Opinion ID: 798605
Heading Depth: 2
Heading Rank: 2

Heading: equitable exemption of earnings

Text: 16 It might be the case that under the Utah Supreme Court’s ruling, a plan cannot substantially comply with IRC § 401(a) if it suffers from formation defects rather than operational defects. Such a limitation might temper concerns about potential abuse of Utah’s exemption provision. Here, however, we do not wrangle with the outer bounds of substantial compliance, because the Keogh plan suffered from operational (as opposed to formation) defects which were correctable under EPCRS. 19 Turning to the second issue appealed, we consider whether earnings produced by $20,400 in preferential contributions should have been included in the turnover order. Mr. Gladwell tells us that the bankruptcy court erred in excluding these earnings because they were “[p]roceeds . . . or profits from property of the estate.” See 11 U.S.C. § 541(a)(6). Dr. Reinhart does not disagree that these earnings were nominally part of the estate. Aplee. Br. at 21-23. Instead, Dr. Reinhart defends their exclusion from the turnover order by asserting that the bankruptcy court acted pursuant to its equitable powers under § 105(a) of the Bankruptcy Code in leaving them out of the turnover order. Section 105(a) grants the bankruptcy court the power to “issue any order . . . or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” The basis for this purported exercise of the bankruptcy court’s equitable powers under § 105(a), Dr. Reinhart tells us, is that Mr. Gladwell failed to identify “specific theories and bases for objecting” to exemption of the Keogh plan until over six years after Dr. Reinhart filed his bankruptcy petition. Aplee. Br. at 22. In other words, Dr. Reinhart frames Mr. Gladwell’s claim for turnover of the earnings as procedurally defaulted, and contends that a declination to include earnings produced by nonexempt contributions is a proper equitable sanction for that default. The bankruptcy court never articulated the notion that it was permitted to exclude earnings on the $20,400 from the turnover order as an exercise of its equitable powers 20 under § 105(a). Instead, the first time this theory was discussed and adopted was in the district court. We disagree with the district court’s justification, and conclude that the bankruptcy court should not have excluded earnings on the $20,400 from the turnover order. Specifically, we hold that the bankruptcy court did not have the authority to withhold earnings on the preferential contributions as a sanction for an alleged procedural default. Dr. Reinhart’s argument suffers from a fatal flaw: The Bankruptcy Code’s plain language definitively states that proceeds from property of the estate are themselves property of the estate. Under § 541(a)(6), “[p]roceeds . . . from property of the estate” are property of the estate. Dr. Reinhart does not dispute that earnings produced by property of the estate fall under this provision. Aplee. Br. at 21-23; see also Parkinson v. Bradford Trust Co. of Boston (In re O’Brien), 50 B.R. 67 (Bankr. E.D. Va. 1985) (including in the bankruptcy estate pre- and post-petition earnings on nonexempt prepetition contributions to a Keogh plan). This is Dr. Reinhart’s undoing, as “a bankruptcy court’s exercise of its authority under § 105(a) may not contravene or disregard the plain language of a statute.” Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258, 1263 (10th Cir. 2008) Our holding in Scrivner is particularly instructive as to the limits on exercise of equitable authority under § 105(a). There, we held that the bankruptcy court may not, acting under the guise of § 105(a), prevent a debtor from exempting property from the 21 bankruptcy estate when the Bankruptcy Code permits him to make the exemption. Scrivner, 535 F.3d at 1264-65. It follows just as strongly that the bankruptcy court may not, in the name of equity, exclude property from the estate when the plain terms of the Code put that property in the estate in the first place and do not allow for its exemption. 17 Excluding earnings produced by property of the estate (viz. $20,400 in preferential contributions) does not carry out any provision of the Bankruptcy Code. Rather, the exclusion contravenes the plain terms of § 541 of the Bankruptcy Code, which include 17 Even if the bankruptcy court could impose a sanction that excluded funds which are patently property of the estate under the Bankruptcy Code, such a sanction is not warranted given the posture of this case. Dr. Reinhart has not shown that the six-year “delay” between Mr. Gladwell’s initial objection and the trial date violated the Bankruptcy Code or accompanying procedural rules. Fed. R. Bankr. Proc. 4003(b) provides, “[A] party in interest may file an objection to the list of property claimed as exempt . . . within 30 days after any amendment to the list or supplemental schedules is filed . . . .” Dr. Reinhart amended his Schedule C to include funds in his Keogh plan on May 16, 2000. Aplt. App’x at 16. Mr. Gladwell objected to the amended schedule on June 15, 2000, thirty days after the amendment was filed. Id. at 12-13. The objection complied with the relevant procedural rules, and there is no statute of limitations for turnover actions. See In re Mushroom Transportation Co., 382 F.3d 325, 336-37 (3rd Cir. 2004) (“The Bankruptcy Code does not impose a statute of limitations on turnover claims arising under [§ 542].”) (citing Solow v. American Airlines, Inc. (In re Midway Airlines, Inc.), 221 B.R. 411, 458 (Bankr. N.D. Ill. 1998)). Therefore, there is no procedural default to sanction. 22 those earnings in the estate. This alone invalidates any supposed exercise of the bankruptcy court’s equitable authority under § 105(a). 18 Consequently, we conclude that the bankruptcy court erroneously excluded from the estate earnings produced by $20,400 in nonexempt contributions to the Keogh retirement plan, and remand for modification of the turnover order. 18 Dr. Reinhart also suggests that a sanction is appropriate because Mr. Gladwell’s claim to the earnings is barred the equitable doctrine of laches. Cf. Aplee. Br. at 22 (“As an equitable court, the [b]ankruptcy [c]ourt could limit the Trustee’s recovery based on his delay in prosecuting his objection to the Debtor’s claimed exemption.”). Courts disagree whether laches can be asserted as an equitable defense to a turnover suit. Compare, e.g., Boyer v. Carlton, Fields, Ward, Emmanuel, Smith & Cutler P.A. (Matter of USA Diversified Products, Inc.), 100 F.3d 53, 56 (7th Cir. 1996) (stating that equitable affirmative defenses are unavailable in a turnover action brought under § 542) with, e.g., Wadsworth v. Viveros (In re Viveros), 456 B.R. 525, 528-29 (Bankr. D. Colo. 2011) (allowing assertion of laches as an affirmative defense to a turnover action). We need not reach a decision on the availability of this defense, because any exercise of § 105(a) was invalid as contrary to the Bankruptcy Code and, in any event, Dr. Reinhart cannot satisfy the elements of laches. “Laches consists of two elements: (1) inexcusable delay in instituting suit; and (2) resulting prejudice to [the] defendant from such delay.” Brunswick Corp v. Spinit Reel Co., 832 F.2d 513, 523 (10th Cir. 1987) (citing University of Pittsburgh v. Champion Products Inc., 686 F.2d 1040, 1044 (3d Cir. 1982)). Laches does not apply here because Dr. Reinhart has not shown that he was prejudiced by Mr. Gladwell’s alleged delay in prosecuting his objection. Thus, even if we assume (without deciding) that Mr. Gladwell lacked diligence in bringing this case to trial and laches is available as an affirmative defense in a § 542 turnover action, equity does not support concocting a remedy inuring to the sole benefit of Dr. Reinhart. 23