United States of America, et al., v. Gary Krause, et al. (In
re Krause);
Case No. 05-17429; Adversary Case No. 05-5775 (Nugent) (November
13, 2007)
MEMORANDUM OPINION DENYING MOTIONS FOR SUMMARY JUDGMENT FILED BY THE PLAINTIFFS UNITED STATES OF AMERICA AND LINDA PARKS, TRUSTEE
Facts:
This was an adversary proceeding commenced on November 1, 2005 against debtor
Gary Krause and his brother Dr. Richard Krause, in Richard’s capacity
as trustee of several trusts. The reader is directed to the August case summaries
for a complete overview of that adversary proceeding and the Court’s
ruling (August 3, 2007). The reader is further directed to the September case
summaries for an overview of intervener Drake Krause’s motion for reconsideration,
which the Court denied (August 14, 2007).
In this proceeding, the United States moved for summary judgment on its claims
against Defendants Gary Krause and Dr. Richard Krause. Specifically, the United
States moved for summary judgment on the following claims: 1. to have Gary’s
tax debt excepted from discharge under 11 U.S.C. §523(a)(1)(C); 2. to
declare that certain property transferred to the Krause Children Trusts constituted
fraudulent transfers; 3. to declare that certain of the Krause Children Trusts
were Gary’s nominees and that the Government’s federal tax lien
attached to property held by the Krause Children Trusts; and 4. to permanently
enjoin Gary and Richard from transferring assets to and from the Krause Children
Trusts.
Holding:
The Court denied summary judgment on each of the Government’s claims.
Summary judgment was not appropriate under 11 U.S.C. §523(a)(1)(C). 11
U.S.C. §523(a)(1)(C) excepts from discharge any debt which is a tax 1.
with respect to which the debtor made a fraudulent return, or 2. which the
debtor has willfully attempted to evade or defeat in any manner. As to the
first prong, courts generally ask three questions: 1. Were the taxes underpaid?
2. Did the taxpayer/debtor know that his return(s) contained materially false
information? 3. Did the taxpayer intend to evade taxes by his returns? The
Court determined that although the partnerships Gary was involved in under-reported
taxes, and that Gary as a tax matters partner intended to limit his investors’ tax
liability, it could not conclude based upon the uncontroverted facts that Gary’s
returns were fraudulent. Further, summary judgment was not appropriate under
the second prong of 11 U.S.C. §523(a)(1)(C). In this inquiry, a court
must consider the totality of the circumstances and may find a willful evasion
of taxes where it is shown that the debtor’s actions are voluntary, conscious,
knowing and done with intent to evade collection. Mere nonpayment of taxes
is not sufficient to demonstrate the evade/defeat prong. The Court indicated
that it could safely conclude that all of Gary’s conduct in the arrangement
of his assets was voluntary, conscious, and knowing. Further, perhaps the Government
would be able to easily demonstrate by a preponderance of the evidence that
he did so with intent to evade or defeat his tax debt. However, on summary
judgment courts do not weigh evidence. There must be no doubt whatsoever of
Gary’s intent, and while many of the transactions were highly suspicious
some had a facial legitimacy, leading to doubt which a factfinder must sort
out.
Summary judgment on the fraudulent transfer claim was not appropriate.
The Court looked to K.S.A. 33-204(b) and the badges of fraud listed therein
to
determine whether the transfers were made with intent to hinder, delay, or
defraud the IRS. Looking to the uncontroverted facts, the Court concluded that
a number of the badges of fraud were present; namely, transfers to relatives,
retention of control of the property after the transfer, timing of transfers,
and transfers without consideration. However, a number of the badges were either
inapplicable or disputed, which allowed inferences to be drawn either way on
the issue of fraud. While taken as a whole, the Court could infer Gary’s
intent to defraud the IRS, to do so would require the Court to weigh the evidence.
On summary judgment, the Court is not permitted to do so. The Government failed
to show that it was entitled to summary judgment beyond a reasonable doubt.
Summary
judgment on the Government’s nominee theory was not appropriate.
In determining nominee status, the Court focused its inquiry on the degree
to which Gary exercised control of the Krause Children Trusts and their assets.
In such an inquiry, courts consider these factors: the taxpayer’s control
over the trust and its assets; the use of trust funds to pay personal expenses
of the taxpayer; the relationship between the taxpayer and the trust; the lack
of internal controls and oversight over the taxpayer’s actions; and the
lack of consideration for transfers of property into the trust. The Court could
not unequivocally conclude that the Krause Children Trusts were Gary’s
nominees. In particularly, the use of Trust funds to pay Gary’s personal
expenses gave rise to doubt if viewed in a light most favorable to Gary. Where
there is doubt, no matter how small, summary judgment must be denied.
Summary
judgment as to the Government’s request for injunctive relief
was similarly not appropriate because the Government’s other three claims
were not ripe for summary judgment.
Betty Sue Bailey; Case No. 04-42258 (Karlin) (December 20, 2007)
MEMORANDUM OPINION AND ORDER DENYING MOTION TO DETERMINE CHILD SUPPORT HAS BEEN PAID THROUGH CHAPTER 13 PLAN
Facts:
In January 2004, SRS filed a petition in state court
seeking reimbursement from Debtor Bailey under K.S.A. 39-718b, which holds
a parent responsible to
pay SRS for assistance provided by state to the child. Judgment was entered
against Debtor for $2,394 in July 2004. In August 2004, Debtor filed a voluntary
Chapter 13 petition. Debtor’s Chapter 13 plan provided that she was indebted
to Creditor DynTec for $2,394, with $1,200 to be paid and the balance discharged.
The plan was confirmed on November 17, 2004. In January 2005, Debtor filed
proof of claim on behalf of DynTec asserting DynTec was only owed $1,200. DynTec
filed its own proof of claim asserting it was owed the whole $2,394. Documentation
submitted clearly showed that the debt in question was for the support of the
Debtor’s minor child. Debtor did not object to DynTec’s claim.
Debtor subsequently moved for an order holding that when she completed her
plan she would be discharged from paying the balance of DynTec’s claim.
The State of Kansas filed a response, arguing both that the debt was not dischargeable
because the so-called “discharge by declaration” language in the
plan was not binding under 11 U.S.C. §1327, but also that the underlying
debt was a nondischargeable child support obligation.
Holding:
The Court held that Debtor’s remaining child support arrearage had
not been, and would not be, discharged by her payment of $1,200.00 to DynTec
during her Chapter 13 plan. The issue before the Court was whether the Debtor
could discharge a portion of her child support obligation to DynTec by including
language in her Chapter 13 plan to the effect that DynTec was only entitled
to $1,200, despite the provisions of 11 U.S.C. §523(a)(5). Relying upon
the key Tenth Circuit cases In re Andersen v. UNIPAC-NEBHELP (In re Andersen),
179 F.3 1253 (10th Cir. 1999), and Poland v. Educ. Credit Mgmt. Corp (In re
Poland), 382 F.3d 1185 (10th Cir. 2004), the Court concluded that a Chapter
13 plan could not convert a nondischargeable debt into a dischargeable one
by simply stating so in the plan. Debtor in this case gave no factual or legal
findings or basis for a finding that her debt to DynTec fit within some exception
to the statute that generally holds child support obligations nondischargeable,
nor did it provide any basis for converting an otherwise nondischargeable debt
into a dischargeable one.
Melnor, Inc. v. Christopher F. Corey (In re Corey); Case No. 07-20462; Adversary Case No. 07-6118 (Somers) (December 21, 2007)
MEMORANDUM OPINION AND ORDER ON DEFENDANT’S MOTION TO DISMISS, PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT, AND DEFENDANT’S CROSS MOTION FOR SUMMARY JUDGMENT
Facts:
Plaintiff Melnor, Inc. filed this adversary proceeding
requesting denial of discharge pursuant to 11 U.S.C. §727(a)(4)(A) and
objecting to discharge of its claim against Debtor pursuant to 11 U.S.C. §523(a)(2)(A).
On the first point, Melnor relied upon an alleged false statement in Debtor’s
Schedule F. On the second point, Melnor alleged that its claim for payment
of a judgment entered in its favor against Debtor in the U.S. District Court
for the District of Virginia was nondischargeable under § 523(a)(2)(A)
because the judgment was based upon fraud and is binding on the Debtor under
the doctrine of collateral estoppel.
Debtor filed a motion to dismiss Melnor’s 11 U.S.C. §523 Court
arguing the Virginia judgment had no collateral estoppel effect because the
issue of fraud was not actually litigated. Melnor objected to the motion and
moved for summary judgment on its 11 U.S.C. §523 claim, arguing that the
Virginia judgment did have collateral estoppel effect even though the allegations
of fraud were not litigated because the judgment was based upon default entered
as a result of Debtor’s litigation misconduct. Melnor also moved for
summary judgment on its 11 U.S.C. §727 claim.
In response, Debtor cross-moved
for summary judgment.
Holding:
Debtor’s motion to dismiss the 11
U.S.C. §523 count of Melnor’s
complaint was denied and Melnor’s motion for summary judgment on the
same was granted. The Court held that Debtor was precluded by the doctrine
of collateral estoppel from litigating either his liability to Melnor for fraud
or the amount of that liability. In the Tenth Circuit, collateral estoppel
bars the relitigation of an issue when 1. the issue previously decided is identical
with the one presented in the action in question, 2. the prior action has been
finally adjudicated on the merits, 3. the party against whom the doctrine is
invoked was a party or in privity with a party to the prior adjudication, and
4. the party against whom the doctrine is raised had a full and fair opportunity
to litigate the issue in the prior action. Preclusive effect is also given
to a default judgment where the losing party has had a full and fair opportunity
to participate in the previous litigation but has engaged in serious obstructive
conduct resulting in a default judgment. In the Virginia litigation, all of
Debtor’s defenses to Melnor’s fraud claim were stricken because
of Debtor’s overall failure to meaningfully participate in discovery,
with Debtor’s failure to appear at a single hearing being the culmination
of a course of obstructive behavior on the part of the Debtor which effectively
prevented the court from proceeding to the merits of the underlying dispute.
Under Tenth Circuit case law, the Court held that Debtor’s actions in
that case fell under the exception to the second element of collateral estoppel.
The Court viewed the striking of all Debtor’s defenses in the Virginia
court as equivalent to the entry of a default judgment on liability for purposes
of collateral estoppel.
Melnor’s motion for summary judgment on its objection
to discharge under 11 U.S.C. §727 was denied for two reasons. First, the
Court found there to be a material issue of controverted fact concerning the
requirement
under 11 U.S.C. §727(a)(4)(A) that the false statement be made knowingly
and fraudulently. In Debtor’s schedule he characterized his obligation
to Melnor on the Virginia judgment as a “business loan consigned.” Among
other things, Debtor claimed his counsel determined the description of the
obligation, not the Debtor. The Court noted that reasonable reliance upon the
advice of counsel is an accepted defense to a 11 U.S.C. §727(a)(4)(A)
objection to discharge claim. Second, Melnor had not established that the alleged
mischaracterization of the obligation was itself material by having any impact
upon the estate. In turn, the Court granted Debtor’s cross-motion for
summary judgment on the 11 U.S.C. §727(a)(4)(A) claim. The alleged mischaracterization
of Melnor’s claim for satisfaction of the Virginia judgment was not a
false statement knowingly and fraudulently made by Debtor that relates to a
material fact.
Julie Ann Fabert; Case No. 06-21539 (Somers) (January 9, 2008)
MEMORANDUM OPINION AND ORDER OVERRULING TRUSTEE’S OBJECTION TO DEBTOR’S AMENDED SCHEDULE C EXCEPTIONS
Facts:
Debtor, at the time a resident of Liberty, Missouri,
filed a voluntary Chapter 7 case in September 2006. From June 2003 through
August 2006, Debtor had resided
at various locations in Kansas. From September 2006 on, she had an address
in Liberty, Missouri listed as her residence. In November 2006, Debtor filed
a change of address to Overland Park, Kansas. Debtor’s initial Schedule
C stated she was entitled to exemptions under 11 U.S.C. §522(b)(2) and
claimed as exempt a certain amount of personal property. In March 2007, Debtor
filed amended Schedules B and C. Amended Schedule B included her 2006 federal
and state income tax refunds. In Amended Schedule C, Debtor added an exemption
for the refunds, pursuant to 11 U.S.C. §522(d)(5). Trustee filed an objection
to Amended Schedule C, alleging Kansas exemptions are applicable and Kansas,
as an opt out state, does not permit Debtor to elect federal exemptions.
Holding:
The issue was whether Debtor was entitled to use federal
exemptions specified in 11 U.S.C. §522(d). The Court overruled the Trustee’s objection
to the Debtor’s use of the federal exemptions. Although under 11 U.S.C. §522(b)(3)(A),
Kansas exemption statutes applied, Trustee failed to prove that Debtor, who
was not living in Kansas at the time of filing, could in fact use the Kansas
personal property exemptions. The Court assumed that Kansas exemptions were
applicable because the parties agreed this to be the case and because the stipulated
facts were insufficient to make possible a determination under federal common
law as to domicile. Under K.S.A. 60-2312, Kansas is an opt-out state, meaning
a Kansas debtor usually may not choose between the federal and state exemptions
and must look to state exemption law. However, the Court held that the Trustee
failed to prove that Debtor was domiciled in Kansas on the date of filing.
Trustee had to show that on the date of filing Debtor, who had a Missouri address
at the time, had not changed her domicile to Missouri and intended to return
to Kansas as her place of residency. Trustee had not done so.
Frontier Farm Credit, PCA v. Christopher Charles Norris, et al. (In re Norris);
Case No. 05-43551-7; Adversary Case No. 06-7005 (Somers) (January 10, 2008)
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT CRAIG NORRIS’S MOTION TO DISMISS THE CLAIMS ASSERTED AGAINST HIM IN THE PLAINTIFF’S FIRST AMENDED COMPLAINT
Facts:
This proceeding began as Frontier’s dischargeability complaint against
the Debtors, including at that time Ford Motor Credit Company. Frontier later
obtained permission to amend its complaint to seek additional relief. The Court
granted Ford Credit’s motion to dismiss. The reader is directed to the
September, 2007, case summaries for an overview of that adversary proceeding
and the Court’s ruling (September 10, 2007). Frontier’s amended
complaint also asserted claims against Debtor Chris Norris’s son, Defendant
Craig Norris. One claim involved four pieces of Debtor’s equipment, a
tractor, a loader, a bush hog, and a stock trailer, upon which Frontier had
a lien. In April, 2005, Frontier agreed to release its lien in the equipment
in order for Debtor to sell said equipment to Defendant for $10,000.00. Frontier’s
first claim against Defendant alleged that Debtor fraudulently claimed all
four items would be sold because Defendant paid $10,000.00 only for the tractor,
receiving the other three items from Debtor as gifts. Frontier claimed its
lien on the three items, therefore, should remain enforceable against the Defendant.
Frontier’s second claim was that Debtor sold 198 head of cattle, which
had been previously pledged to secure a line of credit from Frontier, in March
2004. Debtor then gave the proceeds of the sale to Defendant, who used the
money to pay on a debt he owed to his bank. Frontier alleged the same regarding
a sale of 25 head of cattle in August 2004. In all, Frontier alleged that Defendant’s
bank possessed $45,047.37 and the Defendant $740.17 from the proceeds of Frontier’s
collateral, and requested the Court to impose constructive trusts on the proceeds.
Defendant
moved to dismiss Frontier’s claims, asserting that the $10,000
payment was to purchase all four pieces of equipment, and that Frontier’s
second claim was barred by the statute of limitations for conversion actions,
and in it Frontier failed to plead facts sufficient to assert a fraud claim
against Defendant’s bank and himself.
Holding:
The Court denied Defendant’s motion to dismiss Frontier’s claim
as to the enforceability of its lien on the pieces of equipment. Under Bell
Atlantic Corporation v. Twombly, 127 S.Ct. 1955 (2007), a complaint attacked
on a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations,
but a plaintiff’s obligation to provides the grounds of his or her entitlement
to relief requires more than labels and conclusions. A formulaic recitation
of the elements of the cause of action is not sufficient. Factual allegations
must be enough to raise a right to relief above the speculative level on the
assumption that all the allegations in the complaint are true, even if doubtful
in fact. Frontier’s claim that Debtor misrepresented the transaction
regarding the four pieces of equipment, if accepted by the factfinder as the
truth, could justify reinstating Frontier’s lien on the three aforementioned
items, and thus the motion was denied.
The Court denied Defendant’s motion to dismiss based upon statute of
limitations on Frontier’s claim for a constructive trust. The Court declined
to date the running of the statute of limitations for conversion at the time
of the transaction, but rather from when the transactions first caused substantial
injury to Frontier or when the fact of injury became reasonably ascertainable
to Frontier. K.S.A. 60-513(b). The record before the Court failed to establish
either of these before two years prior to the claims being brought against
Defendant.
The Court granted Defendant’s motion to dismiss Frontier’s claim
against him for a constructive trust on Defendant’s $740.17. Frontier’s
amended complaint did not suggest that Defendant acted in bad faith in receiving
the money from Debtor or that he had notice of Frontier’s trust interest
in the property, both of which must be alleged in order to sufficiently state
a claim for relief. Twombly; Sprague v. Farm Credit Services, 28 Kan. App.
2d 872 (2001).
Julie Nanette Weaver; Case No. 05-25778-7 (Somers) (November 30, 2007)
OPINION FINDING DEBTOR IN CONTEMPT, DECLARING TRUSTEE IS ENTITLED TO RECOVER ATTORNEY FEES, AND DENYING DEBTOR’S RECENT EFFORT TO EXEMPT A HOMESTEAD
Facts:
This case involved a Debtor who filed a Chapter 7 bankruptcy
on October 12, 2005, but ignored numerous obligations imposed on her because
she chose to
seek bankruptcy relief. She failed to provide information and documentation
sought by the Trustee, failed to turn over property of the estate, gave false
information while testifying under oath before the Court, and failed to adequately
explain what happened to a check for more than $48,000.00.
Shortly before filing
on October 12, 2005, the Debtor owned three pieces of real property: 1. a property
where she had lived since 1990 (owned in co-tenancy);
2. a house in Gardner, Kansas, that had belonged to her aunt; and 3. another
house in Osawatomie that had belonged to her grandmother. On her bankruptcy
petition, the Debtor gave her address as being on Carr Avenue, but she did
not otherwise mention that real property in the petition. The day before she
filed for bankruptcy, the Debtor received a check for $48,819.92 at a closing
for the sale of her aunt’s house. That sale was reported on the Debtor’s
Statement of Financial Affairs as having occurred on September 20, rather than
October 11.
The Debtor failed to provide documentation about the transaction and her use
of the proceeds of the sale and testified falsely about her use of the proceeds.
The Debtor also reported being a member of a class-action lawsuit, but said
she had been told she would not receive anything because her claim was not
timely made. In August 2006, however, she received $3,750 to settle her claim
in the case. At some unspecified time in 2006, the Debtor also received federal
and state income tax refunds for 2005; based on the date of her bankruptcy
filing, $2,602.05 of these refunds belonged to the estate. The Debtor failed
to give the Trustee either the settlement money or the estate’s share
of the tax refunds. Eventually, in February 2007, the Trustee filed a motion
to compel turnover of the money that belonged to the estate, and later reached
an agreement for the Debtor to pay the sum of those amounts, $6,352.05, to
the estate out of future tax refunds.
In addition to seeking turnover of the estate’s money, the Trustee’s
motion to compel asked the Court to order the Debtor to provide information
and documentation about a variety of things, including the sale of the aunt’s
house and the mortgage on the grandmother’s house. On July 25, 2007,
the Debtor testified at a hearing at which the
Court granted the motion to compel. A short time later, the Debtor admitted
that much of her testimony at that hearing had been false.
In her original Schedules, the Debtor did not claim any exemptions, but later
amended her schedules to include some exemptions. The Trustee objected to the
newly claimed exemptions, alleging the Debtor’s failure to disclose assets
and information, and her continuing false statements to the Court and the Trustee
should invalidate the exemptions.
On the same day the Trustee filed his objection to the Debtor’s amended
exemptions, the Trustee also filed a motion for an order requiring the Debtor
to show cause why she should not be held in contempt for: 1. failing to provide
proof of filing her 2006 Kansas income tax return; 2. giving false testimony
about her use of the proceeds of the sale of her aunt’s house; 3. failing
to disclose there is a co-owner of the Carr Avenue property; 4. claiming her
grandmother’s house had been foreclosed on when county records show the
Debtor owns it free and clear; and 5. continuing to fail to provide information
and documentation the Trustee had previously requested.
Holding:
The Court held that the Debtor was clearly in contempt because she failed to
comply with the Court’s order to provide information and documentation
to the Trustee and she testified falsely at the July 2007 hearing. The Court
noted that in this case, the Debtor’s contemptuous behavior has forced
the Trustee to incur attorney fees in an effort to force her to comply with
the Court’s Orders. Consequently, the Trustee is entitled to recover
those fees from the Debtor as compensation for her contempt.
The Court held that
because the Debtor failed to disclose and continually made false statements
to the Court and the Trustee, such actions constitute
bad faith and justified denying the Debtor’s homestead exemption. Ordinarily,
in light of the generous protection homesteads in Kansas are given, debtors
here have no reason to try to hide anything about their homesteads. However,
the Tenth Circuit has approved denying a debtor’s otherwise valid exemption
claim based on the debtor’s bad-faith failure to disclose the asset at
the beginning of the bankruptcy case.
The Court ruled as follows: 1. the Debtor is in contempt of the Court’s
orders announced at the July 25, 2007, hearing, and the Trustee is entitled
to recover attorney fees he incurred trying to force the Debtor to comply
with those orders; 2. the Debtor has acted in bad faith throughout this case,
and the Trustee is entitled to recover attorney fees he would not have incurred
if the Debtor had freely and fully disclosed all her financial circumstances
from the beginning of the case; and 3. the Trustee’s objection to the
Debtor’s attempt to exempt is sustained, and the exemption is denied.
William Frederick Munck and Susan Taylor Munck; Case No. 02-41690 (Karlin)
(December 7, 2007)
MEMORANDUM AND ORDER DENYING BOTH THE MOTION TO REOPEN AND MOTION FOR SHOW
CAUSE ORDER
Facts:
This matter was before the Court on the motion by Creditor YoungWilliams
Child Support Services to Reopen Case to Determine Dischargeability, and
Debtors’ Motion for Show Cause Order. YoungWilliams Child Support Services
sought to reopen this case, which was closed on January 27, 2006, for the
purposes of determining whether a debt owed to JoAnn McGuire was discharged
in this bankruptcy. The Debtors Chapter 13 plan contained the following provision:
CHILD SUPPORT: Current child support is generally paid through the plan.
If child support arrearages do exist, indicate how they are to be paid: To
be paid through plan, once actual amount determined. However, all debts denominated
as “reimbursement support” to be discharged upon completion of
the plan.
The term “reimbursement support” mentioned in the plan clearly
referred to a judgment awarded to creditor, JoAnn McGuire, less than eight
months earlier, on January 17, 2002 in the Circuit Court of Kanawha County,
West Virginia in the amount of $24,252.00. On August 12, 2002, Ms. McGuire
filed an objection to the proposed Chapter 13 plan, claiming that the provision
in question sought to discharge her nondischargeable child support obligation.
Debtors responded to Ms. McGuire’s objection on August 19, 2002, claiming
that “JoAnn McGuire is neither ‘a spouse, former spouse, or child
of the debtor’” and that the judgment entered in her favor in
West Virginia was not exempt from discharge under 11 U.S.C. §523. The
confirmation hearing was held on October 30, 2002. Ms. McGuire’s objection
to the plan provision providing for the discharge of her debt for reimbursement
support was heard. The Court confirmed the plan, overruling Ms. McGuire’s
objection.
Holdings:
Because this matter was before the Court on a motion to reopen a case to
determine the dischargeability of a debt, the Court first decided whether
YoungWilliams had any possibility of success on the dischargeability claim.
The Debtors objected to reopening the case because they claim the confirmed
Chapter 13 plan that specifically called for the discharge of the debt in
question is binding upon all parties pursuant to 11 U.S.C. §1327(a).
The Court noted that the decision by the Tenth Circuit Court of Appeals In
re Anderson, 179 F.3d 1253 (10th Cir. 1999) is the starting point for any
analysis of the binding effect of a Chapter 13 plan confirmed before September
24, 2007. In Anderson, the debtor included a provision in her Chapter 13
plan that excepting her student loans from discharge pursuant to 11 U.S.C. §523(a)(8)
would create an undue hardship on the debtor and her dependants, and that
confirmation of the plan would constitute a finding to that effect and that
the student loan debt would be discharged.
After the debtor received her discharge, the student loan creditor began
efforts to collect the student loans in question. The Tenth Circuit Court
of Appeals eventually held that the Chapter 13 plan, which clearly indicated
that the repayment of the student loans would constitute an undue hardship
and would be discharged, was binding on all parties. Thus, the student loan
creditor was bound by the plan’s terms, and could not collect the discharged
debt.
The holding in Andersen was then clarified in In re Poland, 382 F.3d 1185
(10th Cir. 2004), a case where a debtor attempted to apply the holding in
Anderson to her own plan and included language that simply said her student
loans would be discharged upon completion of the plan. In Poland the Court
declined to give preclusive effect to the plan provisions, resulting in the
student loans being excepted from discharge.
This Court found that Andersen, as clarified by Poland, controls in this
case. The Debtors’ Chapter 13 plan clearly indicated that “child
support” would be paid through the plan once the actual amount was
determined, but that “reimbursement support” would be discharged.
Once the Chapter 13 plan was confirmed, and no appeal was taken from the
confirmation order that clearly adopted the provisions of the plan, the determination
that the debt owed Ms. McGuire did not fit within the scope of 11 U.S.C. §523(a)(5)
became binding upon the parties.
For the above reasons, the Court denied the Motion to Reopen.
Ronald Edward Henderson, Jr.; Case No. 05-42351 (Karlin) (December 14, 2007)
Michael Francis Sherlock and Tammi Rae Sherlock; Case No. 06-40579 (Karlin)
(December 14, 2007)
MEMORANDUM OPINION AND ORDER
Facts:
This matter was before the Court on Debtor, Henderson’s Motion for
Determination that the Portion of Debtor’s Income Tax Refund Offset
by the U.S. Department of Treasury is Not Property of the Estate and on the
Motion by Debtors Sherlock for Determination that the Portion of Debtors’ Income
Tax Refund Offset by the IRS is Not Property of the Estate. In both of these
cases, the Chapter 7 Trustee had demanded turnover of pre-petition tax refunds
that were offset by the federal government for either prior tax debts or
past due child support. The Trustee argued that the estate is entitled to
the application of the equitable doctrine of marshaling and that the Debtors’ creditors
should not bear the entire burden of the set offs. In response, the Debtors
filed these motions, seeking a determination that the Chapter 7 Trustee cannot
compel turnover, arguing that the doctrine of marshaling is inapplicable.
Holdings:
The Court discussed that In re Steele 2005 Bankr. LEXIS 2384, the Steele
Court analyzed the equitable doctrine of marshaling, noting that the trustee
must demonstrate the presence of three required elements to invoke that doctrine:
1. the existence of two creditors with a common debtor; 2. the existence
of two funds belonging to the debtor; and 3. the legal right of one creditor
to satisfy his demand from either of the funds, while the other may resort
to only one fund. The trustee asserted that 1. the debtors had two creditors,
the IRS and the Trustee, who stood in the shoes of unsecured creditors; 2.
there were two funds belonging to the debtors, the pre-petition refunds and
post-petition property; and 3. the IRS could satisfy its claim from either
of these funds, since its claim is non-dischargeable, but the Trustee could
look only to the pre-petition refund that had been offset.
Based on the arguments made in Steele, the court invoked the equitable doctrine
of marshaling, and held that the debtor was responsible for reimbursing the
entire amount of the pre-petition tax refund to the estate.
The court also discussed In re Blagg, 372 B.R. 502 (Bankr. D. Kan. 2007)
a case which reached a different conclusion under nearly identical facts.
In Blagg, the court found that the equitable doctrine of marshaling should
not be applied for several reasons. The court held that the first element
for marshaling was not present because the creditors involved were not secured
creditors, and the doctrine’s entire purpose is to benefit junior secured
creditors. Second, the court held there were not two separate funds subject
to a lien by a senior lien holder, and there was in reality no perfected
lien holder. Third, the court held that the debtors never had the purported “two
funds” in their hands, nor did they have control over those funds.
Fourth, the court held that 11 U.S.C. §105 could not be used to invoke
marshaling, because applying marshaling to the facts of this case would directly
circumvent the Bankruptcy Code’s specific provisions that allow a preference
for governmental entities. Fifth, the court reasoned that because the debtors
never actually had possession of or control over the tax refunds, there is
no statutory authority to require them to turnover the funds.
This Court found
that the approach taken in In re Blagg was more persuasive, and adopted that
holding. The Court found that the doctrine of marshaling is
not applicable, and the Trustee may not collect the pre-petition portion of
Debtors’ income tax refunds that were offset by the federal government
from the respective Debtors. The Debtors were not required to repay the offset
amounts to the estate.
Michael E. Lowe and Jacqueline E. Flowers-Lowe; Case No. 05-14936 (Nugent)
(December 24, 2007)
Larry E. LeTourneau and Donna M. LeTourneu; Case No. 05-15333 (Nugent) (December
24, 2007)
Patricia A. Little; Case No. 05-15334; (Nugent) (December 24, 2007)
Ricky A. Murphy and Denice L Murphy; Case No. 05-15728(Nugent) (December
24, 2007)
Cynthia My Nguyen; 05-16484; (Nugent) (December 24, 2007)
Forest Earl Denton and Germaine Ann Denton; 05-16951 (Nugent) (December 24,
2007)
Marc William Dittmar; Case No. 05-17094; (Nugent) (December 24, 2007)
John Earl Hulse; Case No. 05-17430; (Nugent) (December 24, 2007)
MEMORANDUM OPINION
Facts:
This matter was before the Court on debtors’ motion for summary judgment
and Chapter 7 Trustee Linda Parks’ motions for summary judgment on
the Chapter 7 Trustees’ motions for turnover of cash and stock distributions
received by debtors through their employment. The Debtors were former employees
of The Boeing Company who became employees of Spirit AeroSystems, Inc. on
June 17, 2005, the date Spirit acquired Boeing’s commercial aircraft
operations in Wichita, Kansas. At the time of the sale, debtors were represented
by either the International Association of Machinists and Aerospace Workers
(“IAM”) or the International Brotherhood of Electrical Workers
(“IBEW”) The Unions ratified a collective bargaining agreement
with Spirit. A provision contained in the CBA provided for certain employees
to be eligible to receive cash and stock distributions under an anticipated
Equity Participation Program upon the occurrence of specified events. Spirit
issued those cash and stock distributions in December 2006 and March 2007,
respectively, after an Initial Public Offering occurred.
The trustee filed a motion seeking to require the debtors’ to turnover
all distributions received from Spirit, contending that they were property
of the estate pursuant to 11 U.S.C. §541.
Holdings:
The question before the Court was whether the debtors had a legal or equitable
interest in the SARs on the date their petition was filed.
The Trustee argued
that the debtors had a contractual right to the Stock Appreciation Rights
(“SARs”) on the date that the CBA was ratified, which was
prior to all of the debtors’ bankruptcy filing. The debtors respond that
the SARs are not property of the estate because the Equity Participation Program
(“EPP”) was not established until October 27, 2006, after the debtors’ petition
dates. In the alternative, the debtors argued that the SARs were income and
exempt from the estate.
Pursuant to 11 U.S.C. §541(a), an estate is formed when a debtor files
for bankruptcy. The bankruptcy estate includes “all legal or equitable
interests of the Debtor in property as of the commencement of the case,” with
some limited exceptions. In order to be earmarked as property of the estate,
the debtors must have had an interest in the property “as of the commencement
of the case.” While each debtor has a different filing date, all debtors
filed their petitions after June 17, 2005, the date of the CBA.
The Court held that at the time of the debtors’ filed for bankruptcy,
their rights to the SARs were not established. The Court could not conclude
that these rights were “sufficiently rooted in the pre-bankruptcy past
and so little entangled with the bankrupts' ability to make an unencumbered
fresh start” and be regarded as property of the estate. The Court concluded
that the rights to the SARs were not property of the debtors’ estates.
The debtors’ motion for summary judgment was granted.
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