Court Opinion

ID: 2757135
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:34.294698+00
Date Added: 2024-06-11T10:16:21.762738
License: Public Domain

FILED
                                                             MAR 14 2012
 1                          ORDERED PUBLISHED
                                                      SUSAN M SPRAUL, CLERK
 2                                                         U.S. BKCY. APP. PANEL
                                                           O F TH E N IN TH C IR C U IT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5
 6   In re:                        )       BAP No. AZ-11-1551-DJuPa
                                   )
 7   TIMOTHY ANDREW SALAZAR and    )       Bk. No. 08-11597-JMM
     GENA ANNETTE SALAZAR,         )
 8                                 )
                    Debtors.       )
 9   ______________________________)
                                   )
10   LAWRENCE J. WARFIELD,         )
     Chapter 7 Trustee,            )
11                                 )
                    Appellant,     )
12                                 )
     v.                            )       O P I N I O N
13                                 )
     TIMOTHY ANDREW SALAZAR; GENA )
14   ANNETTE SALAZAR,              )
                                   )
15                  Appellees.     )
     ______________________________)
16
                    Argued and submitted on February 24, 2012
17                             at Phoenix, Arizona
18                           Filed - March 14, 2012
19             Appeal from the United States Bankruptcy Court
                         for the District of Arizona
20
       Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding
21
22
     Appearances:      Jacob W. Sparks, Esq., of Scheef & Stone, LLP,
23                     argued for appellant Lawrence J. Warfield,
                       Chapter 7 Trustee;
24                     Kevin J. Rattay, Esq., of Kevin J. Rattay, PLC,
                       argued for appellees Timothy Andrew Salazar and
25                     Gena Annette Salazar
26
27   Before:   DUNN, JURY, and PAPPAS, Bankruptcy Judges.
28
 1   DUNN, Bankruptcy Judge:
 2
 3        During their bankruptcy case, the chapter 131 debtors
 4   received and spent tax refunds that were property of their
 5   bankruptcy estate under § 541 of the Bankruptcy Code.      The
 6   debtors ultimately failed to confirm a chapter 13 plan and
 7   converted their case to chapter 7.      The bankruptcy court denied
 8   the chapter 7 trustee’s motion requesting that the debtors be
 9   compelled to pay into their chapter 7 estate the amount of the
10   prepetition tax refunds.   We AFFIRM.
11                                I.    FACTS
12        Appellees Timothy Andrew Salazar and Gena Annette Salazar
13   (the “Salazars”) filed a chapter 13 petition on September 3, 2008
14   (“Petition Date”).   In their Schedule of Personal Property
15   (“Schedule B”), the Salazars marked “None” in response to
16   Schedule B’s request that they disclose “[o]ther liquidated debts
17   owed to debtor including tax refunds.”      (Emphasis added).
18   However, while the chapter 13 case was pending, the Salazars
19   received refunds based upon their 2008 state and federal tax
20   returns.   The prepetition pro rata amount of those refunds
21   totaled $4,084.94 (“Prepetition Refund”).      The Salazars never
22   amended their Schedule B to disclose the Prepetition Refund.        The
23   Salazars used the Prepetition Refund for living expenses while
24   the chapter 13 case was pending.       No plan ever was confirmed in
25
26        1
               Unless otherwise specified, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27
     all “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure, Rules 1001-9037.

                                        2
 1   their chapter 13 case.
 2        The bankruptcy court converted the Salazars’ case from
 3   chapter 13 to chapter 7 on August 19, 2009.          Appellant Lawrence
 4   Warfield was appointed as the chapter 7 trustee (“Trustee”) in
 5   the converted case.   The Trustee filed a motion to compel the
 6   Salazars to turn over the Prepetition Refund.          The Salazars
 7   responded by asserting that because the Prepetition Refund had
 8   been spent, i.e., was not in their possession, it no longer
 9   constituted property of the estate pursuant to § 348(f)(1)(A).
10   The bankruptcy court agreed in a brief written decision.          The
11   Trustee timely filed a notice of appeal.
12                                 II.   JURISDICTION
13        The bankruptcy court had jurisdiction under 28 U.S.C.
14   §§ 1334 and 157(b)(2)(A) and (E).           We have jurisdiction under 28
15   U.S.C. § 158.
16                                    III.   ISSUE
17        Whether the bankruptcy court erred when it denied the
18   Trustee’s motion for turnover of the Prepetition Refund.
19                           IV.    STANDARD OF REVIEW
20        Whether property is property of the estate is a question of
21   law reviewed de novo.    Mwangi v. Wells Fargo Bank, N.A. (In re
22   Mwangi), 432 B.R. 812, 818 (9th Cir. BAP 2010).          “De novo means
23   review is independent, with no deference given to the trial
24   court’s conclusion.   See First Ave. W. Bldg., LLC v. James (In re
25   Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006).”          Id.
26                                  V.   DISCUSSION
27        The Panel must decide whether the debtors must pay over to
28   the chapter 7 trustee the amount of a tax refund attributable to

                                             3
 1   the debtors’ prebankruptcy earnings that they received and spent
 2   during the pendency of their chapter 13 case in which no plan was
 3   confirmed.
 4        Section 541(a)(1) provides:
 5        The commencement of a case under section 301 . . . of
          this title creates an estate. Such estate is comprised
 6        of all the following property, wherever located and by
          whomever held:
 7        (1) . . . all legal or equitable interests of the
          debtor in property as of the commencement of the case.
 8
 9        The Salazars and the Trustee agree that pursuant to
10   § 541(a), the Prepetition Refund was property of the chapter 13
11   estate on the Petition Date, notwithstanding the failure of the
12   Salazars to disclose it in their Schedule B.   Therefore, the
13   expansive definition of property, i.e., postpetition property, of
14   a chapter 13 estate set forth in § 1306 does not impact the
15   decision in this case.2   The parties also agree that if the
16   Salazars had not spent the Prepetition Refund, they would be
17   compelled by § 348(f) to turn it over to the Trustee.
18
19        2
               Section 1306(a) provides:
20
          (a) Property of the estate includes, in addition to the
21        property specified in section 541 of this title--
22
          (1) all property of the kind specified in such section
23        that the debtor acquires after the commencement of the
          case but before the case is closed, dismissed, or
24        converted to a case under chapter 7, 11, or 12 of this
          title, whichever occurs first; and
25
26        (2) earnings from services performed by the debtor
          after the commencement of the case but before the case
27        is closed, dismissed, or converted to a case under
          chapter 7, 11, or 12 of this title, whichever occurs
28        first.

                                        4
 1        As relevant to this appeal, § 348(f) provides:
 2        § 348. Effect of conversion
          . . .
 3        (f)(1) Except as provided in paragraph (2), when a case
          under chapter 13 of this title is converted to a case
 4        under another chapter under this title –
                (A) property of the estate in the converted case
 5        shall consist of property of the estate, as of the date
          of filing of the petition, that remains in the
 6        possession of or is under the control of the debtor on
          the date of conversion . . . .3
 7
 8   (Emphasis added.)
 9        Courts have struggled in applying § 348(f)(1)(A).   The
10   Salazars point to the decision of one bankruptcy court that has
11   held that property of the estate following conversion from
12   chapter 13 to chapter 7 will consist of the property in the
13   chapter 13 estate on the petition date, less amounts lawfully
14   removed by the debtors in good faith to pay ordinary and
15   necessary living expenses during the period from the petition
16   date to the conversion date.   Bogdanov v. Laflamme (In re
17   Laflamme), 397 B.R. 194 (Bankr. D.N.H. 2008).   In Laflamme, the
18   debtor, while in a chapter 13 case, received and spent
19   prepetition commissions.   The debtor was a self-employed real
20   estate broker.   When the debtor converted her case to chapter 7,
21   the chapter 7 trustee sought to compel the debtor to turn over
22   the commissions to the chapter 7 estate.   Like the Salazars, the
23
          3
24             At oral argument, counsel for the Trustee conceded that
     the Salazars actions did not raise an issue of bad faith. We
25   therefore do not decide what impact § 348(f)(2) might have in
26   this dispute. Section 348(f)(2) provides: “If the debtor
     converts a case under chapter 13 of this title to a case under
27   another chapter under this title in bad faith, the property of
     the estate in the converted case shall consist of the property of
28   the estate as of the date of conversion.”

                                      5
 1   debtor in Laflamme asserted that § 348(f)(1)(A) required that she
 2   turn over to the chapter 7 trustee only the amount of the
 3   commissions remaining in her possession or under her control.
 4   The Laflamme court reasoned that (1) § 1303 vests a chapter 13
 5   debtor with the exclusive right to use and control all property
 6   of the chapter 13 estate,4 (2) § 1304 authorizes a chapter 13
 7   debtor to operate its business in the ordinary course, and (3) it
 8   is “implicit” in § 1306(b) that a chapter 13 debtor has the right
 9   to use or lease property of the estate in the ordinary course of
10   his or her affairs.   Accordingly, the Laflamme court concluded
11   that a chapter 13 debtor may use chapter 13 estate property for
12   living expenses that are “ordinary” and “necessary,” to be
13   determined based upon the facts of each case.   Id. at 206.
14        In contrast, the courts in In re Fatsis held that the
15   Bankruptcy Code contains no authority for a chapter 13 debtor not
16   engaged in business to use property of the estate in the
17   “ordinary course.”
18        The right to use property of the estate in the ordinary
          course of business is found in § 363(c), a subsection
19        not incorporated into § 1303. It is § 1304, a section
          applicable only to a chapter 13 debtor who is “self-
20        employed and incurs trade credit in the production of
          income from such employment . . .” that permits the use
21        of property of the estate in the ordinary course of
          business. The Debtor does not assert that he falls
22        within the ambit of § 1304.
23   In re Fatsis, 396 B.R. 579, 582 (Bankr. D. Mass. 2008), aff’d,
24   405 B.R 1, 8 (1st Cir. BAP 2009) (finding no legal support for
25
26        4
               “Subject to any limitations on a trustee under this
27   chapter, the debtor shall have, exclusive of the trustee, the
     rights and powers of a trustee under sections 363(b), 363(d),
28   363(e), 363(f), and 363(l), of this title.” § 1303.

                                      6
 1   debtor’s inference that because § 363(b), incorporated by § 1303,
 2   allows a chapter 13 debtor to use property of the estate other
 3   than in the ordinary course of business with leave of the court,
 4   the debtor can use property of the estate in the ordinary course
 5   of business without leave of the court).    On the contrary,
 6   § 1306(b) provides:   “Except as provided in a confirmed plan or
 7   order confirming a plan, the debtor shall remain in possession of
 8   all property of the estate.”   Further, § 1327(b) provides that
 9   “[e]xcept as otherwise provided in the plan or the order
10   confirming the plan, the confirmation of a plan vests all of the
11   property of the estate in the debtor.”    Thus, unless and until a
12   plan was confirmed in the case, the Salazars arguably were not
13   authorized to use prepetition estate property.
14        Our starting point for analysis in this appeal is the
15   language of § 348(f)(1)(A).    Where the language of a statute is
16   plain and admits of no more than one meaning, our role is to give
17   full effect to and follow the plain meaning of the statute
18   whenever possible.    2A Norman J. Singer and J.D. Shambie Singer,
19   Statutes and Statutory Construction § 46:1 (7th ed. 2007).     “It
20   is an elementary rule of construction that effect must be given,
21   if possible, to every word, clause and sentence of a statute.”
22   Id. at § 46:6 (citations omitted).    We must presume that every
23   word of a statute was included for a purpose.    See Ratzlaf v.
24   United States, 510 U.S. 135, 140-41 (1994); United States v.
25   Andrews, 600 F.3d 1167, 1173 (9th Cir. 2010) (Clifton, J.,
26   concurring).   Conversely, we must presume that every word
27   excluded from a statute was excluded for a purpose.    2A Statutes
28   and Statutory Construction § 46:6.

                                       7
 1         To “possess” or to be “in possession” of a thing is to have
 2   it or hold it as property.   See Merriam-Webster’s Collegiate
 3   Dictionary, Eleventh Ed. 2005.    To “remain” means “to be a part
 4   not destroyed, taken, or used up,” or “to continue unchanged.”
 5   Id.   Section 348(f)(1)(A), by its terms, contemplates that the
 6   debtors may have “used up” property of the estate and no longer
 7   possess it, and any such property of the estate “used up” prior
 8   to the conversion of the case to chapter 7 is not property of the
 9   estate in the converted case.    Accordingly, a “plain meaning”
10   interpretation of § 348(f)(1)(A) leads us to the conclusion that
11   the Prepetition Refund, having been spent, is not property of the
12   estate on conversion.
13         One court has gone so far as to posit that such a literal
14   application of § 348(f)(1)(A), requiring turnover only of
15   property of the estate as of the commencement of the case that
16   the debtor still possesses on the conversion date, could give
17   debtors “carte blanche to commit fraud.”
18         A chapter 7 debtor who decides that he does not want to
           surrender to the trustee an asset which is property of
19         the estate can convert to chapter 13 long enough to
           dispose of the asset, and then reconvert to chapter 7
20         and obtain a discharge with impunity. In other words,
           the very act which generally would form the basis for
21         the denial or revocation of discharge, i.e.,
           disposition of property of the estate, would insulate
22         the debtor from liability.
23   Wyss v. Fobber (In re Fobber), 256 B.R. 268, 276 (Bankr. E.D.
24   Tenn. 2000) (footnote omitted).
25         We find the Laflamme court’s response to this contention
26   persuasive:   “Debtors should be cautioned that this right cannot
27   be abused and will normally be tempered by one of the underlying
28   concepts of the Bankruptcy Code – a fresh start is only available

                                       8
 1   to the honest debtor.”   Laflamme, 397 B.R. at 206, citing Grogan
 2   v. Garner, 498 U.S. 279, 286-87 (1991).   The Laflamme court
 3   declined “to adopt a bright-line rule to define under what
 4   circumstances (and for what purposes) a debtor may use chapter 13
 5   estate property other than to stress the use must be reasonable
 6   and will usually include normal living expenses,” determined by
 7   the facts of the case.   Laflamme, 397 B.R. at 206.   In other
 8   words, the debtor’s use of estate property in chapter 13 prior to
 9   conversion to chapter 7 is subject to “good faith” scrutiny.
10   See, e.g., §§ 348(f)(2), 707(b)(3)(A) and 727(a)(2)(B).
11        We recognize that a plain meaning application of
12   § 348(f)(1)(A) creates an anomaly with respect to the outcomes
13   for consumer debtors and their creditors in any other context in
14   chapters 13 and 7.   The quid pro quo for a discharge in
15   bankruptcy is that the debtor pay the equivalent of the value of
16   his non-exempt assets to his creditors.   Had the Salazars
17   remained in chapter 13, they would have been required to account
18   to their creditors for the Prepetition Refund even though it had
19   been spent.   Under the “best interests of creditors test,” the
20   Salazars could only confirm a chapter 13 plan which would pay
21   their unsecured creditors the amount those creditors would have
22   received in a hypothetical chapter 7 liquidation as of the
23   Petition Date.   See § 1325(a)(4).   The value of the Prepetition
24   Refund would have been included in the hypothetical chapter 7
25   liquidation in the Salazars’ chapter 13 case.   Further, until the
26   hypothetical chapter 7 liquidation value had been paid to their
27   unsecured creditors, the Salazars would not have been entitled to
28   a discharge in their chapter 13 case, either pursuant to

                                      9
 1   § 1328(a) by completing their plan payments, or pursuant to
 2   § 1328(b) in a “hardship” discharge.5
 3        Alternatively, if their case had commenced as a chapter 7,
 4   the Salazars would have been required to turn over the
 5   Prepetition Refund to the Trustee.    Tax refunds are property of
 6   the bankruptcy estate under § 541(a).    See Segal v. Rochelle, 382
 7   U.S. 375, 379 (1966); United States v. Sims (In re Feiler), 218
 8   F.3d 948, 955-56 (9th Cir. 2000) (The legislative history of
 9   § 541 establishes that Congress adopted the result in Segal,
10   making the right to a tax refund property of the estate.);
11   Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1519 (10th
12   Cir. 1991).    Section § 521(a)(4)6 requires the debtor to
13   surrender all property of the estate to the Trustee.
14        Looking at this anomaly, some courts have declined to apply
15   the plain meaning of § 348(f)(1)(A) in circumstances similar to
16   the case before us on the basis that it produces an absurd result
17   in the statutory scheme of the Bankruptcy Code, looking to the
18   legislative history of the provision for their interpretation of
19   its meaning.    Those courts have concluded that the purpose of
20   § 348(f)(1)(A) was to ensure that postpetition earnings of
21
          5
22             Section 1328(b)(2) provides that, as a condition to
     chapter 13 debtors receiving a discharge prior to completion of
23   payments under their plan, “the value, as of the effective date
     of the plan, of property actually distributed under the plan on
24   account of each allowed unsecured claim is not less than the
     amount that would have been paid on such claim if the estate of
25   the debtor had been liquidated under chapter 7 of this title on
26   such date . . . .”
          6
27             As relevant, § 521(a)(4) provides: “The debtor shall–-
     . . . if a trustee is serving in the case . . . , surrender to
28   the trustee all property of the estate . . . .”

                                      10
 1   debtors while in chapter 13 need not be paid over to a chapter 7
 2   trustee when a case is converted to chapter 7, thus serving as
 3   encouragement to debtors to attempt to complete a chapter 13
 4   repayment plan rather than to proceed immediately to liquidation
 5   in chapter 7.   See, e.g., In re Fobber, 256 B.R. at 277-79.
 6             When a Chapter 13 case is converted to a Chapter 7
          case, a court must determine which assets belonging to
 7        the debtor must be considered property of the Chapter 7
          estate. Accordingly, a court will seek to apply the
 8        provisions of 11 U.S.C. § 348(f) to the facts of the
          case. However, in some instances, literal application
 9        of these provisions leads to an absurdity and is
          contrary to congressional intent. In order to avoid an
10        absurd result, a court must differentiate between
          property acquired prior to the commencement of a
11        bankruptcy case and property acquired after the
          commencement of a bankruptcy case.
12
13   In re Grein, 435 B.R. 695, 699 (Bankr. D. Colo. 2010) (footnotes
14   omitted); 2A Statutes and Statutory Construction § 47:25 (not
15   appropriate to adopt a “plain meaning” which would lead to an
16   “absurd” result or create a clear contradiction in a statutory
17   scheme).
18        While, as we pointed out above, application of the plain
19   language of § 348(f)(1) may be anomalous, depending upon the
20   facts of the case, we do not believe such anomaly equates to
21   producing absurd results or creating a clear contradiction in the
22   statutory scheme in light of the remedies available to chapter 7
23   trustees where the debtors have not acted in good faith.    For
24   example, “chapter 7 trustees who seek former chapter 13 estate
25   property under circumstances indicating abuse can be comforted by
26   the availability of § 727 as a potential remedy.”   Laflamme, 397
27   B.R. at 206.
28        Because we find the plain language of § 348(f)(1)(A)

                                     11
 1   anomalous rather than absurd in its application, we need not, and
 2   do not, look beyond the plain meaning of § 348(f)(1)(A)
 3   articulated above by resort to the legislative history.    As
 4   instructed by the Supreme Court, we must determine the intent of
 5   Congress in enacting § 348(f)(1)(A) from the terms of the
 6   statute.    Lamie v. U.S. Trustee, 540 U.S. 526, 542 (2004).    “If
 7   Congress enacted into law something different from what it
 8   intended then it should amend the statute to conform to its
 9   intent.    ‘It is beyond our province to rescue Congress from its
10   drafting errors, and to provide for what we might think . . . is
11   the preferred result.’”    Id. (citations omitted).
12        Following Laflamme and a plain meaning interpretation of
13   § 348(f)(1)(A), the bankruptcy court determined that the Salazars
14   spent the Prepetition Refund in good faith to pay ordinary and
15   necessary living expenses during the period from the petition
16   date to the conversion date.     Specifically, the bankruptcy court
17   ruled that the Prepetition Refund was spent "in the normal course
18   of living" based on Mr. Salazar’s Affidavit, in which he stated
19   that he "used half the refund for my expenses in Texas, and gave
20   the other half to my wife Gena for her to use for living expenses
21   for herself and the children in Arizona."     The Trustee does not
22   challenge on appeal the bankruptcy court’s finding as to the
23   manner in which the funds were spent.    On this record, we find no
24   error by the bankruptcy court in concluding that the Prepetition
25   Refund, having been used up, did not constitute property of the
26   chapter 7 estate on the conversion date.
27                              VI.   CONCLUSION
28        Because the Salazars had spent the Prepetition Refund before

                                       12
 1   the date they converted their case to chapter 7, the plain
 2   meaning of the language used in § 348(f)(1)(A) excluded the
 3   Prepetition Refund from property of the chapter 7 estate.    We
 4   AFFIRM the bankruptcy court’s order denying the Trustee’s motion
 5   to compel turnover of the Prepetition Refund.
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