irma Kidd.” Under Kansas law, “[a] guaranty involves a tripartite
relationship based on a contract between two or more persons by which one person
promises to answer for the debt of a third person.”15 “A contract of guaranty is to be
construed, as are other contracts, according to the intention of the parties as determined
by a reasonable interpretation of the language used in light of the attendant
circumstances.”16 The $34,000 Loan Agreement unambiguously states that Debtor will
assume her husband’s liability to Plaintiff if Terry dies before the debt is paid. The Court

13 Id., doc. 45.
14 Adv. no. 11-5291, doc. 81.
15 Kansas State Bank & Trust Co. v. DeLorean, 7 Kan. App.2d 246, 255, 640 P.2d 343, 350


(1982).
16 Overland Park Sav. And Loan Ass’n v. Miller, 243 Kan. 730, 738, 763 P.2d 1092, 1097-98

(1988).
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therefore finds that Debtor is a guarantor of Terry’s obligation.17 The balance due when
Terry died has not been paid, and Debtor is liable for that debt.

Debtor’s testimony was simply that she did not agree she owed the debt on the
date of the $34,000 Loan Agreement or when she filed for bankruptcy relief. She was
vague about the factual basis for her position. Debtor’s counsel made several legal
arguments, none of which, for the reasons discussed below, provides a defense to
payment.

First, the Court rejects Debtor’s contention that Pat’s claim fails for lack of
consideration because the statute of limitations had run on Terry’s obligations included in
the principal of the $34,000 Loan Agreement before it was executed on July 28, 2005.
Pat testified she believed at all times before July 28, 2005, that she had a right to collect
the balance owed on the $34,000 Loan Agreement and that Terry would have honored his
obligation. All of these transactions transpired without the assistance of counsel.

Under Kansas law, forbearing to sue is good consideration for a promise, so long

as the one who forbears has a reasonable and sincere belief in the validity of his or her

claim.18 “‘Any forbearance to prosecute or defend a claim or action, or to do an act

which one is not legally bound to perform, is usually a sufficient consideration for a

17 Plaintiff argues that Pat is an accommodation party and therefore various provisions of Article
3 of the Uniform Commercial Code are applicable. The court rejects this argument because the $34,000
Loan Agreement is not a “negotiable instrument” as defined by K.S.A. 2013 Supp. 84-3-104(a). It is not
payable on demand or at a definite time. Although it states a due date of August 1, 2010, it also provides
that “[i]n the event Patricia Gepner passes before me, Terry Kidd, the debt can’t be paid til my death.”

18 Reed v. Hess, 239 Kan. 46, 51, 716 P.2d 555, 560 (1986).

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contract based thereon, unless the claim or defense is obviously invalid, worthless or
frivolous.’”19 The reasonableness and sincerity of the holder’s belief in the claim’s
validity is “‘measured, not by the state of the law as it is ultimately discovered to be, but
by the state of the knowledge of the person who at the time has to judge and make the
concession.’”20 Under Kansas law, the statue of limitations to enforce a contact that is
not in writing is three years.21 Some of the advances which were the subject of the
$34,000 Loan Agreement were made more than three years before July 28, 2005, and
Terry would have had a valid statute of limitations defense to any action by Pat to collect
those advances. But when Pat asked Terry and Debtor to execute the $34,000 Loan
Agreement, she believed the entire debt was enforceable against Terry, and perhaps
against Debtor. Pat is not a lawyer, and there is no evidence that she had any legal
advice about the transaction. Pat’s giving up her perceived right to immediately collect
the entire claim was sufficient consideration for the $34,000 Loan Agreement. Under
Kansas law, “‘an extension of the time of payment of an obligation constitutes in legal
effect a forbearance to sue and . . . is a sufficient consideration for a guaranty of the
obligation.’”22 Therefore Pat’s giving up her perceived right to immediately pursue

19 State, ex rel. Ludwick v. Bryant, 237 Kan. 47, 52, 697 P.2d 858, 862 (1985) (quoting Snuffer v.
Westbrook, 134 Kan. 793, Syl ¶ 1, 8 P.2d 950 (1932)).

20 Reed v. Hess, 239 Kan. at 51, 716 P.2d at 560 (quoting Schiffelbein v. Sisters of Charity, 190
Kan. 278, 280, 374 P.2d 42 (1962), which said it was quoting “12 Am. Jur. p. 581, Sec. 87”).

21 K.S.A. 60-512 (unchanged since 1964).

22 Ryco Packaging Corp. v. Chapelle Int’l., Ltd., 23 Kan. App. 2d 30, 38, 926 P.2d 669, 675
(1996) (quoting 38 Am. Jur. 2d, Guaranty, § 47, p. 1051); Fuller v. Scott, 8 Kan. 25, 32, 1871 WL 710 at

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collection from Terry was also consideration for Debtor’s guaranty agreement to assume

the outstanding debt upon Terry’s death.23 Debtor’s liability on Pat’s claim is not

unenforceable for lack of consideration.

The Court also rejects Debtor’s position that Pat’s claim is unenforceable because

the advances to Terry were investments in Early Bird, not loans. In support of this

theory, Debtor relies on the absence of evidence of the terms of repayment before the

execution of the $34,000 Loan Agreement. But this argument ignores the evidence that

the checks written by Pat when making the advances bear notations indicating that they

are loans and that the Early Bird balance sheet as of December 31, 2000, includes as a

liability a loan owed to Pat.

Although the issues stated in the pretrial order do not include whether the

principal amount owed by Terry as stated in the $34,000 Loan Agreement was accurate,

this issue was raised at trial and was the subject of post-trial briefs, with no objection

from Plaintiff. Debtor argues that Terry’s liability for the approximately $10,000 which

Pat borrowed from Andover State Bank and then advanced to Terry was included in the

balance of the $34,000 Loan Agreement and was also the subject of the $5,484 Loan

Agreement. The record does not support this contention. The documents evidence that

*6 (1871) (“An agreement to extend the time of payment of the note is a sufficient consideration to
sustain the guaranty’).

23 Under K.S.A. 60-520(a), the execution of the $34,000 Loan Agreement started a new
limitations period on Pat’s collection rights, and because the contract was reduced to writing at that time,
the five-year limitations period for written contracts became applicable to it. Pat brought suit in state
court before the new five-year limitations period expired.

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there were separate accountings of the advances represented by the $34,000 Loan
Agreement and the $5,484 Loan Agreement. The worksheet prepared by Pat, entitled
“Terry Owes Me,”24 which shows the calculations establishing the balance of the
$34,000 Loan Agreement, includes a $20,000 advance on July 26, 2000, the same date as
the loan from Andover State Bank. A worksheet prepared by Terry shows two $10,000
advances on the same date.25 Debtor relies upon this circumstantial evidence, the vague
testimony of Pat that the “Terry Owes Me” worksheet contains all of the advances from
Pat to Terry,26 and vague testimony of Vicki that the $10,000 advance is included in the
balance of the “Terry Owes Me” worksheet. But Pat was insistent throughout her
testimony that there were two separate transactions. The first was multiple advances for
which no interest was charged and no repayment schedule was established before the
execution of the $34,000 Loan Agreement, and the second was the advancement of the
proceeds from the Andover State Bank loan, on which Terry made payments — both
before and after the 2005 loan agreements were drafted and executed — to cover
principle and interest owed to the bank.

Further, examination of the exhibits refutes Debtor’s position. According to Pat’s
work sheet, the only payment on the $38,147.89 she had advanced was $3,500 paid on

24 Exh. 6.

25 Exh. 5.

26 Trial Tr., May 6, 2014, at 71-72.

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September 6, 2001.27 When the $34,000 Loan Agreement was initially signed in July

2005, Debtor corrected the typewritten note by reducing the amount owed, initially

stated to be $38,147.89, by the $3,500. A separate worksheet regarding the $5,484 Loan

Agreement prepared by Pat’s daughter shows Terry’s payments to Pat of $4,600 between

May 5, 2002, and June 13, 2005.28 If the advance of the proceeds of the Andover Bank

loan were included in the “Terry Owes Me” worksheet, the payments attributed to that

loan should also have been credited on that worksheet. They were not. Both the retyped

version of the $34,000 Loan Agreement and the $5,484 Loan Agreement were executed

by Terry and Debtor on November 5, 2005; on that date, the parties agreed that there

were two separate obligations owed to Pat. The evidence presented persuades the Court

that it is more likely that there were two separate transactions, and the $10,000 advance

from Andover State Bank was not included in the accounting which was the basis for the

$34,000 Loan Agreement.

For the foregoing reasons, the Court overrules Debtor’s objections to Pat’s proof

of claim.

B. Denial of Discharge under § 727(a)(2)(A).
A party objecting to a discharge under § 727(a)(2)(A) “‘must show by a

27 This payment is also reflected on a worksheet prepared by Terry of the balance owed as of
March 5, 2002. Exh. 5. That worksheet also includes three $100 payments in 2001 which are not
reflected on any of Pat’s worksheets but appear to correlate with cancelled checks for advances which
bear a notation of “Pd Back.” Exh. 8.

28 Exh. 10.

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preponderance of the evidence that (1) the debtor transferred, removed, concealed,

destroyed, or mutilated, (2) property of the [debtor], (3) within one year prior to the

bankruptcy filing, (4) with the intent to hinder, delay, or defraud a creditor.’”29 The

discharge provisions of the Code are to be construed liberally in favor of the debtor and

strictly against the objector seeking to block the discharge.30 Pat, as the plaintiff, has the

burden of proof to show each of these elements31 by a preponderance of the evidence.

Plaintiff’s § 727(a)(2)(A) objection to Debtor’s discharge is based upon three

transfers: (1) the January 14, 2011 transfer of $2,992.34 from Commerce account

*0086, in the names of Irma Kidd, David Kidd, and Jennifer Kidd, to Commerce

Account *8370, in the names of David and Jennifer Kidd; (2) the January 14, 2011

transfer of $55,000 from Commerce account *0086 to Commerce account *8371, in the

names of David and Jennifer; and (3) the March 8, 2011 transfer of $2,480 from Rose

Hill Bank checking account *8906 to Rose Hill savings account *8920. The Court finds

that Pat has failed to prove that these transfers should be the basis for the denial of

Debtor’s discharge under § 727(a)(2)(A).

The first two of these transfers occurred on the same day under identical

29 Mathai v. Warren (In re Warren), 512 F.3d 1241, 1249 (10th Cir. 2008) (quoting Gullickson v.
Brown (In re Brown), 108 F.3d 1290, 1293 (10th Cir. 1997)). The Circuit referred to “property of the
estate” in item (2), but § 727(a)(2)(A) actually applies to transfers of property of the debtor that were
made within one year before filing bankruptcy — no bankruptcy estate exists until the debtor files
bankruptcy, so transfers made before that could not involve property of the estate.

30 6 Collier on Bankruptcy, ¶ 727.01[4] (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th
ed. 2014).

31 Fed. R. Bankr. P. 4005.

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circumstances, so the Court will consider them together. The parties have stipulated that

the transfers were made in January 2011, less than one year before the filing of Debtor’s

bankruptcy petition, but Debtor contends that Pat has not satisfied her burden of proof on

the other three elements.

As to these transfers, the Court agrees Pat has not sustained her burden to prove

that the transfers were made by Debtor. The Commerce Bank transactions were made by

David, not by Debtor, but Pat argues that David’s acts should be attributed to Debtor.

Although the acts of an agent may be attributed to the principal for purposes of an

objection to discharge,32 the Court finds a lack of evidence that David was acting as

Debtor’s agent when he made the transfers. Under Kansas law, “‘[w]here the

relationship of principal and agent is in issue, the party relying thereon to establish his

claim or demand has the burden of establishing its existence by clear and satisfactory

evidence.’”33 There is no direct evidence that David acted as Debtor’s agent when

making the transfers. Debtor testified that she did not know anything about them. David

testified that he made the transfers of his own accord, not at the authorization of his

mother. Pat argues that David’s acts should nevertheless be attributed to Debtor based

upon circumstantial evidence of coordinated conduct between Debtor and her son

because Debtor temporarily removed her name from the Rose Hill savings account on

32 See Gannett v. Carp (In re Carp), 340 F.3d 15, 26 & n. 5 (1st Cir. 2003).
33 In re Schicke, 290 B.R. 792, 804 (10th Cir. BAP 2003) (quoting Turner & Boisseau, Chtd., v .
Marshall Adjusting Corp., 775 F.Supp. 372, 377-78 (D.Kan. 1991)).
19

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the same day that David withdrew the funds from Commerce account *0086. This
circumstantial evidence of actions by both Debtor and David regarding the title to bank
accounts does not prove agency by “clear and satisfactory evidence.”

Further, the Court finds that even if David was acting as Debtor’s agent, Pat still
could not prevail because she failed to prove that Debtor, through David, acted with the
intent to hinder, delay, or defraud Pat. David and Debtor consistently and convincingly
testified that Debtor had withdrawn her one-third share of the “family money” from
Commerce account *0086 by approximately December 2009, and that in their view, on
January 14, 2011, Debtor had no interest in the funds on deposit in Commerce account
*0086. Details of the withdrawals were provided by David. They allocate $70,827.08 to
Debtor. This is approximately one-third of the $221,548.08 “family money.”34 All of
these withdrawals for the benefit of Debtor were made on or before December 2, 2009,
although withdrawals for David’s and Margo’s benefit continued thereafter. David
testified that he made the January 2011 transfers because he was concerned that funds
remaining in Commerce account *0086 after December 2009, which he believed
belonged to him and Margo and not their mother, could be garnished if Pat prevailed in
her litigation against Debtor. David’s intent was to protect his and his sister’s property,
not to hinder or delay Pat’s claim to Debtor’s property. Because David sincerely
believed as of January 14, 2011, that Debtor had no interest in the funds in Commerce

34 E.g., exh. 73.
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account *0086 when he transferred that money, he could not have acted with the intent

to hinder, delay, or defraud Pat from getting Debtor’s property.

The Court therefore denies Pat’s objection to Debtor’s discharge under

§ 727(a)(2)(A) based upon the January 2011, transfers of the balance of Commerce

account *0086, in the names of Debtor, David, and Jennifer, to accounts which did not

include Debtor as an owner. Pat has failed to prove two necessary elements (that the

transfers from Commerce Bank account *0086 were made by Debtor and that they were

made with the intent to hinder, delay, or defraud Pat).35

The Court also finds that Pat has failed to sustain her burden to prove that

Debtor’s discharge should be denied under § 727(a)(2)(A) based upon the transfer of

$2,480 from Rose Hill checking account *8906 to Rose Hill savings account *8920 on

March 8, 2011. In support, Pat cites an exhibit prepared by Pat’s daughter which states

that on March 8, 2011, less one year prior to filing her bankruptcy petition, “Irma

transferred U.S. Income Tax Refund from Rose Hill checking account to David Kidd

savings account.” Although a transfer between two Rose Hill accounts was made on that

date, there was no resulting change of ownership. The account statements show the

35 The Court makes no ruling on whether Debtor had an interest in the balance in Commerce Bank
account *0086 in January 2011 before the transfers were made. Debtor argues that a gift of one-third of
the “family money” was given to David and one-third to Margo when the funds were received by Debtor,
that approximately one-third of the balance had been withdrawn by Debtor before January 2011, and that
Debtor therefore had no interest in the account balance in January 2011. Pat, on the other hand, argues
that although the account was a co-tenancy account, the funds were all owned by Debtor. She contends
no gift tax return was ever filed, Debtor had full access to the balance in the account, the accounting
showing Debtor’s share of the “family money” is not accurate, and only Debtor’s Social Security number
was associated with the account.

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deposit of the $2,480 tax refund to account *8906 on March 4, 2011, and a telephone
transfer of the same amount to account *8920 on March 8, 2011, but both account
statements identify David, Margo, and Debtor as co-owners of the accounts. The
signature card for the *8920 account dated July 6, 2007, identifies all three of them as
owners, but includes only Debtor’s Social Security number. On January 14, 2011,
Debtor’s name was removed from account *8920, but an updated signature card for that
account dated January 15, 2011, one day later, again shows all three family members as
owners, but bears David’s Social Security number. The only change resulting from the
removal of Debtor’s name on the account for one day was the change of the Social
Security number associated with the account from Debtor’s to David’s. Debtor does not
dispute that she continued to have an ownership interest in both Rose Hill accounts, and
on Schedule B, she included the balances of both Rose Hill accounts as of the date of her
bankruptcy filing. The evidence therefore shows that the March 8, 2011 transfer was
between two accounts that were both titled jointly in the names of Debtor, David, and
Margo. There was no transfer of Debtor’s property for purposes of the denial of
discharge under § 727(a)(2)(A).

C. Denial of Discharge under § 727(a)(4)(A).
Section 727(a)(4)(A) provides that a discharge shall be denied if “the debtor
knowingly and fraudulently, in or in connection with the case — (A) made a false oath
or account.” The denial of a discharge under § 727(a)(4)(A), like the denial of a
discharge under § 727(a)(2)(A), requires proof that the debtor acted with a wrongful

22

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intent. The knowing and fraudulent omission of items from the debtor’s bankruptcy
schedules is a common instance of a false oath. However, omissions based “upon honest
advice of counsel, to whom the debtor had disclosed all the relevant facts, . . . will not be
deemed willfully false.”36

Pat contends that Debtor knowingly and fraudulently made false statements in her
Statement of Financial Affairs because: (1) she failed to identify the sale of the
Prudential stock and the deposit of the proceeds in David’s account; (2) she failed to
disclose the removal of her signature from the Rose Hill savings account; and (3) she
failed to disclose the January 2011 transfer of funds from Commerce Bank account
*0086.37

Debtor’s Schedule B, “Personal Property,” lists on line 13 a “½ interest in
Prudential Financial Inc Common Stock” valued at $2,000. The stock was owned in the
name of “Irma E. Kidd TOD David E. Kidd.” Debtor inherited her interest through
Terry. The stock was sold on July 29, 2011, the proceeds of $4,362.68 were received on
August 8, 2011 (after Debtor filed her bankruptcy petition), and the proceeds were
deposited into Commerce account *8371, owned by David and Jennifer, on August 11,
2011. On the advice of Debtor’s bankruptcy counsel, Debtor paid the Trustee $2,181.34,
one-half of the proceeds, by a cashier’s check dated September 8, 2011. On the advice
of Debtor’s litigation counsel, David paid the Trustee $2,181.34 by a cashier’s check

36 6 Collier on Bankruptcy, ¶ 727.04[2].

37 Doc. 81.

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dated December 5, 2011.

Dana Milby, Debtor’s bankruptcy counsel, testified that the entry on Schedule B
of a one-half interest in the stock was based upon Debtor’s understanding that she owned
a one-half interest and David owned the other one-half interest. When distributing the
proceeds, Debtor acted consistent with this understanding. There is no evidence that
Debtor, when making this representation, was acting with wrongful intent. If Debtor’s
intent was to conceal her interest in the stock, she would have made no disclosure, rather
than an incomplete disclosure. The reporting that the stock was presently owned, rather
than in the process of being sold, is not material. A discharge will not be denied based
upon the incomplete disclosure of Debtor’s ownership of the Prudential stock.

The second omission relied upon by Pat is the failure to disclose the removal of
Debtor’s name from Rose Hill savings account *8920. Debtor’s Statement of Financial
Affairs, question 11, “Closed financial accounts,” states that Debtor’s name was
removed from a Commerce Bank savings account in January 2011. There is no mention
of Rose Hill accounts. The exhibits show that the signature card for Rose Hill savings
account *8920 dated July 6, 2007, identifies Debtor, David, and Margo as joint owners,
but includes only Debtor’s Social Security number. On January 14, 2011, Debtor’s name
was removed from account *8920, but an updated signature card for that account dated
January 15, 2011, one day later, again shows all three family members as owners, but
bears David’s Social Security number. The only change resulting from the removal of
Debtor’s name on the account for one day was the change of the Social Security number

24

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associated with the account from Debtor’s to David’s. Debtor continued to have an

ownership interest in the account. Debtor included the balance in the Rose Hill savings

account and the Rose Hill checking account on the date of her bankruptcy filing in item

2 on Schedule B.38 Although Debtor’s Statement of Financial Affairs would have been

more complete if she had disclosed the changes to the Rose Hill savings account, the

Court finds that the omission was not material and cannot be the basis for the denial of

her discharge.

The third omission relied upon by Pat is Debtor’s failure to disclose the $58,00039

that was transferred from Commerce account *0086, in the names of Debtor, David, and

Jennifer, to David’s and Jennifer’s accounts in January 2011. Debtor’s bankruptcy

attorney testified that she had a long discussion with Debtor about her understanding that

she had no interest in the funds in the Commerce account when the transfer was made.

Counsel reviewed a worksheet prepared by David showing that Debtor’s share of the

$211,548.08 in “family funds” was $70,516.03, and that as of January 2011, Debtor had

withdrawn $70,837.01 of the funds. Based upon this inquiry, counsel understood that

David’s and Margo’s interests in the family funds removed from Commerce account

*0086 on January 14, 2011, were their inheritances, in which Debtor had no interest.

38 Trial Tr. 149, ll. 8-23.

39 This is the sum of two transfers, one of approximately $3,000 from Commerce Account *0086
to Commerce Account *8370 and the other of $55,000 from Commerce Account *0086 to Commerce
Account *8371. They are the basis for Plaintiff’s first and second objections to discharge under
§ 727(a)(2)(A), discussed above. The $55,000 transfer is also the subject of the adversary proceeding
brought by the Trustee against David and Jennifer, which has been settled.

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Counsel therefore prepared the response to question 11, “Closed financial accounts,”
stating that a savings account at Commerce Bank had been closed by removal of
Debtor’s name from the account in January 2011, and that “[n]one of the funds in the
account belonged to Ms. Kidd.” Question 10 of the SOFA, “Other transfers,” and
question 14, “Property held for another person,” were both answered “none.” Debtor’s
counsel testified that based upon her inquiry about the “family funds,” she believed the
answers were accurate.

Assuming, but not deciding, that the entire balance in Commerce account *0086
in January 2011 was Debtor’s property, the Court nevertheless finds the inaccuracies and
omissions cannot be the basis for the denial of Debtor’s discharge. Debtor’s belief that
the funds were “family money” and that she had withdrawn her entire share prior to
January 2011 were thoroughly discussed with her counsel. Based upon the testimony as
a whole, the Court has no doubt that Debtor and David sincerely believed that Debtor
had no interest in the remaining “family funds” in January 2011. There is therefore no
basis to find that the errors and omissions regarding the withdrawals from and closure of
Commerce account *0086 were knowing and fraudulent.
CONCLUSION.

For the foregoing reasons, the Court denies Debtor’s objection to Pat’s proof of
claim, and denies Pat’s objection to discharge under § 727(a)(2) and § 727(a)(4)(A).

26

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Judgments based on these rulings will be entered on separate documents.

IT IS SO ORDERED.

# # #

27

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14-21588 Hall (Doc. # 136)

In Re Hall, 14-21588 (Bankr. D. Kan. Nov. 19, 2014) Doc. # 136

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 19th day of November, 2014.

 

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


In re:
LEON FRANCIS HALL, CASE NO. 14-21588
CHAPTER 11
DEBTOR.

MEMORANDUM OPINION AND ORDER GRANTING DEBTOR'S
APPLICATION FOR ENGAGEMENT OF COUNSEL WITH MODIFICATIONS

On July 8, 2014, one day following the filing of the petition in this Chapter 11
case, Debtor Leon Hall filed his Application by Debtor for the Engagement of Counsel.
In it he sought approval of employment of Eron Law, P.A. under 11 U.S.C. § 327,1
effective November 1, 2013, on a contingency fee basis under § 328(a), or alternatively at
the rate of $450 per hour. Leo Hall, a creditor and father of the Debtor, and the United

1 Future references to Title 11 in the text shall be by the section number only.

Case 14-21588 Doc# 136 Filed 11/19/14 Page 1 of 18


States Trustee filed objections. An evidentiary hearing was held on October 22, 2014.
The Debtor appeared in person and by his counsel David Eron, of Eron Law. The United
States Trustee appeared by Joyce Owen. Creditor Leo Hall appeared by Christopher W.
O’Brian of Brown, Dengler & O'Brian LLC, but did not actively participate in the
hearing. There were no other appearances. The Court has jurisdiction.2

The United States Trustee argued in its objection that Eron Law is not
disinterested, as required for appointment under § 327, because it has a claim for
approximately 140 hours of prepetition services, and that the cure is for Eron Law to
become disinterested by waiver of its claim. As to the terms of appointment, the United
States Trustee argued whatever compensation is approved, that it not be under § 328,
which would severely limit the Court’s future ability to review the fees to be awarded.
The United States Trustee opposed approval of a contingency based fee and suggested
that if the Court approves the employment of Eron Law, it should be at the firm's
customary hourly rate, with the total fee being subject to review under the reasonableness
standard of § 330. In his brief, Leo Hall argues that Eron Law should be compensated on

2 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the Amended
Standing Order of Reference 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
June 24, 2013. D. Kan. Standing Order 13-1, printed in D. Kan. Rules of Practice and Procedure at 168
(March 2014). An application to approve the employment of counsel 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.

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Case 14-21588 Doc# 136 Filed 11/19/14 Page 2 of 18


an hourly basis normally charged by Chapter 11 counsel in Wichita, Kansas, where Eron
Law’s office is located.3
BACKGROUND FACTS.

Debtor Leon Hall is a farmer. Farming is all that he knows. Until recently, when
he became estranged from his father, Debtor farmed with his father, Leo Hall. Currently
Debtor is employed part time helping out the farmer who is leasing Debtor’s farmland.
Debtor suffers from several medical conditions which limit his earning ability. He does
not earn enough to pay his living expenses. In the past, Debtor's father provided funds for
Debtor's legal expenses, but this source of funding became unavailable when Debtor and
his father became estranged.

Mr. Eron, the managing partner of Eron Law, has been representing Debtor since
December 2012. At that time, Debtor was upset about the family acrimony and the advice
he was receiving from his attorneys who were beholden to his father. Debtor had filed a
Chapter 12 case in 2010. The case was unsuccessful and eventually dismissed. But in
2012, the Debtor’s former bankruptcy counsel was advising that a new bankruptcy should
be filed. Mr. Eron accepted the representation, even though he knew that Debtor had no
source of funds to pay fees.

Eron Law became convinced that Debtor would benefit from the filing of a Chapter
11 case. Eron Law and Debtor executed the Chapter 11 Legal Services Agreement, dated

3 This case was filed in the Kansas City, Kansas division of the Federal Bankruptcy Court for the
District of Kansas, where the customary fees are significantly higher than in Wichita.

3

Case 14-21588 Doc# 136 Filed 11/19/14 Page 3 of 18


November 6, 2013, which is the subject of the application for appointment. It provides for
fees in the amount of 10% of the gross proceeds from all sales of estate assets, subject to
the approval of the employment by the Bankruptcy Court. After executing the Legal
Services Agreement, significant investigation and prefiling estate planning were
undertaken. The representation also included advising Debtor's divorce counsel regarding
the division of assets and assisting Debtor’s criminal counsel in negotiating a settlement of
a potential criminal prosecution. Further details of the representation are discussed below.

Debtor filed a voluntary petition under Chapter 11 on July 7, 2014. Debtor remains
in possession of the estate. Since Debtor is not conducting farming operations, this will be
a liquidating case. Debtor’s primary asset is 9.5 quarter sections of farmland located in
Stafford County, Kansas valued at approximately $5 million, subject to approximately
$4,350,000 in recorded mortgage liabilities. Sale of the real property will result in
significant capital gain tax liability. Personal property is valued at approximately
$300,000, but is fully encumbered. Debtor’s largest secured creditor is his father, who
holds a claim of approximately $1.8 million.4 There are over 100 creditors. Unsecured
claims are approximately $6 million.

Even though the estate appears insolvent, Mr. Eron’s goal is to sell the estate assets
in a manner which will allow significant distributions to unsecured creditors. Eron Law
has the expertise and skill to undertake this representation. Mr. Eron's representation of

4 Doc. 8, 8. (Application by Debtor for the Engagement of Counsel) Debtor’s schedules include
different values, which may be the nondisputed portions of the claims.

4

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Debtor to date evidences compassion, diligence, and creativity. But several factors make
the representation of Debtor difficult and undesirable. Debtor relies upon these details of
the representation to argue that this case is unique and warrants approval of employment
under § 328 on the basis of a contingency fee calculated to be 10% of the estate's gross
proceeds of sale.

To reach his desired outcome of the case, Mr. Eron will have to overcome
significant obstacles. The first is deep seated family strife, involving Debtor’s father and
sister, complicated by his mother’s death in 2013. Much of Mr. Eron’s optimism of
achieving a good outcome is predicated upon his ability to successfully negotiate
settlements with Debtor’s father.

The second obstacle is maximizing the return from disposition of the farmland. Mr.
Eron’s investigation shows the possibility that several of the recorded mortgages on the
farmland have been paid off. Lien avoidance actions will be necessary to realize this
possibility. Mr. Eron has also identified issues about the extent of a prior judgment lien.
There are issues about the ownership of irrigation equipment. In addition, Debtor has a
low tax basis in the property and the potential of a large tax liability upon sale.

Third, the relationship between Debtor and his father while farming for many years
gives rise to the question of whether they were operating a partnership. Mr. Eron proposes
to use the existence of a partnership to both reduce the claims against the estate and to
recover funds for the estate. He reasons that if Debtor and his father were farming as
partners, Debtor may have less than 100% liability for the claims arising from the farming

5

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operation. Mr. Eron is also investigating whether a claim for rent exists against Debtor’s
father for his use of a portion of Debtor’s farmland. There is also the potential for a legal
malpractice action against Debtor’s former counsel.

The undesirability of the case arises from the expectation that the representation
will require significant time coupled with the risk that the estate will be administratively
insolvent and unable to pay fees, or even expenses. In addition, even if Mr. Eron’s plans
to maximize the value of the estate are successful, any payment of attorney fees will be
substantially delayed. Eron Law has already represented Debtor for over a year without
compensation. Such delay in payment causes significant disruption for Eron Law, which
is essentially a solo practice.

When filing the application, Mr. Eron estimated that after all sales are completed,
gross compensation under the 10% contingency fee arrangement would be $500,000. This
amount includes reimbursement of all costs advanced, estimated to be $50,000, resulting
in net estimated compensation of $450,000. Mr. Eron stated that he initially anticipated
that the total time devoted to the case would be 540 hours, resulting in a fee of
approximately $850 per hour. Mr. Eron’s standard hourly rate is $225 per hour for
bankruptcy cases. By the time of oral argument on the application, Mr. Eron
acknowledged that his estimate of the time required was much too low.
DISCUSSION.

A. The appointment of Eron Law is not precluded because the law firm holds a
claim for prepetition services which has not been waived.
6

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The United States Trustee’s first argument is that the employment of Eron Law is
precluded because the firm is not disinterested as required for employment. Section
327(a), employment of professional persons, provides, "Except as otherwise provided in
this section, the trustee, with the court’s approval, may employ one or more attorneys . . .
that do not hold or represent an interest adverse to the estate, and that are disinterested
persons, to represent or assist the trustee in carrying out the trustee’s duties under this
title." Under § 1107, a debtor in possession generally has all the powers of a trustee, and
therefore may employ an attorney under § 327(a). Section 101(14)(A) defines a
disinterested person to mean a person that “is not a creditor, an equity security holder, or
an insider.”

Debtor’s application states that “Eron Law has spent approximately 140 hours as of
the Petition Date devoted exclusively to Debtor’s case during the eight months preceding
this application.”5 At trial the evidence established that Mr. Eron first provided legal
services to Debtor relating to his financial affairs in December 2012. Matters included
review of Debtor’s 2010 bankruptcy and current financial issues, providing assistance in
settling property matters in Debtor’s pending divorce, and assisting in negotiating
settlement of Debtor’s criminal charges which could have resulted in incarceration,
thereby making Debtor unavailable for personal participation in a potential bankruptcy.
At least by early November, the representation included evaluation and planning for a

5 Doc. 8, 5.
7


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Chapter 11 filing. The Legal Services Agreement between Debtor and Eron Law, P.A. is
dated November 6, 2013. On that date, Mr. Eron’s time sheets show an office conference
with Debtor regarding Chapter 11 and other matters. The first time entry for preparing
schedules was in February 2014. Debtor’s divorce was finalized on May 15, 2014, and
thereafter increasing amounts of time were devoted to preparation of the bankruptcy filing.
The bankruptcy petition was filed on July 7, 2014. Other than a small payment of $800 to
$1000, Eron Law has not been paid for any of the services provided and has waived any
claim for services prior to November 6, 2013.

The United States Trustee claims that because Eron Law has not waived its claim
for services between November 6, 2013 and July 7, 2014, Eron Law is not disinterested
and the requested appointment is precluded by §§ 327(a) and 101(14)(A). This position is
supported by a literal reading of the statutes. Cases cited by the United States Trustee
support the position that an attorney holding a prepetition claim for services is not
disinterested and cannot be appointed unless the claim is waived.6 Neither the Debtor nor
Leo Hall cite cases addressing the disinterestedness question.

6 E.g., In re Boot Hill Biofuels, LLC, 2009 WL 982192 (Bankr. D. Kan. March 27, 2009) (Judge
Nugent held that a law firm was not disinterested as required by § 327(a) because it was an involuntary gap
creditor under § 502 and it would be disqualified unless it disclosed and waived those fees); United States
Trustee v. Price Waterhouse, 19 F.3d 138 (3rd Cir. 1994) (clear and unambiguous language of code
prohibited debtor in possession from employing former accountant, who was one of the 20 largest creditors,
to assist in performing duties in case); In re Estes, 57 B.R. 158 (Bankr N.D. Ala. 1986) (employment of
attorney whose law firm held a claim against the estate was improper in Chapter 11 case).

8

Case 14-21588 Doc# 136 Filed 11/19/14 Page 8 of 18


The Court’s research reveals that some courts decline to apply the definition of
disinterested person literally, as urged by the United States Trustee. In Martin, 7 the First
Circuit, after noting that § 327(a) would at first blush “seem to foreclose the employment
of an attorney who is in any respect a ‘creditor’”, found “such a literalistic reading defies
common sense and must be discarded as grossly overbroad.”8 It reasoned that

to interpret the law in such an inelastic way would virtually
eliminate any possibility of legal assistance for a debtor in
possession, except under a cash-and-carry arrangement or on a
pro bono basis. It stands to reason that the statutory mosaic
must, at least, be read to exclude as a “creditor” a lawyer, not
previously owed back fees or other indebtedness, who is
authorized by the court to represent a debtor in connection
with reorganization proceedings—notwithstanding that the
lawyer will almost instantaneously become a creditor of the
estate with regard to the charges endemic to current and future
representation.9

A bankruptcy court has observed that “most courts have concluded that performance of
customary prepetition bankruptcy services, i.e., preliminary work routinely undertaken to
facilitate an upcoming bankruptcy filing, does not make the attorney a creditor under §
101(13) and will not serve to disqualify an otherwise eligible attorney from appointment
under § 327(a) absent the presence of other disqualifying factors.”10 A respected
commentator states, “[e]ven courts that adhere to the per se rule have held that

7 In re Martin, 817 F.2d 175 (1st Cir. 1987).
8 Id. at 180.
9 Id.
10 In re Watson, 94 B.R. 111, 114 (Bankr. S.D. Ohio 1988).


9

Case 14-21588 Doc# 136 Filed 11/19/14 Page 9 of 18


professionals holding claims for services rendered prior to the commencement of the
chapter 11 case are not thereby barred from representing the debtor in possession if the
services were rendered in preparation for the bankruptcy filing.”11

The Court agrees with the more liberal construction of the disinterestedness
requirement. The evidence, including the testimony and the Court’s examination of Mr.
Eron’s time entries for the prepetition time period, convince the Court that the services
were rendered in preparation of the bankruptcy filing and Eron Law should be considered
disinterested for purposes of appointment under § 327.

B. The Court rejects the request that the appointment be under § 328 on a
contingency basis.
Debtor argues that the employment of Eron Law should be under § 328 “because of
the substantial risk of non-payment if sales are not consummated, and the further risk of an
‘ex post facto’ attempt by other parties to reduce the appropriate fee based upon
subsequent facts not presently known.”12 The United States Trustee argues that if Eron
Law is employed, compensation should be determined under §330 rather than § 328.

Section 330, Compensation of officers, is the generally applicable fee statute. It
provides, subject to § 328, for the award of “reasonable compensation for actual, necessary
services rendered by the . . . attorney” and “reimbursement for actual, necessary
expenses.” In the absence of preapproval under § 328, Eron Law's fees would be reviewed

11 7 Collier on Bankruptcy, ¶ 1107.04[3][b] at 1107-16 (Alan N. Resnick & Henry J. Sommer eds.-inchief,
16th ed. 2014).
12 Doc. 8, 3.
10

Case 14-21588 Doc# 136 Filed 11/19/14 Page 10 of 18


at the conclusion of the case under the § 330 reasonableness standard.13 In the Tenth

Circuit, reasonableness is determined under the adjusted lodestar approach, which takes

into account each of the factors stated in § 330(a)(3) plus additional relevant factors as

identified in Johnson v. Georgia Highway Express. 14

Section 328, under which Eron Law seeks approval of a contingency fee, provides:

The trustee, . . . with the court’s approval, may employ
or authorize the employment of a professional person under
section 327 . . . on any reasonable terms and conditions of
employment, including on a retainer, on an hourly basis, on a
fixed or percentage fee basis, or on a contingent fee basis.
Notwithstanding such terms and conditions, the court may
allow compensation different from the compensation provided
under such terms and conditions after the conclusion of such
employment, if such terms and conditions prove to have been
improvident in light of developments not capable of being
anticipated at the time of the fixing of such terms and
conditions.

Therefore, when evaluating an employment agreement under § 328, the Court makes a

reasonableness examination of the proposed terms and conditions. If the employment is

approved under § 328, the court may not later switch to § 330 to award fees.15 The

standard for review of fees under an agreement approved under § 328 “is that of

improvidence ‘in light of developments not capable of being anticipated at the time of the

13 In re Circle K Corp., 279 F.3d 669, 671 (9th Cir. 2002).

14 Market Center East Retail Property, Inc. v. Barak Lurie (In re Market Center East Retail Property,
Inc.), 730 F.3d 1239, 1247 (10th Cir. 2013), referring to Johnson v. Georgia Highway Exp., Inc., 488 F.2d
714 (5th Cir. 1974).

15 In re Airspect Air, Inc., 288 B.R. 464, 470 (6th Cir. BAP 2003) rev’d on other grounds 385 F.3d
915 (6th Cir. 2004).

11

Case 14-21588 Doc# 136 Filed 11/19/14 Page 11 of 18


fixing of such terms and conditions.’”16 The court may not revisit its prior determination

of reasonableness of the compensation arrangement unless and until it determines that the

pre-approved terms and conditions were “improvident in light of developments not

capable of being anticipated at the time" of approval.17 This is a “high hurdle to clear.”18

For example, when special litigation counsel’s contingency fee arrangement had been pre-

approved under § 328, the bankruptcy court could not reduce the fee award "simply

because the size and scope of a settlement had not actually been anticipated, [since] it does

not follow that it was incapable of anticipation."19

In this case, the application seeks approval of employment under the November 6,

2013, Legal Services Agreement between Eron Law and Debtor. As to fees it provides:

The Firm agrees to accept this case on a contingency fee basis.
The fees described hereafter will be accepted to cover all work
performed by the Firm in your chapter 11 case, or any
proceedings related to your chapter 11 case. The Firm will
earn fees only upon the sale of assets owned by you. The Firm
agrees to accept a fee equal to 10% of any assets sold by you
or the chapter 11 estate, whether sold during your chapter 11
estate pursuant to 11 U.S.C. §363, through a chapter 11 plan,
any combination thereof, or any substitute therefore. The sales
price shall be calculated on the gross amount of any sale,
regardless of any other fees or secured debts that must be paid
out of the sale proceeds. The Firm agrees that it will be

16 Id. at 471, quoting 11 U.S.C. § 328(a).
17 In re Federal Mogul-Global, Inc., 348 F.3d 390, 396-97 (3rd Cir. 2003), cited with approval in In


re Market Center East Retail Property, Inc., 730 F.3d at 1246, n. 5.
18 Riker, Danzig, Scherer, Hyland & Peretti v. Offical Comm. of Unsecured Creditors (In re Smart

World Technologies, LLC.), 552 F.3d 228, 235 (2nd Cir. 2009).
19 Id.

12

Case 14-21588 Doc# 136 Filed 11/19/14 Page 12 of 18


responsible to take appropriate action to seek recovery of any
earned fees through surcharge or pro rata mechanisms in the
event that sale proceeds are insufficient to pay all necessary
costs, fees, and encumbrances. . . .

COSTS AND EXPENSES. Costs and expenses advanced or
paid by the Firm on behalf of you will be paid by the firm and
included in the contingency fee identified above.

A substantial portion of Mr. Eron’s testimony and the expert opinion report offered
by Eron Law was directed at supporting the position that a contingency fee should be
approved because of the complexity of this case. As stated in the background facts, the
complexity is the result of obstacles which will need to be overcome to reach Mr. Eron’s
desired outcome for the case. Also, the case is undesirable because of the risk of
administrative insolvency and the delay in payment, even if there are sufficient assets.

The Court finds that the issues in this case make it difficult, but not unique. Many
Chapter 11 cases have their roots in entrenched family malfunction. The successful
outcome of many cases depend upon lien avoidance, favorable handling of tax liabilities,
and attempting to shift liability for claims to non-debtors. Debtor’s evidence, although
indicating that reasonable compensation may be higher than in Chapter 11 cases having
similar assets, does not convince the Court that a contingency fee arrangement is
reasonable.

In addition, the contingency fee arrangement proposed by the Debtor does not
present a solution to the problem that in Chapter 11 cases counsel often undertake
representation knowing that there is a significant likelihood of inadequate assets to pay

13

Case 14-21588 Doc# 136 Filed 11/19/14 Page 13 of 18


counsel’s administrative claim for fees. As this Court has frequently said, Chapter 11
cases are hourly contingency fee cases. Unless a contingency fee based upon the sale of
assets includes a method for priming the interests of secured creditors and other lien
holders, which the Eron Legal Services Agreement does not include, the award of the
contingency fee, like the award of an hourly fee, is dependent upon the ability of the estate
to pay administrative expenses. The provision in the proposed Legal Services Agreement
whereby “[t]he Firm agrees that it will be responsible to take appropriate action to seek
recovery of any earned fees through surcharge or pro rata mechanisms in the event the sale
proceeds are insufficient to pay all necessary costs, fees, and encumbrances”20 does not
solve this problem. Rather, it raises the undesirable potential of litigation between counsel
for the debtor-in-possession and lien holders on fee issues.

The Court accepts Mr. Eron’s arguments that this case includes factors which
would justify a contingency fee in other litigation, such as personal injury cases. The
Debtor has no source of funds to pay fees and expenses, costs will be substantial,
representation will require many hours of work over several years, and even then a
successful out come (in this case, an administratively solvent estate) is uncertain. But this
is not a tort case. The interests of creditors must be considered. Counsel for the debtor in
possession has significant duties in addition to the sale of assets. To approve a fee based
solely upon the gross value of assets sold, could have the inappropriate effect of causing

20 Doc. 8, 17.
14


Case 14-21588 Doc# 136 Filed 11/19/14 Page 14 of 18


counsel to focus on asset sales, to the detriment of alternative methods of administering the
assets and of other estate issues not involving asset sales, such as recovery of preferential
payments. A conflict of interest could arise. The Court, the United States Trustee, and the
Debtor have not found any cases where employment of bankruptcy counsel for the debtor
in possession was approved on a contingency basis. The cases which approve such
arrangements are for appointment of special counsel for limited purposes.21 The facts of
this case are not so compelling that the Court wishes to "plow new ground" and approve a
contingency fee for a debtor in possession under § 328.

The Court also declines to approve employment of Eron Law under § 328 at an
hourly rate, as requested in Debtor’s application, if the Court does not approve the
contingency fee agreement. Representation of the Debtor in this case involves so many
unknowns that it impossible for the Court at this stage of the proceedings to determine
what issues may arise. There are multiple foreseeable outcomes. On one hand, this case
could be concluded quickly with excellent results if a settlement beneficial to the estate is
soon reached with Leo Hall. On the other hand, if Leo Hall determines to fully litigate all
issues or if the tax issues cannot be resolved, the case could be lengthy and the outcome
less desirable. Because a compensation agreement once approved under § 328 can be
adjusted only if such terms and conditions prove to have been improvident in light of

21 E.g., In re Smart World Technologies, LLC, 552 F.3d 288 (2nd Cir. 2009) (appointment of special
litigation counsel to defend adversary complaint regarding price to be paid for Chapter 11 debtor’s assets);
In re Barron, 225 F.3d 583 (5th Cir. 2000) (employment by chapter 7 trustee of counsel to pursue preferential
transfer or fraudulent transfer proceeding on a continency fee basis).

15

Case 14-21588 Doc# 136 Filed 11/19/14 Page 15 of 18


developments not capable of being anticipated at the time of the fixing of such terms and
conditions, such approval would deprive the Court of the ability to review the
reasonableness of the compensation at the completion of the case.

C. Because of the difficulty of this case, as discussed above, the Court will
approve the employment of Eron Law under § 327 at the hourly rate of $450.
As this Court has previously said,
A bankruptcy court has “‘wide discretion’ to authorize
many types of fee arrangements” for professionals whose
employment is approved under § 327. . . . “[A] Bankruptcy
Court need not approve or reject an application as presented
but may approve an application with modified terms that the
Court finds necessary to render the proposed employment


reasonable.” 22
For the reasons stated above, the Court will not approve employment of Eron Law under §
327 on either a contingency fee basis or an hourly fee basis under § 328. However, it will
approve employment under § 327, at the rate of $ 450 per hour for Mr. Eron’s time, the
rate he requested in the employment application. The Court will approve employment of
other attorneys and non-attorneys affiliated with Eron Law at the firm’s customary rates.
Eron Law will continue to advance costs. The final fee award will be subject o the
reasonableness standard of § 330.

Mr. Eron’s rate is substantially higher than his customary rate for Chapter 11 debtor
work. It is not, however, substantially higher than fees charged for Chapter 11 debtor
work by some lawyers practicing in the United States Bankruptcy Court for the District of

22 In re Brooke Corp., 2013 WL 6782877 (D. Kan. Case 08-22786, Dec. 20, 2013) (citations omitted)
16

Case 14-21588 Doc# 136 Filed 11/19/14 Page 16 of 18


Kansas, the district in which this case was filed. In the Court’s experience, lawyer’s fees
are market driven. Among the factors that effect the market are competition for the work,
the perceived skill of the lawyer, the actual skill of the lawyer, the availability of the
lawyer to do the work to the exclusion of other work, overhead, and the risk of nonpayment.
The Court believes that Leon Hall would be unable to find a lawyer with the
requisite skills needed to have a reasonable chance of achieving a satisfactory result for
Leon Hall at a significantly lower hourly rate. Approving an hourly rate higher than Eron
Law’s customary fees is appropriate given the complexity of this case, the professional
skill and diligence demonstrated in the Eron Law’s representation of Debtor to date, and
the undesirable aspects of the representation. The Court will therefore approve
engagement of counsel under § 327 at the foregoing hourly rates, subject to the
reasonableness standard of § 330.

CONCLUSION.

For the foregoing reasons, the Court denies the Debtor’s application to employ
Eron Law under § 327, based upon the terms of the November 6, 2013 Legal Services
Agreement being approved under § 328. The Court however will approve employment of
Eron Law under § 327 based upon a revised employment agreement in which
compensation is based upon the hourly rates set forth above. Total compensation shall be
subject to the reasonableness standard of § 330. Such appointment shall to retroactive to
the case filing date of July 7, 2014, if a revised employment application incorporating a fee

17

Case 14-21588 Doc# 136 Filed 11/19/14 Page 17 of 18


agreement consistent with this opinion is filed within 14 days of the entry of this
Memorandum and Order.

The foregoing constitute 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. The order based on this
ruling stated above 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.
###


18

Case 14-21588 Doc# 136 Filed 11/19/14 Page 18 of 18

13-21483 Flex Financial Holding Company (Doc. # 199)

In Re Flex Financial Holding Company, 13-21483 (Bankr. D. Kan. Oct. 29, 2014) Doc. # 199

PDFClick here for the pdf document.


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

 

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


In re:
FLEX FINANCIAL HOLDING CASE NO. 13-21483
COMPANY, CHAPTER 11
DEBTOR.

MEMORANDUM OPINION AND ORDER DENYING
DEBTOR’S OBJECTION TO THE CLAIM OF EAGLE WOODS, LLC (CLAIM NO. 15)
BASED UPON EAGLE WOODS, LLC’S FAILURE TO REGISTER TO
DO BUSINESS IN KANSAS


On February 13, 2014, Eagle Woods, LLC, a Missouri limited liability company
(Eagle Woods), filed a timely proof of claim for Debtor’s alleged breach of a lease of real
property located in Olathe, Kansas.1 Debtor Flex Financial Holding Company (Flex)
objected.2 Among other things, Flex raised the question of law whether the claim must be

1 Proof of claim no. 15.
2 Doc. 112.


Case 13-21483 Doc# 199 Filed 10/28/14 Page 1 of 12


disallowed because Eagle Woods was not registered to do business in Kansas at the time
it filed the proof of claim and did not so register until after the expiration of the claims bar
date. Eagle Woods responded to the objection. The Court requested and received
additional briefs. Oral arguments were heard. For the reasons stated below, the Court
finds that the proof of claim will not be disallowed because of Eagle Woods’ delay in
registering to do business in Kansas.

BACKGROUND FACTS.

The relevant facts are undisputed. Eagle Woods is a limited liability company
organized under the laws of Missouri. In 2006, Eagle Woods, as landlord, entered into a
ten-year lease with Flex, as tenant, of premises located in Olathe, Kansas. In 2012, Eagle
Woods sued Flex in Johnson County, Kansas District Court for delinquent rent.3

Flex filed a voluntary petition under Chapter 11 on June 10, 2013. A claims bar
date of February 28, 2014, was ordered.4 On February 13, 2014, Eagle Woods filed its
proof of claim, asserting a nonpriority unsecured claim in the amount of $1,340,614.91,
arising from Debtor’s alleged prepetition breach of the lease. On June 10, 2014, Debtor
filed its response, objecting to the claim on legal and factual bases. The legal basis was
that (1) Eagle Woods owns income-producing property in Kansas, (2) Eagle Woods was
doing business in Kansas, (3) Eagle Woods had not registered to do business in Kansas,

(4) Kansas law bars actions by unregistered foreign companies doing business in Kansas,
3 Doc. 28 at 3 (Statement of Financial Affairs).

4 Doc. 81.

2

Case 13-21483 Doc# 199 Filed 10/28/14 Page 2 of 12


(5) Eagle Woods was not authorized to do business in Kansas at any time before the
expiration of the claims bar date, and (6) under 11 U.S.C. § 502(b)(1) and § 558, Debtor
shall have the benefit of any defenses available to Debtor under these facts.5
On July 1, 2014, Eagle Woods registered with the Kansas Secretary of State as a
foreign limited liability company authorized to do business in the state.6 Eagle Woods
thereafter responded to the objection, arguing in part that it has met all the requirements
of Kansas law that are necessary to obtain authority to do business in Kansas, retroactive
to January 2006, preceding the date of the lease, and also has authority to prosecute its
bankruptcy claim and, if the automatic stay were lifted, to pursue the state court litigation.
DISCUSSION.

Eagle Woods is a limited liability company organized under the laws of the State
of Missouri and is therefore considered a foreign limited liability company under Kansas
law. The parties agree that by owning and renting Kansas real estate, Eagle Woods was
doing business in Kansas. As a foreign limited liability company, Eagle Woods was
subject to K.S.A. 17-76,126, a “closed-door” statute, and could not “maintain any action,
suit or proceeding in the state of Kansas until it . . . registered in this state and . . . paid to
the state all fees and penalties for the years, or parts thereof, during which it did business
in the state without having registered.”7 Eagle Woods was not registered to do business

5 Doc. 112 at 1.

6 Doc. 129-1, exh. A.

7 K.S.A. 17-76,126(a).

3

Case 13-21483 Doc# 199 Filed 10/28/14 Page 3 of 12


in Kansas until July 1, 2014.

The question in this case is what is the impact of Eagle Woods’ failure to register
in Kansas until July 1, 2014, after it filed its proof of claim and after expiration of the
claims bar date. The Court will first examine the impact of the delay in registration under
Kansas law. It will then consider whether that delay (1) provides a defense under 11

U.S.C. § 502(b)(1) or § 5588 to the merits of the claim when asserted in bankruptcy court,
or (2) precludes this Court from considering the proof of claim under bankruptcy law.
The relationship under Kansas law between the statue of limitations and the
dismissal of a counterclaim asserted by a foreign corporation that had done business in
the state without registering with the state for a lack of capacity arising from the failure to
register was noted in Corco. 9 Ledar Transport, Inc., appealed from the dismissal with
prejudice of its counterclaim against Corco, Inc., on the basis that Ledar was a foreign
corporation doing business in Kansas without registering with the Secretary of State. The
Kansas Court of Appeals held noncompliance with the registration requirement meant
that Ledar could not at the time maintain the counterclaim, but also noted that “[s]tates
with similar statutes generally hold that compliance after an action is begun is sufficient
to enable a corporation to maintain an action.”10 The appellate court therefore reversed

8 Future references in the text to Title 11 shall be to the section number only.
9 Corco, Inc., v. Ledar Transport, Inc., 24 Kan. App. 2d 377, 946 P.2d 1009 (1997) (involving


K.S.A. 17-7307(a), which requires foreign corporations to register to do business in the state, much as
K.S.A. 17-76,126(a) does for limited liability companies).
10 Id., 24 Kan App. 2d at 378, 946 P.2d at 1010.
4


Case 13-21483 Doc# 199 Filed 10/28/14 Page 4 of 12


the dismissal with prejudice and remanded with directions to dismiss the counterclaim
without prejudice, but noted that Ledar bore the risk that the statue of limitations might
run before it was properly registered. The court stated:

Under the facts of this case, the proper remedy was to
dismiss Ledar’s counterclaim without prejudice rather than
with prejudice. This would give Ledar the opportunity to
comply with the statutes and then reassert its claim against
Corco. On the other hand, it would also leave the risk that the
statue of limitations might run against Ledar.11

Corco was cited in Haile Group, LLC, 12 an unpublished opinion of the Kansas
Court of Appeals, and the only Kansas appellate court decision construing the limited
liability company “closed-door” statute. Haile, organized under the laws of Florida, sued
the City of Lenexa, claiming it was entitled to compensation for work performed on a city
project. After trial to the court, judgment was entered in favor of the City. Haile
appealed claiming, among other things, that the trial court erred in concluding that Haile
lacked capacity or standing to maintain the action because it was not registered as a
foreign limited liability company as required by K.S.A. 17-76,126. Citing Corco, the
court noted that “[n]oncompliance with the registration statutes at the outset of an action
is not fatal to a plaintiff’s claim.”13 Further, the court observed that “Haile’s failure to
register as a foreign limited liability company only implicates its capacity to sue, not its

11 Id., 24 Kan. App. 2d at 379, 946 P.2d at 1010.
12 Haile Group, LLC .v City of Lenexa, 242 P.3d 1281, 2010 WL 4977221 (Kan. App. 2010).
13 Id. at *3.


5

Case 13-21483 Doc# 199 Filed 10/28/14 Page 5 of 12


standing to sue.”14 The court of appeals held that the district court therefore should have
dismissed “Haile’s action without prejudice to give Haile reasonable time to comply with
the registration statutes and refile the action.”15

In this case, Eagle Woods sued Flex in Johnson County District Court before it
registered in Kansas as a foreign limited liability company. It therefore lacked capacity to
bring the suit; in other words, it had no personal right to litigate16 in Johnson County
District Court. But assuming that the state court litigation against Debtor was not stayed
by the bankruptcy filing, when Eagle Woods registered on July 1, 2014, that defect would
have been cured, since counsel for both parties acknowledged at oral argument that the
Kansas five-year statute of limitations applicable to the enforcement of written contracts
had not run by July 1, 2014. Hence, the delay in registration would not have provided a
defense to Flex if Eagle Woods’ claim were being litigated in state court. To the extent
that Eagle Woods’ claim against Debtor in bankruptcy court is determined under state
law, the delay in registration does not provide a defense under § 502(b)(1) or § 558.

Turning to bankruptcy law, Eagle Woods is a creditor of Debtor17 and therefore is
entitled to file a proof of claim under § 501. The question is whether Eagle Woods’ lack

14 Id. at *5.
15 Id. at *7 (emphasis supplied).
16 See Toklan Royalty Corp. v. Panhandle Eastern Pipe Line Co., 168 Kan. 259, 268, 212 P.2d


348 (1949); 6A Charles Alan Wright, Arthur R. Miller & Mary Jane Kane, Federal Practice and
Procedure, § 1542 at 469 (2010).
17 See Doc. 27 at 10 (Debtor’s Schedule F, listing Eagle Woods as an unsecured nonpriority
creditor).
6

Case 13-21483 Doc# 199 Filed 10/28/14 Page 6 of 12


of capacity under Kansas law, resulting from its failure to register as a foreign limited
liability company as of the time it filed its proof of claim and continuing until after the
claims bar date in bankruptcy court, requires a finding that Eagle Woods lacked the
capacity to file its proof of claim.

For the following reasons, the Court finds that federal rules of procedure govern
the capacity of entities in bankruptcy court litigation, and under those rules, Eagle Woods
has the capacity to engage in claims litigation. Federal Rule of Bankruptcy Procedure
701718 provides that Federal Rule of Civil Procedure 17,19 which addresses real party in
interest, capacity, and related matters, applies in adversary proceedings. Subsection (b) of
Civil Rule 17 provides:

(b) Capacity to Sue or Be Sued. Capacity to sue or
be sued is determined as follows:
(1) for an individual who is not acting in a
representative capacity, by the law of the individual’s
domicile;
(2) for a corporation, by the law under which it was
organized; and
(3) for all other parties, by the law of the state where
the court is located, except that:
(A) a partnership or other unincorporated
association with no such capacity under that
state’s law may sue or be sued in its common
name to enforce a substantive right existing
under the Unites States Constitution or laws;
and
(B) 28 U.S.C. §§ 754 and 959(a) govern the
capacity of a receiver appointed by a United
18 Fed. R. Bankr. P. 7017. Future references in the text shall be to Bankruptcy Rule.

19 Fed. R. Civ. P. 17. Future references in the text shall be to Civil Rule.

7

Case 13-21483 Doc# 199 Filed 10/28/14 Page 7 of 12


States court to sue or be sued in a United States
court.

Debtor’s objection to Eagle Woods’ proof of claim gave rise to a contested matter under

Bankruptcy Rule 9014.20 Subsection (c) of Bankruptcy Rule 9014 provides that

Bankruptcy Rule 7017 also applies in contested matters.

The capacity of a limited partnership organized under Ontario law to bring a

dischargeability complaint in a bankruptcy court in Florida was at issue in Cochrane. 21

Prepetition, Tudor Oaks Limited Partnership obtained a judgment against debtor

Cochrane in Minnesota. Tudor Oaks filed a dischargeability complaint in Cochrane’s

Chapter 7 case, and the debtor responded with a motion to dismiss, premised in part on a

lack of capacity because Tudor Oaks was not registered to do business in Florida. The

court rejected this argument, stating:

While it is without dispute that F.R.B.P. 7017(b), as
adopted by F.R. Civ. P. 17(b) provides that the capacity of a
corporation to sue or to be sued shall be determined by the
law under which it was organized[, a]n important exception to
this Rule is [a prior version of what is now F.R. Civ. P.
17(b)(3)(A)].

The suit pending before this Court is an enforcement of
a right granted by Congress to a creditor to obtain a
determination of the dischargeability of a particular debt. The
jurisdiction to make such a determination is exclusively
within the competence of the Bankruptcy Court where the
case filed by Debtor is pending.

For these reasons it is quite evident that while Tudor

20 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice 3d,
§ 48:27 at 48-78 (Thomson Reuters 2014).

21 Tudor Oaks Ltd. P’ship v. Cochrane (In re Cochrane), 273 B.R. 272 (Bankr. M.D. Fla. 2001).

8

Case 13-21483 Doc# 199 Filed 10/28/14 Page 8 of 12


Oaks Limited Partnership may not have the capacity to pursue
a legal action in courts of this State [Florida], it certainly has
an absolute right to do so in the Federal Bankruptcy Court.22

In Fantastik, 23 a bankruptcy court sitting in Nevada held “that federal law applies
in determining capacity to bring and maintain an adversary proceeding to determine the
allowance or disallowance of a claim in the bankruptcy court.”24 It therefore rejected the
defendants’ contention that litigation against the debtor seeking actual and punitive
damages should be dismissed because the plaintiff, an Oklahoma corporation, had been
doing business in Nevada without qualifying to do so under Nevada law, and therefore
could not commence, maintain, or defend any action in the Nevada state courts. It noted
that a plaintiff in bankruptcy claims litigation has no choice of forums. “It would be
patently inequitable to deny a creditor access to the bankruptcy court to adjudicate a claim
simply because that creditor could not bring that action in the courts of the state in which
the bankruptcy court sits.”25 The authorities relied upon by the Fantastik court included
Civil Rule 17 and Bankruptcy Rule 7017, as applicable to corporations in claims
litigation.

Bankruptcy Rules 9014(c) and 7017, which adopt Civil Rule 17, require the Court
to hold that Eagle Woods has the capacity to engage in litigation of its claim against Flex,

22 Id. at 276-277.

23 Dollar Saver Stores, Inc., v. Brown (In re Fantastik, Inc.), 49 B.R. 510 (Bankr. D. Nev. 1985).

24 Id. at 511.

25 Id. at 512.

9

Case 13-21483 Doc# 199 Filed 10/28/14 Page 9 of 12


even though it was not registered to do business as a foreign limited liability company
until after the claims bar date. Civil Rule 17 does not expressly address the capacity of a
limited liability company. Such a company is not an individual, so subsection (b)(1),
selecting the law of the individual’s domicile, does not apply. Subsection 17(b)(2)
applies to a corporation, selecting the law under which the corporation was organized.
Although a limited liability company has some characteristics of a corporation,
corporations and limited liability companies are distinct entities under Kansas and other
states’ laws. Subsection 17(b)(2) therefore does not apply to Eagle Woods.26 Civil Rule
17(b)(3) states the general rule that the capacity of parties that are not individuals or
corporations is determined “by the law of the state where the court is located.” Numerous
federal courts other than bankruptcy courts have held that Federal Rule 17(b)(3) guides
the capacity inquiry for limited liability companies.27 Under this general rule, the law of
Kansas would apply to the capacity of Eagle Woods and bar further proceedings to prove
its claim, since Eagle Woods did not obtain capacity under Kansas law until July 1, 2014,
after the bar date, which was not tolled by the delay in registration.

But for parties whose capacity is determined by Civil Rule 17(b)(3), including
limited liability companies, there are two exceptions to the application of the law of the

26 The Court observes that if Eagle Woods were considered a corporation under Rule 17, it would
have capacity, since there is no evidence that it lacks capacity under Missouri law.

27 In re Dairy Farmers of Am., Inc., Cheese Antitrust Litig., 767 F. Supp. 2d 880, 892 (N.D. Ill.
2011); Merry Gentleman, LLC, v. George and Leona Prods., Inc., 2014 WL 3810998 at *2, (N.D. Ill.
2014) (collecting cases).

10

Case 13-21483 Doc# 199 Filed 10/28/14 Page 10 of 12


state where the federal court is located. The first applies in this case. It provides that an
entity to which Civil Rule 17(b)(3) applies and which has no capacity under the law of the
state where the court is located may nevertheless sue or be sued in its common name to
enforce a substantive right under the laws of the United States. As discussed above, this
provision has been held applicable to a dischargeability proceeding filed by a foreign
limited partnership.28 It also “has enabled a partnership or other unincorporated
association to sue and be sued in a federal court under the Fair Labor Standards Act,
National Labor Relations Act, Labor Management Relations Act, the antitrust laws,
patent laws, Emergency Price Control Act, War Labor Disputes Act, Capehart Act,
Securities Exchange Act, Railway Labor Act, Federal Arbitration Act, as well as other
federal statutes.”29 The Bankruptcy Code is a part of the laws of the United States. It
gives a holder of a claim against a debtor the substantive right to file a proof of claim and
gives the debtor the right to object to the claim. A claim holder has no ability to choose
the court in which the claim will be asserted — it must be filed in the court in which the
debtor’s bankruptcy case is pending. Allowing a limited liability company claim holder
that is not authorized to do business under the law of the state where that bankruptcy
court is located to assert its claim there promotes the jurisdiction of the bankruptcy court
to adjudicate all claims against the debtor’s bankruptcy estate.

CONCLUSION.

28 In re Cochrane, 273 B.R. at 276-277.

29 6A Federal Practice and Procedure, § 1564 at 630-32.

11

Case 13-21483 Doc# 199 Filed 10/28/14 Page 11 of 12


For the foregoing reasons the Court holds the failure of Eagle Woods, a Missouri
limited liability company, to register to do business in Kansas until after the expiration of
the date for filing proofs of claim does not provide (1) a defense to the claim under state
law, or (2) a basis to disallow the claim under bankruptcy law for lack of capacity. The
Debtor’s objection to Eagle Woods’ claim on the ground the company did not register to
do business in Kansas until July 1, 2014, which was after the date Eagle Woods filed its
proof of claim and after the claims bar date, is denied.

IT IS SO ORDERED.
# # #


12

Case 13-21483 Doc# 199 Filed 10/28/14 Page 12 of 12

13-22462 Tucker Brothers L.L.C (Doc. # 202)

In Re Tucker Brothers L.L.C, 13-22462 (Bankr. D. Kan. Nov. 14, 2014) Doc. # 202

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 13th day of November, 2014.

 

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


In re:
CASE NO. 13-22462
TUCKER BROTHERS, L.L.C., CHAPTER 12
DEBTOR.

MEMORANDUM OPINION AND JUDGMENT
DETERMINING VALUE OF BANK'S REAL PROPERTY COLLATERAL AND
DENYING CONFIRMATION OF DEBTOR'S FOURTH AMENDED PLAN


On October 2, 2014, an evidentiary hearing was held on valuation of Debtor’s real
property and confirmation of Debtor/Farmer’s Fourth Amended Plan of Reorganization

Case 13-22462 Doc# 202 Filed 11/13/14 Page 1 of 19


(Plan),1 to which creditor Farmers State Bank, Blue Mound, Kansas objected.2 Debtor
appeared by counsel William L. Needler of William L. Needer and Associates, Ltd., and
by its manager, Thomas J. Tucker. Farmers State Bank appeared by counsel Bruce
Woner and Patricia A. Reeder, of Woner, Glenn, Reeder & Girard, P.A. and Lonnie
Sprague, its executive vice president. After hearing the evidence, the Court took the
matter under advisement.3 For the reasons stated below, the Court finds for purposes of
the Plan that Debtor’s real property should be valued at $1,740,405 and denies
confirmation of Debtor’s Plan.

BACKGROUND FACTS.

Debtor Tucker Brothers, L.L.C. filed a voluntary petition for relief under Chapter
12 on September 19, 2013. Thomas J. Tucker, aged 64, is the managing member of
Debtor. The other member is Thomas’s brother, who is 14 months older. Debtor engages
in agricultural pursuits primarily by raising and marketing livestock and offspring on land

1 Doc. 165. The Court notes that after the hearing, Debtor filed his First Modification of
Debtor/Farmer’s Fourth Amended Plan Pursuant to 11 USC § 1223 of the Bankruptcy Code
(doc. 196). The Court will not consider these modifications. They were filed after the record
was closed and the objection to the Plan taken under advisement.

2 Doc. 169.

3 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and
the Amended Standing Order of Reference 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 June 24, 2013. D. Kan. Standing Order 13-1,
printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Allowance of claims
and confirmation of plans are core proceedings which this Court may hear and determine as
provided in 28 U.S.C. § 157(b)(2)(B) and (L). There is no objection to venue or jurisdiction
over the parties.

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 2 of 19


it owns in Bourbon County, Kansas. Debtor’s Schedule A lists 1060 acres of farmland in
Bourbon County, Kansas valued at $1,250,000. Schedule B lists cash, vehicles, animals,
inventory, farming equipment, and supplies valued at $41,230. Farmers State Bank
(Bank) is the only secured creditor listed of Schedule D. Bank’s claim is listed at
$1,570,000, with $320,000 of the claim unsecured. Schedule E, creditors holding
unsecured priority claims, lists Bourbon County’s tax claim of $10,667.22. One
unsecured creditor, holding a claim of $152,069.99, is listed on Schedule F. No
executory contracts or unexpired leases are scheduled. The equity holders of Debtor are
listed as co-debtors.

On January 3, 2014, Bank filed a secured proof of claim for $1,598,855.90,
comprised of principal, interest, and attorney fees and expenses. Debtor and Bank
stipulated that the amount of Bank’s claim as stated in its proof of claim is the amount
owing by Debtor to Bank on the date of filing. The parties also agree that the Bank’s
claim is secured by: (1) approximately 1061 acres of real estate in Bourbon County,
Kansas; and (2) all of Debtor’s personal property, including equipment and livestock.

Debtor’s Plan classifies claims and places Bank’s secured claim in Class C. It then
bifurcates the claim into two claims: (1) a “real estate claim” in the amount of
$1,450,000, secured by Bank’s first mortgage lien on farmland; and (2) a “personal
property claim” of $50,731.47 secured by the Bank’s security interest in personal
property. Debtor’s plan proposes that it retain all of the assets, both real and personal, that

3

Case 13-22462 Doc# 202 Filed 11/13/14 Page 3 of 19


it owned on the date it petitioned for relief. Debtor’s Plan proposes to pay the “real estate
claim” as follows:

Year 1 (Oct. 30, 2015) $20,949.00

Year 2 (Oct. 30, 2016) $20,949.00

Year 3 (Oct. 30, 2017) $20,949.00

Years 4 through 17 $86,417.46

Year 18 balloon4
The payments in years one through three are characterized as adequate protection
payments in the amount of “reasonable customary rent for this type of land in this Kansas
location.”5 For these three years, there is no payment of principle6 or interest on the “real
estate claim” and no accrual of interest. The payments in years 4 through 17 are
payments of principle and interest on a debt of $1,450,000 amortized over 30 years at

4.25 per cent. During years one through three Debtor plans to purchase a total of 100
cows from Mark Snelson for $125,000 and proposes to grant the Bank a security interest
in the cows as they are purchased. Debtor’s Plan includes as an expense $5,000 per year
for replacement cows starting in the second year.
4 The Court believes the balloon would be in the amount of $944,242.25, using Debtor’s
amended amortization schedule.

5 Doc. 165, 6-7.

6 Doc. 193, amended exh. D to Plan. But see Plan (doc. 165, 7) stating, “Additionally,
starting the 4th year under the Plan, the secured claim of $1,450,000 on the land, less the
Adequate Protection Payments previously paid under the Plan, shall be paid at the “Till Rate” of
4.25% amortized over 30 years.”

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 4 of 19


The “personal property claim” is in the amount of $50,731.47. Payments are
$4,970.52 per year, commencing on October 30, 2015, with a balloon in 10 years. The
payments are calculated based upon a 15 year amortization period at 5.25 percent interest.

Bank objects to confirmation on multiple grounds. The most significant
objections, which were the focus of the evidence at the confirmation hearing, are: under
valuation of the Bank’s “real estate claim;” failure to meet the requirements of §
1225(a)(5)(B) with respect to the payments on the “real estate claim”and the “personal
property claim;” failure to meet the feasability requirement of § 1225(a)(6); and
improperly seeking to retain causes of action.
DISCUSSION.

The treatment of secured claims in a Chapter 12 plan is addressed by § 1225(a)(5).
It provides three alternatives: (1) acceptance by the secured creditor; (2) cram down; and

(3) surrender of the collateral to the secured creditor. In the Plan, Tucker Brothers seeks
to cram down both the “real estate claim” and the “personal property claim.” A plan
which crams down an allowed secured claim can be approved over the objection of the
secured creditor if:
(B)(i) the plan provides that the holder of such claim retain
the lien securing such claim; and

 (ii) the value, as of the effective date of the plan, of
property to be distributed by the trustee or the debtor under
the plan on account of such claim is not less that the allowed
amount of such claim;7
7 11 U.S.C. § 1225(a)(5).
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Case 13-22462 Doc# 202 Filed 11/13/14 Page 5 of 19


This section “requires the bankruptcy court to determine the amount of the creditor’s
allowed secured claim and whether the proposed payment stream has a present value that
is equal to the allowed secured claim.”8 The Chapter 12 debtor has the burden of
establishing all elements necessary for confirmation.9

A. The Plan does not satisfy § 1225(a)(5)(B)(ii) because the Plan uses an incorrect
value for the amount of Bank’s allowed secured claim.
The first step in analyzing whether a secured claim can be crammed down is the
determination of the amount of the allowed secured claim. The amount of an allowed
secured claim is the amount of the allowed claim, or the value of the collateral securing
the claim, whichever is less.10

The parties have stipulated that the amount of Bank’s claim on the date of filing
was $1,598,855.90 and agree that the claim is secured by Debtor’s real and personal
property, including equipment, machinery, hay, and livestock. Debtor’s Plan is
predicated on a total allowed secured claim of $1,500,731.47, divided into the
$50,731.47 secured “personal property claim” and the $1,450,000 secured “real property
claim,” leaving an unsecured claim of $98,124.43. Bank objects, claiming that its
allowed claim as of October 1, 2014 is $1,719,279.60,11 comprised of the amount owed

8 First Nat’l Bank of Durango v. Woods (In re Woods), 465 B.R. 196, 204 (10th Cir. BAP
2012) rev’d on other grounds In re Woods, 743 F.3d 689 (10th Cir. 2014).
9 In re Ames, 973 F.2d 849, 851 (10th Cir. 1992).
10 11 U.S.C. §§ 501 and 506.
11 Doc. 185, 3.
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Case 13-22462 Doc# 202 Filed 11/13/14 Page 6 of 19


on the petition date plus post petition interest at the contract rate, attorneys fees, and
costs, and that claim is fully secured by Debtor’s personal property, valued in the Plan at
$50,731.47, and by Debtor’s the real property, which the Bank contends has a value of
$1,815,000.12

At trial, the parties each presented an appraisal expert who testified in support of
their respective valuations of the real property. Debtor’s expert, Dennis Totman, is a
certified residential appraiser. He testified that in his opinion, Debtor’s 883.74 acre tract
of contiguous grazing land had a value of $1,211,000 as of April 18, 2014.13 As to the
land value, the appraisal used the comparable sales approach, but it adopted the county
appraiser’s $70,000 valuation of out buildings on this tract. Because the mineral rights
are not owned by the Debtor, Mr. Totman testified that he reduced by $300 per acre the
value determined through the comparable sales method using similar tracts which
included mineral rights. When the value of the outbuildings is deducted from the
appraised value, the result is a value of $1,291.10 per acre. Mr. Totman separately
appraised two smaller tracts, comprised of 178.1 total acres, at $239,000, or $1,341.94 per
acre. His total appraised value for Debtor’s real property was $1,450,000.

Bank’s appraisal, prepared by Joshua Adamson of Martens Appraisal, was more
detailed. Mr. Adamson appraised the land value of 865.35 acres (the entire large tract
without the 20 acres on which the outbuildings are located) to be $1,340,000 using the

12 Exh. 1-A, § 1-3 and Exh. 1-B, § 1-3.
13 Doc. 167, 4.
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Case 13-22462 Doc# 202 Filed 11/13/14 Page 7 of 19


direct capitalization approach and to be $1,320,000 using the sales comparison approach.
These values were reconciled to be $1,330,000 or $1,536.95 per acre.14 The sales
comparison method expressly adjusted values of comparables based upon whether land
was used for pasture or crops. No adjustment was made for Debtor’s lack of ownership
of mineral rights. The appraisal separately valued the 20 acres on which the outbuildings
are located, using the depreciated replacement cost method for the improvements, valued
at $144,595,15 and $1,525 per acre for the 20 acres of land, rounded to $30,000, for a
rounded total value of $175,000. The Martens appraisal valued the approximately 885
acre tract, including the outbuilding, at $1,505,000. Independent appraisals were
conducted for the remainder of the land, comprised of an east south parcel of 152.28 acres
and a noncontiguous east north parcel of 25.98 acres.16 The income approach and the
sales comparison approaches were used for both parcels, which after reconciliation
resulted in values of $60,000 for the “east north tract” and $250,000 for the “east south
tract.” According to the Martens appraisal, the value of Debtor’s real property as of April
28, 2014 is $1,815,000.

Except in one respect, the Court finds Bank’s appraisal to be more credible. Mr.
Adamson, who prepared the Martens appraisal, is a licensed commercial appraiser,
whereas Mr. Totman retained by Debtor is a licensed residential appraiser. The Martens

14 Exh. 1-A, § 1-3.

15 Exh. 1-A, § 7-6.

16 Exh. 1-B.

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 8 of 19


appraisal used two appraisal methods, whereas the Totman appraisal relied exclusively
upon the comparable sales method. When using the comparable sales approach, the
Martens appraisal used more current sales and expressly adjusted for the differing uses of
the land. The Court rejects Mr. Totman’s deduction of $300 per acre because the mineral
rights do not run with the approximately 884 acre tract. The Court finds credible the
testimony of Mr. Adamson that such a deduction is not appropriate, since there is no gas,
oil, or mining activity in the area. When that adjustment is restored to the Totman
appraisal, the value per acre for the approximately 885 acre tract (without considering the
value of the outbuildings) is $1,591 per acre. Bank’s per acre value for the same land is
$1,537 per acre. However, the Court rejects Bank’s appraisal of $144,595 for the
improvements. Rather, the Court adopts the County appraiser’s value of $70,000, which
was adopted by Mr. Totman. A value significantly lower than the Martens’ depreciated
cost value is also supported by Tom Tucker’s testimony, who testified that in his opinion
the outbuildings were not worth even $70,000. For these reasons, the Court concludes
that the value of the approximately 885 acre tract as of April 2014 was $1,430,405,
calculated by reducing the Martens’ appraised value of $1,505,000 by $74,595 (the
reduction in value of the outbuildings resulting from substituting the county’s $70,000
appraised value for the Martens’ depreciated cost value of $144,595).

For similar reasons the Court adopts that the Martens’ appraised value for the

152.28 and 25.98 acre tracts. That appraisal used both the income and market comparison
methods. The Martens comparable sales were more recent than those used by Totman.
9

Case 13-22462 Doc# 202 Filed 11/13/14 Page 9 of 19


This factor is important in the current market where prices have risen in the last few
years. Also, the details of the Martens appraisals more accurately reflect the fact that the
“north east tract” was exclusively grass/pasture land, whereas the “south east tract” has 29
acres of dry crop land with the remainder native grass.

The Court therefore concludes that the value of Debtor’s real property for purposes
of the Plan should be $1,740,405, comprised of $1,430,405 for the approximately 883
acre tract (including the out buildings), $60,000 for the north tract, and $250,000 for the
south tract.

Because the Bank did not object to Debtor’s $50,731.47 valuation of the personal
property collateral and there was no evidence on that value, the Court will use this value
when evaluating the Plan. For purposes of the Plan, the total value of collateral securing
Bank’s claim is therefore $1,791,136.47.

Bank filed a proof of claim for $1,598,855.90, secured by Debtor’s real and
personal property. Debtor did not object, so the claim is deemed allowed.17 Under §
506(a)(1) , “[a]n allowed claim of a creditor secured by a lien on property in which the
estate has an interest . . . is a secured claim to the extent of the value of such creditor’s
interest in the estate’s interest in such property.”18 Since the value of the collateral,
$1,791,136.47 exceeds the value of the claim, Bank’s entire claim as of the date of filing
is an allowed secured claim.

17 11 U.S.C. § 502(a).
18 11 U.S.C. § 506(a)(1).
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Further, Bank’s allowed secured claim may be increased under § 506(b), which
provides:
To the extent that an allowed secured claim is secured by
property the value of which . . . is greater than the amount of
such claim, there shall be allowed to the holder of such claim,
interest on such claim, and any reasonable fees, costs, or
charges provided for under the agreement or State statute

under which such claim arose.19
Bank has filed two applications for allowance of post petition interest, fees, and expenses.
The first, for the period September 19, 2013 to July 31, 2014, relying on provisions of the
loan documents and attached billing statements, prays for allowance of post petition
interest of $53,615.39 and attorney fees and expenses of $44,767.22.20 The Debtor filed
an objection but did not contest the allegation that such addition to the allowed claim is
provided for in the loan documents. The Bank’s second application, for the period of
August 1, 2014 through October 1, 2014, seeks interest of $10,552.87 and fees and
expenses of $8,617.43.21 The total of the additional amounts which Bank prays be added
to the allowed secured claim is $117,552.91.

No hearing has been held on Bank’s motions, but it is likely that all or a
significant portion of the requested postpetition claim will be allowed. This would

19 11 U.S.C. § 506(b).

20 Doc. 158.

21 Doc. 187.

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 11 of 19


increase Bank’s allowed secured claim to approximately $1,716,400,22 as of October 1,
2014.

The Plan is predicated upon Bank’s allowed secured claim being $1,300,731.47,
the sum of the “personal property claim” of $50,731.47 and the “real estate claim” of
$1,250,000. This is not the correct amount. Even if Bank’s motions for post petition
interest and expenses were denied in total, which is highly unlikely, Bank’s allowed
secured claim would $1,598,855.90, the stipulated amount of Bank’s claim as of the date
of filing. The Plan does not attempt to and does not succeed in distributing to Bank
property having a value, as of the effective date of the Plan, on account of Bank’s allowed
secured claim, in an amount not less than the allowed amount of such claim, as required
by § 1225(a)(5)(B)(ii).

B. Even if the amount of Bank’s allowed secured claim were $1,300,731.47, the sum
of the “personal property claim” of $50,731.47 and the “real estate claim” of
$1,250,000, Bank’s claims addressed by the Plan, confirmation would be denied.
1. The value of the property to be distributed with respect to the “real estate
claim” is less than the allowed claim, using Debtor’s valuation and therefore §
1225(a)(5)(B)(ii) is not satisfied.
The most glaring deficiency in the Plan’s treatment of the “real estate claim” is the
delay in payment of principal and interest until year four of the plan. During the first
three years, Bank is to receive adequate protection payments, measured by the rental

22 In its trial brief, Bank states the total claim is $1,719,279.60, as of October 1, 2014
(doc. 185, 3).

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 12 of 19


value of the collateral. These payments are not credited against either interest or
principal, and there is no interest accrual.

Debtor characterizes this treatment as negative amortization - instead of reducing
the debt by the payment of interest and principal during the first three years, the debt is
increasing by the accrual of interest. A more detailed explanation is the following by the
Ninth Circuit Court of Appeals:

Negative amortization refers to “a provision wherein part or
all of the interest on a secured claim is not paid currently but
instead is deferred and allowed to accrue,” with the accrued
interest added to the principal and paid when income is
higher. The extent of negative amortization depends upon the
difference between the “accrual rate,” or the overall rate of
interest to be paid on a claim, and the “pay rate,” or the rate of
interest to be paid on a monthly basis. Even when a debtor
defers payments of interest on its debt obligation, the deferred
amount can be capitalized at a rate of interest which enables
the deferred amount to equal the present value of the
creditor’s allowed secured claim.23

Whether negative amortization is permissible under the fair and equitable standard
applicable to Chapter 11 plans is determined on a case by case basis by consideration of
ten enumerated factors.24 Some of the factors which the Ninth Circuit identified for
consideration are: “Is the amount and length of the proposed deferral reasonable; Is the
ratio of debt to value satisfactory throughout the plan; Are the debtor’s financial
projections reasonable . . . ; What is the nature of the collateral, and is the value of the

23 Great Western Bank v. Sierra Woods Group, 953 F.2d 1174, 1176 (9th Cir. 1992),
quoting In re Club Associates, 107 B.R. 385, 398 (Bankr. N.D. Ga. 1989).
24 Id., 1178.
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Case 13-22462 Doc# 202 Filed 11/13/14 Page 13 of 19


collateral appreciating, depreciating, or stable; . . . ; and Are there adequate safeguards to
protect the secured creditor against plan failure.”25 The Ninth Circuit BAP relied on these
factors when affirming a bankruptcy court’s confirmation of a Chapter 12 plan that
included a 21-month partial deferral on interest, where the creditor was oversecured and
the loan-to-value ratio would increase only slightly, from 71% to 75%.26 A bankruptcy
court in the Ninth Circuit held that a Chapter 12 plan satisfied the requirements of §
1225(a)(5) where the secured creditors would receive partial interest payments during the
first four years, the deferred interest would be accumulated, and the total accumulated
sum including the principal would be amortized over the remaining 16 years.27

In this case, Debtor’s negative amortization does not satisfy § 1225(a)(5). The
annual interest on $1,250,000 at 4.25% is $53,125. Unlike the forgoing negative
amortization plans which were confirmed, during the first three years of this Plan, no
interest is paid. The amount of the deferral is not reasonable. The deferred interest is not
capitalized. This alone is fatal to the proposal. In addition, because Debtor has no equity
in the farm property, the accruing interest obligation, if capitalized would be unsecured.
In effect the Plan provides for Bank to make an interest free, unsecured loan for three
years.

25 Id.

26 Miller v. Nauman (In re Nauman), 213 B.R. 355, 362-64 (9th Cir. BAP 1997).

27 In re Big Hook Land & Cattle Co., 81 B.R. 1001, 1006 (Bankr. D. Mont. 1988).

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 14 of 19


The Court rejects Debtor’s suggestion that granting Bank a security interest in
cows to be purchased during the first three Plan years and the adequate protection rent to
be paid during those years cure any defect. Granting Bank a lien in the cows to be
purchased under the Plan would provide an additional $37,500 in collateral each per year.
But providing collateral each year valued at almost $20,000 less than the accruing annual
interest still leaves a negative amortization plan where Debtor has no equity in the
collateral. Likewise, if the $20,949 adequate protection payments are considered partial
interest payments, the negative amortization aspect of the Plan would require denial of
confirmation. There would be deferred interest of approximately $35,000 per year,
without any provision that it be added to the principal and without an equity cushion.

2. The payment periods for both the “real estate claim” and the “personal
property claim” were not shown to be appropriate under the circumstances of this
case.
Debtor has not sustained his burden of proof to show that the payment periods are
appropriate.28 “When contemplating a plan’s repayment period, a court may consider the
length of the underlying note and the creditor’s customary repayment periods for similar
loans.”29 The annual Plan payments on the “real estate claim” are calculated at 4.25%
interest over 30 years, with a balloon payment after 15 installments, which installments
do not start until year four of the Plan. The annual Plan payments on the “personal
property claim” are calculated at 4.25% interest over 15 years, with a balloon in 10 years.

28 Bank does not challenge the 4.25% interest rate.
29 In re Woods, 465 B.R. at 208.
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Case 13-22462 Doc# 202 Filed 11/13/14 Page 15 of 19


All of Bank’s notes with Debtor, including the real estate note, are for a period of one
year or less. The Plan if confirmed would significantly change Bank’s expectations when
making the loans. Debtor has provided no evidence that the Plan payment periods are
customary for similar loans.

3. The Debtor has not shown that the Plan to be feasible.
Before confirming a plan, § 1225(a)(6) requires the Court to find that “the debtor
will be able to make all payments under the plan and to comply with the plan.” “In order
to satisfy the feasability test, it will be necessary for the debtor to submit sufficient
evidence with regard to the debtor’s projected income and expenses to enable the court to
determine that the debtor can make all of the payments called for by the plan.”30 The
Court is not satisfied as to the feasability of the Plan.

Although the Plan is predicated upon Debtor changing the focus of his farming
operations from raising of horses to raising of cows, in which he had engaged in the past,
little evidence was presented about Debtor’s historical success in the projected operations
or to otherwise support in the income and expense projections in the Plan, particularly in
light of the volatility of the prices of live stock and feed.

More importantly, Debtor provided no testimony as to the feasability of payment
of the projected balloon payments. The managing member of Debtor is 64 years old, and

30 8 Collier on Bankruptcy ¶ 1225.02[5] at 1225-10 (Alan N. Resnick & Henry J. Sommer
eds.-in-chief, 16th ed. 2014).

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 16 of 19


the other member is 14 months older. Refinancing of the “personal property claim” in ten
years could be problematical since both members will be almost 75 years old, the value of
livestock is difficult to predict, and the equipment will have further depreciated. The
“real property claim” balloon will mature in approximately 20 years, when the members
will be in their mid eighties. Absent considerable appreciation in the value of the farm
land, Debtor will have little equity. The Court has no basis on which to find a reasonable
expectation that the balloon payments, required by the Plan, can be refinanced when they
become due.

4. The Plan’s provision for retention of a § 510(c) equitable subordination
cause of action as to Bank’s claim will not be approved.
Bank objects to Debtor’s inclusion of the following as a general provision of the
Plan:
Nothing in this Plan, including any prior classification or
treatment of the holders of a claim of any type, shall prevent
this Debtor/Farmer from bringing any actions at any time
under Section 510(c) of the Bankruptcy Code against any

Creditor secured or unsecured.31
Under § 510(c), the court, under principles of equitable subordination based upon
wrongful conduct of the claimant, may subordinate all or part of an allowed claim to all or
part of another allowed claim or subordinate all or part of an allowed interest to all or part

31 Doc. 165, 12.

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Case 13-22462 Doc# 202 Filed 11/13/14 Page 17 of 19


of another interest.32 Such subordination is limited to reordering the priority of claims to
ensure fairness in the bankruptcy process as a whole.33

Bank’s objection is that Debtor may interpret the forgoing provision of the Plan to
provide a basis for Debtor to attempt to subordinate Bank’s claim after confirmation of a
Plan which provides for payment of that claim. The Court agrees that preservation of
such an action would be inappropriate. Generally, the confirmation of a Chapter 12 plan
binds Debtor and creditors to the plan provisions. “The order of confirmation acts as a
res judicata determination of all matters dealt with by the plan.”34 Although an order of
confirmation may specifically preserve certain matters open to future determination, in
order for such provisions not to conflict with the binding effect of the plan, they must be
limited to those matters not necessary to confirmation.35

In this case, the amount of Bank’s secured claim and the priority of the liens
securing that claim are central to the confirmation of any proposed Plan. Bank is the only
secured creditor, and whether that claim can be crammed down is the primary hurdle to
confirmation. In addition, Debtor has stipulated the Bank’s proof of claim accurately

32 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law &
Practice 3d, § 53:3 at 58-8 (Thomson Reuters/West 2014).

33 Id.

34 8 Collier on Bankruptcy ¶ 1227.01[1] at 1227-2.
35 See In re Buchholz, 224 B.R. 13, 25-26 (Bankr. D.N.J. 1998).
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states the status of the claim as of the date of filing. If Debtor wishes to attempt to
subordinate Bank’s claim in any respect, it must do so before, not after, confirmation.

CONCLUSION.

The Court finds that Debtor’s real property should be valued at $1,740,405 and
denies confirmation of Debtor’s Plan. Debtor shall have 35 days from the date of entry of
this order to file an amended plan consistent with the above holdings. .

The foregoing constitute 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 determining the value of Debtor’s real property for
purposes of plan confirmation is $1,740,405 and denying confirmation of
Debtor/Farmer’s Fourth Amended Plan of Reorganization. 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.
###


19

Case 13-22462 Doc# 202 Filed 11/13/14 Page 19 of 19

13-22232 Rock (Doc. # 43)

In Re Rock, 13-22232 (Bankr. D. Kan. Oct. 7, 2014) Doc. # 43

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 6th day of October, 2014.

 

Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
AMELIA LUE ROCK,
DEBTOR.
CASE NO. 13-22232-13
CHAPTER 13

OPINION DENYING DEBTOR’S REQUEST FOR ATTORNEY FEES

This matter is before the Court for a ruling following a hearing on August 28,
2014, on the Debtor’s request for sanctions against UnitedHealthcare Specialty Benefits,
LLC (UHCSB), for alleged violations of the automatic stay. The Debtor appears by
counsel Sarah A. Sypher of Sypher Law Group, LLC. UHCSB appears by counsel
Michael D. Fielding of Husch Blackwell LLP and Eric S. Goldstein of Shipman &
Goodwin LLP. The Court has reviewed the relevant pleadings and heard the arguments
of counsel, and is now ready to rule. At this point, the question is whether the doctrine of

Case 13-22232 Doc# 43 Filed 10/06/14 Page 1 of 11


recoupment provides UHCSB a defense to actions it took that would otherwise constitute
violations of the automatic stay imposed by § 362(a) of the Bankruptcy Code. As
explained below, the Court concludes UHCSB properly withheld money from
postpetition disability benefits it owed the Debtor in order to recoup an overpayment of
the benefits that had been made to the Debtor before she filed bankruptcy. Consequently,
UHCSB did not violate the automatic stay, and is not liable to the Debtor for attorney fees
she incurred in trying to get UHCSB to stop the withholding and refund the money it
withheld postpetition.

Facts

Before April 2010, the Debtor was working as a nurse for the State of Kansas in
the psychiatric ward of a hospital. In 2010, she was injured by a patient in a way that led
to back surgery. By April 2010, she was no longer able to work and began receiving
long-term disability benefits under a plan sponsored by the Kansas Public Employees
Retirement System. UHCSB administers the plan for KPERS. The plan called for the
Debtor’s benefits to be reduced to the extent she received income from certain other
sources, including workers’ compensation benefits. The plan gave the administrator the
right to recover any overpayments, and to determine the method by which repayment
would be made. In 2011, the Debtor received a workers’ compensation award of $7,300.
Under the plan, that amount was treated as an overpayment of her disability benefits, and
in accordance with the plan, UHCSB reduced the Debtor’s future benefits by $100 per
month in order to recoup that overpayment from her.

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Between 2011 and 2013, the Debtor developed additional health problems that she
attributes to her work injury, including diabetes and a heart condition. She needs several
medications in order to stay alive. The monthly withholding from her disability benefits
has made it more difficult for her to pay her rent and purchase her necessary medicine.
By August 2014, she was approximately 60 years old.

In August 2013, the Debtor filed a Chapter 13 bankruptcy petition. Her attorney
assumed UHCSB would stop the $100 per month withholding, and included that
assumption in drafting the Debtor’s Chapter 13 plan. The plan was confirmed in October
2013. Despite receiving actual notice of the Debtor’s bankruptcy filing, UHCSB
continued to withhold $100 per month from her disability payments to continue
recovering the overpayment from her.

The Debtor’s attorney contacted UHCSB and at first was advised the withholding
would stop, but later was told it would continue. Eventually, an attorney for UHCSB
advised her that the company believed the monthly withholding was in the nature of
recoupment and therefore not prohibited by the automatic stay, providing citations to a
number of cases concerning recoupment. On June 11, 2014, the Debtor filed a motion
asking the Court to compel UHCSB to turn over to the Debtor all the money it had
withheld postpetition, to impose a sanction against UHCSB for violating the automatic
stay by continuing to withhold $100 per month from her benefits after she filed
bankruptcy, and to require UHCSB to pay her $1,500 in attorney fees as an additional
sanction under § 362(k)(1). In a response filed on July 11, 2014, UHCSB continued to

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assert the monthly withholding was a permissible recoupment that did not violate the stay.
Nevertheless, it advised that KPERS had voluntarily agreed to stop withholding any
money from the Debtor’s future disability benefits, to waive the remaining balance owed
on the prepetition overpayment (approximately $4,120), and to refund the $800 that had
been withheld since the Debtor filed bankruptcy.

A hearing on the Debtor’s motion was held on August 28, 2014. In light of
KPERS’s decision to waive the balance of the overpayment and to refund the money that
had been withheld postpetition, the only outstanding relief the Debtor was seeking was
for UHCSB to pay her attorney fees. The Court told the parties the only issue it had to
decide was whether UHCSB had violated the automatic stay. There was no question that
the company thought it had the absolute right to continue the monthly withholding
without getting stay relief. If that was wrong, the Court stated that a reasonable attorney
fee was the only sanction the Court would impose.
Discussion

Ordinarily, any postpetition efforts a creditor takes to recover a prepetition
obligation from a debtor are violations of the automatic stay imposed by § 362(a) unless
the creditor first obtains relief from the stay. The Debtor sensibly suggests that even if
UHCSB’s actions were proper recoupment, the company should at least have asked this
Court to confirm that fact by asking for stay relief, instead of relying solely on its own
determination. A leading bankruptcy treatise says that courts are split on the question

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whether the automatic stay applies to bar or restrain a legitimate right of recoupment.1
However, assuming for the moment that UHCSB had a valid right to recoup the
overpayment, binding Tenth Circuit precedent prohibits this Court from ruling that
UHCSB was required to seek stay relief before it continued to withhold the $100 from the
Debtor’s monthly benefit payment.2

At least within the Tenth Circuit, the doctrine of recoupment is a well-established
exception to the automatic stay, as well as to the discharge injunction imposed by
§ 524(a).3 Recoupment originated as an equitable rule of joinder, allowing adjudication
in one suit of two claims that the common law had required to be brought separately.4
“Under recoupment, a defendant could meet a plaintiff’s claim with a countervailing
claim that arose ‘out of the same transaction.’”5 In bankruptcy, “‘[r]ecoupment’ is an
equitable doctrine . . . that allows one party to a transaction to withhold funds due another

15 Collier on Bankruptcy, ¶ 553.10 at 553-93 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2014).

2Beaumont v. Dept. of Veteran Affairs (In re Beaumont), 586 F.3d 776, 781 (10th Cir. 2009) (“If
the recoupment doctrine applies, then there is no ‘debt’ or ‘claim’ here as defined in the Bankruptcy
Code, and [the party who exercised recoupment rights] has not violated the automatic stay nor the
discharge injunction”).

3See id., 586 F.3d at 781; In re Lunt, 477 B.R. 812, 818-19 (Bankr. D. Kan. 2012), aff’d 500 B.R.
9 (D. Kan. 2013); see also Ahsland Petroleum Co. v. Appel (In re B&L Oil Co.), 782 F.2d 155, 159 (10th
Cir. 1986) (“The general principle is that a petition for bankruptcy operates as a ‘cleavage’ in time; but
the recoupment doctrine has traditionally operated as an exception to the rule that applies to other
debts.”).

4Ashland Petroleum Co. v. Appel (In re B & L Oil Co.), 782 F.2d 155, 157 (10th Cir. 1986).

5Id. (citing J. Moore, 3 Moore’s Federal Practice, ¶ 13.02 at 13-13, n. 1 (2d ed. 1985) and 20 Am.
Jur. 2d Counterclaim, Recoupment, and Setoff, §§ 16-18 (1965)).

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party where the debts arise out of the same transaction. In other words, the doctrine
‘allows a creditor to recover a pre-petition debt out of payments owed to the debtor postpetition.’”
6

Whether UHCSB’s postpetition withholding from the Debtor’s disability benefits
was protected by the recoupment doctrine depends on whether the Debtor’s obligation to
repay the benefits overpayment arose out of the “same transaction” as her right to receive
continuing disability benefits.7 This means that “both debts must arise out of a single
integrated transaction so that it would be inequitable for the debtor to enjoy the benefits
of that transaction without also meeting [the debtor’s] obligations.”8 The Court must
examine the equities of the case, and determine whether the Debtor’s claim for ongoing
disability benefits and UHCSB’s claim to recover the prepetition overpayment of benefits
“are so closely intertwined that allowing the debtor to escape [her] obligation would be
inequitable notwithstanding the Bankruptcy Code’s tenet that all unsecured creditors
share equally in the debtor’s estate.”9

After considering the equities here, the Court concludes it must agree with

6Beaumont, 586 F.3d at 780 (quoting Conoco, Inc., v. Styler (In re Peterson Distributing, Inc.),
82 F.3d 956, 959 (10th Cir. 1996), and City of Fort Collins v. Gonzales (In re Gonzales), 298 B.R. 771
(Bankr. D. Colo. 2003)).

7See Beaumont, 586 F.3d at 781.
8Peterson Distributing, 82 F.3d at 960 (quoting University Medical Ctr. v. Sullivan (In re
University Medical Ctr.), 973 F.2d 1065, 1081 (3d Cir.1992)).
9Peterson Distributing, 82 F.3d at 960.
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UHCSB that this case cannot be distinguished from In re Beaumont10 on any relevant
basis. In Beaumont, the Tenth Circuit held that the Department of Veteran Affairs (VA)
did not violate either the automatic stay or the discharge injunction by reducing the
debtor’s ongoing benefits under a VA disability program in order to recover a prepetition
overpayment of benefits, even though it continued with the reduction after the debtor filed
bankruptcy and after he received a discharge. The debtor was a disabled veteran who had
been receiving disability benefits for eight years when he was given a large probate
distribution. Pursuant to federal statutes, the debtor’s VA benefits were subject to being
reduced if he received any payments from any other source, including an inheritance.
After learning of the inheritance, the VA advised the debtor that it had determined the
probate distribution had made him ineligible for his VA benefits for a period of time,
which meant he had received an overpayment of $18,448 in benefits, and that the VA
intended to collect that amount by offsetting his future disability payments, as was
expressly permitted by statute. The debtor responded by filing for bankruptcy relief, and
the VA continued to offset his benefits during the bankruptcy proceeding and after he
received a discharge. The debtor contended this conduct violated the automatic stay and
the discharge injunction. The Tenth Circuit disagreed.

This Court finds that the obligations of both parties did
arise from the “same transaction.” [Plaintiff-debtor’s] claim
for and award of pension benefits generated the [Defendant
VA’s] obligation to pay those benefits. The Defendant’s

10586 F.3d 776.
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obligation to pay benefits was and is contingent upon
Plaintiff’s financial situation, his annual income, and his
responsibility to keep the Defendant informed of his financial
situation. Plaintiff’s inheritance had the effect of reducing the
amount of benefits he could receive from the Defendant.
Therefore, Plaintiff’s inheritance was directly related to or
intertwined with the amount of benefits Defendant was
obligated to pay to him, and the resulting overpayment of
benefits. It is unlawful for Plaintiff to keep any overpayments
so long as the Defendant, through its own administrative
procedures, has properly determined the amount of
overpayment and properly considered Plaintiff’s disagreement
with that determination. The Court believes that it would be
inequitable for the Plaintiff to receive his inheritance,
continue to receive benefits as if his income was zero, then be
able to discharge in bankruptcy the overpayments once it was
determined that he had been overpaid.11

The same can be said in this case: It would be inequitable for the Debtor to receive her

workers’ compensation award, continue to receive disability benefits as if she had not

received the award, then be able to discharge in bankruptcy the overpayment once it was

determined she had been overpaid.

Pointing to the equitable nature of the recoupment doctrine, the Debtor argues her

unfortunate ongoing health problems and financial condition should convince the Court

not to condone UHCSB’s efforts to recoup the overpayment of disability benefits she

received. But the Court does not understand the 10th Circuit and other courts applying

recoupment to mean the availability of the doctrine ever depends on its impact on the

debtor based on anything about the debtor other than the direct relationship between the

11 Id. at 781.

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prepetition obligation the creditor wants to recoup and the postpetition benefit the creditor
will be providing to the debtor. Instead, the equities to be considered are whether the
debtor’s postpetition benefits are so intertwined with the overpayment or other obligation
the debtor incurred that allowing the debtor to continue to receive those benefits without
meeting the obligation would be inequitable, or whether it would be unfair for the party
providing the postpetition benefits to recover on the related prepetition obligation when
the debtor’s other creditors are not being made whole.12 The Debtor has cited no case
where a court ruled that anything else about the debtor’s circumstances precluded a party
from exercising an otherwise proper right to recoup an obligation the debtor incurred
before filing bankruptcy, and this Court has found none. While the Court feels sympathy
for the Debtor’s health and financial problems, the recoupment doctrine allows no room
for such considerations to affect its application.

The Court did find one case relying on an equitable consideration that might be
viewed as involving the debtor’s unfortunate financial circumstances, the Third Circuit’s
decision in Lee v. Schweiker. 13 In that case, after the debtor filed bankruptcy, the Social
Security Administration continued to reduce her monthly old-age benefits in order to
recover a prepetition overpayment of those benefits. The Third Circuit ruled the SSA’s

12See, e.g., Conoco v. Styler (In re Peterson Distributing, Inc.), 82 F.3d 956, 959-63 (10th Cir.
1996) (denying recoupment); Davidovich v. Welton (In re Davidovich), 901 F.3d 1533, 1537 (10th Cir.
1990) (allowing recoupment of one obligation but not another); B&L Oil, 782 F.2d at 159 (allowing
recoupment).

13739 F.2d 870 (1984).

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action violated the automatic stay, saying,

Social welfare payments, such as social security, are statutory

“entitlements” rather than contractual rights. The purpose of these

payments is to provide income to qualifying individuals. Although the

paying agency can ordinarily recover overpayments, just as creditors can

ordinarily obtain payment from a debtor’s future income, the Bankruptcy

Code protects a debtor’s future income from such claims once a petition has

been filed, and the SSA violated the automatic stay in continuing to

withhold part of [the debtor’s] benefits after she had filed her petition.14
Benefits paid to a debtor based on being unable to work could similarly be viewed as
social welfare payments, which suggests the Third Circuit might apply a similar rule to
disability payments like those the Debtor is receiving in this case. But the Tenth Circuit’s
Beaumont decision, dealing with VA disability benefits, makes clear this Court cannot
rely on the social welfare aspect of the benefits involved in this case to conclude that the
recoupment doctrine did not protect UHCSB’s postpetition recovery of the prepetition
overpayment the Debtor received.

Under the circumstances of this case, the Court concludes UHCSB was entitled to
recoup the prepetition overpayment that resulted when the Debtor received her workers’
compensation award from the postpetition payments it owed the Debtor under the KPERS
long-term disability plan. Consequently, UHCSB did not violate the automatic stay by
deducting $100 per month from the postpetition benefits it paid the Debtor, and is
therefore cannot be liable to her for the attorney fees she incurred trying to get the
deductions stopped.

14Id. at 876.
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Conclusion

For the reasons stated, the Court denies the Debtor’s request that UHCSB be
ordered to pay her attorney fees.
# # #

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