Source: http://www.ksb.uscourts.gov/index.php?view=category&id=40%3Ajudge-nugent-opinions&option=com_content&Itemid=50
Timestamp: 2015-03-27 17:18:12
Document Index: 650220375

Matched Legal Cases: ['§ 548', '§ 547', '§ 547', '§ 101', '§ 547', '§ 547', '§ 101', '§ 101', '§ 157', '§ 1334', '§ 101', '§ 547', '§ 101', '§ 101', '§ 547', '§ 101', '§ 547', '§ 547', '§ 547', '§ 547', '§ 362', '§ 522', '§ 212', '§ 60', '§ 362', '§ 60', '§ 522', '§ 212', '§ 362', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 522', '§ 522', '§ 60', '§ 522', '§60', '§522', '§ 407', '§ 522', '§ 522', '§ 522', '§ 212', '§ 60', 'art 212', '§ 212', '§ 212', '§ 212', '§ 212', '§ 212', '§ 212', '§ 212', 'art 212', '§ 212', '§ 212', '§ 212', '§ 212', '§ 212', 'art 212', '§ 212', '§ 212', '§\n212', '§ 212', '§ 212', '§ 212', '§ 212', '§ 362', '§ 361', '§ 362', '§ 212', '§ 212', '§ 212', '§ 212', '§ 362', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', 'art, 13', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 523', '§ 60', '§ 1328', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§1328']

Category: Judge Nugent	Published on 27 March 2015	Written by Judge Nugent	Hits: 4	Nazar v. Garcia, 14-05039 (Bankr. D. Kan. Mar. 16, 2015) Doc. # 39
SO ORDERED. SIGNED this 16th day of March, 2015.
IN RE: ) )
PAUL A. GARCIA, ) Case No. 12-10393 ) Chapter 7
Debtor. ) __________________________________________) ) EDWARD J. NAZAR, Trustee ) ) Plaintiff, ) )
vs. ) Adv. No. 14-5039
) WILLIAM B. GARCIA Successor ) Trustee of the Revocable Inter Vivos ) Trustee of Lenora Garcia, u/a/d ) November 18, 2008 ) ) Defendant. ) __________________________________________)
Case 14-05039 Doc# 39 Filed 03/16/15 Page 1 of 3
Defendant William Garcia, Trustee of the Lenore Garcia Revocable Inter Vivos Trust, moves for summary judgment on bankruptcy trustee Steven Speth’s complaint to avoid and recover a preference.1 Speth filed that complaint on February 26, 2014 in his capacity as Paul A. Garcia’s bankruptcy trustee.2
The facts underlying his complaint are virtually identical to those supporting bankruptcy trustee J. Michael Morris’s adversary complaint for similar relief in Paul’s brother’s case (Alex Garcia).3 In this proceeding, Speth’s avoidance complaint initially alleged some elements of both a fraudulent transfer under § 548 and a preference under § 547. Early on, William moved to dismiss the complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6).4 On June 16, 2014, the Court granted William’s motion with respect to the fraudulent transfer claim, leaving only the preference claim for trial.5
Then, on November 6, 2014 and after completion of discovery, William filed this summary judgment motion and an identical motion in the Morris adversary in
1 Adv. Dkt. 22. Defendant William Garcia, as Trustee of the Revocable Intervivos Trust of Lenore Garcia, appears by his attorney Elizabeth Carson. The bankruptcy trustee, now the successor bankruptcy trustee, Edward J. Nazar, appears by special counsel Timothy J. King. 2 On December 3, 2014, subsequent to the commencement of this adversary proceeding, Spethresigned as Paul Garcia’s bankruptcy trustee and Edward J. Nazar was appointed assuccessor trustee. Mr. Nazar should be substituted as the plaintiff in this adversary proceeding and the Court has amended the case caption accordingly. But for ease of reference, the Court may continue to refer to Speth as the bankruptcy trustee. On February 26, 2015 Nazar’s application to employ Timothy J. King as special counsel for the bankruptcy trustee in this adversary was approved. Dkt. 260. 3 J. Michael Morris v. Lenore Garcia Intervivos Trust, et al (In re Alex Garcia), Adv. No. 14-5042; Case No. 12-10394 (Bankr. D. Kan.). 4 Adv. Dkt. 8. 5 Adv. Dkt. 14.
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Alex’s case.6 The bankruptcy trustee here adopts trustee Morris’s response brief in Alex’s case as his own.7 William argues that because the Lenore Garcia Trust is not an insider, the bankruptcy trustees may not avoid and recover preferential payments made more than 90 days but within one year of Alex’s and Paul’s bankruptcy filings as 11 U.S.C. § 547(b)(4)(B) allows.
In a reasoned order I entered on March 11, 2015 in the Morris adversary in Alex’s case, I concluded that while the Trust itself may not be a statutory insider under § 101(31)(A), the transfer alleged was made to it for the benefit of the Trust beneficiaries, all of whom are relatives of Alex (and of Paul).8 Because relatives are statutory insiders, I denied William’s (the Trust’s) summary judgment motion. For the same reasons set out in that Order, I DENY it in this one as well.
This adversary proceeding is presently hard set and shall proceed to trial on the bankruptcy trustee’s complaint on March 18, 2015 at 9:00 a.m.
6 Adv. Dkt. 22, 23. Cf. Adv. No. 14-5042, Dkt. 32, 33 (William’s motion and supporting memorandum of law). 7 Adv. Dkt. 28; See Adv. No. 14-5042, Dkt. 39 (Morris’s response brief). 8 Adv. No. 14-5042, Dkt. 56, Order on Defendant Lenore Garcia Inter Vivos Trust’s Motion for Summary Judgment. See also 11 U.S.C. § 547(b)(1) (the bankruptcy trustee may avoid transfers “to or for the benefit of a creditor”).
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Category: Judge Nugent	Published on 27 March 2015	Written by Judge Nugent	Hits: 4	Morris v. Lenore Garcia Inter Vivos Trust et al, 14-05042 (Bankr. D. Kan. Mar. 12, 2015) Doc. # 56
SO ORDERED. SIGNED this 11th day of March, 2015.
ALEX J. GARCIA, ) Case No. 12-10394 ) Chapter 7
Debtor. ) __________________________________________) )
J. MICHAEL MORRIS, Trustee, ) ) Plaintiff, ) ) vs. ) Adv. No. 14-5042 ) LENORE GARCIA INTER VIVOS ) TRUST, by William B. Garcia Successor ) Trustee; the lineal blood descendants ) JEFFREY D. GARCIA, ) (Shane D. Massell, Matthew Garcia, ) a/k/a Matthew Garcia Fry, Derek A. ) Duncan); WILLIAM B. GARCIA; ) the lineal blood descendants of ) JONATHAN GARCIA, (Nathan A. ) Garcia, Jonathan Scott Garcia, Jesse ) Douglas Garcia, Rachel Lynne Garcia, )
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Kaleb Garcia a/k/a Kalieb Stone ) Garcia); and the lineal blood ) descendants of VICTOR M. GARCIA, ) (Victor M. Garcia, II, Melissa Garcia, ) And Elizabeth Garcia), ) ) Defendants. ) __________________________________________)
ORDER ON DEFENDANT LENORE GARCIA INTER VIVOS TRUST’S MOTION FOR SUMMARY JUDGMENT
Whether someone or some entity is an “insider” of the debtor is a core concept in the Bankruptcy Code because transactions between debtors and their insiders are more closely scrutinized than those between debtors and strangers. The Code recognizes and embraces the idea, familiar in non-bankruptcy law, that a debtor’s dealing with persons of affinity may not necessarily be at arm’s length or in good faith. Thus, while the trustee can only avoid preferential transfers made within 90 days of the petition date to or for the benefit of non-insiders, insider transfers made within one year are vulnerable.1
Alex Garcia is one of Lenore Garcia’s sons. Before she died in 2008, Ms. Garcia executed a living trust that settled upon two of her sons all of her assets and provided for the administration and distribution of those assets to all of her sons or, if any of them predeceased her, their children. Among these assets was a limited liability company, Lenore’s La Casita, L.L.C. The L.L.C. operated a restaurant in Salina. Under the terms of the Trust, Alex and his brother Paul Garcia had an option to buy the restaurant business from the Trust by making a series of annual payments to the
1 11 U.S.C. § 547(b)(4)(B).
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Trust for the benefit of certain Trust beneficiaries. When they defaulted on the option, the Trust sued and obtained a partial judgment against Alex and Paul for the first two past-due payments. Alex and Paul paid $35,000 on the judgment seven days after its entry and within a year of Alex’s chapter 13 filing. Now Alex’s bankruptcy trustee seeks to avoid and recover that payment as a preference and the Trust moves for summary judgment, claiming that because trusts are not enumerated as one of the named classes of insiders in 11 U.S.C. § 101(31), the bankruptcy trustee cannot avail himself of the expanded look back period.2 This argument ignores the reality that the Trust was established to distribute the dying Lenore’s assets to her sons and their children and that the payment was made for the sons’ and their children’s benefit. Because all of the Trust beneficiaries are Alex’s relatives, they are statutory insiders under 11 U.S.C. §§ 101(31) and (45). The motion for summary judgment must therefore be denied.3
William Garcia, in his capacity as successor trustee of the Trust, moves for summary judgment under Fed. R. Civ. P. 56, as made applicable in adversary proceedings by Fed. R. Bankr. P. 7056. He argues that the Trust, the recipient of the debtor’s transfer, is not an insider. Many of the material facts relate to the terms of the written Trust instrument and are beyond dispute. The bankruptcy trustee agrees
2 Adv. Dkt. 32, 33. 3 The Court has subject matter jurisdiction over this preference action as a core proceeding. See 28 U.S.C. § 157(b)(1) and (b)(2)(F) and § 1334. J. Michael Morris, the chapter 7bankruptcy trustee appears on his own behalf. The Lenore Garcia Intervivos Trust, by its trustee William B. Garcia, appears by attorney Elizabeth Carson.
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that there are no facts in dispute and relies solely on the Trust’s beneficiaries’ statutory insider status. Summary judgment is proper where there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.4 A preference case based upon a statutory insider is particularly suited for disposition by summary judgment because the issue revolves around the legal conclusion drawn from the undisputed facts against the backdrop of a definitional statute that enumerates certain positions or relationships as insiders and does not depend on actual control.5 At the summary judgment stage then, the Court is tasked with determining whether or not the uncontroverted facts establish as a matter of law that the Trust beneficiaries occupy the requisite relationship to the debtor to qualify as a statutory insider under § 101(31)(A).6
Lenore Garcia’s six sons are Paul, William, Victor, Jeffrey, Jonathan and Alex Garcia. On November 18, 2008, Lenore settled a living trust on herself and Paul and Alex as co-trustees for the benefit of all six of her sons and one grandson, Matthew Garcia Frye, along with her other unnamed grandchildren.7 Among the Trust’s assets was the limited liability company that held her restaurant, Lenore’s La Casita.
4 Fed. R. Civ. P. 56(a). 5 See In re Parks, 503 B.R. 820, 830-31 (Bankr. W.D. Wash. 2013). Cf. In re Kunz, 489 F.3d 1072, 1079 (10th Cir. 2007) (determination of non-statutory insider, as opposed to the Code’sper se insider classification, requires the weighing of evidence and cannot properly be madeon summary judgment). 6 See In the Matter of Wescorp, Inc., 148 B.R. 161, 162-63 (Bankr. D. Conn. 1992) (question to be decided is whether the nondisputed facts establish that FNEC is an insider). 7 For ease of reference the Lenore Garcia Intervivos Trust shall be referred to as the Trust. Unless otherwise specified, references to William Garcia shall be in his capacity as successortrustee of the Trust. William and the Trust may be used interchangeably in this Order as the
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Under the Trust, Paul and Alex had the option to buy the restaurant within 90 days of Lenore’s death. She died on November 25, 2008 and they exercised that option on February 23, 2009. Under the terms of the purchase option, Paul and Alex were to pay $200,000 for the restaurant business in ten equal, interest-free annual instalments, the first coming due on November 1, 2009. Those annual payments were to be distributed to their other four brothers, equally, per stirpes.8 They tendered a partial payment of $5,000 each to their two other brothers (William and Victor) on November 1, 2009, but those payments were returned by William and Victor’s attorneys in January of 2010. That August, Paul and Alex resigned as trustees and William and Victor were appointed successor trustees. In October of 2010, Paul and Alex’s counsel tendered the $5,000 payments again.
In November, the new trustees sued Paul and Alex individually in state court to enforce the terms of the purchase option, sued them in their capacity as former trustees of the Trust for breach of trust, and sued Lenore’s L.L.C. for an accounting. Then Victor died, leaving William as the lone successor trustee. In July of 2011, William was granted partial summary judgment in his trustee capacity on the breach of contract claim against Paul and Alex for $30,000 plus pre- and post-judgment interest, representing the two missed annual $20,000 payments less the two $5,000 payments mentioned above. On July 22, 2011, Paul and Alex paid the Trust $35,000 in satisfaction of the judgment. Thereafter, the Trust refunded them an overpayment
Trust is the named party defendant in this preference action and the motion for summaryjudgment is brought by William in his capacity as the successor trustee of the Trust. 8 See Trust, ¶ 7.1(f).
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of $1,805. The remaining claims in the case never went to trial because, on February 28, 2012, one day before the scheduled trial in state court, Alex and Paul each filed chapter 13 bankruptcy cases.
William alleges that the Trust is not an insider and that, because the July 22, 2011 payment occurred more than 90 days before Alex’s filing date, the bankruptcy trustee cannot avoid that transfer as a preference. 11 U.S.C. § 547(b)(4)(B) extends the look back period for preferences to one year when the recipient is an “insider.” Thus, the question here is whether the Trust or its beneficiaries are insiders of the debtor as a matter of law.
The Code defines a statutory insider in detail at 11 U.S.C. § 101(31). That statue reads, in pertinent part—
(31) The term “insider” includes— (A) if the debtor is an individual--(i) relative of the debtor or of a general partner of the debtor; (ii) partnership in which the debtor is a general partner; (iii) general partner of the debtor; or (iv) corporation of whichthe debtor is a director, officer, or person in control;9 William’s argument is entirely premised on the absence of the word “trust” from this statutory definition. This observation is accurate, but superficial. Lenore settled her Trust on two of her sons as trustees for the benefit of all of her sons and her grandchildren. She conveyed the restaurant to the Trust and granted two of her sons the option to purchase it after she died. Under paragraph 7.1(f) of the Trust, Alex and Paul’s annual purchase payments were to be distributed equally to the other brothers
9 11 U.S.C. § 101(31).
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Victor, Jeffrey, William and Jonathan or, if they were deceased, to their children. When Paul and Alex failed to make full payments, Victor and William were appointed as new trustees of the Trust and sued Paul and Alex to enforce the purchase option on behalf of the Trust beneficiaries.
Section 547(b)(2) renders transfers made “to or for the benefit of a creditor” avoidable.10 Looking past the form of the purchase option transaction to its substance, the actual beneficiaries of the option payments under the Trust are statutory insiders because they are “relatives” of the debtors, Alex and Paul.11 The Trust was created by Lenore to hold and distribute her assets for the benefit of her heirs. As trustee, William was its agent. He had fiduciary duties to those heirs (including himself). Each brother who was named a beneficiary of the option payment, or his children (if deceased), stands within three degrees of consanguinity or affinity of the debtors, Alex and Paul. These individuals are not only blood relatives of Alex and Paul (brothers or nieces and nephews), but they are “relatives” as that term is defined in the Bankruptcy Code.12 The Trust’s beneficiaries, for whose benefit the purchase option payments were made, are Alex’s brother William and the children of his three
10 The quoted phrase contemplates that either the initial transferee “or the transferbeneficiary,” or both, can be sued for avoidance under § 547(b)(1). In re Connolly North America, LLC, 340 B.R. 829, 838 (Bankr. E.D. Mich. 2006). 11 The Court finds persuasive the bankruptcy trustee’s distinction of this case from the facts of the Trust’s sole legal authority In re Anderson, 165 B.R. 482 (Bankr. D. Or. 1994) (mother’sprobate estate, which obtained a judgment lien against debtor son for sums debtor converted from the estate, was not a statutory insider of debtor son). See Plaintiff’s Response to Motionfor Summary Judgment, Adv. Dkt. 39, pp. 4-5. 12 See 11 U.S.C. § 101(45) (a relative is defined as an “individual related by affinity or consanguinity within the third degree as determined by the common law, or individual in astep or adoptive relationship within such third degree”).
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deceased brothers (Jeffrey, Jonathan and Victor). They are all relatives of the debtors and, therefore, statutory insiders.13
The Trust’s successor trustee recovered the $35,000 as part of his duties to the beneficiaries of the restaurant purchase (including himself). Apart from the insider issue, the Trust has pleaded no § 547(c) affirmative defenses to the bankruptcy trustee’s claim and appears to rely entirely upon meeting and besting the statutory presumption of the debtor’s insolvency under § 547(b)(3) and § 547(f). If the transfer meets the other criteria of § 547(b), it is a transfer by Alex “to or for the benefit of” his creditors, the Trust’s beneficiaries. As noted above, those individuals are his “relatives,” extending the applicable look back period to one year before filing, a year that easily embraces the date the payment was made.
Summary judgment is therefore DENIED. This adversary proceeding was previously set for a pretrial scheduling conference on April 30, 2015 to allow the plaintiff time to serve the parties he added after this motion was filed.14 I note that each of these new parties has been served and is in default of answer. The April 30, 2015 setting will remain in force and the plaintiff should proceed to secure the entry of default judgment against any non-answering defendants.
13 See In re Ruel, 457 B.R. 164 (Bankr. D. Mass. 2001) (debtor’s siblings who were beneficiaries of family trust to which debtor gave a mortgage to secure debtor’s debt to familytrust, were statutory insiders). 14 Adv. Dkt. 53.
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Category: Judge Nugent	Published on 25 February 2015	Written by Judge Nugent	Hits: 139	Ledin v. Thompson et al, 14-05193 (Bankr. D. Kan. Feb. 10, 2015) Doc. # 52
SO ORDERED. SIGNED this 10th day of February, 2015.
IN RE: ) JONATHAN EDWARD LEDIN, ) Case No. 14-12347 ) Chapter 7
Debtor. ) ________________________________________________) ) JONATHAN EDWARD LEDIN, ) ) Plaintiff, )
) Adv. No. 14-5193 vs. )
) COMMERCE BANK, AMY WHITE, ) FINANCECO OF KANSAS, INC., and ) RICHARD K. THOMPSON, ) ) Defendants. ) ________________________________________________)
ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM (Dkt. 26 and 32)
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The Bankruptcy Code contains two provisions that protect debtors from collection activity during a case and shield certain exempt assets from administration as part of the debtor’s bankruptcy estate. 11 U.S.C. § 362(a) stays collection activity during a case and § 522(d)(10) exempts social security and other government payments from the reach of the trustee. Neither takes effect unless and until a debtor actually files a bankruptcy case, though, and, except in limited circumstances, neither forms the basis for an independent cause of action. The same is true for the provisions of the Code of Federal Regulations found at 31 C.F.R. §§ 212.6 and 212.7 that govern how financial institutions respond to garnishments of accounts that may contain social security or other government payments. Nor do “violations” of procedural statutes and court rules -- KAN. STAT. ANN. § 60-211(a) and KAN. S. CT. RULE 170(d)
- create independent, substantive claims. FinanceCo of Kansas took a deficiency judgment on a defaulted car loan owed by debtor Jonathan Ledin sometime in 2008. In 2013, FinanceCo transcribed that judgment on the Chapter 60 appearance docket of the Reno County District Court and, in June of 2014, garnished Ledin’s savings accounts at Commerce Bank. Ledin replied, claiming that the accounts contained funds traceable to social security payments, but the Reno County court concluded that the funds were not exempt, granting judgment and entering a pay order on the garnishment. In September of 2014, FinanceCo garnished Ledin’s checking account at Commerce. This time, Ledin replied, additionally claiming that he was in the process of preparing a bankruptcy filing. The state court allowed that garnishment as well, after conducting a hearing
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on Ledin’s objection. Ledin then filed the present chapter 7 case here on October 14, 2014. He filed this adversary proceeding against judgment creditor FinanceCo, its counsel Richard Thompson, garnishee Commerce Bank, and its Hutchinson branch manager, Amy White, seeking over a million dollars in damages (the garnishments netted $1,066) and demanding a jury trial. All four defendants move to dismiss the complaint as failing to state a claim for relief under Rule 12(b)(6).1
Ledin’s claims for damages under §§ 362(a) and 522(d)(10) fail because he was not a debtor in bankruptcy when either of the garnishments occurred and because neither of those sections support a private right of action under the circumstances that he alleges. His tort claims under the “CFRs” fail because those regulations also do not supply a right of private action and because the facts alleged in the complaint do not support a plausible claim for relief. KAN. STAT. ANN. § 60-211(a) and KAN. S. CT. RULE 170(d) are state procedural rules that do not give rise to causes of action. Finally, Ledin’s remedy in the state garnishment case was to timely appeal the Reno County court’s orders after the garnishment hearings instead of seeking collateral relief from those final orders in this Court in the form of a wrongful garnishment lawsuit. The complaint should therefore be dismissed.2
1 Fed. R. Civ. P. 12(b)(6), as made applicable to adversary proceedings by Fed. R. Bankr. P. 7012. See Adv. Dkt. 26 (Motion to Dismiss of defendants FinanceCo of Kansas, Inc. and Richard Thompson); Adv. Dkt. 32 (Motion to Dismiss of defendants Commerce Bank and Amy White). 2 Plaintiff Jonathan Ledin appears pro se. Defendants Commerce Bank and Amy White appear by their attorney Jack C. Marvin. Defendants FinanceCo of Kansas, Inc. and RichardThompson appear by their attorney Samantha M.H. Woods.
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In determining whether Ledin’s complaint states a claim upon which relief may be granted, I assess whether these factual allegations give rise to a cause of action against defendants for violation of the statutes and regulations alleged. The question is whether the complaint contains facts sufficient to support these claims, not whether Ledin will ultimately prevail on those claims.3 The plaintiff must allege enough facts to support a claim that is plausible on its face.4 The plausibility standard is less than a probability but more than a sheer possibility that Ledin is entitled to the relief requested.5 For purposes of this motion, I take the facts pled in the complaint as true.6
Ledin seeks cumulative damages in excess of $1.1 million dollars against the defendants for violation of the exemption statute, 11 U.S.C. § 522(d)(10)(A) [Count I]; violation of certain federal banking regulations dealing with garnishment of accounts containing direct deposit federal benefit payments, 31 C.F.R. §§ 212.6 and 212.7 [Counts II and III]; violation of the automatic stay, 11 U.S.C. § 362; violation of KAN. STAT. ANN. § 60-211(a) (2013 Supp.) for failure to sign unspecified court documents;
3 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to dismiss the judge must accept all allegations as true and may not dismiss on the basis that it appears unlikely the allegations can be proven.). 4 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (enough facts must be alleged to nudge the claim across the line from conceivable to plausible). 5 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 6 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In reviewing the sufficiency of the complaint, the court assumes the truth of the plaintiff’s well-pleaded factual allegations and views them in the light most favorable to the plaintiff.); Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion tests the sufficiency of the allegations within the four corners of the complaint after accepting as true all well-pleaded factual allegations.).
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and violation of KAN. S. CT. RULE 170(d)(2) for failure to make reasonable effort to resolve Ledin’s objections to proposed orders submitted to the state court regarding the garnishments.7 These claims arise from two prepetition state court garnishments that attached a total of $1,066.15 in funds from Ledin’s savings and checking accounts at Commerce Bank which he claimed were exempt social security disability benefits. Ledin demands a jury trial on all claims – claims that he characterizes as actions in tort.
Summary of Facts Pled in Complaint8
FinanceCo obtained a chapter 61 state court limited actions judgment in the amount of $6,023 against Ledin sometime in 2008. FinanceCo transcribed its limited actions judgment to Reno County District Court sometime in November 2013, thus imposing a chapter 60 judgment lien on Ledin’s real property in the county where recorded.9 Ledin does not dispute the validity of FinanceCo’s underlying judgment.
In early September 2013 Ledin opened a checking account and two savings accounts at Commerce Bank. Initially, his monthly social security disability benefit check of $1,323 was directly deposited in the checking account. He would then withdraw $100 cash from the checking account each month and deposit $50 in each
7 Ledin asserts the exemption and “CFR” claims against all defendants. He asserts the stay violation against FinanceCo and Thompson, and the remaining § 60-211(a) and Rule 170(d) claims against Thompson only. 8 These facts are common to all of the claims alleged. None of the pleadings, orders, or documents pertaining to the subject garnishments were attached to Ledin’s complaint. 9 See KAN. STAT. ANN. § 60-2418(a) and § 60-2202(b). Upon transcribing the limited actions judgment (Case No. 09 LM 0731) to a code of civil procedure chapter 60 judgment (Case No.14 CV 2) and recording it, execution to satisfy the judgment proceeds in the same fashion as though it were an original chapter 60 judgment.
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savings account. Ledin characterizes the savings accounts as his “emergency fund” and says he opened them because of Commerce Bank’s Rewards program.
On June 12, 2014, FinanceCo garnished Ledin’s savings accounts at Commerce and attached $688.05. This garnishment depleted both savings accounts. Ledin asserted that the funds were exempt as his social security disability benefit. Ms. White told Ledin that his disability benefit was not protected from garnishment once he transferred the funds out of his checking account to his savings account. It is unclear from the face of the complaint whether Ledin requested a court hearing to assert his claim of exemption or otherwise filed a reply contesting the garnishee’s answer as provided by Kansas garnishment procedures.10 In any event, the state court apparently rejected Ledin’s claim of exemption of the garnished funds leading to this complaint.11
In July or August of 2014 Ledin changed the direct deposit method for his social security disability benefit. Instead of the funds being directly deposited to his bank account, the monthly benefit was now transferred to a stored value card called a Direct Express® Debit Card – apparently available to certain federal benefit program recipients. Ledin would take a cash advance from the Debit Card and deposit it in his checking account to supplement his “emergency fund.”
On or about September 9, 2014, FinanceCo garnished Ledin’s checking account
10 See KAN. STAT. ANN. §§ 60-735(b) and 60-738. 11 In other pleadings that Ledin filed in this adversary proceeding, he attached some of the documents pertaining to the June 2014 garnishment, including a copy of the state court’sOrder to Pay Money to Judgment Creditor entered August 14, 2014. See Adv. Dkt. 42-1, p.
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and attached $378.10, causing the account to be overdrawn. On or about September 12, 2014, Ledin “contested” this garnishment by submitting an affidavit claiming the funds protected as social security disability income and stating that he “intends to file for Chapter 7 Bankruptcy . . . .” The affidavit was not attached to Ledin’s adversary complaint, but was attached to his “response” to the Motion to Dismiss.12 Reno County District Court Judge Chambers conducted a hearing on the second garnishment on September 29, 2014. Nothing in the pleadings tells me what happened at that hearing.
After Commerce closed Ledin’s bank accounts on October 10, 2014, he filed his bankruptcy petition on October 14, 2014 and commenced this adversary proceeding on November 17, 2014.
1. The Exemption Claim under § 522(d)(10)(A) Ledin alleges that the defendants “violated” § 522(d)(10)(A), the Bankruptcy Code provision that allows bankruptcy debtors to claim exempt the right to receive a “social security benefit.” Section 522(d) lists the so-called federal exemptions in bankruptcy. Because Kansas has opted out of the federal exemption scheme Kansas bankruptcy debtors must generally use the state law exemptions, but KAN. STAT. ANN. § 60-2312(b), expressly authorizes an “individual debtor under the federal bankruptcy reform act” to claim the § 522(d)(10)(A) federal exemption in addition to
12 See Adv. Dkt. 31, pp. 15-16.
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the state law exemptions.13 In order to claim the §60-2312(b)/§522(d)(10) exemption, the claimant must be a debtor in bankruptcy.
When he contested the state court garnishment proceedings, Ledin claimed that his Social Security disability benefit was exempt. A person’s future right to the payment of Social Security benefits is generally exempt from execution under 42
U.S.C. § 407(a). Ledin has not alleged that any of the defendants sought to garnish his benefits in the hands of the Government or that they sought to execute on his future right to claim them. The state court, not the defendants, determined that the garnished funds—cash that he withdrew from his checking account and deposited into his savings account—were not in any way exempt. Section 522(d)(10) did not apply to Ledin when this determination was made because he was not yet in bankruptcy. Even if there were a private right of action under § 522(d)(10)(A), the state court garnishment proceedings occurred before Ledin filed his bankruptcy case, rendering § 522 of the Bankruptcy Code inapplicable to those proceedings. Finally, as the defendants note, there is no private cause of action in tort for damages in § 522 when a court disallows an exemption claim – inside or outside of a bankruptcy case.14 Ledin’s damage claim for “violating” this exemption statute fails to state a claim upon which relief may be granted. 2. Violation of Federal Regulations, 31 C.F.R. §§ 212.6 and 212.7 Ledin also seeks damages for defendants’ withholding or freezing funds as the 13 KAN. STAT. ANN. § 60-2312(a) (2005). 14 See Adv. Dkt. 33, p. 5. Adv. Dkt. 27, pp. 5-6.
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state court garnishment order directed. Part 212 of Title 31 of the Code of Federal Regulations, adopted in 2011, deals with garnishment of accounts containing federal benefit payments. Its purpose is to protect federal benefits from garnishment by establishing procedures for financial institutions when served with a garnishment order against an account holder “into whose account a [protected] Federal benefit payment has been directly deposited.”15 It applies to financial institutions as defined in § 212.3, not their individual officers or employees. That alone protects defendant White from liability here.16 The regulations require that a financial institution, as garnishee, conduct an account review and follow certain procedures when served with a garnishment order.17 Section 212.3 defines a “[f]inancial institution” as “a bank, savings association, credit union, or other entity chartered under Federal or State law to engage in the business of banking.” Ledin does not allege that defendants FinanceCo or Thompson are financial institutions within the meaning of § 212.3. As with his claims against defendant White, this kills Ledin’s alleged claim against FinanceCo and Thompson for violating the garnishment regulations. Thompson is an individual engaged in the practice of law, not a financial institution or other entity engaged in banking. There is no allegation that FinanceCo is an entity chartered to engage in the business of banking. Because the judgment creditor and its attorney are not financial institutions and were not served with an order of garnishment, they are not subject to these regulations, are not obligated to conduct
15 31 C.F.R. § 212.1 (2011). Emphasis added. 16 31 C.F.R. § 212.2. 17 31 C.F.R. § 212.2, § 212.3 (defining an “account review”); § 212.5.
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an “account review,” and are not obligated to adhere to the procedures enumerated in Part 212. The regulations govern a financial institution who is served with an order of garnishment on its depositor’s accounts and as garnishee must evaluate whether the garnishment seeks to attach protected federal benefit payments. Ledin’s complaint fails to state a claim for damages against White, FinanceCo, and Thompson for violation of 31 C.F.R. §§ 212.6 and 212.7.18
Commerce is a financial institution under the regulations. A “benefit payment” is specifically defined as one that is paid electronically by direct deposit to the account and contains certain encoded characters in the record of the direct deposit entry.19 In general, when a financial institution receives a garnishment order, it must review the transactions over the preceding 2 months in any account held by the judgment debtor to determine whether a benefit payment was deposited into the account by a benefit agency in that time and determine what the “protected amount” of the account is. That “protected amount” as determined by the financial institution is “conclusively considered to be exempt from garnishment under law.”20 If a benefit payment was electronically deposited, a protected amount established, and funds exist in excess of the protected amount, the financial institution is required to send notice to the account holder.21 If there was no benefit payment deposited during the look back period, the financial institution is not required to give notice. While § 212.10 of the
18 31 C.F.R. § 212.2. 19 31 C.F.R. § 212.3. 20 See §§ 212.3, 212.5, 212.6. 21 Section 212.7.
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regulations provide a safe harbor against both the judgment creditor and the account holder to financial institutions that act in good faith, Part 212 does not create or expressly authorize a private cause of action by an account holder against the financial institution. Even if they did, Ledin’s complaint fails to state a claim against Commerce.
On its face, Ledin’s complaint does not state a claim for relief with respect to the first garnishment. The garnishment order applied to Ledin’s savings accounts – accounts that Ledin says contained funds from cash deposits, not electronic direct deposits. He alleges that he took cash withdrawals from his checking account and deposited them into his savings accounts.22 He does not allege that any direct deposits of social security payments were made electronically to his savings accounts by a benefit agency. Thus, the savings account did not contain a “benefit payment” as defined in § 212.3 and the federal regulations do not apply.
Nor were the funds caught by the second garnishment protected. Ledin says he took a cash advance from his Direct Express Debit Card that he then deposited in his checking account. He does not allege that the second garnishment attached a “benefit payment” made by a “benefit agency.” This part of Ledin’s complaint fails to state a claim for relief against Commerce.23 Because no benefit payments as defined in § 212.3 were deposited by a benefit agency, Commerce was not obligated to comply
22 Only electronic deposits made by a “benefit agency” are protected from garnishment. See §
212.3 and § 212.5(b) and (c). 23 See § 212.3 which defines a “benefit agency” as the Social Security Administration and requires the “benefit payment” to be paid by direct deposit electronically into the account holder’s account. Case 14-05193 Doc# 52 Filed 02/10/15 Page 11 of 17
with the procedures in the regulations nor provide the notice referenced in § 212.6(e)
and § 212.7 to Ledin.24 The “CFR” claim against Commerce must be dismissed for
3. Alleged Stay Violation, 11 U.S.C. § 362 Ledin alleges that FinanceCo and Thompson violated the automatic stay by
requesting garnishment orders in June and September of 2014. Specifically, he
alleges in the complaint that FinanceCo:
. . . did intentionally and illegally obtain a Court Order to garnish Plaintiff’s savings and checking account for a total of $1,066.15 with the intention, knowledge and purpose of harming Plaintiff by attempting to collect, assess, or recover on a claim for a debt; a deficiency judgment that increased to the amount of $15,551.47, from a court hearing held . . . on September 29, 2014 in violation of 11 U.S.C. § 361(a)(1), (2), and (6), of the automatic stay. . . . FinanceCo . . . had knowledge that Plaintiff was preparing to file for bankruptcy Chapter 7 protection through said Affidavit mentioned in paragraph 22. Defendant FinanceCo . . . is therefore liable in tort to Plaintiff for violation of: (1) 11 U.S.C. § 362(a)(1), (2), and (6), of the automatic stay . . .25
The referenced paragraph 22 provides:
Plaintiff submitted an Affidavit signed September 12, 2014 to the trial court, in Ref: Case No. 14 CV 2 that he was filing for bankruptcy Chapter 7. Defendant FinanceCo . . . continued to conduct the hearing held on September 29, 2014 in Division II, the Honorable Judge Timothy Chambers presiding.26
Like allegations are made against defendant Thompson, including that Thompson
24 See 31 C.F.R. § 212.5(b) (where no benefit payment is deposited during the look back period, the financial institution is not required to follow the procedures in § 212.6); § 212.6(the provisions of § 212.6 apply only if an account review shows that “a benefit agency deposited a benefit payment into an account during the look back period.”). 25 Adv. Dkt. 1, ¶ 26. 26 Id. at ¶ 22.
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knew “Plaintiff was preparing to file for bankruptcy . . . .”27 Ledin did not file his chapter 7 case here until October and this alone is fatal to his stay violation claim.
The sum of the stay violations alleged against FinanceCo and Thompson are that (1) they obtained garnishment orders which were issued and served on approximately June 12, 2014 and September 9, 2014;28 and (2) that they continued forward with a hearing on September 29, 2014 despite knowing that Ledin was preparing to file bankruptcy. These allegations do not state a claim for relief because the automatic stay was not in effect at any point during this timeframe.
The automatic stay is triggered by the filing of a bankruptcy petition.29 Section 362(a) provides that: “. . . a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities . . .” Intent to file bankruptcy in the future does not trigger the automatic stay.30 Ledin did not file his bankruptcy petition until October 14, 2014. Thus, no stay was in effect during the complained-of conduct that can possibly give rise to a violation of the automatic stay. Ledin’s affidavit submitted on September 12, 2014 in response to the second garnishment and to apparently halt the September 29 hearing did not cause the stay to go into effect.
Because Ledin has not alleged the commencement or continuation of any garnishment activity or proceedings by FinanceCo or Thompson after October 14, 2014, he has failed to state a claim for violation of the automatic stay under 11 U.S.C.
27 Id. at ¶ 40 28 Id. at ¶s 20-21. 29 In re Calder, 907 F.2d 953, 956 (10th Cir. 1990). 30 In re Nelson, 335 B.R. 740, 749 (Bankr. D. Kan. 2004). See also In re Bush, 169 B.R. 34
(W.D. Va. 1994). Case 14-05193 Doc# 52 Filed 02/10/15 Page 13 of 17
§ 362(a).
4. Failing to Sign Orders and Court Documents, KAN. STAT. ANN. § 60-211(a) Ledin vaguely alleges that Thompson is liable in tort for “fail[ing] to sign court documents related to the Court Order of garnishment” with the intention of harming him in violation of § 60-211.31 As a consequence, he asserts that all “Orders, Judgments and Garnishment Orders” signed by the state court trial judge since 2009 are null and void.32 He also alleges that Thompson failed on three occasions to sign proposed Orders submitted to the state trial court under Kansas Supreme Court Rule 170(d)(2), rendering him liable for violation of § 60-211.33 These allegations are the sum total of Ledin’s attempt to state a cause of action under § 60-211.
Section 60-211(a) (2013 Supp.) of the Kansas Code of Civil Procedure provides:
(a) Signature. Every pleading, written motion, and other paper must be signed by at least one attorney of record in the attorney’s name,or by a party personally if the party is unrepresented. The paper must state the signer’s address, e-mail address, telephone numberand fax number. Unless a rule or statute specifically states otherwise, a pleading need not be verified or accompanied by anaffidavit or a declaration pursuant to K.S.A. 53-601, andamendments thereto. The court must strike an unsigned paperunless the omission is promptly corrected after being called to the attorney’s or party’s attention. Ledin makes no effort to identify the specific pleadings, motions, or papers that
Thompson failed to sign. His complaint is that Thompson did not sign Orders,
Judgments, and Garnishment Orders, all of which were entered by judges and which
31 Adv. Dkt. 1, ¶s 41-44 32 Id. at ¶ 44. 33 Id. at ¶ 46.
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attorneys are not necessarily required to sign. Section 60-211(a) does not support a private cause of action in tort. This is a procedural, not substantive provision.34 The more commonly invoked provisions (not pled by Ledin here), § 60-211(b) and (c), supply a basis for courts to sanction lawyers and parties who file frivolous or false pleadings. Ledin’s allegation of noncompliance with subsection (a) that merely parrots the language of the statute is not sufficient to show that there are facts that support a plausible claim for relief.35 Nothing alleged here shows that Ledin is entitled to relief. The alleged violation of § 60-211(a) does not state a claim for relief against Thompson and must be dismissed.
5. Failing to Comply with KAN. S. CT. RULE 170(d)(2) Ledin claims that Thompson failed to comply with KAN. S. CT. RULE 170(d)(2), a procedural rule governing proceedings in Kansas district courts (state trial courts) titled “Preparation of Order” and that he should be answerable in damages. Rule 170 specifies the procedure for memorializing a court’s order when a state trial court directs that it be prepared by a party. If the opposing party objects to the order, the parties are to attempt to resolve the dispute before submitting the order to the court to settle. Ledin says that on three occasions, Thompson failed to make a reasonable effort to resolve Ledin’s objections to proposed orders submitted to the state trial
34 See Christenson Media Group, Inc. v. Lang Industries, Inc., 782 F. Supp. 2d 1213, 1221 (D.Kan. 2011) (an unsigned pleading is a technical defect that does not affect the substantialrights of the adverse party under § 60-211). 35 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007) (Plaintiff must plead the grounds of his entitlement to relief with more than labels and conclusions or formulaic recitation of the elements of a cause of action).
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court.36 He does not allege any facts concerning the efforts attempted or the nature of the objections. He does not even identify the proposed orders. Rule 170(d)(2) and (3) provide:
(d)(2) If there is an objection, the parties must make a reasonable effort to confer to resolve the objection and, if agreement is reached, the drafter must submit the agreed journal entry to the court for approval. A “reasonable effort to confer” requires more than sending a communication to the opposing party. It requires that the parties in good faith converse, compare views, and deliberate, or in good faith attempt to do so.
(d)(3) If – after reasonable effort to confer – the parties have not agreed on the terms of the order, the drafter must submit the original draft and the objection to the court and the court mustsettle the order, with or without a hearing.
This purported claim against Thompson fails for the same reasons as Ledin’s claim under § 60-211(a). No right to tort damages arises from the parties’ inability to resolve an objection to a proposed order or a party’s noncompliance with the procedure for drafting and submitting orders to the state trial court. Ledin’s allegation, pled solely in paragraph 45 of the complaint, fails to state a claim for relief and must be dismissed.
6. Lack of Subject Matter Jurisdiction Ledin’s complaint is really no more than a collateral attack on a state court’s final order. Ledin should have (and apparently did) raise his exemption claim in reply to both FinanceCo garnishments as KAN. STAT. ANN. §§ 60-735(b) and 60-738(a) (2013 Supp.) allow.37 When the judgment debtor replies, objecting to the requested
36 Adv. Dkt. 1, ¶ 45. 37 See Adv. Dkt. 31, pp. 15-16 (Affidavit submitted in reply to September garnishment).
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garnishment, the state court holds a hearing at which the objecting party bears the burden of proving a claimed exemption and the facts alleged in his objection.38 Ledin did that and lost; his remedy was to appeal that final order to the Kansas Court of Appeals.39 When he didn’t, the garnishment order and order to pay became final. This Court must give those orders full faith and credit. Even if an independent action were proper under the circumstances, a wrongful garnishment action based upon a prepetition garnishment proceeding would properly lie within the jurisdiction of the state court, not the bankruptcy court, particularly where the garnished funds are claimed exempt and not property of the bankruptcy estate. Moreover, such a cause of action would be property of Ledin’s bankruptcy estate and the only proper party plaintiff would be, in the first instance, the chapter 7 trustee. This Court is simply without jurisdiction to grant the relief Ledin seeks.
For all of the foregoing reasons, Ledin’s complaint fails to state a claim for relief against defendants Commerce Bank, Amy White, FinanceCo of Kansas, Inc., and Richard Thompson. The defendants’ motions are granted; the complaint is dismissed. A judgment on decision shall issue this day.
38 See KAN. STAT. ANN. § 60-735(c) and § 60-738(b). 39 See e.g., LSF Franchise REO I v. Emporia Restaurants, Inc., 283 Kan. 13, 152 P.3d 34 (2007) (after judgment debtor successfully quashed garnishment of bank accounts, judgmentcreditor appealed).
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Category: Judge Nugent	Published on 20 March 2015	Written by Judge Nugent	Hits: 64	In Re Stewart, 13-13038 (Bankr. D. Kan. Mar. 6, 2015) Doc. # 81
SO ORDERED. SIGNED this 6th day of March, 2015.
IN RE: DOUGLASS RYAN STEWART, SHAWNEA MARIE STEWART, Debtors. ) ) ) ) ) Case No. 13-13038 Chapter 7
ORDER ON MOTION FOR TURNOVER OF INCOME TAX REFUND
The State of Kansas has determined that the earned income tax credit (EIC) portion of a bankrupt debtor’s federal and state income tax for one year is exempt, except for collection of child support. Bankruptcy trustees may not recover that part of a debtor’s prepetition federal or state income tax refund for the benefit of the estate. Here, the debtors made a general assignment of a portion of their refunds to their attorney to cover his fees and the filing fee in this case. They argue that these fees should be collected solely from the non
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exempt portion of the refunds; the trustee says that the EIC portion may bear part of that burden as well. Because the debtors’ assignment didn’t discriminate between the exempt and non-exempt portions, and because nothing in Kansas or federal law precludes a debtor from encumbering otherwise exempt property, the assignment, after being allocated between the state and federal refunds, may be deducted from the whole tax refund (net of the child support setoff), not just the nonexempt portion.1
Debtors Douglass and Shawnea Stewart filed their chapter 7 bankruptcy case on November 26, 2013. Shortly before filing, debtors granted an assignment of their 2013 federal and state income tax refunds to their bankruptcy attorney Martin Peck for his attorney fees in the amount of $1,175 and their filing fee in the amount of $306.3 They also assigned their refunds to two former spouses of Mr. Stewart to pay back child support obligations that accrued during 2013. The assignment made no distinction between the EIC portion and non-EIC portion of their refunds.
1 Debtors appear by their attorney Martin J. Peck. The chapter 7 trustee J. Michael Morris appears on his own behalf. 2 The parties submit this matter to the Court on stipulations and briefs. See Dkt. 61 and 64 (Stipulations and supporting Exhibits A-F). 3 The assignment in this case assigns the 2013 tax refunds and does not restrictthe assignment to the pre-petition portion of their refunds. Cf. In re Hunter, No. 09-12270, 2011 WL 1749933 (Bankr. D. Kan. May 5, 2011).
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The debtors’ 2013 tax returns reflect a federal refund of $7,932 of which $6,044 is an earned income tax credit and a state refund of $1,063 of which $1,027 is an earned income tax credit. The Kansas Department of Children and Families (KDCF) setoff these refunds to collect Mr. Stewart’s child support arrearage. It setoff $1,119 from the federal refund (but refunded $1,084.25 back to debtors) and setoff $884.73 from the state refund. Debtors received the balance of their refunds in February of 2014 – a total of $8,075.52 comprised of a net federal refund of $7,897.25 and a net state refund of $178.27. From these refunds, debtors paid $1,481 to Mr. Peck for his attorney fees and the bankruptcy filing fee pursuant to the assignment.
In May of 2014 the trustee filed the subject motion for turnover of the 2013 tax refunds.4 He sought the estate’s share (330/365ths = .9041095) of the net refunds after application of the EICs and attorney fees assignment, and the KDCF set off, or $1,354.77. The trustee asserts that the EIC portion of the refunds must share ratably with the non-EIC portion with regard to the amount of the attorney fees assignment. The trustee also sought turnover of the $200 sanction previously ordered against debtors for failing to timely provide their tax returns to the trustee.5
4 Dkt 49 and 55. 5 The trustee abandoned his request for turnover of non-exempt wages. See Dkt. 61, ¶ 8.
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This case presents a slight variation on an otherwise common theme: reconciling a trustee’s turnover rights with a debtor’s lawyer’s tax refund assignment for fees. The variation results from these debtors’ refunds having been set off by the Kansas Department of Children and Families to pay child support arrearage claims against Douglas Stewart and the fact that these debtors’ earned income credit accounts for such a large portion of their refunds. The setoff issues have been resolved by agreement between the trustee and the debtors, so the remaining question is whether the debtors’ general assignment of their refund for attorney fees includes the EIC portion of the refund or whether the fees should be withheld solely from the non-exempt, non-EIC portion. Doing the latter burdens the estate while doing the former burdens the debtors’ KAN. STAT. ANN. § 60-2315 EIC exemption.
Kansas exempts the federal and state EIC portion of a bankruptcy debtor’s tax refunds for one tax year.6 Typically, debtors exempt that part of their state and federal refunds for the year preceding the one in which they file. The exemption statute also says that nothing in § 60-2315 should be read to limit the state or federal government’s rights to offset or attach the EIC portion for payment of support or maintenance. Accordingly, in this case, KDCF’s intercept of the debtors’ 2013 refund does not impair the debtors’ exemption and doesn’t factor into today’s decision.
6 KAN. STAT. ANN. § 60-2315 (2013 Supp.).
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I have issued a series of orders dealing with attorney fee assignments and trustee turnover. These orders can be distilled to several principles that guide my decision here. First, I have previously ruled that depending upon the nature of the assignment, an assignment for attorney’s fees or costs (including filing fees advanced) should be prorated between the debtor’s federal and state tax refunds based upon the proportion each refund’s amount bears to the sum of the refund amounts. Those fees should then be deducted from the refunds before the trustee attempts to allocate them between the pre- and post-petition periods.7
Likewise, I have held that a set off for a tax debt should not be taken from either the exempt or post-petition portion of a debtor’s refund; instead, burdening the estate’s share of the refund with a tax set off is entirely consistent with the priority scheme of the Bankruptcy Code. Just as the tax debt would be paid before general unsecured creditors in a chapter 7 distribution, the funds a taxing authority withheld from the prepetition refund should reduce the estate’s take from the refund.8 Finally, I have held that a
7 Redmond v. Carson (In re Carson), 374 B.R. 247 (10th Cir. BAP 2007).Allocating the debtor’s tax refund between the pre- and post-petition years is required by In re Barowsky, 946 F.2d. 1516, 1518 (10th Cir. 1991) (determiningthat the pre-petition portion of a debtor’s tax refund is property of thebankruptcy estate when the relevant tax year ended post-petition). See also In re Roy, No. 12-11246, Dkt. 39 at pp. 7-8 (Bankr. D. Kan. Sept. 24, 2013) (Unpublished) (prorating refund assignment for attorney fees between federal and state refund prior to Barowsky pre- and post-petition allocation). 8 In re Roy, No. 12-11246, Dkt. 39 at pp. 8-10 (Bankr. D. Kan. Sept. 24, 2013).
Case 13-13038 Doc# 81 Filed 03/06/15 Page 5 of 9
specific pre-petition assignment of that portion of the debtor’s refund that accounts for the prepetition portion of the filing year is enforceable against the trustee in a turnover proceeding because the debtor’s making that assignment is conceptually identical to the debtor paying a retainer from funds that would otherwise wind up in the estate.9
In this case, the Stewarts seek to further refine this rule by asking me to hold that a general assignment of a refund for attorney’s fees cannot be charged against the EIC portion of their tax refund because it is exempt. They rely not on my ruling in In re Roy, but on its math. In Roy, I overruled the trustee’s assertion that the debtor’s EIC refund could be apportioned between the pre- and post-petition periods.10 Following the BAP’s and Judge Karlin’s decisions in In re Westby, I instead held that any apportionment of the EIC that resulted in part of it being subject to turnover improperly burdened the § 60-2315 exemption.11 I further held in Roy that deducting a debtor’s attorney fee assignment from the entire refund (including the EIC portion) before apportioning it between the pre- and post-petition periods is proper. There, the debtor made a consensual assignment of the refund. Nothing in § 60-2315 prevents a debtor from waiving his or her EIC exemption by assigning it.12 The
9 See In re Hunter, No. 09-12270, 2011 WL 1749933 at *5 (Bankr. D. Kan. May 5, 2011). 10 In re Roy, No. 12-11246, Dkt. 39 at pp. 10, 13. See also In re Westby, 486
B.R. 409 (10th Cir. B.A.P. 2013). 11 Roy, supra at 10. 12 Id. at pp. 13-14. Case 13-13038 Doc# 81 Filed 03/06/15 Page 6 of 9
trustee relies on that statement in Roy to advocate that the debtor’s exempt EIC portion of the refund should bear a ratable share of his or her attorney’s fees assignment. I disagree with both parties.
In Roy, I first deducted the fee assignment (after allocating it between the state and federal refunds) from each refund and then deducted the EIC from each, granting the trustee’s turnover application for the estate’s apportioned share of the remainder of each.13 Because the tax-based portion of the Roy refund was considerably larger than the EIC portion, no part of the debtors’ EIC was affected by the attorney’s fee assignment. That will not necessarily occur in every case. Here, for example, the Stewarts’ EIC portion, $6,044, is significantly larger than the tax-based portion of their federal refund, $1,888, and all but $36 of their gross state refund is comprised of EIC. And, it is certainly possible that other debtors will have no tax-based refund, but still receive a substantial EIC refund. Whatever the case, however, the same principles upon which I decided Hunter and Roy apply.
The debtor may, in all cases, assign some or all of his or her prepetition income tax refund to the debtors’ lawyer as a fee for work done preparing the bankruptcy case. This assignment is, as I have stated in other cases, not much different than debtors paying their lawyers a retainer from cash they have on hand prepetition.14 The end result is that the attorney, not the estate, gets the
13 Id. at p. 14. 14 In re Hunter, 2011 WL 1749933 at *5 and *7.
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money. A debtor’s consensual tax refund assignment for fees and expenses that impairs the EIC portion of their refund is also entirely consistent with Kansas exemption law. Therefore I refuse to hold that an EIC refund can never be impaired by an attorney’s fee assignment. I likewise decline to impose the proration scheme advocated by the trustee.
For better or worse, the Legislature has made a debtor’s EIC-based tax refund exempt. Long-standing bankruptcy court authority and years of practice and custom have allowed debtors to assign their income tax refunds to their bankruptcy lawyers for fees and expenses. Nothing prevents the exempt portions from being consensually assigned, therefore nothing should prevent the deductions of both the EIC and the fees from the entire refund before applying the Barowsky apportionment of it between the pre- and post-petition year. This method is simple, straightforward, and consistent with Kansas and federal bankruptcy law and practice.
Therefore, the appropriate calculation of the estate’s share of the debtors’ 2013 tax refunds is as follows:
Federal State Gross Refund 7932.00 1063.00 Less: KDCF Support Setoff 34.75 884.73 Net Refund 7897.25 178.27
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Less: Attorney Fee/Filing Fee Assignment ($1,481) proratedbetween federal and state refunds15 1305.95 175.05 Less: EIC exempt portion of refund 6044.00 1027.00 Net Refund Available for Turnover before Barowsky allocation 547.30 0.00 Estate’s share of Refund (330/365 = .90410) 494.81 0.00
As this calculation demonstrates, because nearly all of the gross state refund is EIC-based, the fee assignment burdens the EIC portion and no remainder subject to turnover exists; but a remainder of the federal tax refund in excess of the fee assignment and EIC portion exists and is subject to turnover. The trustee’s motion for turnover is granted in part and debtors are ordered to turnover $494.81 to the trustee, together with the $200 sanction previously ordered by this Court.16
15 The federal refund comprises 88.18% of the total gross refund ($7,932 ÷ $8,995); the state refund comprises 11.82% of the total gross refund ($1,063 ÷ $8,995). 16 Dkt. 47.
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Category: Judge Nugent	Published on 27 January 2015	Written by Judge Nugent	Hits: 279	Nielsen et al v. Pollan, 13-05204 (Bankr. D. Kan. Jan. 14, 2014) Doc. # 55
SO ORDERED. SIGNED this 13th day of January, 2015.
IN RE: ) ) MARY DONNA POLLAN, ) Case No. 13-12513 ) Chapter 13 Debtor. ) __________________________________________)
) SHERI NIELSEN and ) JACKIE NIELSEN, )
) Plaintiffs, ) vs. ) Adv. No. 13-5204
) MARY DONNA POLLAN, ) ) Defendant. ) __________________________________________)
Mary Pollan offered Sheri Nielsen a hand up in a time of need; she borrowed
money from two banks to buy Sheri a car and fund Sheri’s nursing school
Case 13-05204 Doc# 55 Filed 01/13/15 Page 1 of 14
enrollment while permitting her to live in a rental home Mary owned in Wichita. Sheri was to make the payments on the debts that Mary incurred for her. When Sheri failed to repay her, Mary resorted to self-help to collect from Sheri. After convincing Sheri’s mother, Jackie, to refinance the car loan in her own name, Mary reclaimed the (Kia) Soul that she had purchased for Sheri and sold it. Now Sheri and Jackie allege that Mary defrauded them. After they sued her in state court, she filed a chapter 13 case here. Sheri and Jackie filed this dischargeability complaint alleging that Mary’s debt to them should be excepted from her discharge because it was incurred by false representations, false pretenses or actual fraud as 11 U.S.C. § 523(a)(2)(A) provides.
To prevail in this proceeding, Sheri and Jackie Nielsen must show that Mary’s representations were false when she made them or that she intentionally fostered a false impression to defraud Sheri and Jackie. Merely demonstrating that Mary took property in which Sheri and Jackie claimed an interest is not sufficient to support their fraud-based claims—the only exceptions to her discharge that Sheri and Jackie pled.1
This is the unhappy story of the misplaced affections and misunderstandings that often begin with the best intentions. When Sheri Nielsen met Mary Pollan in 2004, she was a single mother. Mary and her husband (now deceased) ranched in the Cambridge area of southeastern Kansas and Sheri lived nearby with her daughter, America, and her boyfriend, Abel. Until he left Sheri, Abel helped Mr. Pollan with miscellaneous work on the ranch. Mary became attached to Sheri and
1 Plaintiffs Sheri and Jackie Nielsen appeared by their attorney Barry L. Arbuckle of Wichita, Kansas. Defendant and debtor Mary Pollan appeared by her attorney Carl B. Davis of Wichita, Kansas.
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America acting almost as a mother and grandmother to them. Sheri’s mother Jackie worked at the café in town, helping to support herself and Sheri’s father who was ill and on Social Security. Mary frequently cared for America and helped Sheri in various other ways.
By 2011, Sheri wanted to become a nurse so Mary, now widowed, offered Sheri three kinds of material assistance.2 She offered to borrow money from her bank, the Emerald Bank, on her personal vehicle, and lend it to Sheri to pay for nurses training and some lingering personal debts. She offered to assist Sheri in purchasing a more reliable car (Sheri was driving a junker) so she could safely get to Wichita for school. And, Mary offered Sheri a place to live in her rental house in Wichita. Sheri was a nursing assistant at a nursing home at this time. Even so, she agreed that if Mary would take these loans out, Sheri would carry the payments so that Mary’s credit would not be periled.
On July 11, 2011, Sheri and Mary went to the Steven dealership in Wichita to look at cars for Sheri. When they found a suitable vehicle, a used 2010 Kia Soul, they applied for financing as co-makers. But, when the dealer told them that the interest rate would be lower if only Mary were on the note (apparently owing to Sheri’s bad credit), Mary alone signed a retail installment contract that Steven assigned to TD Auto Finance and the car was titled to her.3 This was a 72-month obligation with a $309 monthly payment. Sheri agreed that she would make the payments.
The next day, July 12, Mary signed a note to Emerald Bank for $10,000, secured by a lien on her 1995 Ford Mustang.4 This note was payable over two years at $456 per month. The loan proceeds were deposited in her checking account and
2 At the time of the events in this proceeding, Sheri was 33-34 years of age. 3 Ex. C, Ex. D, and Ex. P. 4 Ex. A.
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from there, a $2,000 down payment was made on the Kia Soul by check dated July 19, a $1,700 cash withdrawal was made on July 22, and $6,000 was paid for Sheri’s nursing school fees by check dated July 20.5 Mary wrote the $6,000 check, leaving the payee line blank, and gave it to Sheri for nursing school; on the memo line of the check, Mary noted “Loan Sheri.”6 Mary said she left the payee line blank because she didn’t know the name of the school; Sheri says Mary actually gave her the check to cash, that she did so at a Bank of America branch, and gave the money back to Mary who took it instead to the casino. Someone wrote the name “Kari Einerson” on the payee line and Ms. Einerson appears to have endorsed the check. Ms. Einerson was an acquaintance of Sheri’s and according to Sheri used Bank of America to cash the check (where Einerson banked), because Sheri had no bank account and could not cash the check on her own.7 Sheri’s version lacks credibility not least because Sheri concedes she agreed to repay the Emerald debt and because, as Sheri testified, she was denied admission to nurses training after failing an entrance examination or course prerequisite. Sheri wouldn’t have agreed to pay (and, in fact, make payments) if she never received the benefit of the money.
At about the same time, Mary evicted a troublesome tenant from her rental home on Sheridan Street in Wichita and allowed Sheri and America to move in.
5 See Ex. I. As the cancelled checks on Mary’s bank account demonstrate, she routinely filled out the memo line of her checks identifying the purpose of the check. The $2,000 down payment to StevenKia (check no. 2100) was dated July 19 and cleared July 21. The $6,000 for nursing school (check no. 2101) was dated July 20 and cleared the bank on July 21. The cash withdrawal was purportedly for unpaid bills and expenses of Sheri (including to repay loans from family members), but she deniesreceiving the $1,700 withdrawal. Sheri claims that she received a total of $2,700 from the $10,000 Emerald loan – the $2,000 car down payment and $700 cash for unspecified bills. In any event, Sheri admitted receiving some amount for bills and expenses from Mary and acknowledged her obligation to make payments on the Emerald loan. 6 Ex. H. 7 Sheri’s story that she was merely cashing the check for Mary is not believable. Mary’s bank account records show that Mary made cash withdrawals in $50-$100 increments fairly regularly (which shepersonally signed for). See Ex. I, J, K. She needed neither to write a check to obtain cash nor Sheri’s assistance. If Mary had intended to obtain cash via a check drawn on her account, she could have made the check payable to “cash” and presented it.
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Sheri was to have free rent for three months, then begin paying $450 rent each month. Mary intended this arrangement to run for at least six months. While it’s difficult to understand how Sheri would be able to service $765 each month in debt while paying $450 in rent, a total of $1,215 monthly, on her minimum wage job and while she attended school, that appears to have been Sheri’s understanding and Mary’s expectation.
Sheri defaulted. She missed the first several Emerald payments. She also missed and was late from the outset on the TD Auto car loan payments, regularly incurring late fees, while she was off work due to a shoulder injury.8 And, after the free three months expired, she didn’t pay the rent on the Sheridan property. Mary addressed this situation by repeatedly asking for the money. When that didn’t work, in January of 2012, she took the car briefly as a “wake up call” to Sheri that she expected repayment and in an effort to thwart a possible repossession of the Kia by TD Auto.9 Not surprisingly, their relationship deteriorated and Sheri stopped communicating with Mary. Sheri called TD Auto to see about taking the car loan on herself, but, because TD Auto apparently thought Sheri was Mary’s daughter, they sent the application to Mary’s Cambridge address. No application was made.
In April, Mary approached Jackie at Jackie’s workplace, the 160 Café in Cambridge. She told Jackie about the two loans and Sheri’s default. She told Jackie she wanted them all paid and that she didn’t want to hazard her credit rating. She specifically asked Jackie to take on the TD Auto loan by refinancing it at her own bank, Citizens Bank of Kansas. On April 24, 2012, someone representing either Mary or Citizens Bank called TD Auto to get a payoff amount and, on April 30,
8 See Ex. F, TD Auto Account History showing a total of 4 loan payments on the TD Auto Loan: October 12, 2011, January 24, 2012, February 6, 2012, and March 13, 2012. 9 Ex. L. TD Auto sent a notice of default addressed to Mary at the Sheridan property but Mary never received the correspondence because she was not residing at the Sheridan property at the time. Sheriwas living there.
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Jackie closed a loan from Citizens for $17,709, enough to pay off the TD Auto loan in full.10 Citizens forwarded the funds to TD Auto who, in turn, released its lien against the Kia Soul on May 22.11 On June 2, the Kansas Department of Revenue issued a clear certificate of title for the Soul to Mary, its record owner.12
Between May and September, Mary continued to ask Sheri and Jackie for payment on the Emerald loan. When Sheri stopped taking Mary’s calls, Mary wrote her letters, stating in one that she was “sorry I didn’t keep the car when I came after it the first time.”13 Mary also approached Jackie at work, resulting in Jackie calling the sheriff to remove her. Meanwhile, Citizens needed to complete its documentation of the Nielsen car loan and, to that end, Citizens requested of Mary to bring the Soul’s certificate of title to the bank. Mary brought the title to the Winfield branch office and met with branch president Dennis Knackstedt. She showed him the title, but took it back, saying she wished to consult with a lawyer about how she might best proceed to preserve her rights in connection with the Emerald loan. She then left the bank, never to return. Knackstedt wrote her on September 28 requesting delivery of the title or repayment of what Citizens Bank had advanced to pay off TD Auto.14
After receiving the Citizens Bank letter, Mary acted quickly. On October 2, she and friend drove to Wichita and secured a duplicate key to the Soul from the Steven dealership. They then went to Andover, Kansas where Sheri worked, and stopped at the police department to seek assistance in taking the car. When the police declined to assist, Mary and her friend went to Sheri’s place of employment and took the car. They returned with it to Steven but, according to Mary, were told
10 Ex. 13, 9. 11 Ex. F and Ex. G. The TD Auto loan was paid off by Citizens on May 9, 2012 (Ex. F). 12 Ex. B. 13 Ex. T. 14 Ex. 16.
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the car was in too poor condition for Steven to buy it. In the intervening months between July of 2011 and October of 2012, some 34,000 miles had been put on the car. Sheri’s two dogs had ridden in it a lot; the windshield was cracked, and the car was filled with toys, clothes, and trash. Nevertheless, when Mary and her friend went to Carmax, that dealer offered her $8,000.15 Mary accepted and took the money, signed over her title, and deposited the proceeds in Emerald Bank on October 3 after paying, at least in part, the Emerald note.16
Sheri reported the car stolen, but because Mary had legal title to it, the Andover police declined to pursue the complaint. Likewise, Sheri’s parents, who had apparently insured the car, made a stolen car claim to Farm Bureau. Like the police, Farm Bureau concluded that Mary’s legal title to the car supported her taking it, thus denying the claim.17 Jackie and Sheri consulted their counsel and sued Mary in Sedgwick County District Court.
The state court litigation has been eventful and expensive. Sheri and Jackie sued not only Mary, but also Carmax, TD Auto, and Citizens Bank on a plethora of theories. A proposed settlement between them and Citizens Bank was never consummated. Carmax was dismissed from the case, as was TD Auto. TD Auto received an award of KAN. STAT. ANN. § 60-211 attorney’s fee sanctions against Sheri and Jackie’s counsel as part of its dismissal order. Their Kansas Consumer Protection Act claims against Citizens were likewise dismissed and the Bank’s “prevailing party” attorneys’ fees were also assessed against them. Their motion to reconsider that award was denied and their counsel was sanctioned for his conduct in connection with that matter as well. There are many copied court documents in
15 Ex. E. 16 Ex. M shows that Mary deposited the $8,000 sale proceeds in her savings account, net of $4,890 applied to the Emerald loan. Mary bagged up the personal property in the car and left it at the backdoor of the 160 Café for Jackie to return to Sheri. 17 Ex. N.
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evidence, but the status of the remainder of the state court case remains unclear. Whatever its status is, all that matters in this adversary proceeding is whether Mary made false representations, employed false pretenses, or committed actual fraud to obtain the Soul or its value and whether Mary’s debt to Sheri and Jackie should be excepted from her chapter 13 discharge.18 Mary filed this chapter 13 case on September 27, 2013. Neither Sheri nor Jackie filed a proof of claim in that case.19
The plaintiffs’ theory of recovery in this case has evolved from a broad-brushed allegation that Mary committed “fraud” under 11 U.S.C. § 1328(a)(2) which incorporates § 523(a)(2)(A), to the more narrow issues presented at trial. In his opening statement, plaintiffs’ counsel (who is also their lawyer in state court) claimed his clients relied on Mary’s two alleged false statements: (1) that Mary would assist Sheri in buying the Soul and, when Sheri had completed the payments, Mary would sign it over to her; and (2) that if Sheri and Jackie would refinance the car loan, Mary would let them have the car to secure that loan. In addition, counsel stated that Mary’s conduct as a whole demonstrated false pretenses. Thus, this case proceeded and will be decided on whether Mary’s statements were knowingly false, made with intent to deceive, and justifiably relied upon by Sheri and Jackie to their detriment under § 523(a)(2)(A). Likewise, I will consider whether the plaintiffs proved that Mary’s conduct demonstrated false pretenses or actual fraud. Those are the only theories of recovery the plaintiffs pleaded. Exceptions to discharge are narrowly construed in favor of the debtor to promote the “fresh start” policy of the Bankruptcy Code and therefore, where there is doubt it is resolved in the debtor’s
18 Nor did Plaintiffs present evidence of the extent of their claimed loss caused by Mary’s fraud. 19 The claims bar date ran on January 28, 2014. Sheri and Jackie are listed on Schedule F as unsecured creditors with unliquidated claims.
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favor.20 The plaintiffs, as creditors, have the burden of proving their alleged exception to discharge by a preponderance of the evidence.21
A representation is false for § 523(a)(2)(A) purposes if the speaker knows its falsity when she utters it, that she intended to deceive the creditor by uttering it, that the creditor relied on the statement to her detriment, and that the reliance was justifiable.22 The intent to deceive can be inferred from the totality of the circumstances.23 Sheri and Jackie allege that Mary made two sets of false statements: first, that while Mary’s name would be on the TD Auto financing and the Soul’s title, Sheri would own it; and second, that if Jackie and Sheri took out a new loan to refinance Mary’s TD Auto car loan, the she would let them have the vehicle as security.
The facts do not support the first alleged false representation. There is simply no evidence that Mary undertook the purchase of the Soul for Sheri’s use with the intention of getting someone else to pay for the car or with designs on ultimately keeping it for herself. She already had two cars, the Mustang on which she borrowed from Emerald and a 2010 Ford Fusion. Mary and Sheri shared the understanding that Sheri would complete the payments and eventually receive the vehicle. If Mary formed the intention to mulct Sheri and Jackie into paying for the Soul so she could keep it, she did so after she purchased it from Steven and borrowed the purchase price from TD Auto and after Sheri defaulted on payments. Mary’s pre-purchase representation that Sheri would own the car once she’d made the loan payments was not false and was not made with the intent to deceive. There
20 Jones v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir. 1993); Herman v. White (In re White), 519
B.R. 832, 834-35 (Bankr. N.D. Okla. 2014); In re Coates, 519 B.R. 842, 848 (Bankr. D. Utah 2014). 21 In re White, 519 B.R. at 835. 22 Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222 (10th Cir. B.A.P. 2013). 23 Copper v. Lemke (In re Lemke), 423 B.R. 917, 922 (10th Cir. B.A.P. 2010). 9
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was no evidence that Mary had no intention of fulfilling her promise to transfer the car to Sheri upon repayment of the loans when the agreement was struck in July of 2011.24 Only when Sheri breached the agreement by not repaying the loans did Mary’s intent change.25
The second representation allegation also lacks factual support. The evidence is less than clear whether Mary’s conversations with Jackie at the café referred to the Emerald loan. Jackie says Mary said nothing to her about it until after Jackie and Sheri had signed the Citizens Bank note that refinanced the TD loan. Mary says that she did in fact discuss the Emerald note with Jackie because she considered the Emerald loan, the TD Auto loan, and the lease of the Sheridan property a coordinated effort to help Sheri. The plaintiffs’ evidence of the second representation is iffy at best. Jackie and Sheri had the burden to prove that Mary made the false statement; I cannot conclude that they met that burden. Rather, given Mary’s continuing belief that the loans and lease transaction were elements of one arrangement between her and Sheri, it seems more likely that she would have discussed the Emerald loan with Jackie. Repayment of the Emerald loan (secured by Mary’s Ford) was, at least in Mary’s mind, a condition precedent to the Nielsens getting the Kia.26 Mary’s subsequent conduct also suggests no misrepresentation was made. The Citizens Bank loan, payoff of TD Auto, and lien release on the Soul occurred in April and May of 2012. Mary took no steps to seize the Soul until October, after Citizens Bank made demand upon her and after months of Mary
24 See In re Borschow, 454 B.R. 374, 395 (Bankr. W.D. Tex. 2011) (Mere promise, to be executed inthe future, is insufficient to make debt nondischargeable under § 523(a)(2)(A) unless debtor had no intention of fulfilling the promise when made.). 25 This first representation is not in any event actionable by Jackie as Mary made no representationsto Jackie prior to purchase of the Kia. Jackie learned of Mary’s 2011 loans to Sheri after the fact. 26 In re Bird, 224 B.R. 622, 627 (Bankr. S.D. Ohio 1998) (If there is room for inference of honest intent, nondischargeability must be resolved in favor of debtor.).
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asking Sheri and Jackie for repayment of the Emerald Bank loan. Indeed, Mary’s correspondence with both Jackie and Sheri in August, evidences Mary’s insistence on Sheri’s timely payments of the Emerald Bank loan or getting it out of Mary’s name so as not to damage her credit.27 That was the premise of Mary’s and Sheri’s “deal” from the outset. Had Sheri made the Emerald payments, Mary likely would not have seized the Kia.28
While false representation claims require express statements, false pretense claims involve “implied representations intended to create and foster a false impression.”29 This can include conduct and material omissions. As with the Nielsens’ false representation claims, their proof falls short here. They failed to prove that Mary’s initial conduct in borrowing money for Sheri to get her a car and help finance her nursing school ambitions was done to create and foster a false impression. The evidence demonstrates that, based largely on their friendship and trust, Mary undertook to help Sheri, and through her, Sheri’s daughter, find a way to a better life. Indeed, Sheri testified to her understanding that she would receive the car when she had completed the payments on the TD loan. She also testified that she attempted to keep the Emerald payments current until she was hurt and unable to work. Sheri contacted TD Auto about moving the loan into her own name and asked her mother about it. Sheri also knew that she would be obligated to pay rent on the Wichita house at some point. Sheri and Jackie failed to demonstrate that Mary’s conduct or speech “fostered a false impression” at least during the
27 Ex. T, U. 28 See also Ex. 15 – interrogatory answers nos. 10 and 11 indicate Mary’s intent and Sheri’s promisethat she would repay both the Emerald Bank loan and the TD Auto loan before ownership would betransferred to Sheri. 29 In re Sturgeon, 496 B.R. 215, 223.
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summer 2011.30
Whether Mary fostered a false impression in her dealings with Jackie and Citizens Bank is a much closer call. While it is not clear to me that Mary expressly and falsely represented to Jackie that the Nielsens would get the Kia once they refinanced the TD Auto loan, some of her conduct after that time might suggest that she “fostered a false impression” about that. Whether she in her discussions with Jackie made payment of Emerald loan a condition precedent to Sheri and Jackie obtaining the Kia or not, Mary clearly understood that no third bank would likely make a car loan without receiving a lien on the car. Indeed, she had to give Emerald Bank a lien on her Ford to secure the nursing home loan. Mary wanted out from under the TD Auto loan, but she also wanted the Emerald loan repaid. She showed the Kia title to Mr. Knackstedt at Citizens Bank knowing that the TD Auto loan had been paid off, but then refused to sign it over and carried it off. Then, in October of 2012, after Citizens wrote and demanded that either the title be turned over or that Mary take over the loan, Mary and her friend took possession of the Kia and sold it.
In the end, Mary’s obligation to TD Auto was repaid by Jackie and Sheri’s refinance at Citizens and her liability to Emerald was reduced when she sold the Soul and applied its proceeds to that debt.31 But the issue in this proceeding was whether that was the outcome she had in mind when she approached Jackie about the TD Auto refinance.32 The record is simply unclear. Mary saw these transactions as one: she incurred credit that Sheri couldn’t have gotten from a legitimate
30 The evidence established that Jackie was not even privy to Mary’s and Sheri’s dealings until after the car was purchased. 31 The record is unclear on this point. Ex. M shows that Mary applied $4,890 to the Emerald Bankloan but it is unclear whether this paid off the loan in full. 32 There was no evidence that Mary had any direct communication with Citizens Bank as to therefinance transaction until after it was consummated.
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financial institution, credit that Sheri agreed to repay. While a banker or lawyer might understand that retaining the Kia to “secure” Sheri’s paying Mary back for the Emerald loan wasn’t legally proper, none of these three parties had either the education or training to understand that. That taking the car to pay the Emerald loan made sense to Mary suggests that she lacked requisite wrongful intent.33 In her mind, even after the TD Auto loan had been repaid, Mary still had a debt to collect and the Kia was the only means to do it, because Sheri had stopped making payments. She took the asset to pay a debt. And as noted under the false representations section herein, Mary continued to pursue Sheri’s timely loan payment on the Emerald Bank loan after TD Auto was paid off and before she resorted to the Kia.34 That is not enough to support a finding of false pretenses here.
To prevail on an actual fraud claim, the Nielsens had to show that Mary deliberately engaged in a scheme to deprive them of property or a legal right. As discussed above, they did not prove that Mary had any such plan or motive in mind in July of 2011 when she purchased the Kia. Nor did they show that Mary had a malign plan in mind when she approached Jackie about refinancing the Kia. What appears to have happened here is that Sheri’s failure to maintain the payments that Mary generously incurred in her behalf led to hurt feelings and distrust leading her to take matters into her hands. After Mary realized that Sheri and Jackie couldn’t or wouldn’t repay her for the Emerald loan, she repossessed a car to which she had received clear title, sold it, and paid the Emerald loan herself. The
33 In correspondence to both Jackie and Sheri in August 2012, Mary lamented not keeping the car when she repossessed it the first time. Ex. T, U. This negates the suggestion that she intended allalong to keep the car when she first approached Jackie to refinance the TD Auto loan. 34 See Ex. T, U.
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Nielsens failed to prove the existence of a scheme to deprive or cheat them. Mary’s only “scheme” was to collect from the Nielsens what she felt she was owed and what Sheri had promised to pay.
What transpired in this case is unfortunate at best. Well-intended loans between close friends or relatives frequently go awry when emotions cloud a person’s lending judgment. Mary Pollan’s judgment was thus clouded. But her conduct in this case is consistent with her belief that Sheri had agreed to repay her for the credit she extended – the TD Auto loan and the Emerald loan. Once Sheri and Mary’s communication broke down, Mary collected what she could by repossessing and selling the car titled in her name. While discrete pieces of this transaction show Mary in a negative light, Sheri and Jackie have failed to demonstrate by a preponderance of the evidence that she falsely represented her intentions to them, that she fostered a false impression, or that she made the Kia purchase as part of a scheme to retain the car. Nor does it appear that Mary intended to take the car at the time she approached Jackie about refinancing it. The plaintiffs failed to demonstrate Mary’s bad intent; their complaint fails.35
Mary is entitled to judgment on the plaintiffs’ complaint and judgment will be entered this day accordingly. # # #
35 The Court does not condone Mary’s self-help initiative and notes that, in a non-bankruptcy setting, Jackie and Sheri might be able to show that they had equitable title to the Kia and that Mary converted it when she repossessed and sold the Soul. That was pled in state court, but not here.Conversion can form the basis for a Chapter 7 discharge exception under § 523(a)(6) (willful and malicious damage to property) when the converter is shown to have the requisite malicious intention.That exception is not incorporated as one of the exceptions to a chapter 13 full payment discharge under §1328(a)(2).
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