Court Opinion

ID: 9700447
Source: CourtListenerOpinion
Date Created: 2023-08-25 21:29:16.044859+00
Date Added: 2024-06-11T18:21:09.363373
License: Public Domain

CLARK, Bankruptcy Judge,
dissenting.
The majority has approved the creation of a new remedy for debtor misconduct— invading the Debtors’ pension plan and exemptions. New remedies such as this should be created by Congress, not the courts.
I agree with the majority’s opinion that the “Cheaters” stream of income is not exempt. I agree that the Turnover Order is a final order from which no timely appeal was taken, and I agree that the Trustee is not estopped from seeking alternative remedies. I disagree with respect to the “surcharge” of Debtors’ exemptions.
The Majority Should Not Use § 105 to Create a Remedy that is Unavailable Under § 522(c)
Section 522(c) of the Bankruptcy Code specifically defines the instances where a debtor’s exempt property my be surcharged.1 Failure to turnover property of the estate and failure to obey a court order do not fall within any of the enumerated sections of § 522(c). The majority should not be permitted to use § 105 to judicially amend § 522(c). Section 522(c) is a detailed and specific statute. Section 105 is a general statute. A precisely drawn, de*356tailed statute preempts more general remedies, and it braces the preemption claim when the general remedy extends the limits of the specific statute. EC Term of Years Trust v. United States, — U.S. -, 127 S.Ct. 1763, 1767, 167 L.Ed.2d 729 (2007). Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied in the absence of evidence of a contrary legislative intent. TRW Inc. v. Andrews, 534 U.S. 19, 28, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) (quoting Andrus v. Glover Constr. Co., 446 U.S. 608, 616-617, 100 S.Ct. 1905, 64 L.Ed.2d 548 (1980)).

The Power of § 105 is Limited

The majority argues that § 105 authorizes the surcharge of Debtors’ exempt property in order “to augment those obligations found elsewhere in the Bankruptcy Code.” See Majority Opinion at 352. The word “augment” is defined to mean “[t]o make greater in size, number, amount, degree, etc.; to increase, enlarge, extend.” Oxford English Dictionary Online (2007). Bankruptcy courts must use the equitable powers under § 105 within the confines of the Bankruptcy Code and must not increase, enlarge or extend those powers through judicial fiat. “[Wjhatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). The majority cites at 352 n. 19 to Marrama v. Citizen’s Bank of Massachusetts, — U.S. -, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (5-4 decision), for the proposition that general principles of equity are sufficient to issue the surcharge order. Marrama does not go so far. The Marrama Court allows the use of § 105 to authorize the immediate denial of a motion to convert filed under § 706 in lieu of a conversion order “that merely postpones the allowance of equivalent relief[.]” 127 S.Ct. at 1112. Marra-ma does not increase, enlarge, or extend the power of § 105 beyond the confines of the Bankruptcy Code. What Marrama does is allow the use of § 105 to provide an immediate remedy as opposed to an equivalent, but postponed remedy.

The Surcharge Fails the Latman Test

The majority identifies five published opinions to support the concept of surcharging a debtor’s exemptions, and from that argues that “a majority of courts hold that a bankruptcy court is empowered under § 105(a) to authorize the trustee to ‘surcharge’ the debtor’s exempt assets[.]” Majority Opinion at 351. Given the length of time that the Bankruptcy Code has been in existence and given the number of courts faced with situations where a debtor fails to turnover property of the estate, five opinions is hardly a majority. The majority’s leading ease, Latman v. Burdette, 366 F.3d 774 (9th Cir.2004), holds that a bankruptcy court “may equitably surcharge a debtor’s statutory exemptions when reasonably necessary both to protect the integrity of the bankruptcy process and to ensure that a debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code.”2 If the test defined in Latman is applied to the facts of this case, the surcharge of Debtors’ exempt assets would be prohibited.3

*357
Other Remedies are Available

Congress created a variety of remedies to deal with situations where a debtor fails to turnover property of the estate or fails to obey a court order. A trustee has turnover powers under § 542, a trustee is vested with certain rights and avoiding powers under § 544, a trustee may avoid preferences under § 547, fraudulent transfers under § 548, postpetition transfers under § 549, and transfers to third parties under § 550. A trustee may bring an action under § 727 to have the debtor’s discharge denied or revoked.4 If a trustee believes that a bankruptcy crime has been committed, the trustee is duty bound under 18 U.S.C. § 3057 to report the facts and circumstances to the United States Attorney for criminal prosecution. Section 523(a)(13) specifically carves out any order of restitution issued under Title 18 of the United States Code from a debtor’s discharge. Congress knew how to fashion remedies for the estate, and chose not to surcharge a debtor’s exempt assets as a remedy for the failure to turnover property or the failure to obey a court order. A trustee is armed with a panoply of remedies under the existing Bankruptcy Code. Where an alternate remedy exists at law, equitable relief is not available. Switzer v. Com, 261 F.3d 985, 991 (10th Cir.2001). It is fundamental that equity will not grant relief if the complaining party has, or by exercising proper diligence would have had, an adequate remedy at law, or by proceedings in the original action. Winfield Assocs., Inc. v. Stonecipher, 429 F.2d 1087, 1090 (10th Cir.1970). Here, there is no evidence in the record that the Trustee made any effort to diligently recover the stream of income until some five months after the petition date. The equitable powers of the court should not be utilized to save a less-than-diligent trustee from the consequences of his errors.
Another remedy is available to compensate this estate for its loss. The Debtors filed Chapter 7 bankruptcy on October 14, 2005. With the filing, the Debtors disclosed their interest in the Limited Partnership in the Cheaters television show, and they disclosed a monthly income ranging from $700.00 to $1,700.00 from the limited partnership. The Debtors did not claim the proceeds to be exempt in the original schedules or statements. For reasons unknown and unexplained in the record, with full knowledge that the Debtors were receiving, and not turning over, between $700.00 and $1,700.00 per month in nonexempt income, the Trustee failed to timely object to, or seek an extension of time to object to, the Debtors’ discharge5 under § 727. Even more inexplicably the Chapter 7 Trustee failed to file a motion for turnover of the proceeds until late March 2006, more than 5 months after the petition date.6 It is the trustee’s duty to collect and reduce to money the property of the estate and to close the estate as expeditiously as is compatible with the best interests of the parties. For a Chapter 7 trustee to fail to take action to collect a stream of nonexempt income for over 5 months smacks of dereliction and invites a further inquiry. Certainly, fault lies with the Debtors, but to the extent that the *358Trustee contributed to this problem, the Trustee should contribute to the solution-with cash.7 It seems rather disingenuous for the Trustee to seek an “equitable” remedy from the court, given the facts of this case and the apparent failings by the Trustee.

Courts May Not Equitably Surcharge a Debtor’s Pension

Equitable grounds are insufficient to support the surcharge of a debtor’s pension 8 — even a debtor who has misbehaved. See Guidry v. Sheet Metal Workers Nat’l Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990). Guidry was the chief executive officer of the Sheet Metal Workers International Association, Local 9 (the “Union”), and a trustee of the Union’s pension fund. Guidry’s employment made him eligible to receive benefits from the Union pension funds. Guidry embezzled substantial sums of money9 from the Union. After discovery of the embezzlement, Guidry stipulated to a judgment of $275,000.00 against himself and in favor of the Union. Eventually, Guidry plead guilty to embezzling more than $377,000.00 and began serving a prison sentence. While still incarcerated, Guidry filed a complaint against the Union alleging that the Union had wrongfully refused to pay him the pension benefits to which he was alleged to be entitled. The Union, among other things, argued that Guidry breached his fiduciary duty owed to the Union, and that the Union was entitled to various remedies under the theories of conversion, fraud, equitable restitution, and constructive trust. It argued that Guidry forfeited his right to receive benefits as a result of his criminal misconduct, and that if Guidry were found to have a right to benefits, those benefits should be paid to the Union rather than to Guidry. The dispute between Guidry and the Union involved two pools of money. One pool of money consisted of Guidry’s interest in the Union’s ERISA qualified pension plan and payable to Guidry over the term of his retirement (the “Plan Funds”). The other pool of money consisted of funds paid to Guidry from the pension plan and held in Guidry’s personal bank account (the “Bank Account Funds”). The Bank Account Funds had not been commingled with other funds and were claimed exempt by Guidry under state law.
In ruling that because the Union’s claims did not override ERISA’s anti-alienation provisions, the Court reasoned that were it to accept the Union’s position, ERISA’s anti-alienation provision would be inapplicable whenever a judgment creditor relied on the remedial provisions of a federal statute, and that such an approach would eviscerate the protections of ERISA’s prohibition on assignment or alienation of pension benefits.10
*359With respect to the Union’s equitable arguments, the Court stated, at 493 U.S. at 376-377, 110 S.Ct. 680 (footnote omitted), that:
Nor do we think it appropriate to approve any generalized equitable exception-either for employee malfeasance or for criminal misconduct-to ERISA’s prohibition on the assignment or alienation of pension benefits. Section 206(d) reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. If exceptions to this policy are to be made, it is for Congress to undertake that task.
As a general matter, courts should be loath to announce equitable exceptions to legislative requirements or prohibitions that are unqualified by the statutory text. The creation of such exceptions, in our view, would be especially problematic in the context of an antigar-nishment provision. Such a provision acts, by definition, to hinder the collection of a lawful debt. A restriction on garnishment therefore can be defended only on the view that the effectuation of certain broad social policies sometimes takes precedence over the desire to do equity between particular parties. It makes little sense to adopt such a policy and then to refuse enforcement whenever enforcement appears inequitable. A court attempting to carve out an exception that would not swallow the rule would be forced to determine whether application of the rule in particular circumstances would be ‘especially’ inequitable. The impracticability of defining such a standard reinforces our conclusion that the identification of any exception should be left to Congress.
Pension funds that are protected by anti-alienation or anti-garnishment provisions are not available for surcharge. “Indeed, this Court itself vigorously has enforced ERISA’s prohibition on the assignment or alienation of pension benefits, declining to recognize any implied exceptions to the broad statutory bar.” Patterson v. Shumate, 504 U.S. 753, 759, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (citing Guidry, 493 U.S. 365, 110 S.Ct. 680, 107 L.Ed.2d 782).

Courts May Not Equitably Surcharge a Debtor’s Exemptions

The question with respect to the “Bank Account Funds” which was not addressed by the Court in Guidry, 493 U.S. 365, 110 S.Ct. 680,107 L.Ed.2d 782, was later taken up by the Tenth Circuit Court of Appeals in Guidry v. Sheet Metal Workers Nat’l Pension Fund, 39 F.3d 1078 (1994) (rh’gen banc). The dissent is noteworthy because it reminds us that even courts of equity must follow the law, and must not be permitted the luxury of creating their own remedies in the name of equity. The dissent states at 39 F.3d at 1087:
The rain it raineth on the just And also on the unjust fella: But chiefly on the just, because The unjust steals the just’s umbrella.
Charles Bowen, Thad Stem Jr., and Alan Butler, Sam Ervin’s Best Short Stories, (1973).
The majority today has ruled that a thief is free to keep the fruits of his crime under Colorado law.
The dissent goes on at 39 F.3d 1089 (footnote omitted) to argue that:
The majority has concluded a faithless servant, an embezzler, a man who steals from the hard earned labors of the *360workers, is entitled to keep the fruits of his crime. I do not believe the Colorado legislature or the Colorado courts would permit such an unconscionable result. It is nonsensical to assume Colorado would want a thief to keep ill-gotten gains. Like Mr. Bumble of Oliver Twist, I believe “[i]f the law supposes that ... the law is a ass — a idiot,” and I am not willing to believe Colorado law to be either.
Despite a vigorous dissent, the majority found Guidry’s Bank Account Funds to be exempt under the Colorado exemption statute. The majority’s ruling was in keeping with the rule that exemptions must be construed liberally and it is assumed that, in the absence of specific language in the statute limiting the extent of an exemption, the legislature did not intend to impose a limitation. Under Gui-dry, the law of this Circuit is that absent specific statutory language to the contrary, state exemption law will not be limited regardless of the equities of the case.

The Surcharge of Debtors’ Exemptions Impermissibly Invades State Law

When enacting the bankruptcy laws under Title 11 of the United States Code, Congress chose not to preempt state exemption law. In fact, Congress did the opposite. Congress gave the decision to the individual states concerning which exemptions may be elected by their citizens. The State of Oklahoma opted out of the federal exemption list pursuant to § 522(b)(1). The exemptions that the majority would permit to be surcharged are exemptions enacted by the State of Oklahoma for the people of Oklahoma. The Bankruptcy Court for the Western District of Oklahoma lacks the power to modify Oklahoma state law.
The majority supports its decision to allow the surcharge of the Debtors’ state law exemptions citing to the broad equitable powers of 11 U.S.C. § 105. Even the broadest possible reading of § 105 cannot be interpreted to preempt Oklahoma’s exemption laws. Federal law preempts state law in three circumstances: (1) when Congress explicitly defines the extent to which the enacted statute preempts state law, (2) when state law actually conflicts with federal law, or (3) when state law attempts to regulate conduct in a field that Congress intended the Federal Government to occupy exclusively. United States v. Wagoner County Real Estate, 278 F.3d 1091, 1096 (10th Cir.2002). In any preemption analysis, congressional intent is the ultimate touchstone. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992). Congress did not intend for the Bankruptcy Code to pre-empt all state laws that otherwise constrain the exercise of a trustee’s powers. Midlantic Nat’l Bank v. N.J. Dep’t Envtl. Prot., 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986). Because 11 U.S.C. § 105 does not preempt Oklahoma’s exemption laws, the Bankruptcy Court must look to the rulings of the highest state court, and, if no such rulings exist, must endeavor to predict how that high court would rule. Johnson v. Riddle, 305 F.3d 1107, 1118 (10th Cir.2002).

Oklahoma State Law Prohibits the Surcharge of Exemptions

Bankruptcy courts must resort to state law for interpretation of state exemption rights. In re Duncan, 329 F.3d 1195, 1198 (10th Cir.2003). In Oklahoma, a debtor’s exemptions cannot be surcharged for the payment of any debt.11 As with most *361states, Oklahoma has long construed its exemptions laws in a liberal manner.12 “We have liberally construed our homestead exemption in the interest of the family home.” State of Okla. v. Ten (10) Acres of Land, 877 P.2d 597, 601 (Okla.1994) (citing First Nat’l Bank v. Burnett, 122 Okla. 255, 254 P. 95, 96 (1927)). “Each member of the family residing upon the homestead and in good faith making it a home is equally protected by the statute, and has such an interest as will prevent its forcible seizure for the debts or liabilities of either.” Cassady v. Morris, 19 Okla. 203, 91 P. 888, 890 (1907). In ruling that property protected by Oklahoma’s exemption laws were not subject to forfeiture under Oklahoma’s Uniform Controlled Dangerous Substance Act, the Supreme Court of Oklahoma stated that “[w]e believe that the intent of our homestead exemption statutes was primarily protection of the homestead. We cannot find that the intent of Oklahoma’s homestead exemption statute is to apply only to forced sales for the payment of debts and not otherwise.” State of Okla. v. Ten (10) Acres of Land, 877 at 601. In a case certified13 by the United States Bankruptcy Court for the Western District of Oklahoma, the Supreme Court of Oklahoma stated that “we are committed to the rule that statutes exempting property from forced sale for the payment of debts are to be given a reasonable construction to effect their intent and purpose. In cases of doubt, the doubt will be resolved in favor of the exemption.” In re Anderson, 932 P.2d 1110, 1112 (Okla.1996). Bankruptcy courts must interpret state exemption laws under the state’s rules of statutory construction. In re Hodes, 308 B.R. 61, 68 (10th Cir.BAP2004). In another case certified by the United States Bankruptcy Court for the Western District of Oklahoma, the Supreme Court of Oklahoma ruled that:
Because Oklahoma has opted out of the federal scheme, debtors are limited to the exemptions provided under state law. Exemptions are intended to provide debtor’s [sic] with sufficient assets for a fresh start and to keep bankrupts from becoming a charge on society.... It is our duty to give effect to legislative acts, not to amend, repeal or circumvent them.
In re Alexander, 980 P.2d 659, 664-665 (Okla.1999) (footnotes omitted).
In a State where even its own drug forfeiture laws cannot defeat a debtor’s claimed exemptions, it is highly unlikely that the Supreme Court of Oklahoma would permit a court, in the name of equity, to fashion a generalized remedy that would amend, repeal, or circumvent the exemption laws of the State of Oklahoma.

The Majority Cannot Do Indirectly That Which Is Prohibited Directly

The Trustee, by seeking to surcharge the Debtors’ exemptions is, in essence, objecting to and seeking to disallow the Debtors’ claimed exemptions. The Trustee’s time for objecting to the Debtors’ *362exemptions expired, and the Trustee should not be entitled to now object to the Debtors’ exemptions on equitable grounds or on any other grounds. Without a timely objection, even claimed exemptions that have no basis in state law cannot be denied. In re Coones, 996 F.2d 250, 251 (10th Cir.1993). The United States Supreme Court in Taylor v. Freeland & Kronz, 503 U.S. 638, 645, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), states that “[w]e have no authority to limit the application of § 522(Z) to exemptions claimed in good faith.” Likewise, bankruptcy courts have no authority to limit the application of § 522(0 to exemptions on equitable grounds.

Lack of Jurisdiction

To the extent that the bankruptcy court’s Surcharge Order purports to be a judgment14 against the Debtors’ pensions, the bankruptcy court lacks jurisdiction because there is no evidence that the plan administrator has ever been served with process or even provided with notice of the surcharge action. A retirement fund, being a trust instrument, is a separate legal entity and is entitled to due process of law.15 Before a federal court can assert personal jurisdiction over a defendant, the court must determine whether the exercise of jurisdiction comports with due process. Service of process and personal jurisdiction both must be satisfied before a suit can proceed, they are distinct concepts that require separate inquiries. Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th Cir.2000). There is nothing in the record that shows service of process upon the pension plan has ever been obtained. There is nothing in the record that shows the bankruptcy court ever obtained jurisdiction over the corpus of the pension plan. These inquiries must be satisfied before the Surcharge Order with respect to the pension plan can be allowed to stand.

Conclusion

This Dissent argues several independent reasons why the Surcharge Order must not stand. I would REVERSE.

. The operation of § 522(c) is limited in scope and goes nowhere near as far as the majority proposes with the Surcharge Order. Section 522(c) provides that property exempted under § 522 is not liable during or after the case for any debt with the exception of debts arising under § 523(a)(1) or (5), debts secured by certain liens, a debt specified in § 523(a)(4) or (6) owed by an institution — affiliated party of an insured depository institution, or debts in connection with fraud in the obtaining of student loans. Because the surcharge approved by the majority goes well beyond the remedy provided under § 522(c), the majority's opinion leaves § 522(c) creditors to look to the remains the debtor's exempt assets after the trustee has satisfied his surcharge. The surcharge will defeat the statutory treatment of § 522(c) creditors by reducing § 522(c) creditors to a second priority behind the trustee's surcharge. The "categorical reordering of priorities that takes place at the legislative level of consideration is beyond the scope of judicial authority.” United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 229, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996).

. Id. at 786.

. Under Latman, a surcharge of the debtor's exempt assets is only permissible when it is necessary to ensure that the debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code. In the present case, no one is suggesting that the exemptions to be surcharged are excessive.

. Perhaps the majority is suggesting to the lower courts that a "surcharge” is available where it is easier than the statutory remedies.

. The deadline for filing complaints objecting to the Debtors' discharge was February 13, 2006. Debtors received their discharge on March 7, 2006.

.Nowhere in the Trustee's Motion for Turnover, and nowhere in the Trustee's Motion for Surcharge, does the Trustee allege that he made any demand that the Debtors turnover the income stream prior to the March, 2006 Turnover Motion.

. Pursuant to Bankruptcy Rule 2010, all trustees must carry a bond conditioned upon the faithful performance of the trustee’s official duties.

. It is not clear from the record whether or not the Debtors’ pension plans are ERISA qualified or whether they contain anti-assignment or anti-alienation provisions. For purposes of this argument, it is assumed that the Debtors' pension plans are ERISA qualified plans, or contain anti-assignment or anti-alienation provisions.

. An audit indicated that over $998,000.00 was missing from the Union funds.

. If an ERISA qualified plan's anti-assignment provision is violated by payment directly to a trustee, the plan may lose both its ERISA qualification and its tax exempt status. See McLean v. Cent. States, Se. & Sw. Areas Pension Fund, 762 F.2d 1204, 1206 (4th Cir.1985); see also Anderson v. Raine (In re Moore), 907 F.2d 1476, 1480-81 (4th Cir.1990) (“[A] plan’s ERISA-qualification and tax exempt status depend on compliance with *359the anti-assignment provisions in 26 U.S.C. § 401(a)(13) and 29 U.S.C. § 1056(d)(1).”).

. For example, Oklahoma’s statutory homestead provision, Oklahoma Statutes title 31 § 1, states in part: . the following property shall be reserved to every person residing in the state, exempt from attachment or execution and every other species of forced sale *361for the payment of debts, except as herein provided[.]”

. This same liberal approach is shared by the Bankruptcy Appellate Panel of the Tenth Circuit. “When interpreting exemption statutes, the interpretation must further the spirit of such laws. Specifically the court must be guided by the general principle that exemption statutes are to be liberally construed so as to effect their beneficent purposes.” In re Bechtoldt, 210 B.R. 599, 601 (10th Cir.BAP1997) (citing In re Pancratz, 175 B.R. 85, 93 (D.Wyo.1994)).

. Certification to a state's Supreme Court is appropriate where the proceeding involves important questions of state law. Swink v. Sunwest Bank (In re Fingado), 955 F.2d 31, 33 (10th Cir.1992).

. If the Surcharge Order does nothing more than give permission to the Trustee to sue the Debtors' pension plan, the order is meaningless. A trustee always has the duty to collect and liquidate property of the estate, and does not need a court order to do so. The automatic stay does not prevent a trustee from prosecuting any of the estate's legal rights. In re Lyngholm, 24 F.3d 89, 92 (10th Cir. 1994).

. Due process requirements apply equally to bankruptcy proceedings. Bank of Marin v. England, 385 U.S. 99, 102, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966).