Source: http://www.ksb.uscourts.gov/index.php?option=com_content&view=category&id=51&Itemid=61
Timestamp: 2014-11-24 08:07:07
Document Index: 425825599

Matched Legal Cases: ['§ 586', '§ 157', '§ 157', '§ 348', '§ 348', '§ 1327', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 1327', '§ 1327', '§ 348', '§ 348', '§ 348', '§ 348', '§ 507', '§ 1327', '§ 348', '§ 1327', '§ 1327', '§ 1327', '§ 1327', '§ 348', '§ 348', '§ 348', '§ 348', '§ 348', '§ 60', '§ 60', '§ 341', '§ 157', '§ 157', '§ 60', '§ 541', '§ 541', '§ 522', '§ 522', '§ 60', '§ 522', '§ 60', '§ 60', '§ 1325', '§ 157', '§ 157', '§ 1325', '§ 3701', '§ 1325', '§ 522', '§ 541', '§ 541', '§ 522', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 522', '§522', '§ 522', '§ 522', '§ 522', '§ 2701', '§ 2710', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 117', '§ 117', '§ 541', '§ 541', '§ 1325', '§ 1325', '§ 1325', '§ 541', '§ 541', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 542', '§ 522', '§ 522', '§ 3701', '§ 522', '§ 522']

Category: Judge Karlin	Published on 19 November 2014	Written by Judge Karlin	Hits: 46	In Re Ungerer, 13-41131 (Bankr. D. Kan. Oct. 17, 2014) Doc. # 72
SO ORDERED. SIGNED this 17th day of November, 2014.
In re: Case No. 13-41131 Terry Lee Ungerer Chapter 7 Delores Jean Ungerer,
Order Denying Debtors’ Motion to Refund Postpetition Mortgage Payments
Debtors Terry and Delores Ungerer filed a chapter 13 bankruptcy petition and about eight months later converted their case to one under chapter 7 of the Bankruptcy Code. Post-conversion, Debtors requested refund of a significant portion of the plan payments they made to the chapter 13 trustee (the “Trustee”), because those payments were intended for a mortgage creditor that never filed a proof of claim, and because they no longer wished to retain the related real property. The Trustee resisted, arguing that the funds should instead be disbursed to creditors pursuant to the confirmed chapter 13 plan.
This debate—the subject of a current Circuit Court split, but one that the Tenth Circuit has not yet weighed in on—has reasonable arguments on both sides. After considering these arguments,
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this Court holds that Debtors do not have a right to refund of the payments reserved for payment of the mortgage note, as their confirmed chapter 13 plan controls disbursements and requires the chapter 13 Trustee pay those funds to creditors. Debtors’ motion for return of the money held by the Trustee at conversion is denied.
I. Procedural and Factual Background The parties have stipulated to the following facts or they are part of the record in this case. Debtors filed a chapter 13 bankruptcy petition in August 2013. Their chapter 13 plan proposed payments of $1025 per month for at least 36 months, and indicated the following would be paid: filing fees, attorney fees for their bankruptcy attorney, home mortgage arrearage to Ocwen Loan Servicing, and ongoing mortgage payments and “conduit administrative expenses” associated with the home mortgage pursuant to this Court’s Standing Order 11-3 (the “conduit mortgage rule”). Paragraph 14 of the District’s form plan also states that “[g]eneral unsecured claims will be paid after all other unsecured claims, including administrative and priority claims, from Debtor’s projected disposable income in an amount not less than the amount those creditors would receive if the estate of Debtor were liquidated under Chapter 7 on the date of confirmation. . . .”1
The chapter 13 plan was confirmed on November 20, 2013, after Debtors agreed to raise their monthly plan payment to $1093 to assure the plan’s feasibility. Debtors’ mortgage creditor never filed a proof of claim.2
1 Doc. 2 (Plan).
2 This failure of a mortgagee to file a claim— an increasingly common situation—presents difficult problems for debtors and trustees, alike. Counsel entered an appearance for the mortgage creditor in September 2013 (Doc. 17), so lack of notice is clearly not the cause.
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About eight months after they filed their chapter 13 petition, Debtors filed a notice to convert their case to chapter 7, and the case was converted a few days later. Debtors have since received their chapter 7 discharge, and the chapter 7 trustee has claimed no interest in these funds.
On the date of conversion (and to date), the chapter 13 Trustee held $8007.56 in plan payments in his account. While the chapter 13 case was pending, each time the chapter 13 Trustee made a disbursement, he retained a portion of the plan payments he had received, in anticipation of receiving a proof of claim from the mortgage creditor. As of the date of conversion, and pursuant to the plan terms and this District’s conduit mortgage rule, the Trustee had reserved $7184 for the ongoing mortgage payments and $166.75 for the mortgage administrative claim. The remainder of the funds would typically have been disbursed as follows: $624.59 to the chapter 13 Trustee for his statutory fees (pursuant to 28 U.S.C. § 586(e)(2)), and $32.22 to Debtors’ attorney. Based on the timely filed claims, if the Court orders the chapter 13 Trustee to stop holding the funds for the mortgage claim and to disburse these funds to the remaining creditors Debtors’ plan provides to pay, in full or in part, the funds would be disbursed as follows: $624.59 to the Trustee, $2587.24 to Debtors’ attorney, and $4795.73 to allowed unsecured claims.
After converting their case, Debtors filed the motion to require the Trustee return the money being held for the mortgage creditor to them, as opposed to having the Trustee disburse the funds in the normal course of a confirmed plan.3 The chapter 13 Trustee objected, arguing that Debtors do not have a right to control the funds after they pay them to the trustee, and that the funds received prior to conversion should be disbursed by the chapter 13 Trustee pursuant to the confirmed chapter
3 Doc. 59 (seeking order requiring Trustee “to disburse the proceeds . . . directly to the Debtors.”).
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13 plan. The parties have now fully briefed this matter on the above stipulated facts. This matter constitutes a core proceeding over which the Court has the jurisdiction and authority to enter a final order.4
II. Analysis Debtors’ motion to disburse, and the Trustee’s opposition thereto, are the subject of divided rulings from two Circuit Courts of Appeal: the Third Circuit and Fifth Circuit have reached different conclusions on whether undistributed payments held by a chapter 13 trustee after the conversion of a case from a chapter 13 to a chapter 7 should be returned to the debtor or distributed to creditors. There are no pertinent rulings on this matter from the Tenth Circuit or Tenth Circuit BAP, and no Judge in this District has yet decided the issue.5
A. Third Circuit: In re Michael6 The Third Circuit was the first Circuit Court to hear this issue, and it held that if the chapter 13 trustee is holding funds acquired from the debtor postpetition at the time of conversion from a chapter 13 to a chapter 7, the chapter 13 trustee must return those funds to the debtor.7 In In re
4 See 28 U.S.C. § 157(b)(2)(A) (stating that “matters concerning the administration of the estate” are core proceedings); § 157(b)(1) (granting authority to bankruptcy judges to hear core proceedings).
5 There is an older bankruptcy case from this District that concluded that funds held by a chapter 13 trustee at the time of conversion to chapter 7 were not property of the chapter 7 estate but should instead be distributed to creditors pursuant to the chapter 13 plan, In re Simmons, 286
B.R. 426, 427, 430–31 (Bankr. D. Kan. 2002) (Flanagan, J.). But apparently no party in that case argued that the funds should be returned to the debtors. Rather, it was an argument about which trustee was entitled to administer the funds. The Simmons case also addresses no arguments that aren’t thoroughly addressed by the Third and Fifth Circuit cases, so the Court finds it more instructive to focus on the Circuit Court opinions. 6 699 F.3d 305 (3d Cir. 2012).
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Michael, the debtor filed a chapter 13 bankruptcy, and his plan was later confirmed.8 The plan required the debtor to pay $277 per month to the chapter 13 trustee for 53 months, with funds to be distributed to secured and priority creditors, and any remaining funds to be distributed to unsecured creditors pro rata.9 GMAC held the mortgage on the debtor’s home, and the plan provided that its prepetition delinquency would be paid by the trustee inside the plan, with debtor continuing to make postpetition mortgage payments directly to GMAC outside the plan.10
Soon after plan confirmation, however, GMAC filed a motion for relief from stay because the debtor had failed to make ongoing mortgage payments outside the plan. The court granted GMAC’s motion to allow it to foreclose on the home.11 But because the debtor did not amend his plan or modify the wage order that required his employer make the $277 plan payments, the employer continued to send the plan payments to the chapter 13 trustee.12 The chapter 13 trustee attempted to pay funds to GMAC, but GMAC refused to accept them to avoid possible estoppel or waiver defenses regarding its foreclosure action. As a result, the funds continued to accumulate.13
Approximately three years later, the debtor moved to convert his case to chapter 7.14 Shortly after the conversion of his case, the debtor filed a motion seeking return of the accumulated
8 Id. 9 Id. 10 Id. 11 Id. 12 Id. 13 Id. 14 Id.
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funds—then totaling $9181.62—from the chapter 13 trustee.15 The chapter 13 trustee objected, arguing that the funds should be distributed pro rata to unsecured creditors as provided by the confirmed chapter 13 plan.16
The Third Circuit began its analysis with 11 U.S.C. § 348(f)(1)(A),17 which states that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” In the case of a bad faith conversion, “the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.”18 The In re Michael court noted that
“Prior to the addition of § 348(f), courts considering the disposition of funds held by a Chapter 13 trustee at the time of conversion reached three different results: the funds were
(i) property of the new Chapter 7 estate, (ii) property of the debtor, or (iii) property of creditors under a confirmed Chapter 13 plan. . . . Section 348(f) removed the first result, but did not resolve explicitly whether the Chapter 13 trustee should give the funds to the debtor or distribute them to creditors under the confirmed Chapter 13 plan.”19 The Third Circuit ultimately concluded that the funds should be returned to the debtor.
First, the Third Circuit noted that § 1327(b) vests all property of the chapter 13 estate in the debtor upon plan confirmation. Section 1327(b) states: “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in
17 All future statutory references are to title 11 of the United States Code (the “Bankruptcy Code”) unless otherwise specified. 18 § 348(f)(2). 19 In re Michael, 699 F.3d at 308–09. -6
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the debtor.” According to the Third Circuit, this implies that property held by the Chapter 13 trustee after plan confirmation is “under the control of the debtor as of the date of a later conversion” for purposes of § 348(f)(1).20 According to the Third Circuit, there is no provision in the Bankruptcy Code that classifies any property, including post-petition wages, as belonging to creditors, and the debtor loses no vested interest until the trustee affirmatively transfers the funds to creditors.21 Because the debtor retains this vested interest, the Third Circuit reasoned, the funds should revert to the debtor.22
Second, the Third Circuit concluded that returning the funds to the debtor better aligns with § 348(e). Section 348(e) states that after the conversion of the case, the services of the chapter 13 trustee are terminated, and this “seemingly renders [the chapter 13 trustee] powerless to make payments to creditors under a Chapter 13 plan.”23 The Third Circuit reasoned that the chapter 13 trustee has limited post-conversion duties, and returning undistributed funds better aligns with those duties as “their return should be considered part of the Chapter 13 trustee’s short list of remaining duties.”24
Third, the Third Circuit concluded that returning the funds to the debtor furthers the legislative intent of encouraging debtors to attempt chapter 13 cases. The Third Circuit noted that the legislative history of § 348(f) shows that Congress revised § 348(f) to its current state based on
21 Id. at 312–13.
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the reasoning of In re Bobroff 25—a case holding that a postpetition tort cause of action did not become part of the chapter 7 estate after conversion of the chapter 13 case to chapter 7—to encourage debtors to attempt to pay their creditors something under chapter 13 before resorting to a chapter 7 liquidation.26 The Third Circuit concluded that Congress was concerned that losing postpetition earnings to the chapter 7 estate would dissuade debtors from attempting chapter 13.27 Additionally, to account for “game the system” behavior, Congress enacted § 348(f)(2), giving the court discretion if the debtor has converted in bad faith.28
Fourth, the Third Circuit concluded that distributing the funds to creditors, rather than returning them to the debtor, would weaken the disincentive of § 348(f)(2)’s bad faith provisions. The Third Circuit reasoned that by allowing property that would normally be excluded from the chapter 7 estate to be included and thereby distributed to creditors, § 348(f)(2) provides a punishment for converting in bad faith.29 It concluded the disincentive provided by § 348(f)(2) would be weakened if funds that would be returned to the debtor are instead distributed to creditors anyway.30
Finally, the Third Circuit concluded that returning the funds to the debtor is not unjust to creditors. The Third Circuit specifically rejected the argument that returning undistributed plan
25 766 F.2d 797 (3d Cir. 1985).
26 Id. at 803.
27 In re Michael, 699 F.3d at 314–15.
28 Id. at 315.
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payments would be “unjust,” and cited case law noting that creditors will most likely receive as much, if not more, than they would have if the debtor originally filed under chapter 7 based on the fact that under chapter 13, creditors have had the benefit of a debtors’s wage contributions, and these funds are not available under chapter 7.31
B. Fifth Circuit: Viegelahn v. Harris (In re Harris)32 The Fifth Circuit in In re Harris has just recently addressed this issue.33 In In re Harris, the debtor also initially filed for chapter 13 relief, and his confirmed plan required monthly payments of $530 for 60 months.34 Of that monthly payment, $352 was to repay Chase for the debtor’s home mortgage arrearage.35 The debtor was also required to directly pay Chase $960/month for his ongoing mortgage payment.36 About six months after the debtor’s plan was confirmed, Chase moved to lift the automatic stay with respect to the debtor’s home, stating that the debtor had failed to make payments to Chase as the plan required.37 The debtor moved out of the home and “it was presumably foreclosed upon.”38
31 Id. at 312 (citing In re Boggs, 137 B.R. 408, 410 (Bankr. W.D. Wash. 1992)).
32 757 F.3d 468 (5th Cir. 2014).
33 The In re Harris case has been appealed to the United States Supreme Court (petition
for certiorari filed October 6, 2014), although as of the date of this order, no decision has been issued on that certiorari petition.
34 Id. at 471.
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Despite this, the debtor continued to make $530 monthly payments to the chapter 13 trustee for approximately the next year, at which point the debtor converted to chapter 7.39 When the case was converted, the chapter 13 trustee distributed all the funds she held, including the money intended for Chase, as follows: $397.68 to another secured creditor, $3583.78 to unsecured creditors, and $267.79 to herself as a statutory commission.40 The debtor moved to compel her to return these funds.41
The Fifth Circuit rejected much of the In re Michael analysis and reversed the bankruptcy and district courts, concluding that fairness required the funds instead be distributed to creditors.42 The Fifth Circuit addressed § 348, and quickly held it bore little weight in its analysis. It found little merit to the argument that § 348(e) terminates the chapter 13 trustee’s services and thus the trustee has no power to disburse funds.43 It reasoned that if that premise were to follow, then the chapter 13 trustee would also have no authority to return the funds to the debtor.44 The chapter 13 trustee also has the duty to issue a final report and account, and turn over necessary records and property to the chapter 7 trustee, the Fifth Circuit reasoned, and therefore the language of § 348(e) should not be taken “too literally.”45
42 Id. at 480–81 (noting that strong considerations of fairness support holding).
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Second, the Fifth Circuit concluded that the Third Circuit had erred in applying § 1327(b). Although the Fifth Circuit agreed that § 1327(b) typically vests all property in the debtor upon confirmation of the plan,46 it found that the Third Circuit erred by ignoring the clear exception to that rule: “except as otherwise provided in the plan or the order confirming the plan.”47 If the plan required the debtor to make payments to be distributed to creditors, it follows that the debtor does not retain any possession of, or control over, these payments after they are paid to the trustee.48
Third, the Fifth Circuit concluded that distributing funds to creditors does not weaken the disincentive created by § 348(f)(2), noting that the Third Circuit failed to take into account that if the conversion is found to be in bad faith, all of a debtor’s postpetition property would go into the chapter 7 estate, and in most cases, this would be more than just the attached wages held by the chapter 13 trustee.49 “Accordingly, distributing the remaining payments held by the trustee at the time of the conversion [to creditors] neither renders § 348(f)(2) superfluous nor removes the disincentive for bad faith in most cases.”50
Fourth, the Fifth Circuit determined that the legislative intent to encourage debtors to attempt chapter 13 is not harmed by distributing funds to creditors rather than returning them to debtors. The Fifth Circuit acknowledged that Congress enacted § 348(f) to further the policy of encouraging
46 Id. at 477.
48 Id. at 478 (confirmation divests the debtor of any interest).
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debtors to attempt chapter 13.51 The Fifth Circuit, however, held that the knowledge that payments made under a chapter 13 plan will not be returned would not meaningfully deter a debtor from attempting chapter 13.52 The Fifth Circuit’s reasoning was based on the facts that (1) the debtor can voluntarily end chapter 13 payments at any time by converting to chapter 7, and (2) it is the debtor who proposes the chapter 13 plan in the first place with the explicit provision that the funds will be used to pay creditors.53
Finally, the Fifth Circuit reasoned that distributing funds to creditors was supported by strong considerations of fairness, because if the funds were to revert to the debtor, the debtor would receive a “windfall.”54 The Fifth Circuit also supported its fairness analysis with the idea that the attached wages in the chapter 13 plan are “quid pro quo that the debtor has given up” for the benefit of the automatic stay.55 The conversion does not undo the benefits the debtor receives from the automatic stay nor does it undo the distinct disadvantages creditors suffer from that stay, which prevents them from attempting to collect money or foreclose on, or repossess, property. Therefore, the Fifth Circuit reasoned it would be unfair to return the funds to the debtor.56
C. This Court’s Analysis Both the Third Circuit and Fifth Circuit concede that there is no clear answer as to whether
51 Id. at 479.
53 Id. at 479–80.
55 Id. at 480.
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funds should be returned to the debtor or distributed to creditors after conversion of a case from chapter 13 to chapter 7,57 and this Court agrees. Unfortunately, despite the rule of statutory construction that courts should begin by looking to the plain language of the Bankruptcy Code,58 there is no direct answer in the Bankruptcy Code. For example, the Third Circuit concluded that the return of the funds to the debtor better aligns with § 348(e) and the chapter 13 trustee’s limited post-conversion duties,59 but the Fifth Circuit countered that if the chapter 13 trustee had no post-conversion power then he or she would be powerless to return the funds to the debtor.60 On the other hand, the Third Circuit’s argument is not that the chapter 13 trustee is completely powerless, simply noting the limited duties the chapter 13 trustee has post-conversion.61 But the Fifth Circuit counters that the chapter 13 trustee’s many statutory duties post-conversion are not “limited.”62
This example shows how the Code does not anticipate, let alone answer, the question at hand. The argument that returning funds to the debtor better aligns with the chapter 13 trustee’s
57 Id. at 473 (noting that “no statute explicitly states what should happen to these funds”); In re Michael, 699 F.3d at 308 (“We have a pure question of law—what does the Bankruptcy Code require a Chapter 13 trustee to do with undistributed funds received pursuant to a confirmed Chapter 13 plan when that Chapter 13 case is converted to Chapter 7? Not only does the Code provide no clear answer to this question, in reading it one finds an internal tension, as separate provisions seemingly lead to divergent results.”).
58 See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240–41 (1989) (instructing courts with Bankruptcy Code questions to begin “with the language of the statute itself”).
59 In re Michael, 699 F.3d at 314.
60 In re Harris, 757 F.3d at 474.
61 In re Michael, 699 F.3d at 310–12.
62 In re Harris, 757 F.3d at 474.
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limited duties63 is persuasive. The chapter 13 trustee’s duties post-conversion are typically in the nature of wrapping up the chapter 13 estate, and it is reasonable that simply returning the funds to the debtor better aligns with the Code’s wrapping up function of the chapter 13 trustee—as opposed to distributing the funds among creditors. Distribution to creditors is admittedly a more active role than the other more passive post-conversion duties of returning funds.
On the other hand, however, the argument that disbursing funds to a creditor is no more active than disbursing funds back to the debtor64 is also persuasive. If the chapter 13 Trustee has no power to write a check to a creditor to distribute funds already held by him—in a distribution scheme governed by the order of priorities set out in § 507—how does the chapter 13 Trustee have the power to write a check to Debtors?
A similar quandary results when assessing the parties’ arguments on how confirmation and the vesting of property impacts the right to the funds. As stated above, the Third Circuit noted that § 1327(b) vests all property of the chapter 13 estate in the debtor upon plan confirmation, and that this implies that property held by a Chapter 13 trustee after plan confirmation is “‘under the control of the debtor [on] the date of conversion.’”65 The Third Circuit reasoned that because there is no provision in the Bankruptcy Code that classifies any property as belonging to creditors, and the debtor retains a vested interest in the funds, the debtor does not lose his or her vested interest until the trustee affirmatively transfers the funds to creditors.66 The Fifth Circuit, however, concluded that
64 In re Harris, 757 F.3d at 474.
65 In re Michael, 699 F.3d at 310 (quoting § 348(f)(1)).
66 Id. at 312–13.
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the Third Circuit erred in its application of § 1327(b). The Fifth Circuit agreed that § 1327(b) vests all property in the debtor upon confirmation of the plan, but concluded that the Third Circuit erred by ignoring the clear exception to that rule: “except as otherwise provided in the plan or the order confirming the plan.”67
And regardless, here, Debtors’ plan (and the confirmation order for that plan), provides that property of the estate vests with Debtors only upon receipt of a discharge under their Chapter 13 plan or dismissal.68 So even if § 1327(b) somehow directed who has control over this property— by defining when property of the estate is vested in the debtor—Debtors specifically provided the property would not vest in them at confirmation, a choice they could have exercised when drafting the plan. Accordingly § 1327(b) does not seem to help here.
Because the Bankruptcy Code provides no clear answer, it is reasonable to try to determine legislative intent.69 By specifically adopting the reasoning from In re Bobroff that a postpetition tort cause of action did not become part of the chapter 7 estate after conversion of the chapter 13 case to chapter 7, to encourage debtors to attempt chapter 13 before chapter 7,70 it does seem clear that Congress intended, in enacting § 348(f), to encourage debtors to attempt chapter 13 before
67 In re Harris, 757 F.3d at 477. Although this discussion in both the Third and Fifth Circuit cases is really only about the Code’s vesting of property of the estate, and neither case explicitly addresses the factual circumstances of the plans in those cases or how they addressed vesting, the Fifth Circuit does note in a footnote that the debtor’s plan in that case had conflicting terms about the timing of the vesting of property in the debtor. Id. at 478 n.8. The factual timing of the plan’s vesting of property in Michael is not addressed.
68 Doc. 2 at ¶ 16.b (plan); Doc. 36 at ¶ 13 (order confirming plan).
69 See Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989) (“If the statute’s plain language is ambiguous . . ., we look to the legislative history and the underlying public policy of the statute [to determine Congressional intent].”).
70 766 F.2d 797, 803 (3d Cir. 1985).
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proceeding under chapter 7.71 But again, the legislative history of § 348(f) does not necessarily help here. The Third Circuit persuasively argues that if a debtor was to lose postpetition earnings to the chapter 7 estate, it would dissuade the debtor from attempting a chapter 13 plan before resorting to a straight liquidation in chapter 7, and it should therefore follow that losing those earnings to creditors through the chapter 13 trustee after converting would have the same effect on the debtor as losing those earnings to the chapter 7 estate.72 Under this reasoning, returning the funds to the debtor seems to be in accordance with the legislative intent of § 348(f). But the Fifth Circuit’s equity and fairness arguments are equally well-founded. It is troubling that a debtor could receive the benefits of the automatic stay by making required payments to the chapter 13 trustee under the confirmed plan (while creditors are disadvantaged by the automatic stay), but when the debtor converts to chapter 7 the creditors are still disadvantaged in the same way without a corresponding “hurt” to the debtor.73
Debtors in this case argue that the facts here are different: the specific funds at issue—paid in pursuant to this District’s conduit mortgage rule—are designated for a specific purpose, and thus these funds are different than “normal” plan payments. Debtors contend that a conduit creditor receives special benefits under the conduit mortgage rule, and that the conduit creditor’s failure to file a proof of claim to enjoy those special benefits does not create an alternate right for other creditors to receive them—a result Debtors contend would be unfair.
71 See In re Michael, 699 F.3d at 314 (“The legislative history of § 348(f) supports that Congress’s intended outcome is that payments held by the Chapter 13 trustee revert to the debtor on conversion. Congress stated that it was . . . “adopting the reasoning” of our decision in Bobroff.”).
72 Id. at 314–15.
73 In re Harris, 757 F.3d at 480–81.
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To the contrary, however, nothing in the Bankruptcy Code, or this Court’s conduit mortgage rule, changes the presumption that Debtors’ monthly payment is made pursuant to their plan, and that Debtors’ plan, as supplemented by the conduit mortgage rule, controls. The conduit mortgage rule does not somehow transform the monthly plan payment so that it is not a “normal” plan payment. Rather, the purpose of the conduit mortgage rule is to define what needs to be included in the plan payment. The mortgage creditor is just one of the parties impacted by the plan, and Debtor’s confirmed plan dictates how each creditor is to be treated.
This Court finds that, although there is no clear answer, the strongest arguments favor the chapter 13 Trustee disbursing the accumulated funds to creditors, pursuant to the confirmed plan. As the Fifth Circuit noted, the wages that the chapter 13 Trustee is holding have already been “attached” under Debtors’ plan and were “paid to the trustee for distribution to the creditors.”74 Debtors made these payments to the chapter 13 Trustee under their confirmed plan, with the intent that they then be distributed. The fact that the mortgage creditor did not file a proof of claim does not change the fact that Debtors made these payments to fulfill their obligations under the plan in exchange for the benefit of the protections derived from that plan. This Court agrees with the Fifth Circuit that Debtors enjoyed the benefits of the chapter 13 proceeding, and as such, the only fair result is that those payments be distributed to creditors for that privilege.
Also, this Court agrees with the Fifth Circuit that distributing funds to creditors in the situation at hand would not generally deter debtors from attempting chapter 13 cases. As the Fifth Circuit stated, “it is unlikely a debtor would be meaningfully deterred by the knowledge that payments made under a confirmed Chapter 13 plan will not be returned to him if he chooses to
74 In re Harris, 757 F.3d at 480. -17
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convert to Chapter 7.”75 The reasoning of the Fifth Circuit is sound:
It is the debtor who proposes the payment plan in the first place, with the explicit
provision that the funds are to be used to pay creditors. Because the funds are out of
the hands of the debtor after payment and under the control of the trustee, it is
essentially fortuitous whether any undistributed funds are still in the hands of the
trustee at the time of conversion. And if the undistributed funds revert to the debtor,
instead of being distributed to the creditors in accordance with the plan’s terms, the
debtor would receive a windfall.76 As a result, this Court sees no conflict with the legislative history of § 348(f) by requiring distribution to creditors, rather than return of the funds to Debtors. As the Fifth Circuit notes, if a debtor is concerned about a chapter 13 trustee distributing funds on hand to creditors at conversion, the debtor could time his or her conversion and payments to “prevent any additional wages from going into the hands of creditors.”77
Finally, debtors can generally prevent the situation presented here by modifying their plan to surrender a home and reduce their plan payment by the amount of their house payment. The plan in this case had only been in effect a few months when these Debtors converted, but in both the Michael and Harris cases, the debtors continued to voluntarily pay in amounts for a creditor who had been granted stay relief. As the chapter 13 Trustee notes here, the money a debtor pays to the Trustee is not a personal savings account that the debtor can have returned if he changes his mind. Once a debtor makes a plan payment under a confirmed plan, he no longer has the right to direct the
75 Id. at 479.
76 Id. (internal footnote, quotations, and alterations omitted).
77 Id. at 480. Debtors here could have modified their plan to surrender their interest in the subject real property to the mortgage creditor, and modified the wage order to their employer to stop the higher plan payment. Admittedly, this would have resulted in their having more excess income (if they were able to continue to live in the home until foreclosure and ultimate sale), which excess income might have been the basis for the Trustee seeking the return of the higher payment for the benefit of other creditors.
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Trustee how to disburse the payment (so long as the Trustee is disbursing the payment as the plan requires). Because the mortgage creditor here elected not to receive payment under the plan by failing to file a claim, the money on hand then trickled down to the remaining creditors who had timely filed a claim, and the chapter 13 Trustee is required to disburse the money in accordance with the confirmed plan.
III. Conclusion Because the Court concludes the balance of factors weighs in favor of distributing the remaining plan payments held by the Trustee to creditors, rather than returning them to Debtors, the motion to refund postpetition mortgage payments78 is denied. The chapter 13 Trustee is authorized to disburse these funds to the remaining creditors in Debtors’ case, pursuant to Debtors’ confirmed plan.
78 Doc. 59.
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Category: Judge Karlin	Published on 13 November 2014	Written by Judge Karlin	Hits: 66	In Re Hagans, 14-40750 (Bankr. D. Kan. Nov. 10, 2014) Doc. # 42
SO ORDERED. SIGNED this 10th day of November, 2014.
In re: Case No. 14-40750 Deedric Oliver Hagans, Chapter 7 Debtor.
Order Sustaining Trustee’s Objection to Exemption
Debtor Deedric Hagans seeks to exempt a 1997 Chevrolet truck as a “tool of the trade” under Kansas exemption law, but the chapter 7 Trustee has objected to that exemption, arguing that because the truck was not modified to specifically suit Debtor’s occupation, it could not be claimed exempt as a tool of the trade.
The Court concludes that, based on the stipulated facts presented, Debtor is not entitled to a tool of the trade exemption for the 1997 Chevrolet truck, and the Trustee’s objection to exemption is sustained.
I. Procedural and Factual Background The following facts have been stipulated by the parties or are part of the record
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in this case. Debtor, who is not represented by counsel, filed a chapter 7 bankruptcy petition on July 1, 2014. Debtor exempted a 1999 GMC Suburban as a “means of conveyance” under K.S.A. § 60-2304(c),1 and the Trustee did not object to Debtor’s exemption of the 1999 GMC Suburban. Debtor also exempted a 1997 Chevrolet truck as a “tool of trade” under K.S.A. § 60-2304(e), to which exemption the Trustee timely objected. The total value of all assets Debtor seeks to exempt as tools of trade is less that $7500.
Debtor is a self-employed metal fabricator. He testified at his § 341 meeting of creditors that the 1997 Chevrolet truck is a ½ ton pickup with 4-wheel drive and a trailer hitch. Debtor also testified that the 1997 Chevrolet truck is used in his metal fabrication business, and that the truck had not been modified in any way to specifically suit his occupation as metal fabricator. The parties have stipulated that a pickup truck is necessary to perform Debtor’s work. Debtor depreciates the 1997 Chevrolet truck as a “work only” vehicle on this federal income taxes, and those taxes have been processed and accepted by the IRS.
1 Section 60-2304(c) provides debtors an exemption for “[s]uch person’sinterest, not to exceed $20,000 in value, in one means of conveyance regularly usedfor the transportation of the person or for transportation to and from the person’sregular place of work.” This exemption need not be discussed further, as the Trusteedoes not object to its use.
2 See 28 U.S.C. § 157(b)(2)(B) (stating that “allowance or disallowance of . . .exemptions from property of the estate” are core proceedings); § 157(b)(1) (granting
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II. Analysis Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief, an estate is created,3 and that bankruptcy estate consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.”4 The Bankruptcy Code does, however, permit the exemption of certain property from the estate,5 and permits a state to “opt-out” of the federal exemptions in favor of state-law exemptions when that state specifically excludes the use of the federal exemptions.6 Kansas has opted out of the federal exemption scheme,7 and a debtor in Kansas may exempt from the estate those “State or local law” exemptions that are “applicable as of the filing date.”8
The Kansas statute dealing with tools of trade exemptions is K.S.A. § 60-2304(e). Section 60-2304(e) grants an exemption for: “The books, documents, furniture,
authority to bankruptcy judges to hear core proceedings).
3 11 U.S.C. § 541(a) (“The commencement of a case under . . . this titlecreates an estate.”).
4 Id.§ 541(a)(1).
5 Seeid.§ 522(b)(1) (“Notwithstanding section 541 of this title, an individualdebtor may exempt from property of the estate the property listed in eitherparagraph (2) or, in the alternative, paragraph (3) of this subsection.”).
6 Id.§ 522(b)(2).
7 K.S.A. § 60-2312 (prohibiting, with exception, individual debtors fromelecting federal exemptions).
8 11 U.S.C. § 522(b)(3)(A); K.S.A. §§ 60-2301 through 60-2315 (Kansasexemptions).
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instruments, tools, implements and equipment, the breeding stock, seed grain or growing plants stock, or the other tangible means of production regularly and reasonably necessary in carrying on the person’s profession, trade, business or occupation in an aggregate value not to exceed $7500.”
In a challenge to a claimed exemption, the objecting party—here the Trustee—has the “burden of proving that the exemptions are not properly claimed.”9 Under Kansas law, exemption statutes are to be liberally construed for the benefit of the debtor.10 Whether or not a vehicle qualifies as a tool of the trade must be decided on a case by case basis after considering all of the facts and circumstances. 11
In Kansas, the test for property to qualify as a tool of the trade is that it must be “reasonably necessary, convenient, or suitable for the production of work.”12 Because
K.S.A. § 60-2304 includes both a tool of the trade exemption and a means of conveyance exemption, it was not intended for an automobile to automatically qualify as a tool of 9 Fed. R. Bankr. P. 4003(c).
10 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004)(“Under Kansas law, exemption statutes are to be liberally construed in favor ofthose intended by the legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730 (Bankr. D. Kan. 2008) (stating that “the Kansas Supreme Court has directed thatexemption claims are to be liberally construed in favor of debtors”).
11 In re Bondank, 130 B.R. 586, 587 (Bankr. D. Kan. 1991); In re Meany, 35
B.R. 3, 4 (Bankr. D. Kan. 1982). 12 In re Bondank, 130 B.R. at 587; In re Currie, 34 B.R. 745, 748 (D. Kan.1983) (citing Reeves v. Bascue, 91 P. 77 (Kan. 1907)); In re Frierson, 15 B.R. 157, 159 (Bankr. D. Kan. 1981).
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the trade.13 Therefore, a debtor must show that the vehicle is in fact a tool of the trade and not just a means of conveyance to qualify for this exemption.14 A vehicle may be a tool of the trade if it is “uniquely suited” for its uses15 or if the debtor’s work is “uniquely dependent” on it.16 If the debtor primarily uses the vehicle for transportation purposes, it is exempt only as a means of conveyance and not as a tool of the trade.17
The case law interpreting this exemption is highly fact dependent. In In re Rice, 18 a truck used for the debtor’s home remodeling business did not qualify as a tool of the trade because, “simply [held,] the truck is used and is exempt as a means of conveyance for the debtor’s transportation.”19 This finding was based on the fact the truck was primarily used for hauling materials and transporting employees, and it was not “uniquely suited for these uses.”20 Additionally, the bankruptcy court noted that it was “immaterial that the truck is only used in connection with work.”21
13 In re Bondank, 130 B.R. at 587; In re Rice, 35 B.R. 431, 432 (Bankr. D. Kan.
14 In re Rice, 35 B.R. at 432.
16 In re Currie, 34 B.R. at 748; In re Meany, 35 B.R. at 4.
17 In re Rice, 35 B.R. at 433.
18 35 B.R. 431 (Bankr. D. Kan. 1982).
19 Id. at 433.
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In In re Bondank, 22 the bankruptcy court held that a real estate appraiser’s vehicle was not a tool of the trade because it was primarily a source of transportation.23 While the debtor was able to prove that he needed a vehicle to perform his duties for his employer, he was unable to prove that he needed that particular vehicle.24 For similar reasons, the bankruptcy court in In re Meany found that a real estate agent’s vehicle was not a tool of the trade.25
On the other side of the coin, in In re Currie, 26 a truck used for the debtor’s cattle operation did qualify as a tool of the trade.27 The district court affirmed the bankruptcy court’s holding that the truck fit within the “reasonably necessary, convenient, or suitable” test because the debtor “could not continue her cattle operation without the means to haul cattle to and from market.”28 Additionally the debtor used the four-wheel drive truck to haul hay for the cattle in the winter.29 The debtor’s other vehicle (a Ford Torino) was not a tool of the trade because the debtor’s cattle operation was not
22 130 B.R. 586 (Bankr. D. Kan. 1991).
23 Id. at 588. 24 Id.
25 35 B.R. 3, 4 (Bankr. D. Kan. 1982) (“[D]ebtors have not demonstrated that[debtor] cannot continue in her occupation without the use of this car.”).
26 34 B.R. 745 (D. Kan. 1983).
27 Id. at 748.
29 Id. -6
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“uniquely dependent” on it.30 In In re Kobs, 31 similar to In re Currie, the bankruptcy court found a truck used on a farm to haul irrigation pipe, haul and feed cattle, fuel other farm vehicles, and perform other various tasks did qualify as a tool of the trade.32
The Trustee’s sole argument supporting his objection to exemption is that Debtor’s truck is not specially modified to specifically suit his metal fabrication business. While a special modification to a vehicle is a factor that courts have mentioned would favor the vehicle qualifying as a tool of the trade,33 it is not a conclusive factor in the required case by case analysis.34 Debtor, however, in support of his claimed exemption, relies on Kansas case law from the time before the enactment of a means of conveyance exception in Kansas.35 Cases before the enactment of the means of conveyance exception have no persuasive effect when determining whether a vehicle qualifies as a tool of the trade.36
Additionally, Debtor has failed to stipulate to any evidence indicating the truck
30 Id. 31 163 B.R. 368 (Bankr. D. Kan. 1994). 32 Id. at 372. 33 In re Bondank, 130 B.R. at 588; In re Rice, 35 B.R. at 432–33. 34 See In re Currie, 34 B.R. at 748 (making no mention of any special
modifications when finding that a truck qualified as a tool of the trade). 35 Doc. 30 at ¶ 6 (citing Dowd v. Hueson, 122 Kan. 278 (1927)). The Kansasexemption statutes were not amended to include a specific exemption for a means ofconveyance until 1965. In re Rice, 35 B.R. at 432. 36 See In re Rice, 35 B.R. at 432 (noting how the analysis has changed afterinclusion of the means of conveyance exception). -7
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is “uniquely suited” for his metal fabrication business or that his business is “uniquely dependent” on the truck. While the parties stipulate that “a pick-up truck is necessary to perform Debtor’s work,”37 Debtor introduced no further stipulations expanding on this statement. And the fact that “a pick up truck” is “necessary” will not qualify a specific vehicle as a tool of the trade.38 Debtor argues that “the bed and tailgate serve as an adequate welding bench.”39 Even if this argument were a stipulated fact, which it is not, this would not be enough. The truck is neither “uniquely suited” for Debtor’s business nor is Debtor’s business “uniquely dependent” on the truck—presumably, the same work could be done with an actual welding bench. With nothing more than argument that the truck serves as an “adequate welding bench,” this Court is left to conclude that the truck’s main purpose is transportation from job to job. As a result, it cannot be exempt as a tool of the trade.40
Debtor is proceeding pro se in this case, and although his pleadings are “to be construed liberally,” the Court cannot “assume the role of advocate for the pro se litigant.”41 Debtor has not put forth sufficient facts for this Court to find that the truck
37 Doc. 39 at ¶ 13.
38 See In re Bondank, 130 B.R. at 588 (concluding that there was no evidencethe specific vehicle at issue “had been modified to specifically suit the debtor’soccupation” and that just because the debtor needs ‘a vehicle” does not mean thedebtor needs the specific vehicle claimed).
39 Doc. 30 at ¶ 4.
40 In re Rice, 35 B.R. at 433.
41 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
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is exempt as a tool of the trade, and the Trustee’s objection to exemption is therefore sustained.
III. Conclusion For the reasons stated more fully herein, the Trustee’s objection to exemption42 is sustained. It is so ordered. # # #
42 Doc. 18.
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Category: Judge Karlin	Published on 23 October 2014	Written by Judge Karlin	Hits: 133	BAP WY-14-002 In Re Miller, Oct. 8, 2014
Category: Judge Karlin	Published on 04 November 2014	Written by Judge Karlin	Hits: 112	In Re Scott, 14-40543 (Bankr. D. Kan. Oct. 27, 2014) Doc. # 49
SO ORDERED. SIGNED this 27th day of October, 2014.
In re: Case No. 14-40529 William Leroy McDonald Chapter 13 Bonnie Kaye McDonald,
In re: Case No. 14-40543 Kliffton Joseph Scott Chapter 13 Jeanette Lynn Scott,
Memorandum Opinion and Order Sustaining Trustee’s Objections to Confirmation of Chapter 13 Plan and Objections to Exemption
Debtors, William and Bonnie McDonald and Kliffton and Jeanette Scott, have filed chapter 13 plans that do not propose to pay any amount to satisfy the best interest of the creditors test of 11 U.S.C. § 1325(a)(4) with regard to per capita payments they receive from the Prairie Band Potawatomi Nation Indian Tribe (hereinafter “Prairie Band” or the “Tribe”). Building on governing precedent, the Court concludes that despite
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changes to the Prairie Band Per Capita Ordinance and Tribal Code since it last ruled on these issues, the per capita payments remain property of the respective chapter 13 estates, and the Debtors’ plans have thus failed to satisfy the best interest of the creditors test with respect to this contingent, unliquidated property.
I. Background and Procedural Facts Both sets of Debtors filed joint bankruptcy petitions under chapter 13 of the Bankruptcy Code.1 The Trustee objected to confirmation of plans filed in each case because neither plan satisfied the best interest of the creditors test as to Debtors’ per
1 All future statutory references are to title 11 (the “Bankruptcy Code”), unlessotherwise specified herein.
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capita payments.2 The Trustee also objected in each case to the Debtors’ claimed exemption of the per capita payments. In their joint stipulation and briefing, the Scott Debtors abandoned their exemption claim, so only the McDonald Debtors still claim the per capita payments as exempt.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). The following findings of fact are based upon the stipulations filed by the parties, including stipulated exhibits.3
A. William and Bonnie McDonald The McDonald Debtors filed their chapter 13 bankruptcy petition on May 14, 2014. Debtors are married and have below median income for their household size and geographical region under § 1325(b)(3) and (4). Debtor Bonnie McDonald is a member of the Tribe. As a member, Bonnie receives quarterly “per capita” gaming revenue distributions in accordance with the Prairie Band Per Capita Ordinance. The McDonald
2 The McDonald Debtors make a fleeting one-sentence argument that because theircase has “not been consolidated for the purpose of administration,” only Bonnie McDonald,and not also William McDonald, should be affected by the Trustee’s motion to dismiss andobjection to confirmation. But the McDonald Debtors have filed a joint petition and plan,and have never moved to sever their jointly administered bankruptcy case. As such, theCourt will not further address this possible ‘argument.” If the McDonald Debtors wish tosever their joint bankruptcy case, they may file the proper motion to do so, which would beconsidered in due course after opportunity for objection and argument.
3 The parties filed a Joint Stipulation of Facts, and attached Title 4 of the“Potawatomi Law and Order Code” as Exhibit A, Doc. 33 in the McDonald Case No. 1440529 and Doc. 40 in the Scott Case No. 14-40543. The parties also filed a supplement tothat Stipulation with the Tribe’s “Per Capita Ordinance” attached as Exhibit B, Doc. 40 inthe McDonald Case No. 14-40529 and Doc. 41 in the Scott Case No. 14-40543. Hereinafter, these will be referred to as the “Tribal Code” (cited as Exhibit A) and the “Per CapitaOrdinance” (cited as Exhibit B), respectively.
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Debtors claim an exemption in Bonnie’s per capita payments.
When Debtors filed their bankruptcy petition, they lived at an address in Topeka, Kansas where they had resided for at least 730 days prior to filing. This residence is not located on the Tribe’s reservation. In addition, Bonnie holds a non-transferable joint tenancy interest in approximately 86 acres of Tribal trust agricultural land managed by the Secretary of the Interior pursuant to 25 U.S.C. § 3701–3715. Bonnie values that interest at zero.
Debtors’ Schedule I estimates Bonnie’s per capita payment at $361/mo. This income is also listed on Debtors’ Form 22C. Debtors’ only other income is from Bonnie’s receipt of Social Security disability payments. Debtors’ plan provides for monthly payments of $130, paying attorney fees, a secured debt to the Shawnee County Treasurer for real estate taxes, the filing fee, Trustee fees, and approximately $495 to unsecured creditors. The plan is a 36 month base case, makes no specific reference to per capita payments, and states the amount payable under paragraph 15’s “Best Interests of Creditors Test” is zero.
B. Kliffton and Jeanette Scott The Scott Debtors filed their chapter 13 bankruptcy petition filed on May 15, 2014. Debtors are married and have below median income for their household size and geographical region under § 1325(b)(3) and (4). Debtor Jeanette Scott is a member of the Tribe. As a member, Jeanette receives quarterly per capita gaming revenue distributions in accordance with the Prairie Band Per Capita Ordinance. The Scott Debtors originally claimed an exemption in Jeanette’s per capita payments but have
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now abandoned that exemption. Debtors had no per capita funds on hand when they filed their bankruptcy petition.
When Debtors filed their bankruptcy petition, they lived in Topeka, Kansas, and had lived in either Topeka or nearby Carbondale for at least 730 days prior to filing. Neither the Topeka nor Carbondale residence is located on the Tribe’s reservation. Debtors’ Schedule I estimates Jeanette’s per capita payment at $472.80/mo.4 This income is also listed on Debtors’ Form 22C. Debtors’ plan provides for monthly payments of $270, and proposes to pay the filing fee, attorney fees, a priority tax debt, and a special class claim for unpaid rent. The plan proposes no distribution to unsecured creditors and makes no specific reference to per capita payments. The plan provides a zero amount under paragraph 15’s “Best Interests of Creditors Test.”
II. Analysis A. Relevant Case Law From This District This Court first addressed the issue of per capita payments from the Prairie Band Tribe in In re McDonald. 5 In In re McDonald, the debtors did not deny that the per
4 Since both Debtors receive the same amount per quarter from the Tribe, the Courtcannot explain why the McDonalds’ and Scotts’ estimates of how the quarterly benefitstranslate into monthly amounts differ so substantially on their respective Schedules I ($361versus $472).
5 353 B.R. 287 (Bankr. D. Kan. 2006) (Karlin, J.). Coincidentally, the debtors in McDonald are the same individuals as the McDonald Debtors herein. Although theStipulation of Facts does not reveal how long this Tribe has been making quarterly percapita distributions, the fact that Bonnie McDonald has apparently been receiving themsince at least 2005 (the year her Chapter 13 case was converted to Chapter 7 in the prior McDonald decision, id. at 289) gives some credence to the argument that they may continueinto the years during which these Debtors’ plans will remain pending. The McDonald decision reveals the payments ranged around $800 per quarter in 2005 and 2006. Id.
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capita payments were property of the estate, and instead argued that the per capita payments were exempt.6 Before addressing the debtors’ exemption argument, the Court first relied on two prior decisions from other jurisdictions, In re Kedrowski7 and Johnson
v. Cottonport Bank, 8 to affirmatively hold that the per capita distributions were property of the estate.9 In their prior case, Debtors claimed the per capita payments were exempt under the then-active Potawatomi tribal code provision providing that “per capita distributions ‘shall be exempt, from garnishment, attachment, execution, sale, and other process for the payment of principal and interest, costs, and attorney fees upon any judgment of the Tribal Court.’”10 The Court held that debtors were not “entitled to rely upon the exemptions contained in the Potawatomi Tribal Code,”11 reasoning that because Kansas is an opt-out state, debtors were limited to the exemptions allowed under Kansas law.12 Because Kansas law did not permit exemption based on the Potawatomi tribal code, debtors could not thus rely.13
6 Id. at 290–91. 7 284 B.R. 439, 446 (Bankr. W.D. Wis. 2002). 8 259 B.R. 125, 131 (W.D. La. 2000). 9 In re McDonald, 353 B.R. at 291. 10 Id. at 292 (quoting then-current tribal code) (internal emphasis omitted).
13 This Court also noted that Kansas law permits debtors to claim the exemptionscontained in § 522(d)(10), which includes payments for social security benefits and
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The debtors in In re McDonald next argued that the per capita payments were
excluded from the property of the estate by § 541(c)(2), as trust funds protected by a
spendthrift provision.14 The Court again ruled against the debtors, holding that the
postpetition per capita payments were not held in trust because the Tribe’s per capita
ordinance placed no restrictions on the per capita payments to be made to competent,
adult members of the Tribe.15 Regarding the debtors’ argument that the tribal code
exemption somehow created a trust, the Court stated:
Although the Tribe, through the Ordinance, clearly indicates that the percapita distributions are not subject to garnishment, attachment, execution,sale or other process under tribal law, it just as clearly does not impose atrust upon all of the per capita distributions. If the Court were to followDebtors’ argument in this case—that because the property is exempt, it isby definition also trust property, every piece of real or personal propertythat is exempt under state or federal law would have to likewise beconsidered trust property and excluded from the bankruptcy estatepursuant to § 541(c)(2), including wages, homesteads, automobiles, toolsof the trade, etc. Property is not subject to a trust simply because agovernmental entity has declared that property exempt from execution tosatisfy a judgment.16
The Court did find that the Tribe had expressly created a trust for per capita payments
to “incompetents and minors,” but that no other trust was created by the per capita
distributions which, per tribal code and ordinance, were to be made to all members,
disability payments, reasoning that the legislature obviously knew how to enumeratespecific exemptions when it chose to do so. Id. at 292 n.8.
15 Id. at 294.
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regardless of need or individual circumstances.17
In a decision issued the same day as In re McDonald, in the case of In re Hutchinson, 18 the Court also addressed whether the per capita payments were exempt as “a local public assistance benefit” under § 522(d)(10)(A).19 The Court adopted the following definition of “public assistance benefit:” “government aid to needy, blind, aged, or disabled persons and to dependent children.”20 Because the Tribe’s per capita payments were not based on need, but were distributed simply on a per capita basis (specifically, “in equal amounts to all enrolled tribal members regardless of need”), the Court concluded they were not an exempt public assistance benefit.21
The In re Hutchinson case then addressed the § 1325(a)(4) best interest of the creditors test. First, the Court clarified that the best interest of the creditors test of § 1325(a)(4) is a separate and distinct test from the “best effort” requirement of § 1325(b)(1). As such, the fact that the debtors were proposing to commit all of their disposable income to plan payments during the life of their chapter 13 plan had no bearing on the § 1325(a)(4) analysis.22 Second, the Court rejected the argument that the per capita payments could not be valued because of their uncertain nature. The Court
17 Id. at 294–95. 18 354 B.R. 523 (Bankr. D. Kan. 2006) (Karlin, J.). 19 Id. at 529. 20 Id. at 530. 21 Id. at 530–31. 22 Id. at 531.
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concluded that the fact that “the present value of the per capita distributions might be difficult to ascertain does not mean that those distributions have no value.”23 Because the per capita payments were capable of being valued, the payments “must be provided for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors to satisfy the ‘best interest of the creditors test.’”24
Four years later, in In re Howley, 25 another judge from this District, Judge Somers, addressed the same Prairie Band Tribe per capita payments. In In re Howley, the debtors again attempted to exempt their Tribe per capita payments under the tribal code, which was worded the same as it had been at the time both In re McDonald and In re Hutchinson were decided.26 The Court, relying on In re McDonald, held that because the debtors were domiciled in Kansas, they could only use Kansas’ state law exemptions and were not entitled to use the exemptions of the tribal code.27 Judge Somers also addressed the additional argument that the Tribe’s exemption was a “local law” within the meaning of § 522(b)(3)(A)’s provision of an exemption for property
23 Id. at 532.
25 439 B.R. 535 (Bankr. D. Kan. 2010) (Somers, J.).
27 Id. at 539 (“Thus, the Kansas legislature, as authorized by Congress in §522(b)(2), has provided that the exemptions of § 522(b)(1) are not available, and that the‘exemptions allowed under state law’ and § 522(d)(10) are available. Although it couldclearly do so, the Kansas legislature has not incorporated the tribal exemptions into statelaw.”).
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exempt under “State or local law.”28 Judge Somers concluded that, even if the Tribe’s exemption could be considered a local law, the Tribe’s exemption could not apply because § 522(b)(3)(A) “expressly requires use of state or local law applicable at the place in which the debtor’s domicile has been located for a specific period.”29 Because the debtors in In re Howley did not live on the Tribe’s reservation, the Tribe’s exemption did not apply because it had no extraterritorial effect.30
B. The Current Relevant Tribal Authority The Indian Gaming Regulatory Act of 1988 generally governs the practice of casino gambling on tribal lands.31 Pursuant to this Act, the Tribe has adopted a Per Capita Ordinance. Some version of that Ordinance was approved by the Secretary of the Interior on August 25, 2008.32 The Per Capita Ordinance directs that “every eligible Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming
28 Id. at 540–42.
29 Id. at 541–42.
30 Id. at 542. In dicta, Judge Somers also noted that the exemption as worded alsoapplied only to judgments of the tribal court, and that, therefore, the limited scope of theexemption simply did not apply. Id. at 542–43. This language has been changed in thecurrent version of the Tribal Code, but that change is not relevant herein.
In a follow-up opinion, In re Howley, 446 B.R. 506 (Bankr. D. Kan. 2011), JudgeSomers addressed the debtor’s late argument that the per capita payments were not, infact, property of the estate. Judge Somers affirmatively found that the Prairie Band percapita payments were contingent interests that were property of the estate, and rejectedthe argument that the contingent nature removed future per capita payments from theChapter 7 trustee’s reach. Id. at 513–14.
31 25 U.S.C. §§ 2701–2721.
32 Exhibit B p.7. Again, the earlier McDonald case demonstrates that the same or a similar per capita program by this Tribe was in existence at least by 2005. 353 B.R. at 289.
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revenues.33 The Per Capita Ordinance also states: “Every living person who is an enrolled member of the Prairie Band of Potawatomi Indians on the eligibility determination date is eligible to receive a Per Capita Payment.”34 The distribution is solely “based on the latest membership list as of the eligibility determination date.”35 The per capita payments are to be disbursed within certain time periods, and are to be made by “tribal check . . . payable to the eligible tribal member.”36 Each per capita payment must be accompanied by a notice that federal law requires that the per capita payments be subject to federal taxation and that the Tribe will withhold federal income tax from each per capita payment.37 Both minors and legally incompetent tribal members are the only individuals whose payments are treated differently.38
The Tribe has also enacted a “Law and Order Code” (the “Tribal Code”), with section 4-14-1 of the Tribe’s Civil Procedure Code dealing specifically with “claims against per capita.”39 Several terms are specifically defined within this section of the Tribal Code. The term “per capita” means “the payment provided to all enrolled members of the Prairie Band . . . which are paid directly from the Prairie Band . . . Net
33 Exhibit B p.5 (Article V, Section 1). 34 Exhibit B p.4 (Article IV, Section 1). 35 Exhibit B p.4 (Article IV, Section 2). 36 Exhibit B p.5 (Article V, Sections 2 and 3). 37 Exhibit B p.6 (Article V, Section 7). 38 Exhibit B p.5–6 (Article V, Sections 4 and 5). 39 Exhibit A p.4-41 to 4-44.
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Gaming Revenues pursuant to the . . . Per Capita Ordinance.”40
This section of the Tribal Code also defines the term per capita share as “a Tribal member’s equal share of a Per Capita payment prior to a reduction for any withholding, garnishment, or levy permitted by this Section, but after withholding at the source required by federal income tax law.”41 The term per capita payment is then defined as “a personal benefit to a Tribal member,” and “a periodic payment not a property right.”42 The same section also states that a per capita share “is property of the [Tribe] until such time as a distribution is duly made.”43 The Tribal Code then states that a “distribution of a Per Capita payment occurs when the Per Capita payments are placed in the U.S. Mail or otherwise transferred to a Tribal member.”44
Two additional sections of the Tribal Code are pertinent. In a section titled “Permitted Claims against a Per Capita Share,” the Tribal Code states: “A Per Capita Share shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, seizure, attachment or other legal or equitable process.”45 Three exceptions to this general rule are then listed: for debts owed by tribal members to the
40414243 Exhibit A p.4-42 (Section (D)(4)). Exhibit A p.4-42 (Section (D)(6)). Exhibit A p.4-43 (Section (E)). Id. 4445 Exhibit A p.4-43 (Section (F)). Exhibit A p.4-43 (Section (G)(1)). -12
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Tribe, for garnishments for child support, and for federal income tax levies.46 And finally, in a section titled “Prohibited Claims,” the Tribal Code states again: “a Per Capita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,] pledge, encumbrance or charge, seizure, attachment or other legal or equitable process; and any proceeding for those purposes shall not be recognized nor enforceable.”47 The same exceptions for debts owed to the Tribe, child support, and federal tax levies apply to this section as well.
The major changes to the Tribal Code and Per Capita Ordinance are three-fold. First, the Tribal Code distinguishes between per capita shares and per capita payments, and includes an anti-alienation provision for per capita shares. Second is the addition of the language stating that a per capita payment “is a personal benefit” and “a periodic payment not a property right,” while a per capita share “is property of the [Tribe] until such time as a distribution is duly made.” Finally, the Per Capita Ordinance no longer has a section on exemption, but instead the language of the Tribal Code includes the anti-alienation language previously noted.48
46 Exhibit A p.4-43 (Section (G)(1)–(3)).
47 Exhibit A p.4-44 (Section (H)).
48 The Trustee mentions in his brief that the per capita provisions of the Tribal Codehave not been approved by the Secretary of Interior, as Per Capita Ordinances must be.Case No. 14-40529, Doc. 41 at pp.22–23; see also 25 U.S.C. § 2710(b)(3)(B) (requiringapproval by the Secretary of the Interior of gaming ordinances for per capita payments tomembers of an Indian tribe). The Trustee states that the Tribe has “attempted to modifythe Tribal members’ interest in per capita payments [through the Tribal Code] withoutamending the Per Capita Ordinance and without obtaining approval of the Secretary of theInterior.” Case No. 14-40529, Doc. 41 at p.23. The Trustee has not squarely presented thisargument, however, or cited any authority for this Court to address a claim against thevalidity of the Prairie Band’s Tribal Code. Accordingly, the Court will not address it further.
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C. Analysis of the Arguments of the Parties 1. Property of the Estate The Bankruptcy Code defines property of the estate in § 541. Under § 541(a), property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case,” except for property that is excluded from the estate by § 541(b) and § 541(c)(2).49 While no party has argued that § 541(b) has any applicability to this case, both the McDonalds and the Scotts rely on § 541(c)(2)—which excludes from the bankruptcy estate “a debtor’s beneficial interest in a spendthrift trust”50— to support their argument that the per capita payments are not property of their respective bankruptcy estates.
To determine whether a debtor’s interest in a trust is excluded from the bankruptcy estate, the Court must “analyze the nature of that interest, under applicable state law.”51 Under Kansas law, a “spendthrift trust is a trust created to provide a fund for the maintenance of a beneficiary and at the same time to secure the fund against his improvidence or incapacity. Provisions against alienation of the trust fund by the
49 Section 1306 expands the definition of property of the estate in chapter 13 cases toalso include property rights a debtor “acquires after the commencement of the case butbefore the case is closed, dismissed, or converted.”
50 Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007). Section541(c)(2) excludes from the bankruptcy estate property upon which there is a “restriction onthe transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law” by providing that the restrictive provision “is enforceable ina case under this title.” Id.
51 Id. at 468.
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voluntary act of the beneficiary or by his creditors are its usual incidents.”52
To exclude property from the bankruptcy estate under § 541(c)(2), Debtors must satisfy three criteria. “First, they must show that they have a beneficial interest in a trust. Second, they must show that there is a restriction on the transfer of that interest. Third, they must show that the restriction is enforceable under nonbankruptcy law.”53 Debtors bear the burden of proof regarding whether property can be excluded from the bankruptcy estate.54
As discussed above, this Court in In re McDonald previously considered the issue of whether Prairie Band per capita payments could be excluded from property of the estate by § 541(c)(2) as trust funds protected by a spendthrift provision. Because there were no restrictions made on the per capita payments actually made to competent adult members of the Tribe, and because the property’s Tribal exempt status did not transform it into a trust, however, there was no spendthrift trust found.55 The In re McDonald opinion also noted that the Tribe obviously knew how to create a trust via per capita payments, because trust provisions were included for both minors and
52 In re Estate of Sowers, 1 Kan. App. 2d 675, 680, 574 P.2d 224, 228 (1977).
53 In re McDonald, 353 B.R. at 293.
54 See Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003)(“Debtors bear the burden of demonstrating that all the requirements of § 541(c)(2) havebeen met before the property in question can be effectively excluded from the estate.”); In re Robben, 502 B.R. 572, 577 (Bankr. D. Kan. 2013) (relying on Adams to conclude the same); In re McDonald, 353 B.R. at 293 (same).
55 In re McDonald, 353 B.R. at 294.
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incompetent persons.56
The same remains true today, regardless of the changed state of the Prairie Band’s Per Capita Ordinance and Tribal Code. The current Prairie Band Per Capita Ordinance directs that “every eligible Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming revenues.57 The distribution is not based on need, disability, or any other qualifier, but is instead solely “based on the latest membership list as of the eligibility determination date.”58 The Tribal Code elects to only treat per capita payments for minors and legally incompetent tribal members differently.59
The Tribal Code dictates that the “per capita” is “the payment provided to all enrolled members of the Prairie Band . . . which are paid directly from the Prairie Band” from the Tribe’s net gaming revenues.60 So again, no restrictions or discretion is present to transform the per capita into a trust. There is simply no trust created by the Per
56 Id. at 294–95.
57 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).
58 Exhibit B p.4 (Article IV, Section 2).
59 Exhibit B p.5–6 (Article V, Sections 4 and 5). The Per Capita Ordinanceestablishes the following general terms for the trust for minors: the trust is irrevocable andadministered by an independent trustee, all per capita payments, plus interest, are held ina trust account until the child reaches 18, and then the accrued per capita distributions,with interest, are paid out at established percentages over the next 3 years. There is anexception, as is common for many trusts for minors, allowing the trustee to makedistributions for the minor’s health, education or welfare upon the request of a parent orlegal guardian if deemed necessary by the independent trustee. Exhibit B p.5–6 (Article V,Section 5).
60 Exhibit A p.4-42 (Section (D)(4)).
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Capita Ordinance or Tribal Code; i.e., there is no “beneficial interest in a trust,”61 which is a required element to find a spendthrift trust.
Debtors argue that other changes in the Per Capita Ordinance and Tribal Code change this conclusion. The current Tribal Code—in the changes spawning this litigation—distinguishes between a per capita share, which is the Tribal member’s share of the per capita prior to distribution,62 and a per capita payment, which is the per capita distribution made when the Tribe mails the per capita payment to each Tribal member.63 The cited language is merely an anti-alienation provision against the per capita share held by the Tribe before it is disbursed as a per capita payment. Although the Tribe places restrictions on claims against the per capita share, 64 it is the per capita payment ultimately distributed to these Debtors that is at issue.
Again, none of this word smithing does anything to satisfy the criteria for
61 In re McDonald, 353 B.R. at 293.
62 Exhibit A p.4-42 (Section (D)(6)). The term per capita share is defined as “a Tribalmember’s equal share of a Per Capita payment prior to a reduction for any withholding,garnishment, or levy permitted by this Section, but after withholding at the source requiredby federal income tax law,” id., and is “property of the [Tribe] until such time as adistribution is made,” Exhibit A p.4-43 (Section (E)(3)).
63 Exhibit A p.4-43 (Section (E)). The per capita payment is “a periodic payment,”Exhibit A p.4-43 (Section (E)(2)), and “distribution . . . occurs when the Per Capitapayments are placed in the U.S. Mail or otherwise transferred to a Tribal member,” ExhibitA p.4-43 (Section (F)).
64 See Exhibit A p.4-43 (Section (G)(1)) (“A Per Capita Share shall not be subject toanticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, seizure,attachment or other legal or equitable process.”); Exhibit A p.4-44 (Section (H)) (“[A] PerCapita Share shall not be subject to anticipation, alienation, sale, transfer, assignment[,]pledge, encumbrance or charge, seizure, attachment or other legal or equitable process; andany proceeding for those purposes shall not be recognized nor enforceable.”).
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excluding the per capita as a spendthrift trust under § 541(c)(2).65 The Tribal Code
simply fails to create a trust for payments made to anyone except minors and
incompetent adults, which is the basic requirement for § 541(c)(2) to apply to Debtors’
per capita payments here.
The post-In re McDonald changes to the Tribal Code simply do not alter this
Court’s analysis. They do not affect the right of any eligible member to receive a per
capita payment. Neither the Per Capita Ordinance, nor the Tribal Code, restrict or
prohibit the distribution of a per capita payment to a competent, adult Tribal member.
No trust is created by the per capita distributions that, per Tribal Code and Ordinance,
are to be made to all members, regardless of need or individual circumstances. And the
anti-alienation provision of the per capita share has no impact on this analysis: as stated
in McDonald, “[p]roperty is not subject to a trust simply because a governmental entity
has declared that property exempt from execution to satisfy a judgment.”66
65 As the Trustee notes, the Tribal Code suffers inconsistencies. On one hand, it attempts to claim the per capita share as Tribal property until payment is made. But on theother hand, the definition of per capita share requires that the amount of the share bereduced by federal income taxes. But how can federal income tax be owed by the tribalmember unless and until the per capita—whether defined as a “share” or “payment”—isproperty of the Tribal member? Because the Trustee points out this inconsistency, theMcDonald Debtors argue that this Court should “ask the Tribal Council for clarificationbefore proceeding to decide these issues.” Case No. 14-40529, Doc. 45 at p.1. Although theCourt notes the inconsistency, it has no bearing on the holdings herein, is thus irrelevant,and referral to the Tribe is unwarranted.
66 Id. at 294. Debtors attempt a round-a-bout sovereign immunity argument here byarguing that the Prairie Band Tribe, as a sovereign, has the right to determine what areproperty rights under its jurisdiction, relying on an Eighth Circuit BAP case that holds thata tribe and its tribal finance company could assert the tribe’s sovereign immunity as adefense to a chapter 7 trustee’s avoidance and turnover action. Bucher v. Dakota Fin. Corp. (In re Whitaker), 474 B.R. 687 (8th Cir. BAP 2012); see also Ho-Cak Fed. v. Herrell (In re DeCora), 396 B.R. 222 (W.D. Wis. 2008) (concluding chapter 7 trustee could not exercise
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The individual Debtors make a couple of additional arguments. The Scott Debtors refer to per capita funds held in trust by the Secretary of the Interior under 25 U.S.C. § 117a, which governs “[f]unds held in trust by the Secretary of the Interior . . . for an Indian tribe,” and argue that “by analogy, the per capita from Indian gaming, under the Tribe’s current per capita ordinance and its code of procedure on per capita payments, create a trust similar to that described in 25 U.S.C. § 117a.”67 But of course, this is not the reality. The reality is that the Prairie Band has not elected to create a trust with respect to per capita payments. The Per Capita Ordinance directs that “every eligible Potawatomi tribal member” receive an “equal share” of the Tribe’s net gaming revenues,68 and these payments are made regardless of need.
The McDonald Debtors then argue that their current financial situation dictates a different result from their prior case because now Debtor Bonnie McDonald receives Social Security disability income. Debtors argue that because she is disabled, her per capita payment should be viewed as a public assistance benefit, and the Court should thus infer the creation of a spendthrift trust as to her. But as discussed at length, the per capita payments simply do not work that way. Just because Bonnie McDonald
avoidance powers against bank because “tribal law subordinates the lien creditor’s claim to[the tribe’s] and federal preemption and tribal sovereignty prevent state law form alteringthis result”). But the Trustee is not attacking the Tribe’s sovereign immunity here; theTribe is not a party, and what constitutes a spendthrift trust is determined by trust law,not the Tribe’s exemption ordinance.
67 Case No. 14-40543, Doc. 43 at pp.6–7.
68 Exhibit B p.5 (Article V, Section 1). The Per Capita Ordinance also states: “Everyliving person who is an enrolled member of the Prairie Band of Potawatomi Indians on theeligibility determination date is eligible to receive a Per Capita Payment.” Exhibit B p.4(Article IV, Section 1).
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happens to be disabled, does not mean that the Prairie Band Tribe has in the past or is presently treating her any differently than any other legally competent adult. There is simply no evidence in the record that Bonnie McDonald has been adjudged incompetent by a court of competent jurisdiction, or that she has a legal guardian appointed to receive her per capita payments, or that her payments are received from an independent trustee after meeting the stringent provisions in Section 4 of Article V of the Per Capita Ordinance. Her disability for Social Security purposes is simply irrelevant to the provisions of the Tribal Code and Per Capita Ordinance.
And finally, Debtors point to other courts outside of Kansas addressing tribal per capita payments that have concluded that per capita payments are not property of the estate. For example, in Dietz v. Barth (In re Barth), 69 the bankruptcy court concluded that tribal per capita payments were not property of the bankruptcy estate where the tribal ordinance at issue stated that the per capita payments were not a property right but a personal benefit, did not vest until actually paid out, and were not subject to alienation.70 The bankruptcy court concluded that the tribe had “the authority to limit the definition of property right with respect to tribal property to exclude the per capita payments of tribal funds paid by the tribe to qualified members,” and that there was “no credible reason” why the tribe could not define property rights with respect to property within its jurisdiction and exclude them from property of the estate.71
69 485 B.R. 919 (Bankr. D. Minn. 2013).
70 Id. at 921–22.
71 Id. at 922.
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But In re Barth did not address any of the above case law or assess the
Bankruptcy Code in any way. Instead, its rationale centered around the existence of
prior harms by the United States to Native Americans.72 And while those harms cannot
be denied, Congress has not seen fit to directly address those harms within its liberal
treatment of what constitutes “property” under the Bankruptcy Code.
As a result, this Court concludes that the Bankruptcy Code defines “property of
the estate” via § 541(a), and the scope of that definition is broad and equally applicable
to the per capita payments these Debtors receive.73 The controlling law in the Tenth
Circuit requires this Court to determine the existence and scope of Debtors’ interest in
property by reference to the underlying property law, and contingent interests fall
within the bankruptcy estate.74 Nothing in the changes to the Prairie Band’s legal
72 See id. at 922 n.2 (referring to “lessons learned from earlier tribal experience”).An additional case concluding that a similar tribal code’s treatment of per capita paymentscaused the payments to not be property of the estate is In re Fess, 408 B.R. 793, 799 (Bankr.
W.D. Wis. 2009), which concluded that federal law and tribal law, not state law, defined theproperty interest, and that under the tribal law the debtors had only “an expectancy towhich no legal rights attach.” See id. at 798 (applying tribal law instead of state lawbecause the tribe’s interest in controlling its revenue outweighed the state’s interest in thesame). 73 See Weinman v. Graves (In re Graves), 609 F.3d 1153, 1156 (10th Cir. 2010)(stating that § 541(a) “is deliberately broad in scope”).
74 See, e.g., Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204–05 (10th Cir.2010) (stating that “property interests are created and defined by state law” and thatfederal law resolves the question of “the extent to which that interest is property of theestate;” holding that under Kansas law, “contingent interests are property interests”); see also Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007) (noting that thenature of a property interest must be analyzed under applicable state law); In re Howley, 446 B.R. 506, 510–11 (Bankr. D. Kan. 2011) (“Kansas law recognizes contingent interests asproperty. The Court has no doubt that the Kansas courts would recognize Debtor’s interestin future Per Capita Payments as a property interest. The question is then whether thatinterest is property of the estate, as defined by federal law. Section 541(a) defines property
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definitions concerning per capita alter this result.
2. Best Interest of the Creditors Test of § 1325(a)(4) Regarding the best interest of the creditors test under § 1325(a)(4), this Court in
In re Hutchinson stated:
The test, articulated under § 1325(a)(4), requires that the Chapter 13 planprovide distributions to each allowed unsecured creditor that are not lessthan what the unsecured creditor would have received if the debtor’s estate were liquidated under a Chapter 7 proceeding. This provisionessentially allows Chapter 13 debtors to “buy-out” non-exempt, prepetitionassets by paying their value to unsecured creditors with increasedpayments (or payments over a longer term) to the Trustee over the life ofthe plan. . . .
[I]n order to comply with this test, Debtors’ plan must propose to pay theirunsecured creditors an amount at least equal to what those creditorswould have received had the bankruptcy estate been liquidated under aChapter 7 proceeding. According to the parties’ stipulations, the amendedplan “does not propose to pay any money to unsecured creditors.”Therefore, the plan can only be confirmed if Debtors can show that aliquidation of the estate would have resulted in no payments to unsecuredcreditors.
If the bankruptcy estate were liquidated, the trustee would collectand sell all non-exempt, unencumbered property of the estate ofconsequential value and divide the proceeds from the sale among theunsecured creditors.75
Debtors have the burden of proving that they have “met all of the requirements of §
of the estate as including all legal and equitable interests of the debtor in property as of thecommencement of the case. [T]he scope of § 541 is broad and should be generouslyconstrued. [A]n interest may be property of the estate even if it is novel or contingent.Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, andderivative, is within the reach of 11 U.S.C. § 541.” (internal footnotes and quotation marksomitted)).
75 In re Hutchinson, 354 B.R. at 531.
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1325, including the ‘best interest of the creditors’ test under § 1325(a)(4).”76
Again, Debtors argue that the changes to the Tribal Code and Per Capita Ordinance require a different result than the Court’s prior determination concerning their per capita payments and the best interest of the creditors test. Debtors argue that because of the anti-alienation provision as to the per capita share, and the Tribal Code’s labeling of the per capita payment as “a personal benefit” and “a periodic payment not a property right,” while the per capita share is labeled “property of the [Tribe] until such time as a distribution is duly made,” that their per capita cannot be alienated and would thus have no value in a chapter 7 proceeding that could be realized to pay claims of unsecured creditors.
The Court disagrees with Debtors’ conclusion. The Tribal Code asserts anti-alienation provisions as to the per capita shares while they are held by the Tribe prior to disbursement to the Tribal member. Once the Tribe makes the decision to make a disbursement, however, the per capita payment is automatically distributed to all Tribal members on a per capita basis. As such, these Debtors continue to have an expectation of payment, unchanged by the modifications to the Tribal Code. Once that payment is received, it is transferable by Debtors. The interest is admittedly a contingent interest, but as an interest that is property of the estate, it must be accounted for in the best interest of the creditors test.
This Court has previously rejected the argument that the per capita payments cannot be valued because of their uncertain nature. In In re Hutchinson, this Court
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concluded that the fact that “the present value of the per capita distributions might be difficult to ascertain does not mean that those distributions have no value.”77 Because the per capita payments are capable of being valued, the payments “must be provided for in [the debtors’] Chapter 13 plan in the form of payments to the unsecured creditors to satisfy the ‘best interest of the creditors test.’”78
Debtors also again contend they should not have to account for the per capita payments in the best interest of the creditors test of § 1325(a)(4), because they are already accounting for them in their disposable income and satisfying the best efforts test of § 1325(b)(1)(B). As stated previously in In re Hutchinson, however, the best interest of the creditors test of § 1325(a)(4) is a separate and distinct test from the best effort requirement of § 1325(b)(1). Because of this, the fact that Debtors are proposing to commit all of their disposable income to plan payments during the life of their chapter 13 plan has no bearing on the § 1325(a)(4) analysis.79 If the result of subtracting their living expenses from their income demonstrates an inability to repay the value of this contingent interest, that unfortunately means that their plan is not feasible, not that they do not have to account for that interest in the first instance.
And finally, Debtors point to a line of cases that conclude per capita payments are property of a bankruptcy estate, but that then conclude that in the chapter 7 setting, the per capita payments are of inconsequential value to the estate for purposes of analyzing
77 Id. at 532. 78 Id. 79 Id. at 531.
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turnover to the chapter 7 trustee. In In re Meier, 80 the bankruptcy court first presumed— without deciding— that tribal per capita payments were property of the estate.81 The In re Meier decision then held that the per capita payments were nevertheless not subject to turnover because § 542(a) sanctions non-turnover, even of estate property, if “such property is of inconsequential value or benefit to the estate.”82
The Meier court followed a Ninth Circuit BAP case holding that an interest in a future distribution “‘is only of value to the estate if it can be assigned, sold or reached for the enforcement of judgments,’”83 and concluded that the per capita payments the debtor expected to receive were nontransferable based on “the tribe’s clear intent to preclude sale or transfer of the right to receive payments to anyone outside of the tribe.”84 Because of this finding, the In re Meier court concluded the per capita payments
80 Case No. 13-02323-B-SWH, 2013 WL 6135085 (Bankr. E.D.N.C. Nov. 21, 2013).
81 Id. at *2.
82 Id. at *3.
83 Id. (quoting Brown v. Locke (In re Locke), Case No. NC-06-1101, 2006 WL 6810938 (9th Cir. BAP Sept. 28, 2006)).
The In re Locke case, relied on by In re Meier, affirmatively concluded that the tribalper capita payments at issue in the chapter 7 case were property of the estate. 2006 WL6810938, at *9–11 (holding that the per capita payments actually received prepetition werepersonal property and that the entitlement to future payments was a contingent, intangibleproperty interest; concluding both were property of the estate). The In re Locke case then considered whether, because the per capita shares did not become the debtor’s personalproperty until each payment was made, the contingent interests in future payments wereprotected against transfer. Id. at *14–15. The Ninth Circuit BAP concluded that a remand was appropriate for the bankruptcy court to consider whether the trustee’s motion forturnover was appropriate, because the “interest in future distributions is only of value tothe estate if it can be assigned, sold or reached for the enforcement of judgments,” and for adetermination of the asset’s value to the estate. Id. at *12, *15–16.
84 Id. at *4.
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were of negligible value to the estate.85 In addition, that court concluded that because the per capita payments would be hard to market due to the variability of the payments and the fact that the payments would cease immediately upon the death of a member, and the fact that the bankruptcy case would have to be held open for a lengthy time for the trustee to administer the payments, the chapter 7 trustee’s efforts would actually be a burden to the estate, rather than a benefit.86
This line of cases, however, again does not help the Debtors here. These cases do not change this Court’s analysis that the per capita payments are in fact property of the estate. And as property of the estate, they must be accounted for in the best interest of the creditors analysis. Obviously, the parties in interest will need to negotiate the correct value of these admittedly contingent interests, and litigate that value if no agreement can be reached. But no party has yet raised the valuation issue with any specificity, and there is nothing in the record that would allow this Court to find that these property interests have no value. That is an issue for another day if the parties are unable to agree on the value.
3. Exemption Arguments Finally, the McDonalds argue that if the per capita payments are property of the estate, then under § 522(b)(3)(A) they are exempt as a “local law . . . that is applicable . . . to the place in which the debtor’s domicile has been located for the 730 days
85 Id. 86 Id. at *5.
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immediately preceding the date of filing of the petition. . .”87 Counsel’s convoluted argument in this respect appears to be that because the Tribal Code extends its jurisdiction to “all Tribal Members, wherever located,”88 the Tribe therefore “retains authority and jurisdiction over per capita payments and to its recipients living off the reservation.”89 As a result, counsel argues that the Bankruptcy Code’s exemption for local laws applicable to the place of a debtor’s domicile somehow requires that the Tribal Code’s anti-alienation provisions for the per capita share exempt the McDonalds’ per capita payments from the bankruptcy estate.90
The McDonald’s exemption argument is unpersuasive. First, as Judge Somers held in In re Howley, even if the Tribal Code could be considered a “local law” under the Bankruptcy Code, the Bankruptcy Code additionally requires the “use of state or local law applicable at the place in which the debtor’s domicile has been located for a specific period.”91 Because the Howley debtor was not domiciled on the Tribe’s reservation, the
87 11 U.S.C. § 522(b)(3)(A).
88 Exhibit A p.4-41 (Section B).
89 Case No. 14-40529, Doc. 42 at p.3.
90 The McDonald Debtors do not appear to be making a sovereign immunityargument here, although they do claim in their reply brief that allowing the Trustee to“take” Debtors’ per capita payments “would be to continence a violation” of federal and statetreaties with the Tribe. They also argue that the Tribal Code is entitled to respect as theTribe is a sovereign entity. Case No. 14-40529, Doc. 41 at p.4. There is no violation ofsovereign immunity here, however, because no claim is being made against the Tribe andsovereign immunity does not extend to Tribe members not representing the Tribe. See Crowe & Dunlevy, P.C. v. Stidham, 640 F.3d 1140, 1153–54 (10th Cir. 2011) (describingsovereign immunity of Indian tribes and stating that the immunity extends to tribalofficials, “so long as they are acting within the scope of their official capacities”).
91 In re Howley, 439 B.R. at 541–42 (emphasis added).
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Tribe’s exemption did not apply.92
Second, domicile is a defined term. “Generally, the words and phrases contained in a federal statute are defined by reference to federal law.”93 When the Supreme Court defined the term “domicile” in reference to the Indian Child Welfare Act, it concluded that domicile is “established by physical presence in a place in connection with a certain state of mind concerning one’s intent to remain there.”94 A person can have only one domicile at a time, even if that person has multiple residences.95
The McDonalds specifically stipulated that they lived in Topeka on the date they filed their bankruptcy petition, and that they have lived in Topeka at the same address for the 730 days prior to filing their petition. In other words, Debtors stipulated that they were not at filing, and had not been for the last 730 days, living on Tribal land. If that were not already crystal clear, Debtors additionally stipulated that their Topeka residence is not located on the Tribe’s reservation. As a result, the McDonalds are not domiciled on Prairie Band land but instead in Topeka, Kansas. The state or local law applicable at the place of Debtor’s domicile is the law of Kansas.96
92 Id. at 542.
93 In re Hodgson, 167 B.R. 945, 949 (D. Kan. 1994) (citing Jerome v. United States, 318 U.S. 101, 104 (1943)).
94 Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 48 (1989).
95 In re Hodgson, 167 B.R. at 950 (citing Williamson v. Osenton, 232 U.S. 619 (1914)).
96 Regardless of all this, the McDonalds never do attempt to explain how the TribalCode’s anti-alienation provisions as to the per capita share somehow transform into aBankruptcy Code exemption of Debtors’ per capita payment. Regardless, the McDonalds’“local law” exemption argument fails for so many other reasons, the Court need not address
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The McDonalds additionally argue that because Bonnie has a joint tenancy interest in approximately 86 acres of Tribal trust agricultural land managed by the Secretary of the Interior (pursuant to 25 U.S.C. § 3701–3715)—land upon which she does not reside—that she should nevertheless be treated as being domiciled on the Prairie Band land or that the Tribe somehow has jurisdiction over the funds in her hands. As stated above, however, owning land, in trust or otherwise, does not equate to a domicile. None of the stipulated facts even suggest that the McDonalds live or have ever lived on Prairie Band land; the only facts before this Court are that they lived in Topeka at filing and have lived at the same address therein for the 730 days prior to filing. In addition, the Tribal Code itself states that once a per capita payment is made to a Tribal member, it is a personal benefit to that member and is no longer property of the Tribe. Accordingly, the fact that Debtor Bonnie McDonald holds an unrelated joint tenancy interest in Prairie Band land held in trust is simply irrelevant to the analysis under § 522(b)(3)(A).
And finally, although again not clear, the McDonalds may be arguing that because Debtor Bonnie McDonald receives Social Security disability payments, her per capita payments are somehow transformed into, and exempt as, “a local public assistance benefit” under § 522(d)(10)(A). Citing In re Hutchinson, 97 which defined “public assistance benefit” as “government aid to needy, blind, aged, or disabled persons
this lapse. 97 354 B.R. 523 (Bankr. D. Kan. 2006).
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and to dependent children,”98 the McDonald Debtors argue that “[n]one can deny that Bonnie McDonald is disabled and that what she receives constitutes a de facto public assistance benefit from her tribe.”99 But again, as stated repeatedly herein and as this Court noted in In re Hutchinson, because the Tribe’s per capita payments are not based on need, but are distributed simply on a per capita basis, they are not an exempt public assistance benefit.100 Although Debtor Bonnie McDonald receives Social Security disability income, her per capita payments are distributed to her by the Tribe without regard to any disability.
III. Conclusion The Trustee’s objections to confirmation and objections to exemption are sustained, for the reasons stated more fully above. Debtors shall file amended plans that comply with this opinion within 21 days. If Debtors choose not to amend their plans within this time frame, the Trustee should submit orders granting his motions to dismiss each case.
98 Id. at 530. 99 Case No. 14-40529, Doc. 42 at p.5. 100 In re Hutchinson, 354 B.R. at 530–31.
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Category: Judge Karlin	Published on 06 October 2014	Written by Judge Karlin	Hits: 198	In Re Officer, 11-41306 (Bankr. D. Kan. Oct. 1, 2014) Doc. # 161