Court Opinion

ID: 3025055
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:32:57.130961+00
Date Added: 2024-06-11T11:47:44.217539
License: Public Domain

United States Bankruptcy Appellate Panel
                               FOR THE EIGHTH CIRCUIT
                                  ________________

                                      No. 00-6005ND
                                  ________________

In re: Roger Edward Arzt and                *
Carol Ann Arzt                              *
                                            *
      Debtor                                *
                                            *
Kip M. Kaler, as Bankruptcy Trustee         *
for Roger Edward Arzt and                   *
Carol Ann Arzt                              *   Appeal from the United States
                                            *   Bankruptcy Court for the
      Plaintiff-Appellee                    *   District of North Dakota
                                            *
               v.                           *
                                            *
David A. Overboe and                        *
John R. Wentz                               *
                                            *
      Defendants-Appellants                 *

                                  ________________

                                 Submitted June 30, 2000
                                  Filed: August 29, 2000
                                   ________________

Before KRESSEL, SCHERMER, and FEDERMAN,1 Bankruptcy Judges

                                  ________________

FEDERMAN, Bankruptcy Judge

      1
       The Honorable Arthur B. Federman, Chief United States Bankruptcy Judge for the
Western District of Missouri, sitting by designation.
       David A Overboe and John R. Wentz (the Transferees) appeal from a bankruptcy court
order avoiding a pre-petition preferential transfer, and holding that the property so transferred
is property of the bankruptcy estate.2 For the following reasons, we affirm the decision of the
bankruptcy court.

                                                I

       On or before March 26, 1999, assets owned by Roger and Carol Arzt (the Debtors)
included a homestead with approximately $80,000.00 in equity. The Debtors also had
outstanding obligations to the Transferees and the Internal Revenue Service, among others. On
March 26, 1999, the Debtors granted Transferee David Overboe a mortgage against the
homestead, duly recorded that same day, in the amount of $12,000.00. The Debtors granted
the mortgage in order to secure an antecedent debt in the amount of $9,135.00, for legal
services previously rendered. The remaining $2,865.00 was to secure payment for future
services to be incurred in relation to an anticipated bankruptcy filing.

       Also on March 26, 1999, the Debtors granted Transferee John Wentz a mortgage
against the homestead, duly recorded that same day, in the amount of $58,000.00. The Debtors
granted this mortgage to secure a debt to Mr. Wentz that had been outstanding for a number of
years.

      On March 30, 1999, the Debtors filed a Chapter 7 bankruptcy petition, and Appellee Kip
M. Kaler (the Trustee) was appointed as the Chapter 7 bankruptcy trustee.

       On August 24, 1999, the Trustee filed an adversary proceeding against the Transferees.
He sought to avoid the mortgage to Wentz, and all but $2,865.00 of the $12,000.00 mortgage
to Overboe, as preferential transfers, pursuant to section 547 of the Bankruptcy Code (the
Code). The Trustee also sought to preserve the Debtor’s equity in their homestead for the
benefit of the bankruptcy estate, pursuant to section 551 of the Code. The Transferees

       2
       The Honorable William A. Hill, United States Bankruptcy Judge for the District of
North Dakota.

                                               2
conceded that the transfers were preferential. They argued, however, that the Trustee could not
avoid the transfer by the Debtors of their exempt property because creditors could not
otherwise reach the exempt property.

       The bankruptcy court, relying on its ruling in Kaler v. Letcher (In re Wegner),3 ruled in
favor of the Trustee. Transferees appealed. The Transferees make three arguments on appeal.
They first argue that the Debtors’ right to use, transfer, or encumber their homestead allowance
is a fundamental right granted to the Debtors by state law. They next argue that by the time the
Trustee filed this adversary proceeding, the Debtors had claimed the mortgaged property as
exempt, thus it was no longer property of the bankruptcy estate, and not subject to the Trustee’s
avoidance powers. Finally, the Transferees argue that the Bankruptcy Appellate Panel for the
Eighth Circuit (the BAP) is not constrained by the Eighth Circuit’s summary affirmance of In
re Wegner. We will deal with the first two arguments simultaneously.

                                                II

       A bankruptcy appellate panel shall not set aside findings of fact unless clearly
erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the
credibility of the witness.4 In this case, there is no factual dispute. We review the legal
conclusions of the bankruptcy court de novo.5

                                                III

       Section 541 of the Code provides that the filing of a bankruptcy petition, without more,
creates an estate that contains all property in which the debtor has a legal or equitable interest:

       3
        210 B.R. 799 (Bankr. D. N.D. 1997), aff’d, 162 F.3d 1166 (8th Cir. 1998) (Table).
       4
       Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v.
Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th Cir.
1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609 (8th
Cir.1997)). Fed. R. Bankr. P. 8013.
       5
        First Nat’l Bank of Olathe, Kansas v. Pontow (In re Pontow) , 111 F.3d 604, 609 (8th
Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997).

                                                3
       (a) The commencement of a case under section 301, 302, or 303 of this title
       creates an estate. Such estate is comprised of all the following property,
       wherever located and by whomever held:

              (1) Except as provided in subsections (b) and (c)(2) of this
              section, all legal or equitable interests of the debtor in property
              as of the commencement of the case.6

Thus, all of the Debtors’ property became property of the bankruptcy estate on the date the
case was filed. That property included Debtors remaining equity in their homestead, which was
less than $10,000.00 after Debtors voluntarily encumbered the homestead pre-petition.
Debtors, however, have the right to exempt certain property from the estate based on either the
Code or applicable state law. 7 Residents of North Dakota, where the Debtors resided on the
date they filed their bankruptcy petition, are allowed only to claim exemptions allowable by
North Dakota law. 8

       Under either state or federal law, however, debtors can only exempt property to the
extent there is value in the property over and above consensual liens against the property.9 On
the date they filed their Chapter 7 petition, the Debtors could, therefore, only claim as exempt,
that equity remaining after they had granted the Transferees consensual liens against their
homestead.

       The Code also vests in a bankruptcy trustee the power to avoid a transfer of property
made by the debtor to a third party, if the transfer was: (1) made within 90 days of filing the
petition; (2) made while the debtor was insolvent; (3) made on account of an antecedent debt;
and (4) made while the debtor had other unsecured creditors:

       6
        11 U.S.C. § 541(a)(1).
       7
        11 U.S.C. § 522(b)(1) and (2)(A).
       8
       N.D. Cent. Code § 28-22-17 (Supp. 1999); In re Reisnour, 56 B.R. 225, 227 (D.
N.D. 1985).
       9
       Mund v. Rambough, 432 N.W.2d 50, 56 (N.D. 1988); Karsznia v. Kelsey, 262
S.W.2d 844, 844 (Mo. 1953); Meeks Leasing Company v. Young, 881 S.W.2d 232, 236
(Mo. Ct. App. 1994); 11 U.S.C. § 522(f)(2)(A).

                                               4
              (B) Except as provided in subsection (c) of this section, the
              trustee may avoid any transfer of an interest of the debtor in
              property --

                      (1) to or for the benefit of a creditor;

                      (2) for or on account of an antecedent debt owed
                      by the debtor before such transfer was made;

                      (3) made while the debtor was insolvent;

                      (4) made--

                               (A) on or within 90 days before the
                               date of the filing of the petition;

                               ...

                      (5) that enables such creditor to receive more than
                      such creditor would receive if --

                               (A) the case were a case under
                               chapter 7 of this title;

                               (B) the transfer had not been made;
                               and

                               (C) such creditor received payment
                               of such debt to the extent provided
                               by the provisions of this title.10

The Transferees agreed at the outset that the granting of these two mortgages satisfied the
elements of section 547(b), therefore, the transfers were preferential. The Debtors executed
and duly recorded mortgages within four days of filing their Chapter 7 bankruptcy petition that,
in effect, converted the Transferees’ general unsecured claims into secured claims.

       10
         11 U.S.C. § 547(b).

                                               5
       But, the Code not only vests a bankruptcy trustee with the power to avoid a preferential
transfer, it also provides that once the transfer is avoided, the property that was transferred
becomes property of the estate:

       Any transfer avoided under section 522, 544, 547, 548, 549, or 724(a) of this
       title, or any lien void under section 506(d) of this title, is preserved for the
       benefit of the estate but only with respect to property of the estate.11

       While the Code, thus, provides that once a trustee avoids a preferential transfer the
property becomes property of the estate,12 Section 522(g) also provides that a debtor can
exempt any equity created by the avoided transfer only under certain circumstances:

       (g) Notwithstanding sections 550 and 551 of this title, the debtor may exempt
       under subsection (b) of this section property that the trustee recovers under
       sections 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that
       the debtor could have exempted such property under subsection (b) of this
       section if such property had not been transferred, if—

               (1) (A) such transfer was not a voluntary transfer of such
               property by the debtor; and

                      (B) the debtor did not conceal such property; or

               (2) the debtor could have avoided such transfer under subsection (f)(2) this
               section.13
None of those circumstances are present here. Debtors voluntarily chose to transfer most of
the equity in their homestead prior to filing their Chapter 7 bankruptcy petition, and the
Debtors could not have avoided these two mortgages under section 522(f).

       11
         11 U.S.C. § 551.
       12
         Id.
       13
         11 U.S.C. § 522(g).

                                              6
        The bankruptcy court in North Dakota dealt with this precise issue in Kaler v. Letcher
(In re Wegner).14 In Wegner, the trustee sought to avoid an unrecorded first mortgage against
debtors’ homestead and to preserve the mortgage lien for the benefit of the estate.15 The holder
of the unrecorded first mortgage argued that because the homestead was exempt property at
the commencement of the case, section 551 was ineffective to bring any value to the estate.
The court rejected this argument and found, instead, that a debtor may only exempt property
the trustee recovers under section 551 if the transfer was not a voluntary transfer.16 The
Wegner Court then stated that the “exemption provisions of section 522 suggest by negative
implication that a debtor cannot, by utilizing exemption statutes, take advantage of the trustee’s
recovery efforts.”17 The Court then concluded that the “clear implication here is that property
that was voluntarily transferred by the debtor, but recovered by the trustee under section 551,
cannot be exempted.”18 Other courts in the Eighth Circuit have also interpreted section 551 to
so hold.19 As the Court in Wegner explained, a bankruptcy trustee who avoids a transfer steps

       14
          210 B.R. 799 (Bankr. D. N.D. 1997), aff’d, 162 F.3d 1166 (1998) (Table).
       15
          Id. at 800.
       16
          Wegner, 210 B.R. at 802 (citing In re Heintz, 198 B.R. 581, 586 (9th Cir. B.A.P.
1996)).
       17
          Wegner, 210 B.R. at 802.
       18
          Id.
       19
         See Fox Hill Office Investors, Ltd v. Mercantile Bank (In re Fox Hill Office
Investors, Ltd.), 101 B.R. 1007, 1023 (Bankr. W.D. Mo. 1989) (holding that section 551
preserves the avoided transfer or lien to the estate). See also In re Scott, 2000 WL 122360,
*1 (Bankr. N.D. Iowa Jan. 3, 2000) (holding that if a debtor had voluntarily granted a
security interest that was later avoided, the debtor was not entitled to exempt the interest
recovered); Schieffler v. Beshears (In re Beshears), 182 B.R. 235, 240 (Bankr. E.D. Ark.
1995) (holding that debtors cannot claim an exemption in a homestead after trustee avoided
the transfer of the property as a fraudulent conveyance because the transfer by the debtors
was voluntary); In re Flitter, 181 B.R. 938, 941 (Bankr. D. Minn. 1995)(stating that where a
debtor granted a consensual security interest in property later recovered by the trustee, the
debtor voluntarily parted with the value and, thus, he cannot use section 522(g)(1) as the
basis for a claim of exemption).

                                                7
into the shoes of the transferee and acquires the same rights that the transferee held.20 In other
words, after the Trustee avoided the preferential transfers to the Transferees, the Trustee held
the two mortgages for the benefit of the bankruptcy estate as a secured creditor. Thus, the only
homestead equity Debtors had available to exempt after the commencement of this Chapter
7 case was the equity remaining after executing the two mortgages. As such, we find that the
Trustee’s recovery from the Transferees does not impair the Debtor’s right to either encumber
their homestead, or claim their homestead as exempt, under North Dakota law.

                                                IV

       The Transferees argue, however, that section 522(g) notwithstanding, under the
Bankruptcy Act of 1898 (the Act), a bankruptcy trustee had no authority to avoid a transfer of
exempt property because such property was not subject to the claims of creditors. They also
claim that the Code did not specifically overrule such precedent, therefore, it is still relevant
in this case. We disagree. The United States Supreme Court recently discussed the precedential
value of legal conclusions, reached under the Act, that conflict with the language of the Code.
In Hartford Underwriters v. Union Planters Bank, N.A. (In re Hen House Interstate, Inc.) 21 the
Supreme Court explained that “while pre-Code practice ‘informs our understanding of the
language of the Code,’ . . . it cannot overcome that language.”22 The Court then stated that
“‘[w]here the meaning of the Bankruptcy Code’s text is itself clear . . . its operation is
unimpeded by contrary . . . prior practice.”23 We find that the language in section 551 is clear
and unambiguous, therefore, it leaves “no room for clarification by pre-code practice.” It may
be true that creditors cannot reach a debtor’s exempt interest in property, but it is also true that
debtors are free to voluntarily encumber that interest. That is what happened in this case, and

       20
         Wegner, 210 B.R. at 802.
       21
         ___ U.S. ___, 120 S. Ct. 1942, ___ L. Ed. 2d ___ (2000).
       22
        Id. at 1949 (quoting Kelly v. Robinson, 479 U.S. 36, 44, 107 S. Ct. 353, 358, 93 L.
Ed. 2d 216 (1986)).
       23
        Id. (quoting BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L.
Ed. 2d 556 (1994).

                                                 8
since that voluntary transfer was preferential, the Trustee’s recovery of the transfer is for the
benefit of the estate, not the debtors.

                                                   V

       The Transferees make one final argument. They claim that the Eighth Circuit affirmed
both the bankruptcy court and the district court’s holdings in Wegner by a summary affirmance,
therefore, the BAP is not bound by that affirmance. The Eighth Circuit recently ruled on that
precise issue.24 InAnastasoff, the Court declared unconstitutional that portion of Rule 28(A)(i)
of the Federal Procedural Rules Service, Court of Appeals, Eighth Circuit, that declares that
unpublished opinions have no precedential value.25 As the Court stated so eloquently:

         Inherent in every judicial decision is a declaration and interpretation of a general
         principle or rule of law. . . . This declaration of law is authoritative to the extent
         necessary for the decision, and must be applied in subsequent cases to similarly
         situated parties.26

The Court found that the precedential effect of judicial opinions derives from the nature of
judicial power, and the limitation place thereon by Article III of the United States
Constitution.27 Any attempt to avoid the precedential effect of a prior decision merely because
of a decision to not publish same would expand judicial power beyond the bounds envisioned
by the Framers of the Constitution.28 We, therefore, affirm the bankruptcy court’s conclusions
in this case because we are bound by the Eighth Circuit’s opinion in Wegner. Moreover, we

         24
           See Anastasoff v. United States of America, Case No-993917EM (8th Cir. Aug. 22,
2000).
         25
           Id. at 3.
         26
           Id.
         27
           Id.
         28
           Id. at 4.

                                                   9
affirm the bankruptcy court’s legal conclusions because we find that sections 522(g)(1)(A) and
551 of the Code preserve the recovered property for the benefit of the bankruptcy estate.

                                             VI

       Accordingly, we affirm the judgment of the bankruptcy court.

       A true copy.

              Attest:

                        CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
                        EIGHTH CIRCUIT

                                             10