KSB

13-21855 Wilkinson (Doc. # 67)

In Re Wilkinson, 13-21855 (Bankr. D. Kan. Apr. 4, 2014) Doc. # 67

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The relief described hereinbelow is SO ORDERED.
SIGNED this 4th day of April, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re:

MARK ROBERT WILKINSON and Case No. 13-21855
THERESA JEAN WILKINSON,
Debtors.

ORDER DENYING TRUSTEE’S MOTION OBJECTING TO DISCHARGE

This matter is before the Court on the chapter 13 Trustee’s motion to deny discharge in
this case.1 The chapter 13 Trustee alleges that the Debtors are ineligible for discharge under 11

U.S.C. 1328(f).2 Section 1328(f) provides:
(f) Notwithstanding subsections (a) and (b), the court shall not grant a
discharge of all debts provided for in the plan or disallowed under section 502, if
the debtor has received a discharge-1
Doc. 12.

2 This matter is a core proceeding under 28 U.S.C. §157(b)(2)(A), (D), (G), (M), and (O). This Court has
jurisdiction under 28 U.S.C. §157 and 1334. Venue is proper pursuant to 28 U.S.C. §1408 and 1409. All future
statutory references are to the Bankruptcy Code (“Code”), as amended by the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, 11 U.S.C. §§ 101 - 1532, unless otherwise specifically noted.

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(1) in a case filed under chapter 7, 11, or 12 of this title during the
4-year period preceding the date of the order for relief under this chapter, or
(2) in a case filed under chapter 13 of this title during the 2-year
period preceding the date of such order.
The issue is whether under § 1328(f) “case filed under” should apply to the bankruptcy chapter
under which a case is originally filed or, following conversion under § 348, to the bankruptcy
chapter under which discharge was ultimately entered.3 For the reasons set forth below, this
Court finds that the term “case filed under” refers to the bankruptcy chapter under which the case
was initially filed under and not the bankruptcy chapter under which the discharge order was
ultimately entered. For this reason, the Court finds that the Debtors are eligible to receive a
discharge in this case under § 1328(a), and the Trustee’s motion is denied.

Background

Debtors previously filed a bankruptcy petition in the District of Kansas as Case No.
09-24357. The case was initially filed under chapter 13 and was twice converted before it was
ultimately discharged under chapter 7. A brief chronology of the events in the prior case that are
pertinent to the matter before the Court follows:

December 31, 2009 Chapter 13 case filed. Debtors did not obtain confirmation of their
chapter 13 plan.
August 6, 2010 Case converted to chapter 11 on Debtors’ motion.
April 25, 2011 Debtors’ chapter 11 plan confirmed.
January 21, 2013 Chapter 11 case converted to chapter 7 on Debtors’ motion.

3 Debtors appear by and through their attorney, Jonathan C. Becker, Lawrence, Kansas. William H.
Griffin, the chapter 13 Trustee, also appears.

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May 1, 2013 Chapter 7 discharge order entered.

The case sub judice was filed as a chapter 13 proceeding on July 21, 2013, and remains a
chapter 13 proceeding. The Trustee filed his motion objecting to discharge on July 23, 2013.4
Less than four years, but more than two years, have elapsed since the filing of the Debtors’
previous case and this case. The Trustee argues that it is the Bankruptcy Code chapter under
which the Debtors ultimately received a discharge and not the chapter under which the Debtors
filed their prior bankruptcy that determines the discharge eligibility waiting period under
§ 1328(f).

Analysis

The meaning of § 1328(f) is plain and the effects of the conversion of a bankruptcy case
under § 348 are precise. Section 348 provides:

(a) Conversion of a case from a case under one chapter of this title to a
case under another chapter of this title constitutes an order for relief under the
chapter to which the case is converted, but, except as provided in subsections (b)
and (c) of this section, does not effect a change in the date of the filing of the
petition, the commencement of the case, or the order for relief.
(b) Unless the court for cause orders otherwise, in sections 701(a),
727(a)(10), 727(b), 1102(a), 1110(a)(1), 1121(b), 1121(c), 1141(d)(4), 1201(a),
1221, 1228(a), 1301(a), and 1305(a) of this title, “the order for relief under this
chapter” in a chapter to which a case has been converted under section 706, 1112,
1208, or 1307 of this title means the conversion of such case to such chapter.
(c) Sections 342 and 365(d) of this title apply in a case that has been
converted under section 706, 1112, 1208, or 1307 of this title, as if the conversion
order were the order for relief.
(d) A claim against the estate or the debtor that arises after the order for
4 Doc. 12.
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relief but before conversion in a case that is converted under section 1112, 1208,
or 1307 of this title, other than a claim specified in section 503(b) of this title,
shall be treated for all purposes as if such claim had arisen immediately before the
date of the filing of the petition.

(e) Conversion of a case under section 706, 1112, 1208, or 1307 of this
title terminates the service of any trustee or examiner that is serving in the case
before such conversion.
(f)
(1) Except as provided in paragraph (2), when a case under chapter
13 of this title is converted to a case under another chapter under
this title-(
A) property of the estate in the converted case shall consist
of property of the estate, as of the date of filing of the petition, that
remains in the possession of or is under the control of the debtor on
the date of conversion;
(B) valuations of property and of allowed secured claims in
the chapter 13 case shall apply only in a case converted to a case
under chapter 11 or 12, but not in a case converted to a case under
chapter 7, with allowed secured claims in cases under chapters 11
and 12 reduced to the extent that they have been paid in
accordance with the chapter 13 plan; and
(C) with respect to cases converted from chapter 13-(
i) the claim of any creditor holding security as of
the date of the filing of the petition shall continue to be
secured by that security unless the full amount of such
claim determined under applicable nonbankruptcy law has
been paid in full as of the date of conversion,
notwithstanding any valuation or determination of the
amount of an allowed secured claim made for the purposes
of the case under chapter 13; and
(ii) unless a prebankruptcy default has been fully
cured under the plan at the time of conversion, in any
proceeding under this title or otherwise, the default shall
have the effect given under applicable nonbankruptcy law.
(2) If the debtor converts a case under chapter 13 of this title to a
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case under another chapter under this title in bad faith, the property
of the estate in the converted case shall consist of the property of
the estate as of the date of conversion.

A voluntary bankruptcy case is commenced by the filing of a petition for relief as provided in

§ 301:

(a) A voluntary case under a chapter of this title is commenced by the filing
with the bankruptcy court of a petition under such chapter by an entity that may
be a debtor under such chapter.
(b) The commencement of a voluntary case under a chapter of this title
constitutes an order for relief under such chapter.
For purposes of a voluntary bankruptcy, the Code defines a “petition” as a petition filed
under § 301 that commences a case under Title 11.5 Here, the Debtors’ previous bankruptcy case
was commenced by the filing of a voluntary petition filed under chapter 13.6 The filing with the
Bankruptcy Court of a petition for relief commences a voluntary case; further, the
commencement of the voluntary case constitutes an order for relief under the chapter of the Code
under which the petition is filed.7 While the petition that commences the bankruptcy case
triggers an order for relief, this is only one of many consequences of the filing of the petition; the
commencement of the case brings myriad consequences, obligations, and benefits under the law
of bankruptcy. Section 348 determines the limited effects of the conversion of a bankruptcy case
from one chapter to another chapter under the Code. Section 348 does not change the chapter

5 § 101(42).
6 Petition, Doc. 1, in Case No. 09-24357. The Court will restrict its discussion to voluntary cases
commenced under § 301.
7 § 301(b).
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under which the case was originally filed.8

Conversion of a case under § 348 from one chapter of the Code to another does not
change the petition date and only effects changes as provided in § 348.9 Unless a case is
converted from chapter 13 to chapter 7 in bad faith, the chapter 7 estate only includes the
property interests held by the debtor on the original chapter 13 petition date.10 In their prior case,
the Debtors’ first conversion was from chapter 13 to chapter 11, in which case the property
valuations and allowed secured claims are preserved from the chapter 13 case and these allowed
secured claims are reduced to the extent paid in the chapter 13 proceeding.11

Although conversion of a case from one chapter of the Code to another under § 348
constitutes an order for relief under the converted chapter, the “conversion does not affect the
dates of the filing of the petition, the commencement of the case or the order for relief, except as
provided in subsections (b) and (c) . . . .”12 Importantly, except as provided in § 348(b) and (c),
“the sections of the Code that are keyed to the dates of the filing of the petition, the
commencement of the case or the entry of the order for relief are unaffected by conversion.
Section 348(a) operates in conjunction with many other Code provisions.”13

8 In re Hamilton, 383 B.R. 469 (Bankr. W.D. Ark. 2008).

9 3 COLLIER ON BANKRUPTCY ¶ 348.01, at 348-4 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.
2013).

10 § 348(f)(2).

11 Id.

12 3 COLLIER ON BANKRUPTCY ¶ 348.02, at 348-7. Of course the conversion order triggers an order for
relief under the chapter to which the case is converted, but this merely effects the requirement of § 301(b) for a
voluntary petition. What is not changed is the chapter under which the petition and, by extension, the case was filed.

13 Id.

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Conversion does not result in a new petition. For instance, in Standiferd v. U.S.

Trustee, 14 the court held that a debtor was properly denied a discharge for refusal to obey a court
order even though that refusal occurred before a chapter 13 case was converted to a chapter 7
case. The conversion of a case from one chapter to another does not change the petition date for
purposes of calculating the chapter 7 discharge eligibility waiting period; a debtor could not file
a chapter 13 bankruptcy, allow the eight-year waiting period to expire under § 728(a)(8), and
then convert his or her case to a chapter 7 bankruptcy and receive a discharge.15

If the debtor converts a case from chapter 11 to chapter 7, as occurred in these Debtors’
prior case, property of the estate is determined as of the original petition date and not as of the
date of conversion.16 Likewise, when a case is converted from chapter 13 to chapter 7, property
held by the chapter 13 trustee is the debtor’s property, since case conversion terminates the
services of the chapter 13 trustee and the Code does not create an ownership interest in the
debtor’s property by the creditors.17 Following this theme in the Tenth Circuit, that court held in
In re Marcus18 that debtor’s exemptions are determined as of the original petition date and not

14 641 F.3d 1209 (10th Cir. 2011).

15 Of course, the fact that a debtor is not entitled to discharge does not prohibit the filing of a chapter 13 or
a chapter 7 bankruptcy; however, a debtor who files prior to the expiration of the time limits to receive a discharge
under the respective chapters is not entitled to a discharge. 6 COLLIER ON BANKRUPTCY ¶ 727.11[1][1], at 727-52
(Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2013).

16 See Casey v. Hochman, 963 F.2d 1347 (10th Cir. 1992).

17 3 COLLIER ON BANKRUPTCY ¶ 348.02[1], at 348-9.

18 1 F.3d 1050 (10th Cir. 1993).

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the date when the case is converted from chapter 13 to chapter 7.19 Debtors’ entitlement to a
homestead exemption is determined as of the original petition date for a chapter 11, and this
result is not affected by conversion.20

The analysis in Hall v. United States21 requires this Court to interpret the plain reading of
the changes in the 2005 Amendments, even if such interpretation could be at odds with
Congressional intent. Hall is a tax case in which the debtors were family farmers who filed a
chapter 12 bankruptcy. The debtors in Hall argued that the 2005 amendment that added
§ 1222(a)(2)(A) was intended to provide tax relief to family farmers under chapter 12.22
However, when it drafted the amendment, Congress did not recognize that a separate estate for
tax purposes is not created in chapter 12 proceedings. Despite the asserted intent of Congress to
provide tax relief to family farmers attendant to the post-petition disposition of estate property,
the Hall Court held that the 2005 Amendments did not accomplish this purpose because the
amendment provided relief from taxes incurred by the estate and in chapter 12 the estate is not
separately taxable.23 As a result, the debtor family farmer was personally liable for capital gains
taxes associated with the post-petition liquidation of farm assets used in the debtors’ farming

19 This result was later codified in § 348(f) which maintains the vitality of the original petition and
commencement date for most purposes. 3 COLLIER ON BANKRUPTCY, supra note 9, ¶ 348.07[1], at 348-07.
20 See Stinson v. Williamson (In re Williamson), 804 F.2d 1355 (5th Cir. 1986). Rule 1019 generally
addresses conversion of a case originally filed under chapters 11, 12 or 13 to a chapter 7 case.
21 132 S. Ct. 1882 (2012).
22 In part, the amendment provided that taxes incurred by the bankruptcy estate that arise from a debtor
family farmer’s post-petition sale of a farm asset is treated as a general unsecured claim.
23 Hall, 132 S. Ct. at 1887, 1888.
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operation. Writing for the majority, Justice Sotomayor stated: “Certainly, there may be
compelling policy reasons for treating postpetition income tax liabilities as dischargeable. But if
Congress intended that result, it did not so provide in the statute. Given the statute’s plain
language, context, and structure, it is not for us to rewrite the statute . . . .”24 The Tenth Circuit’s
statutory construction dictates are no less precise:

“Our primary task in construing statutes is to determine congressional intent,

using traditional tools of statutory interpretation.” See N.M. Cattle Growers Ass’n

v. U.S. Fish & Wildlife Serv., 248 F.3d 1277, 1281 (10th Cir. 2001). Supreme
Court “precedents make clear that the starting point for [the] analysis is the
statutory text. And where, as here, the words of the statute are unambiguous, the
judicial inquiry is complete.” Desert Palace, Inc. v. Costa, 539 U.S. 90, 98,
(2003) (citation and quotation omitted); see also Park ‘N Fly, Inc. v. Dollar Park
& Fly, Inc., 469 U.S. 189, 194, (1985) (“Statutory construction must begin with
the language employed by Congress and the assumption that the ordinary
meaning of that language accurately expresses the legislative purpose.”).25
“[I]f an act is unambiguous, that ends the matter and resort should not be had to

the statutory history.”26

Continuing, with respect to the absurdity doctrine and its application to statutory construction,

the Taylor court observed:

The absurdity doctrine applies to unambiguous statutes “as a means to avoid
applying the unequivocal language of a statute. But the doctrine has been strictly
limited.” Robbins v. Chronister, 435 F.3d 1238, 1241 (10th Cir. 2006) (en banc).
The absurdity doctrine applies “in only the most extreme of circumstances,” when
an interpretation of a statute “leads to results so gross as to shock the general
moral or common sense,” which is a “formidable hurdle” to the application of this
doctrine. United States v. Husted, 545 F.3d 1240, 1245 (10th Cir. 2008);
Robbins, 435 F.3d at 1241 (quotation omitted). It is not enough to show that

24 Id. at 1893.

25 In re Taylor, 737 F.3d 670, 678 (10th Cir. 2013).

26 Id. at 680, quoting Wyodak Res. Dev. Corp. v. United States, 637 F.3d 1127, 1135 (10th Cir. 2011).

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Congress intended a different result from the one produced by the plain language

of the statute. Robbins, 435 F.3d at 1241.

It Is the Chapter under Which the Debtors’ Prior Case Was Filed that
Determines the Lookback Period under § 1328(f)


The Trustee cites to the Court two cases in support of his position.27 Both cases applied
the language of § 1328(f) and § 348 and found that the lookback period for a debtor to be
eligible for discharge in a subsequent bankruptcy is determined by the chapter under which a
prior discharge was ultimately entered in a case and not by the chapter under which the case was
initially filed. The Grydzuk decision, issued shortly after BAPCPA became effective, is
interesting. The court concluded that § 1328(f)(1) is “an example of an ambiguity, not an
example of a literal construction leading to an absurd result. Obviously, the [author] who
actually authored this provision had no clue as to the fact that certain cases are initiated under
one chapter of the Bankruptcy Code, and end up with a discharge being granted under another
chapter.”28 The Grydzuk court surmised that § 1328(f) was crafted to combat the “infidel
concept of a ‘20’, i.e., the filing of a chapter 7 to eliminate debts which might be
discharged,”. . . followed by the filing of chapter 13 bankruptcy to address debt that is not
dischargeable in a chapter 7 bankruptcy.29 However, these comments are supposition by the
court and there is no citation to authority to support this conclusion.30 The court also observed

27 In re Grydzuk, 353 B.R. 564 (Bankr. N.D. Ind. 2006); In re Finney, 486 B.R. 177 (B.A.P. 9th Cir. 2013).

28 Grydzuk, 353 B.R. at 567.

29 In re Grydzuk, 353 B.R. 564 (Bankr. N.D. Ind. 2006).

30 Id. at 568.

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that § 1328(f)(1) is “not really very ambiguous.”31 The court concluded that in “a very strict and
literal sense,”32 the debtor’s case was filed under the chapter to which it is converted, in part
because under § 348 conversion results in “an order for relief under the chapter to which the
case is converted . . . (emphasis in original). Thus, upon conversion, the order for relief--the
critical component in the initiation of a bankruptcy case--became ‘an order for relief under the
chapter to which the case was converted’, i.e., chapter 7. Thus, the case became ‘filed under’
chapter 7 [the converted chapter] rather than chapter 13 [the original chapter].”33 However, the
critical component in the commencement of a bankruptcy is not the order for relief, but the
petition itself. The order for relief is merely one of the consequences when a bankruptcy petition
is filed and a case is commenced. Contrary to the Grydzuk court’s conclusion, although § 348(a)
creates an order for relief under the converted chapter, the effect of a case conversion is limited
under § 348(a) and does not change the chapter the case “was filed under.”

The Grydzuk court also supported its finding based on the language of § 301(a), which
provides for the filing of a voluntary bankruptcy; however, this subsection only provides that a
bankruptcy case is commenced by the filing with the bankruptcy court of a petition under a
chapter for which the debtor qualifies. Nothing in § 301(a) supports the notion that conversion
of a bankruptcy case from one chapter to another alters the chapter under which a case is filed; if
anything, the language supports the conclusion that conversion does not effect any change to the

31 Id.

32 Id.

33 Id.

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chapter under which a case is filed. The Grydzuk court concluded that the effect of § 348(a) is to
literally render a debtor’s converted case that was initially filed under one chapter to a case filed
under the converted chapter and that “it is clear that the discharge referred to in 11 U.S.C.
§ 1328(f)(1) refers to the chapter under which the discharge was actually entered, rather than the
chapter under which the case was initiated.”34 In reviewing the pertinent statutes, this Court
respectfully disagrees with the Grydzuk decision. The language of § 1328(f)(1) is not
ambiguous; one posits, what is the ambiguity in the phrase “case filed under” to which the
Grydzuk decision refers? The plain language of § 348(a) does not change the chapter under
which a debtor’s case is filed, and the language of § 1328(f) does not refer to the chapter under
which discharge is ultimately entered as opposed to the chapter the case “was filed under.”

The Trustee also relies on In re Finney. 35 The Finney court notes that “Section 1328(f)
establishes a ‘look back period’ for measuring when a debtor may receive a discharge in a
subsequent bankruptcy case.”36 The Finney court agreed with the chapter 13 trustee’s argument
that when a bankruptcy case is filed under one chapter of the Code and then later converted to
another chapter, the case is deemed to have been filed under the converted chapter.37 Such is not
the effect of § 348. The Finney court also reached the rather anomalous conclusion that a
converted bankruptcy case can be characterized as filed under both chapters “but the discharge is

34 Id.

35 486 B.R. 177 (B.A.P. 9th Cir. 2013)

36 Finney, 486 B.R. at 180.

37 Id. at 180-181.

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only entered in” the chapter to which the case is converted.38 The court cited the Grydzuk
decision and relied in part on the fact that § 348(a) provides that an order for relief is issued
under the converted chapter.39 However, as noted above, § 348(a) is a limiting statute and does
not change the chapter under which a bankruptcy case is filed. The Finney court also stated that
§ 348(a) “effectively converts” a case filed under one chapter of the Code to one filed under the
converted chapter; this conclusion is not supported by a plain reading of § 348(a). Section 348
does not change the plain language of § 1328(f) and the lookback period. Unlike the Grydzuk
decision, the Finney court hangs its hat on the peg of legislative history, but since the language
of the statute is not ambiguous, this Court is compelled to comply with its plain meaning.
Justice Sotomayor, writing for the majority in In re Hall, touched on the issue of legislative
history that could be interpreted as contrary to that Court’s holding,40 and the Justice was not
persuaded but employed the plain meaning of the statute.41 As noted above, Justice Sotomayor
commented that even if the legislative history were an indication of what Congress intended,
then Congress did not accomplish this task by the language employed in the statute.42 Here, the
result urged by the chapter 13 Trustee is not supported by the plain language in §§ 1328(f) and

348.
38 Id. at page 181.

39 Id. at 181.

40 Hall, 132 S. Ct. at 1892.

41 Id. 1893.

42 Id. at 1893.

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The Finney court implies that a contrary reading to its holding may be illogical.43 This
Court does not agree with this observation, but even if it were accurate, illogical is not the same
as absurd, and it cannot drive this Court away from employing the plain reading of the statutory
language. Although this Court’s interpretation is nuanced, it is neither illogical nor absurd, and
it is arguably less nuanced than the Grydzuk and Finney decisions. Of course, many aspects of
bankruptcy are nuanced.44 Competent bankruptcy counsel engage in extensive inquiry into the
debtor’s finances, as well as the debtor’s emotional state, before a decision is made whether to
file bankruptcy, and if to file bankruptcy, under what chapter. There are many other
considerations, including the various lookback periods that affect when a debtor can file another
bankruptcy and receive a discharge. It is fully compatible with the pre-bankruptcy decision-
making process that one of the debtor’s considerations is that the chapter under which a
bankruptcy petition is initially filed will dictate the lookback period for future eligibility to
receive a discharge in the event that the case is later converted to another chapter.

The Finney court observed that “the vast majority of courts that have considered the issue
support . . .”45 the notion that it is the converted chapter that determines the lookback period for

43 Finney, 486 B.R. at 181, quoting from and citing to McDow v. Capers (In re Capers), 347 B.R. 169,
171-72 (Bankr. D.S.C. 2006).

44 For example, writing for the majority, Justice Scalia observed: “The Bankruptcy Code standardizes an
expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably
using well established principles of statutory construction.” RadLAX Gateway Hotel, LLC v. Amalgamated Bank,
132 S. Ct. 2065, 2073 (2012) (concluding that a secured creditor’s right to credit bid under § 363(k) cannot be
eviscerated in a chapter 11 plan of reorganization). Justice Scalia’s regard for the Bankruptcy Code continued when
he explained the work of the Supreme Court: “Most of the time we are doing real law: We’re figuring out the
meaning of the Bankruptcy Code, the Internal Revenue Code. That is hard and really dull stuff.”
(http://www.houstonchronicle.com/news/houston-texas/houston/article/At-Houston-lecture-Scalia-explores-Christian
-4794443.php?t=1c711cf5704c5e314b).

45 Finney, 486 B.R. at 181.

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discharge eligibility in a later case. Swimming against this current is In re Hamilton. 46 In this
decision, the bankruptcy court concluded that it is the original chapter under which a bankruptcy
petition is filed that controls the debtor’s future eligibility to receive a discharge, i.e., “the look
back period.” Finney well summarizes the Hamilton court’s analysis (and then disagrees with
it):

Under the Hamilton court’s analysis, (1) § 301(a) provides that “[a] voluntary
case under a chapter of this title is commenced by the filing with the bankruptcy
court of a petition under such chapter by an entity that may be a debtor under such
chapter”; (2) § 348(a) explicitly provides that conversion of a case does not effect
a change in the commencement date for the case; and (3) Congress could easily
have stated that the “look back period” set in § 1328(f) is determined based on the
chapter under which a prior discharge was entered, which it did not do.47

Ironically, the Finney court noted that since the discharge eligibility lookback period is
not tolled by a bankruptcy filing, then if Finney’s [debtor’s] bankruptcy case were dismissed, she
would then be eligible for a chapter 13 discharge since the four-year lookback period under
§ 1328(f)(1) had expired during the pendency of the case.48 This is another nuance of § 1328(f)
that is no more illogical than this Court’s or the Hamilton court’s conclusions. This Court agrees
with the Hamilton court’s analysis and that: “Upon conversion, the date of filing does not
change, nor does the fact that the case was originally filed under chapter 13.”49 As observed by
the Hamilton court, if this Court were to adopt the Trustee’s position, then this Court would have

46 383 B.R. 469 (Bankr. W.D. Ark. 2008).

47 Id.

48 Id. at 182, 183 n.3. See also 3 COLLIER ON BANKRUPTCY ¶ 1328.06[2], at 1328-33 (Alan N. Resnick &
Henry J. Sommer, eds., 16th ed. 2013). “[A]n unsuccessful chapter 13 case filed before the time period set forth in
section 1328(f)(2) has expired should not toll the running of that period.”

49 Hamilton, 383 B.R. at 471.

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to find that when the Debtors’ previous chapter 13 case was ultimately converted to a chapter 7
case, “the Chapter 13 case originally filed by the debtor did not exist.”50

Here, the Debtors’ prior case was filed under chapter 13 and the conversion to a chapter 7
case does not mean that the original case is deemed to have been filed under chapter 7. “Upon
conversion, the date of filing does not change, nor does the fact that the case was originally filed
under chapter 13.”51 A new order for relief under § 348(a) to one under the converted chapter
does not affect the original petition date or the chapter under which the original petition was
filed. Conversion does not alter the fact that these Debtors’ prior case was filed under chapter 13
and not under chapter 7. The plain language of § 348(a) provides that conversion of a case does
not effect a change to the date of the original order for relief-- which in this case is an order for
relief under chapter 13. This plain language construction is supported by the Standiferd court’s
interpretation and application of § 348(a):

Under § 348(a), the conversion of a case from one chapter of the Code to another
“constitutes an order for relief under the chapter to which the case is converted,
but ... does not effect a change in the date of the filing of the petition, the
commencement of the case, or the order for relief.” § 348(a) (emphasis added). In
other words, a converted case is commenced on the date the initial bankruptcy
petition was filed, not on the date it was converted. Thus, the plain language of §
348(a) clearly provides that, upon conversion, “the case” includes the proceedings
that occur both before and after conversion. Consequently, when a debtor
converts his case from Chapter 13 to Chapter 7, discharge may be denied under §
727(a)(6)(A) based on the debtor's refusal to obey a lawful order of the court
while the case was proceeding under Chapter 13.52

50 Id. at 470.

51 Id. at 471.
52 Standiferd v. U.S. Trustee, 641 F.3d 1209, 1215 (10th Cir. 2011).
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The integrity of the Debtors’ prior chapter 13 petition and the case commencement is maintained
upon conversion. Section 348 does not state that conversion of a case to another chapter
commences a bankruptcy case--it is a “housekeeping” statute that addresses the limited effects of
a case conversion.

Conclusion

For purposes of § 1328(f), the term “case filed under” refers to the bankruptcy chapter
under which the Debtors’ prior case was intially filed and not to the chapter under which the
discharge order was ultimately entered. The conversion of the Debtors’ prior chapter 13 case,
first to one under chapter 11 and ultimately to one under chapter 7, does not alter this rule
despite the fact that the Debtors’ case was discharged under chapter 7. Since the Debtors’ prior
bankruptcy case was filed under chapter 13 of the Code, it is the § 1328(f)(2) two-year lookback
period for previously filed chapter 13 bankruptcy cases that applies to the Debtors’ eligibility to
receive a discharge in this case. Since more than two years had expired between the time the
Debtors’ prior chapter 13 case was filed and this case was filed, the Debtors are eligible to
receive a discharge in this chapter 13 case. The Trustee’s motion objecting to discharge is
denied.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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11-06263 Rajala, Ch 7 Trustee v. Martin, Jr. et al (Doc. # 59)

Rajala, Ch 7 Trustee v. Martin, Jr. et al, 11-06263 (Bankr. D. Kan. Mar. 25, 2014) Doc. # 59

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 24th day of March, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

CONVENIENCE XPRESS, INC., Case No. 10-20052-7
Debtor.
In re:
CONVENIENCE USA, L.P., Case No. 10-20053-7

ERIC C. RAJALA, CHAPTER 7 TRUSTEE,
Plaintiff,
v. Adv. Nos. 11-6263; 11-6264
Consolidated Case No. 11-6263
WILLIAM MARTIN, JR., MIKE BOYS,
and M&W MIDWEST PROPERTIES, LLC,
Defendants.

ORDER DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

This matter is before the Court on the motion for summary judgment of Plaintiff Eric C.

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Rajala, Chapter 7 Trustee.1 The Trustee appears by his attorney, Stephen G. Mirakian of Wyrsch
Hobbs Mirakian, P.C., Kansas City, Missouri. The Defendant William Martin, Jr., appears by
his attorneys, Jeffrey A. Deines and Shane J. McCall of Lentz Clark Deines, P.A., Overland
Park, Kansas. Defendant Mike Boys appears by his attorney, James S. Willard, Topeka, Kansas.
M&W Midwest Properties appears pro se. After reviewing the pleadings and considering the
Trustee’s arguments, the Court is prepared to rule.

The Trustee of the bankruptcy estates of Debtors Convenience Xpress, Inc.
(“Convenience Xpress”), and Convenience USA, L.P. (“Convenience USA”), sued Defendants
William Martin, Jr., Howard “Mike” Boys, and M&W Midwest Properties (“M&W”) to recover
allegedly fraudulently transferred property under 11 U.S.C. § 548 and § 544 and preferential
transfers under § 547.2 Identical adversaries were filed stemming from the bankruptcy cases of
both Convenience entities, and the adversaries were consolidated as companion cases under case
number 11-6263. Defendant Martin thereafter filed his own chapter 7 bankruptcy petition,
staying further action against him personally. Defendant M&W, however, entered into an agreed
journal entry of judgment with the Trustee, agreeing to forego litigation of Plaintiff’s complaint
and agreeing to a judgment against it of $600,000.

The Trustee has now filed his motion for summary judgment against Defendant Boys,
arguing that he is entitled to avoid the transfer of Convenience assets to M&W in July 2008
under § 548(a)(1)(B)(i) and (ii)(I) and under § 544(b)(1). The Trustee did not move for summary

1 Doc. 55.

2 All future statutory references are to the Bankruptcy Code (“Code”), as amended by the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101-1532,
unless otherwise specifically noted.

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judgment on his § 547 preferential transfer claim. Boys did not file a response to the Trustee’s
motion; the Trustee’s motion is unopposed. For the reasons set forth in more detail below, the
Trustee’s motion is denied. The parties will submit a final pretrial order within 45 days from the
entry of this order; at that time an evidentiary hearing will be scheduled.

I. Background and Findings of Fact3
Debtor Convenience Xpress is the general partner of Debtor Convenience USA.4
Defendant Boys, since 2003, has been a 50 percent shareholder of Convenience Xpress;
Defendant Martin owned the other 50 percent. Boys and Martin were the sole shareholders,
officers, and directors of Convenience Xpress, although Martin handled the day-to-day
operations of the company. The offices of Convenience Xpress, Convenience USA, and
Defendant M&W were all in the same location, and Defendant Martin was the president of all
three companies.5 An employee of Convenience USA (who reported directly to Martin) was
responsible for much of the day-to-day business of that company; the Convenience Xpress
company itself had no employees, no bank accounts, and no assets--it apparently existed solely

3 The Trustee’s motion for summary judgment states 28 “undisputed or incontrovertible
facts,” with citations to the record. The citations given, however, often do not support the “fact”
stated, and many are apparently incorrect. The Court has attempted to compile the facts with the
information given that was correctly supported or from facts that could be readily found in the
record provided.

4 Although never stated in the Trustee’s motion, the Court has gleaned from the record
that the Convenience entities and M&W operated in the fuel supply and convenience/gas store
business.

5 The Trustee’s motion for summary judgment, statement of fact number 2, states that
Martin and Boys were the sole members of M&W for the relevant time period. The record
citation, however, does not support this fact and instead expressly denies it. This is an example
of the Trustee’s alleged uncontroverted facts not being not supported by his record citations.

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as the holding company of Convenience USA.

In July 2007, M&W purchased two properties from Convenience USA and then leased
the properties back to Convenience USA. In order to make this purchase, M&W borrowed
approximately $700,000 and both Martin and Boys personally guaranteed repayment of this
loan. By the end of 2007, Convenience USA’s liabilities exceeded its assets, leaving it with a
negative net equity.

The situation did not improve in early 2008. In January and February 2008, Convenience
USA suffered further losses due to level expenses but decreasing sales. Boys attended a March 8,
2008, stockholder meeting for Convenience USA and received copies of the Convenience USA
profit and loss statements and a treasurer’s report. By the end of May 2008, Convenience USA’s
assets totaled only $240,468.13. Convenience USA also had a $300,000 letter of credit.
Convenience USA was consistently losing money on an annual basis. Despite this, during May
and June 2008, Convenience USA obtained approximately $1.4 million worth of fuel products
from two creditors: Growmark and Sinclair Oil.

Mr. Boys was aware that Convenience USA owed money for fuel purchases from
Sinclair Oil and that it could not pay the amount due. Boys would not have authorized a payment
draft, knowing that the funds were not available for payment. As of June 12, 2008, Boys knew
that Convenience USA owed approximately $700,000 to suppliers. Mr. Martin testified in his
deposition that when Convenience USA was purchasing product from suppliers like Sinclair Oil
and Growmark in early 2008, he did not think anybody was going to pay for the product

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“because it was too far gone.”6 Martin knew Convenience USA was in trouble in early 2008,
which is when it made the fuel purchases. Convenience USA attempted payment to Sinclair Oil
throughout early June 2008, but approximately $900,000 in payments from Convenience USA
were returned as having been drawn on insufficient funds.

As of June 2008, Convenience USA also owed money to M&W for past-due rent
payments for the buildings Convenience USA leased from M&W. By letter dated June 2, 2008,
Boys, on behalf of M&W, made demand upon Convenience USA for payment of past due rent
and informed Convenience USA that unless rent were paid by July 1, M&W would assume
control of all Convenience USA facilities, including inventory at such locations.

Sinclair Oil officially notified Martin and Convenience Xpress that Convenience USA
was in default of the parties’ distributorship agreement on June 5, 2008, and made demand for
payment. Also on June 5, Martin sent a letter to all Convenience USA partners informing them
that drafts to fuel suppliers were not going to clear and that when that happened, the fuel supply
would be cut off. Martin’s letter stated:

At that point we will no longer be able to service our debt and everything goes

down hill from that point. . . .The assets that Convenience USA LP presently

have, [sic] will automatically go to the bank to cover loans. If the loans and drafts,

that are currently due, [sic] cannot be covered, it will be necessary to file for

bankruptcy of Convenience USA LP. (Emphasis in original.)7

Convenience USA made no rent payments to M&W and, based on the joint decision of
Martin and Boys, M&W took over Convenience USA’s operations on July 2, 2008 (except for

6 Doc. 55, Ex. B, at 12 (Deposition of William Mace Martin, Jr., in Case No.
08 CV 07017 in the District Court of Johnson County, Kansas, captioned “Sinclair Oil
Corporation v. Convenience, USA, L.P., et al., 44:23).

7 Doc. 55, Ex. L, at 3.

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one store in Plainville, Kansas). From that point, all of Convenience USA’s revenue from
business operations was received by M&W. M&W stopped taking Sinclair Oil credit cards, even
though M&W was still selling under the Sinclair sign and logos. (If a Sinclair Oil credit card
were accepted, the payment would have gone directly to Sinclair Oil, rather than to M&W.) The
primary purpose of Convenience USA transferring all of its inventory and operation income to
M&W was so that M&W did not default on its debt obligations, which would have also resulted
in both Martin and Boys having their personal guarantees on those debts enforced. Martin and
Boys prevented default on the M&W debt, and the personal guarantees were not called. Neither
Sinclair Oil nor Growmark, however, received payment on the debt owed to them, despite
Convenience USA having approximately $2.2 million in fuel sales from June through August
2008. Further, although M&W assumed the income and inventory of Convenience USA, it did
not assume Convenience USA’s debt obligations. As of July 3, 2008, after application of a line
of credit, Convenience USA owed Growmark approximately $324,000. Sinclair Oil also applied
its line of credit, and Convenience USA owed Sinclair Oil approximately $500,000.

In January 2010, Debtors Convenience Xpress and Convenience USA filed chapter 7
bankruptcy petitions, each listing more than $1.25 million in debt. As stated above, the Trustee
then filed the adversary complaints at issue herein.

II. Analysis
A. Standard for Motion for Summary Judgment
An adversary proceeding to determine, avoid, or recover fraudulent conveyances is a core
proceeding under 28 U.S.C. § 157(b)(2)(H) over which this Court may exercise subject matter

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jurisdiction.8

Summary judgment is appropriate if the movant shows that there is no genuine dispute as
to any material fact and that the movant is entitled to judgment as a matter of law.9 The moving
party bears the initial burden of demonstrating--by reference to pleadings, depositions, answers
to interrogatories, admissions, and affidavits--the absence of genuine issues of material fact.10 In
making this determination, the Court draws all reasonable inferences in favor of the non-moving
party.11

This standard is “somewhat modified in an unopposed motion for summary judgment,”12
which is the case herein. “It is improper to grant a motion for summary judgment simply because
it is unopposed.”13 Rather, the court must be “certain that the uncontroverted facts as established
by the unopposed motion for summary judgment reveal no undisclosed factual dispute and
constitute a sufficient legal basis for this court to grant plaintiffs [sic] judgment as a matter of
law.”14

The Trustee bears the burden of proof to establish each element of his claim under

8 28 U.S.C. § 157(b)(1) and § 1334(b).

9 FED. R. CIV. P. 56(a); FED. R. BANKR. P. 7056.

10 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

11 Taylor v. Roswell Indep. Sch. Dist., 713 F.3d 25, 34 (10th Cir. 2013).

12 Thomas v. Bruce, 428 F. Supp. 2d 1161, 1163 (D. Kan. 2006).

13 E.E.O.C. v. Lady Baltimore Foods, Inc., 643 F. Supp. 406, 407 (D. Kan. 1986).

14 Id.

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§ 548.15 The Trustee also bears the burden to establish fraud by clear and convincing evidence to
support his § 544(b) claim.16

B. § 548(a)(1)(B)(i) and (ii)(I)
The Trustee seeks to avoid the transfer of the Convenience assets to M&W in July 2008

under § 548(a)(1)(B)(i) and (ii)(I). Those statutory subsections state:

(a)(1) The trustee may avoid any transfer (including any transfer to or for the

benefit of an insider under an employment contract) of an interest of the debtor in

property . . . that was made or incurred on or within 2 years before the date of the

filing of the petition, if the debtor voluntarily or involuntarily-


. . .

(B) (i) received less than a reasonably equivalent value in
exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made
. . ., or became insolvent as a result of such transfer . . . .

To summarize the statute, under this subsection, the Trustee must, therefore, prove: (1) a transfer
of an interest of the Convenience entities in property; (2) the transfer was made or incurred
within two years before the date of the bankruptcy petition of the Convenience entities; (3) the
Convenience entities received less than a reasonably equivalent value in exchange for the
transfer; and (4) the Convenience entities were insolvent either on the date the transfer was made
or became insolvent as a result of the transfer.

This Court need spend no more time on this claim than Trustee’s counsel did on the
motion for summary judgment--which is to say, almost none. First as to Convenience Xpress, the

15 See Zubrod v. Keffer (In re Keffer), Case No. BAP WY-03-071, 2004 WL 632875, at
*2 (B.A.P. 10th Cir. Mar. 26, 2004) (noting that the trustee has the burden of proof for
reasonably equivalent value and constructive fraud avoidance claims under § 548).

16 Gaddis v. Allison, 234 B.R. 805, 811 (D. Kan. 1999).

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Trustee has set forth no facts showing that Convenience Xpress transferred an interest in

property to M&W in any way, and the Trustee’s claim therefore necessarily fails at the very first

step of the multi-element § 548 claim. Second, as to Convenience USA, although the Trustee has

detailed the transfer of the Convenience USA assets to M&W on July 2, 2008, and therefore

addresses steps one and two of the § 548 claim, the Trustee makes no effort to show that

Convenience USA received less than reasonably equivalent value in exchange for the transfer;17

that Convenience USA was insolvent when the transfer was made; or that Convenience USA

became insolvent as a result of the transfer.18 As a result, the Trustee fails to show that he is

17 The Trustee barely mentions reasonably equivalent value and certainly makes no
reasoned argument on the subject.

Although the Bankruptcy Code does not define the phrase “reasonably equivalent value,”
there is law on the subject. Section 548(d)(2)(A) defines the term “value” as “property, or
satisfaction or securing of a present or antecedent debt of the debtor, but [it] does not include an
unperformed promise to furnish support to the debtor or to a relative of the debtor.” The
Supreme Court addressed the phrase “reasonably equivalent value” in BFP v. Resolution Trust
Co., and stated that the question of reasonably equivalent value asks “whether the debtor has
received value that is substantially comparable to the worth of the transferred property . . . .” 511

U.S. 531, 548 (1994). The Court also stated that reasonably equivalent value typically has a
meaning similar to “fair market value.” Id. at 545. Comparing transfers to antecedent debt is one
method of assessing reasonably equivalent value. See, e.g., Jobin v. McKay (In re M&L Bus.
Mach. Co.), 84 F.3d 1330, 1340–41 (10th Cir. 1996) (concluding debtor received reasonably
equivalent value because of a reduction of a claim for restitution, due to the debtor owing
antecedent debt at the time the transfer arose to reduce the claim).
18 Regarding insolvency, the Trustee makes statements relating to insolvency in his
statement of facts, but never makes a legal argument regarding insolvency. And again,
insolvency must be established with reference to the applicable law. See, e.g., § 101(32)(A)
(stating the definition of “insolvent” as “the sum of such entity’s debts is greater than all of such
entity’s property, at a fair valuation, exclusive of-- (i) property transferred, concealed, or
removed with intent to hinder, delay or defraud such entity’s creditors; and (ii) property that may
be exempted from property of the estate under section 522 of this title”); see also Sherman v.
Rose (In re Sherman), Case No. 00-8052, 2001 WL 997946, at *3 (10th Cir. 2001) (discussing
approaches to measuring solvency); Stillwater Nat’l Bank & Trust v. Kirtley (In re Solomon),
299 B.R. 626, 628–39 (B.A.P. 10th Cir. 2003) (same).

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entitled to judgment as a matter of law on his claim under § 548(a)(1)(B)(i) and (ii)(I). The
Trustee’s motion for summary judgment must, therefore, be denied on this claim.

C. § 544(b)(1)
The Trustee also seeks summary judgment on his claim under § 544(b)(1), which states
that a “trustee may avoid any transfer of an interest of the debtor in property or any obligation
incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured
claim that is allowable under section 502 of this title or that is not allowable only under section
502(e) of this title.” The Trustee argues that the transfer from Convenience USA to M&W is
avoidable in Kansas under the Kansas Uniform Fraudulent Transfer Act (“UFTA”), K.S.A. § 33


102. The Kansas UFTA states:
Every gift, grant or conveyance of lands, tenements, hereditaments, rents, goods or
chattels, and every bond, judgment or execution, made or obtained with intent to
hinder, delay or defraud creditors of their just and lawful debts or damages, or to
defraud or to deceive the person or persons who shall purchase such lands,
tenements, hereditaments, rents, goods or chattels, shall be deemed utterly void and
of no effect.
Essentially, the Trustee argues that the transfer from Convenience USA to M&W was a
fraudulent conveyance under the UFTA, that the transfer was therefore void under Kansas law,
and because of that, the Trustee can avoid the transfer under § 544(b)(1).

To state a claim for fraudulent conveyance, the Trustee must prove two elements: “first,
an intent on the part of the grantor to hinder, delay or defraud his creditors and second, the
participation of the grantee in such fraudulent scheme or such knowledge on the latter’s part of
facts and circumstances as would import knowledge of the fraud to him.”19 Because direct

19 City of Ark. City v. Anderson, 243 Kan. 627, 632 (Kan. 1988) (internal quotation
marks omitted).

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evidence of fraud is “not always available,” fraud may also be established by circumstantial
evidence and the particular conduct of the parties, details of the transaction at issue, and the
totality of the surrounding circumstances.20 The Kansas Supreme Court recognizes six “badges”
or indicia of fraud to aid in this determination:

(1) a relationship between the grantor and grantee; (2) the grantee’s knowledge of
litigation against the grantor; (3) insolvency of the grantor; (4) a belief on the
grantee’s part that the contract was the grantor’s last asset subject to a Kansas
execution; (5) inadequacy of consideration; and (6) consummation of the transaction
contrary to normal business procedures.21
The badges are not intended to be exclusive.22

There is no direct evidence presented in this case: the Trustee has shown no
uncontroverted facts that establish the actual intent by Convenience USA to defraud or the intent
of M&W to engage or participate in fraud. The Trustee argues circumstantial evidence—the
badges of fraud—however, to prove his case. The Trustee first points out that Convenience USA
had no reasonable ability to pay for more than $1,000,000 of fuel products from Sinclair Oil and
Growmark. Boys and Martin also knew that approximately $900,000 had been rejected by
Sinclair Oil for insufficient funds. Convenience USA then transferred all of its assets to M&W,
including all income and inventory. The Trustee argues that these facts show a close relationship
between the grantor and grantee, the insolvency of the grantor, a transfer of the “last assets” of
the grantor, and an intent to hinder and delay creditors from obtaining payment on debts.

20 Gaddis v. Allison, 234 B.R. 805, 811 (D. Kan. 1999).
21 Credit Union of Am. v. Myers, 234 Kan. 773, 778 (Kan. 1984) (citing Polk v. Polk, 210
Kan. 107, 110 (Kan. 1972)).
22 Koch Eng’g Co. v. Faulconer, 239 Kan. 101, 105, 716 P.2d 180, 185 (Kan. 1986).
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Further, the Trustee argues that the fact that Boys and Martin were personal guarantors of the
debt of M&W shows that the purpose of the transfer was to protect Boys and Martin, rather than
a normal business transaction.

The Trustee’s motion fails on his § 544(b)(1) claim as well. Starting again with the
Trustee’s claim related to Convenience Xpress, there was no transfer made by Convenience
Xpress in the Trustee’s facts, so there is no possible cause of action under § 544(b)(1) related to
Convenience Xpress. As to Convenience USA, although the Trustee has shown facts that could
potentially support his claim against M&W, the Trustee has made no effort to pinpoint Boys’
liability as separate and distinct from M&W. Essentially, the Trustee must impute the transfer
that was made from Convenience USA to M&W personally to Boys, and he has made no effort
to do so. Although the Trustee points out that Boys was the 50 percent shareholder of
Convenience Xpress, which was the general partner of Convenience USA, and alleges that Boys
was also a 50 percent member of M&W,23 he makes no argument as to how or why the corporate
veil of M&W should be pierced as to Boys.24 In addition, the Trustee never alleges that Boys
personally received any transfer of funds from either Convenience entity. As a result, the Trustee
has again failed to establish that he is entitled to judgment as a matter of law against Boys under
§ 544(b)(1).

23 This alleged fact was not supported by the Trustee’s record citation.

24 Generally, in Kansas, the corporate form is presumed to be separate and distinct from
individual members, and to disregard the corporate form and impose liability on individuals, a
court must consider a multi-factor test. See, e.g., Parks v. Anderson, 406 B.R. 79, 95-96 (D. Kan.
2009) (discussing alter ego doctrine and general rules of law related thereto). The Court states no
position as to whether the Trustee could establish these elements, just that he has not attempted
to do so with this motion for summary judgment.

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III. Conclusion
For the reasons set forth above, the Court finds that Plaintiff has not met his burden to
support his motion for summary judgment, and as a result, the motion must be denied. The
parties will submit a final pretrial order within 45 days from the entry of this order; an
evidentiary hearing will then be scheduled.

It is, therefore, by the Court ordered that the motion for summary judgment25 is
denied.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
25 Doc. 55.

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13-06062 Turkal v. Viera Condominium Association et al (Doc. # 34)

Turkal v. Viera Condominium Association et al, 13-06062 (Bankr. D. Kan. Feb. 25, 2014) Doc. # 34

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 24th day of February, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

PATRICIA J. TURKAL Case No. 08-22906
Debtor. Chapter 13

PATRICIA J. TURKAL,
Plaintiff,

vs. Adversary No. 13-6062

ALTAMIRA CONDOMINIUM ASSOCIATION,
Defendant.

MEMORANDUM OPINION AND ORDER DENYING
PLAINTIFF/DEBTOR’S MOTION FOR SUMMARY JUDGMENT


Debtor Patricia J. Turkal filed suit against Defendant Altamira Condominium Association
(“Altamira”) seeking a determination that Debtor’s post-petition homeowners association dues

14.02.24 Turkal SJ Order.wpd
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are dischargeable under 11 U.S.C. 1328(a).1 Debtor has moved for summary judgment,2 and
Altamira has responded, largely agreeing with Debtor on the facts but alleging improper service
and arguing that the facts do not support summary judgment for Debtor. The motion is fully
briefed and the Court is prepared to rule. Because Debtor failed to show Altamira had notice or
actual knowledge of Debtor’s bankruptcy in time to meaningfully participate, the Court denies
her motion.

I. Jurisdiction.
An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.3 The parties do not dispute the Court’s subject matter jurisdiction.

Altamira argues that this Court lacks personal jurisdiction over the association due to
improper service. As a general rule, a plaintiff bears the burden of establishing personal
jurisdiction over defendants and proving the validity of his or her method of serving defendants
by a preponderance of the evidence;4 the Court would lack personal jurisdiction over a party if
the service on that party were insufficient. When there has been no evidentiary hearing, and the
case is still in its pretrial phase, the district court must determine whether personal jurisdiction

1 All future statutory references are to the Bankruptcy Code (“Code”), as amended by the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101 - 1532, unless otherwise specifically
noted.

2 Doc. 21.

3 28 U.S.C. § 157(b)(1) and § 1334(b).

4 Fed. Deposit Ins. Corp. v. Oaklawn Apartments, 959 F.2d 170, 174 (10th Cir. 1992).

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exists based on affidavits and other materials.5

Here, Altamira argues that Debtor failed to obtain service on Altamira, specifically
alleging that the summons in the adversary proceeding was against the Viera Condominium
Association, not the Altamira Condominium Association. Debtor’s Complaint lists Altamira
Condominium Association as defendant.6 Debtor initially requested summons be issued on
Viera Condominiums Association7 and Chris Montanino,8 neither of whom are named in the
complaint. Then, on July 12, 2013, Debtor requested that summons be issued on Altamira
Condominium Association and on Chris Montanino, as President of Altamira.9 On July 15, the
summons on Altamira and Chris Montanino issued,10 and on July 16, the certificates of service
were filed, showing service by mail on Altamira Condominium Association11 and Chris
Montanino12 at an address on Pflumm Road, in Olathe, Kansas. The Court takes judicial notice
that this address is listed as Altamira Condominium Association’s principal place of business on
the Kansas Secretary of State’s Annual Report for Altamira Condominium Association. This
service appears to be in keeping with Fed. R. Bankr. P. 7004(b)(3), which permits service by

5 Richardson v. Alliance Tire & Rubber Co., Ltd., 158 F.R.D. 475, 478 (D.Kan.1994).
6 Doc. 1-1, at 1.
7 Doc. 4.
8 Doc. 5.
9 Doc. 12 and 13.
10 Doc. 14 and 15.
11 Doc. 16.
12 Doc. 17.


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mail of a copy of the summons and complaint to the attention of an officer of a domestic
association. Altamira provides no reason why this apparently good service is faulty, and the
Court finds none. The Court deems this service of the summons sufficient to give the Court
personal jurisdiction over Altamira.

II. Legal Standard.
Summary judgment is appropriate if the moving party demonstrates that there is no
genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.13 In
applying this standard, the court views the evidence and all reasonable inferences therefrom in
the light most favorable to the nonmoving party.14 A fact is “material” if, under the applicable
substantive law, it is “essential to the proper disposition of the claim.”15 An issue of fact is
“genuine” if “‘the evidence is such that a reasonable jury could return a verdict for the nonmoving
party.’”16

The moving party initially must show the absence of a genuine issue of material fact and
entitlement to judgment as a matter of law.17 In attempting to meet this standard, a movant that
does not bear the ultimate burden of persuasion at trial need not negate the other party’s claim;

13 FED.R.CIV. P. 56(a); see also Grynberg v. Total, S.A., 538 F.3d 1336, 1346 (10th Cir. 2008).
14 City of Herriman v. Bell, 590 F.3d 1176, 1181 (10th Cir. 2010).
15 Wright ex rel. Trust Co. of Kan. v. Abbott Labs., Inc., 259 F.3d 1226, 1231–32 (10th Cir. 2001) (citing


Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998)).
16 Thomas v. Metro. Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir. 2011) (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)).
17 Spaulding v. United Transp. Union, 279 F.3d 901, 904 (10th Cir. 2002) (citing Celotex Corp. v. Catrett,
477 U.S. 317, 322–23 (1986)).
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rather, the movant need simply point out to the court a lack of evidence for the other party on an
essential element of that party’s claim.18 Here, where the creditor has the burden of proving
nondischargeability, Debtor need only point out a lack of evidence of nondischargeability.

Once the movant has met this initial burden, the burden shifts to the nonmoving party to
“set forth specific facts showing that there is a genuine issue for trial.”19 The nonmoving party
may not simply rest upon its pleadings to satisfy its burden.20 Rather, the nonmoving party must
“set forth specific facts that would be admissible in evidence in the event of trial from which a
rational trier of fact could find for the nonmovant.”21 To accomplish this, the facts “must be
identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated
therein.”22 Rule 56(c)(4) provides that opposing affidavits must be made on personal knowledge
and shall set forth such facts as would be admissible in evidence.23 The nonmoving party cannot
avoid summary judgment by repeating conclusory opinions, allegations unsupported by specific
facts, or speculation.24

18 Adams v. Am. Guar. & Liab. Ins. Co., 233 F.3d 1242, 1246 (10th Cir. 2000) (citing Adler, 144 F.3d at
671); see also Kannady v. City of Kiowa, 590 F.3d 1161, 1169 (10th Cir. 2010).
19 Anderson, 477 U.S. at 256; Celotex, 477 U.S. at 324; Spaulding, 279 F.3d at 904 (citing Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).
20 Anderson, 477 U.S. at 256; accord Eck v. Parke, Davis & Co., 256 F.3d 1013, 1017 (10th Cir. 2001).
21 Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197–98 (10th Cir. 2000) (quoting Adler, 144 F.3d at
671); see Kannady, 590 F.3d at 1169.
22 Adams, 233 F.3d at 1246.
23 FED.R.CIV. P. 56(c)(4).
24 Id.; Argo v. Blue Cross & Blue Shield of Kan., Inc., 452 F.3d 1193, 1199 (10th Cir. 2006) (citation
omitted).
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Finally, summary judgment is not a “disfavored procedural shortcut”; on the contrary, it
is an important procedure “designed to secure the just, speedy and inexpensive determination of
every action.”25 In responding to a motion for summary judgment, “a party cannot rest on
ignorance of facts, on speculation, or on suspicion and may not escape summary judgment in the
mere hope that something will turn up at trial.”26

III. Uncontroverted Facts.
Debtor filed a chapter 13 bankruptcy petition on November 5, 2008 (District of Kansas
Case 08- 22906), and the chapter 13 Plan was confirmed in early 2009. Debtor owns a
condominium in Johnson County, Kansas (the “Condominium”). Although Debtor had two
mortgages on the Condominium, on the date of her chapter 13 petition, the Condominium was
not encumbered by a lien in favor of Defendant; Debtor did not owe anything to Defendant; and
Debtor did not identify Defendant as a creditor on her bankruptcy schedules. Defendant received
neither notice of the bankruptcy when it was filed nor any subsequent notice regarding
amendments and/or motions.

After the petition, Debtor had an obligation to pay ongoing Condominium dues to
Defendant, ranging from $465 per month to $660 per month. Debtor paid all Condominium dues
and fees invoiced from the petition date through July 31, 2013, making her last payment on
August 6, 2013. On October 10, 2012, Debtor moved to amend her chapter 13 Plan to surrender
the Condominium, and the motion was granted without objection. Defendant has now moved to

25 Celotex, 477 U.S. at 327 (quoting FED.R.CIV. P. 1).

26 Conaway v. Smith, 853 F.2d 789, 794 (10th Cir. 1988).

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vacate the Court’s Order granting the motion to amend the chapter 13 Plan. Since October 2012,
Debtor has not made payments to the senior mortgagee, Countrywide Home Loans Servicing LP
(Countrywide), but Countrywide has not commenced foreclosure proceedings. Debtor does not
now live in or spend any time at the property, and the property is presently unoccupied.

Neither party has submitted any documents concerning Debtor’s obligation to pay the
Condominium fees.

IV. Analysis and Conclusions.
This case presents the question of whether post-petition condominium dues are subject to

discharge under 11 U.S.C. § 1328(a).27 As a general matter, and subject to some exceptions not

relevant here, post-petition debts are not subject to discharge in a chapter 13 bankruptcy. The

question, then, becomes whether the post-petition condominium dues accrued post-petition or

prepetition. Courts faced with this question have generally taken one of three approaches:

One line holds that the debtor’s liability for condominium assessments is
nondischargeable, arising from a covenant running with the land. . . . [These]
cases determine[] that condominium assessments accrue postpetition because the
debtor owns the property postpetition. The determinative factor under this
analysis is that the condominium declaration constitutes a covenant running with
the land.
. . .
The second line holds that the debtor’s liability for the assessments is
dischargeable, arising from a prepetition contractual obligation. . . . [These] cases
determine[] that postpetition condominium assessments accrue prepetition
because the debtor’s ownership of the condominium prepetition initially
establishes his liability for future condominium assessments, although the liability
is contingent and unliquidated. These cases hold that the condominium
declaration is a contract entered into when the debtor purchased the
condominium. The purchase of the condominium obligates the debtor to pay any

27 Section 523(a)(16), which renders nondischargeable a post-petition fee or assessment related to a
condominium ownership, does not apply in a chapter 13 full payment discharge under § 1328(a).

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assessments levied in the future. This obligation to pay is uncertain, depending

upon the debtor’s continued ownership of the land and whether the condominium

association levies assessments. However, the assessments still accrue prepetition

because the definition of debt under the Bankruptcy Code includes unliquidated,

contingent and unmatured debts.28
Other courts take a third approach, holding that the liability for condominium assessments arises
from a covenant running with the land, but that the debt is dischargeable as a personal liability
for the debtor and remains as an in rem obligation on the property.29 Debtor argues for the
second approach, suggesting that the dues are dischargeable because they arise from a
prepetition contractual obligation.

This Court need not decide among these approaches here.30 Altamira asserts Debtor’s
failure to list Altamira in Debtor’s schedules and Debtor’s failure to notify Altamira of the
bankruptcy as an affirmative defense, and the parties agree that Debtor did not identify Altamira
as a creditor on her bankruptcy schedules and that Altamira did not receive notice of the
bankruptcy when it was filed nor any subsequent notice regarding amendments and/or motions.
When a creditor is not listed on a debtor’s schedules and has no notice and no actual knowledge
of the bankruptcy, the creditor’s claim is nondischargeable under § 523(a)(3).31 The debtor bears

28 Affeldt v. Westbrooke Condo. Ass’n (In re Affeldt), 60 F.3d 1292, 1295 (8th Cir. 1995)(citations omitted).

29 In re Kahn, No. 133248PM, 2014 WL 345714 (Bankr. D. Md. Jan. 30, 2014).

30 The Court notes that such an analysis would involve review of the contract or other document that
allegedly created Debtor’s obligation to pay dues. Where, as here, a creditor fails to file the document, the creditor
has not carried the creditor’s burden in a summary judgment setting, and the Court would be compelled to rule for
the debtor. In re Affeldt, 60 F.3d at 1295.

31 Section 523(a)(3) does not apply to a no-asset chapter 7 case in which there is not a proof of claim
deadline. 4 COLLIER ON BANKRUPTCY ¶ 523.09(5), at 523-69 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.
2013). Since all chapter 13 bankruptcy cases have a proof of claim deadline, this no-asset exception to § 523(a)(3)
would not apply.

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the burden of proving that a creditor had “notice or actual knowledge” under § 523(a)(3) and has
not even alleged such notice or knowledge here.32 Taking this failure to its logical conclusion,
even if, as Debtor argues, the dues were a debt that accrued prepetition, the debts would
nonetheless be nondischargeable under § 523(a)(3).33 Thus, Debtor cannot show she is entitled to
judgment as a matter of law, and so Debtor’s Motion for Summary Judgment is denied.34

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
32 Jones v. Arross, 9 F.3d 79, 81-82 (10th Cir. 1993). Debtor may be able to show that Altamira had actual
knowledge of the bankruptcy in time for Altamira to meaningfully participate, but Debtor has made no effort to do
so at the summary judgment stage.

33 Additionally, a creditor who does not receive timely notice is not bound by a chapter 13 plan. See Keith

M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY,4TH EDITION, § 229.1, at ¶349.1 Sec. Rev. Oct. 8,
2010, www.Ch13online.com.
34 Spaulding, 279 F.3d at 904.

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12-06127 Sinclair Oil Corporation v. Martin, Jr (Doc. # 20)

Sinclair Oil Corporation v. Martin, Jr, 12-06127 (Bankr. D. Kan. Feb. 27, 2014) Doc. # 20

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 26th day of February, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

WILLIAM H. MARTIN, JR., Case No. 12-21938-7
Debtor.

SINCLAIR OIL CORPORATION,
Plaintiff,

v. Adv. No. 12-6127
WILLIAM MARTIN, JR.,
Defendant.

ORDER DENYING IN PART AND GRANTING IN PART
DEFENDANT’S MOTION TO DISMISS


This matter is before the Court on Defendant William Martin, Jr.’s motion to dismiss1 the
adversary complaint filed against him by Plaintiff Sinclair Oil Corporation (“Sinclair Oil”). The
adversary complaint seeks the denial of discharge of debt to Sinclair Oil, claiming that Martin is

1

Doc. 12.

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the alter ego of Convenience Express, Inc. (which is itself the general partner of Convenience
USA LP), a company in debt to Sinclair Oil for $511,451.56. Plaintiff claims the debt is not
dischargeable under 11 U.S.C. § 523(a)(2)(A) and/or (a)(6) and that Martin should be denied a
discharge under § 727.2 Martin has moved to dismiss the complaint under Federal Rules of Civil
Procedure 12(b)(6) and 9(b), arguing that the allegations made are conclusory and do not satisfy
minimal pleading standards.

Because the Court finds that Plaintiff has stated just enough facts to support its claims
under §§ 523(a)(2)(A) and (a)(6), the Court denies Defendant’s motion to dismiss the § 523
claims. Plaintiff has chosen not to pursue its § 727 claim, however, and the Court grants the
motion to dismiss that claim, without prejudice.

I. Background and Findings of Fact
Defendant/Debtor Martin filed a chapter 7 bankruptcy petition listing nearly two million
dollars of debt or joint debt, 3 and Plaintiff Sinclair Oil filed a proof of claim in that bankruptcy
for $511,451.56 for unsecured debt for nonpayment of a purchase. Sinclair Oil then filed this
adversary proceeding, generally alleging in its complaint that the debt is the result of fraud,
deceit, misrepresentations, and concealment perpetrated by Martin against Sinclair Oil.
Specifically, Sinclair Oil claims that between June 4, 2008, and July 8, 2008, ostensibly pursuant
to an August 1, 2006, distributor sale contract, Convenience USA LLP (“Convenience USA”)
acquired motor fuel and other petroleum products from Sinclair Oil. Convenience USA

2 All future statutory references are to title 11 of the United States Code, unless otherwise specified.
3 As discussed below, Martin is a controlling partner in M&W Midwest Properties, LLC, and much of the
debt listed in his individual petition is listed as joint debt with that company.
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apparently acted through its general partner, Convenience Express, Inc. (“Convenience
Express”). Sinclair Oil alleges that Convenience USA had the obligation to pay Sinclair Oil for
these products at the time of acquisition, but Convenience USA was insolvent and had no ability
to make payment for the product.

Sinclair Oil alleges that Martin knew or should have known that “the product was
obtained by fraud, deceit and misrepresentation without the ability to pay and without any
reasonable likelihood of having the ability to pay for the product in the foreseeable future.”4
Convenience USA apparently had a $300,000 secured line of credit for product from Sinclair
Oil, but at least some portion of the product acquired was distinct from this secured credit line.
At some point (again, the exact details are not clear), Sinclair Oil realized the extent of
Convenience USA’s acquisition of product and made demand for payment, which Convenience
USA did not transmit.

Sinclair Oil then alleges that Martin, knowing that Convenience USA “had not paid for
the product and could not pay for the product, . . . concealed, transferred, dissipated or
absconded with the product,” including selling or transferring the product to a third party.5 Then,
in early July 2008, Martin entered into an agreement with M&W Midwest Properties, LLC
(“M&W”), a company also controlled by Martin, to convey to M&W all or substantially all of
Convenience USA’s assets.

Sinclair Oil filed suit in state court against Convenience USA, Convenience Express, and
Martin, seeking compensation for the product acquired. There, as it does here, Sinclair Oil

4 Doc. 1 ¶ 6(a).

5 Doc. 1 ¶ 6(d).

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alleged individual liability by Martin based on Martin being the alter ego of the Convenience
entities. 6 Again, Sinclair Oil alleges that Martin knowingly and intentionally engaged in fraud,
deceit, and misrepresentation to maliciously and willfully injure Sinclair Oil by “fraudulently
and deceitfully obtaining product from Sinclair without paying for it so that Martin could further
his individual and personal financial interests.”7 At some point after Sinclair Oil filed its state
court lawsuit, Convenience USA and Convenience Express filed bankruptcy petitions, followed
by the individual chapter 7 bankruptcy petition filed by Martin.

Rather than answering the adversary proceeding complaint, Martin has moved to dismiss.
Martin challenges the sufficiency of the complaint for all three counts: §§ 523(a)(2)(A),
523(a)(6), and 727. In its response to Martin’s motion to dismiss, Sinclair Oil additionally
alleges that Martin’s intent in orchestrating the scheme outlined in the complaint was to get
assets to M&W, so that the bank holding a note on M&W would not call the note and Martin’s
personal guaranty of the M&W debt. Sinclair also claims in its response that Martin “essentially
acknowledged” in a deposition in the state court lawsuit “both the wrongful scheme to deceive
Sinclair in order to obtain the motor fuel and to convey it to MW thereafter.”8 Sinclair Oil also
attaches to its response a journal entry of judgment entered in an adversary proceeding in the
bankruptcy cases of the Convenience entities against M&W. Because these additional alleged

6 To support its alter ego claim, Sinclair Oil alleges that neither Convenience USA nor Convenience
Express were sufficiently capitalized when the debt was incurred, that Martin failed to follow or meet the corporate
formalities required by controlling Kansas statutes, that no corporate dividends were paid and no person other than
Martin ever acted as an officer or director, that Martin siphoned corporate funds as the dominant stockholder, and
that Martin merely operated Convenience Express as a facade for his own operations. See Doc. 1 ¶ 10. Martin does
not challenge this portion of Sinclair Oil’s complaint as insufficiently plead.

7 Doc. 1 ¶ 6(f).

8 Doc. 16, at 3.

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facts stated in Sinclair Oil’s response to Martin’s motion to dismiss do not appear in the
complaint but in a response brief, they will not be considered further. 9
Finally, Sinclair Oil states in its response that it elects not to pursue the § 727 claim, and
it seeks to withdraw that claim without prejudice.

II. Analysis
A. Standard for Motion to Dismiss
An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.10

Martin brings his motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),
which permits a motion for “failure to state a claim upon which relief can be granted.”11 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.”12 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.”13 The complaint must contain “enough facts to state a
claim to relief that is plausible on its face.”14 “[T]he complaint must give the court reason to

9 See Hayes v. Whitman, 264 F.3d 1017, 1025 (10th Cir. 2001) (citing cases stating general rule that a
complaint may not be amended by a response to a motion to dismiss).
10 28 U.S.C. § 157(b)(1) and § 1334(b).
11 Rule 12 is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7012(b).
12 Rule 8 is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7008(a).
13 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

14

Id. at 570.
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believe that this plaintiff has a reasonable likelihood of mustering factual support for these
claims.”15

The plausibility standard does not require a showing of probability that a defendant has
acted unlawfully, but requires more than “a sheer possibility.”16 “[M]ere ‘labels and
conclusions,’ 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.”17 Finally, 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.18

Where a party alleges fraud—here, a claim under § 523(a)(2)(A) can be for “false
pretenses, a false representation, or actual fraud”—Rule 9(b) requires the party to “state with
particularity the circumstances constituting fraud or mistake,” with general allegations only
allowed for “[m]alice, intent, knowledge, and other conditions of a person’s mind.”19 A 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.’”20 In other

15 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (emphasis omitted).

16 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

17 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting Twombly, 550 U.S.

at 555).

18 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

19 Rule 9(b) is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7009.

20 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 176, 180 (10th Cir. 1991)).
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words, the alleging party must specify the “who, what, where, and when of the alleged fraud.”21

B. § 523(a)(2)(A) Claim
Under § 523(a)(2)(A), an individual is not discharged for any debt “for money, property,
services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false
pretenses, a false representation, or actual fraud[.]” The creditor, here Sinclair Oil, bears the
burden of establishing false pretenses, a false representation, or actual fraud.22

To state a claim under § 523(a)(2)(A), Sinclair Oil must allege facts supporting the
following elements: (1) Martin engaged in false pretenses, false representations, or actual fraud;

(2) which Martin knew at the time to be false or fraudulent; (3) with the intent to deceive Sinclair
Oil; (4) Sinclair Oil justifiably relied on the representation; and 5) Sinclair Oil sustained damage
as a proximate result of the debtor’s false pretenses, false representations, or actual fraud.23 The
intent to deceive a creditor need not be from an express misrepresentation, but may be inferred
from the totality of circumstances. 24
Martin’s motion to dismiss argues that Sinclair Oil’s complaint points to no express
misrepresentation and does not expressly state an intent to deceive or justifiable reliance.
Sinclair Oil responds that a § 523(a)(2)(A) claim can be proven by either affirmative acts or
omissions, even without affirmative misrepresentations, and that justifiable reliance can be

21 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)).

22 DSC Nat’l Prop. LLC v. Johnson (In re Johnson), 477 B.R. 156, 169 (B.A.P. 10th Cir. 2012).

23

Id.

24 Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir. 1996); see also 6050 Grant, LLC v.
Hanson (In re Hanson), 428 B.R. 475, 486 (Bankr. N.D. Ill. 2010) (noting that false pretenses “do not necessarily
require overt misrepresentations” but can also include concealment or “failure to disclose pertinent information”).

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proven by Sinclair Oil’s justifiable expectation of payment.

Although not a model of clarity, the allegations here support a claim under
§ 523(a)(2)(A). The complaint alleges that Martin, through the Convenience companies,
knowingly and through deceit acquired petroleum and other products from Sinclair Oil without
any reasonable likelihood of being able to pay for those products and without Sinclair Oil’s full
consent. The allegations also state that Martin then absconded with the product by transferring
that product to M&W, knowing that the Convenience entities had not and would not make
payment for the product. Sinclair Oil alleges that Martin engaged in this scheme so that he
“could further his individual and personal financial interests.” Sinclair Oil justifiably relied on
Martin, through the Convenience entities, for payment, and was damaged by nonpayment. As
stated above, to bring a § 523(a)(2)(A) claim, Sinclair Oil need not prove an express false
statement, although it can certainly make its case by doing so; it can also prove its case by
Martin’s knowing omissions regarding obtaining the product and thereafter secreting the product
away.

Sinclair Oil has carried its burden to plead the § 523(a)(2)(A) claim by stating just
enough facts to make the claim plausible on its face. 25 At this stage, these facts must be viewed
in the light most favorable to Sinclair Oil, 26 and although the Court expresses no opinion on
whether Sinclair Oil will ultimately prevail on its claim, the complaint sufficiently pleads each
element of a § 523(a)(2)(A) claim; Martin will not be hampered in his ability to prepare a

25 See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) (stating that “heightened fact pleading of
specifics” is not required, “but only enough facts to state a claim to relief that is plausible on its face”).

26 See Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991) (stating that
the facts alleged in a bankruptcy complaint must be assumed to be true).

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defense. Martin’s motion to dismiss this claim is denied.

C. § 523(a)(6) Claim
Under § 523(a)(6), an individual is not discharged for any debt “for willful and malicious
injury by the debtor to another entity or to the property of another entity.” Again, Sinclair Oil as
the creditor bears the burden of establishing the elements of § 523(a)(6). 27

The injury alleged by the creditor under this subsection must be both willful and
malicious. 28 For injury to property to be willful under § 523(a)(6), it must be “a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.”29 Willfulness of
injury is typically inferred from a debtor’s other actions. 30 For injury to property to be malicious,
there must be “an intentional act [that is] ‘performed without justification or excuse.’”31 Under
this subsection, therefore, the debtor “must intend the consequences of his actions, not just the
actions themselves.”32 “[T]he debtor must ‘desire . . . [to cause] the consequences of his act
or . . . believe [that] the consequences are substantially certain to result from it.’”33

In his motion to dismiss, Martin claims the allegations regarding transfer of the
petroleum products from the Convenience entities to M&W cannot support a claim for injury to

27 Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 655 (B.A.P. 10th
Cir. 1999).
28 Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004).
29 Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998).
30 Richards v. Smith (In re Smith), 472 B.R. 833 (Bankr. D. Colo. 2012).
31 Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (quoting Am. First Credit
Union v. Gagle (In re Gagle), 230 B.R. 174, 181 (Bankr. D. Utah 1999)).
32 Melquiades v. Hill (In re Hill), 390 B.R. 407, 411 (10th Cir. BAP 2008).
33 In re Moore, 357 F.3d at 1129 (quoting In re Longley, 235 B.R. at 657).
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the property of Sinclair Oil, because after the sale of the property to Convenience USA, Sinclair
Oil no longer had any property interest in the property that could be damaged. Sinclair Oil
responds that it is the initial alleged false pretenses and deceit by Martin (acting through the
Convenience entities) that form the basis for its complaint and that this behavior by Martin is
clearly alleged as causing deliberate and intentional harm to Sinclair Oil in the amount of
$511,451.56.

Sinclair Oil has sustained its pleading burden here again, as the allegations found in
Sinclair Oil’s complaint also support a claim under § 523(a)(6). Again, although not a model
complaint with many details, the complaint alleges that Martin acted through his Convenience
entities to wrongfully and intentionally cause injury to Sinclair Oil, with the intent to cause harm
to Sinclair Oil (because Martin knew he could not pay for the product he had obtained, but
deceitfully took the product to instead further his own individual financial interests). Sinclair Oil
has met the pleading standards of Rule 8(a), and Martin’s motion to dismiss this claim must also
be denied.

D. § 727 Claim
Finally, Sinclair Oil’s complaint purports to state a claim under § 727, although no
factual support or any attempts to meet the elements of a § 727 claim is made in the complaint.
Wisely, in response to Martin’s motion to dismiss, Sinclair Oil abandons this claim. As a result,
Martin’s motion to dismiss this claim is granted, without prejudice.

III. Conclusion
For the reasons set forth above, the Court finds that Plaintiff has stated just enough facts
to support its claims under §§ 523(a)(2)(A) and (a)(6), and the Court denies Defendant’s motion

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to dismiss as to the § 523 claims. Because Plaintiff has chosen not to pursue its § 727 claim,
however, the Court grants the motion to dismiss, without prejudice, as to that claim.
It is, therefore, by the Court ordered that Defendant Martin’s Motion to Dismiss is
DENIED IN PART and GRANTED IN PART, as stated more fully herein.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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06-21677 Weiss (Doc. # 153)

In Re Weiss, 06-21677 (Bankr. D. Kan. Dec. 19, 2013) Doc. # 153

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 19th day of December, 2013.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

SCOTT CHRISTOPHER WEISS and Case No. 06-21677
JODI KENNEDY WEISS, Chapter 13
Debtors.

ORDER ON DEBTOR’S MOTION
FOR DETERMINATION OF IRS TAX LIABILITY


Debtor Scott Weiss1 requests an order declaring his prepetition tax liabilities to the
Internal Revenue Service discharged.2 Debtors received a full payment discharge on
September 8, 2011, under §1328(a). The estate’s administration is complete. The IRS did not
receive a distribution in the Debtors’ case. Initially, this seemed a relatively straightforward
issue to determine the dischargeability of prepetition IRS tax debts in a full payment Chapter 13
discharge case. This supposition proved overly optimistic.

A Chapter 13 discharge under § 1328(a)(2)3 does not discharge a tax debt of the kind

1 Co-debtor Jodi Weiss is not liable for the tax liabilities.

2 Doc. No. 131.

3 This and all future statutory references are to the Bankruptcy Code, as amended by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101 - 1532, unless otherwise specifically noted.

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specified under §507(a)(8)(C) (“Trust Fund Taxes”) or tax debts under § 523(a)(1)(B) (unfiled or
late-filed tax returns).4 The IRS must hold an allowed priority unsecured claim against the
bankruptcy estate in order for Trust Fund Taxes to be excepted from discharge under
§ 1328(a)(2) (“Trust Fund Tax Exception” to discharge); however, there is not a requirement that
the IRS hold an allowed unsecured claim to except taxes from discharge under § 523(a)(1)(B)
(unfiled or late-filed return exception to discharge). An evidentiary hearing is necessary to
determine what portion of Mr. Weiss’s tax debt to the IRS is excepted from discharge under
§ 523(a)(1)(B) and to liquidate Mr. Weiss’s IRS tax debt.

Background

Debtors filed a Chapter 13 petition and plan on October 18, 2006. Debtors included on

their bankruptcy petition the following names used prepetition by Mr. Weiss: Scott Weiss, LLC;

fdba SB&D Enterprises, LLC; fdba JK & Sons, LLC.5 These names were set out on the Notice

of Chapter 13 Bankruptcy Case.6 Debtors listed the IRS as a creditor holding a priority claim in

their Chapter 13 plan (“Plan”).7 The Plan was confirmed by this Court on December 20, 2006.8

The Plan provided that the IRS’s allowed priority claims would be treated as follows:

Debtor shall pay all allowed priority claims under 11 USC 507, without post
petition interest. Payments through the Trustee of the principal and interest of the
tax obligations due as of the date of the filing of the bankruptcy petition (as
determined by the creditor’s proof of claim or order of the Court) shall result in a
full and total discharge of all obligations of the Debtor for those taxes. Unless
placed in controversy, the specific dollar amount to be paid shall be in accordance
with the creditor’s proof of claim unless [sic] objected to the claim shall be

4 The exception to discharge of certain tax debts under § 523(a)(1)(B) is incorporated by reference into
§ 1328(a)(2). Interestingly, the prefatory language “does not discharge” in § 523(a) is not incorporated. United
State Student Aid Funds, Inc., v. Espinosa, 559 U.S. 260, 275 n.11 (2010).

5 Doc. No. 1, at 1.
6 Doc. No. 4, at 1.
7 Doc. No. 2.
8 Order Confirming Chapter 13 Plan, Doc. No. 30.


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deemed allowed. (Certain tax claims may be secured and will be treated
accordingly, if they exist.)9
The effect of confirmation of a Chapter 13 plan is clear:
§ 1327. Effect of confirmation.

(a) The provisions of a confirmed plan bind the debtor and each creditor, whether
or not the claim of such creditor is provided for by the plan, and whether or not
such creditor has objected to, has accepted, or has rejected the plan.
The pertinent § 1328(a) full payment discharge exceptions that apply to tax debts are:

§ 1328. Discharge

(a) Subject to subsection (d), as soon as practicable after completion by the debtor
of all payments under the plan, . . . the court shall grant the debtor a discharge
of all debts provided for by the plan or disallowed under section 502 of this
title, except any debt-.
. . .

(2) of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B)
. . . of section 523(a). . . . (Emphasis added.)
With the exception of domestic support obligations excepted from discharge under § 523(a)(5),
§ 523(a) “should be strictly construed against the objecting creditor and liberally in favor of the
debtor.”10 This same principle should apply to the § 1328(a) full payment discharge.
The Debtors estimated the IRS debt as $0.00 in their Chapter 13 Plan and on their
Schedule E. The IRS did not file a timely proof of claim and withdrew two late-filed proofs of
claim after Debtors objected to them as untimely filed. The IRS does not complain of lack of
notice or deficient or insufficient service.
The Trust Fund Taxes resulted from the failure of Mr. Weiss’s limited liability
companies (“LLCs”), Scott Weiss, LLC, SB&D Enterprises, LLC, and JK & Sons, LLC, to pay
Federal Income Contribution Act (FICA) taxes between 2004 and 2006. The IRS claims Mr.

9 Debtors’ Chapter 13 Plan, Doc. No. 2, at 2.
10 4 COLLIER ON BANKRUPTCY ¶ 523.05, at 523-1 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.
2013) (footnote omitted).

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Weiss is responsible for $72,067.01 in unpaid Trust Fund Taxes and non-trust fund taxes.11 The
IRS also claims that the LLCs failed to file or filed late some of the associated employment tax
returns or understated their tax liability on filed returns.

A recapitulation of the IRS summary of the tax debts is set out below. The Court does
not adopt this summary in its findings of fact because an evidentiary hearing is necessary to
determine the amount of the tax debts and when the tax returns were filed. However, it is
beneficial to summarize the IRS allegations as to the prepetition tax debts owed and the status of
the related tax returns for the three LLCs.

Category 1 Taxes (Unfiled Tax Returns) of $30,700.44: The IRS alleges that the tax
debts in this category should be excepted from discharge under § 523(a)(1)(B) because a return
was not filed.

Category 2 Taxes (Late-Filed Tax Returns) of $6,269.59: The IRS alleges that the tax
debts in this category should be excepted from discharge under § 523(a)(1)(B) because the
returns, although filed, were filed late and within two years of the bankruptcy petition date.12

Category 3 Taxes (Timely-Filed Tax Returns) of $35,096.98: The IRS alleges that the
tax debts in this category are priority and excepted from discharge under the Trust Fund Tax
Exception set out in § 1328(a)(2).

11 The non-trust fund Form 940 federal unemployment taxes are $1,449.28 of the total amount allegedly
due.

12 Debtors’ bankruptcy case was filed on October 18, 2006, and since the associated liabilities were for
quarters that were within two years of the filing of the bankruptcy case, then the tax returns must have been filed
within two years if in fact they were filed late.

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Analysis

A.
As to the Trust Fund Tax Exception to Discharge Set Out in § 1328(a)(2),
Mr. Weiss’s Trust Fund Taxes Were Discharged.
The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA” or “2005
Amendments”) narrowed the Chapter 13 discharge by amending §1328(a)(2) to except from
discharge tax debts of the kind specified in §507(a)(8)(C) and §§ 523(a)(1)(B).13 Taxes excepted
from discharge by reference to §507(a)(8)(C) are those required to be collected or withheld and
for which the debtor is liable in any capacity (Trust Fund Taxes).14 FICA taxes withheld from an
employee’s wages are Trust Fund Taxes.15 Section 1328(a)(2) also excepts from discharge taxes
with respect to which a tax return, if required, was not filed or was filed late and within two
years of the petition date.16

Because Mr. Weiss was the sole member of each LLC, the IRS properly alleges the
prepetition tax liability falls upon Weiss personally.17 Where an employment tax is due prior to
January 1, 2009, the sole member of an LLC is liable for employment taxes on wages; in effect
the LLC is disregarded as to Trust Fund Taxes.18 Here, the involved entities were LLCs solely
owned by the debtor and the Trust Fund Taxes are for wages paid prior to January 1, 2009.
Despite the existence of the LLCs, Mr. Weiss as the sole member is liable for the associated

13 11 U.S.C. §1328(a)(2). There are other tax and non-tax related exceptions, but they are not relevant to
this case.

14 See 8 COLLIER ON BANKRUPTCY ¶ 1328.02[3][c] at 1328-14 to 1328-15 (Alan N. Resnick & Henry J.
Sommer, eds., 16th ed. 2013). These taxes are priority unsecured claims.

15 United States v. Bisbee, 245 F.3d 1001, 1005 (8th Cir. 2001).

16 §523(a)(1)(B) is incorporated by reference.

17 Med. Practice Solutions, LLC, v. Comm’r, 132 T.C. 125, 128-29 (2009). Because the pertinent
regulation was amended, the Med. Practice Solutions decision does not apply to taxes for wages paid after January
1, 2009. As noted below, all of the payroll taxes owed by Mr. Weiss are on account of wages paid prior to January
1, 2009.

18 See id.

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Trust Fund Taxes on the petition date.19

The IRS also argues that Mr. Weiss should be liable for Trust Fund Taxes based upon an
alter-ego theory. This theory does not give rise to an independent cause of action but simply
provides a remedy to enforce liabilities against third parties if the veil piercing is successful.
The alter-ego theory has been successfully employed to impose Trust Fund Taxes.20 The alter-
ego theory generally walks hand-in-hand with the trust fund tax penalty.21 Since the Court finds
that Mr. Weiss is liable under the Medical Practice Solutions case, there is no need to address
either the responsible person liability under I.R.C. § 6672 or the alter-ego theory, and the Court
makes no finding with regard to either.

Before the 2005 Amendments, a Chapter 13 full payment discharge under § 1328(a)
discharged Trust Fund Taxes if the plan provided for payment of priority tax claims in full. This
was the result even if the taxing authority did not actually receive payments because it did not
file a proof of claim or filed it late.22 The question is in what manner did the 2005 amendment to
§ 1328(a)(2) change this result.

The analysis in Hall v. United States23 requires this Court to interpret the plain reading of
the tax debt treatment changes in the 2005 Amendments, even if such interpretation could be at
odds with Congressional intent. In Hall, the debtors were family farmers who filed a Chapter 12
bankruptcy. The debtors in Hall argued that the 2005 amendment that added § 1222(a)(2)(A)

19 Id. at 128.

20 See 11 COLLIER ON BANKRUPTCY ¶ TX4.02[1][d][vi] at TX4-19 (Alan N. Resnick & Henry J. Sommer,
eds., 16th ed. 2013).

21 Id.; see I.R.C. § 6672.

22 See, e.g., Richards v. U.S. (In re Richards), 50 B.R. 339 (E.D. Tenn. 1985); Workman v. U.S. (Matter of

Workman, 108 B.R. 826 (Bankr. M.D. Ga. 1989).
23 132 S. Ct. 1882 (2012).

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was intended to provide tax relief to family farmers under Chapter 12.24 However, when it
drafted the amendment, Congress did not recognize that a separate estate for tax purposes is not
created in Chapter 12 proceedings. Despite the asserted intent of Congress to provide tax relief
to family farmers attendant to the post-petition disposition of estate property, the Hall Court held
that the 2005 Amendments did not accomplish this purpose because the amendment provided
relief from taxes incurred by the estate and in Chapter 12 the estate is not separately taxable.25
As a result, the debtor family farmer was personally liable for capital gains taxes associated with
the post-petition liquidation of farm assets used in the debtors’ farming operation. “Certainly,
there may be compelling policy reasons for treating postpetition income tax liabilities as
dischargeable. But if Congress intended that result, it did not so provide in the statute. Given the
statute’s plain language, context, and structure, it is not for us to rewrite the statute . . . .”26

In the same vein, one might argue that Congress intended to except from discharge Trust
Fund Taxes in Chapter 13 cases whether a claim is allowed or is not allowed, but Congress did
not so provide in § 1328(a)(2). Absent allowance of the Trust Fund Tax as a priority unsecured
claim in the Debtors’ Chapter 13 bankruptcy proceeding, there is not a defined debt to except
from discharge. Why Congress did not simply incorporate into § 1328(a) the § 523(a)(1)
exception to discharge that applies to trust fund tax debts and not just those associated with
unfiled, late-filed, or fraudulent income tax returns is not for this Court to discern; clearly, this
would have effected the intent that the IRS urges upon this Court.

This Court must employ a plain reading of § 1328(a)(2) and further abide by the 10th

24 In part, the amendment provided that taxes incurred by the bankruptcy estate that arise from a debtor
family farmer’s post-petition sale of a farm asset is treated as a general unsecured claim.

25 Hall, 132 S. Ct. at 1887, 1888.

26 Id. at 1893.

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Circuit’s precedent set out in Victor.27 Victor focused on the type of claim asserted against the
estate and not the type of tax. Victor involved a personal Chapter 11 case filed by a husband and
wife. The plan provided for payment in full of the IRS’s fully secured tax claim. The Victor
court found that since § 507(a)(8) only imparts priority claim status to “allowed unsecured
claims,” by definition these tax debts cannot include secured claims. The court focused on the
character or nature of the claims and found that since the IRS held secured claims, the tax debts
did not fall within the ambit of §§ 523(a)(1)(A) and 507(a)(8). The same result is demanded in
Mr. Weiss’s case as to the Trust Fund Tax Exception under § 1328(a)(2) because the IRS did not
hold any allowed priority unsecured claims.28 The Victor holding has been fairly summarized as
follows:

At least one Circuit Court has held that, under a strict reading of the statute, if the

trust fund recovery penalty is secured by a Federal Tax Lien, it may be

discharged. Section 507(a)(8) gives priority only to unsecured claims for

uncollected taxes.29

Without allowed priority unsecured claims against the Debtors’ bankruptcy estate, the
Trust Fund Taxes are not excepted from discharge under the Trust Fund Tax Exception of
§ 1328(a)(2). Absent an allowed priority unsecured claim, the alleged tax debt is not of a kind
under § 507(a)(8)(C). It is notable that § 523(a)(1)(A) excepts from discharge a tax debt
“whether or not a claim for such tax was filed or allowed.” However, this language does not
apply to Trust Fund Taxes under a § 1328(a) full payment discharge. If Congress intended that
§ 507(a)(8)(C) Trust Fund Taxes were not dischargeable regardless of whether an unsecured

27 United States v. Victor, 121 F.3d 1383 (10th Cir. 1997). Here, the IRS argues that “to the extent it could
be argued that Victor affects the outcome here, we respectfully submit that Victor was wrongfully decided . . . .”
Doc. No. 146 at 14. Of course, this Court is not at liberty to ignore the binding precedent set out in Victor.

28 Id. at 1388.

29

 2 ARTHUR H. BOELTER, REPRESENTING THE BANKRUPTCY TAXPAYER § 10:60, at 201 (2012).

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claim were filed and allowed, it did not so provide in the 2005 Amendments. “[W]here Congress
includes particular language in one section of the statute but omits it in another provision of the
same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate
inclusion or exclusion.”30 Under the plain reading mandate of the Supreme Court,31 this Court
finds that unfiled or late-filed returns are excepted from discharge under § 1328(a) whether a
claim has been or has not been allowed; however, the same is not true with regard to the Trust
Fund Tax Exception because this exception to discharge requires the allowance of a priority
unsecured claim. In effect, sans an allowed priority unsecured claim for trust fund tax debts,
there is not a debt that qualifies under the Trust Fund Tax Exception.

B.
The Debtors’ Plan Resulted in the Discharge of Mr. Weiss’s Prepetition
Priority IRS Tax Debts.
Regardless of the language in § 1328(a)(2), the Debtors’ Plan provides that all allowed
priority claims under § 507 shall be paid in full without postpetition interest. This language is
binding on the IRS.32 The Debtors’ Plan unambiguously provides that all § 507 priority tax debts
shall be fully and totally discharged. Since the IRS proofs of claim were disallowed, Mr.
Weiss’s prepetition Trust Fund Taxes as contemplated under § 507(a)(8)(C) were discharged
without payment. The court in Espinosa warned creditors not to sleep upon their rights by
failing to object to a debtor’s Chapter 13 plan.33 The IRS did not object to the Debtors’ Plan, and

30 Direct Capital Group, LLC, v. Hadley (In re Hadley), 2011 WL 3664609, at *15 (Bankr. E.D. Va. 2011)
(quoting Soliman v. Gonzales, 419 F.3d 276, 283 (4th Cir. 2005)). BAPCPA is somewhat anomalous in that it was
superimposed over the 1978 Act and effected significant changes via the addition and deletion of language.

31 United States v. Ron Pair Enterprises, Inc., 409 U.S. 235, 241 (1989); Hall, 132 S. Ct. at 1887 (“plain
and natural reading” of the text).

32 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 275, 130 S. Ct. 1367 (2010). Even if the
bankruptcy court committed legal error in confirming a debtor’s plan that contained a provision not strictly in
conformity with § 1325(a), the plan is still binding on a creditor.

33 Id. and see Keith M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY, 4TH ED., § 229.1, at ¶ 77,
Sec. Rev. Oct. 8, 2010, www.Ch13online.com, for the “snooze, you lose” rule.

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the Plan is binding upon the IRS whether it is in conformity with § 1328(a)(2) or is not.
Additionally, the IRS slept on its rights by not timely filing a proof of claim. The IRS twice
filed a proof of claim late. Both attempts were met with claim objections by the Debtors, and
twice the IRS withdrew its proofs of claim as a result of these objections. The IRS did not object
to confirmation of the Debtors’ Plan and did not timely file a proof of claim for the alleged
prepetition Trust Fund Taxes. The Debtors’ tax debts to the IRS that may have been entitled to
§ 507)(a)(8)(C) priority status have been discharged because the Plan provided for the discharge
of IRS priority tax claims.

This Court’s interpretation of the 2005 amendment to § 1328(a) does not leave the Trust
Fund Tax Exception without teeth. If the IRS held allowed priority unsecured claims against the
Debtors’ estate, then not only would a Debtors’ plan have to provide for payment in full of these
allowed claims,34 but these allowed claims would be excepted from discharge. The significance
of the latter is that interest that accrued during the pendency of the Debtors’ Chapter 13
bankruptcy case would not be discharged.35 More importantly, the Trust Fund Tax Exception
would have provided a valid basis for the IRS to object to confirmation of the Debtors’ Plan
since the Plan expanded the definition of what debts were otherwise not dischargeable under
§ 1328(a).

The use in § 1328(a)(2) of a debt “of the kind specified” is different when applied to the
Trust Fund Tax Exception, because the language specifically refers to § 507(a)(8)(C) debts and
by definition in order for a debt to be priority, it must be allowed, whereas the next clause in
§ 1328(a)(2) refers to debts of a kind under various subsections of § 523(a). The incorporated

34 § 1322(a)(2).
35 United States v. Monahan (In re Monahan), 497 B.R. 642 (B.A.P. 1st Cir. 2013).


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§ 523(a)(1) exceptions do not require allowance of an unsecured claim to be excepted from
discharge.

In Espinosa, Judge Thomas makes an interesting observation as to the incorporation by
reference of certain § 523(a) exceptions to a full payment Chapter 13 discharge:

[T]he “does not discharge” language in § 523(a) is inapplicable to this case. . . .

[Debtor] sought a discharge under § 1328(a), which provides that, upon

completion of a Chapter 13 plan, a bankruptcy court “shall grant the debtor a

discharge of all debts provided for by the plan ..., except any debt ... of the kind

specified in ... paragraph ... (5), (8), or (9) of section 523(a).” Section 1328(a)

thus incorporates by reference paragraph (8) of § 523(a), including that

paragraph’s self-executing requirement for an undue hardship determination, but

does not incorporate the “does not discharge” text of § 523(a) itself.36
Hence, § 1328(a)(2) incorporates certain discharge exceptions under § 523(a)(1), but does not
incorporate the prefatory language “does not discharge” set out in § 523(a). Therefore, we must
look to the language of § 1328(a)(2) to resolve the matter before this Court. The broader
Chapter 13 discharge functions as an incentive for debtors to file a Chapter 13 bankruptcy and
seek repayment of some or all of their debts and also to make all payments due under a Chapter
13 plan.37 We look to the incorporated subsections of § 523(a) without reference to whether a
claim has been or has not been allowed. With regard to Trust Fund Taxes, the definitional
predicate is a priority claim under § 507(a)(8)(C), which may only be established by the
allowance of a priority unsecured claim. To determine the dischargeability of debts, § 1328(a)
controls, unless a confirmed plan, as addressed in Espinosa, contains language to the contrary.

It is this Court’s conclusion that since the Trust Fund Tax Exception requires the
allowance of a priority unsecured claim, then in the case sub judice this exception does not

36 Espinosa, 559 U.S. at 275 n.11. (Emphasis added in original.)

37 8 COLLIER ON BANKRUPTCY ¶ 1328.02[2][b], at 1328-10 (Alan N. Resnick & Henry J. Sommer, eds.,
16th ed. 2013).

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apply. In contrast, allowance of an unsecured claim is not required for the exceptions to
discharge under § 523(a)(1) that are incorporated by reference into § 1328(a). In Espinosa the
plan specifically dealt with the discharge of student loan debts under § 523(a)(8); here, the
Debtor’s Plan does not address tax debts associated with late or unfiled tax returns under
§ 523(a)(1)(B). Without this language, the latter exception still applies and excepts from
discharge those tax debts that fall within this exception to discharge.

In In re Tuttle, 38 the debtors owed prepetition priority unsecured tax claims to the IRS
and obtained confirmation of a Chapter 11 plan of reorganization that paid any and all claims
asserted by the IRS. Unlike a full payment discharge in Chapter 13, all § 523(a) exceptions to
discharge apply to individual Chapter 11 cases.39 Accordingly, the IRS priority unsecured tax
claims were not discharged upon confirmation of the debtors’ plan or upon discharge of the
case.40 The Tuttle court held that the gap interest on nondischargeable tax claims was also not
discharged.41 Importantly the Tuttle court noted that the tax debts could be treated differently in
a Chapter 13 proceeding as opposed to the Chapter 11 proceeding that was before the court.42
Although this recognition by the Tuttle court predated the 2005 Amendments, the observation
remains pertinent to unsecured priority tax claims which are not included in those subsections of
523(a)(1) that are incorporated by reference into § 1328(a), as well as the Trust Fund Tax
Exception that only references priority tax debts under §507(a)(8)(C). Even after the 2005
Amendments, there are priority tax debts that are dischargeable without payment in a full

38 In re Tuttle, 291 F.3d 1238 (10th Cir. 2002).

39 See § 1141(d)(2). Section 1328(a) selects out some, but not all, of the § 523(a) exceptions to discharge.

40 See § 523(a)(1), which in the case of an individual debtor excepts from discharge any debt under
§ 507(a)(8).

41 “Gap” interest accrues on nondischargeable tax debts between the debtor’s petition date and
confirmation of the debtor’s plan.

42 Tuttle, 291 F.3d at 1244 n.4.

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payment Chapter 13 discharge under § 1328(a) if there is not an allowed priority claim.43

The discharge order44 entered in this case is compatible with the Debtors’ Plan. On page
2 of the discharge order under the category “Debts that are not discharged,” subparagraph h,
appears the following language:

Debts for certain taxes to the extent not paid in full under the plan (in a case filed

on or after October 17, 2005) . . . .
This rather general language does not conflict with the specific treatment of priority taxes set out
in the Debtors’ Plan or with this Court’s interpretation of the Trust Fund Tax Exception. In
Espinosa, the Circuit Court found that the plan language that proposed discharge of the post-
petition interest on the debtor’s student loan was incompatible with the discharge order that was
entered in the case. The discharge order in Espinosa excepted from discharge “any debt . . . for a
student loan.”45 The Ninth Circuit remanded the matter to the bankruptcy court, and the
bankruptcy court amended the discharge order so that it would conform with the confirmation
order.46 However, it is imprudent for debtors to expect or rely upon such procedural latitude on
the part of the courts.47

C.
To the Extent Mr. Weiss’s Trust Fund Taxes Are Associated with Unfiled or
Late-Filed Returns, They Were Not Discharged.
In In re Grynberg, 48 a husband and wife filed a joint Chapter 11 petition in 1981, and
their joint plan of reorganization was confirmed in April 1982. The bankruptcy court set a proof

43 Municipality of Carolina v. Gonzalez (In re Gonzalez), 490 B.R. 642, 650 (B.A.P. 1st Cir. 2013).
44 Doc. No. 137.
45 Espinosa, 559 U.S. at 268 n.4.
46 Id.
47 See Am. Family Mut. Ins. Co. v. Reichartz (In re Reichartz), 498 B.R. 217 (E.D. Wis. 2013), wherein the


court found that even though the debtor’s confirmed plan provided for the discharge of post-petition interest on a
nondischargeable debt, it was the discharge order that dictated the scope of the discharge. In effect, the discharge
order trumped the confirmation order.

48 986 F.2d 367 (10th Cir. 1993).

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of claim bar date that expired prior to confirmation of the debtors’ plan.49 The IRS timely filed a
proof of claim for income taxes but did not file a proof of claim for gift taxes. The Debtors’
schedules listed the IRS as a disputed creditor as to both gift taxes and for income taxes. The
debtors’ plan of reorganization did not reference gift taxes. In 1989 after full consummation of
the debtors’ plan, the IRS sent Mr. Grynberg a notice of a proposed gift tax deficiency and
associated penalties of approximately $5 million. The asserted gift tax arose from the transfer by
the debtors of property to other family members in the year just preceding the bankruptcy filing.
The debtors never filed gift tax returns and contended that the transfers were not taxable gifts.
The IRS disagreed.

The Grynberg court found that the gift tax liabilities constituted excise taxes as
contemplated under § 507(a)(8)(E), and since the transfer occurred within three years prior to the
filing of the bankruptcy, the taxes were entitled to priority status. Additionally, the IRS
successfully argued that the liabilities associated with the gift tax deficiency and penalties were
not dischargeable under § 523(a)(1)(B)50 because the debtors had never filed a gift tax return
with the IRS as to the transfer. Here, it is Mr. Weiss’s LLCs, of which he was the sole member,
that allegedly did not file or filed late returns that generated trust fund taxes under the Internal
Revenue Code. Since Mr. Weiss is also liable for these Trust Fund Taxes, and these taxes are on

49 The proof of claim bar date is set by an order of the bankruptcy court in a Chapter 11 bankruptcy. See
Fed. R. Bankr. P. 3003(c)(3).

50 § 523. Exceptions to discharge.

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an
individual debtor from any debt-(
1) for a tax or a customs duty--. . . .
(B) with respect to which a return, or equivalent report or notice, if required-(
i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was
last due, under applicable law or under any extension, and after two years before
the date of the filing of the petition . . . .
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account of late-filed or unfiled tax returns, any and all Trust Fund Taxes associated with the
LLCs’ late-filed or unfiled tax returns are not dischargeable as to Mr. Weiss. The language in
the Debtors’ Plan and its binding effect does not change this result. The Debtors’ Plan language
addresses allowed priority claims under § 507 held by the IRS, of which there are none in this
case. Notably, if a tax is not assessed before, but is assessable after the petition date, then it is
entitled to priority status, unless the tax is associated with a late-filed, unfiled or fraudulent
return.51 However binding the Debtors’ Plan language may be as to IRS priority tax claims, it
does not change the effect of the independent exception to discharge under § 523(a)(1)(B) as
incorporated by § 1328(a)(2).

This Court must conduct an evidentiary hearing to determine the tax debts associated
with late-filed or unfiled tax returns and to determine Mr. Weiss’s IRS tax debts as of the
petition date. Subject to this determination, the Court finds that those tax debts associated with
the LLCs’ late-filed and unfiled tax returns as contemplated under § 523(a)(1)(B) have not been
discharged. As to the trust fund taxes with respect to which § 522(a)(1)(B) does not apply, those
tax debts were discharged.

D. The Court Does Not Abstain From Determining Mr. Weiss’s Tax Debts.
The bankruptcy court has the authority to determine the amount of a debtor’s tax
liability.52 However, the power is discretionary, and the court may abstain from exercising its
authority if the purposes of §505 would not be furthered.53 This Court does not abstain with

51 § 507(a)(8)(A)(iii).

52 11 U.S.C. §505(a)(1).

53 Kohl v. IRS (In re Kohl), 397 B.R. 840, 845 (Bankr. N.D. Ohio) (“a bankruptcy court’s exercise of
jurisdiction under §505 is permissive, not mandatory”); Millsaps v. U.S. (In re Millsaps), 133 B.R. 547, 554 (Bankr.

M.D. Fla. 1991) (“when there is no need for a determination of the amount of the tax for estate administration
purposes, Congress did not intend or foresee that the bankruptcy court would be the forum for this litigation”); but
see Chance Rides, Inc., v. Director, Div. of Taxation (In re Chance Rides, Inc.), 2001 WL 34656216, at *5 (Bankr.
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regard to the determination as to the dischargeability or the liquidation of Mr. Weiss’s
prepetition tax debts.54 As set out above, the IRS has provided a detailed breakdown regarding
the trust fund tax liabilities.55 As to those tax debts that the Court finds were not discharged,
post-petition interest will not be discharged.56 Mr. Weiss argues that the tax returns for the listed
tax debts were timely filed. This Court will determine whether tax returns were timely filed,
late-filed or not filed at all. The Court does not abstain from the determination of the amount of
prepetition taxes that are due by Mr. Weiss to the IRS. For purposes of illustration only, the
Court sets out the three categories of taxes that the IRS alleges are owed by Mr. Weiss. The
treatment by the Court with regard to each category as to dischargeability is as follows (at an
evidentiary hearing the Court will determine the tax debts that fall within each category):

Category 1 Taxes (Unfiled Tax Returns): Those tax debts in this category are excepted
from discharge under § 523(a)(1)(B) because a return was not filed.

Category 2 Taxes (Late-Filed Tax Returns): Those tax debts in this category are
excepted from discharge under § 523(a)(1)(B) because the returns, although filed, were filed late
and within two years of the bankruptcy petition date.57

Category 3 Taxes (Timely-Filed Tax Returns): Those tax debts in this category are
dischargeable because the returns were timely filed, the tax debts were not allowed as priority

D. Kan. Dec. 5, 2001) (abstention not appropriate when “[a] prompt determination of [a debtor’s] tax liability is
essential to continuing and completing the administration of [the] bankruptcy case”).
54 Attendant to this procedure, this Court will determine whether there were late-filed or unfiled tax returns
as contemplated by § 523(a)(1)(B).
55 The Court notes that those tax debts set out in Category 2, the liabilities associated with the Form 940 tax
returns, are not trust fund liabilities and the Trust Fund Tax Exception would not apply to them even if an allowed
unsecured claim had been filed.

56 Tuttle at 291 F.3d 1238, 1241.

57 Debtors’ bankruptcy case was filed on October 18, 2006, and since the associated liabilities were for
quarters that were within two years of the filing of the bankruptcy case, then the tax returns must have been filed
within two years.

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unsecured claims in this bankruptcy case, and because of the latter, the tax debts are not excepted
from discharge under the Trust Fund Tax Exception set out in § 1328(a)(2). This category of
taxes are also dischargeable under the Debtors’ Plan that provided for the discharge of IRS
priority tax claims.

Conclusion

Because of the inapplicability of the Trust Fund Tax Exception under § 1328(a)(2) and
the binding effect of the Debtors’ confirmed Plan, the Trust Fund Taxes owed by Mr. Weiss
have been discharged, except that any tax debts associated with late-filed or unfiled tax returns
have not been discharged. This Court may, and elects to, determine the Debtor’s tax debts and to
determine those tax debts associated with late-filed or unfiled tax returns. These determinations
are material to Mr. Weiss’s fresh start. Since the IRS alleges that certain of Mr. Weiss’s tax
debts have not been discharged, then it is proper for this Court to render a final judgment as to
dischargeability after liquidation of the tax debts.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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