- Category: Judge Karlin
- Published on 25 November 2014
- Written by Judge Karlin
- Hits: 37
Williamson v. Bank of America, N.A. et al, 14-07033 (Bankr. D. Kan. Nov. 24, 2014) Doc. # 35
SIGNED this 24th day of November, 2014.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
In re: Case No. 12-41444
Eva M. Rodriguez, Chapter 7
Darcy Williamson, Trustee,
Plaintiff, Case No. 14-7033
v. Adversary Proceeding
Bank of America, N.A.,
Robert A. Johnson, Jr., and
Order Granting in Part and Denying in Part
Defendant Bank of America’s Motion to Dismiss
The chapter 7 Trustee, Darcy Williamson (hereinafter, the “Trustee”), filed this
adversary proceeding against Defendants Bank of America, N.A. (hereinafter “Bank
of America”), Anthony Abeyta, Robert Johnson, Jr., and Erlinda Johnson, to avoid
Case 14-07033 Doc# 35 Filed 11/24/14 Page 1 of 17
allegedly fraudulent transfers under 11 U.S.C. § 548 and to recover those transfers for
the bankruptcy estate under 11 U.S.C. §§ 550, 551, and 542. The Trustee alleges that
the debtor in the underlying bankruptcy case, Eva Rodriguez, sold real property to
Defendants Robert and Erlinda Johnson for less than fair market value, and used a
portion of the proceeds of that sale to pay off a second mortgage on the real property
and other debts to Defendant Bank of America, despite the fact her ex-husband,
Defendant Anthony Abeyta, was obligated by their divorce decree to pay the second
mortgage loan and the other debts.
Defendant Bank of America has moved to dismiss the counts against it, arguing
that the payment of the second mortgage loan is not constructively fraudulent because
it gave reasonably equivalent value in the form of a lien release in exchange for the
payment. Defendant Bank of America also argues that the Trustee’s complaint does
not allege actual intent to defraud sufficient to state a claim for actual fraud under §
Because the Court concludes that the payment of the second mortgage loan was
not constructively fraudulent as a matter of law, and that the Trustee did not allege
sufficient facts to support a claim of actual fraud, the Court finds that the Trustee has
failed to state a claim upon which relief can be granted as to those portions of her
complaint. Accordingly, the Court grants Defendant Bank of America’s motion to
dismiss as to those specific claims. The remainder of the alleged claims, however—that
payment of unsecured debts by the debtor to Bank of America resulted in a
constructively fraudulent transfer—do state a claim for relief, although just barely. As
Case 14-07033 Doc# 35 Filed 11/24/14 Page 2 of 17
a result, Bank of America’s motion to dismiss is denied as to this small portion of the
I. Background and Procedural History
The factual allegations of the Trustee’s complaint, which are assumed true for
the consideration of this motion, are included herein. Other procedural facts are
included from the docket of this adversary case.
Defendant Anthony Abeyta and Debtor Eva Rodriguez received title to real
property located at 1113 Safford, Garden City, Kansas ( the “Safford property”) via
general warranty deed in May 2001. Two years later, they granted Defendant Bank of
America a mortgage on the Safford property, and this first mortgage was recorded with
the Finney County Register of Deeds in October 2003.
Although the time of the next action on the Safford property is unclear, the
Trustee alleges that either in May 2005 or August 2008, Defendant Abeyta and Debtor
executed a second mortgage in favor of Bank of America on the Safford property.1 The
second mortgage was recorded with the Finney County Register of Deeds in September
2008. Defendant Abeyta and Debtor were the absolute owners of the Safford property
at the time they made, executed, and delivered both the first and second mortgages.
Shortly after the second mortgage was recorded, in November 2008, Defendant
Abeyta and Debtor divorced in Finney County and title to the Safford property was
1 The second mortgage, attached to the memorandum in support of Bank ofAmerica’s motion to dismiss, states the date as May 14, 2005. Regardless, theprecise date of the second mortgage appears to be immaterial to the disputesdiscussed herein, and neither party raises an issue with regard to that date.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 3 of 17
awarded to Debtor. The parties’ settlement agreement further required Defendant
Abeyta to pay the debt to Bank of America for the second mortgage and to hold Debtor
harmless for the payment of that debt. The Trustee alleges that the amount due on the
second mortgage loan from Defendant Abeyta was $15,377.13. There is apparently a
third loan between Defendant Abeyta and Debtor with Bank of America, and the
property settlement agreement also required Debtor to pay that third loan. As of May
2012, the amount due under this third loan was $7474.57.
Several years later, in May 2012, Debtor entered into an agreement with
Defendants Robert and Erlinda Johnson to sell them the Safford property for $53,000.
Of the $53,000 gross sale proceeds, $27,000.66 was paid to Bank of America to satisfy
the first mortgage, and $15,377.13 was paid to Bank of America to satisfy the second
mortgage. After costs, Debtor received $9198.31 from the closing. Shortly after closing,
Debtor paid $5000 and $4202 from her checking account to unknown sources. The
Trustee alleges that Defendant Abeyta and Bank of America “may have been paid by
the Debtor on unsecured debts including, but not limited to, credit card obligations.”2
On May 29, 2012, Bank of America executed a real estate mortgage release
acknowledging full satisfaction of the second mortgage on the Safford property, and the
next day that release was filed with the Finney County Register of Deeds. On May 31,
2012, Bank of America executed a real estate mortgage release acknowledging full
satisfaction of the first mortgage on the Safford property, and that release was filed
2 Doc. 1 ¶ 19.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 4 of 17
with the Finney County Register of Deeds a week later.
In 2012, the Finney County Appraiser’s Office valued the Safford property at
$77,700. At the time Debtor sold the Safford property to the Johnson Defendants, she
did not offer it for sale to any third party buyers to test its value. About three and a
half months after the sale of the property—on September 7, 2012—Debtor filed for
chapter 7 bankruptcy relief, and her Schedule A discloses no ownership interest in any
Safford property. Her Schedule D, however, lists a secured debt to Bank of America on
property listed as 704 Safford.3
The Trustee’s complaint states three claims. Count 1, against Defendants
Abeyta and Bank of America, is for avoidance of a fraudulent conveyance under § 548.
The Trustee alleges that Defendant Abeyta was responsible for paying the second
mortgage loan, and that Debtor’s payment of that loan “or potential other unsecured
obligations, at the time she closed the sale of 1113 Safford” was a transfer of an
interest of the Debtor in property within the two-year period preceding the date of
Debtor’s bankruptcy petition. The Trustee alleges that the transfers were made to
satisfy a debt obligation that Defendant Abeyta owed, and that the transfers were for
the benefit of Defendant Abeyta and Bank of America. The Trustee alleges that Debtor
made the transfers with the actual intent to hinder, delay, or defraud any entity to
which Debtor was indebted, or that Debtor received less than the reasonably
3 No explanation is given to the parties as to this property (i.e., 704 Saffordversus 1113 Safford). Debtor’s Schedule D lists her as a codebtor on the propertyand her Schedule H states that she is co-liable with her ex-husband, Defendant
Abeyta, on this debt.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 5 of 17
equivalent value in exchange for the transfers. The Trustee alleges that Debtor
received no consideration for the transfers from either Defendant Abeyta or Bank of
America. And finally with regard to Count 1, the Trustee alleges that Debtor was
insolvent or became insolvent as a result of the transfers, as Debtor’s bankruptcy
schedules reflect $6760 in assets and $116,421 in liabilities.
Count 2 of the Trustee’s complaint is against Defendants Robert and Erlinda
Johnson and is also for avoidance of fraudulent transfer under § 548. The Trustee
alleges that when Debtor sold the Safford property to Defendants Johnson, Debtor
received $24,700 less than the appraised value for the property. The Trustee alleges
that this below-appraisal sale is a transfer of an interest of Debtor in property, made
within the two-year period preceding Debtor’s bankruptcy. Again, the Trustee alleges
that Debtor made the transfer with the actual intent to hinder, delay, or defraud any
entity to which Debtor was indebted, or that Debtor received less than the reasonably
equivalent value in exchange for the transfer, and that Debtor was insolvent or became
insolvent as a result of the transfer.
And finally, Count 3 of the Trustee’s complaint, against all Defendants, is for
recovery of the avoided interests under §§ 550, 551, and 542. The Trustee alleges she
is entitled to recover the transfers, or the value of such property, from Defendants
under § 550(a), that she is entitled to preserve the transfers, or the value of the
property, for the benefit of the bankruptcy estate under § 551, and that she is entitled
to turnover of the transfers under § 542.
Defendants Robert and Erlinda Johnson answered the Trustee’s complaint,
Case 14-07033 Doc# 35 Filed 11/24/14 Page 6 of 17
admitting they purchased the Safford property from Debtor for $53,000, but otherwise
generally denying the remaining allegations against them.4 While a motion to extend
time to answer was pending as to Defendant Abeyta, the Trustee and Defendant
Abeyta jointly moved to dismiss the complaint against him, and an order was entered
dismissing the claims against Abeyta on October 21, 2014.5 Defendant Bank of
America, in lieu of answering, filed the motion to dismiss that is the subject of this
A. Standards for Motions to Dismiss
Bank of America moves to dismiss the Trustee’s complaint under Federal Rule
of Civil Procedure 12(b)(6), for “failure to state a claim upon which relief can be
granted.”6 The requirements for a legally sufficient claim stem from Rule 8(a), which
requires “a short and plain statement of the claim showing that the pleader is entitled
to relief.”7 To survive a motion to dismiss, a complaint must present factual allegations,
that when assumed to be true, “raise a right to relief above the speculative level.”8 The
4 Doc. 15.
5 Doc. 26. Notwithstanding this dismissal and the deletion of his name in thecaption of the case, this decision will continue to refer to Abeyta as a defendant.
6 Rule 12 is made applicable to adversary proceedings via Federal Rule ofBankruptcy Procedure 7012(b).
7 Rule 8 is made applicable to adversary proceedings via Federal Rule ofBankruptcy Procedure 7008(a).
8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 7 of 17
complaint must contain “enough facts to state a claim to relief that is plausible on its
face.”9 “[T]he complaint must give the court reason to believe that this plaintiff has a
reasonable likelihood of mustering factual support for these claims.”10 The Court must
accept the nonmoving party’s factual allegations as true and may not dismiss on the
ground that it appears unlikely the allegations can be proven.11
While the Trustee has repeatedly referred to the Bank of America second
mortgage within her complaint, she did not attach a copy of it. Bank of America has
attached a copy of the second mortgage to its memorandum in support of its motion to
dismiss. In the Tenth Circuit, “[i]t is accepted practice that, if a plaintiff does not
incorporate by reference or attach a document to its complaint, but the document is
referred to in the complaint and is central to the plaintiff’s claim, a defendant may
submit an indisputably authentic copy to the court to be considered on a motion to
dismiss.”12 Otherwise, “a plaintiff with a deficient claim could survive a motion to
dismiss simply by not attaching a dispositive document upon which the plaintiff
9 Id. at 570. The plausibility standard does not require a showing ofprobability that a defendant has acted unlawfully, but requires more than “a sheerpossibility.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). However, “mere ‘labels andconclusions,’ and ‘a formulaic recitation of the elements of a cause of action’ will not
suffice; a plaintiff must offer specific factual allegations to support each claim.”
Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting
Twombly, 550 U.S. at 555).
10 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir.
11 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
12 Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001)
(internal quotations omitted).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 8 of 17
relied.”13 Generally stated:
The Court may consider documents outside of the complaint on a motionto dismiss in three instances . . . First, the Court may consider outsidedocuments pertinent to ruling on a motion to dismiss pursuant to Fed. R.
Civ. P. 12(b)(1) [relating to subject-matter jurisdiction]. Second, the Courtmay consider outside documents subject to judicial notice, including courtdocuments and matters of public record. Third, the Court may consideroutside documents that are both central to the plaintiff’s claims and towhich the plaintiff refers in his complaint.14
Despite these three exceptions, a court is not obligated to consider extraneous
documents; the decision to do so is discretionary.15
Here, the second mortgage is absolutely central to a portion of the claims the
Trustee has made against Bank of America, and the Trustee (in her response to the
motion to dismiss) does not dispute the authenticity of the copy of the second mortgage
Bank of America attached to its memorandum in support of its motion to dismiss. As
a result, the Court will consider the second mortgage provided by Bank of America.16
B. Section 548 Fraudulent Transfer
The Trustee’s complaint raises two types of fraudulent transfer claims against
Bank of America: for contractive fraud and for actual fraud. The relevant portions of
13 GFF Corp. v. Assoc. Wholesale Grocers, Inc., 130 F.3d 1381, 1385 (10th Cir.
14 Driskell v. Thompson, 971 F. Supp. 2d 1050, 1057 (D. Colo. 2013) (internalcitations omitted).
15 Prager v. LaFaver, 180 F.3d 1185, 1189 (10th Cir. 1999).
16 See Jacobsen v. Deseret Book Co., 287 F.3d 936, 941–42 (10th Cir. 2002)
(noting holding of GFF Corp. that a court “may consider documents referred to inthe complaint if the documents are central to the plaintiff’s claim and the parties donot dispute authenticity”).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 9 of 17
§ 548 state:
(a)(1) The trustee may avoid any transfer . . . of an interest of the debtorin property . . . that was made or incurred on or within 2 years before thedate of the filing of the petition, if the debtor voluntarily or involuntarily-
(A) made such transfer . . . with actual intent to hinder, delay, ordefraud any entity to which the debtor was or became, on or after thedate that such transfer was made or such obligation was incurred,
(i) received less than a reasonably equivalent value inexchange for such transfer . . . ; and
(I) was insolvent on the date that such transfer wasmade . . . , or became insolvent as a result of such
transfer . . . [.]
The Trustee will ultimately bear the burden of proof as to each element of a § 548(a)
To prove constructive fraud under § 548(a)(1)(B), the Trustee must allege that
Debtor: (1) transferred property within two years of the bankruptcy filing; (2) received
less than reasonably equivalent value for the transfer; and (3) was insolvent as a result
thereof.18 Regarding the Trustee’s constructive fraud claim, Bank of America focuses
its motion to dismiss on the issue of “reasonably equivalent value” and the second
mortgage. Although the phrase “reasonably equivalent value” is not defined by the
Bankruptcy Code, the word “value” is defined in § 548(d)(2)(A) as “property, or
17 In re Adam Aircraft Indus., Inc., 510 B.R. 342, 352 (10th Cir. BAP 2014).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 10 of 17
satisfaction or securing on a present or antecedent debt of the debtor.”19
Bank of America argues that Debtor’s payment of $15,377.13 to Bank of America
to satisfy its second mortgage loan is not constructively fraudulent because when a
fully secured creditor releases its lien in exchange for payment, the fully secured
creditor gives reasonably equivalent value to the payor. Bank of America cites two
cases for this proposition: In re Vinzant20 and In re C.W. Mining Co.21
In In re Vinzant, the “value” question arose regarding release of judgment liens
in exchange for payment.22 Regarding whether release of a lien in exchange for
payment is reasonably equivalent value, the bankruptcy court stated:
In determining fair consideration the Court must look at what thedebtors received regardless of what the creditor may have gained or lost.
At the time of the transfer defendant held a valid judgment lien ondebtors’ property. The transfer (i.e., the release of the lien given inexchange for the payment to the defendant) satisfied an antecedent debtof the debtors. This transfer constituted value under § 548(d)(2). . . . Thevalue was roughly equal and so the Court finds reasonably equivalentvalue was received by the debtors.23
Likewise, the In re C.W. Mining Co. decision also stated: “If a fully secured creditor
releases its lien in exchange for payment, the fully secured creditor gives value in
19 A “debt” is then defined in § 101(12) as “liability on a claim,” and “claim” isdefined by § 101(5) to include the “right to payment, whether or not such right isreduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
20 108 B.R. 752 (Bankr. D. Kan. 1989).
21 465 B.R. 226 (Bankr. D. Utah 2011).
22 108 B.R at 759.
23 Id. (internal citations omitted).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 11 of 17
exchange for the payment and the transfer is not fraudulent.”24 The case here is not
distinguishable. Bank of America released its lien in exchange for payment of the
secured mortgage, and therefore gave reasonably equivalent value in exchange for the
Bank of America also contends that because the Debtor was jointly obligated
under the second mortgage, there was an exchange of reasonably equivalent value
when Bank of America released its lien in response to payment of the second mortgage
loan, regardless whether her divorce settlement's division of debts and assets required
someone else—here, Defendant Abeyta—to repay the loan that both parties signed.
The second mortgage defines the borrowers (the “Grantors”) as both Anthony Abeyta
and Eva M. Abeyta.26 There is also a clause in the second mortgage stating: “Joint and
Several Liability. All obligations of Grantor under this Mortgage shall be joint and
several, and all references are to Grantor shall mean each and every Grantor. This
means that each Grantor signing below is responsible for all obligations in this
Mortgage.”27 The Trustee’s complaint acknowledges both that Bank of America was a
24 465 B.R. at 232–33.
25 Although the Tenth Circuit has not expressly weighed in on the matter, “anumber of courts have held that ‘a dollar-for-dollar reduction in debt constitutes
—as a matter of law—reasonably equivalent value for purposes of the fraudulent-
transfer statutes.’” Gonzales v. Liberman (In re Brutsche), Case No. 11-13326-7,
2013 WL 501666, at *6 (Bankr. D.N.M. Feb. 11, 2013) (quoting In re Southeast
Waffles, LLC, 702 F.3d 850, 857 (6th Cir. 2012) (citing additional cases)).
26 Doc. 17 Ex. A p.1.
27 Doc. 17 Ex. A p.7.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 12 of 17
properly perfected secured creditor and that Bank of America released its lien in
exchange for payment of the second mortgage debt. As a result, reasonably equivalent
value was exchanged when Bank of America released its fully secured lien in exchange
for payment by Debtor, despite the divorce settlement division of debts. The Court
must grant Bank of America’s motion to dismiss this portion of the Trustee’s
constructive fraud claim; the Trustee has failed to “state a claim upon which relief can
But there is a second portion of the Trustee’s claim: namely, that Debtor’s
payment of “potential other unsecured obligations, at the time she closed the sale of
1113 Safford” was also a fraudulent transfer under § 548. The Trustee alleges that this
transfer for the unsecured debt was within the two-year period preceding the date of
Debtor’s bankruptcy petition, that the transfer was made to satisfy a debt obligation
held or co-held by Defendant Abeyta, and that the transfer was for the benefit of
Defendant Abeyta and Bank of America. The Trustee alleges that Debtor received
$9198.31 at closing of the sale of the Safford property, and that shortly after closing,
Debtor paid $5000 and $4202 from her checking account to an unknown source(s). The
Trustee also specifically alleges a third loan between Defendant Abeyta and Debtor
with Bank of America (with a balance of $7474.57 as of May 2012), and that Defendant
Abeyta and Bank of America “may have been paid by the Debtor on unsecured debts
28 Fed. R. Civ. P. 12(b)(6).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 13 of 17
including, but not limited to, credit card obligations.”29
The motion to dismiss filed by Bank of America ignores this transfer and the
allegations with respect to it. As stated above, to prove constructive fraud under §
548(a)(1)(B), the Trustee must allege that Debtor: (1) transferred property within two
years of the bankruptcy filing; (2) received less than reasonably equivalent value for
the transfer; and (3) was insolvent as a result thereof.30 Although not a model of clarity,
the Trustee’s complaint does satisfy this bare minimum. The Trustee alleges that
Debtor made two transfers—of $5000 and $4202—after the sale of the Safford property
to unknown sources. She then also alleges, however, a loan between Debtor and Bank
of America for $7474.57, and that Bank of America may have been paid on credit card
obligations (which are presumably this third loan). The transfers occurred within two
years of Debtor’s bankruptcy petition, and the Trustee alleges Debtor was insolvent at
the time of filing her petition, which was only three months after the payments were
made. Again, Bank of America’s motion to dismiss fails to address this claim at all, and
gives no explanation for the conflicting amounts of the debt versus the alleged
payments, or what value was given in exchange.
Although not many details are given, the Trustee’s complaint does have “enough
facts to state a claim to relief that is plausible on its face”31 with respect to these
29 Doc. 1 ¶ 19.
30 In re Adam Aircraft Indus., Inc., 510 B.R. 342, 352 (10th Cir. BAP 2014).
31 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 14 of 17
allegations. It is unclear the exact amount and date of transfer that is at issue
here—the $5000 or $4202 payments were made to unknown sources and the Trustee
does not expressly state that Bank of America was the “unknown source” of the
transfers. These links can be implied, however, because the Trustee also alleges that
Bank of America was paid on unsecured loan obligations. As a result, the Court finds
that this portion of the Trustee’s complaint survives, and denies Bank of America’s
motion to dismiss this portion of the Trustee’s constructive fraud claim.
2. Actual Fraud
Finally, with respect to the last substantive portion of the Trustee’s § 548
complaint against Bank of America—a claim for actual fraud under § 548(a)(1)(A)—
the Trustee must allege actual fraudulent intent. And a claim for actual fraud is
subject to heightened pleading requirements found in Federal Rule of Civil Procedure
Rule 9(b) requires the party to “state with particularity the circumstances
constituting fraud,” with general allegations only allowed for “malice, intent,
knowledge, and other conditions of a person’s mind.” The party alleging fraud must
“‘set forth the time, place, and contents of the false representation, the identity of the
party making the false statements and the consequences thereof.’”33 In other words, the
32 Rule 9(b) is applicable in bankruptcy pursuant to Federal Rule ofBankruptcy Procedure 7009.
33 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997)
(quoting Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 982, 987 (10thCir. 1992)).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 15 of 17
alleging party must specify the “‘who, what, where, and when of the alleged fraud.’”34
The Trustee here has not met this pleading burden as to Bank of America with
respect to any of the payments alleged in the complaint. The only allegations made by
the Trustee are a recitation of the “actual intent to hinder, delay, or defraud” language
from § 548(a)(1)(A). The complaint alleges no facts by which this Court could
reasonably infer that Bank of America acted with actual intent to defraud anyone, let
alone the who, what, where, or why of such alleged fraud. There are simply no facts in
the complaint to satisfy the pleading requirements for an actual fraud claim under §
548(a)(1)(A), let alone the heightened pleading requirements of Rule 9(b). This portion
of Bank of America’s motion to dismiss is granted.
C. The Trustee’s Claims for Recovery and Turnover
The Trustee’s remaining claims against Defendant Bank of America are for
recovery of any avoided interest under §§ 550, 551, and 542. The Trustee alleges she
is entitled to recover the transfers, or the value of such property, from Defendants
under § 550(a), that she is entitled to preserve the transfers, or the value of the
property, for the benefit of the bankruptcy estate under § 551, and that she is entitled
to turnover of the transfers under § 542. These claims are, of course, dependent on
success on the fraudulent transfer claims. Because of the above rulings, Defendant
Bank of America’s motion to dismiss these derivative claims is also granted in part and
34 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan.
2007) (quoting Plastic Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201,1203 (D. Kan. 2001)).
Case 14-07033 Doc# 35 Filed 11/24/14 Page 16 of 17
denied in part. Only the Trustee’s claim for constructive fraud based on the “other
payments” for the unsecured debt could support these derivative claims.
Defendant Bank of America’s motion to dismiss35 is granted in part and denied
in part. Bank of America has shown that the Trustee has failed to state claims as to:
1) any actual fraud, or 2) constructive fraud based on the payment and release of the
second mortgage. Bank of America’s motion to dismiss is also granted as to the
derivative claims based on those allegations. The Trustee’s remaining constructive
fraud claim based on payment of unsecured debt to Bank of America, is, however
sufficient to state a claim for relief, and Bank of America’s motion to dismiss as to this
portion of the Trustee’s complaint, and the derivative claims based thereon, is denied.
It is so ordered.
35 Doc. 16.
Case 14-07033 Doc# 35 Filed 11/24/14 Page 17 of 17
- Category: Judge Karlin
- Published on 19 November 2014
- Written by Judge Karlin
- Hits: 81
In Re Ungerer, 13-41131 (Bankr. D. Kan. Oct. 17, 2014) Doc. # 72
SIGNED this 17th day of November, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 13-41131
Terry Lee Ungerer Chapter 7
Delores Jean Ungerer,
Debtors’ Motion to Refund Postpetition Mortgage Payments
Debtors Terry and Delores Ungerer filed a chapter 13 bankruptcy petition and about eight
months later converted their case to one under chapter 7 of the Bankruptcy Code. Post-conversion,
Debtors requested refund of a significant portion of the plan payments they made to the chapter 13
trustee (the “Trustee”), because those payments were intended for a mortgage creditor that never
filed a proof of claim, and because they no longer wished to retain the related real property. The
Trustee resisted, arguing that the funds should instead be disbursed to creditors pursuant to the
confirmed chapter 13 plan.
This debate—the subject of a current Circuit Court split, but one that the Tenth Circuit has
not yet weighed in on—has reasonable arguments on both sides. After considering these arguments,
Case 13-41131 Doc# 72 Filed 11/17/14 Page 1 of 19
this Court holds that Debtors do not have a right to refund of the payments reserved for payment of
the mortgage note, as their confirmed chapter 13 plan controls disbursements and requires the
chapter 13 Trustee pay those funds to creditors. Debtors’ motion for return of the money held by the
Trustee at conversion is denied.
I. Procedural and Factual Background
The parties have stipulated to the following facts or they are part of the record in this case.
Debtors filed a chapter 13 bankruptcy petition in August 2013. Their chapter 13 plan proposed
payments of $1025 per month for at least 36 months, and indicated the following would be paid:
filing fees, attorney fees for their bankruptcy attorney, home mortgage arrearage to Ocwen Loan
Servicing, and ongoing mortgage payments and “conduit administrative expenses” associated with
the home mortgage pursuant to this Court’s Standing Order 11-3 (the “conduit mortgage rule”).
Paragraph 14 of the District’s form plan also states that “[g]eneral unsecured claims will be paid
after all other unsecured claims, including administrative and priority claims, from Debtor’s
projected disposable income in an amount not less than the amount those creditors would receive
if the estate of Debtor were liquidated under Chapter 7 on the date of confirmation. . . .”1
The chapter 13 plan was confirmed on November 20, 2013, after Debtors agreed to raise
their monthly plan payment to $1093 to assure the plan’s feasibility. Debtors’ mortgage creditor
never filed a proof of claim.2
1 Doc. 2 (Plan).
2 This failure of a mortgagee to file a claim— an increasingly common
situation—presents difficult problems for debtors and trustees, alike. Counsel entered an
appearance for the mortgage creditor in September 2013 (Doc. 17), so lack of notice is clearly
not the cause.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 2 of 19
About eight months after they filed their chapter 13 petition, Debtors filed a notice to convert
their case to chapter 7, and the case was converted a few days later. Debtors have since received
their chapter 7 discharge, and the chapter 7 trustee has claimed no interest in these funds.
On the date of conversion (and to date), the chapter 13 Trustee held $8007.56 in plan
payments in his account. While the chapter 13 case was pending, each time the chapter 13 Trustee
made a disbursement, he retained a portion of the plan payments he had received, in anticipation of
receiving a proof of claim from the mortgage creditor. As of the date of conversion, and pursuant
to the plan terms and this District’s conduit mortgage rule, the Trustee had reserved $7184 for the
ongoing mortgage payments and $166.75 for the mortgage administrative claim. The remainder of
the funds would typically have been disbursed as follows: $624.59 to the chapter 13 Trustee for his
statutory fees (pursuant to 28 U.S.C. § 586(e)(2)), and $32.22 to Debtors’ attorney. Based on the
timely filed claims, if the Court orders the chapter 13 Trustee to stop holding the funds for the
mortgage claim and to disburse these funds to the remaining creditors Debtors’ plan provides to pay,
in full or in part, the funds would be disbursed as follows: $624.59 to the Trustee, $2587.24 to
Debtors’ attorney, and $4795.73 to allowed unsecured claims.
After converting their case, Debtors filed the motion to require the Trustee return the money
being held for the mortgage creditor to them, as opposed to having the Trustee disburse the funds
in the normal course of a confirmed plan.3 The chapter 13 Trustee objected, arguing that Debtors do
not have a right to control the funds after they pay them to the trustee, and that the funds received
prior to conversion should be disbursed by the chapter 13 Trustee pursuant to the confirmed chapter
3 Doc. 59 (seeking order requiring Trustee “to disburse the proceeds . . . directly to the
Case 13-41131 Doc# 72 Filed 11/17/14 Page 3 of 19
13 plan. The parties have now fully briefed this matter on the above stipulated facts. This matter
constitutes a core proceeding over which the Court has the jurisdiction and authority to enter a final
Debtors’ motion to disburse, and the Trustee’s opposition thereto, are the subject of divided
rulings from two Circuit Courts of Appeal: the Third Circuit and Fifth Circuit have reached different
conclusions on whether undistributed payments held by a chapter 13 trustee after the conversion of
a case from a chapter 13 to a chapter 7 should be returned to the debtor or distributed to creditors.
There are no pertinent rulings on this matter from the Tenth Circuit or Tenth Circuit BAP, and no
Judge in this District has yet decided the issue.5
A. Third Circuit: In re Michael6
The Third Circuit was the first Circuit Court to hear this issue, and it held that if the chapter
13 trustee is holding funds acquired from the debtor postpetition at the time of conversion from a
chapter 13 to a chapter 7, the chapter 13 trustee must return those funds to the debtor.7 In In re
4 See 28 U.S.C. § 157(b)(2)(A) (stating that “matters concerning the administration of
the estate” are core proceedings); § 157(b)(1) (granting authority to bankruptcy judges to hear
5 There is an older bankruptcy case from this District that concluded that funds held by a
chapter 13 trustee at the time of conversion to chapter 7 were not property of the chapter 7 estate
but should instead be distributed to creditors pursuant to the chapter 13 plan, In re Simmons, 286
B.R. 426, 427, 430–31 (Bankr. D. Kan. 2002) (Flanagan, J.). But apparently no party in that case
argued that the funds should be returned to the debtors. Rather, it was an argument about which
trustee was entitled to administer the funds. The Simmons case also addresses no arguments that
aren’t thoroughly addressed by the Third and Fifth Circuit cases, so the Court finds it more
instructive to focus on the Circuit Court opinions.
6 699 F.3d 305 (3d Cir. 2012).
7 Id. at 307.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 4 of 19
Michael, the debtor filed a chapter 13 bankruptcy, and his plan was later confirmed.8 The plan
required the debtor to pay $277 per month to the chapter 13 trustee for 53 months, with funds to be
distributed to secured and priority creditors, and any remaining funds to be distributed to unsecured
creditors pro rata.9 GMAC held the mortgage on the debtor’s home, and the plan provided that its
prepetition delinquency would be paid by the trustee inside the plan, with debtor continuing to make
postpetition mortgage payments directly to GMAC outside the plan.10
Soon after plan confirmation, however, GMAC filed a motion for relief from stay because
the debtor had failed to make ongoing mortgage payments outside the plan. The court granted
GMAC’s motion to allow it to foreclose on the home.11 But because the debtor did not amend his
plan or modify the wage order that required his employer make the $277 plan payments, the
employer continued to send the plan payments to the chapter 13 trustee.12 The chapter 13 trustee
attempted to pay funds to GMAC, but GMAC refused to accept them to avoid possible estoppel or
waiver defenses regarding its foreclosure action. As a result, the funds continued to accumulate.13
Approximately three years later, the debtor moved to convert his case to chapter 7.14 Shortly
after the conversion of his case, the debtor filed a motion seeking return of the accumulated
Case 13-41131 Doc# 72 Filed 11/17/14 Page 5 of 19
funds—then totaling $9181.62—from the chapter 13 trustee.15 The chapter 13 trustee objected,
arguing that the funds should be distributed pro rata to unsecured creditors as provided by the
confirmed chapter 13 plan.16
The Third Circuit began its analysis with 11 U.S.C. § 348(f)(1)(A),17 which states that
“property of the estate in the converted case shall consist of property of the estate, as of the date of
filing the petition, that remains in the possession of or is under the control of the debtor on the date
of conversion.” In the case of a bad faith conversion, “the property of the estate in the converted case
shall consist of the property of the estate as of the date of conversion.”18 The In re Michael court
“Prior to the addition of § 348(f), courts considering the disposition of funds held by a
Chapter 13 trustee at the time of conversion reached three different results: the funds were
(i) property of the new Chapter 7 estate, (ii) property of the debtor, or (iii) property of
creditors under a confirmed Chapter 13 plan. . . . Section 348(f) removed the first result, but
did not resolve explicitly whether the Chapter 13 trustee should give the funds to the debtor
or distribute them to creditors under the confirmed Chapter 13 plan.”19
The Third Circuit ultimately concluded that the funds should be returned to the debtor.
First, the Third Circuit noted that § 1327(b) vests all property of the chapter 13 estate in the
debtor upon plan confirmation. Section 1327(b) states: “Except as otherwise provided in the plan
or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in
17 All future statutory references are to title 11 of the United States Code (the
“Bankruptcy Code”) unless otherwise specified.
18 § 348(f)(2).
19 In re Michael, 699 F.3d at 308–09.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 6 of 19
the debtor.” According to the Third Circuit, this implies that property held by the Chapter 13 trustee
after plan confirmation is “under the control of the debtor as of the date of a later conversion” for
purposes of § 348(f)(1).20 According to the Third Circuit, there is no provision in the Bankruptcy
Code that classifies any property, including post-petition wages, as belonging to creditors, and the
debtor loses no vested interest until the trustee affirmatively transfers the funds to creditors.21
Because the debtor retains this vested interest, the Third Circuit reasoned, the funds should revert
to the debtor.22
Second, the Third Circuit concluded that returning the funds to the debtor better aligns with
§ 348(e). Section 348(e) states that after the conversion of the case, the services of the chapter 13
trustee are terminated, and this “seemingly renders [the chapter 13 trustee] powerless to make
payments to creditors under a Chapter 13 plan.”23 The Third Circuit reasoned that the chapter 13
trustee has limited post-conversion duties, and returning undistributed funds better aligns with those
duties as “their return should be considered part of the Chapter 13 trustee’s short list of remaining
Third, the Third Circuit concluded that returning the funds to the debtor furthers the
legislative intent of encouraging debtors to attempt chapter 13 cases. The Third Circuit noted that
the legislative history of § 348(f) shows that Congress revised § 348(f) to its current state based on
20 Id. at 310.
21 Id. at 312–13.
23 Id. at 310.
24 Id. at 314.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 7 of 19
the reasoning of In re Bobroff 25—a case holding that a postpetition tort cause of action did not
become part of the chapter 7 estate after conversion of the chapter 13 case to chapter 7—to
encourage debtors to attempt to pay their creditors something under chapter 13 before resorting to
a chapter 7 liquidation.26 The Third Circuit concluded that Congress was concerned that losing
postpetition earnings to the chapter 7 estate would dissuade debtors from attempting chapter 13.27
Additionally, to account for “game the system” behavior, Congress enacted § 348(f)(2), giving the
court discretion if the debtor has converted in bad faith.28
Fourth, the Third Circuit concluded that distributing the funds to creditors, rather than
returning them to the debtor, would weaken the disincentive of § 348(f)(2)’s bad faith provisions.
The Third Circuit reasoned that by allowing property that would normally be excluded from the
chapter 7 estate to be included and thereby distributed to creditors, § 348(f)(2) provides a
punishment for converting in bad faith.29 It concluded the disincentive provided by § 348(f)(2)
would be weakened if funds that would be returned to the debtor are instead distributed to creditors
Finally, the Third Circuit concluded that returning the funds to the debtor is not unjust to
creditors. The Third Circuit specifically rejected the argument that returning undistributed plan
25 766 F.2d 797 (3d Cir. 1985).
26 Id. at 803.
27 In re Michael, 699 F.3d at 314–15.
28 Id. at 315.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 8 of 19
payments would be “unjust,” and cited case law noting that creditors will most likely receive as
much, if not more, than they would have if the debtor originally filed under chapter 7 based on the
fact that under chapter 13, creditors have had the benefit of a debtors’s wage contributions, and these
funds are not available under chapter 7.31
B. Fifth Circuit: Viegelahn v. Harris (In re Harris)32
The Fifth Circuit in In re Harris has just recently addressed this issue.33 In In re Harris, the
debtor also initially filed for chapter 13 relief, and his confirmed plan required monthly payments
of $530 for 60 months.34 Of that monthly payment, $352 was to repay Chase for the debtor’s home
mortgage arrearage.35 The debtor was also required to directly pay Chase $960/month for his
ongoing mortgage payment.36 About six months after the debtor’s plan was confirmed, Chase moved
to lift the automatic stay with respect to the debtor’s home, stating that the debtor had failed to make
payments to Chase as the plan required.37 The debtor moved out of the home and “it was presumably
31 Id. at 312 (citing In re Boggs, 137 B.R. 408, 410 (Bankr. W.D. Wash. 1992)).
32 757 F.3d 468 (5th Cir. 2014).
33 The In re Harris case has been appealed to the United States Supreme Court (petition
for certiorari filed October 6, 2014), although as of the date of this order, no decision has been
issued on that certiorari petition.
34 Id. at 471.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 9 of 19
Despite this, the debtor continued to make $530 monthly payments to the chapter 13 trustee
for approximately the next year, at which point the debtor converted to chapter 7.39 When the case
was converted, the chapter 13 trustee distributed all the funds she held, including the money
intended for Chase, as follows: $397.68 to another secured creditor, $3583.78 to unsecured creditors,
and $267.79 to herself as a statutory commission.40 The debtor moved to compel her to return these
The Fifth Circuit rejected much of the In re Michael analysis and reversed the bankruptcy
and district courts, concluding that fairness required the funds instead be distributed to creditors.42
The Fifth Circuit addressed § 348, and quickly held it bore little weight in its analysis. It found little
merit to the argument that § 348(e) terminates the chapter 13 trustee’s services and thus the trustee
has no power to disburse funds.43 It reasoned that if that premise were to follow, then the chapter 13
trustee would also have no authority to return the funds to the debtor.44 The chapter 13 trustee also
has the duty to issue a final report and account, and turn over necessary records and property to the
chapter 7 trustee, the Fifth Circuit reasoned, and therefore the language of § 348(e) should not be
taken “too literally.”45
42 Id. at 480–81 (noting that strong considerations of fairness support holding).
43 Id. at 474.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 10 of 19
Second, the Fifth Circuit concluded that the Third Circuit had erred in applying § 1327(b).
Although the Fifth Circuit agreed that § 1327(b) typically vests all property in the debtor upon
confirmation of the plan,46 it found that the Third Circuit erred by ignoring the clear exception to
that rule: “except as otherwise provided in the plan or the order confirming the plan.”47 If the plan
required the debtor to make payments to be distributed to creditors, it follows that the debtor does
not retain any possession of, or control over, these payments after they are paid to the trustee.48
Third, the Fifth Circuit concluded that distributing funds to creditors does not weaken the
disincentive created by § 348(f)(2), noting that the Third Circuit failed to take into account that if
the conversion is found to be in bad faith, all of a debtor’s postpetition property would go into the
chapter 7 estate, and in most cases, this would be more than just the attached wages held by the
chapter 13 trustee.49 “Accordingly, distributing the remaining payments held by the trustee at the
time of the conversion [to creditors] neither renders § 348(f)(2) superfluous nor removes the
disincentive for bad faith in most cases.”50
Fourth, the Fifth Circuit determined that the legislative intent to encourage debtors to attempt
chapter 13 is not harmed by distributing funds to creditors rather than returning them to debtors. The
Fifth Circuit acknowledged that Congress enacted § 348(f) to further the policy of encouraging
46 Id. at 477.
48 Id. at 478 (confirmation divests the debtor of any interest).
Case 13-41131 Doc# 72 Filed 11/17/14 Page 11 of 19
debtors to attempt chapter 13.51 The Fifth Circuit, however, held that the knowledge that payments
made under a chapter 13 plan will not be returned would not meaningfully deter a debtor from
attempting chapter 13.52 The Fifth Circuit’s reasoning was based on the facts that (1) the debtor can
voluntarily end chapter 13 payments at any time by converting to chapter 7, and (2) it is the debtor
who proposes the chapter 13 plan in the first place with the explicit provision that the funds will be
used to pay creditors.53
Finally, the Fifth Circuit reasoned that distributing funds to creditors was supported by strong
considerations of fairness, because if the funds were to revert to the debtor, the debtor would receive
a “windfall.”54 The Fifth Circuit also supported its fairness analysis with the idea that the attached
wages in the chapter 13 plan are “quid pro quo that the debtor has given up” for the benefit of the
automatic stay.55 The conversion does not undo the benefits the debtor receives from the automatic
stay nor does it undo the distinct disadvantages creditors suffer from that stay, which prevents them
from attempting to collect money or foreclose on, or repossess, property. Therefore, the Fifth
Circuit reasoned it would be unfair to return the funds to the debtor.56
C. This Court’s Analysis
Both the Third Circuit and Fifth Circuit concede that there is no clear answer as to whether
51 Id. at 479.
53 Id. at 479–80.
55 Id. at 480.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 12 of 19
funds should be returned to the debtor or distributed to creditors after conversion of a case from
chapter 13 to chapter 7,57 and this Court agrees. Unfortunately, despite the rule of statutory
construction that courts should begin by looking to the plain language of the Bankruptcy Code,58
there is no direct answer in the Bankruptcy Code. For example, the Third Circuit concluded that the
return of the funds to the debtor better aligns with § 348(e) and the chapter 13 trustee’s limited
post-conversion duties,59 but the Fifth Circuit countered that if the chapter 13 trustee had no post-
conversion power then he or she would be powerless to return the funds to the debtor.60 On the other
hand, the Third Circuit’s argument is not that the chapter 13 trustee is completely powerless, simply
noting the limited duties the chapter 13 trustee has post-conversion.61 But the Fifth Circuit counters
that the chapter 13 trustee’s many statutory duties post-conversion are not “limited.”62
This example shows how the Code does not anticipate, let alone answer, the question at
hand. The argument that returning funds to the debtor better aligns with the chapter 13 trustee’s
57 Id. at 473 (noting that “no statute explicitly states what should happen to these
funds”); In re Michael, 699 F.3d at 308 (“We have a pure question of law—what does the
Bankruptcy Code require a Chapter 13 trustee to do with undistributed funds received pursuant
to a confirmed Chapter 13 plan when that Chapter 13 case is converted to Chapter 7? Not only
does the Code provide no clear answer to this question, in reading it one finds an internal
tension, as separate provisions seemingly lead to divergent results.”).
58 See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240–41 (1989)
(instructing courts with Bankruptcy Code questions to begin “with the language of the statute
59 In re Michael, 699 F.3d at 314.
60 In re Harris, 757 F.3d at 474.
61 In re Michael, 699 F.3d at 310–12.
62 In re Harris, 757 F.3d at 474.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 13 of 19
limited duties63 is persuasive. The chapter 13 trustee’s duties post-conversion are typically in the
nature of wrapping up the chapter 13 estate, and it is reasonable that simply returning the funds to
the debtor better aligns with the Code’s wrapping up function of the chapter 13 trustee—as opposed
to distributing the funds among creditors. Distribution to creditors is admittedly a more active role
than the other more passive post-conversion duties of returning funds.
On the other hand, however, the argument that disbursing funds to a creditor is no more
active than disbursing funds back to the debtor64 is also persuasive. If the chapter 13 Trustee has no
power to write a check to a creditor to distribute funds already held by him—in a distribution
scheme governed by the order of priorities set out in § 507—how does the chapter 13 Trustee have
the power to write a check to Debtors?
A similar quandary results when assessing the parties’ arguments on how confirmation and
the vesting of property impacts the right to the funds. As stated above, the Third Circuit noted that
§ 1327(b) vests all property of the chapter 13 estate in the debtor upon plan confirmation, and that
this implies that property held by a Chapter 13 trustee after plan confirmation is “‘under the control
of the debtor [on] the date of conversion.’”65 The Third Circuit reasoned that because there is no
provision in the Bankruptcy Code that classifies any property as belonging to creditors, and the
debtor retains a vested interest in the funds, the debtor does not lose his or her vested interest until
the trustee affirmatively transfers the funds to creditors.66 The Fifth Circuit, however, concluded that
64 In re Harris, 757 F.3d at 474.
65 In re Michael, 699 F.3d at 310 (quoting § 348(f)(1)).
66 Id. at 312–13.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 14 of 19
the Third Circuit erred in its application of § 1327(b). The Fifth Circuit agreed that § 1327(b) vests
all property in the debtor upon confirmation of the plan, but concluded that the Third Circuit erred
by ignoring the clear exception to that rule: “except as otherwise provided in the plan or the order
confirming the plan.”67
And regardless, here, Debtors’ plan (and the confirmation order for that plan), provides that
property of the estate vests with Debtors only upon receipt of a discharge under their Chapter 13
plan or dismissal.68 So even if § 1327(b) somehow directed who has control over this property— by
defining when property of the estate is vested in the debtor—Debtors specifically provided the
property would not vest in them at confirmation, a choice they could have exercised when drafting
the plan. Accordingly § 1327(b) does not seem to help here.
Because the Bankruptcy Code provides no clear answer, it is reasonable to try to determine
legislative intent.69 By specifically adopting the reasoning from In re Bobroff that a postpetition tort
cause of action did not become part of the chapter 7 estate after conversion of the chapter 13 case
to chapter 7, to encourage debtors to attempt chapter 13 before chapter 7,70 it does seem clear that
Congress intended, in enacting § 348(f), to encourage debtors to attempt chapter 13 before
67 In re Harris, 757 F.3d at 477. Although this discussion in both the Third and Fifth
Circuit cases is really only about the Code’s vesting of property of the estate, and neither case
explicitly addresses the factual circumstances of the plans in those cases or how they addressed
vesting, the Fifth Circuit does note in a footnote that the debtor’s plan in that case had
conflicting terms about the timing of the vesting of property in the debtor. Id. at 478 n.8. The
factual timing of the plan’s vesting of property in Michael is not addressed.
68 Doc. 2 at ¶ 16.b (plan); Doc. 36 at ¶ 13 (order confirming plan).
69 See Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989) (“If the statute’s plain
language is ambiguous . . ., we look to the legislative history and the underlying public policy of
the statute [to determine Congressional intent].”).
70 766 F.2d 797, 803 (3d Cir. 1985).
Case 13-41131 Doc# 72 Filed 11/17/14 Page 15 of 19
proceeding under chapter 7.71 But again, the legislative history of § 348(f) does not necessarily help
here. The Third Circuit persuasively argues that if a debtor was to lose postpetition earnings to the
chapter 7 estate, it would dissuade the debtor from attempting a chapter 13 plan before resorting to
a straight liquidation in chapter 7, and it should therefore follow that losing those earnings to
creditors through the chapter 13 trustee after converting would have the same effect on the debtor
as losing those earnings to the chapter 7 estate.72 Under this reasoning, returning the funds to the
debtor seems to be in accordance with the legislative intent of § 348(f). But the Fifth Circuit’s equity
and fairness arguments are equally well-founded. It is troubling that a debtor could receive the
benefits of the automatic stay by making required payments to the chapter 13 trustee under the
confirmed plan (while creditors are disadvantaged by the automatic stay), but when the debtor
converts to chapter 7 the creditors are still disadvantaged in the same way without a corresponding
“hurt” to the debtor.73
Debtors in this case argue that the facts here are different: the specific funds at issue—paid
in pursuant to this District’s conduit mortgage rule—are designated for a specific purpose, and thus
these funds are different than “normal” plan payments. Debtors contend that a conduit creditor
receives special benefits under the conduit mortgage rule, and that the conduit creditor’s failure to
file a proof of claim to enjoy those special benefits does not create an alternate right for other
creditors to receive them—a result Debtors contend would be unfair.
71 See In re Michael, 699 F.3d at 314 (“The legislative history of § 348(f) supports that
Congress’s intended outcome is that payments held by the Chapter 13 trustee revert to the debtor
on conversion. Congress stated that it was . . . “adopting the reasoning” of our decision in
72 Id. at 314–15.
73 In re Harris, 757 F.3d at 480–81.
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To the contrary, however, nothing in the Bankruptcy Code, or this Court’s conduit mortgage
rule, changes the presumption that Debtors’ monthly payment is made pursuant to their plan, and
that Debtors’ plan, as supplemented by the conduit mortgage rule, controls. The conduit mortgage
rule does not somehow transform the monthly plan payment so that it is not a “normal” plan
payment. Rather, the purpose of the conduit mortgage rule is to define what needs to be included in
the plan payment. The mortgage creditor is just one of the parties impacted by the plan, and Debtor’s
confirmed plan dictates how each creditor is to be treated.
This Court finds that, although there is no clear answer, the strongest arguments favor the
chapter 13 Trustee disbursing the accumulated funds to creditors, pursuant to the confirmed plan.
As the Fifth Circuit noted, the wages that the chapter 13 Trustee is holding have already been
“attached” under Debtors’ plan and were “paid to the trustee for distribution to the creditors.”74
Debtors made these payments to the chapter 13 Trustee under their confirmed plan, with the intent
that they then be distributed. The fact that the mortgage creditor did not file a proof of claim does
not change the fact that Debtors made these payments to fulfill their obligations under the plan in
exchange for the benefit of the protections derived from that plan. This Court agrees with the Fifth
Circuit that Debtors enjoyed the benefits of the chapter 13 proceeding, and as such, the only fair
result is that those payments be distributed to creditors for that privilege.
Also, this Court agrees with the Fifth Circuit that distributing funds to creditors in the
situation at hand would not generally deter debtors from attempting chapter 13 cases. As the Fifth
Circuit stated, “it is unlikely a debtor would be meaningfully deterred by the knowledge that
payments made under a confirmed Chapter 13 plan will not be returned to him if he chooses to
74 In re Harris, 757 F.3d at 480.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 17 of 19
convert to Chapter 7.”75 The reasoning of the Fifth Circuit is sound:
It is the debtor who proposes the payment plan in the first place, with the explicit
provision that the funds are to be used to pay creditors. Because the funds are out of
the hands of the debtor after payment and under the control of the trustee, it is
essentially fortuitous whether any undistributed funds are still in the hands of the
trustee at the time of conversion. And if the undistributed funds revert to the debtor,
instead of being distributed to the creditors in accordance with the plan’s terms, the
debtor would receive a windfall.76
As a result, this Court sees no conflict with the legislative history of § 348(f) by requiring
distribution to creditors, rather than return of the funds to Debtors. As the Fifth Circuit notes, if a
debtor is concerned about a chapter 13 trustee distributing funds on hand to creditors at conversion,
the debtor could time his or her conversion and payments to “prevent any additional wages from
going into the hands of creditors.”77
Finally, debtors can generally prevent the situation presented here by modifying their plan
to surrender a home and reduce their plan payment by the amount of their house payment. The plan
in this case had only been in effect a few months when these Debtors converted, but in both the
Michael and Harris cases, the debtors continued to voluntarily pay in amounts for a creditor who
had been granted stay relief. As the chapter 13 Trustee notes here, the money a debtor pays to the
Trustee is not a personal savings account that the debtor can have returned if he changes his mind.
Once a debtor makes a plan payment under a confirmed plan, he no longer has the right to direct the
75 Id. at 479.
76 Id. (internal footnote, quotations, and alterations omitted).
77 Id. at 480. Debtors here could have modified their plan to surrender their interest in the
subject real property to the mortgage creditor, and modified the wage order to their employer to
stop the higher plan payment. Admittedly, this would have resulted in their having more excess
income (if they were able to continue to live in the home until foreclosure and ultimate sale),
which excess income might have been the basis for the Trustee seeking the return of the higher
payment for the benefit of other creditors.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 18 of 19
Trustee how to disburse the payment (so long as the Trustee is disbursing the payment as the plan
requires). Because the mortgage creditor here elected not to receive payment under the plan by
failing to file a claim, the money on hand then trickled down to the remaining creditors who had
timely filed a claim, and the chapter 13 Trustee is required to disburse the money in accordance with
the confirmed plan.
Because the Court concludes the balance of factors weighs in favor of distributing the
remaining plan payments held by the Trustee to creditors, rather than returning them to Debtors, the
motion to refund postpetition mortgage payments78 is denied. The chapter 13 Trustee is authorized
to disburse these funds to the remaining creditors in Debtors’ case, pursuant to Debtors’ confirmed
It is so ordered.
# # #
78 Doc. 59.
Case 13-41131 Doc# 72 Filed 11/17/14 Page 19 of 19
- Category: Judge Karlin
- Published on 04 November 2014
- Written by Judge Karlin
- Hits: 117
In Re Scott, 14-40543 (Bankr. D. Kan. Oct. 27, 2014) Doc. # 49
SIGNED this 27th day of October, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40529
William Leroy McDonald Chapter 13
Bonnie Kaye McDonald,
In re: Case No. 14-40543
Kliffton Joseph Scott Chapter 13
Jeanette Lynn Scott,
Memorandum Opinion and Order Sustaining Trustee’s Objections to
Confirmation of Chapter 13 Plan and Objections to Exemption
Debtors, William and Bonnie McDonald and Kliffton and Jeanette Scott, have
filed chapter 13 plans that do not propose to pay any amount to satisfy the best interest
of the creditors test of 11 U.S.C. § 1325(a)(4) with regard to per capita payments they
receive from the Prairie Band Potawatomi Nation Indian Tribe (hereinafter “Prairie
Band” or the “Tribe”). Building on governing precedent, the Court concludes that despite
Case 14-40543 Doc# 49 Filed 10/27/14 Page 1 of 30
changes to the Prairie Band Per Capita Ordinance and Tribal Code since it last ruled
on these issues, the per capita payments remain property of the respective chapter 13
estates, and the Debtors’ plans have thus failed to satisfy the best interest of the
creditors test with respect to this contingent, unliquidated property.
Debtors William and Bonnie McDonald also seek to exempt the per capita
payments from the bankruptcy estate by arguing they are exempt under 11 U.S.C. §
522(b)(3)(A) as “local law that is applicable . . . at the place in which the debtor’s
domicile has been located for the 730 days immediately preceding the date of the filing
of the petition.” The McDonalds have stipulated that their domicile is in Topeka,
Kansas, however, and they are not domiciled on Prairie Band land. As a result, §
522(b)(3)(A)’s exemption based on “local law” is not applicable. The McDonalds’ other
exemption arguments likewise fail.
As a result of the conclusions discussed more fully herein, the Court sustains the
Chapter 13 Trustee’s objections to confirmation and objections to exemption in each
I. Background and Procedural Facts
Both sets of Debtors filed joint bankruptcy petitions under chapter 13 of the
Bankruptcy Code.1 The Trustee objected to confirmation of plans filed in each case
because neither plan satisfied the best interest of the creditors test as to Debtors’ per
1 All future statutory references are to title 11 (the “Bankruptcy Code”), unlessotherwise specified herein.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 2 of 30
capita payments.2 The Trustee also objected in each case to the Debtors’ claimed
exemption of the per capita payments. In their joint stipulation and briefing, the Scott
Debtors abandoned their exemption claim, so only the McDonald Debtors still claim the
per capita payments as exempt.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§
157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). The following
findings of fact are based upon the stipulations filed by the parties, including stipulated
A. William and Bonnie McDonald
The McDonald Debtors filed their chapter 13 bankruptcy petition on May 14,
2014. Debtors are married and have below median income for their household size and
geographical region under § 1325(b)(3) and (4). Debtor Bonnie McDonald is a member
of the Tribe. As a member, Bonnie receives quarterly “per capita” gaming revenue
distributions in accordance with the Prairie Band Per Capita Ordinance. The McDonald
2 The McDonald Debtors make a fleeting one-sentence argument that because theircase has “not been consolidated for the purpose of administration,” only Bonnie McDonald,
and not also William McDonald, should be affected by the Trustee’s motion to dismiss andobjection to confirmation. But the McDonald Debtors have filed a joint petition and plan,
and have never moved to sever their jointly administered bankruptcy case. As such, theCourt will not further address this possible ‘argument.” If the McDonald Debtors wish tosever their joint bankruptcy case, they may file the proper motion to do so, which would beconsidered in due course after opportunity for objection and argument.
3 The parties filed a Joint Stipulation of Facts, and attached Title 4 of the“Potawatomi Law and Order Code” as Exhibit A, Doc. 33 in the McDonald Case No. 1440529
and Doc. 40 in the Scott Case No. 14-40543. The parties also filed a supplement tothat Stipulation with the Tribe’s “Per Capita Ordinance” attached as Exhibit B, Doc. 40 inthe McDonald Case No. 14-40529 and Doc. 41 in the Scott Case No. 14-40543. Hereinafter,
these will be referred to as the “Tribal Code” (cited as Exhibit A) and the “Per CapitaOrdinance” (cited as Exhibit B), respectively.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 3 of 30
Debtors claim an exemption in Bonnie’s per capita payments.
When Debtors filed their bankruptcy petition, they lived at an address in Topeka,
Kansas where they had resided for at least 730 days prior to filing. This residence is not
located on the Tribe’s reservation. In addition, Bonnie holds a non-transferable joint
tenancy interest in approximately 86 acres of Tribal trust agricultural land managed by
the Secretary of the Interior pursuant to 25 U.S.C. § 3701–3715. Bonnie values that
interest at zero.
Debtors’ Schedule I estimates Bonnie’s per capita payment at $361/mo. This
income is also listed on Debtors’ Form 22C. Debtors’ only other income is from Bonnie’s
receipt of Social Security disability payments. Debtors’ plan provides for monthly
payments of $130, paying attorney fees, a secured debt to the Shawnee County
Treasurer for real estate taxes, the filing fee, Trustee fees, and approximately $495 to
unsecured creditors. The plan is a 36 month base case, makes no specific reference to per
capita payments, and states the amount payable under paragraph 15’s “Best Interests
of Creditors Test” is zero.
B. Kliffton and Jeanette Scott
The Scott Debtors filed their chapter 13 bankruptcy petition filed on May 15,
2014. Debtors are married and have below median income for their household size and
geographical region under § 1325(b)(3) and (4). Debtor Jeanette Scott is a member of the
Tribe. As a member, Jeanette receives quarterly per capita gaming revenue
distributions in accordance with the Prairie Band Per Capita Ordinance. The Scott
Debtors originally claimed an exemption in Jeanette’s per capita payments but have
Case 14-40543 Doc# 49 Filed 10/27/14 Page 4 of 30
now abandoned that exemption. Debtors had no per capita funds on hand when they
filed their bankruptcy petition.
When Debtors filed their bankruptcy petition, they lived in Topeka, Kansas, and
had lived in either Topeka or nearby Carbondale for at least 730 days prior to filing.
Neither the Topeka nor Carbondale residence is located on the Tribe’s reservation.
Debtors’ Schedule I estimates Jeanette’s per capita payment at $472.80/mo.4 This
income is also listed on Debtors’ Form 22C. Debtors’ plan provides for monthly payments
of $270, and proposes to pay the filing fee, attorney fees, a priority tax debt, and a
special class claim for unpaid rent. The plan proposes no distribution to unsecured
creditors and makes no specific reference to per capita payments. The plan provides a
zero amount under paragraph 15’s “Best Interests of Creditors Test.”
A. Relevant Case Law From This District
This Court first addressed the issue of per capita payments from the Prairie Band
Tribe in In re McDonald. 5 In In re McDonald, the debtors did not deny that the per
4 Since both Debtors receive the same amount per quarter from the Tribe, the Courtcannot explain why the McDonalds’ and Scotts’ estimates of how the quarterly benefitstranslate into monthly amounts differ so substantially on their respective Schedules I ($361versus $472).
5 353 B.R. 287 (Bankr. D. Kan. 2006) (Karlin, J.). Coincidentally, the debtors in
McDonald are the same individuals as the McDonald Debtors herein. Although theStipulation of Facts does not reveal how long this Tribe has been making quarterly percapita distributions, the fact that Bonnie McDonald has apparently been receiving themsince at least 2005 (the year her Chapter 13 case was converted to Chapter 7 in the prior
McDonald decision, id. at 289) gives some credence to the argument that they may continueinto the years during which these Debtors’ plans will remain pending. The McDonald
decision reveals the payments ranged around $800 per quarter in 2005 and 2006. Id.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 5 of 30
capita payments were property of the estate, and instead argued that the per capita
payments were exempt.6 Before addressing the debtors’ exemption argument, the Court
first relied on two prior decisions from other jurisdictions, In re Kedrowski7 and Johnson
v. Cottonport Bank, 8 to affirmatively hold that the per capita distributions were property
of the estate.9
In their prior case, Debtors claimed the per capita payments were exempt under
the then-active Potawatomi tribal code provision providing that “per capita distributions
‘shall be exempt, from garnishment, attachment, execution, sale, and other process for
the payment of principal and interest, costs, and attorney fees upon any judgment of the
Tribal Court.’”10 The Court held that debtors were not “entitled to rely upon the
exemptions contained in the Potawatomi Tribal Code,”11 reasoning that because Kansas
is an opt-out state, debtors were limited to the exemptions allowed under Kansas law.12
Because Kansas law did not permit exemption based on the Potawatomi tribal code,
debtors could not thus rely.13
6 Id. at 290–91.
7 284 B.R. 439, 446 (Bankr. W.D. Wis. 2002).
8 259 B.R. 125, 131 (W.D. La. 2000).
9 In re McDonald, 353 B.R. at 291.
10 Id. at 292 (quoting then-current tribal code) (internal emphasis omitted).
13 This Court also noted that Kansas law permits debtors to claim the exemptionscontained in § 522(d)(10), which includes payments for social security benefits and
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The debtors in In re McDonald next argued that the per capita payments were
excluded from the property of the estate by § 541(c)(2), as trust funds protected by a
spendthrift provision.14 The Court again ruled against the debtors, holding that the
postpetition per capita payments were not held in trust because the Tribe’s per capita
ordinance placed no restrictions on the per capita payments to be made to competent,
adult members of the Tribe.15 Regarding the debtors’ argument that the tribal code
exemption somehow created a trust, the Court stated:
Although the Tribe, through the Ordinance, clearly indicates that the percapita distributions are not subject to garnishment, attachment, execution,
sale or other process under tribal law, it just as clearly does not impose atrust upon all of the per capita distributions. If the Court were to followDebtors’ argument in this case—that because the property is exempt, it isby definition also trust property, every piece of real or personal propertythat is exempt under state or federal law would have to likewise beconsidered trust property and excluded from the bankruptcy estatepursuant to § 541(c)(2), including wages, homesteads, automobiles, toolsof the trade, etc. Property is not subject to a trust simply because agovernmental entity has declared that property exempt from execution tosatisfy a judgment.16
The Court did find that the Tribe had expressly created a trust for per capita payments
to “incompetents and minors,” but that no other trust was created by the per capita
distributions which, per tribal code and ordinance, were to be made to all members,
disability payments, reasoning that the legislature obviously knew how to enumeratespecific exemptions when it chose to do so. Id. at 292 n.8.
14 Id. at 293.
15 Id. at 294.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 7 of 30
regardless of need or individual circumstances.17
In a decision issued the same day as In re McDonald, in the case of In re
Hutchinson, 18 the Court also addressed whether the per capita payments were exempt
as “a local public assistance benefit” under § 522(d)(10)(A).19 The Court adopted the
following definition of “public assistance benefit:” “government aid to needy, blind, aged,
or disabled persons and to dependent children.”20 Because the Tribe’s per capita
payments were not based on need, but were distributed simply on a per capita basis
(specifically, “in equal amounts to all enrolled tribal members regardless of need”), the
Court concluded they were not an exempt public assistance benefit.21
The In re Hutchinson case then addressed the § 1325(a)(4) best interest of the
creditors test. First, the Court clarified that the best interest of the creditors test of §
1325(a)(4) is a separate and distinct test from the “best effort” requirement of §
1325(b)(1). As such, the fact that the debtors were proposing to commit all of their
disposable income to plan payments during the life of their chapter 13 plan had no
bearing on the § 1325(a)(4) analysis.22 Second, the Court rejected the argument that the
per capita payments could not be valued because of their uncertain nature. The Court
17 Id. at 294–95.
18 354 B.R. 523 (Bankr. D. Kan. 2006) (Karlin, J.).
19 Id. at 529.
20 Id. at 530.
21 Id. at 530–31.
22 Id. at 531.
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concluded that the fact that “the present value of the per capita distributions might be
difficult to ascertain does not mean that those distributions have no value.”23 Because
the per capita payments were capable of being valued, the payments “must be provided
for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors
to satisfy the ‘best interest of the creditors test.’”24
Four years later, in In re Howley, 25 another judge from this District, Judge
Somers, addressed the same Prairie Band Tribe per capita payments. In In re Howley,
the debtors again attempted to exempt their Tribe per capita payments under the tribal
code, which was worded the same as it had been at the time both In re McDonald and
In re Hutchinson were decided.26 The Court, relying on In re McDonald, held that
because the debtors were domiciled in Kansas, they could only use Kansas’ state law
exemptions and were not entitled to use the exemptions of the tribal code.27 Judge
Somers also addressed the additional argument that the Tribe’s exemption was a “local
law” within the meaning of § 522(b)(3)(A)’s provision of an exemption for property
23 Id. at 532.
25 439 B.R. 535 (Bankr. D. Kan. 2010) (Somers, J.).
26 Id. at 538.
27 Id. at 539 (“Thus, the Kansas legislature, as authorized by Congress in §
522(b)(2), has provided that the exemptions of § 522(b)(1) are not available, and that the‘exemptions allowed under state law’ and § 522(d)(10) are available. Although it couldclearly do so, the Kansas legislature has not incorporated the tribal exemptions into statelaw.”).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 9 of 30
exempt under “State or local law.”28 Judge Somers concluded that, even if the Tribe’s
exemption could be considered a local law, the Tribe’s exemption could not apply because
§ 522(b)(3)(A) “expressly requires use of state or local law applicable at the place in
which the debtor’s domicile has been located for a specific period.”29 Because the debtors
in In re Howley did not live on the Tribe’s reservation, the Tribe’s exemption did not
apply because it had no extraterritorial effect.30
B. The Current Relevant Tribal Authority
The Indian Gaming Regulatory Act of 1988 generally governs the practice of
casino gambling on tribal lands.31 Pursuant to this Act, the Tribe has adopted a Per
Capita Ordinance. Some version of that Ordinance was approved by the Secretary of the
Interior on August 25, 2008.32 The Per Capita Ordinance directs that “every eligible
Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming
28 Id. at 540–42.
29 Id. at 541–42.
30 Id. at 542. In dicta, Judge Somers also noted that the exemption as worded alsoapplied only to judgments of the tribal court, and that, therefore, the limited scope of theexemption simply did not apply. Id. at 542–43. This language has been changed in thecurrent version of the Tribal Code, but that change is not relevant herein.
In a follow-up opinion, In re Howley, 446 B.R. 506 (Bankr. D. Kan. 2011), JudgeSomers addressed the debtor’s late argument that the per capita payments were not, infact, property of the estate. Judge Somers affirmatively found that the Prairie Band percapita payments were contingent interests that were property of the estate, and rejectedthe argument that the contingent nature removed future per capita payments from theChapter 7 trustee’s reach. Id. at 513–14.
31 25 U.S.C. §§ 2701–2721.
32 Exhibit B p.7. Again, the earlier McDonald case demonstrates that the same or a
similar per capita program by this Tribe was in existence at least by 2005. 353 B.R. at 289.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 10 of 30
revenues.33 The Per Capita Ordinance also states: “Every living person who is an
enrolled member of the Prairie Band of Potawatomi Indians on the eligibility
determination date is eligible to receive a Per Capita Payment.”34 The distribution is
solely “based on the latest membership list as of the eligibility determination date.”35
The per capita payments are to be disbursed within certain time periods, and are to be
made by “tribal check . . . payable to the eligible tribal member.”36 Each per capita
payment must be accompanied by a notice that federal law requires that the per capita
payments be subject to federal taxation and that the Tribe will withhold federal income
tax from each per capita payment.37 Both minors and legally incompetent tribal
members are the only individuals whose payments are treated differently.38
The Tribe has also enacted a “Law and Order Code” (the “Tribal Code”), with
section 4-14-1 of the Tribe’s Civil Procedure Code dealing specifically with “claims
against per capita.”39 Several terms are specifically defined within this section of the
Tribal Code. The term “per capita” means “the payment provided to all enrolled
members of the Prairie Band . . . which are paid directly from the Prairie Band . . . Net
33 Exhibit B p.5 (Article V, Section 1).
34 Exhibit B p.4 (Article IV, Section 1).
35 Exhibit B p.4 (Article IV, Section 2).
36 Exhibit B p.5 (Article V, Sections 2 and 3).
37 Exhibit B p.6 (Article V, Section 7).
38 Exhibit B p.5–6 (Article V, Sections 4 and 5).
39 Exhibit A p.4-41 to 4-44.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 11 of 30
Gaming Revenues pursuant to the . . . Per Capita Ordinance.”40
This section of the Tribal Code also defines the term per capita share as “a Tribal
member’s equal share of a Per Capita payment prior to a reduction for any withholding,
garnishment, or levy permitted by this Section, but after withholding at the source
required by federal income tax law.”41 The term per capita payment is then defined as
“a personal benefit to a Tribal member,” and “a periodic payment not a property right.”42
The same section also states that a per capita share “is property of the [Tribe] until such
time as a distribution is duly made.”43 The Tribal Code then states that a “distribution
of a Per Capita payment occurs when the Per Capita payments are placed in the U.S.
Mail or otherwise transferred to a Tribal member.”44
Two additional sections of the Tribal Code are pertinent. In a section titled
“Permitted Claims against a Per Capita Share,” the Tribal Code states: “A Per Capita
Share shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, seizure, attachment or other legal or equitable process.”45 Three
exceptions to this general rule are then listed: for debts owed by tribal members to the
Exhibit A p.4-42 (Section (D)(4)).
Exhibit A p.4-42 (Section (D)(6)).
Exhibit A p.4-43 (Section (E)).
Exhibit A p.4-43 (Section (F)).
Exhibit A p.4-43 (Section (G)(1)).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 12 of 30
Tribe, for garnishments for child support, and for federal income tax levies.46 And
finally, in a section titled “Prohibited Claims,” the Tribal Code states again: “a Per
Capita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,]
pledge, encumbrance or charge, seizure, attachment or other legal or equitable process;
and any proceeding for those purposes shall not be recognized nor enforceable.”47 The
same exceptions for debts owed to the Tribe, child support, and federal tax levies apply
to this section as well.
The major changes to the Tribal Code and Per Capita Ordinance are three-fold.
First, the Tribal Code distinguishes between per capita shares and per capita payments,
and includes an anti-alienation provision for per capita shares. Second is the addition
of the language stating that a per capita payment “is a personal benefit” and “a periodic
payment not a property right,” while a per capita share “is property of the [Tribe] until
such time as a distribution is duly made.” Finally, the Per Capita Ordinance no longer
has a section on exemption, but instead the language of the Tribal Code includes the
anti-alienation language previously noted.48
46 Exhibit A p.4-43 (Section (G)(1)–(3)).
47 Exhibit A p.4-44 (Section (H)).
48 The Trustee mentions in his brief that the per capita provisions of the Tribal Codehave not been approved by the Secretary of Interior, as Per Capita Ordinances must be.
Case No. 14-40529, Doc. 41 at pp.22–23; see also 25 U.S.C. § 2710(b)(3)(B) (requiringapproval by the Secretary of the Interior of gaming ordinances for per capita payments tomembers of an Indian tribe). The Trustee states that the Tribe has “attempted to modifythe Tribal members’ interest in per capita payments [through the Tribal Code] withoutamending the Per Capita Ordinance and without obtaining approval of the Secretary of theInterior.” Case No. 14-40529, Doc. 41 at p.23. The Trustee has not squarely presented thisargument, however, or cited any authority for this Court to address a claim against thevalidity of the Prairie Band’s Tribal Code. Accordingly, the Court will not address it further.
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C. Analysis of the Arguments of the Parties
1. Property of the Estate
The Bankruptcy Code defines property of the estate in § 541. Under § 541(a),
property of the estate includes “all legal or equitable interests of the debtor in property
as of the commencement of the case,” except for property that is excluded from the
estate by § 541(b) and § 541(c)(2).49 While no party has argued that § 541(b) has any
applicability to this case, both the McDonalds and the Scotts rely on § 541(c)(2)—which
excludes from the bankruptcy estate “a debtor’s beneficial interest in a spendthrift
trust”50— to support their argument that the per capita payments are not property of
their respective bankruptcy estates.
To determine whether a debtor’s interest in a trust is excluded from the
bankruptcy estate, the Court must “analyze the nature of that interest, under applicable
state law.”51 Under Kansas law, a “spendthrift trust is a trust created to provide a fund
for the maintenance of a beneficiary and at the same time to secure the fund against his
improvidence or incapacity. Provisions against alienation of the trust fund by the
49 Section 1306 expands the definition of property of the estate in chapter 13 cases toalso include property rights a debtor “acquires after the commencement of the case butbefore the case is closed, dismissed, or converted.”
50 Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007). Section541(c)(2) excludes from the bankruptcy estate property upon which there is a “restriction onthe transfer of a beneficial interest of the debtor in a trust that is enforceable under
applicable nonbankruptcy law” by providing that the restrictive provision “is enforceable ina case under this title.” Id.
51 Id. at 468.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 14 of 30
voluntary act of the beneficiary or by his creditors are its usual incidents.”52
To exclude property from the bankruptcy estate under § 541(c)(2), Debtors must
satisfy three criteria. “First, they must show that they have a beneficial interest in a
trust. Second, they must show that there is a restriction on the transfer of that interest.
Third, they must show that the restriction is enforceable under nonbankruptcy law.”53
Debtors bear the burden of proof regarding whether property can be excluded from the
As discussed above, this Court in In re McDonald previously considered the issue
of whether Prairie Band per capita payments could be excluded from property of the
estate by § 541(c)(2) as trust funds protected by a spendthrift provision. Because there
were no restrictions made on the per capita payments actually made to competent adult
members of the Tribe, and because the property’s Tribal exempt status did not
transform it into a trust, however, there was no spendthrift trust found.55 The In re
McDonald opinion also noted that the Tribe obviously knew how to create a trust via per
capita payments, because trust provisions were included for both minors and
52 In re Estate of Sowers, 1 Kan. App. 2d 675, 680, 574 P.2d 224, 228 (1977).
53 In re McDonald, 353 B.R. at 293.
54 See Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003)
(“Debtors bear the burden of demonstrating that all the requirements of § 541(c)(2) havebeen met before the property in question can be effectively excluded from the estate.”); In re
Robben, 502 B.R. 572, 577 (Bankr. D. Kan. 2013) (relying on Adams to conclude the same);
In re McDonald, 353 B.R. at 293 (same).
55 In re McDonald, 353 B.R. at 294.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 15 of 30
The same remains true today, regardless of the changed state of the Prairie
Band’s Per Capita Ordinance and Tribal Code. The current Prairie Band Per Capita
Ordinance directs that “every eligible Potawatomi tribal member” receive an “equal
share” of the Tribe’s net gaming revenues.57 The distribution is not based on need,
disability, or any other qualifier, but is instead solely “based on the latest membership
list as of the eligibility determination date.”58 The Tribal Code elects to only treat per
capita payments for minors and legally incompetent tribal members differently.59
The Tribal Code dictates that the “per capita” is “the payment provided to all
enrolled members of the Prairie Band . . . which are paid directly from the Prairie Band”
from the Tribe’s net gaming revenues.60 So again, no restrictions or discretion is present
to transform the per capita into a trust. There is simply no trust created by the Per
56 Id. at 294–95.
57 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).
58 Exhibit B p.4 (Article IV, Section 2).
59 Exhibit B p.5–6 (Article V, Sections 4 and 5). The Per Capita Ordinanceestablishes the following general terms for the trust for minors: the trust is irrevocable andadministered by an independent trustee, all per capita payments, plus interest, are held ina trust account until the child reaches 18, and then the accrued per capita distributions,
with interest, are paid out at established percentages over the next 3 years. There is anexception, as is common for many trusts for minors, allowing the trustee to makedistributions for the minor’s health, education or welfare upon the request of a parent orlegal guardian if deemed necessary by the independent trustee. Exhibit B p.5–6 (Article V,
60 Exhibit A p.4-42 (Section (D)(4)).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 16 of 30
Capita Ordinance or Tribal Code; i.e., there is no “beneficial interest in a trust,”61 which
is a required element to find a spendthrift trust.
Debtors argue that other changes in the Per Capita Ordinance and Tribal Code
change this conclusion. The current Tribal Code—in the changes spawning this
litigation—distinguishes between a per capita share, which is the Tribal member’s share
of the per capita prior to distribution,62 and a per capita payment, which is the per capita
distribution made when the Tribe mails the per capita payment to each Tribal
member.63 The cited language is merely an anti-alienation provision against the per
capita share held by the Tribe before it is disbursed as a per capita payment. Although
the Tribe places restrictions on claims against the per capita share, 64 it is the per capita
payment ultimately distributed to these Debtors that is at issue.
Again, none of this word smithing does anything to satisfy the criteria for
61 In re McDonald, 353 B.R. at 293.
62 Exhibit A p.4-42 (Section (D)(6)). The term per capita share is defined as “a Tribalmember’s equal share of a Per Capita payment prior to a reduction for any withholding,
garnishment, or levy permitted by this Section, but after withholding at the source requiredby federal income tax law,” id., and is “property of the [Tribe] until such time as adistribution is made,” Exhibit A p.4-43 (Section (E)(3)).
63 Exhibit A p.4-43 (Section (E)). The per capita payment is “a periodic payment,”
Exhibit A p.4-43 (Section (E)(2)), and “distribution . . . occurs when the Per Capitapayments are placed in the U.S. Mail or otherwise transferred to a Tribal member,” ExhibitA p.4-43 (Section (F)).
64 See Exhibit A p.4-43 (Section (G)(1)) (“A Per Capita Share shall not be subject toanticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, seizure,
attachment or other legal or equitable process.”); Exhibit A p.4-44 (Section (H)) (“[A] PerCapita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,]
pledge, encumbrance or charge, seizure, attachment or other legal or equitable process; andany proceeding for those purposes shall not be recognized nor enforceable.”).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 17 of 30
excluding the per capita as a spendthrift trust under § 541(c)(2).65 The Tribal Code
simply fails to create a trust for payments made to anyone except minors and
incompetent adults, which is the basic requirement for § 541(c)(2) to apply to Debtors’
per capita payments here.
The post-In re McDonald changes to the Tribal Code simply do not alter this
Court’s analysis. They do not affect the right of any eligible member to receive a per
capita payment. Neither the Per Capita Ordinance, nor the Tribal Code, restrict or
prohibit the distribution of a per capita payment to a competent, adult Tribal member.
No trust is created by the per capita distributions that, per Tribal Code and Ordinance,
are to be made to all members, regardless of need or individual circumstances. And the
anti-alienation provision of the per capita share has no impact on this analysis: as stated
in McDonald, “[p]roperty is not subject to a trust simply because a governmental entity
has declared that property exempt from execution to satisfy a judgment.”66
65 As the Trustee notes, the Tribal Code suffers inconsistencies. On one hand, it
attempts to claim the per capita share as Tribal property until payment is made. But on theother hand, the definition of per capita share requires that the amount of the share bereduced by federal income taxes. But how can federal income tax be owed by the tribalmember unless and until the per capita—whether defined as a “share” or “payment”—isproperty of the Tribal member? Because the Trustee points out this inconsistency, theMcDonald Debtors argue that this Court should “ask the Tribal Council for clarificationbefore proceeding to decide these issues.” Case No. 14-40529, Doc. 45 at p.1. Although theCourt notes the inconsistency, it has no bearing on the holdings herein, is thus irrelevant,
and referral to the Tribe is unwarranted.
66 Id. at 294. Debtors attempt a round-a-bout sovereign immunity argument here byarguing that the Prairie Band Tribe, as a sovereign, has the right to determine what areproperty rights under its jurisdiction, relying on an Eighth Circuit BAP case that holds thata tribe and its tribal finance company could assert the tribe’s sovereign immunity as adefense to a chapter 7 trustee’s avoidance and turnover action. Bucher v. Dakota Fin. Corp.
(In re Whitaker), 474 B.R. 687 (8th Cir. BAP 2012); see also Ho-Cak Fed. v. Herrell (In re
DeCora), 396 B.R. 222 (W.D. Wis. 2008) (concluding chapter 7 trustee could not exercise
Case 14-40543 Doc# 49 Filed 10/27/14 Page 18 of 30
The individual Debtors make a couple of additional arguments. The Scott Debtors
refer to per capita funds held in trust by the Secretary of the Interior under 25 U.S.C.
§ 117a, which governs “[f]unds held in trust by the Secretary of the Interior . . . for an
Indian tribe,” and argue that “by analogy, the per capita from Indian gaming, under the
Tribe’s current per capita ordinance and its code of procedure on per capita payments,
create a trust similar to that described in 25 U.S.C. § 117a.”67 But of course, this is not
the reality. The reality is that the Prairie Band has not elected to create a trust with
respect to per capita payments. The Per Capita Ordinance directs that “every eligible
Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming
revenues,68 and these payments are made regardless of need.
The McDonald Debtors then argue that their current financial situation dictates
a different result from their prior case because now Debtor Bonnie McDonald receives
Social Security disability income. Debtors argue that because she is disabled, her per
capita payment should be viewed as a public assistance benefit, and the Court should
thus infer the creation of a spendthrift trust as to her. But as discussed at length, the
per capita payments simply do not work that way. Just because Bonnie McDonald
avoidance powers against bank because “tribal law subordinates the lien creditor’s claim to[the tribe’s] and federal preemption and tribal sovereignty prevent state law form alteringthis result”). But the Trustee is not attacking the Tribe’s sovereign immunity here; theTribe is not a party, and what constitutes a spendthrift trust is determined by trust law,
not the Tribe’s exemption ordinance.
67 Case No. 14-40543, Doc. 43 at pp.6–7.
68 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 19 of 30
happens to be disabled, does not mean that the Prairie Band Tribe has in the past or is
presently treating her any differently than any other legally competent adult. There is
simply no evidence in the record that Bonnie McDonald has been adjudged incompetent
by a court of competent jurisdiction, or that she has a legal guardian appointed to
receive her per capita payments, or that her payments are received from an independent
trustee after meeting the stringent provisions in Section 4 of Article V of the Per Capita
Ordinance. Her disability for Social Security purposes is simply irrelevant to the
provisions of the Tribal Code and Per Capita Ordinance.
And finally, Debtors point to other courts outside of Kansas addressing tribal per
capita payments that have concluded that per capita payments are not property of the
estate. For example, in Dietz v. Barth (In re Barth), 69 the bankruptcy court concluded
that tribal per capita payments were not property of the bankruptcy estate where the
tribal ordinance at issue stated that the per capita payments were not a property right
but a personal benefit, did not vest until actually paid out, and were not subject to
alienation.70 The bankruptcy court concluded that the tribe had “the authority to limit
the definition of property right with respect to tribal property to exclude the per capita
payments of tribal funds paid by the tribe to qualified members,” and that there was “no
credible reason” why the tribe could not define property rights with respect to property
within its jurisdiction and exclude them from property of the estate.71
69 485 B.R. 919 (Bankr. D. Minn. 2013).
70 Id. at 921–22.
71 Id. at 922.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 20 of 30
But In re Barth did not address any of the above case law or assess the
Bankruptcy Code in any way. Instead, its rationale centered around the existence of
prior harms by the United States to Native Americans.72 And while those harms cannot
be denied, Congress has not seen fit to directly address those harms within its liberal
treatment of what constitutes “property” under the Bankruptcy Code.
As a result, this Court concludes that the Bankruptcy Code defines “property of
the estate” via § 541(a), and the scope of that definition is broad and equally applicable
to the per capita payments these Debtors receive.73 The controlling law in the Tenth
Circuit requires this Court to determine the existence and scope of Debtors’ interest in
property by reference to the underlying property law, and contingent interests fall
within the bankruptcy estate.74 Nothing in the changes to the Prairie Band’s legal
72 See id. at 922 n.2 (referring to “lessons learned from earlier tribal experience”).
An additional case concluding that a similar tribal code’s treatment of per capita paymentscaused the payments to not be property of the estate is In re Fess, 408 B.R. 793, 799 (Bankr.
W.D. Wis. 2009), which concluded that federal law and tribal law, not state law, defined theproperty interest, and that under the tribal law the debtors had only “an expectancy towhich no legal rights attach.” See id. at 798 (applying tribal law instead of state lawbecause the tribe’s interest in controlling its revenue outweighed the state’s interest in thesame).
73 See Weinman v. Graves (In re Graves), 609 F.3d 1153, 1156 (10th Cir. 2010)
(stating that § 541(a) “is deliberately broad in scope”).
74 See, e.g., Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204–05 (10th Cir.
2010) (stating that “property interests are created and defined by state law” and thatfederal law resolves the question of “the extent to which that interest is property of theestate;” holding that under Kansas law, “contingent interests are property interests”); see
also Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007) (noting that thenature of a property interest must be analyzed under applicable state law); In re Howley,
446 B.R. 506, 510–11 (Bankr. D. Kan. 2011) (“Kansas law recognizes contingent interests asproperty. The Court has no doubt that the Kansas courts would recognize Debtor’s interestin future Per Capita Payments as a property interest. The question is then whether thatinterest is property of the estate, as defined by federal law. Section 541(a) defines property
Case 14-40543 Doc# 49 Filed 10/27/14 Page 21 of 30
definitions concerning per capita alter this result.
2. Best Interest of the Creditors Test of § 1325(a)(4)
Regarding the best interest of the creditors test under § 1325(a)(4), this Court in
In re Hutchinson stated:
The test, articulated under § 1325(a)(4), requires that the Chapter 13 planprovide distributions to each allowed unsecured creditor that are not lessthan what the unsecured creditor would have received if the debtor’s
estate were liquidated under a Chapter 7 proceeding. This provisionessentially allows Chapter 13 debtors to “buy-out” non-exempt, prepetitionassets by paying their value to unsecured creditors with increasedpayments (or payments over a longer term) to the Trustee over the life ofthe plan.
. . .
[I]n order to comply with this test, Debtors’ plan must propose to pay theirunsecured creditors an amount at least equal to what those creditorswould have received had the bankruptcy estate been liquidated under aChapter 7 proceeding. According to the parties’ stipulations, the amendedplan “does not propose to pay any money to unsecured creditors.”
Therefore, the plan can only be confirmed if Debtors can show that aliquidation of the estate would have resulted in no payments to unsecuredcreditors.
If the bankruptcy estate were liquidated, the trustee would collectand sell all non-exempt, unencumbered property of the estate ofconsequential value and divide the proceeds from the sale among theunsecured creditors.75
Debtors have the burden of proving that they have “met all of the requirements of §
of the estate as including all legal and equitable interests of the debtor in property as of thecommencement of the case. [T]he scope of § 541 is broad and should be generouslyconstrued. [A]n interest may be property of the estate even if it is novel or contingent.
Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, andderivative, is within the reach of 11 U.S.C. § 541.” (internal footnotes and quotation marksomitted)).
75 In re Hutchinson, 354 B.R. at 531.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 22 of 30
1325, including the ‘best interest of the creditors’ test under § 1325(a)(4).”76
Again, Debtors argue that the changes to the Tribal Code and Per Capita
Ordinance require a different result than the Court’s prior determination concerning
their per capita payments and the best interest of the creditors test. Debtors argue that
because of the anti-alienation provision as to the per capita share, and the Tribal Code’s
labeling of the per capita payment as “a personal benefit” and “a periodic payment not
a property right,” while the per capita share is labeled “property of the [Tribe] until such
time as a distribution is duly made,” that their per capita cannot be alienated and would
thus have no value in a chapter 7 proceeding that could be realized to pay claims of
The Court disagrees with Debtors’ conclusion. The Tribal Code asserts anti-
alienation provisions as to the per capita shares while they are held by the Tribe prior
to disbursement to the Tribal member. Once the Tribe makes the decision to make a
disbursement, however, the per capita payment is automatically distributed to all Tribal
members on a per capita basis. As such, these Debtors continue to have an expectation
of payment, unchanged by the modifications to the Tribal Code. Once that payment is
received, it is transferable by Debtors. The interest is admittedly a contingent interest,
but as an interest that is property of the estate, it must be accounted for in the best
interest of the creditors test.
This Court has previously rejected the argument that the per capita payments
cannot be valued because of their uncertain nature. In In re Hutchinson, this Court
Case 14-40543 Doc# 49 Filed 10/27/14 Page 23 of 30
concluded that the fact that “the present value of the per capita distributions might be
difficult to ascertain does not mean that those distributions have no value.”77 Because
the per capita payments are capable of being valued, the payments “must be provided
for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors
to satisfy the ‘best interest of the creditors test.’”78
Debtors also again contend they should not have to account for the per capita
payments in the best interest of the creditors test of § 1325(a)(4), because they are
already accounting for them in their disposable income and satisfying the best efforts
test of § 1325(b)(1)(B). As stated previously in In re Hutchinson, however, the best
interest of the creditors test of § 1325(a)(4) is a separate and distinct test from the best
effort requirement of § 1325(b)(1). Because of this, the fact that Debtors are proposing
to commit all of their disposable income to plan payments during the life of their chapter
13 plan has no bearing on the § 1325(a)(4) analysis.79 If the result of subtracting their
living expenses from their income demonstrates an inability to repay the value of this
contingent interest, that unfortunately means that their plan is not feasible, not that
they do not have to account for that interest in the first instance.
And finally, Debtors point to a line of cases that conclude per capita payments are
property of a bankruptcy estate, but that then conclude that in the chapter 7 setting, the
per capita payments are of inconsequential value to the estate for purposes of analyzing
77 Id. at 532.
79 Id. at 531.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 24 of 30
turnover to the chapter 7 trustee. In In re Meier, 80 the bankruptcy court first
presumed— without deciding— that tribal per capita payments were property of the
estate.81 The In re Meier decision then held that the per capita payments were
nevertheless not subject to turnover because § 542(a) sanctions non-turnover, even of
estate property, if “such property is of inconsequential value or benefit to the estate.”82
The Meier court followed a Ninth Circuit BAP case holding that an interest in a
future distribution “‘is only of value to the estate if it can be assigned, sold or reached
for the enforcement of judgments,’”83 and concluded that the per capita payments the
debtor expected to receive were nontransferable based on “the tribe’s clear intent to
preclude sale or transfer of the right to receive payments to anyone outside of the
tribe.”84 Because of this finding, the In re Meier court concluded the per capita payments
80 Case No. 13-02323-B-SWH, 2013 WL 6135085 (Bankr. E.D.N.C. Nov. 21, 2013).
81 Id. at *2.
82 Id. at *3.
83 Id. (quoting Brown v. Locke (In re Locke), Case No. NC-06-1101, 2006 WL
6810938 (9th Cir. BAP Sept. 28, 2006)).
The In re Locke case, relied on by In re Meier, affirmatively concluded that the tribalper capita payments at issue in the chapter 7 case were property of the estate. 2006 WL6810938, at *9–11 (holding that the per capita payments actually received prepetition werepersonal property and that the entitlement to future payments was a contingent, intangibleproperty interest; concluding both were property of the estate). The In re Locke case then
considered whether, because the per capita shares did not become the debtor’s personalproperty until each payment was made, the contingent interests in future payments wereprotected against transfer. Id. at *14–15. The Ninth Circuit BAP concluded that a remand
was appropriate for the bankruptcy court to consider whether the trustee’s motion forturnover was appropriate, because the “interest in future distributions is only of value tothe estate if it can be assigned, sold or reached for the enforcement of judgments,” and for adetermination of the asset’s value to the estate. Id. at *12, *15–16.
84 Id. at *4.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 25 of 30
were of negligible value to the estate.85 In addition, that court concluded that because
the per capita payments would be hard to market due to the variability of the payments
and the fact that the payments would cease immediately upon the death of a member,
and the fact that the bankruptcy case would have to be held open for a lengthy time for
the trustee to administer the payments, the chapter 7 trustee’s efforts would actually
be a burden to the estate, rather than a benefit.86
This line of cases, however, again does not help the Debtors here. These cases do
not change this Court’s analysis that the per capita payments are in fact property of the
estate. And as property of the estate, they must be accounted for in the best interest of
the creditors analysis. Obviously, the parties in interest will need to negotiate the
correct value of these admittedly contingent interests, and litigate that value if no
agreement can be reached. But no party has yet raised the valuation issue with any
specificity, and there is nothing in the record that would allow this Court to find that
these property interests have no value. That is an issue for another day if the parties are
unable to agree on the value.
3. Exemption Arguments
Finally, the McDonalds argue that if the per capita payments are property of the
estate, then under § 522(b)(3)(A) they are exempt as a “local law . . . that is applicable
. . . to the place in which the debtor’s domicile has been located for the 730 days
86 Id. at *5.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 26 of 30
immediately preceding the date of filing of the petition. . .”87 Counsel’s convoluted
argument in this respect appears to be that because the Tribal Code extends its
jurisdiction to “all Tribal Members, wherever located,”88 the Tribe therefore “retains
authority and jurisdiction over per capita payments and to its recipients living off the
reservation.”89 As a result, counsel argues that the Bankruptcy Code’s exemption for
local laws applicable to the place of a debtor’s domicile somehow requires that the Tribal
Code’s anti-alienation provisions for the per capita share exempt the McDonalds’ per
capita payments from the bankruptcy estate.90
The McDonald’s exemption argument is unpersuasive. First, as Judge Somers
held in In re Howley, even if the Tribal Code could be considered a “local law” under the
Bankruptcy Code, the Bankruptcy Code additionally requires the “use of state or local
law applicable at the place in which the debtor’s domicile has been located for a specific
period.”91 Because the Howley debtor was not domiciled on the Tribe’s reservation, the
87 11 U.S.C. § 522(b)(3)(A).
88 Exhibit A p.4-41 (Section B).
89 Case No. 14-40529, Doc. 42 at p.3.
90 The McDonald Debtors do not appear to be making a sovereign immunityargument here, although they do claim in their reply brief that allowing the Trustee to“take” Debtors’ per capita payments “would be to continence a violation” of federal and statetreaties with the Tribe. They also argue that the Tribal Code is entitled to respect as theTribe is a sovereign entity. Case No. 14-40529, Doc. 41 at p.4. There is no violation ofsovereign immunity here, however, because no claim is being made against the Tribe andsovereign immunity does not extend to Tribe members not representing the Tribe. See
Crowe & Dunlevy, P.C. v. Stidham, 640 F.3d 1140, 1153–54 (10th Cir. 2011) (describingsovereign immunity of Indian tribes and stating that the immunity extends to tribalofficials, “so long as they are acting within the scope of their official capacities”).
91 In re Howley, 439 B.R. at 541–42 (emphasis added).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 27 of 30
Tribe’s exemption did not apply.92
Second, domicile is a defined term. “Generally, the words and phrases contained
in a federal statute are defined by reference to federal law.”93 When the Supreme Court
defined the term “domicile” in reference to the Indian Child Welfare Act, it concluded
that domicile is “established by physical presence in a place in connection with a certain
state of mind concerning one’s intent to remain there.”94 A person can have only one
domicile at a time, even if that person has multiple residences.95
The McDonalds specifically stipulated that they lived in Topeka on the date they
filed their bankruptcy petition, and that they have lived in Topeka at the same address
for the 730 days prior to filing their petition. In other words, Debtors stipulated that
they were not at filing, and had not been for the last 730 days, living on Tribal land. If
that were not already crystal clear, Debtors additionally stipulated that their Topeka
residence is not located on the Tribe’s reservation. As a result, the McDonalds are not
domiciled on Prairie Band land but instead in Topeka, Kansas. The state or local law
applicable at the place of Debtor’s domicile is the law of Kansas.96
92 Id. at 542.
93 In re Hodgson, 167 B.R. 945, 949 (D. Kan. 1994) (citing Jerome v. United States,
318 U.S. 101, 104 (1943)).
94 Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 48 (1989).
95 In re Hodgson, 167 B.R. at 950 (citing Williamson v. Osenton, 232 U.S. 619
96 Regardless of all this, the McDonalds never do attempt to explain how the TribalCode’s anti-alienation provisions as to the per capita share somehow transform into aBankruptcy Code exemption of Debtors’ per capita payment. Regardless, the McDonalds’
“local law” exemption argument fails for so many other reasons, the Court need not address
Case 14-40543 Doc# 49 Filed 10/27/14 Page 28 of 30
The McDonalds additionally argue that because Bonnie has a joint tenancy
interest in approximately 86 acres of Tribal trust agricultural land managed by the
Secretary of the Interior (pursuant to 25 U.S.C. § 3701–3715)—land upon which she
does not reside—that she should nevertheless be treated as being domiciled on the
Prairie Band land or that the Tribe somehow has jurisdiction over the funds in her
hands. As stated above, however, owning land, in trust or otherwise, does not equate to
a domicile. None of the stipulated facts even suggest that the McDonalds live or have
ever lived on Prairie Band land; the only facts before this Court are that they lived in
Topeka at filing and have lived at the same address therein for the 730 days prior to
filing. In addition, the Tribal Code itself states that once a per capita payment is made
to a Tribal member, it is a personal benefit to that member and is no longer property of
the Tribe. Accordingly, the fact that Debtor Bonnie McDonald holds an unrelated joint
tenancy interest in Prairie Band land held in trust is simply irrelevant to the analysis
under § 522(b)(3)(A).
And finally, although again not clear, the McDonalds may be arguing that
because Debtor Bonnie McDonald receives Social Security disability payments, her per
capita payments are somehow transformed into, and exempt as, “a local public
assistance benefit” under § 522(d)(10)(A). Citing In re Hutchinson, 97 which defined
“public assistance benefit” as “government aid to needy, blind, aged, or disabled persons
97 354 B.R. 523 (Bankr. D. Kan. 2006).
Case 14-40543 Doc# 49 Filed 10/27/14 Page 29 of 30
and to dependent children,”98 the McDonald Debtors argue that “[n]one can deny that
Bonnie McDonald is disabled and that what she receives constitutes a de facto public
assistance benefit from her tribe.”99 But again, as stated repeatedly herein and as this
Court noted in In re Hutchinson, because the Tribe’s per capita payments are not based
on need, but are distributed simply on a per capita basis, they are not an exempt public
assistance benefit.100 Although Debtor Bonnie McDonald receives Social Security
disability income, her per capita payments are distributed to her by the Tribe without
regard to any disability.
The Trustee’s objections to confirmation and objections to exemption are
sustained, for the reasons stated more fully above. Debtors shall file amended plans that
comply with this opinion within 21 days. If Debtors choose not to amend their plans
within this time frame, the Trustee should submit orders granting his motions to
dismiss each case.
It is so ordered.
# # #
98 Id. at 530.
99 Case No. 14-40529, Doc. 42 at p.5.
100 In re Hutchinson, 354 B.R. at 530–31.
Case 14-40543 Doc# 49 Filed 10/27/14 Page 30 of 30
- Category: Judge Karlin
- Published on 13 November 2014
- Written by Judge Karlin
- Hits: 79
In Re Hagans, 14-40750 (Bankr. D. Kan. Nov. 10, 2014) Doc. # 42
SIGNED this 10th day of November, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 14-40750
Deedric Oliver Hagans, Chapter 7
Order Sustaining Trustee’s Objection to Exemption
Debtor Deedric Hagans seeks to exempt a 1997 Chevrolet truck as a “tool of the
trade” under Kansas exemption law, but the chapter 7 Trustee has objected to that
exemption, arguing that because the truck was not modified to specifically suit
Debtor’s occupation, it could not be claimed exempt as a tool of the trade.
The Court concludes that, based on the stipulated facts presented, Debtor is not
entitled to a tool of the trade exemption for the 1997 Chevrolet truck, and the Trustee’s
objection to exemption is sustained.
I. Procedural and Factual Background
The following facts have been stipulated by the parties or are part of the record
Case 14-40750 Doc# 42 Filed 11/10/14 Page 1 of 9
in this case. Debtor, who is not represented by counsel, filed a chapter 7 bankruptcy
petition on July 1, 2014. Debtor exempted a 1999 GMC Suburban as a “means of
conveyance” under K.S.A. § 60-2304(c),1 and the Trustee did not object to Debtor’s
exemption of the 1999 GMC Suburban. Debtor also exempted a 1997 Chevrolet truck
as a “tool of trade” under K.S.A. § 60-2304(e), to which exemption the Trustee timely
objected. The total value of all assets Debtor seeks to exempt as tools of trade is less
Debtor is a self-employed metal fabricator. He testified at his § 341 meeting of
creditors that the 1997 Chevrolet truck is a ½ ton pickup with 4-wheel drive and a
trailer hitch. Debtor also testified that the 1997 Chevrolet truck is used in his metal
fabrication business, and that the truck had not been modified in any way to
specifically suit his occupation as metal fabricator. The parties have stipulated that a
pickup truck is necessary to perform Debtor’s work. Debtor depreciates the 1997
Chevrolet truck as a “work only” vehicle on this federal income taxes, and those taxes
have been processed and accepted by the IRS.
This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order.2
1 Section 60-2304(c) provides debtors an exemption for “[s]uch person’sinterest, not to exceed $20,000 in value, in one means of conveyance regularly usedfor the transportation of the person or for transportation to and from the person’sregular place of work.” This exemption need not be discussed further, as the Trusteedoes not object to its use.
2 See 28 U.S.C. § 157(b)(2)(B) (stating that “allowance or disallowance of . . .
exemptions from property of the estate” are core proceedings); § 157(b)(1) (granting
Case 14-40750 Doc# 42 Filed 11/10/14 Page 2 of 9
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,
an estate is created,3 and that bankruptcy estate consists of “all legal or equitable
interests of the debtor in property as of the commencement of the case.”4 The
Bankruptcy Code does, however, permit the exemption of certain property from the
estate,5 and permits a state to “opt-out” of the federal exemptions in favor of state-law
exemptions when that state specifically excludes the use of the federal exemptions.6
Kansas has opted out of the federal exemption scheme,7 and a debtor in Kansas may
exempt from the estate those “State or local law” exemptions that are “applicable as
of the filing date.”8
The Kansas statute dealing with tools of trade exemptions is K.S.A. § 60-2304(e).
Section 60-2304(e) grants an exemption for: “The books, documents, furniture,
authority to bankruptcy judges to hear core proceedings).
3 11 U.S.C. § 541(a) (“The commencement of a case under . . . this titlecreates an estate.”).
4 Id.§ 541(a)(1).
5 Seeid.§ 522(b)(1) (“Notwithstanding section 541 of this title, an individualdebtor may exempt from property of the estate the property listed in eitherparagraph (2) or, in the alternative, paragraph (3) of this subsection.”).
6 Id.§ 522(b)(2).
7 K.S.A. § 60-2312 (prohibiting, with exception, individual debtors fromelecting federal exemptions).
8 11 U.S.C. § 522(b)(3)(A); K.S.A. §§ 60-2301 through 60-2315 (Kansasexemptions).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 3 of 9
instruments, tools, implements and equipment, the breeding stock, seed grain or
growing plants stock, or the other tangible means of production regularly and
reasonably necessary in carrying on the person’s profession, trade, business or
occupation in an aggregate value not to exceed $7500.”
In a challenge to a claimed exemption, the objecting party—here the
Trustee—has the “burden of proving that the exemptions are not properly claimed.”9
Under Kansas law, exemption statutes are to be liberally construed for the benefit of
the debtor.10 Whether or not a vehicle qualifies as a tool of the trade must be decided
on a case by case basis after considering all of the facts and circumstances. 11
In Kansas, the test for property to qualify as a tool of the trade is that it must
be “reasonably necessary, convenient, or suitable for the production of work.”12 Because
K.S.A. § 60-2304 includes both a tool of the trade exemption and a means of conveyance
exemption, it was not intended for an automobile to automatically qualify as a tool of
9 Fed. R. Bankr. P. 4003(c).
10 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004)
(“Under Kansas law, exemption statutes are to be liberally construed in favor ofthose intended by the legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730
(Bankr. D. Kan. 2008) (stating that “the Kansas Supreme Court has directed thatexemption claims are to be liberally construed in favor of debtors”).
11 In re Bondank, 130 B.R. 586, 587 (Bankr. D. Kan. 1991); In re Meany, 35
B.R. 3, 4 (Bankr. D. Kan. 1982).
12 In re Bondank, 130 B.R. at 587; In re Currie, 34 B.R. 745, 748 (D. Kan.
1983) (citing Reeves v. Bascue, 91 P. 77 (Kan. 1907)); In re Frierson, 15 B.R. 157,
159 (Bankr. D. Kan. 1981).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 4 of 9
the trade.13 Therefore, a debtor must show that the vehicle is in fact a tool of the trade
and not just a means of conveyance to qualify for this exemption.14 A vehicle may be
a tool of the trade if it is “uniquely suited” for its uses15 or if the debtor’s work is
“uniquely dependent” on it.16 If the debtor primarily uses the vehicle for transportation
purposes, it is exempt only as a means of conveyance and not as a tool of the trade.17
The case law interpreting this exemption is highly fact dependent. In In re
Rice, 18 a truck used for the debtor’s home remodeling business did not qualify as a tool
of the trade because, “simply [held,] the truck is used and is exempt as a means of
conveyance for the debtor’s transportation.”19 This finding was based on the fact the
truck was primarily used for hauling materials and transporting employees, and it was
not “uniquely suited for these uses.”20 Additionally, the bankruptcy court noted that
it was “immaterial that the truck is only used in connection with work.”21
13 In re Bondank, 130 B.R. at 587; In re Rice, 35 B.R. 431, 432 (Bankr. D. Kan.
14 In re Rice, 35 B.R. at 432.
16 In re Currie, 34 B.R. at 748; In re Meany, 35 B.R. at 4.
17 In re Rice, 35 B.R. at 433.
18 35 B.R. 431 (Bankr. D. Kan. 1982).
19 Id. at 433.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 5 of 9
In In re Bondank, 22 the bankruptcy court held that a real estate appraiser’s
vehicle was not a tool of the trade because it was primarily a source of transportation.23
While the debtor was able to prove that he needed a vehicle to perform his duties for
his employer, he was unable to prove that he needed that particular vehicle.24 For
similar reasons, the bankruptcy court in In re Meany found that a real estate agent’s
vehicle was not a tool of the trade.25
On the other side of the coin, in In re Currie, 26 a truck used for the debtor’s cattle
operation did qualify as a tool of the trade.27 The district court affirmed the bankruptcy
court’s holding that the truck fit within the “reasonably necessary, convenient, or
suitable” test because the debtor “could not continue her cattle operation without the
means to haul cattle to and from market.”28 Additionally the debtor used the four-wheel
drive truck to haul hay for the cattle in the winter.29 The debtor’s other vehicle (a Ford
Torino) was not a tool of the trade because the debtor’s cattle operation was not
22 130 B.R. 586 (Bankr. D. Kan. 1991).
23 Id. at 588.
25 35 B.R. 3, 4 (Bankr. D. Kan. 1982) (“[D]ebtors have not demonstrated that[debtor] cannot continue in her occupation without the use of this car.”).
26 34 B.R. 745 (D. Kan. 1983).
27 Id. at 748.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 6 of 9
“uniquely dependent” on it.30 In In re Kobs, 31 similar to In re Currie, the bankruptcy
court found a truck used on a farm to haul irrigation pipe, haul and feed cattle, fuel
other farm vehicles, and perform other various tasks did qualify as a tool of the trade.32
The Trustee’s sole argument supporting his objection to exemption is that
Debtor’s truck is not specially modified to specifically suit his metal fabrication
business. While a special modification to a vehicle is a factor that courts have
mentioned would favor the vehicle qualifying as a tool of the trade,33 it is not a
conclusive factor in the required case by case analysis.34 Debtor, however, in support
of his claimed exemption, relies on Kansas case law from the time before the enactment
of a means of conveyance exception in Kansas.35 Cases before the enactment of the
means of conveyance exception have no persuasive effect when determining whether
a vehicle qualifies as a tool of the trade.36
Additionally, Debtor has failed to stipulate to any evidence indicating the truck
31 163 B.R. 368 (Bankr. D. Kan. 1994).
32 Id. at 372.
33 In re Bondank, 130 B.R. at 588; In re Rice, 35 B.R. at 432–33.
34 See In re Currie, 34 B.R. at 748 (making no mention of any special
modifications when finding that a truck qualified as a tool of the trade).
35 Doc. 30 at ¶ 6 (citing Dowd v. Hueson, 122 Kan. 278 (1927)). The Kansasexemption statutes were not amended to include a specific exemption for a means ofconveyance until 1965. In re Rice, 35 B.R. at 432.
36 See In re Rice, 35 B.R. at 432 (noting how the analysis has changed afterinclusion of the means of conveyance exception).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 7 of 9
is “uniquely suited” for his metal fabrication business or that his business is “uniquely
dependent” on the truck. While the parties stipulate that “a pick-up truck is necessary
to perform Debtor’s work,”37 Debtor introduced no further stipulations expanding on
this statement. And the fact that “a pick up truck” is “necessary” will not qualify a
specific vehicle as a tool of the trade.38 Debtor argues that “the bed and tailgate serve
as an adequate welding bench.”39 Even if this argument were a stipulated fact, which
it is not, this would not be enough. The truck is neither “uniquely suited” for Debtor’s
business nor is Debtor’s business “uniquely dependent” on the truck—presumably, the
same work could be done with an actual welding bench. With nothing more than
argument that the truck serves as an “adequate welding bench,” this Court is left to
conclude that the truck’s main purpose is transportation from job to job. As a result,
it cannot be exempt as a tool of the trade.40
Debtor is proceeding pro se in this case, and although his pleadings are “to be
construed liberally,” the Court cannot “assume the role of advocate for the pro se
litigant.”41 Debtor has not put forth sufficient facts for this Court to find that the truck
37 Doc. 39 at ¶ 13.
38 See In re Bondank, 130 B.R. at 588 (concluding that there was no evidencethe specific vehicle at issue “had been modified to specifically suit the debtor’soccupation” and that just because the debtor needs ‘a vehicle” does not mean thedebtor needs the specific vehicle claimed).
39 Doc. 30 at ¶ 4.
40 In re Rice, 35 B.R. at 433.
41 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
Case 14-40750 Doc# 42 Filed 11/10/14 Page 8 of 9
is exempt as a tool of the trade, and the Trustee’s objection to exemption is therefore
For the reasons stated more fully herein, the Trustee’s objection to exemption42
It is so ordered.
# # #
42 Doc. 18.
Case 14-40750 Doc# 42 Filed 11/10/14 Page 9 of 9
- Category: Judge Karlin
- Published on 23 October 2014
- Written by Judge Karlin
- Hits: 137
BAP WY-14-002 In Re Miller, Oct. 8, 2014
U.S. Bankruptcy Appellate Panel of the Tenth Circuit
October 8, 2014 Blaine F. Bates
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT
IN RE VEDE JACOB MILLER, alsoknown as Jake Miller,
VEDE JACOB MILLER, Appellant,
UNITED STATES TRUSTEE, Appellee.
BAP No. WY-14-002
Bankr. No. 13-20384 Chapter 7
Appeal from the United States Bankruptcy Courtfor the District of Wyoming
Submitted on the briefs:*
Brad T. Hunsicker of Winship & Winship, P.C., Casper, Wyoming, for Appellant.
Ramona D. Elliott, Deputy Director/General Counsel (P. Matthew Sutko,Associate General Counsel, and Robert J. Schneider, Jr., Trial Attorney, with heron the brief) Washington, D.C., and Patrick S. Layng, United States Trustee forRegion 19 (Daniel J. Morse, Assistant United States Trustee, with him on thebrief), Cheyenne, Wyoming, for Appellee.
Before NUGENT, KARLIN, and SOMERS, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
The issue we face is whether a debtor’s wages need to be both earned and
* The parties did not request oral argument, and after examining the briefsand appellate record, the Court has determined unanimously that oral argumentwould not materially assist in the determination of this appeal. See Fed. R. Bankr. P. 8012. The case is therefore ordered submitted without oral argument.
received during the applicable six-month “look-back” period in order to be included as part of his “current monthly income” under 11 U.S.C. § 101(10A). Debtor Vede Jacob Miller (“Miller”) timely appealed the bankruptcy court’s order dismissing his Chapter 7 petition after the court determined that, when properly calculated, Miller’s current monthly income (“CMI”) disqualified him from proceeding under Chapter 7 of the Bankruptcy Code.1 When Miller declined to convert his bankruptcy case from Chapter 7 to Chapter 13, the bankruptcy court dismissed his petition. We affirm the dismissal.
The relevant facts are undisputed. Miller filed his Chapter 7 bankruptcy petition in April 2013. He claimed the § 707(b) presumption of abuse did not apply to his bankruptcy filing, under § 707(b)(7)(A), which effectively exempts a filer from the presumption of abuse if his income is less that the median income for his state and family size. When Miller filed his bankruptcy, he was paid biweekly (26 times annually) and reported gross annual income of $77,705 and $81,066 in 2011 and 2012, respectively. When he filed, the median income for a family of three in Wyoming was $73,688; it was $78,733 for a family of four.
Miller’s first Form B22A (the Chapter 7 means test) listed a family size of 3 and a CMI of $4,977, resulting in a calculated annual income of $59,721. Three months later, Miller filed an amended B22A form, this time claiming a family size of 4 and a CMI of $6,112—$73,338 annually, still $300 below Wyoming’s median income for a family of three. The figure was also $5,395 less than the $78,733 median income for a family of four, the family size Miller claimed on the amended form.2
1 Unless otherwise indicated, all statutory references in this decision will beto the Bankruptcy Code, Title 11 of the United States Code.
2 The UST suggests that Miller changed his family number from 3 to 4 (continued...)
The United States Trustee (UST) contested Miller’s CMI calculations,
which Miller based on his understanding of the term “current monthly income,” as
defined in § 101(10A). That definition includes, “income from all sources that
the debtor receives . . . without regard to whether such income is taxable income,
derived during the 6-month period.” Miller argued that the “derived during”
language means “earned during,” such that his CMI only need include income he
both received and earned during the look-back period.3 The UST read the
definition to include all money received during the look-back period, regardless
when it was earned.
These differing definitions led the UST and Miller to dispute the inclusion
of one payment, which Miller received on October 10 in the amount of $2,942.
Those wages were in compensation for work he completed in the two weeks
before commencement of the look-back period—the “10/10 payment.”4
Eliminating this payment from Miller’s CMI calculation reduced his annualized
2 (...continued)because his income otherwise would have exceeded the Wyoming median annualincome, even using his calculation. Brief of Appellee Patrick S. Layng, UnitedStates Trustee, at 8. The UST argument is inaccurate. Miller’s amended calculation reflecting annual income of $73,338 was still below the $73,688median income for a family of 3 in Wyoming at the time his petition was filed.
m. Printed copies of this, and all other webpages cited herein, are provided as anattachment located at the end of this decision. The Court accepts noresponsibility for, and does not endorse, any product, organization, or content atany hyperlinked site, or at any site to which that site might be linked. The Courtaccepts no responsibility for the availability or functionality of any hyperlink.Thus, the fact that a hyperlink ceases to work or directs the user to some othersite does not affect the Opinion of the Court.
3 The defined look-back period was October 1, 2012, through March 31,2013.
4 The UST’s analysis of Miller’s pay advices indicates that the pay periodcovered by the 10/10 Payment was September 14-30, a period of 17 days. See Appellant’s Appendix (“Appx”) at 67. Each of Miller’s other checks covered a 14-day period that ended 10 days prior to the payment date. As the 10/10 payadvice is not contained in the appellate record, the Court assumes the UST’sstated pay period is simply a transcription error.
income to nearly $6,000 below the Wyoming annual median for a family of four. But when the UST included that payment, Miller’s income placed him at above-median income status. As a result, Miller’s CMI would have resulted in Miller having to repay (under a 60-month repayment plan required of above median income debtors) approximately $42,000 to his unsecured creditors. Since he listed total non-priority unsecured debt of $58,062, creditors would have potentially received payment of more than 70% of their claims.
Based on this calculation, the UST filed a Statement of Presumed Abuse pursuant to §§ 707(b) and 704(b)(2),5 and a motion to dismiss Miller’s case pursuant to § 707(b)(2) and (3).6 Miller then filed his own motion for partial summary judgment, claiming that because the 10/10 payment should be excluded, he should be allowed to proceed in Chapter 7.
The bankruptcy court agreed with the UST interpretation, holding that all income received by a debtor in the look-back period must be included in the calculation of CMI “without relation to when that income was earned.”7 As a result, the bankruptcy court dismissed Miller’s case pursuant to § 707(b)(2)8 when he declined to convert to a Chapter 13 proceeding.
II. APPELLATE JURISDICTION
This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
5 See Appx at 59.
6 Id. at 60. Section 707(b)(2) is based on a presumption of abuse that arisesfrom a mathematical calculation of income and expenses, whereas § 707(b)(3)requires a showing of bad faith but does not require the trustee (or other party ininterest) prove that the debtor exceeded the abuse threshold.
7 Opinion on Motion for Partial Summary Judgment at 7, in Appx at 131.
8 As a result, the bankruptcy court did not reach the UST’s § 707(b)(3) badfaith claim against Miller.
unless one of the parties elects to have the district court hear the appeal.9 A decision dismissing a bankruptcy case is a final order for purposes of appeal.10
Miller timely appealed the bankruptcy court’s dismissal of his case as well as the order denying him summary judgment.11 Neither party elected to have the appeal heard by the district court, and the parties have therefore consented to appellate review by this Court.
III. ISSUE AND STANDARD OF REVIEW
In calculating CMI pursuant to § 101(10A), is income that was
earned before the start of the six-month look-back period
included if it is received during that period?
The sole issue on appeal requires us to interpret a statute, a question of law
that we review de novo.12
Under § 707(b)(1), “the court . . . may dismiss a case . . . or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Section 707(b)(2) sets out a means test that creates a presumption of abuse in many cases, but § 707(b)(7)(A) effectively exempts a debtor from the
9 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002; 10th Cir.BAP L.R. 8001-3.
10 In re Miller, 383 B.R. 767, 770 (10th Cir. BAP 2008) (order of dismissal isgenerally final and appealable under 28 U.S.C. § 158(a)).
11 The UST suggests that 10th Cir. BAP L.R. 8001-1 required Miller to paytwo filing fees in order to appeal both the order denying his motion for partialsummary judgment and the order dismissing his case. This local rule is interpreted to require separate notices of appeal from separate final orders, whichthe December 5 order was not. Moreover, an appellant may seek review of allinterim, non-final orders in conjunction with an appeal of the final order resolvingthe case. See Koch v. City of Del City, 660 F.3d 1228, 1237 (10th Cir. 2011),cert. den., 133 S.Ct. 211 (2012) (interlocutory orders merge into a final judgmentand are reviewable on appeal).
12 In re Woods, 743 F.3d 689, 693 (10th Cir. 2014); In re Ford, 574 F.3d1279, 1282 (10th Cir. 2009).
means test presumption of abuse “if the current monthly income of the debtor . . . and the debtor’s spouse combined . . . when multiplied by 12, is equal to or less than” the median income for the debtor’s family size in the applicable state. The term “current monthly income” is defined in § 101(10A) as follows:
(10A) The term “current monthly income”–
(A) means the average monthly income from all sourcesthat the debtor receives (or in a joint case the debtor andthe debtor’s spouse receive) without regard to whethersuch income is taxable income, derived during the6-month period ending on–
(i) the last day of the calendar monthimmediately preceding the date of thecommencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii)(emphasis added).
The parties offer differing interpretations of the term “current monthly income.” Miller reads “derived during” to mean “earned during.” As a result, he reads § 101(10A) to include only income that he both received and earned during the 6-month look-back period. In other words, he contends the statute excludes both income received in the look-back period that he earned outside of that period and income he earned during the look-back period for which he received payment outside of it. The UST contends that all income received during the look-back period must be included in the calculation of CMI, regardless when it was earned.13
The Tenth Circuit Court of Appeals has not considered this issue, and our independent research has produced no other appellate decisions addressing the meaning of this language. We are thus left to interpret the Code in the first instance. “[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries
The UST agrees with Miller that income earned in the look-back period—but received outside of that period—is not included in CMI (such as Miller’sApril 10, 2013 pay).
must begin: with the language of the statute itself.’”14 “It is well established that ‘when the statute’s language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’”15 Further, “[i]t is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”16 “If the statute’s plain language is ambiguous as to Congressional intent, we look to the legislative history and the underlying public policy of the statute.”17
The most common definition of “derive” is “to take, receive, or obtain especially from a specified source,”18 and both parties rely on this definition.19 But this definition is actually defining the phrase “derive from.” Using the term “derive,” as outlined in these definitions, requires the preposition “from.” But Congress did not choose the phrase “derived from;” instead, it used the term “derived” in a temporal setting, that is, “derived during.” And a dictionary definition analogous to the one for “derived from” for the phrase “derived during” would read as follows: “to take, receive, or obtain, especially during a specified period.” Using this definition in the statute, then, the primary dictionary meaning leads us to read “income derived during the look-back period” as “income taken, received, or obtained during the look-back period.” The meaning of the terms
14 Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 131 S.Ct. 716, 723 (2011)(quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)).
15 Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)).
16 Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989).
17 United States v. Manning, 526 F.3d 611, 614 (10th Cir. 2008) (citation andinternal quotation marks omitted).
18 See, e.g., Merriam-Webster Online Dictionary,http://www.merriamwebster.com/dictionary/derive.
19 See Appellant’s Brief at 11-12.
“taken” and “obtained” are subsumed in the broader term “received,”20 so we read the definition of “income derived during the look-back period” as “income received during the look-back period.” This appears to be the plain meaning of the statute.
Admittedly, construing the words “derived during” to be essentially synonymous with the word “received” presents a statutory interpretation challenge, given that Congress used the word “receives” earlier in the same sentence. If the legislature intended the words to have the same meaning, why would it use different words?
Miller makes just this argument, asserting that “if different language is used in different parts of a statute, then a court should presume the legislature intended a different meaning and effect with respect to each term.”21 This argument appears to rely on the idea that courts should not read a statute to render any portion of the statute redundant, and reading dissimilar terms to mean the same thing risks creating redundancy. But there is little precedential support for the alleged rule that different words must have different meanings.
The United States Supreme Court has specifically recognized that Congress’s use of two different terms in a statute does not preclude the courts assigning the terms the same meaning, noting that Congress may have used the terms, “not as contrasting, but as synonymous or alternative terms.”22 And even if
20 If one takes or obtains money, one still receives that money; the termssimply provide additional information about how that money is received.
21 Appellant’s Brief at 12.
22 Wachovia Bank v. Schmidt, 546 U.S. 303, 314 (2006) (in reference to thewords “located” and “established” in a statute). Congress certainly does usesynonyms in its drafting, and courts should not strain to interpret wordsdifferently when their ordinary meaning is synonymous. Thus, the rule againstsuperfluities cannot be used to override the “fundamental canon of statutoryconstruction . . . that, unless otherwise defined, words will be interpreted astaking their ordinary, contemporary, common meaning.” Perrin v. United States,
this purported rule were a canon, “canons are not mandatory rules” but, rather, are “guides  designed to help judges determine the Legislature’s intent as embodied in particular statutory language. And other circumstances evidencing congressional intent can overcome their force.”23
Nevertheless, Miller argues “derive” must have a different definition from “receive”, and so ultimately interprets “derived during” to require that “the income at issue must originate from, or be earned during, the applicable six-month “look-back” period (i.e., the “specified source” or “origin” of the income)” (emphasis added). But there is simply no basis in the statute or the dictionary definitions for interpreting “derived” as “earned,” the latter being a word Miller adds to the definition without explanation. This unjustified addition twists the meaning of the term “derived” and would fundamentally alter the CMI definition. None of the dictionary definitions of “derive” uses the term “earn.” Even if Miller is correct that Congress generally does not use two words to mean the same thing, there is simply no basis to substitute “earned” for “derived,” as Miller advocates.
Moreover, Miller’s general argument, that reading two different words to mean the same thing renders portions of the statute redundant, fails in this case. Careful consideration of this statute indicates that, even when “received” and “derived” are given the same meaning, every portion of the statute remains essential. We note that the first portion of the statute, containing the term “receives,” is in the present tense and explains what kind of income is included in a CMI calculation, without respect to its receipt. Thus, “income from all sources that the debtor receives . . . without regard to whether such income is taxable” is
22 (...continued)444 U.S. 37, 42 (1979).
23 Chickasaw Nation v. United States, 534 U.S. 84, 94 (2001) (citation andinternal quotation marks omitted).
included in CMI. The second part of the CMI definition sets the time period
applicable to that income; the income must have been “derived during” the look-
back period. When the statute is read as a whole, then, it contains no
surplusage—both portions of the definition of CMI are necessary to the
After reviewing the accepted definitions for the term “derived,” in the
context of the phrase “derived during,” the Court concludes that the phrase
“income derived during the look-back period” has the plain meaning “income
received during the look-back period.” This reading does not raise the concerns
about redundancy or surplusage sometimes associated with reading dissimilar
terms to mean the same thing, and this reading directly applies the commonly
accepted dictionary definition of the term “derived” to the question at hand.
Because this is the only reasonable interpretation of the statutory language, the
language is not ambiguous.24
The Court is aware of the divided case law on this question,25 and Miller
24 Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., No. 123295, 2014 WL 4069137, at *31 (10th Cir. Aug. 19, 2014).
25 See, e.g., In re Strickland, 504 B.R. 542, 545-46 (Bankr. D. Minn. 2014)(holding that “current monthly income” under § 101(10A) means the amount ofincome earned during the six months, regardless of the date of receipt); In re Robrock, 430 B.R. 197, 204 (Bankr. D. Minn. 2010) (same); In re Cruz, No. 0823419, 2008 WL 3346583, at *2 (Bankr. E.D. Wis. Aug. 11, 2008) (holding that“[w]hether income is included in CMI is determined by when the debtor receives funds, not when they are earned.”), relying on In re DeThample, 390 B.R. 716(Bankr. D. Kan. 2008); In re Burrell, 399 B.R. 620, 627 (Bankr. C.D. Ill. 2008)(holding that “derived during” was mere “surplusage adding nothing substantiveto the definition” of CMI); In re DeThample, 390 B.R. at 721 (holding that§ 101(10A) “include[s] every dime a debtor gets during the relevant period exceptfor those amounts specifically excluded”); In re Sanchez, No. 06-40886, 2006 WL2038616, at *2 (Bankr. W.D. Mo. July 13, 2006) (holding that “derived” islargely redundant of “received,” meaning “to take, receive, or obtain especiallyfrom a specified source,” and thus that CMI included all money received duringthe look-back period).
relies extensively on two prior Chapter 7 cases, Arnoux and Meade, 26 which merit additional discussion. First, Miller relies on Arnoux, but the definition of “derived” was not at issue in Arnoux, as both the Chapter 7 debtor and the UST apparently agreed that the term meant “earned.” The only dispute was whether income the debtor received after the look-back period, for work performed during that period, must be included in CMI. Debtor Arnoux argued (as does Miller) that income must be both received and earned in the look-back period, whereas the trustee argued (as does the UST here) that only the term “derived” is actually limited to the look-back period. The debtor had included all income she received during the look-back period, but had excluded a two-week payment for work performed during that period, but received outside of it.
The Arnoux trustee argued that the “natural reading” of § 101(10A) imposed two conditions on income inclusion (only one of which was subject to a time parameter): 1) it was received by the debtor, and 2) it was “derived” (i.e., earned) during the look-back period. Contrary to that trustee’s plain language assertion, the Arnoux court determined § 101(10A) to be ambiguous.27 It then considered the statute’s legislative history, concluding that the drafters intended the look-back period to apply to both “receives” and “derived.”28 Thus, the court held that income must be both received and earned during the look-back period, so income the debtor received outside of the look-back period but earned during it was excluded from the debtor’s CMI.
26 In re Arnoux, 442 B.R. 769 (Bankr. E.D. Wash. 2010); In re Meade, 420
B.R. 291 (Bankr. W.D. Va. 2009).
27 In re Arnoux, 442 B.R. at 776 (but disagreeing with the Burrell court’s assessment that the phrase “derived during” was in the statute as the “result ofpoor sentence construction and inartful drafting”).
Miller also relies on In re Meade29 to support his position. In Meade, the
principal dispute centered around whether the entire $9,000 annual bonus
received by one of the debtors during the November 1, 2008 through April 30,
2009 look-back period—theoretically for work done throughout 2008—should be
included.30 As the entirety of the bonus was received during the look-back
period, the trustee argued that it should all be included in calculating the debtors’
CMI. The Meades countered that “a common sense approach” would be to divide
the bonus into twelve months, rather than six, since it was an annual bonus.31
Significantly, the Meades had stipulated to their above-median status, and that the
statutory presumption of ability to pay their creditors arose under § 727(b)(2). As
such, the specific issue in Meade was whether debtors’ “disposable income”
(CMI, less allowed expenses, times sixty) exceeded the threshold for presumption
The Meade court elected to include only half of the annual bonus in the
debtors’ CMI. It did so based in large part on the parties’ agreement that the term
29 In re Meade, 420 B.R. at 291.
30 The debtor had also received a similar bonus of $9,000 in February 2008,and $8,500 in February of 2007, corroborating that the debtor’s receipt of annualbonuses, in this range, was the norm.
31 In re Meade, 420 B.R. at 301. The Meades did not argue, as they mighthave, that the entirety of the annual bonus was “earned” in calendar year 2008, inwhich case, only two months of the bonus (November and December) were both“earned” (or “derived”) and received during the look-back period. At most, thebonus likely was earned in only three months of the look-back period (Novemberthrough January), as bonuses are not typically paid in advance. Although thisargument was not made, the fact that it could have been under Miller’s reading of§ 101(10A) helps illustrate the UST’s argument that requiring income to be bothearned and received in the look-back period would, in many instances, increasethe complexity of determining the amount of income to include in CMI. Thus,although it is ordinarily simple enough to determine when regular pay (“earnedincome”) was “earned” as in the present case, other income, including bonuses,401(k) distributions, and other “passive income,” might be quite difficult to tie toa particular date other than when it was received.
32 See § 707(b)(2)(A)(i).
“derived,” as used in § 101(10A), meant “earned.” This is apparent from the
court’s discussion regarding the difficulty of prorating a bonus that was paid prior
to the look-back period under the parties’ statutory reading.33 The court then
“acknowledge[d] the conceptual difficulties” of its holding, but found them to be
no greater than the problem of using past income to determine what a debtor will
pay in a future repayment plan.34 Ultimately, however, the court granted the
trustee’s motion to dismiss the Meades’ case, finding that they had failed to rebut
the statutory presumption.35 Thus, Meade neither supports Miller’s assertion that
income must be both received and earned in the look-back period, nor does it hold
that the term “derived” means “earned.”
Although the statute is unambiguous, its legislative history and underlying
public policy also support our interpretation of the statute. As several courts have
already noted, the word “derived” was never used in the legislative history of
33 The court noted that there was authority in a Chapter 13 context to includesuch a non-look-back period payment in CMI, citing In re Foster, No. 05-50448,2006 WL 2621080 (Bankr. N.D. Ind. Sept. 11, 2006). Meade, 420 B.R. at 306.Because Foster involved facts well beyond the ones presented by the present case,we do not discuss it here.
34 In re Meade, 420 B.R. at 306-07. It is significant to note that the Meade court did not have the benefit of the Supreme Court’s 2010 decision in Hamilton
v. Lanning, 560 U.S. 505, 517 (2010), which held that determinations of projecteddisposable income should involve a “forward looking approach” that takes intoconsideration “known or virtually certain changes to debtors’ income orexpenses.” Although the Lanning decision did not discuss the issue of “receives” and “derived” with respect to inclusion of income in CMI, its holding is at leastarguably supportive of the UST’s position that while all income received shouldbe included in CMI, the continued accuracy of that income going forward may beraised by a debtor (at least in Chapter 13 cases) in connection with thedetermination of projected income. Thus, although the debtor in Lanning was treated as an above-median debtor based on her CMI, which included twosignificant, non-recurring buy-out payments from her former employer, theamount of her actual plan payment was based on her true income at the time ofplan confirmation.
35 One factor that led to dismissal of the Meades’ case was the court’s conclusion that debtor wife’s school teacher salary should not be prorated over 12months, but should instead be included in CMI as it had been actually received.
§ 101(10A), and very little was said about the statute at all.36 One of only two nearly identical legislative statements regarding CMI is found in a section-bysection discussion of BAPCPA’s 2005 overhaul of the Bankruptcy Code:
Section 102(b) of the Act amends section 101 of the Bankruptcy
Code to define “current monthly income” as the average monthly
income that the debtor receives (or in a joint case, the debtor and
debtor’s spouse receive) from all sources, without regard to whether
it is taxable income, in a specified six-month period preceding the
filing of the bankruptcy case.37 And as the Burrell court noted, “[t]he legislative history only makes reference to when income is received; nowhere is reference made to when the income is earned. The phrase ‘derived during’ is completely absent.”38 The legislative history thus supports a reading of the terms at issue here as merely synonymous.
Finally, the doctrine that we should be guided by the underlying public policy of the statute reinforces our interpretation of CMI as requiring inclusion of all income received by a debtor during the look-back period. As a general matter, remedial legislation should be construed in a way that effectuates its remedial purpose:
[R]emedial legislation, like BAPCPA, should be construed broadly to
effectuate its purpose. The means test was intended to screen
Chapter 7 individual debtor filings to determine who could pay a
significant portion of their debts over time. . . . BAPCPA intended to
force these debtors into Chapter 13 filings if they wanted bankruptcy
relief. The impetus behind this law was to ‘combat perceived fraud
and abusive [Chapter 7] filings.’ Thus BAPCPA is remedial in
nature.39 This Court is well aware of the remedial concerns BAPCPA was intended to address, and Miller is precisely the type of debtor who the drafters sought to
Kucharz, 418 B.R.635, 642 (Bankr. C.D. Ill. 2009) and Tcherepnin v. Knight, 389
36 See, e.g., In re Burrell, 399 B.R. 620, at 627 (Bankr. C.D. Ill. 2008).
37 H.R. Rep. No. 109-31, at 122, reprinted in 2005 U.S.C.C.A.N. 88.
38 In re Burrell, 399 B.R. at 626.
39 In re Gentry, 463 B.R. 526, 530 (Bankr. D. Colo. 2011), citing In re
U.S. 332, 336 (1967).
screen from use of Chapter 7—higher income debtors who have the ability to repay a portion of their unsecured debt, yet seek to instead have that debt
Miller receives bi-weekly salary payments, a very common employer payment method. Employees who are paid bi-weekly receive 13 paychecks in any six-month period. However, Miller’s interpretation of CMI would reduce that number to 12, thereby reducing the look-back period income of all bi-weekly paid debtors by nearly 8%, since one of those payments will have been earned before the period and paid during it, while another will be earned during the period and paid after it. Reading the statute to only include 12 bi-weekly payments would be inconsistent with its purpose, as it would not fairly capture an entire six-month’s worth of income. It was not Congress’s intent in enacting the BAPCPA “means test” to allow debtors to distort their actual income to avoid paying a fair share of their future income to their creditors.
Thus, even if we were to hold this statute ambiguous, an analysis of the legislative history, coupled with an appreciation of the statute’s remedial purpose, would dictate the same conclusion.
Although both parties present persuasive arguments on this difficult issue of statutory interpretation, we conclude that the plain meaning of § 101(10A) is that the term “current monthly income” includes all income a debtor receives in the look-back period, regardless when it was earned. Even were we to conclude that the statute was ambiguous, imposition of an additional requirement—that the
Although the math suggests Miller might have been able to pay as much as 72% of his unsecured debt ($42,000/$58,062), the UST contends, using data fromMiller’s own schedules I and J, that Miller could have paid his unsecuredcreditors as much as 50% of their claims over a 60-month repayment plan. See
U.S. Trustee’s Analysis of the Debtor(s) Schedules I & J, in Appx at 73-75.Regardless whether it is 50% or 72%, it is a significant recovery for creditors.
income also be earned during the look-back period—is supported neither by the statute’s language nor by legislative history, and we would ultimately define the term in the same way. Therefore, we affirm the bankruptcy court’s dismissal of Miller’s Chapter 7 case, pursuant to § 707(b)(2).
IOWA KANSAS KENTUCKY LOUISIANA MAINE MARYLAND MASSACHUSETTS MICHIGAN MINNESOTA MISSISSIPPI MISSOURI MONTANA NEBRASKA NEVADA NEW HAMPSHIRE NEW JERSEY NEW MEXICO NEW YORK NORTH CAROLINA NORTH DAKOTA OHIO OKLAHOMA OREGON PENNSYLVANIA RHODE ISLAND SOUTH CAROLINA $42,207 $42,577 $40,020 $37,967 $41,488 $58,269 $55,602 $45,029 $48,097 $36,240 $41,092 $42,301 $41,861 $44,924 $52,588 $61,146 $38,349 $47,790 $40,710 $41,557 $42,814 $40,665 $43,160 $47,439 $46,896 $39,238 $58,852 $56,851 $46,815 $47,731 $53,227 $73,685 $67,443 $52,621 $63,654 $43,095 $51,784 $54,362 $59,543 $55,674 $65,830 $69,697 $51,965 $59,308 $51,812 $61,492 $53,218 $51,575 $55,057 $55,210 $61,607 $50,548
$64,552 $78,366 $65,907 $76,402 $55,613 $67,783 $55,863 $70,347 $60,425 $79,931 $87,206 $108,915 $82,495 $103,624 $61,715 $73,864 $76,909 $89,126 $46,062 $59,248 $59,549 $72,150 $56,977 $67,055 $67,235 $77,057 $55,674 $66,562 $82,924 $99,457 $85,016 $103,786 $51,965 $61,617 $69,052 $83,209 $56,339 $64,983 $68,688 $86,653 $60,960 $74,270 $53,500 $64,374 $62,202 $67,315 $68,848 $82,078 $76,864 $83,785 $53,532 $61,388
SOUTH DAKOTA $38,071 $57,188 $65,829 $73,960
TENNESSEE $39,891 $48,617 $55,080 $65,038
TEXAS $41,225 $55,895 $60,503 $67,296
UTAH $50,976 $56,089 $63,430 $66,590
VERMONT $46,019 $61,702 $67,774 $85,750
VIRGINIA $53,328 $65,930 $77,585 $91,661
WASHINGTON $52,724 $65,123 $71,289 $83,270
WEST VIRGINIA $41,499 $44,536 $54,790 $66,756
WISCONSIN $43,661 $58,668 $65,775 $81,296
WYOMING $45,336 $63,193 $73,688 $78,733
* For cases filed on or before March 31, 2013, add $7,500 for each individual in excess of 4.
For cases filed on or after April 1, 2013, add $8,100 for each individual in excess of 4.
FAMILY SIZE COMMONWEALTH OR
U.S. TERRITORY 1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *
GUAM $38,410 $45,925 $52,334 $63,331 NORTHERN MARIANA ISLANDS $25,793 $25,793 $30,008 $44,137 PUERTO RICO $22,392 $22,392 $23,537 $28,180 VIRGIN ISLANDS $30,475 $36,627 $39,052 $42,785
* For cases filed on or before March 31, 2013, add $7,500 for each individual in excess of 4. For cases filed on or after April 1, 2013, add $8,100 for each individual in excess of 4.
FRIDAY, SEPTEMBER 27, 2013 10:49 AM
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