Court Opinion

ID: 3202685
Source: CourtListenerOpinion
Date Created: 2016-05-11 20:01:00.235206+00
Date Added: 2024-06-11T07:39:16.081297
License: Public Domain

FILED
                             NOT FOR PUBLICATION
                                                                            MAY 11 2016
                      UNITED STATES COURT OF APPEALS                    MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS

                             FOR THE NINTH CIRCUIT

ALLEN L. WISDOM                                   No. 13-35409

                Appellant,                        D.C. No. 1:12-cv-00530-BLW

 v.                                               MEMORANDUM*

JEREMY J. GUGINO

                Appellee.

                     Appeal from the United States District Court
                               for the District of Idaho
                   B. Lynn Wynmill, Chief District Judge, Presiding

                         Argued and Submitted March 9, 2016
                                  Portland, Oregon

         Before: FISHER and WATFORD, Circuit Judges, and WALTER,** District
Judge.

         Allen Wisdom, a Chapter 7 bankruptcy debtor, appeals the district court’s

judgment upholding the bankruptcy court’s determination that trustee Jeremy

          *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
          **
             The Honorable Donald E. Walter, Senior United States District Judge
for the Western District of Louisiana, sitting by designation.
Gugino properly liquidated five of Wisdom’s life insurance policies. We have

jurisdiction under 28 U.S.C. § 158(d), and we affirm.

       The bankruptcy court properly upheld Gugino’s objection to the exemptions

Wisdom sought to claim under Idaho Code § 11-605(10) (“subsection 10”).

Gugino correctly objected that subsection 10 permitted Wisdom to exempt $5,000

of total value across all of his life insurance policies, rather than permitting him to

exempt $5,000 of value from each policy. See In re Oxford, 274 B.R. 887, 891-93

(Bankr. D. Idaho 2002).

       The bankruptcy court also properly rejected Wisdom’s argument that his

claim under subsection 10 prevented Gugino from liquidating his life insurance

policies. Wisdom did not claim an exemption under Idaho Code § 11-605(9)

(“subsection 9”), which would have exempted the policies themselves from

inclusion in the bankruptcy estate. His Amended Schedule C instead claimed an

exemption under subsection 10 alone, which protected only a portion of his interest

in the policies. See Schwab v. Reilly, 560 U.S. 770, 781–82 (2010) (distinguishing

between exempting a portion of the debtor’s “interest” in an asset and exempting

the asset itself).

       The bankruptcy court also properly held that Gugino did not violate any

fiduciary duty to Wisdom. A bankruptcy trustee is a representative and fiduciary

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of the estate, see 11 U.S.C. § 323; In re AFI Holding, Inc., 530 F.3d 832, 844 (9th

Cir. 2008), charged primarily with conserving estate assets and maximizing

distributions to creditors, see In re Rigden, 795 F.2d 727, 730 (9th Cir. 1986).

When a debtor retains an interest in estate assets—either by properly claiming

exemptions or because surplus property will remain in the estate after all creditors

have been compensated—the trustee owes a fiduciary duty to the debtor as well.

See U.S. Dep’t of Justice, Executive Office for the United States Trustees,

Handbook for Chapter 7 Trustees 4-2 (2012). Here, Gugino correctly objected to

Wisdom’s claimed exemptions to the extent they were improper, but did not object

to Wisdom’s exemption of $5,000 from Policy No. 344. After liquidating all the

policies, Gugino promptly sent Wisdom a check for $5,000, which Wisdom

cashed. To the extent Gugino owed a duty to preserve Wisdom’s interest in the

exempt value of his life insurance, Gugino fulfilled that duty by paying over the

exempt liquidation proceeds.1

      1
        Nor did Gugino violate his fiduciary duties when he applied the subsection
10 exemption solely to Policy No. 344. Gugino’s objection made clear he was not
objecting to Wisdom’s $5,000 claim on Policy No. 344. Wisdom had an
opportunity to challenge that allocation or to rearrange how he allocated the $5,000
value by either responding to Gugino’s objection or filing another Amended
Schedule C which claimed no more than $5,000 total across all his policies.
Because he did neither, Gugino had no obligation to second-guess Wisdom’s intent
once the bankruptcy court sustained the objection.
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      We agree with Wisdom, however, that Gugino breached his procedural

obligations under 11 U.S.C. § 363(b)(1) by liquidating Wisdom’s insurance

policies without providing separate notice and opportunity for a hearing.

Independent of any fiduciary duties, § 363(b)(1) requires a trustee to provide notice

and opportunity for a hearing before using, selling or leasing an estate asset outside

the ordinary course of the debtor’s business. In our view, the liquidation of Policy

No. 344 for its cash surrender value qualified as the “use” or “sale” of an estate

asset within the meaning of § 363. See 3 Collier on Bankruptcy ¶ 363.02 (Alan N.

Resnick & Henry J. Sommer eds., 16th ed. 2015) (“Section 363(b) has been

applied to other uses that one might not ordinarily posit as a question of use of

property, but rather as entering into transactions out of the ordinary course of

business.”); cf. In re Lavigne, 114 F.3d 379, 384 (2d Cir. 1997) (holding the

cancellation of a debtor-in-possession’s malpractice insurance policy violated

§ 363 because the debtor-in-possession failed to comply with the notice

requirements of that section).

      Because Wisdom had actual notice of the impending liquidation of his

policies, however, he was not prejudiced by Gugino’s failure to satisfy § 363(b).

Both parties agree bankruptcy sales may be set aside in appropriate circumstances,

but on these facts, we decline to set aside the liquidation of the policies or award

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Wisdom the monetary damages he seeks. See In re CADA Investments, Inc., 664

F.2d 1158, 1161–63 (9th Cir. 1981) (describing the power to set aside transactions

as a matter of equity within the discretion of the court). The record reveals that

Wisdom received actual notice of the impending liquidation when New York Life

sent him a letter several weeks before Policy No. 344 was liquidated. When

Wisdom received that letter, his deadline for responding to Gugino’s objection had

not yet expired. Thus, Wisdom had the opportunity to prevent the liquidation,

notwithstanding Gugino’s failure to comply with § 363(b)(1).

      In sum, Wisdom’s claims against the trustee are without merit. We

recognize, however, that Wisdom may have been ill served by his bankruptcy

lawyers. (Our admonition does not extend to Wisdom’s pro bono appellate

counsel, whose advocacy in this case was excellent.) Wisdom’s failure to respond

to Gugino’s objection appears to have been due to his bankruptcy lawyers’

inaction. In addition, Wisdom’s policies would have remained intact had his

bankruptcy lawyers claimed an exemption under subsection 9 in lieu of or in

addition to subsection 10. The efficacy of Wisdom’s legal representation is not

before us, however, as Wisdom’s bankruptcy lawyers are not parties to this appeal

and this is not a malpractice case.

      AFFIRMED.

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