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WHAT IS PROPERTY OF THE BANKRUPTCY ESTATE?
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
Everything the debtor owns, or has or will have a right to, is property of the estate.
Failure to list property in the schedules will result in the property remaining property of the estate, even if case is closed.
The bankruptcy process is a series of many steps. One important step is the requirement that the debtor must list all property they have a interest in, no matter where it is located. 11 U.S.C. 541 (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
When dealing with property the debtor owns, or has or could have a right to, everything must be listed in the bankruptcy on Schedules A/B (the debtor swears under oath all the information is correct). If the debtor has an exemption right, that must be listed on Schedule C. When the bankruptcy is filed the trustee (and creditors) have a deadline to file objections to the items exempt is 30 days after the conclusion of the creditor’s meeting (522(f)). If there is no objection by the deadline, then the trustee and creditors waive their right to object to those items listed as exempt.
When the court closes the file, then everything listed on A/B is abandoned to the debtor (no one can make a claim on it, unless it is used as security for a debt). 11 U.S.C. Section 554(c) Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.
But, if there is any property that was not listed on Schedule A/B, even though the case is closed, the property is still not abandoned. If undisclosed property is discovered, even years later, the trustee can reopen the case to administrate (liquidate) the property.
MORAL TO THE STORY – BANKRUPTCY IS NOT SOMETHING TO DO WITHOUT UNDERSTAND ALL THE CONSEQUENCES.
A young, inexperienced paralegal said “bankruptcy is not rocket science”. She apologized for her naivety after we spend hours talking about some of the very basic bankruptcy issues.
Case law: Stevens v. Whitmore, 9th Cir. BAP No. CC-19-1325-TaFL Bk. No. 6:17-bk-15301-MH (7/2/20) A lawsuit was listed in the SOFA and even discussed at the 341 hearing, but the BAP decided that was not sufficient because it was not listed on Schedules A/B. Therefore, it was not abandoned and when the disputed claim ripened into a sum of money, it belonged to the estate, not the debtors.
Exempt property is property of the estate, “at least as of the commencement of the case”.
US v Warfield (also In re Tillman) , (NOTE – on appeal 6/15/21) CV 10-08204-PCT-DWL, (Arizona Dist Ct) The bankruptcy court correctly determined that the avoided tax lien was property of the estate and, therefore, could be preserved by the Trustee for the benefit of the estate under § 551. In Owen, the Supreme Court confirmed that property that is exempted is nevertheless initially the property of the bankruptcy estate.
The Court stated that “[n]o property can be exempted (and thereby immunized [against liability under § 522]) . . .unless it first falls within the bankruptcy estate” and noted that “[s]ection 522(b) provides that the debtor may exempt certain property ‘from property of the estate’; obviously, then, an interest that is not possessed by the estate cannot be exempted.” Owen, 500 U.S. at 308. In short, as the BAP noted in Heintz, “the fact that property is removed from the estate after a case is commenced, through exemption or some other means, does not change the fact that it was property of the estate as of the commencement of the case.” 198 B.R. at 585. See also In re Rains, 428 F.3d 893, 906 (9th Cir. 2005) (acknowledging the “well settled rule that property cannot be exempted unless it is first property of the estate”) (quoting Heintz). Debtor thus could not have exempted any interest in the Property if the Property had not first been considered property of the estate under § 541.
Trustee Avoids IRS tax lien – preserved for the benefit of the estate
Hutchinson v. Internal Revenue Service, 19-60065 (US Ct Appeals 9th Cir, 10/19/21) The IRS recorded liens for unpaid taxes, interest, and penalties against the debtors’ residence. After debtors filed for bankruptcy, the IRS filed a proof of claim. The portion of the claim that was secured by liens on the residence and attributable only to penalties was $162,000. The debtors filed an adversary proceeding, asserting that the IRS’s claim for penalties was subject to avoidance by the trustee and that because the trustee had not attempted to avoid this claim, debtors could do so under 11 U.S.C. 522(h). The trustee cross-claimed to avoid the liens and alleged their value should be recovered for the benefit of the bankruptcy estate. The bankruptcy court dismissed the adversary complaint. The trustee and the IRS agreed that the penalty portions of the liens were avoided under 11 U.S.C. 724(a). The Bankruptcy Appellate Panel and Ninth Circuit affirmed. Section 522(h) did not authorize the debtors to avoid the liens that secured the penalties claim to the extent of their $100,000 California law homestead exemption. Section 522(c)(2)(B), denies debtors the right to remove tax liens from their otherwise exempt property. Under 11 U.S.C. 551, a transfer that is avoided by the trustee under 724(a) is preserved for the benefit of the estate; this aspect of 551 is not overridden by 522(i)(2), which provides that property may be preserved for the benefit of the debtor to the extent of a homestead exemption.
In re Tillman (Warfield vs IRS and Tillman), 3:19-bk-01074 On June 19, 2020, this Court heard oral argument on this matter. Having heard the parties’ arguments and having reviewed their briefs, this Court now holds there exists no genuine issue of material fact and the Trustee may avoid the Tax Lien for the benefit of the estate pursuant to § 551. The Debtor is only entitled to claim as exempt value over and above the voluntary 1st lien and the involuntary IRS lien against her residence. After avoidance of its Tax Lien, the IRS holds an unsecured (but possibly nondischargeable) claim against the Debtor in the amount of the avoided Tax Lien. The Debtor may not employ §522(g) because the Debtor may not exempt that portion of the value of the Property occupied by the Tax Lien, whether that Tax Lien is held by the IRS or is avoided and then held by the Trustee for the benefit of this bankruptcy estate. Trustee’s Motion for Summary Judgment is hereby granted.
Child tax credit payments may not property of the estate and not to be considered for means test purposes either. Notice to Chapter 7 and 13 Trustees Regarding American Rescue Plan Act of 2021 (justice.gov)
see also: https://www.cnbc.com/2021/06/22/families-can-now-opt-out-of-child-tax-credit-payments-starting-july-15.html
The issue of wages versus accounts receivable: the difference may lie in whether the debtor has an inalienable right to receive the payments even if he never lifts a finger in the future. If he has that right, then there may be a good argument that it should be something akin to receivables. Conversely, if he still must perform some function in the future in order to get the money, then it can be argued that what he receives in the future is wages with the 75% exemption. In an insurance agent example, are the future commissions guaranteed no matter what? Or must the agent still take future action to make sure the money comes in? Or, for that matter, are there other contingencies in play (e.g. policy cancellations, etc.)? Then there is the question of whether or not taxes are being withheld from the income. If they are, that militates toward wages.
“Wages” is not defined in the Bankruptcy Code. Its definition from the Arizona Revised Statutes is as follows: 23-622. Wages A. “Wages” means all remuneration for services from whatever source, including commissions, bonuses and fringe benefits and the cash value of all remuneration in any medium other than cash.
(dealing with commissions) In re Roetman, 405 B.R. 336 (Bankr. Ariz. 2009); Warfield v. Alaniz, 2008 WL 700160 (D. Ariz. 2008); contra In re Osworth , 234 B.R. 497 (9th Cir. BAP 1999).
Commissions vs wages:
In re Roetman, 405 B.R. 336 (Bankr. Ariz. 2009 HAINES) The Trustee objects to the debtor’s claimed exemption of pre-petition real estate commissions under Arizona Revised “Statute (“A.R.S.”) § 33-1131. The Trustee argues that commissions paid to an independent contractor do not qualify as “earnings” because the exemption statute requires an “employer-employee” relationship. This court does not interpret A.R.S. § 33-1131 to require an “employer-employee” relationship in order for commissions to qualify as earnings, so the Trustees’ objection is denied and the debtor’s exemption claim is sustained.
In re Pruss, 235 B.R. 430, at 433 (8th Cir. BAP 1999) vacated following the dismissal of the bankruptcy case, 22 ( F.3d 1197 (8th Cir. 2000). When dealing with the issue of an attorney’s accounts receivable, the 8th Circuit Bankruptcy Appellate Panel ruled: ‘This court agrees and finds that when an attorney performs legal services, the fees generated constitute “earnings” from the attorney’s personal services. As such, the portion of the fees associated with the attorney’s personal labor fall squarely within the statutory definition of “earnings” in Neb.Rev.Stat. § 25-1558. Labeling the Debtor’s earnings as “accounts receivable” rather than “accrued compensation” does not change the essential fact that these funds constitute compensation earned by the Debtor for rendering personal services. Indeed, every wage earner and salaried employee whose compensation is paid in arrears holds an account receivable; yet, the existence of such a receivable does not change the character of the compensation from earnings to some other category of income.”
(book of business) In re Palmer: 167 B.R. 579, 93-10245-PHX-SSC, Adv. No. 93-1255. (Arizona 1/8/1994)
Once the bankruptcy petition was filed, the Debtor’s contractual right to receive these renewal commissions became property of the bankruptcy estate. As such, the Trustee is now entitled to pursue the contractual right of the Debtor to collect the renewal commissions earned on insurance policies sold prepetition.
Several courts have had the opportunity to address this issue. Those courts which have ruled on this issue have done so after reviewing the contract between the debtor and the insurance company. Generally, the courts have held that if the contract between the debtor and the insurance company requires the debtor to perform ongoing servicing as a prerequisite to receiving the renewal commissions then, and only then, should the renewal commissions not be considered to be property of the estate. In re Kervin, 19 B.R. 190 (Bankr.S.D.Ala.1982) (Court determined that the receipt of the commissions was conditioned upon the debtor meeting performance requirements and continuing to service accounts; as such, the commissions were not property of the estate). In re Tomer, 147 B.R. 461 (S.D.Ill. 1992) and In re Froid, 109 B.R. 481 (Bankr. M.D.Fla.1989) in which the courts acknowledged that the debtors had performed services postpetition; but because those services were not a prerequisite to receiving the commissions, and the majority of the services had been performed to obtain the original policy, the renewal commissions were property of the estate.(17. On a similar issue, if a debtor receives an income tax refund postpetition, the refund will constitute property of the estate to the extent it is attributed to prepetition withholdings. In re Rash, 22 B.R. 323 (Bankr.D.Kan.1982).)
ARS 33-1126(a) protects up to $300 (for each debtor) in one bank account on the day of filing the bankruptcy case. If the debtor has issued checks, but the funds have not yet been physically paid out of their bank account prior to the filing of the bankruptcy – these funds are property of the estate and the Trustee will demand surrender of the funds. The Debtor must reimburse the Trustee for the funds that were in the account on the date of filing, minus their exemption of $150.00. In re Sawyer, Judge Curley 3/06 (9th Circuit).
Check issued vs honored: Lewis v. Kaelin (In re Cresta Technology Corp.), NC-17-1186-BSTa (9th Circuit, Apr 06, 2018) The issue before the bankruptcy court was whether an ordinary check delivered to the creditor prepetition, but honored postpetition, was transferred on the date of delivery or honor for purposes of § 549(a). Relying on Barnhill v. Johnson, 503 U.S. 393 (1992), the bankruptcy court determined that the payment was transferred when the check was honored by the debtor’s bank.
Remotely deposited checks:
Regulation CC now includes new indemnities for remotely deposited checks, new warranties for electronic checks and electronic returned checks, and new indemnities for electronically-created items. These new rules also modify the expeditious return rules, including by making electronic returned checks subject to those requirements. The final rules were issued on May 31, 2017, and will take effect on July 1, 2018.
The rule therefore shifts the risk of loss to the remote deposit bank. When the check cashing store deposits the check at its bank and that bank does not get paid on the check by the drawee bank because the check has already been paid, the check cashing store’s bank will be able to recover from the remote deposit bank under the new rules.
Original article by John ReVeal, K&L Gates
What if your name is on someone else’s bank account?
That could be a significant problem. It is important to understand Arizona law as it governs the ownership of accounts:
14-6211. Ownership of accounts
A. During the lifetime of all parties an account belongs to the parties in proportion to the net contribution of each to the sums on deposit unless there is clear and convincing evidence of a different intent. As between parties married to each other, in the absence of proof otherwise, the net contribution of each is presumed to be an equal amount.
B. A beneficiary in an account having a pay on death designation has no right to sums on deposit during the lifetime of any party.
C. An agent in an account with an agency designation has no beneficial right to sums on deposit.
D. For the purposes of subsection A of this section, “net contribution” means the sum of all deposits to an account made by or for the party, less all payments from the account that are made to or for the party and that have not been paid to or applied to the use of another party and a proportionate share of any charges deducted from the account, plus a proportionate share of any interest or dividends earned, whether or not included in the current balance. Net contribution includes deposit life insurance proceeds added to the account by reason of the death of the party whose net contribution is in question.
Practice tip: List in SOFA under “property held for another”. Describe the circumstances and cite: ARS 14-6211. Perhaps list on A/B with zero value (assuming that to be the facts).
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See article by Cathy Moran, The Soap Box, Who Gets Grannie’s Cash – Grannie or the Bankruptcy Trustee?
There is a significant difference in a debtor who operates a business as a sole-proprietor and a debtor who has an interest in an LLC.
See In re Nakhuda, 9th Cir. BAP (3/2/15) Chapter 71 debtor Farouk E. Nakhuda (“Debtor”) appeals from an order granting the ex-parte application of chapter 7 trustee Paul J. Mansdorf (“Trustee”) and requiring the Debtor’s turnover of bankruptcy estate assets and records and discontinuance of the Debtor’s operation of two businesses. He also appeals from two orders denying his subsequent requests to set aside the order. We AFFIRM the bankruptcy court.
At the time that he filed a chapter 7 petition, the Debtor operated four laundromats. Two of the laundromats were sole proprietorships owned by the Debtor; according to the Debtor, the other two laundromats were partnerships in which the Debtor was an equal partner.
Before the § 341(a) meeting of creditors, the Trustee learned from Debtor’s counsel that the Debtor continued to operate the two sole proprietorship laundromats post-petition. In response, the Trustee advised counsel that continued operations of the laundromats was inappropriate. At the § 341(a) meeting, the Debtor testified that the laundromat operations (and his independent consulting business) were funded from a single bank account in his name, which he
continued to use. He also testified that, notwithstanding the Trustee’s earlier communication with counsel, he continued to operate the sole proprietorship laundromats.
The debtor’s membership rights in an LLC—including management rights—become property of the estate under §541. If the sole member of a single-member LLC files a Chapter 7 petition, the Chapter 7 trustee obtains all rights the single member previously held relating to the LLC, including without limitation the rights to manage the LLC and to obtain profits and distributions from the LLC, if any.
Under Arizona law, a judgment creditor can obtain a charging order to attach a judgment debtor’s interest in an LLC. A.R.S. § 29-655(A). However, the charging order allows the judgment creditor to obtain only the “member’s interest” in the LLC. Id. Arizona law defines the “member’s interest” as “a member’s share of the profits and losses of a limited liability company and the right to receive distributions of limited liability company assets.” A.R.S. § 29-601(13). A judgment creditor therefore does not obtain any management rights in the LLC with a charging order under state law. Similarly, the rights an assignee of a member’s interest may obtain are limited to economic rights or dictated by the LLC’s operating agreement and other governance documents. A.R.S. § 29-732(A), (B).
The Chapter 7 scenario is different, because all legal and equitable rights of a debtor become property of the estate under 11 U.S.C. § 541—not just those rights that a judgment creditor or assignee would be granted. In re B&M Land & Livestock, LLC, 498 B.R. 262, 266 (9th Cir. B.A.P. 2013). Section 541(c)(1)(A) “overrides state and contract law restrictions on the transfer of [a] [d]ebtor’s interests in order to transfer all property interests into the bankruptcy estate.” Id., citing In re First Protection, Inc., 440 B.R. 821, 830 (9th Cir. B.A.P. 2010). Therefore, a Chapter 7 trustee has the right to control and make decisions for a single member LLC, regardless of state law provisions or restrictions set forth in an operating agreement. Id.; First Protection, 440 B.R. at 830.
Note that a different result could pertain for a multi-member LLC, because the rights and interests of persons other than just the debtor are at stake. See, e.g., In re Albright, 291 B.R. 539 (Bankr.D.Colo. 2003); In re Modanlo, 412 B.R. 714 (Bankr.D.Md. 2006) (discussing relevant concepts in the context of a Chapter 11 case).
Can the trustee seize the member’s interest? The issue came to a head in the case of Movitz v. Fiesta Investments LLC (In re Ehmann), 319 B.R. 200, 2005 WL 78921 (Bk.D.Ariz., 2005) (“The Court here concludes that because the operating agreement of a limited liability company imposes no obligations on its members, it is not an executory contract. Consequently when a member who is not the manager files a Chapter 7 case, his trustee acquires all of the member’s rights and interests pursuant to Bankruptcy Code §§ 541(a) and (c)(1), and the limitations of §§ 365(c) and (e) do not apply.”).
The Ehmann court allowed a Trustee to take over a Debtor’s interest in an LLC which interest was effectively passive (there was nothing for the Debtor to do to continue to receive distributions), but indicated that if the Debtor’s interest was active (the Debtor had to do affirmatively undertake some acts to gain entitlement to distributions) the Trustee would have been restricted by Arizona law and the terms of the Operating Agreement. But, see In re Denman, 513 B.R. 720 (W.D.Tenn., July 24, 2014). If the Denman decision survives appeal and is accepted by other courts, has the potential to create significant problems for the other members of an LLC if one of the members lands in bankruptcy. If Section 365 never applies, then the Trustee will be able to take over all the rights that the debtor-member had in the LLC, even (presumably) if those rights were contingent upon the debtor-member first taking some other action as required by the Operating Agreement. In other words, it may be that the Trustee will be able to take the good without the bad in some situations, which of course may be to the disadvantage of the other members.
CHAPTER 13 CONVERTED TO 7:
Full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate. This is a confirmed chapter 13.
In re Castleman, (9th Cir. July 28, 2023) “In sum,” Judge Hawkins said, “the plain language of § 348(f)(1) dictates that any property of the estate at the time of the original filing that is still in [the] debtor’s possession at the time of conversion once again becomes part of the bankruptcy estate, and our case law dictates that any change in the value of such an asset is also part of that estate. In this case, that property increased in value.”
In re Castleman, 19-12235 (Bankr. W.D. Was, June 7, 2021) The issue before me is whether the debtor or the Chapter 7 bankruptcy estate receives the benefit of appreciation in property value for the period between filing of a Chapter 13 case and conversion of that case to Chapter 7. Choosing between conflicting judicial approaches, I determine that the Chapter 7 estate receives the benefit as appreciation is not a distinct and separate asset under the Bankruptcy Code and nothing in the statute fixes the value of estate assets at the date of petition. I conclude that the full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate.
In re Castleman, US District Court, W.D. Wa, 7/1/22 District court affirms: This appeal arises from the bankruptcy court’s June 4, 2021 memorandum decision and order that, upon conversion from Chapter 13 to Chapter 7, the Chapter 7 estate includes the post-petition, pre-conversion increase in equity in the Debtors’ house. Dkt. #1 at 14. Having considered the briefs of the Debtors and the Trustee, the applicable law, and the file herein, the Court affirms the bankruptcy court’s decision.
Postpetition, pre-conversion appreciation in value of Chapter 13 debtor’s home inured to the benefit of the debtor.
In re Cofer, 19-40361-JMM, (Bankruptcy court, D. ID, 1/8/21) Holdings: The Bankruptcy Court, Joseph M. Meier, J., held that the fact that property of the Chapter 13 estate, including debtor’s residence, may have vested in debtor once plan was confirmed did not prevent the property from entering the estate when debtor converted her Chapter 13 case to a case under Chapter 7; conversion of debtor’s Chapter 13 case to a case under Chapter 7 did not affect state law homestead exemption that debtor could claim, which remained the $32,020.56 exemption that debtor had on petition date; but postpetition, pre-conversion appreciation in value of Chapter 13 debtor’s home inured to the benefit of the debtor.
Chapter 13 appreciation in real property value (after confirmation of plan) belongs to Debtor.
In re Black, BAP NV 18-1352-FBH, BK 2:14-bk-12402-ABL (11/21/19) Debtor Richard L. Black obtained confirmation of a chapter 13 plan that required him to pay $45,000 to his creditors when he sold or refinanced his rental property. About three years later, he sold the property for $107,000. He proposed to pay $45,000 to his creditors and to retain the excess sale proceeds for himself. Chapter 13 trustee Kathleen A. Leavitt (“Trustee”) moved to modify Mr. Black’s confirmed plan to require him to pay the excess sale proceeds to his unsecured creditors. The bankruptcy court approved the modified plan.
Mr. Black appeals, arguing that he was not required to commit the excess proceeds to his plan payments. He also argues that the Trustee’s motion was untimely and that the modified plan did not meet the statutory requirements for plan confirmation.
We hold that the Trustee’s modified plan was timely and complied with the applicable statutes. But we agree with Mr. Black that he was entitled to retain the excess sale proceeds. Accordingly, we REVERSE.
In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property. Cf. Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1323 (9th Cir. 1991) (“No doubt Debtor’s argument that appreciation enured to him would have merit if his entire interest in the residence had been set aside or abandoned to him; it was not.”
In re: Gebhart United States Ninth Circuit, 09/14/2010 In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.
Bare Legal Title, Equitable Interest
541(d), states that property, in which Debtor only has bare legal title, is only property of the estate with respect to the “bare legal title”, as 541(d) makes the property subject to a third-party’s equitable interest. So, when we are talking about a vehicle that is just in Debtor’s name only (but someone else is driving and purchased the vehicle with his or her own money), 541(d) probably would not allow the trustee to take the car, as the only part of the estate is the Debtor’s bare legal title, and because the vehicle is subject to the equitable interest of a third-party, the value of that bare legal title is $0.00.
However, 544(a)(3) is another way to bring REAL property, regardless of whether the Debtor just has bare legal title. 544(a)(3) gives the trustee the status of a bona fide purchaser of real property.
The trustee may be a “bona fide purchaser”, depending on the definition under state law. For instance, Arizona, like most states, held that a bona fide purchaser depends on whether the prospective purchaser knows or should know that the property is not really the property of the record-title owner.
See three cases:
In re Sedona Cultural Park, BAP AZ-06-1339, 4/13/07) This case shows that the trustee can bring in the real property under 544(a)(3) as a bona fide purchaser, despite the debtor only having bare legal title under 541(d). However, in dicta, the court gives an example where a prospective purchaser is not a bona fide purchaser if there is actual or constructive notice that someone else is living in the real property, giving rise to a question on ownership despite what the title says. In this case, the trustee was a bona fide purchaser despite others living in the real property. Without getting into the details, this occupancy from a third party was irrelevant because other agreements indicated that the occupants did not appear to be the real owners, and hence the trustee was a bona fide purchaser due based on the terms of collateral agreements. But, in the typical case, the fact that others are living in the property may be enough to quash the trustee being a bona fide purchaser of real property for purposes of 544(a)(3). Regardless, it is a risk, as the mere occupancy may not be enough to disqualify the trustee as a “bona fide purchaser”. This is an unpublished case, but it cites all of the relevant case law, and it is a great roadmap for the analysis.
In re shepherd Oil, Inc, B-84-2015- (BK Court District of Arizona, Judge Curley, 7/11/1990) “Trustee’s strong-arm powers are superior to any rights creditor may claim under provision of Bankruptcy Code stating that property in which debtor holds, as of commencement of case, only legal title and not equitable interest, becomes property of estate only to extent of debtor’s legal title to such property. Bankr.Code, 11 U.S.C.A. §§ 541(d), 544(a)(3).”
In re Todd, Bankr. S.D. Florida 2008) “Chapter 7 debtor did not receive less than reasonably equivalent value when she transferred, for no consideration, real property to which she had held only bare legal title pursuant to resulting trust arising from previous transfer of property to debtor for no consideration, since value of debtor’s interest in property was essentially zero, and therefore transfer was not constructive fraudulent transfer under either Bankruptcy Code or Florida law.” This is just one example of similar cases.
In re Harrison, (Bkrtcy.D.Kan.) July 9, 2010: Bankruptcy Estate – Certificate of deposit titled in debtor’s name was impressed with a resulting trust in favor of her grandparents. A certificate of deposit (CD), though titled in the Chapter 7 debtor’s name, was impressed with a resulting trust in favor of her grandparents, a Kansas bankruptcy court held. Thus, the debtor held bare legal title and no equitable interest in the CD, and it was not subject to turnover to the trustee. The debtor’s grandparents provided the funds to purchase the CD, and it was titled in the debtor’s name pursuant to an agreement that it would be held exclusively for the grandparents’ benefit. There was no fraudulent intent, the court found, only an intent by the grandparents to place their savings beyond the reach of those who operate scams that prey upon the elderly. The debtor successfully rebutted the presumption that her grandparents intended a gift to her.
Issues to discuss in determining whether or not trust can be accessed by bankruptcy trustee: Is the trust revocable or irrevocable. Is the debtor the Trustee of the Trust. If not, is there an anti-alienation clause or any clause giving the Trustee discretion on whether to make a disbursement or not. If not, and the Trust can not be terminated, then a Chapter 7 Trustee might sell the stream of income at its current value. A Chapter 13 Trustee would look to the value of the Debtor’s interest in the Trust for Chapter 7 reconciliation purposes. See also: In re Pugh and In re Coumbe, 304 B.R. 378 …A “self-settled” trust is not subject to exclusion from the property of the estate under 11 U.S.C. §541 ( c) (2). In Pugh, 274 B.R. 883 (Bankr. Ariz. 2002); A.R.S. §14-7706.
Money and property held in a trust with a valid spendthrift provision specifying that the beneficiary cannot transfer his or her interest in the trust and has no control over it typically cannot be used to pay off the beneficiary’s creditors in bankruptcy. After your death, your beneficiary can receive distributions, i.e., gifts from the trust, according to the terms of the trust, as long as they are purely at the trustee’s discretion or for certain specific purposes, such as health, education, support, or maintenance. However, any amounts that are distributed prior to bankruptcy or within 180 days after the bankruptcy petition is filed can become part of the beneficiary’s bankruptcy estate and used to pay off creditors. https://www.mcrazlaw.com/1589-2/
There are numerous, more recent cases reported in the Ninth Circuit, which have concluded that the beneficial interest in a trust, if protected by valid spendthrift language, is not property of the estate. See In re Cutter, 398 B.R. 6 (B.A.P. 9th Cir. 2008); In re Cogliano, 355 B.R. (B.A.P. 9th Cir. 2006). This standard has similarly been followed by Arizona bankruptcy courts, which have concluded that property subject to a valid spendthrift provision with a restriction on the transfer of such beneficial interest is not property of the estate and is beyond the reach of creditors. See In re Kent, 396 B.R. 46 (Bankr. D. AZ. 2008). Perhaps most important for the analysis of the federal law is that in each of the cited cases, the Ninth Circuit BAP and Arizona bankruptcy courts have looked to state law to determine the validity of the spendthrift language and whether such property was beyond the reach of creditors. (Notably, 11 U.S.C. §541(c)(2) references property which includes a restriction on transfer, according to applicable nonbankruptcy law.)
A trust with a “spendthrift clause” should not be considered an equitable interest which may be claimed by the bankruptcy trustee, depending on state law. “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” 11 U.S.C. 541(c)(2). The future inheritance is not pre-bankruptcy property, and there is nothing to pull it into the bankrupt estate but see the special rule of Section 541(a)(5)(A),(C).
Would a spendthrift clause be an “exemption” to be disclosed under Rule 1007(h)? The Bankruptcy Rules specifically require a debtor to file a disclosure of the receipt of an inheritance after the commencement of a bankruptcy action. Under Bankruptcy Rule 1007(h), if the debtor acquires or becomes entitled to property under 11 U.S.C. 541(a)(5), “the debtor shall within 10 days after the information comes to the debtor’s knowledge or within such further time the court may allow, file a supplemental schedule in the chapter 7 liquidation case or chapter 13 individual debt adjustment case. If any of the property required to be reported under this subdivision is claimed by the debtor as exempt, the debtor shall claim the exemption in the supplemental schedule.”
Money and property held in a trust with a valid spendthrift provision specifying that the beneficiary cannot transfer his or her interest in the trust and has no control over it typically cannot be used to pay off the beneficiary’s creditors in bankruptcy. After your death, your beneficiary can receive distributions, i.e., gifts from the trust, according to the terms of the trust, as long as they are purely at the trustee’s discretion or for certain specific purposes, such as health, education, support, or maintenance. However, any amounts that are distributed prior to bankruptcy or within 180 days after the bankruptcy petition is filed can become part of the beneficiary’s bankruptcy estate and used to pay off creditors. https://www.mcrazlaw.com/1589-2/
There are numerous, more recent cases reported in the Ninth Circuit, which have concluded that the beneficial interest in a trust, if protected by valid spendthrift language, is not property of the estate. See In re Cutter, 398 B.R. 6 (B.A.P. 9th Cir. 2008); In re Cogliano, 355 B.R. (B.A.P. 9th Cir. 2006). This standard has similarly been followed by Arizona bankruptcy courts, which have concluded that property subject to a valid spendthrift provision with a restriction on the transfer of such beneficial interest is not property of the estate and is beyond the reach of creditors. See In re Kent, 396 B.R. 46 (Bankr. D. AZ. 2008). Perhaps most important for the analysis of the federal law is that in each of the cited cases, the Ninth Circuit BAP and Arizona bankruptcy courts have looked to state law to determine the validity of the spendthrift language and whether such property was beyond the reach of creditors. (Notably, 11 U.S.C. §541(c)(2) references property which includes a restriction on transfer, according to applicable nonbankruptcy law.)
In Clark v. Rameker, 573 U.S. 122 (2014), the Supreme Court held that individual retirement accounts inherited before bankruptcy are not exempt and belong to creditors. When petitioners filed for Chapter 7 bankruptcy, they sought to exclude $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the “retirement funds” exemption, 11 U.S.C. 522(b)(3)(C). The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The district court reversed. The Seventh Circuit reversed the district court. The Supreme Court affirmed, holding that funds in inherited IRAs are not “retirement funds” within the meaning of the code, based on three characteristics. The holder of an inherited IRA may never invest additional money in the account; is required to withdraw money from the account, no matter how far the holder is from retirement; and may withdraw the entire account at any time and use it for any purpose without penalty. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement, but nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The “retirement funds” exemption should not be read to create a “free pass,” The possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds.
NOTE: Unlike an IRA, an inherited 401(k) does not become estate property. In re Dockins, 20-10119 (Bankr. W.D.N.C. June 4, 2021) Judge Hodges (N.C. Bankruptcy judge) distinguished Clark. There, the question was whether an inherited IRA fell under Section 522(b)(3)(C), which exempts “retirement funds” if they are exempt from taxation under specified provisions of the Internal Revenue Code. Clark focused on the characteristics of inherited IRAs that make them something other than “retirement funds.” Unlike retirement funds, the holder of an IRA cannot make additional investments, must continually make withdrawals, and may withdraw everything without incurring a penalty.
Judge Hodges observed that inherited 401(k)s have “the same legal characteristics,” but the result was not the same. Unlike IRAs, the trusts holding 401(k)s must have anti-alienation provisions as required by both the IRS Code and ERISA.
In re Stern, No. 00-56431/56526 (9th Cir. February 04, 2003) Although a pension plan was properly included within a bankruptcy estate, the pension plan assets were exempt from distribution to debtor’s creditors. (Amended opinion)
Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, No. 02-458 (U.S.S.C March 02, 2004) The working owner of a business may qualify as a “participant” in a pension plan covered by ERISA. If the plan covers one or more employees other than the business owner and his or her spouse, the working owner may participate on equal terms with other plan participants; such a working owner qualifies for the protections ERISA affords plan participants and is governed by the rights and remedies ERISA specifies. Remanded with instructions regarding issue of loan repayments.
Hebbring v. U.S. Trustee, No. 04-16539 (9th Cir. September 11, 2006)
The Bankruptcy Code does not, per se, disallow voluntary contributions to a retirement plan as a reasonably necessary expense in calculating a debtor’s disposable income, but rather requires courts to examine the totality of the debtor’s circumstances on a case-by-case basis to determine whether retirement contributions are a reasonably necessary expense for that debtor.
Title 28 U.S.C. Section 157(b)(5) probably does not apply to PI claims held by DR against others. Such claims are usually considered non-core proceedings, therefore the state law is usually followed. 11 U.S.C. Section 522(d)(11) property exempted by BK estate – (FEDERAL EXEMPTIONS) the DR’s right to receive, or property that is traceable to – includes a payment, not to exceed $16,150 (check statute), for personal injury, not including pain and suffering or compensation for actual pecuniary loss, of the DR or an individual of whom the DR is a dependent, or (E) payment in compensation of loss of future earning of the DR or an individual of who the DR is or was a dependent, to the extent reasonably necessary for the support of the DR and any dependant of the DR; However, pain and suffering and actual damages are specifically not included in calculating the exemption amount. STATE EXEMPTIONS: NO PROTECTION, OTHER THAN WAGES/COMPENSATION: Kahn portion that is wages is 75 percent exempt; legitimate business purposes, if income going to be SSI (and exempt), only protection is that portion that is determined to be future income (but still issue that the “income” is not actually “wages”); If use the money to pay on house, then must have good business purpose in order for courts not to set aside (1 year look back in BK Court, 4 years in State Court);
POST-CONFIRMATION PI CLAIM:
In re Taylor, No. 16-40873 (Bankr. D. Kans. July 21, 2021). The best interests test does not provide authority to compel turnover through plan modification of settlement funds from the debtor’s post-petition personal injury case where that money would not be available to unsecured creditors in a case converted from chapter 13 to chapter 7 under section 348(f).
After the debtor’s chapter 13 plan was confirmed, she sustained a personal injury for which she filed a lawsuit. The case settled, and the trustee moved to modify her plan to incorporate $20,000 of the settlement, arguing that the money became property of the bankruptcy estate under section 1306 and, under the best interest of creditors test, should be paid to unsecured creditors. The debtor objected.
The best interest of creditors test, codified in section 1325(a)(4), provides that unsecured creditors in a chapter 13 case should receive no less than they would have received in a chapter 7 liquidation based on the value of estate property “as of the effective date of the plan.” That test is incorporated into section 1329(a) which provides that at any time during the pendency of a chapter 13 case, the trustee, debtor, or unsecured creditor may move to modify the plan to increase or reduce plan payments. Section 1306(a) provides that “property of the estate includes, in addition to the property specified in section 541” all property specified by section 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”
Because the phrase “effective date of the plan” in section 1325(a)(4) is not defined in the Code, some courts, such as Forbes v. Forbes (In re Forbes), 215 B.R. 183 (8th Cir. BAP 1997) and Sanchez v. Sanchez (In re Sanchez), 270 B.R. 322 (Bankr. D.N.H. 2001), have found the effective date to be the original date of the chapter 13 petition. These cases dealt with property newly acquired post-petition. The Forbes court found that “the effective date of the plan is not altered by plan modification,” noting that a modified plan does not need to be confirmed but may replace the original plan “if it is not disapproved.” That court was further convinced by the fact that the chapter 7 estate is governed by section 541 and section 1306 does not come into play in determining the chapter 7 estate property.
Other courts, such as In re Barbosa, 235 B.R. 540, 552 (Bankr. D. Mass. 1999), aff’d, Barbosa v. Solomon, 243 B.R. 562 (D. Mass. 2000), aff’d, 235 F.3d 31 (1st Cir. 2000), In re Villegas, 573 B.R. 844 (Bankr. W.D. Wash. 2017) and In re Nott, 269 B.R. 250 (Bankr. M.D. Fla. 2000), have found the effective date to be the modification date. In each of these cases, the court addressed a post-petition change in value to pre-petition property. The Barbosa court reasoned that using the modification date as the effective date gives effect to section 1325(a)(4). That court relied in part on “Keith Lundin’s Chapter 13 treatise and the 1977 legislative history of § 1325(a)(4), which states ‘the application of the liquidation test must be redetermined at the time of the confirmation of the modified plan.’”
The court here noted that other bankruptcy courts in Kansas have relied on Barbosa to find that “the effective date of the plan” for the best interests calculation is the date of plan modification. In In re Auernheimer, 437 B.R. 405 (Bankr. D. Kan. 2010), the debtor sought reduction of plan payments to reflect reduced value of personal assets and uncollectible receivables. That court found that using the modification date as the effective date dovetailed with section 348(f) which provides that the original chapter 13 valuations do not carry over to a converted chapter 7 case.
Likewise, in In re Davenport, No. 08-41213, 2011 WL 6098068 (Bankr. D. Kan. Dec. 7, 2011), the court granted the trustee’s motion for modification to capture proceeds from property the debtor sold for fifteen times its value as appraised on the petition date. The court found using the modification date as the effective date would allow unsecured creditors to receive what they would get if the case were converted under section 348(f) at that time.
The court agreed with those courts finding that the “effective date” was the date of plan modification, finding that the debtor’s position would render the best interests test meaningless in the context of modification.
Turning to the calculation of best interests using the modification date as the effective date, the court looked to section 348(f) to compare what unsecured creditors would receive in a hypothetical chapter 7 case converted at that time and what they would receive under the proposed modification. Section 348(f) provides that the “property of a Chapter 7 estate resulting from a good faith conversion from Chapter 13 consists of property of the estate as of the date of filing of the petition that remains in the debtor’s possession or control at the time of conversion.” The converted estate does not include property acquired during the pendency of the chapter 13 case under section 1306(a). Because unsecured creditors would not receive after-acquired property in a converted chapter 7 case, the court found they were not entitled to it in a modified chapter 13 case.
The court was further persuaded by tenets of statutory construction under which the specific applies over the general. Here, section 1306 is a general provision supplementing estate property under section 541, while section 348(f) specifically addresses property belonging to an estate converted from chapter 13 to chapter 7. For that reason, for purposes of the best interest test, the modified plan should be compared to the property that would be included in the hypothetical converted chapter 7 case.
The court denied the trustee’s motion to modify the debtor’s plan.
Kane v. Nat’l Union Fire Ins. Co., No. 07-30611 (U.S. 5th Circuit Court of Appeals, July 14, 2008)
In a personal injury suit, summary judgment for defendants finding plaintiffs were judicially estopped based on their failure to include the personal injury action in their Chapter 7 bankruptcy schedules, as well as a denial of the trustee’s motion to be substituted in that action as moot, are reversed and the case remanded where: 1) the personal injury claim became an asset of the bankruptcy estate upon filing of the Chapter 7 petition; 2) the trustee was the real party in interest and never abandoned his interest; 3) plaintiffs only stand to benefit in the event there is a surplus after all the debts of the estate are paid; and 4) a prior circuit court case did not control the outcome of this case, and the district court abused its discretion in concluding as a matter of law that it did.
NOTE TO ATTORNEYS RE Personal injury – chapter 7 The debtor may, as a practical matter, have more control over the situation than the trustee thinks. The debtor can effectively end the litigation by refusing to cooperate. This may not be in the debtor’s best interest if either (a) the debtor can exempt a portion of the proceeds, or (b) the potential recovery is considerably greater than the claims against the estate (thus leaving the excess to the debtor). The trustee can solve the problem of an uncooperative plaintiff by guaranteeing a portion of the proceeds to the debtor.
As a practical matter the trustee may have made a mistake by not working things out with the debtor’s existing counsel (who probably has a lien for his or her fees, as well). In my opinion, it is best for the trustee to retain the counsel who ‘has’ the case, and to agree to split the recovery so that the debtor has incentive to continue with the case.
A further problem may be state law prohibitions on the assignability of personal injury causes of action. While it is generally held that such prohibitions do not prevent the cause of action from becoming part of the BK estate, a defendant could argue in state court that the trustee, as an assignee, does not have standing to bring suit. If a lawsuit has not been filed, can a trustee file the injury claim lawsuit in his/her representative capacity, without the debtor being a named plaintiff? Or, in other words, can the trustee “force” the debtor to file a lawsuit? Does the duty to cooperate under sec. 521 extend to filing a personal injury action?
Other issues: If the trustee employs the debtor’s PI counsel as “special counsel” to represent the estate in pursing the injury claim, can that attorney also continue to represent the debtor? Does the trustee really have a legal interest in the claim itself, giving him/her the right to control prosecution of the claim, or does the trustee only have an equitable interest in the proceeds of the lawsuit?
The Trustee “owns” the entire claim and not just the proceeds. The Trustee can file the action in their representative capacity without the debtor’s permission. The assignability issue has been resolved in most circuits including the Ninth. See, Sierra Switchboard. Unless there is some dispute to “settle,” the Trustee can’t “give” anything to the debtor to elicit their cooperation. It would violate absolute priority and no court would approve the compromise. But, in California (and I’m sure other states), there are exemptions that are dependent upon the debtor’s “needs.” In such a situation, it is very common for the parties to resolve the split under the guise of a compromise of the disputed exemption claim. At that point, the debtor has the continuing financial interest to fully cooperate and both sides receive what they are entitled to.
2013 – (settlement with several big lenders/servicers). The settlement applies to the following servicers and loans that were being serviced and in the foreclosure process between January 1, 2009 and December 31, 2010. The servicers participating in the Independent Foreclosure Review settlement include: Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.
The settlement stems from enforcement actions that began in April, 2011, initiated by the OCC, the Federal Reserve and the Office of Thrift Supervision. It appears that those who filed their bankruptcy before April 1, 2011, their payment would not be considered property of the estate because the enforcement action at the foundation of the settlement did not happen until then. The argument is that until that action and the subsequent enforcement action filed in September, 2011, the borrower had no right to anything.
The settlement refers to people being in the foreclosure process. The foreclosure process begins long before the date the trustee sale is recorded. In bankruptcy the questions are – how will the trustee determine that the Debtor was in the foreclosure process between the dates of January 1, 2009 and December 31, 2010? Will the debtors be required to surrender all or some of the settlement checks. The legal question is – when did the right to the claim arise: 1) when the foreclosure process began or 2) when the enforcement action took place? From reading the settlement summary it appears the answer might be the latter, but only time will tell. See here if you want to know more: http://www.occ.gov/topics/consumer-protection/foreclosure-prevention/ifr-settlement-faqs.html
In re: Carrie Margaret Neidorf, AZ-14-1496-JuKiPa (9th Cir. BAP 2015)Chapter 7 debtor Carrie Margaret Neidorf (Debtor) scheduled her real property (Residence) as an asset of her estate. There was no equity in the property. Postpetition, the lender obtained an unopposed relief from stay order and foreclosed on the property. Years after the foreclosure, but while her bankruptcy case was still open, Debtor received a postpetition payment in the amount of $31,250 (Foreclosure Payment). The payment was made to Debtor pursuant to a national settlement between banking regulators and certain financial institutions, including Bank of America (B of A). Debtor disclosed her receipt of the Foreclosure Payment to Robert A. MacKenzie, the chapter 7 trustee (Trustee). Trustee then filed a Motion to Compel Debtor to Turnover Estate Property (Turnover Motion), asserting that the Foreclosure Payment was property of the estate under § 541(a)(7). The bankruptcy court denied trustee’s motion, 9th Circuit affirms.
But see: In re: Porrett 09-03881 (Bk Ct, Dist Idaho 3-10-16) In this chapter 7 case, the Court addresses an issue about the scope of property included in the bankruptcy estate. Post-closing Debtors received settlement from Wells Fargo which represented a post-petition consent order resulting from illegal lending practices in lending practices – diverted qualified borrowers away from “prime” loans, into more expensive “nonprime” loans. Wells Fargo identified Debtors as entitled to a compensatory payment under the Consent Order. Debtors’ case was reopened and trustee argued funds are property of the estate. The role played by the release is a critical factor in the Court’s analysis in this case. Because Trustee was required to release potential claims against Wells Fargo in order to receive the Payment, if the Payment was property of the estate, the Payment is likewise property of the estate pursuant to either. § 541(a)(6) or § 541(a)(7). The Court concludes the Payment is property of the bankruptcy estate.
Cusano v. Klein (09/06/01 – No. 99-56131)(9th Cir. Ct App) Under 11 USC 1141(b), listing of “songrights” written for a band in a Chapter 11 schedule of assets is sufficient to designate copyrights and song royalties such that disposition of the Chapter 11 petition will vest those rights back to the debtor.
Cassel v. Kolb, No. 01-17240 (9th Cir. March 03, 2003) A debtor’s declaration of an interest in trust properties on loan applications constituted an acceptance of his contingent interest in those properties, and that contingent interest is an asset of the bankruptcy estate.
In re Dawson, No. 02-16903 (9th Cir. May 18, 2004) “Actual damages” under 11 U.S.C. section 362(h) does not include damages for emotional distress suffered by a debtor when a creditor violates the automatic stay.
In re Rodeo Canon Dev. Corp., No. 02-56999, 02-57203 (9th Cir. March 30, 2004) Nonbankrupt partner is entitled to disgorgement of the proceeds of the sale of the property, pending the outcome of the property ownership dispute.
Sliney v. Battley (10/16/01 – No. 00-35075) (9th Cir. Ct App) Fishing quota rights granted 18 months after a fisherman filed for bankruptcy are not property of the bankruptcy estate even if the quota was based on pre-filing fishing history.
In re Nebel vs Warfield; 3:16-cv-08240-GMS (AZ District 6/17) Debtors filed for Chapter 7 bankruptcy on April 29, 2015. Prior to the petition date, Debtors made several payments related to an upcoming ballet course in North Carolina, which their seventeen-year-old daughter was to attend in June and July of 2015. Trustee filed a Motion to Compel Debtor to Turnover Estate Property on November 18, 2015. As relevant here, the Trustee sought turnover of two things: (1) the equivalent value of the payments related to the ballet course, and (2) 25% of the Debtors’ interest in the paid time off (“PTO”) each had accrued at their respective places of employment as of the petition date. BK Court ordered turnover, debtors appealed.
Nothing in § 541 requires that the debtor’s interest be immediately capable of being liquidated into cash in order to constitute property of the estate. To the contrary, § 541(c)(1) provides that such debtor’s interests become property of the estate even though they could not be liquidated and transferred by the debtor under applicable nonbankruptcy law. Moreover, § 542(a) [governing turnover is not limited to property that the debtor can transfer in kind to the trustee, because it alternatively requires that the “value of such property” be delivered to the trustee.
Henry A. KOKOSZKA v. Richard BELFORD, Trustee, 395 U.S. 337 (89 S.Ct. 1820, 23 L.Ed.2d 349) (June 1974) – tax refunds are not “earnings”.
The provision in the Consumer Credit Protection Act limiting wage garnishment to no more than 25% of a person’s aggregate ‘disposable earnings’ for any pay period does not apply to a tax refund, since the statutory terms ‘earnings’ and ‘disposable earnings’ are confined to periodic payments of compensation and do not pertain to every asset that is traceable in some way to such compensation. Hence, the Act does not limit the bankruptcy trustee’s right to treat the tax refund as property of the bankrupt’s estate. Pp. 648—652
PAWNED PROPERTY STILL PROPERTY OF THE ESTATE UNTIL ALL STATE COURT PROCEDURES HAS BEEN FOLLOWED.
In re Sorenson, BAP No. NC-17-1152-FBTa, Bk. No. 16-52281, Adv. No. 17-05018 (9th Cir BAP 5/25/18) Appellant Schnitzel, Inc., dba R&J Jewelry & Loan (“R&J”), appeals from the bankruptcy court’s ruling prohibiting R&J from disposing of chapter 131 debtor Sydney Eileen Sorensen’s pawned jewelry. R&J argues that the bankruptcy court erred because the jewelry was excluded from Ms. Sorensen’s estate by § 541(b)(8), and she could not extend her right to redeem the property through the bankruptcy process. We AFFIRM the Bankruptcy Court’s decision.
DISCUSSION: In the present case, when Ms. Sorensen filed her bankruptcy petition, all of her interests in her jewelry at that time became part of her bankruptcy estate. See Cty. of Imperial TreasurerTax Collector v. Stadtmueller (In re RW Meridian LLC), 564 B.R. 21, 28 (9th Cir. BAP 2017) (“The nature and extent of the debtor’s interests in property must be determined by nonbankruptcy law.”); Cal. Fin. Code. § 21201(a), (f). The bankruptcy court correctly held that her estate included her right to redeem her jewelry. California law
specifies that the pawnbroker only becomes vested with full ownership of the property after the ten-day period expires.
BUT – “Actions taken in violation of the automatic stay are void.” In re RW Meridian LLC, 564 B.R. at 28. Because the ten day notice was void ab initio, R&J did not satisfy the notice requirement was not satisfied. Therefore Ms. Sorensen’s redemption right was never extinguished, R&J never took title to the jewelry under subsection (f), and § 541(b)(8) did not remove the jewelry from the estate.
Dalton v. Warfield BAP for 9th Circuit, July 11, 2018) Chapter 7 debtor appeals from an order authorizing the chapter 7 trustee to enter into a compromise under Rule 9019 to settle Dalton’s prepetition claims against his former insurance agent, Wade Atchison, for payment of $5,000. At the time of his chapter 7 petition filing, Dalton’s claims against Atchison already had been disposed of by summary judgment in favor of Atchison. Shortly after Dalton commenced his bankruptcy case, Dalton filed a notice of appeal from the summary judgment, but the notice of appeal was untimely, and the district court presiding over Dalton’s claims denied Dalton’s motion for an extension of time to appeal. Under these circumstances, we agree with the bankruptcy court that there were considerable obstacles to any recovery on the prepetition claims. In light of these considerations, the bankruptcy court did not err in concluding that the estate’s creditors would be best served by approval of the compromise. Accordingly, we AFFIRM the bankruptcy court’s order authorizing the compromise.
JAN GLASER and TATYANA KHOMYAKOVA BAP No. NV-18-1175-KuTaB (9th Cir. BAP, 3/5/19), In June 2017, Debtors received a letter from the IRS notifying them that they owed $257,570.46 for the 2012 tax year plus accruing interest and penalties. As it turned out, because they had received a six month extension from the IRS in connection with their 2012 tax debt, Debtors filed their bankruptcy case approximately six days too early to discharge that debt. BAP concluded “the malpractice claims cannot be deemed to have accrued prepetition as the damages caused by Ms. Guymon’s negligence were suffered by Debtors entirely postpetition.”
Chapter 71 trustee, Shelley D. Krohn (Trustee), appeals from the bankruptcy court’s order denying her motion for (1) a determination that the malpractice cause of action of debtors, Jan Glaser and Tatyana Khomyakova (collectively, Debtors), against their bankruptcy attorney was property of Debtors’ bankruptcy estate and (2) damages for Debtors’ violation of the automatic stay. We AFFIRM.
Pradeep & Rindi Singh v. Rindi Singh, US TE (In re Singh) BAP No. CC-17-1353-FLS (9th Circuit, Mar 14, 2019) Not Published Ruling: For purposes of § 727(a)(2)(A), “property of the debtor” includes property held by the debtor’s alter-ego. Thus, a debtor who used a corporation that conducted a Ponzi scheme in addition to legitimate business could properly be found to be the debtor’s alter-ego, and funds that were deposited in and disbursed through that corporation’s bank account could constitute property of the debtor’s bankruptcy estate.
In re Nebel, 17-16350 (2/5/19, 9th Cir Ct of Appeals) Before filing a Chapter 7 petition, Mark and Amy Nebel paid the fees for their daughter to attend an out-of-state ballet camp and bought airline tickets for her. The daughter attended the camp post-filing. The bankruptcy court ordered the Nebels to reimburse the estate the amount paid for the camp tuition and tickets. The court also ordered turnover of 25% of any salary subsequently received by the Nebels from their employer for paid time off (“PTO”) accrued as of the date of filing. The district court affirmed the turnover order. We have jurisdiction of the Nebels’ appeal of the district court order under 28 U.S.C. § 158(d)(1) and affirm.
CHAPTER 13:
Debtor’s name on title, but never contributed to the property. Perhaps treat it as fully unsecured and put it in a separate class, relying by analogy on a chapter 11 case, Wells Fargo Bank, N.A. v. Loop 76, LLC (In re Loop 76, LLC), 465 B.R. 525 (B.A.P. 9th Cir. 2012).
WHAT INTEREST DOES THE DEBTOR HAVE THAT THE TRUSTEE CAN CLAIM?
- Under the right circumstances, Section 544(a)(3) does not give the trustee a back door. Siegel v. Boston (In re Sale Guaranty Corp.), 220 B.R. 660, 664 (9th Cir. BAP 1998), aff’d, 199 F.3d 1375 (9th Cir. 2000). Circumstances there:
- Debtor held deeds
- California law recognized a resulting trust because equitable owners, not Debtor, had paid for the properties
- Under California law, any purchaser for value would have had constructive knowledge of the equitable owners’ claim because they were in possession. (For purposes of Section 544(a)(3), the rights of a bona fide purchaser are determined by state law.)
In these circumstances, 544(a)(3) did not allow the trustee to avoid the equitable owners’ interests.
- On the same issues, Arizona law lines up with California law, and specifically extends to joint title situations.
- Resulting trust: Becchelli v. Becchelli, 508 P.2d 59, 62, 109 Ariz. 229, 232 (1973); Toth v. Toth, 190 Ariz. 218, 946 P.2d 900, 902 (1997).
- Possession gives constructive knowledge of the occupier’s title. Roy & Titcomb, Incorporated v. Villa, 296 P. 260, 261, 37 Ariz. 574, 577 (1931); see also Shalimar Ass’n v. D.O.C. Enterprises, Ltd., 688 P.2d 682, 690, 142 Ariz. 36 (Ct. App. 1984) (rights evident from inspection or which would have been revealed by inquiry after inspection).
- From out of state cases:
- “Application of the [resulting trust] rule is peculiarly appropriate where a child furnishes the purchase money and for reasons of convenience, minority, or otherwise, title is taken in his parents.” Ravenscroft v. Ravenscroft, 585 S.W.2d 270, 273 (Mo. Ct. App. 1979), disapproved on other grounds by Hoffmann v. Hoffmann, 676 S.W.2d 817, 824-25 (Mo. 1984).
- The resulting trust conclusion can be upheld even if the title holder is the only one on the mortgage, where the person claiming as equitable owner “paid the down payment and became obligated to pay the deferred installments.” Shirley v. McNeal, 145 So.2d 415, 274 Ala. 82 (Ala. 1962); see also Ravenscroft, 585 S.W.2d at 272 (noting deficiencies in the record on who paid what, but still either assuming or deciding that the resulting trust doctrine applied).
