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14-05002 Morris v. Ark Valley Credit Union et al (Doc. # 75)
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Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Sep. 19, 2015) Doc. # 75
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JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7
Debtor. )
J. MICHAEL MORRIS, Trustee, )
Plaintiff, )
vs. ) Adv. No. 14-5002
and JEFFREY KENT GRACY )
Defendants. )
On August 25, 2015, the United States District Court, Hon. J. Thomas Marten,
reversed this Court's determination that Ark Valley Credit Union's lien did not attach
to Jeffrey Gracy's manufactured home and remanded the adversary proceeding for
me to determine whether that home was a fixture.1 If the home was a fixture on the
petition date, the lien of Ark Valley's mortgage encumbers it and, if that encumbrance
is unperfected as to the manufactured home, the Trustee can avoid and preserve it
for the benefit of the bankruptcy estate under 11 U.S.C. §§ 544 and 551.
In my Memorandum Opinion issued on January 6, 2015, I concluded that Ark
Valley's mortgage did not attach to the manufactured home because its habendum
clause's language did not sufficiently describe the home.2 KAN. STAT. ANN. § 84-9-
108(e) provides that general collateral type descriptors are not adequate to
reasonably describe the collateral in consumer transactions and Ark Valley's
mortgage only spoke in terms of "fixtures and improvements." Because I held that
the mortgage's description was inadequate, I did not reach the issue of whether the
manufactured home was a fixture or improvement. The District Court reversed on
this point and held that the use of the words "fixtures and improvements" in close
proximity to the common address of the real estate and its legal description was
reasonably descriptive. The District Court strictly construed the statutory language
of KAN. STAT. ANN. § 58-4214(a), the "title elimination" statute of the Kansas
Manufactured Housing Act, to hold that complying with it is not the only means of
rendering a manufactured home annexed to real estate a fixture or improvement.3
1 J. Michael Morris, Trustee v. Ark Valley Credit Union, et al., Case No. 15-1024-JTM (D. Kan. Aug.
25, 2015).
2 Adv. Dkt. 56.
3 In its order, the District Court noted that this conclusion is contrary to the Tenth Circuit
Bankruptcy Appellate Panel's holding in In re Thomas, 362 B.R. 478 (10th Cir. BAP 2007), that KAN.
STAT. ANN. § 58-4214 is the sole means of converting a manufactured home to an improvement of
Case 14-05002 Doc# 75 Filed 09/17/15 Page 2 of 9
real property. The District Court disagreed and noted that it is not bound by contrary BAP authority.
As the District Court's order is the law of this case, I am required to disregard Thomas here.
4 See Peoples State Bank of Cherryvale v. Clayton, 2 Kan. App. 2d 438, 440, 580 P.2d 1375 (1978)
(The Uniform Commercial Code's definition of fixtures does not conflict with common law, and
application of the common-law test of fixtures, is appropriate.); KAN. STAT. ANN. § 84-9-102(a)(41)
(2014 Supp.) (defining "fixtures" as "goods that have become so related to particular real property
that an interest in them arises under real property law.").
The statute does not preclude a determination that a manufactured home is a fixture
at common law.4 On remand, the principal issue before me is whether this particular
manufactured home is a fixture. If it is, I must then determine the value of Ark
Valley's liens.
Burden of Proof
As plaintiff, the Trustee had the burden to show that Ark Valley had a lien
that not been properly perfected at the petition date and would therefore be avoidable
by someone wielding the trustee's hypothetical lien creditor powers under §544(a).
Rather than fight about perfection, Ark Valley instead argued that it had never taken
a lien in the manufactured home because it was not described in the mortgage and
not affixed. Thus, part of the Trustee's proof necessarily focused on whether the
manufactured home had become a fixture and he had the burden of persuasion on
that issue.
Mr. Gracy testified that he and his late wife purchased the manufactured home
sometime after 1994 and placed it on the real estate near Caldwell thereafter. The
home was placed on piers that are set on concrete slabs spaced 2-3 feet apart that run
length-wise under the home. The home is 50 feet long. The home is anchored to the
piers and slabs by "metal straps" or "stanchions." He skirted the home with brick, but
the skirting is decorative, not structural and bears no weight. The utilities are run
through the floor of the structure from underground. He built a wood porch that is
attached to the home and the ground. The back door is accessible via concrete steps
and a concrete pad.
Ms. Gillette from Ark Valley testified that loan officers at her institution were
trained to take a mortgage on manufactured homes that were on a permanent
foundation. She stated that they "had to be on a permanent foundation" to make a
home equity loan and the "title had to be eliminated so they became real estate."5 She
said she did not know this home was a manufactured home and that Mr. Gracy didn't
tell her that in 2009 or 2010 when the loans were made and the mortgages granted.
She did know there was a home of some kind there and she testified that she intended
to take a security interest in it, severely undercutting Ark Valley's "no lien attached"
defense. Mr. Gracy testified that when he gave the mortgages to Ark Valley, he
understood that the house and garage were part of the collateral.6 Mr. Gracy has lived
in the manufactured home for 20 years.
5 Adv. Dkt. 68, Tr. at p. 52. See also KAN. STAT. ANN. § 58-4214 (2005) (title elimination statute).
6 Adv. Dkt. 68, Tr. at pp. 19-20.
The Trustee presented Rick Hopper, a real estate agent familiar with the
Caldwell area, to testify about the value of the home and land. Mr. Hopper is a realtor
and an auctioneer who auctions 40 to 50 properties a year. He drove by Mr. Gracy's
homestead and, based on "experience and gut feel," as well as a review of comparable
sales, determined that the value of the property overall was $70,000 with the
manufactured home contributing $40,000. He later revised the opinion after referring
to the NADA guide for used manufactured homes and, based upon that document, he
concluded that the manufactured home itself was worth only $21,743. In his second
opinion letter, however, he stuck by his view that the land itself is worth $30,000,
yielding a total value for the tract and home of $51,743. The property has been
appraised for taxes in Sumner County at $69,230. I find that the reasonable retail
replacement value of the manufactured home is $21,743.7
The District Court's remand order requires me to determine whether the
manufactured home is a fixture at common law. To demonstrate that an item of
personal property has become a common law fixture, a party must show that the item
has been annexed to real property, that it has been adapted or appropriated to the
use of the real property, and that the annexor intended that it become a fixture.8 In
determining whether the property has been annexed sufficiently to be classified as
an improvement to the real estate, Kansas courts look to the degree of permanency
of its attachment to the land.9 "Permanency" in this sense does not require the
7 See 11 U.S.C. § 506(a)(2)(In a chapter 7 or 13 case, replacement value of property acquired for
personal family or household use is price a retail merchant would charge given the property's age
and condition at the time value is determined).
8 Stalcup v. Detrich, 27 Kan. App. 2d 880, 886, 10 P. 3d 3 (2000), citing U.S.D. No. 464 v. Porter, 234
Kan. 690, 695, 676 P.2d 84 (1984).
9 City of Wichita v. Denton, 296 Kan. 244, 257-58, 294 P.3d 207 (2013) (billboard structure attached
to land by a concrete foundation that had been in place for 20 years was personal property classified
as a trade fixture and not compensable in condemnation proceeding).
Case 14-05002 Doc# 75 Filed 09/17/15 Page 5 of 9
property to be immovable. Rather, whether the chattel is affixed or intended to be
affixed is a matter of degree.10
Here, the home retains its rail framework and it is plausible that the home
could be removed from the ground without significant damage to either. The home is
strapped to the piers and slabs, but is not otherwise attached.11 But courts assess less
importance to this factor than they do to the other two and when there is persuasive
evidence that the property has been adapted to the land's use and that the annexor
intended it to become part of the land, those latter proofs make up for a lesser degree
of permanence of the attachment.12 As the Kansas Supreme Court long ago
recognized, the courts have placed less emphasis on the annexation test:
But attachment to the realty is not alone sufficient to change the
character of personal property. It is only one of several tests to
determine whether property originally a chattel has become a fixture by
being used for a particular purpose, and however the rule may have been
formerly it is not now deemed to be the controlling test. Tyler, on page
101 of his treatise on fixtures, says: "The simple criterion of physical
annexation is so limited in its range, and so productive of contradiction,
that it will not apply with much force, except in respect to fixtures in
dwellings." . . . It [fixture] is now determined by the character of the act
by which the structure is put into its place, the policy of the law
10 In re Farmland Industries, Inc., 298 B.R. 382, 388-89 (Bankr. W.D. Mo. 2003) (equipment
containing a regenerator and reactor vessels installed in oil refinery)
11 Stalcup, supra at 886-87 (metal building that was bolted to a concrete slab was not a fixture;
parties intended for the metal building to remain personal property and building was taxed
separately from real estate); Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan. App. 2d
150, 737 P.2d 52 (1987), rev. denied 241 Kan. 838 (1987) (in determining that bank that financed
purchase of mobile home did not have to make a new fixture filing when mobile home was set on
concrete block foundation on real estate, the appellate court noted the ease with which a mobile
home could be moved and the enormous burden on a secured creditor to monitor the whereabouts of
the mobile home).
12 Alphonse Squillante, Law of Fixtures: Common Law and the Uniform Commercial Code -- Part I:
Common Law of Fixtures, 15 HOFSTRA L. REV. 191, 207-208 (1987) (hereafter "Squillante"). See
Atchison, T. & S.F.R.Co. v. Morgan, 42 Kan. 23, 21 P. 809, 812 (1889) (physical annexation to the
realty is not alone sufficient to change character of personal property and is no longer the controlling
Case 14-05002 Doc# 75 Filed 09/17/15 Page 6 of 9
connected with its purpose, and the intention of those concerned.
[citation omitted].13
Thus the latter factors of adaptation and intent decide this case.
The land at Caldwell is Mr. Gracy's homestead. He placed this manufactured
home on that land to inhabit as his homestead and has done so for nearly 20 years.
The home contributes considerable value to the homestead property. He surrounded
the home with brick skirting, built a porch and a back patio adjacent to it, and erected
a large garage just by it. Adding these amenities and living in the home suggest Mr.
Gracy's efforts to adapt it to the use of the land as his homestead.14 The home provides
Mr. Gracy a place to live on his homestead. Mr. Hopper, the realtor retained by the
Trustee to value the home, testified that the home contributed about $21,734 in value
to the land, but he also testified that the home and the land, sold together, could bring
as much as $70,000. This also supports a conclusion that the home has been
successfully adapted to the use of the realty.15
Turning to Gracy's intent to make his manufactured home a permanent part
of the realty, I am required to determine his intent at the time of annexation.16 The
title elimination statute had not been enacted at the time that Gracy annexed his
manufactured home to the realty in the mid-1990's and I can draw no inference from
his or the Credit Union's not eliminating title then or later. But, it is clear to me that
13 Atchison, T. & S.F.R.Co. v. Morgan, 21 Pac. at 811-12.
14 Farmland Industries, Inc., 298 B.R. at 389 (adaptation to the use of the realty is shown by
evidence that the land was used for a particular purpose and the property in question was used to
further that purpose).
15 Atchison, T. & S.F.R. Co., 42 Kan. 23, 21 P. 809, 812 (1889) (If a structure is placed on the realty
to improve it and make it more valuable, that is evidence that it is a fixture.).
16 In re Equalization Appeals of Total Petroleum, Inc., 28 Kan. App. 2d 295, 301, 16 P.3d 981 (2000).
Case 14-05002 Doc# 75 Filed 09/17/15 Page 7 of 9
Mr. Gracy intended to make the property as a whole his homestead when he moved
the manufactured home onto the realty and subsequently made further
improvements to it while he continuously lived there over the next 20 years. Ark
Valley presented no evidence to the contrary. Gracy's improvements, along with his
grant of several mortgages on the land and its improvements also demonstrate his
intention that the home remain affixed and become part of the realty. Mr. Gracy said
he considered it his permanent home.17 He stated he intended to encumber it along
with his homestead real estate. Even if he hadn't, courts generally infer that a
mortgagor intends personal property to be a fixture when he grants a mortgage in
land to which personal property has been annexed.18 Certainly both he and Ms.
Gillette intended the lien of the mortgage to attach to the home. Given both Mr.
Gracy's and Ms. Gillette's testimony, it is easy to conclude that both the mortgagor
and mortgagee here treated the home as part of the real estate.
All three factors having been shown, I conclude that this home is a fixture or
improvement to the Caldwell land and, given the law of this case as determined by
the District Court, is subject to Ark Valley's mortgages even though its title was never
Whether or not KAN. STAT. ANN. § 58-4214 determines the manufactured
home's status as a fixture for purposes of attachment of Ark Valley's mortgages, the
statute does affect whether Ark Valley properly perfected its security interests in the
17 Adv. Dkt. 68, Tr. at p. 28.
18 Stalcup, 27 Kan. App. 2d 880, 886 (acknowledging general rule that a building is normally
considered to be part of real estate and that the burden of showing otherwise is upon the party
claiming the building is personal property); Squillante, supra p. 228.
Case 14-05002 Doc# 75 Filed 09/17/15 Page 8 of 9
home by merely recording its mortgages. The statute makes clear that, for the
purposes of the KMHA,19 a manufactured home only becomes real estate that is
encumbered by a mortgage on the real estate where it is set when the home's title is
eliminated.20 Because the title hadn't been eliminated at the date of Gracy's petition,
a security interest in the home could only have been perfected under KAN. STAT. ANN.
§ 58-4204(i) by placing Ark Valley's liens on the home's certificate of title. Both the
Trustee and Ark Valley agree that this never occurred. Accordingly, the Trustee can
use his hypothetical lien creditor powers under §544(b) to avoid and preserve the
unperfected security interest.
Judgment should be entered on remand for the Trustee and against Ark Valley
Credit Union avoiding the liens of the Ark Valley mortgages as unperfected and
preserving them for the estate, said liens having a value of not more than $21,734,
the value of the manufactured home. A final judgment will issue this day.
# # #
19 Kansas Manufactured Housing Act, KAN. STAT. ANN. § 58-4201 et seq. (2005 and 2014 Supp.).
20 KAN. STAT. ANN. § 58-4214(a). See also § 58-4204(a) which provides that for purposes of titling
and perfecting a security interest, a manufactured home is deemed to be personal property.
Case 14-05002 Doc# 75 Filed 09/17/15 Page 9 of 9
14-12601 Mills (Doc. # 121)
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In Re Mills, 14-12601 (Bankr. D. Kan. Oct. 29, 2015) Doc. # 121
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SIGNED this 29th day of October, 2015.
Case No. 14-12601
Chapter 13
The parties to this matter all agree that valid grounds exist to dismiss or
convert this chapter 13 case for cause under § 1307(c). They differ on whether the
Court can convert a chapter 13 case to chapter 7 after the debtor has requested
dismissal under § 1307(b) and, second, whether it would better serve the interests of
the creditors to dismiss this case or convert it to chapter 7. If, as a matter of law, the
debtor's motion to dismiss must be granted, whether the case should be converted is
a moot point.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 1 of 17
11 U.S.C. § 1307(b) says that the court "shall" grant the request of the debtor
to dismiss his case "at any time." But subsection (c) provides that the court "may"
dismiss a chapter 13 case for cause or convert it to chapter 7 if that would be in the
best interests of the creditors and estate. Mills says that the statute's mandate to
dismiss the case trumps the discretionary power to convert his case. Creditors Jason
Appell, Kevin Law, and Robert Law, joined by Kanza Bank (and the trustee, at least
in the beginning) assert that "Debtor's absolute right to dismiss is qualified by an
implied exception for bad faith conduct and/or abuse of the bankruptcy process."1
Given the explicit mandatory language of § 1307(b), the limits the Supreme Court
has placed on the scope of § 105(a), and the voluntary nature of chapter 13 relief, I
find no "implicit exception" to the debtor's unqualified right of dismissal. The motion
to convert is moot and Ryan Mills' case must be dismissed.2
Procedural History
Mills filed his chapter 13 case on November 20, 2014. He submitted a 36-month
plan that proposed monthly payments of $1,500. After the debtor's first meeting of
creditors on December 19, the trustee filed her initial objections to the plan on
December 22. Appell and the Laws filed theirs on January 27, 2015 along with a
motion to extend their time in which to file a dischargeability complaint. In February,
the Internal Revenue Service amended its proof of claim, increasing it from $11,615
1 Dkt. 65.
2 The debtor Ryan Mills appeared in person and by his attorney Mark J. Lazzo. The chapter 13trustee Laurie B. Williams appeared by her attorney Karin Amyx. The Law creditors appeared bytheir attorney Tom Gilman. Chris Borniger briefly appeared for creditor Kanza Bank but requested
to be excused from participation in the proceedings and the Court granted that request.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 2 of 17
to $79,883. In March, the trustee filed her supplemental objection that questioned
Mills' eligibility due to exceeding the debt limit. At trial, both the debtor's and the
trustee's counsel stated that the debtor had agreed to dismiss his case after the
supplemental objection was filed.3 But no such order was entered and then, on April
23, the trustee moved to convert the case to chapter 7. On May 5 the debtor objected
to that motion and, on May 14, the debtor moved to dismiss. Appell and the Laws
objected to debtor's motion and, in their response, joined in the trustee's motion to
convert. All of these matters were called for trial on August 18, after Appell and the
Laws conducted only document discovery. At trial, the trustee stood mute on the
motion to convert, leaving Appell and the Laws to prosecute it. Because Mills has
asked to voluntarily dismiss his case, objections to the confirmation of his chapter 13
plan are moot, leaving only his motion to dismiss and Appell's and the Laws' motion
to convert before me today.
The underlying question here is one of law: can the court deny a debtor's
motion to dismiss his chapter 13 case for bad faith conduct and/or an abuse of the
bankruptcy process? But because bad faith or abuse of the process is largely a factual
matter, some background is necessary.
Ryan Mills was in the construction and real estate development business
before he filed his case. In 2011 he formed a company called RDM Properties LLC,
d/b/a Mills Construction. In 2012, he organized M&L Development Group LLC with
3 Debtor's Ex. C.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 3 of 17
Mickey Lynch.4 Mills also did construction work individually.5 M&L Development's
activities between 2012 and 2014 coincided with the development of Walker's
Bar/Jetty's Pizza on Commerce Street in Wichita. Mills remains in the construction
The Walker's Bar/Jetty's Pizza project is the centerpiece of the parties' dispute.
Ryan Mills acquired a 50% interest in The Tree Guys LLC in 2010. That entity
purchased two old buildings located at 220 and 222 S. Commerce Street (the
"Commerce Property") from Michael McGill. In the fall of 2011, Mills and McGill
formed Commerce Street Developers, LLC (CSD) to acquire the Commerce Property
from The Tree Guys.6 CSD planned to develop the Commerce Property into
Walker's/Jetty's by renovating the old buildings. Sometime later in 2012 or 2013,
Robert "Rusty" Law, who owns Pacific Coast Pizza in northeast Wichita, introduced
Mills to Mickey Lynch and Lynch joined the venture acquiring a 51% membership
interest in CSD. The bar and restaurant opened in late December of 2013.
Along with his work for CSD, Mills did business as "Commerce Street
Operators," a sole proprietorship. In 2012, he solicited a $120,000 loan from Appell
and the Law brothers for development of the Commerce Property. He gave them a
promissory note dated April 26, 2012 by which he agreed to repay the loan in 75 days
by paying the three $40,000 each. In October of 2012, Mills borrowed another
4 Ex. 27, 29. Mills organized a third entity post-petition named RDM Development, LLC. See Ex. 32.
According to Mills, this new entity was his construction business post-petition.
5 This is clear from some of the proofs of claim filed in the case.
6 Ex. 24 shows that CSD was organized in 2011 with McGill and Mills as its initial members.
According to McGill, he owned 51% of CSD and Mills owned 49%.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 4 of 17
$140,000 from the Law brothers (but not Appell), offering to assign a 50%
membership interest in CSD with Mills to keep the other 50%. He represented that
the buildings were subject to valuable and transferable historical tax credits (HTCs)
from both the federal government and the state of Kansas. Mills received money from
the Laws, but never executed the assignments to them.7
Mills defaulted on the April note. He began to improvise. He offered Appell a
"royalty" on Walker's operating revenue in exchange for Appell's forbearing to sue
him for his portion of the April note. He convinced Appell to loan him another $60,000
in August of 2013, giving him note from Mills and CSD, the same to be payable in 30
days in the amount of $66,000.8
Mills met Lynch during this period of time. Lynch agreed to invest in the
project and became a member of CSD in 2013, acquiring what may have been McGill's
51% interest in that company for an initial $250,000 cash investment. Mills found
another investor, 222 Commerce LLC, and assigned it a 25% membership from his
holdings. As of October 15, 2013 Mills owned 24%, Lynch owned 51% and 222
Commerce owned 25% interest in CSD.
Walker's and Jetty's opened in late 2013, but due to a lack of parking and other
issues, did not flourish. By March of 2014, Mills had only paid Appell $20,000 of the
$60,000 he had borrowed on the second note. Appell and the Law brothers sued Mills
in state court in September, seeking judgment on the notes and claiming that Mills
7 Nor could he have; though the record is cloudy on this point, Mills doesn't appear to have held more
than 49% of CSD at that time.
8 The extra $6,000 is euphemistically described in the instrument as "10% interest."
Case 14-12601 Doc# 121 Filed 10/29/15 Page 5 of 17
had fraudulently induced them to lend and/or invest in the enterprise. The bar and
restaurant both closed by August.
In July of 2014, Mike McGill, who had previously owned this property, became
interested in acquiring it again. Mills and CSD were still indebted to McGill on the
purchase money mortgage notes that Tree Guys had granted to McGill when it
acquired the property from him in 2010. McGill formed Uncondemned Properties,
LLC ("UP") in July of 2014 to reacquire the Commerce Property from CSD. He was
UP's managing member and owned 86% of it; Mills owned the other 14%.9 UP
purchased the Commerce Property for $523,900 under an asset purchase agreement
executed on August 28, 2014, and assumed Mills' and CSD's indebtedness to McGill
which, according to the reinstatement documents signed by Mills, amounted to about
$440,000 for which Mills remained personally liable.10 At closing, funds were to be
distributed to several mechanics' lien claimants, to Sedgwick County for past-due ad
valorem taxes, and to Garden Plain State Bank to release a prior mortgage. Mickey
Lynch received $100,000, and 222 Commerce LLC $243,000 to retire their respective
interests in CSD. Mills assigned 100% of CSD's state and federal historic tax credits
to Lynch. This left Mills the sole member of CSD, but CSD no longer held any assets.
Even after transferring his 51% interest in CSD, Lynch executed a deed on
September 4 as a "member" of CSD, conveying the Commerce Property to UP. At
closing, Lynch received 14% of UP, Mills' interest increased to 35%, and McGill
9 See Ex. 105, pp. 147-176 – original Operating Agreement for UP executed July 17, 2014. How or
why Mills retained this interest was not explained at trial.
10 Ex. 105, pp. 275-89, 304-06.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 6 of 17
retained 51%.11 Lynch could not say what, if any, consideration he paid for his
interest in UP or how he acquired it. McGill testified that a side deal made at closing
changed the members' percentages and granted Lynch his 14% interest in UP.12
Lynch paid nothing for it.
Then, shortly after the closing on September 4, UP bought out Mills' 35%
interest in it for $42,000 cash and forgave Mill's personal liability on the Tree Guys
$440,000 debt. McGill conceded that there was no writing that evidenced the release
of Mills.13 We cannot tell whether this transfer occurred before or after Appell and
the Law brothers filed their state court suit against Mills on September 9, 2014.
Appell and the Law brothers say that this series of transactions should be
examined by a trustee and, possibly, avoided for the benefit of Mills' creditors, even
though most of the transfers appear to involve the property of entities, not of Mills
individually. They also say that Mills filed his bankruptcy case in bad faith and
abused the legal process because he filed this case immediately after the state court
pretrial discovery conference in their suit and because his bankruptcy pleadings
reflect some inconsistencies. For example, Mills discloses that he sold his 35% interest
in UP to McGill for $42,000, but does not refer to his being forgiven on the Tree Guys
debt. He failed to append exhibits referenced in his statement of financial affairs that
11 An operating agreement for UP was executed by the members of UP on September 4, 2014
showing these revised interests. See Ex. 110.
12 This change was allegedly negotiated and agreed upon by the parties notwithstanding an
"entireties clause" in the asset purchase agreement. See Ex. 105, p. 285, ¶ 11. No written document
that memorialized this oral agreement or modified the asset purchase agreement was produced at
13 Mills disclosed the sale and transfer of this interest in his Statement of Financial Affairs,
Questions 2 and 10.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 7 of 17
would have detailed his pending lawsuits and business interests. At trial, though,
Mills said he provided these exhibits to the trustee at the first meeting of creditors
and no one contradicted that testimony. Mills' declaration on Schedule B that he
retained ownership of 49% of the federal historical tax credits is also likely inaccurate
because Mills never owned the credits as an individual. The entities did. Finally,
Mills admitted at his first meeting and again at trial that he listed CSD's unsecured
creditors as well as creditors of his construction entities on Schedule F, but disputed
any personal liability for those debts.
After he filed, Mills collected about $4,500 of his construction accounts
receivable and used those funds either in his construction business or for living
expenses. In February of 2015, he organized a new limited liability company called
RDM Development, LLC to conduct his construction business.14 He admitted that his
tax debt greatly exceeded the amounts he scheduled, and that he could not find a way
to service those debts in a plan. He also desires to negotiate an offer and compromise
with the Internal Revenue Service on his tax debt which he cannot do while in
bankruptcy. Mills' tax claims now exceed $200,000, his assets amount to very little,
and his unsecured creditors are unlikely to receive any distribution after all priority
claims have been paid.
Appell and the Laws (and, initially, the trustee) argue that the existence of the
potential transfer actions, combined with the various inaccuracies on Mills' schedules
14 Ex. 32.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 8 of 17
demonstrate his bad faith and justify converting the case to chapter 7.15 But if I
conclude that there is no "implicit exception" to a debtor's unconditional right to
dismiss his chapter 13 case "at any time," their motion is moot and the case must be
Bankruptcy Code § 1307(b) states that "on request of the debtor at any time, if
the case has not been converted [from chapters 7, 11, or 12], the court shall dismiss
a case under [chapter 13]."16 Appell, the Laws, and the trustee argue that a
bankruptcy judge may exercise § 105(a) equitable discretion to deny what appears to
be mandatory relief under that subsection when creditors or other parties in interest
demonstrate that the debtor has proceeded in bad faith. They claim the Supreme
Court's decision in Marrama v. Citizens Bank as the foundation for this view.17 In
Marrama, the Supreme Court held that a chapter 7 debtor's right to "mandatory"
conversion to chapter 13 could be restricted or conditioned when a court concludes
that a debtor has proceeded in bad faith. Five justices of the Court concluded that
nothing in the text of § 706 or § 1307(c) (which supplies examples of cause to
involuntarily dismiss or convert of a chapter 13 case) "limits the authority of the court
to take appropriate action in response to fraudulent conduct by the atypical litigant
who has demonstrated that he is not entitled to the relief available to the typical
debtor."18 Instead, they said that courts have "broad authority" under § 105(a) to
"prevent an abuse of process" by immediately denying a debtor's motion to convert a
15 The trustee initially joined this view, but her counsel abandoned that position at trial.
16 See 11 U.S.C. §1307(b), emphasis added.
17 Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007).
18 Id. at 374-75.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 9 of 17
chapter 7 case to chapter 13 when approving it might permit the debtor to take
actions prejudicial to creditors.19
Along with denying that he acted improperly, Mills says that the court lacks
discretion to deny a debtor's motion to dismiss a chapter 13 case by using § 105(a) as
the Marrama court did. The Supreme Court's recent refinement of its holding in
Marrama in Law v. Siegel supports his view.20 There the Court concluded that the
bankruptcy judge's "broad authority" did not allow for the surcharge of a debtor's
exempt homestead even though the debtor committed fraud to conceal the
homestead's value from the trustee. The Court held that nothing in § 105(a) gave a
bankruptcy court power to rewrite § 522's rules concerning exemptions or to add
conditions or exceptions to them. It noted that the Marrama majority concluded that
§ 706(d) expressly conditions a debtor's right to convert on his being eligible for
chapter 13 relief and that a debtor's bad faith disqualifies him from relief in chapter
13 under § 1307(c).21 Justice Scalia's majority opinion in Law also consigns
Marrama's "broad authority" language to the realm of dicta—
At most, Marrama's dictum suggests that in some circumstances a
bankruptcy court may be authorized to dispense with futile procedural
niceties in order to reach more expeditiously an end result required by
the Code. Marrama most certainly did not endorse, even in dictum, the
view that equitable considerations permit a bankruptcy court to
contravene express provisions of the Code.22
19 Id. at 375.
20 ___ U.S. ___, 134 S. Ct. 1188 (2014).
21 134 S. Ct. at 1197.
22 Id.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 10 of 17
The narrow view of Marrama's interpretation of § 706(a) taken by the Law v.
Siegel Court makes sense. That section provides that the debtor "may" convert a
chapter 7 case to one in chapter 13 if the debtor has not already converted the case to
chapter 7 from another chapter. Section 706(d) appends a further limitation to the
privilege of voluntary conversion: a chapter 7 debtor may not convert a case to a
chapter for which he is not eligible. By contrast, § 1307(b) mandates dismissal on the
debtor's request by using the words "at any time" and "shall." It only limits the
debtor's ability to dismiss cases that have previously been converted to chapter 13
from chapters 7, 11, or 12. This court should not use § 105(a) to rewrite the mandatory
provisions of § 1307(b).23
The interplay of § 1307(b) with the Rules of Bankruptcy Procedure lends
support to that conclusion. Fed. R. Bankr. P. 1017(f)(2) governs a debtor's request to
dismiss under § 1307(b) and provides that "…dismissal under … § 1307(b) shall be
on motion filed and served as required by Rule 9013." That rule provides the means
for serving a "request for an order," but doesn't provide for other parties having an
opportunity to object. Rule 1017(f)(1) governs a motion to convert under § 1307(c),
providing that such a motion shall be treated as a contested matter under Rule 9014
which, in turn, requires that parties be served with notice under Rule 7004, be
granted an opportunity to object, and be given a hearing. Rule 1017(f)(2)
23 Law v. Siegel, __ U.S. __, 134 S. Ct. 1188, 1194-95 (2014). See also Scrivner v. Mashburn (In re
Scrivner), 535 F.3d 1258, 1263 (10th Cir. 2008) (Bankruptcy court's equitable powers under § 105(a)
may not be used to contravene or disregard the plain language of a statute or exercised in a manner
that is inconsistent with specific provisions of the Code.); In re Alderete, 412 F.3d 1200, 1207 (10th
Cir. 2005); In re Hedged-Investments, 380 F.3d 1292, 1298 (10th Cir.2004); In re Alternate Fuels, Inc.,
189 F.3d 1139, 1146-49 (10th Cir. 2015).
Case 14-12601 Doc# 121 Filed 10/29/15 Page 11 of 17
contemplates that a debtor's §1307(b) dismissal motion should be granted out of
There is no binding Tenth Circuit precedent on the question of whether a
debtor's § 1307(b) unconditioned right to dismiss is trumped by the court's § 1307(c)
power to convert a case in the best interests of the creditors. Other circuits are split
on the issue.25 But a close reading of the statutory language and applicable rules,
considered with the very different policies that animate chapters 13 and 7, convinces
me that the debtor has the better argument and that his request to dismiss this case
must be honored.26
The Second Circuit has adopted this view. In 1999, the Second Circuit Court of
Appeals held that a chapter 13 debtor's voluntary request to dismiss must be granted
even when a creditor seeks conversion instead.27 The Barbieri court noted § 1307(b)'s
use of the words "at any time" and "shall," and concluded that "shall" is mandatory
and leaves no discretion to a court.28 It also observed that the only exception to
24 See Alan N. Resnick and Henry J. Sommer, 8 COLLIER ON BANKRUPTCY, ¶ 1307.03 at 1307-9 (16th
Ed. 2015) (". . . because there is no right to contest the dismissal, the procedures of Bankruptcy Rule9013, rather than Bankruptcy Rule 9014, are followed. No hearing is required.").
25 See In re Jacobsen, 609 F.3d 647 (5th Cir. 2010) (chapter 13 debtor's right to voluntarily dismiss
case is not absolute and may be denied on grounds of bad faith conduct and provide cause for
conversion); In re Rosson, 545 F.3d 764 (9th Cir. 2008) (same); In re Molitor, 76 F.3d 218 (8th Cir.
1996) (same); In re Barbieri, 199 F.3d 616 (2nd Cir. 1999) (chapter 13 debtor has absolute right todismiss so long as order converting case to chapter 7 has not been entered). All of these cases were
decided prior to Law v. Siegel.
26 The interpretation of a bankruptcy statute is a question of law. The inquiry begins with the
language of the statute itself and courts must presume that Congress says in a statute what itmeans and means in a statute what it says. If the language of the statute is unambiguous, the plain
and ordinary meaning of the statute controls and the judicial inquiry is complete. In re McGough,
737 F.3d 1268, 1272-73 (10th Cir. 2013); In re Mallo, 774 F.3d 1313, 1317, 1327 (10th Cir. 2014). See
also United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989).
27 Barbieri v. RAJ Acquisition Corp. (In re Barbieri), 199 F.3d 616 (2nd Cir. 1999).
28 Id. at 619.
Case 14-12601 Doc# 121 Filed 10/29/15 Page 12 of 17
voluntary dismissal is found in subsection (b) itself—if the debtor previously
converted to chapter 13 from another chapter, the request need not be granted.29 The
Second Circuit also compared the use of "shall" in § 1307(b) to "may" in (c), the section
that permits the court to convert or dismiss a chapter 13 case for cause. When "may"
and "shall" are used in the same statute, "the normal inference is that each is used
in its usual sense—the one act being permissive, the other mandatory."30 The
Barbieri court concluded that this reading of § 1307(b) reflected Congress's intent to
create an entirely voluntary chapter of the Code. If creditors wish to force debtors
into bankruptcy, they have recourse to § 303, but they must comply with many more
requirements than "simply showing cause."31 Finally, presaging the Supreme Court's
subsequent statements in Law v. Siegel, the Barbieri court noted that § 105(a)'s
equitable powers "are not a license for a court to disregard the clear language and
meaning of the bankruptcy statutes and rules."32 There being other available means
to remedy abuse of the bankruptcy process, including an involuntary proceeding,
sanctions, or making a criminal referral to the proper authorities, depriving the court
of the power to convert in the face of a dismissal request by no means strips it of the
tools it needs to sanction debtor misconduct as part of the dismissal.33 Numerous
29 Id.
30 Id. at 620, internal citation omitted.
31 Id.
32 Id. at 620-21, citing Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir.
33 See 11 U.S.C. § 349(a); 11 U.S.C. § 109(g)(1) and (2); Fed. R. Bankr. P. 9011. See e.g., Ross v.
AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D. Pa. 2015) (dismissal with prejudice and
debtor enjoined from filing future cases without permission from bankruptcy court); In re Winder,
No. 10-07070-TOM13, 2011 WL 2620992 (Bankr. N.D. Ala. July 1, 2011) (voluntary dismissal
conditioned under §109(g)(1) with 180-day refiling bar for failure to comply with confirmation order
to provide tax return to trustee); In re Hasan, 287 B.R. 308 (Bankr. D. Conn. 2002) (after voluntary
Case 14-12601 Doc# 121 Filed 10/29/15 Page 13 of 17
bankruptcy courts have followed Barbieri's plain language approach to voluntary
dismissals under § 1307(b), both before and after Marrama.34
The Fifth, Eighth, and Ninth Circuits have adopted the contrary view. Both
the Fifth and Ninth Circuits have held that Barbieri's conclusions were abrogated by
Marrama. In In re Jacobsen, the case relied upon by the trustee, the Fifth Circuit
held that when a debtor has acted in bad faith or abused the bankruptcy process, the
case may be converted despite the debtor having made a §1307(b) motion for
dismissal.35 Deeming the absolute dismissal right an "escape hatch" for abusive
debtors, the Fifth Circuit concluded that Marrama's rejection of the "absolute right"
to convert in § 706(c) applied equally to §1307(b), and commented that there was no
"analytical distinction" between the two subsections. The court also reasoned that,
because a debtor who has been converted to chapter 7 need not commit her post-
petition earnings to any form of repayment, she runs no risk of involuntary servitude.
dismissal of case, bankruptcy court assessed attorney fees against debtor for offensive conductduring the case); In re Polly, 392 B.R. 236 (Bankr. N.D. Tex. Aug. 8, 2008) (§ 349 permits the court todismiss the case with prejudice to refiling and the court may reserve the matter of sanctions under
Rule 9011 following dismissal).
34 See Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D. Pa. 2015) (debtor's right todismissal under § 1307(b) is absolute, but court has the power to impose restrictions on debtor's refiling);
Johnston v. Johnston, 536 B.R. 576 (D. Vt. 2015) (following Barbieri, the controlling Second
Circuit authority); In re Procel, 467 B.R. 297 (S.D.N.Y. 2012) (applying Barbieri); In re Dulaney, 285
B.R. 10 (D. Colo. 2002) (concluding chapter 13 debtor has absolute right to dismiss under the clear
language, history and purpose of § 1307(b)); In re Thompson, No. 10-23017, 2015 WL 394361 (Bankr.
E.D. Ky. Jan. 29, 2015); In re Darden, 474 B.R. 1 (Bankr. D. Mass. 2012); In re Williams, 435 B.R.
552 (Bankr. N.D. Ill. 2010); In re Neiman, 257 B.R. 105 (Bankr. S.D. Fla. 2001); In re Patton, 209
B.R. 98 (Bankr. E.D. Tenn. 1997); In re Greenberg, 200 B.R. 763 (Bankr. S.D. N.Y. 1996) (noting that
the language of § 1307(b) is "too clear to read other than as an absolute command," but the court can
impose conditions and sanctions in the dismissal order); In re Harper-Elder, 184 B.R. 403 (Bankr. D.
D.C 1995) (§ 1307(b) is mandatory – "shall" really means "shall."); In re Looney, 90 B.R. 217 (Bankr.
W.D. Va. 1988); In re Turiace, 41 B.R. 466 (Bankr. D. Ore. 1984); In re Gillion, 36 B.R. 901 (E.D. Ark.
1983). See also Keith M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY, 4TH EDITION, § 330.1,
Sec. Rev. June 16, 2004, www.Ch13online.com, for discussion and cases regarding absolute right to
35 609 F.3d 647, 660 (5th Cir. 2010).
Case 14-12601 Doc# 121 Filed 10/29/15 Page 14 of 17
In re Molitor was a pre-Marrama case in which the Eighth Circuit employed
similar reasoning to convert a repeat chapter 13 debtor's filing to chapter 7 over his
protest without considering § 105(a). It emphasized that bankruptcy affords the
honest but unfortunate debtor a fresh start, but does not grant wrongdoers a shield
from paying their debts.36 Because the debtor had not acted in good faith, he could
not be permitted to bail out of bankruptcy rather than face its consequences. In In re
Rosson, the Ninth Circuit applied Marrama's reasoning to deny the debtor's request
to dismiss in a similar situation. It stated that in the proper circumstances, the court
could deny a request to dismiss on grounds of the debtor's bad faith conduct or to
prevent an abuse of process under § 105(a).37 Issued in 2010, Jacobsen is the last
reported Circuit authority on this issue.
Other courts have recognized Law v. Siegel's limitations on Marrama and
declined to fashion equitable relief that contravenes express provisions of the Code.38
In In re Fisher,39 the bankruptcy court concluded that denying a § 1307(b) motion to
dismiss for bad faith would be, in effect, rewriting its express language:
It is the discord between a debtor's right to dismiss under Section
1307(b), allegations of bad faith, and a creditor's motion to convert that
this Court now addresses, particularly in light of the impact of Law v.
Siegel, which speaks to the Bankruptcy Court's power to fashion
equitable relief in the presence of express statutory language that
instructs otherwise.
* * *
36 76 F.3d 218 (8th Cir. 1996).
37 545 F.3d 764 (9th Cir. 2008).
38 Law v. Siegel, __ U.S. __, 134 S.Ct. 1188, 1194, 1197 (2014).
39 No. 14-61076; 2015 WL 1263354 (Bankr. W.D. Va. Mar. 19, 2015).
Case 14-12601 Doc# 121 Filed 10/29/15 Page 15 of 17
The Court's role is not to redraft the statute, even if it perceives a need
to deter and remedy a debtor's bad-faith conduct in advance of a motion
under 11 U.S.C. § 1307(b). Law is instructive in that regard. . .
Given the guidance in Law, the right of the debtor to request a
bankruptcy court to dismiss an unconverted Chapter 13 case becomes
even more compelling. If this Court were to refuse to grant the Debtor's
request . . . it would exceed its authority by acting in direct
contravention of the express terms of Section 1307(b). This Court
declines to do so.40
I concur with these well-stated comments and conclude that Barbieri and the
courts that follow it correctly interpret and apply § 1307(b). Law v. Siegel precludes
bankruptcy courts from crafting a bad faith exception to a chapter 13 debtor's
voluntary dismissal. Chapter 13 is a voluntary remedy only; in the absence of specific
statutory direction, a debtor should be able to exit without risking being subjected to
involuntary liquidation without the due process protections afforded involuntary
debtors by § 303. If a debtor commits sanctionable wrongdoing in the course of the
case, the court has many means of addressing that other than forced liquidation
premised on a shaky legal foundation. Section 1307(b) grants a chapter 13 debtor the
absolute right to voluntarily dismiss his case at any time.
Conclusion and Orders
The Court GRANTS Ryan Mills' motion to voluntarily dismiss his chapter 13
case under § 1307(b) and DENIES as MOOT the motion of the trustee, Jason Appell,
40 2015 WL 1263354 at *2, *6. See also Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277, 28788
(E.D. Pa. May 5, 2015) (citing Law v. Siegel and distinguishing Marrama); In re Williams, 435
B.R. 552 (Bankr. N.D. Ill. 2010) (distinguishing Marrama; cited with approval in In re Fisher).
Case 14-12601 Doc# 121 Filed 10/29/15 Page 16 of 17
Kevin Law, Robert Law, and Kanza Bank to convert under § 1307(c). The case is
# # #
Case 14-12601 Doc# 121 Filed 10/29/15 Page 17 of 17
14-05068 Williams v. M. Bruenger & Co., Inc. (Doc. # 26)
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Williams v. M. Bruenger & Co., Inc., 14-05068 (Bankr. D. Kan. Jun. 25, 2015) Doc. # 26
Click here for the pdf document.
SIGNED this 25th day of June, 2015.
LAURA B. BRANNAN, ) Case No. 13-12834
) Chapter 13
Debtor. )
Chapter 13 Trustee, )
Plaintiff, )
vs. ) Adv. No. 14-5068
Defendant. )
Is the chapter 13 Trustee barred from avoiding a secured creditor's liens post-
confirmation when she did not object to confirmation? Does it matter whether the
Case 14-05068 Doc# 26 Filed 06/25/15 Page 1 of 17
Trustee signed an Agreed Order providing for the creditor's claims to be treated as
secured or that she did so before the claims bar date and didn't have an opportunity
to see, far less object to, the creditor's claim before confirmation? And if the orders
bar her efforts, does § 502(j) reconsideration of the claims leave the trustee another
source of relief?
Section 1327(a) binds the debtor and each creditor to a confirmed plan's
provisions whether the plan treats the claim or not and whether the creditor objects,
accepts, or rejects it.1 Section 502(j) provides for the reconsideration of a claim that
has been allowed or disallowed, upon a showing of cause and based upon the equities
of the case.2 Even though the plan was confirmed before the claims bar date, the
Trustee signed an agreed order providing for the secured creditor's treatment and
recommended that the debtor's plan be confirmed. That treatment binds her under §
1327(a) and effectively bars the Trustee's adversary proceeding to avoid the creditor's
lien under § 544(b).3 Even § 502(j) does not save the Trustee because she did not show
cause why the secured creditor's claims should be reconsidered.
Finally, even if confirmation did not bar the complaint or if she had
demonstrated cause to reconsider, her cause of action fails on the merits. Although
the debtor did not execute a form security agreement that contained words of grant,
reading all of the documents between the debtor and the creditor as a composite
1 11 U.S.C. § 1327(a).
2 11 U.S.C. § 502(j).
3 11 U.S.C. § 544(b).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 2 of 17
transaction makes it clear that the parties intended that the creditor would sell the
debtor the trucks while retaining a purchase money security interest in them. The
creditor's liens attached to the collateral under KAN. STAT. ANN. § 84-9-203 (2014
Supp.). 4
This adversary proceeding is a core proceeding over which the Court may
exercise subject matter jurisdiction under 28 U.S.C. § 1334 and § 157(a) and (b)(1).5
The debtor Laura Brannan is an over-the-road trucker who was formerly
employed by M. Bruenger & Co. (MBC), a Wichita trucking concern. For a long time,
MBC has made a practice of locating and selling semi-tractors (trucks) to its drivers.
The drivers purchase the trucks and drive loads provided by MBC. MBC deducts the
drivers' weekly installment payment from their pay or fees and purportedly retains
a security interest in the trucks until the sale price is paid in full. The idea is to
incentivize the drivers by giving them ownership of their unit while making them
independent contractors of MBC as opposed to its employees. MBC sold two semi-
tractors to Ms. Brannan utilizing this financing program.
In Ms. Brannan's case, MBC documented its two transactions by the parties
4 The plaintiff chapter 13 trustee Laurie B. Williams appears by her attorney Karin
Amyx. The defendant M. Bruenger & Co., Inc. appears by its attorney Eric W.
5 See 28 U.S.C. § 157(b)(2)(A), (K) and (O).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 3 of 17
executing a series of documents, beginning with a Weekly Installment Agreement.6
That agreement described the truck being sold, the purchase price, the date of sale,
and the weekly installment payment. Both Brannan and a representative of MBC
signed it. MBC then made a Bill of Sale over to the buyer, again describing the truck
by vehicle identification number, make, and year, and showing the purchase price.7
MBC next assigned to the buyer its certificate of title for the truck, its representative
executing the assignment section on the title's reverse side, assigning the truck and
title to Brannan.8 In this assignment section, Brannan checked a box indicating that
the truck is subject to MBC's lien and signed a statement affirming that lien as the
title form requires. As the new owner of the truck, Brannan then obtained a Title and
Registration Receipt from the Kansas Division of Vehicles indicating MBC's liens on
the trucks.9 MBC followed this process for both of the trucks Brannan purchased -- a
2007 Kenworth purchased in October of 2012 and a 2009 Cascadia Freightliner
purchased two months later in December.
Ms. Brannan filed her chapter 13 case on November 1, 2013.10 The nongovernmental
creditor bar date was set for March 4, 2014. She filed an amended
chapter 13 plan in December in which she proposed to make 60 monthly payments of
6 Ex. A, p. 4 (Kenworth); Ex. E, p. 4 (Freightliner).
7 Ex. B (Kenworth); Ex. F (Freightliner).
8 Ex. C (Kenworth); Ex. G (Freightliner).
9 Ex. A, p. 8; Ex. E, p.8; Ex. D, H, and Q.
10 Brannan scheduled MBC as a secured creditor on her bankruptcy schedules and
identified the trucks as the security. See No. 13-12834, Dkt. 12, Schedule D.
Case 14-05068 Doc# 26 Filed 06/25/15 Page 4 of 17
$1,437.00.11 Because she had purchased the trucks within a year of filing, her plan
provided for treating MBC under the two truck purchase agreements as "one year
loan creditors" under § 1325(a)(5)'s hanging paragraph.12 She proposed minimum
monthly payments on both trucks and to pay them in full. On December 27, the
trustee objected to Brannan's plan for several reasons, but did not question whether
MBC's claims were secured claims.13 On January 2, 2014, MBC objected to
confirmation, too, noting that the plan did not provide for a third truck, but
specifically not objecting to the proposed treatment of the two trucks described
On February 3, the parties presented an Agreed Order that resolved MBC's
confirmation objection by providing for the surrender of the unmentioned truck and
setting forth an agreement about the values and payment terms concerning the two
trucks Brannan sought to retain.15 The Trustee approved this Agreed Order along
with counsel for debtor and MBC. The Agreed Order specifies that "Bruenger shall
have a general secured claim" as to both vehicle transactions, that "it shall be allowed
a general unsecured claim for any deficiency balance," and that "Bruenger shall
retain its liens with respect to its secured claims…."16 The amended plan was
11 No. 13-12834, Dkt. 26.
12 11 U.S.C. § 1325(a)(5). The hanging paragraph is an unnumbered paragraph that
immediately follows § 1325(a)(9) but refers to treatment of certain allowed secured
claims provided for by the plan under § 1325(a)(5).
13 No. 13-12834, Dkt. 33.
14 No. 13-12834, Dkt. 34.
15 No. 13-12834, Dkt. 43.
16 Id. at ¶ 6.
Case 14-05068 Doc# 26 Filed 06/25/15 Page 5 of 17
confirmed and a confirmation order entered on February 19.17 MBC filed its proofs of
claim on March 4, 2014.18 After the Trustee reviewed the proofs of claim, she filed
this adversary proceeding under § 544 to avoid and preserve what she alleges to be
an unattached security interest in each of the trucks. The parties provided pre- and
post-trial briefs and the Court held a trial on March 17, 2015.
The Trustee claims that MBC's purported security interests in the two trucks
never attached because Laura Brannan never "authenticated" a security agreement
as is required by KAN. STAT. ANN. § 84-9-203(b), Kansas' version of revised Article 9
of the Uniform Commercial Code. MBC responds that while no form security
agreement was made, a reading of all the transaction documents makes clear that
the parties intended to and did create security interests that attached to the
Freightliner and Kenworth to secure MBC's claims. But MBC also claims that the
Trustee's execution of the Agreed Order resolving MBC's objection to confirmation
and the Confirmation Order itself bar the Trustee's lien avoidance action.
Section 1327(a) Finality
Section 1327(a) provides that confirmation of the debtors plan is binding on
the debtor and every creditor (whose interests the Trustee represents) whether or not
the plan treats their claims or they have objected to or accepted the plan.19 In this
17 No. 13-12834, Dkt. 49.
18 See Proof of Claim Nos. 18 and 19.
19 11 U.S.C. § 1327(a). See In re Talbot, 124 F.3d 1201 (10th Cir. 1997) (res judicata
effect of § 1327(a) barred IRS from extracting payments for penalties and interest
Case 14-05068 Doc# 26 Filed 06/25/15 Page 6 of 17
case, the confirmed plan plainly provides that MBC's claims are secured by the trucks
and for those claims to be paid as specified in the Agreed Order. MBC argues that §
1327(a) effectively codifies the doctrine of res judicata as to the allowance and
treatment of claims once a plan is confirmed and that, as the United States Supreme
Court has held in Espinosa, parties to a plan are stuck with its contents once it's
confirmed, even if the applicable plan provisions are contrary to bankruptcy or other
law.20 The Trustee responds that § 502(j) carves out an exception to § 1327(a)'s
preclusive effect by permitting her to seek reconsideration of MBC's allowed claims
for cause.
The Trustee notes that her approval of the Agreed Order and confirmation
recommendation both occurred before MBC filed its proofs of claim. She says that
without the proofs of claim being filed, there wasn't any way for her to know that
MBC's liens were flawed and that she signed the Agreed Order because this Judge
requires that she be made privy to and sign off on all orders in chapter 13 cases that
affect her duties.21 She also argues that when plans are confirmed in this District,
confirmation does not finally allow or disallow claims and that any claim treated in
not provided for under confirmed plan in exchange for release of lien on residence
debtors sought to sell); In re Mersmann, 505 F.3d 1033, 1047 (10th Cir. 2007)
(binding effect of confirmed chapter 13 plan serves the same purpose as the general
doctrine of res judicata), abrogated on other grounds by United Student Aid Funds,
Inc. v. Espinosa, 559 U.S. 260 (2010).
20 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 276 (2010).
21 This requirement insures that debtors and creditors do not enter into agreements
that affect the Trustee's administrative duties without her knowledge.
Case 14-05068 Doc# 26 Filed 06/25/15 Page 7 of 17
the plan can be disallowed even after confirmation.22
The courts are somewhat divided on whether confirmed plans preclude
revisiting the validity of liens or claims. Some hold that they do not. In In re Johnson,
when the trustee objected to a creditor's secured claim after plan confirmation, that
creditor raised § 1327(a) as a bar to the objection.23 Noting that the district's form
plan neither allows nor disallows claims, and that meaningful claim review by the
trustee is impossible in a district where plans are routinely confirmed on the date of
the debtor's first meeting of creditors, well before the claims bar date, the court
sustained the trustee's claim objection. The court explained that the plan in question
is a "pot" plan, meaning that the debtor is obligated for a series of fixed payments
that will fund a liquidated amount to be distributed to the creditors treated in the
plan. Implicit in that sort of plan is the idea that if the trustee successfully objects to
a claim (or avoids a secured creditor's lien), part or all of that pot will be distributed
differently. In other words, what § 1327(a) makes "final" about a confirmation order
is not what a particular creditor will get, but what the debtor will pay.24 According to
the Johnson court, holding otherwise would greatly damage the speedy confirmation
process by slowing it down while the trustee examined claims before recommending
Other courts conclude that the entry of a confirmation order precludes any
22 The trustee cites 11 U.S.C. § 502(j) which provides for reconsideration of an
allowed or disallowed claim for cause according to the equities of the case.
23 In re Johnson, 279 B.R. 218 (Bankr. M.D. Tenn. 2002).
24 Id. at 221-22.
Case 14-05068 Doc# 26 Filed 06/25/15 Page 8 of 17
issue that is fundamental to the order. In In re Reid,25 a chapter 13 trustee sought to
avoid a mortgage on the debtor's home after the debtor's plan was confirmed. The
plan specifically called for the debtor to cure and maintain mortgage payments and
for the creditor to retain its lien. Only then did the trustee file an adversary
proceeding to avoid the mortgage. The court began with the familiar rule that an
issue is precluded if it has been resolved by a final judgment on the merits in an
action involving the identical parties that considered the same or similar cause of
action. In Reid, the court concluded that the chapter 13 confirmation order was a final
order on the merits, that both the trustee and the creditor were parties to the
confirmation process that generated the order, and that the plan had addressed the
creditor's claim. All three of the components of res judicata were thus met. The court
further noted that even though the trustee is not specifically named in § 1327(a), "it
is difficult to imagine how the plan can be final if it is not final as to [the trustee]."26
The Reid opinion cites a number of cases that have so held.
The Eleventh Circuit has also held that confirmation orders are final and
preclude actions like the one here. In Hope v. Acorn Financial, Inc., a chapter 13
trustee (who, unlike the trustee here, was fully aware of a defect in the secured
creditor's lien) failed to object to confirmation of the debtor's plan, but then sought to
avoid the lien as does the trustee here.27 The trustee argued that the absence of a
25 Bankowski v. Wells Fargo Bank, N.A. (In re Reid), 480 B.R. 436 (Bankr. D. Mass.
26 Id. at 445, n. 9 (citing cases) and 446.
27 731 F.3d 1189 (6th Cir. 2013).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 9 of 17
reference to the trustee in § 1327(a) meant that the trustee was not bound by the
confirmation order as the debtor and particular creditors are. The panel reasoned
that § 1327(a) must be read along with other parts of chapter 13 like § 1325(a)(2) and
(c) that require the trustee to make distributions under the confirmed plan and §
1329(a) which authorizes the trustee to request post-confirmation modification of a
plan. Quoting the Reid court, the panel stated, "These provisions would be
'unnecessary if the confirmed plan did not already bind the trustee as it does the
debtor.'"28 Moreover, the panel noted, the role of the trustee is to serve the interests
of the creditors as a body.29 Consequently, the trustee would be bound by provisions
that bind the creditors. The panel also noted that its decision should be limited to its
facts and particularly to the fact that the trustee knew of the lien's flaw, but
apparently did not act on that knowledge before confirmation.
The Trustee's complaint here is not based on information that was unavailable
to her before confirmation. As the Trustee affirmatively consented to the debtor's and
creditor's proposed treatment of the claim as secured and then recommended the
amended plan be confirmed, it is hard to understand how she should not be bound by
that consent. While it may not be reasonable to expect the trustee to conduct
discovery as to every secured claim, it is equally untenable to expose the debtor and
secured creditors to the possibility of having to defend their secured status even after
28 Id. at 1193.
29 Id., citing Overbaugh v. Household Bank, N.A. (In re Overbaugh), 559 F.3d 125,
129-30 (2nd Cir. 2009).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 10 of 17
the trustee has consented to its treatment as a secured claim. That would seriously
undermine the creditors' confidence that the resolution they have reached, and that
the court has blessed, will be final and enforceable. As one bankruptcy court noted in
addressing a post-confirmation challenge to the validity of a secured claim:
. . . had the Trustee believed that the Mortgage was avoidable, he
would not have recommended confirmation of a plan calling for
payment of a one-percent dividend to general unsecured creditors. . .
. When reviewing plans for confirmation, the standing Chapter 13trustee is charged with calculating the value of the non-exempt assets
and disposable income available in the estate for payment, over time,
to unsecured creditors.30
Here, the Trustee went one step further when she approved the Agreed Order. The
secured status of MBC was an issue intrinsic to the plan as confirmed. The Trustee's
action to avoid that status is barred by the res judicata effect of § 1327(a).
Reconsideration of Allowed Claims, § 502(j)
The Trustee's fallback argument is that § 502(j) authorizes the Court to
reconsider an allowed claim for cause even after confirmation.31 The first question is
30 In re Crum, 479 B.R. 734, 743 (Bankr. S.D. Ohio 2012) (applying § 1327 and the
doctrine of judicial estoppel to bar the chapter 13 trustee's post-confirmation
avoidance complaint based upon a discoverable defect in the creditor's mortgage;
facts bearing on extent of creditor's lien were available prior to confirmation). See
also Celli v. First Nat'l Bank of N. New York (In re Layo), 460 F.3d 289, 295 (2d Cir.
2006) (the trustee has both a motive and opportunity to confirm the status of real
estate liens affecting the debtor's estate at or before confirmation of the plan.).
31 See In re Willoughby, 324 B.R. 66 (Bankr. S.D. Ind. 2005) (Till decision handed
down after confirmation of plan constituted cause for reconsidering cram downinterest component of creditor's claim; fact that plan had been confirmed did not
preclude reconsideration of claim.); Amtech Lighting Services Co. v. Payless
Cashways (In re Payless Cashways, Inc.), 230 B.R. 120, 137 (8th Cir. BAP 1999)
(reconsideration can be requested at any time, even after expiration of the time to
Case 14-05068 Doc# 26 Filed 06/25/15 Page 11 of 17
whether the Agreed Order and the Confirmation Order operated to allow MBC's claim
as secured. Some courts hold that claims are deemed allowed by a confirmation order
that is entered without objection.32
If the Agreed Order and Confirmation Order sufficed to allow MBC's claims,
the Trustee could still seek their reconsideration for cause. Another judge in this
District has held that the classification of a secured claim may be reconsidered post-
confirmation when the creditor's collateral is destroyed.33 Most reconsideration cases
involve an unexpected post-confirmation change in circumstances, fraud, or newly
discovered evidence as the "cause" for reconsideration.34 There is nothing the Trustee
knows now that was unascertainable or concealed by the creditor beforehand. Nor is
there a suggestion of misconduct on MBC's part. The Trustee has shown no "cause"
appeal); In re Gomez, 250 B.R. 397 (Bankr. M.D. Fla. 1999) (confirmation of plan
does not preclude reconsideration of claim); Matter of Zieg, 206 B.R. 974 (D. Neb.
1997) (confirmed plan is not res judicata as to a motion for reconsideration).
32 See In re Gomez, 250 B.R. 397, 401; In re Bernard, 189 B.R. 1017, 1021, n. 4
(Bankr. N.D. Ga. 1996)(the "implicit decision of allowance took place at
33 See In re Lane, 374 B.R. 830 (Bankr. D. Kan. 2007) (post-confirmation destruction
of car securing creditor's 910 claim; reclassified creditor's deficiency claim as
general unsecured claim)
34 See In re Mellors, 372 B.R. 763 (Bankr. W.D. Pa. 2007) (post-confirmation change
of circumstances); In re East Hill Mfg. Corp., 214 B.R. 536 (Bankr. D. Vt. 1997) (no
cause shown were information regarding allowed claim was available to debtor
when its objection to claim was heard); In re Arden Properties, Inc., 248 B.R. 164
(Bankr. D. Ariz. 2000) (denying reconsideration where information was not newly
discovered evidence); In re Farley, Inc., 211 B.R. 889 (Bankr. N.D. Ill. 1997)
(previously discoverable and available evidence may not be considered in context of
motion to reconsider); International Yacht and Tennis, Inc., 922 F.2d 659 (11th Cir.
1991) (fraud). See also 4 Collier on Bankruptcy, § 502.11[5] (16th ed.) (newly-
discovered evidence after allowance of claim should be cause for reconsideration).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 12 of 17
to reconsider MBC's claims.35
Composite Documentation Constitutes an Authenticated
Security Agreement and Attachment of Lien
Even if there were reason to reconsider MBC's secured claims, the "equities"
do not support the Trustee's assertion that MBC's documents failed to create
enforceable security interests in the trucks because the law of secured transactions
35 In addition, several courts have held that post-confirmation reconsideration of a
claim may not be used to reclassify a creditor's claim from secured to unsecured
which is essentially what the Trustee is after here. See e.g. Celli v. First Nat'l Bank
of N. New York (In re Layo), 460 F.3d 289 (2d Cir. 2006) (confirmation order was resjudicata where trustee attempted to avoid lien following confirmation; can't
reclassify secured claims post-confirmation);Wallis v. Justice Oaks II, Ltd. (In re
Justice Oaks, II, Ltd.), 898 F.2d 1544, 1553 (11th Cir. 1990), cert. denied, 498 U.S.
959 (1990) (an objection that challenges the classification of a claim must be madebefore confirmation of the chapter 13 plan or it will be deemed allowed by the
confirmation order); In re Beam, 510 B.R. 399 (Bankr. N.D. Ga. 2014) (debtors werebarred by confirmed plan from reclassifying secured claim to strip off creditor's
lien); In re Crum, 479 B.R. 734 (Bankr. S.D. Ohio 2012) (chapter 13 trustee whom
recommended confirmation of plan was precluded by res judicata effect of
confirmation order from seeking to avoid lender's mortgage lien; allowing trustee to
belated challenge secured claim would result in unfair detriment to mortgagelender); In re Berrouet, 469 B.R. 393 (Bankr. N.D. Ga. 2012) (confirmation orderwas res judicata on classification and treatment of claims provided in plan and as toissues that were or could have been brought prior to confirmation); In re Rutt, 457
B.R. 97 (Bankr. D. Colo. 2010) (confirmed plan is res judicata to all issues that wereor could have been brought prior to confirmation); In re Wilson, 409 B.R. 72 (Bankr.
W.D. Pa. 2009) (chapter 13 debtors not entitled to reconsideration of order allowingpurchase money vehicle lender's claim as fully secured where plan treated as fullysecured and debtors did not indicate any intent to challenge value of vehicle and
strip down lien); In re Coffman, 271 B.R. 492 (Bankr. N.D. Tex. 2002)
(reconsideration of claim cannot be used to reclassify claim; debtors bound by
confirmed plan); In re Clark, 172 B.R. 701 (Bankr. S.D. Ga. 1994) (doctrine of resjudicata precluded debtor's objection to treatment of creditor's claim as secured;
proof of secured claim must be allowed or disallowed before plan confirmation or the
claim must be deemed allowed for purposes of the plan).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 13 of 17
makes clear that they do.36 Many courts have read composite agreements like the
ones in this case to create enforceable security interests even in the absence of "magic
words" of grant because the agreements' provisions manifested the parties' intent to
create security interests in the collateral. A reading of the documents in pari materia
makes that clear here. Though the Weekly Payment Agreement lacks words of grant,
it shows that the parties intended to enter into a sale agreement. So does the Bill of
Sale. While those agreements lack references to the creation or retention of security
interests in the trucks, others do not. First, Ms. Brannan signed and acknowledged
on the reverse side of the titles (assignment of title) that she was the buyer of the
trucks and that they each were subject to MBC's lien.37 Second, she signed an
application for title indicating that MBC was a "1st Lienholder."38 Finally, MBC is
identified on the Title and Registration Receipts as a lienholder on the trucks.39 The
sum of these documents, taken with Mr. Bruenger's credible testimony as to the
custom and usages of MBC as to this long-standing financing program satisfy the
36 Even if the Trustee were able to show "cause," she must also demonstrate that
the equities of the case warrant disallowance of MBC's secured claims. See Fed. R.
Bankr. P. 3008 and § 502(j); Municipality of Carolina v. Gonzalez (In re Gonzalez),
490 B.R. 642, 651 (1st Cir. BAP 2013) (There is no basis to reconsider an order
disallowing a claim according to the equities of the case without cause); In re
Rayborn, 307 B.R. 710, 720 (Bankr. S.D. Ala. 2002) (reconsideration is a two-stepprocess: first, cause must be shown and second, the court must decide whether the
equities dictate allowance or disallowance of the claim).
37 Ex. C (Kenworth), Ex. G (Freightliner). On both titles, Brannan "swear[s] oraffirms[s] that all liens . . . are listed" and acknowledges "severe penalties formaking false statements under oath."
38 Ex. D (Kenworth); Ex. H (Freightliner).
39 Ex. A (Proof of Claim 19), p. 8; Ex. E (Proof of claim 18), p. 8.
Case 14-05068 Doc# 26 Filed 06/25/15 Page 14 of 17
Court that Brannan granted MBC purchase money security interests in the
Freightliner and the Kenworth.
KAN. STAT. ANN. § 84-9-203 requires that a debtor "authenticate" a security
agreement in order to create a security interest, but no particular form of a security
agreement is required. Instead the agreement must create a security interest as
defined in § 84-1-201(b)(35).40 Indeed a "collage" or "composite" group of documents
may stand as evidence of such an agreement.41 Kansas contract law recognizes the
collage or composite document theory.42 As one treatise on secured transactions has
noted, requiring formal words of grant "smack[s] of the antiquated formalism the
40 KAN. STAT. ANN. § 84-9-102(a)(73) (2014 Supp.) (defining a "security agreement");
§ 84-1-201(b)(35) (2014 Supp.) (defining "security interest" as an interest inpersonal property or fixtures which secures payment or performance of an
obligation). See also City of Arkansas City v. Anderson, 242 Kan. 875, 883-86, 752
P.2d 673 (1988) (assignment created a security interest); Wellsville Bank v. Nicolay,
7 Kan. App. 2d 172, 178, 638 P.2d 975 (1982) (Assignment was valid security
agreement where it satisfied statutory requirements of providing for a security
interest, identified the collateral, and bore debtor's signature.).
41 1 Barkley Clark and Barbara Clark, THE LAW OF SECURED TRANSACTIONS UNDER
THE UNIFORM COMMERCIAL CODE, §2.02[1][d] (3d ed. 2015) (hereafter "Clark").
42 See City of Arkansas City, supra at 883-84 (all documents associated with
assignment would be read together to ascertain the true meaning of the assignment
and intent of the parties to the assignment to determine whether it created a
security interest); Hall v. Mullen, 234 Kan. 1031, 1038, 678 P.2d 169 (1984) (two ormore instruments executed by same parties as part of same transaction and subject
matter will be read together to determine parties' intent); In re Cunningham, 489
B.R. 602 (Bankr. D. Kan. 2013) (considering credit application, cardholderagreement, and several sales receipts under composite document theory but
concluding documentation was "facially insufficient" to create security interest in
consumer goods purchased by debtors for lack of a sufficient description of theconsumer goods in the credit application and lack of debtors' signature and securityinterest on the sales receipts).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 15 of 17
drafters [of Article Nine] were trying to avoid."43 In this case, these documents, when
read together, unequivocally "contemplate[ ] objective indicia of the possibility of an
underlying actual agreement," thus serving the purposes of a security agreement.44
They suggest the parties' mutual intention to create or retain a lien and they describe
that which is encumbered. If Brannan didn't intend to confer a lien, why did she sign
and check the lien box on the assignment of title? And why did she designate MBC
as a lienholder when she applied for a title? The documents here indicate at least the
"possibility of an underlying agreement" if not much more.45
The Trustee's lien avoidance complaint is barred by the res judicata effect of
the Agreed Order on MBC's claims and the confirmed chapter 13 plan under §
1327(a). She did not demonstrate sufficient cause to reconsider MBC's secured claims
under § 502(j). And, if she had, her challenge to MBC's secured status would be denied
on the merits under the composite document theory because the sale and title
43 Clark, §2.02[1][c] at 2-21.
44 4 White & Summers, UNIFORM COMMERCIAL CODE, § 31-3 (6th ed. 2010).
45 See In re Giaimo, 440 B.R. 761 (6th Cir. B.A.P. 2010) (considered together,
application for certificate of title and certificate of title, constituted securityagreement); In re Jacobs, 2006 WL 4451566 (Bankr. D. Idaho Feb. 10, 2006)
(debtors' application for certificate of title for car coupled with contemporaneous
seller's invoice constituted a valid security agreement; application identified thecollateral, instructed the state to issue a title showing seller as a lienholder, andwas signed by debtor); Roan v. Murray, 556 N.W.2d 893, 895-96 (Mich. Ct. App.
1996) (debtor's application for a certificate of title, standing alone, was sufficient to
create a security agreement); Baystate Drywall, Inc. v. Chicopee Sav. Bank, 385
Mass 17, 429 N.E.2d 1138, 1142 (1982) (application for transfer of title listing
lienholder meets writing requirement for security interest to attach).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 16 of 17
documentation for both truck transactions amount to authenticated security
agreements that granted MBC enforceable security interests. Its liens attached to the
trucks under KAN. STAT. ANN. § 84-9-203.
Judgment shall be entered in favor of MBC on the Trustee's adversary
complaint. A Judgment on Decision will issue this day.
# # #
Case 14-05068 Doc# 26 Filed 06/25/15 Page 17 of 17
15-05016 Dynamic Drywall, Inc. v. Hartford Fire Insurance Company et al (Doc. # 39)
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Dynamic Drywall, Inc. v. Hartford Fire Insurance Company et al, 15-05016 (Bankr. D. Kan. Aug. 17, 2015) Doc. # 39
Click here for the pdf document.
DYNAMIC DRYWALL, INC. ) Case No. 14-11131
) Chapter 11
Debtor. )
Plaintiff, )
vs. ) Adv. No. 15-5016
COMPANY and STINSON LEONARD )
Defendants. )
Dynamic Drywall, Inc. (DDI) filed an adversary proceeding against Hartford
Insurance, Inc. and Stinson Leonard Street (SLS) asserting a breach of contract claim
against the former and seeking a declaration that the latter is not entitled to an
attorney's fee lien against the Hartford contract claim. After SLS answered and
waived its fees, effectively mooting the second claim for relief to determine the
attorney lien's validity, DDI amended its complaint to add a third claim for relief.1
Plaintiff now says that SLS breached its fiduciary duty to plaintiff by failing to
segregate fees it billed for work on the Hartford litigation from fees it billed for other
matters and that if I find that Hartford did breach the contract, but that DDI can't
recover because the fees weren't segregated, SLS should be liable for whatever DDI
is unable to recover from Hartford due to the billing error. Both defendants have
moved to dismiss under Fed. R. Civ. P. 12(b)(6) as made applicable to adversary
proceedings under Fed. R. Bankr. P. 7012(b). DDI sought additional time to respond
to Hartford's motion, but has failed to respond to SLS's motion and its time to do so
has expired. For the reasons set forth below, SLS's motion is GRANTED; Hartford's
motion will be addressed in a separate order when the briefing is complete.2
1 See Fed. R. Civ. P. 15(a)(1)(B) as made applicable in adversary proceedings by Fed. R.
Bankr. P. 7015.
2 Defendant Stinson Leonard Street LLP appears by its attorney Nicholas J. Zluticky.
Plaintiff Dynamic Drywall, Inc. makes no appearance on SLS's Motion to Dismiss.
Factual and Procedural Background
DDI's causes of action arise out of years of prior state court construction
litigation commenced in 2006 surrounding DDI's efforts to recover amounts under a
subcontract it claimed the general contractor Building Construction Enterprises, Inc.
(BCE) owed it for labor and materials provided on a Johnson County department of
corrections project bonded by Hartford. At the end of that litigation, in 2014, the
District Court of Johnson County, Kansas entered judgment against BCE, but not
Hartford, awarding certain attorney's fees and expenses DDI incurred in pursuing
the claims. BCE is insolvent. On May 5, 2014, DDI appealed the fee denial as against
Hartford to the Kansas Court of Appeals. DDI filed its chapter 11 bankruptcy on May
21, 2014 and on August 6, 2014, I granted Hartford and BCE relief from the automatic
stay to defend the appeal.
3 Dkt. 38.
4 Building Construction Enterprises, Inc. v. Public Building Commission of Johnson County,
Kansas, et al., Johnson County District Court Case No. 06CV3708, Appeal No. 111820
(Kan. App.).
DDI's claim against SLS, its former counsel in the state court litigation, is best
understood in context with its claim against Hartford in this matter. The general
contractor, BCE filed a state court lawsuit against the Johnson County Public
Building Commission (PBC) seeking to recover for unpaid labor and materials
provided in the construction of a correctional facility in Johnson County. DDI, also
unpaid and represented by SLS, intervened in that action to recover under its
subcontract with BCE. Hartford, as bond surety, issued the statutory payment and
performance bonds for the project. BCE filed a counterclaim against DDI. Their
subcontract provided that the prevailing party in any litigation to enforce the
agreement would be awarded its attorney's fees and expenses. This state court action
began in 2006 and in February of 2010, DDI, Hartford, and BCE entered into a partial
settlement agreement providing that Hartford would pay $325,000 in full satisfaction
of DDI's claims versus BCE and Hartford, but DDI's attorney fee claim was excepted
from the scope of the settlement and the attendant releases.
5 Adv. Dkt. 17-1.
6 Adv. Dkt. 17-1 at ¶ 6.
7 Adv. Dkt. 17-3.
Hartford and BCE will not contest that DDI is entitled to attorney
fees . . . except that Hartford and BCE specifically reserve the right to
challenge the amount of the attorney fees based on the Subcontract and
Kansas law.6
DDI subsequently filed its attorney's fees motion and, in 2011, the Johnson
County District Court conducted a three day evidentiary hearing on it. Both Hartford
and BCE objected to the motion. Hartford specifically contested that DDI could
recover attorney fees under the payment bond. Hartford challenged the fees claimed,
alleging first that as a Kansas surety, it is not liable to pay attorney fees because
those are not lienable labor and materials under KAN. STAT. ANN. § 60-1111, and
second, that not all of the fees claimed were specifically incurred by DDI in its pursuit
of the BCE recovery.
In April of 2014, the state court issued a lengthy reasoned order concluding
that DDI was not entitled to recover any fees from Hartford under the payment bond
and that it was only entitled to recover $378,662 of its $619,313 claimed fees against
BCE.7 The court specifically questioned whether all of the fees charged by SLS and
claimed by DDI were incurred in the course of the BCE litigation and denied those it
found were not. Then, in an odd twist, the state court stated that this amount could
be adjusted for "legal work not related to the claims and issues involved in the dispute
between BCE and DDI, which shall be determined at a subsequent hearing."
8 Id. at p. 17.
9 Id. at p. 16.
10 Later in DDI's bankruptcy, BCE and Hartford belatedly sought reconsideration of the fee
award as invited by the state court. On October 22, 2014, this Court denied their motion to
lift the stay to pursue that motion. See Dkt. 111.
11 Adv. Dkt. 17 at ¶ 2 and pp. 3-9 (First Claim for Relief).
12 DDI has obtained an extension of time to August 17, 2015 to file its response. See Adv.
Dkt. 33.
Now, DDI claims that Hartford breached the settlement agreement when it
challenged DDI's right to recover attorney fees and expenses.11 Hartford has moved
to dismiss that claim and DDI has not, as of this writing, responded.12 As to SLS, DDI
says that if it can recover against Hartford on the breach claim, but is stymied by
SLS's failure to properly segregate BCE-related fees from other non-BCE fees, it is
entitled to recover from SLS what it lost. Its legal theory is that SLS breached both
its fiduciary duty and its duty of care to DDI when it failed to heed DDI's alleged
instructions to segregate the fees on its statements.
13 Adv. Dkt. 17, pp. 10-12 (Third Claim for Relief).
14 Adv. Dkt. 11.
15 Adv. Dkt. 26, 27.
16 Issa v. Comp USA, 354 F.3d 1174, 1177-78 (10th Cir. 2003). The consequence of not timely
filing a response to the motion to dismiss is that the party is deemed to have waived the right
to file an opposing memorandum. See D. Kan. Rule 7.4(b).
17 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In reviewing
the sufficiency of the complaint, the court assumes the truth of the plaintiff's well-pleaded
factual allegations and views them in the light most favorable to the plaintiff.); Mobley v.
McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion tests the sufficiency of
the allegations within the four corners of the complaint after accepting as true all well-
DDI initially sued SLS for a declaration that its attorney fee lien did not attach
to the above-described contract cause of action against Hartford. SLS answered and
waived its lien and attorney fee claim against DDI.14 DDI amended its complaint to
add as a second claim against SLS the professional liability claim described above.
SLS's current motion to dismiss followed, to which DDI has filed no response.15
Legal Standards for Rule 12(b)(6) Motions to Dismiss
An uncontested motion to dismiss may not be granted merely because the non-
moving party has failed to file a response.16 The purpose of a motion to dismiss under
Rule 12(b)(6) is to test the sufficiency of the allegations within the four corners of the
complaint and to that end, the Court is required to examine the allegations in the
plaintiff's complaint and determine whether plaintiff has stated a claim for relief,
whether or not the non-moving party has filed an opposing memorandum of law.
In determining whether DDI has stated a claim, I take the facts pleaded in the
complaint as true and draw any inferences against SLS.17 If relief under those facts
pleaded factual allegations.).
18 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to dismiss
the judge must accept all allegations as true and may not dismiss on the basis that it appears
unlikely the allegations can be proven.).
19 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
20 See Navajo Nation v. Urban Outfitters, Inc., 935 F. Supp. 2d 1147, 1157 (D.N.M. 2013)
(Conversion is not required under Rule 12(d) when the court considers information that is
subject to proper judicial notice (e.g. facts that are a matter of public record such as pleadings
in a related case) or exhibits attached to the complaint); Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322 (2007).
21 Tal v. Hogan, 453 F.3d 1244, 1265 n. 24 (10th Cir. 2006) (exhibits attached to a complaint
are properly treated as part of the pleadings for purposes of ruling on a Rule 12(b)(6) motion
and courts may take judicial notice of facts which are a matter of public record).
is facially plausible, the complaint survives. A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged. The question is whether the
complaint contains facts sufficient to support these claims, not whether DDI will
ultimately prevail on those claims.18 The plausibility standard is less than a
probability but more than a sheer possibility that DDI is entitled to the relief
requested.19 In addition, I may consider the exhibits or attachments to DDI's
amended complaint without converting the motion to dismiss to one for summary
judgment under Fed. R. Civ. P. 12(d).20 Specifically, I can take judicial notice of
petitions, orders, journal entries, or other pleadings from the state court case which
were referenced in or attached to DDI's amended complaint.21
Because SLS has waived its right to attorney fees from DDI and its alleged
attorney fee lien, the second cause of action for determination of the validity of the
lien is moot; the Court focuses its analysis on DDI's third cause of action – the
professional liability claim – asserted against SLS in the amended complaint.
DDI fails to state a claim against SLS based upon
the ripeness doctrine.
As DDI's amended complaint states, the state court has previously entered an
order determining (1) that Hartford is not legally liable for DDI's attorney fees in the
DDI/BCE/Hartford dispute; and (2) that BCE owes $378,662 in prevailing party
attorney fees to DDI, subject to a motion for reconsideration that BCE never filed.
The legal issue that surrounds whether Hartford is liable to pay a subcontractor's
attorney fees awarded against BCE has been finally decided against DDI in state
court. That issue is precluded here. The amount of fees the state court determined
that BCE owes is precluded, too.
For DDI to recover against SLS on the professional liability claim, several
things have to occur. First, DDI has to prevail here on its claim that Hartford
breached the settlement agreement by challenging DDI's right to recover attorney
fees from Hartford, or on its appeal of the state court's determination that Hartford,
is not liable for the attorney fees under the partial settlement. Second, DDI has to
demonstrate that it did not recover the correct amount of fees from BCE and Hartford
as a result of SLS's professional failings. Third, it must show that it has been
damaged by SLS's failure to segregate to the extent of the fees it has been unable to
collect from BCE, apparently because that company is judgment-proof. These future
uncertainties implicate the ripeness doctrine and the Court's power to hear and
consider the merits of this adversary proceeding.
The ripeness doctrine is a question of timing. It asks whether the challenged
harm has matured sufficiently to warrant judicial intervention.
22 In re Westby, 473 B.R. 392, 401 (Bankr. D. Kan. 2012), citing Tarrant Regional Water Dist.
v. Herrmann, 656 F.3d 1222 (10th Cir. 2011); Awad v. Ziriax, 670 F.3d 1111, 1124 (10th Cir.
2012) (Aim of ripeness doctrine is to prevent courts from entangling themselves in abstract
disagreements by avoiding premature adjudication, citing Abbott Labs. v. Gardner, 387 U.S.
136, 148 (1967), overruled on other grounds by Califano v. Sanders, 430 U.S. 99 (1977)).
23 Awad v. Ziriax, 670 F.3d at 1124.
24 Initiative and Referendum Inst. v. Walker, 450 F.3d 1082, 1097 (10th Cir. 2006).
25 Westby, supra.
26 In re Swanson, 343 B.R. 678, 680-81 (Bankr. D. Kan. 2006).
27 Awad v. Ziriax, supra.
DDI's claim is not ripe for adjudication because it rests on future contingencies
that may never come to pass. Assuming without deciding that Hartford breached the
settlement agreement by opposing DDI's right to fees under the payment bond, the
language of the attorney fee provision in the settlement agreement expressly
permitted Hartford and BCE to challenge the amount of the attorney fees "based on
the Subcontract and Kansas law." The state court recognized that the statutory
language of KAN. STAT. ANN. § 60-1111(a) and courts considering similar bond claims
hold that such public works payment bonds generally do not cover prevailing party
attorney fees.
28 Adv. Dkt. 17-3, p. 11, citing Blinne Contracting Co. v. Bobby Goins Enterprises, Inc., 715
F. Supp. 1044, 1046 (D. Kan. 1989), aff'd 1 F.3d 1249 (10th Cir. 1993). The district court in
Blinne held that only the value of goods and services used or expended in the construction
of a public improvement are recoverable under § 60-1111; lost profits or damages incurred
from a contract breach are not recoverable against the bond. 715 F. Supp. at 1046. Such
public works bonds are viewed as substitutes for mechanic's liens and do not broaden the
class of those protected. Wichita Sheet Metal Supply, Inc. v. Dahlstrom and Ferrell Const.
Co., Inc., 246 Kan. 557, 562, 792 P.2d 1043 (1990). See also Hope's Architectural Products,
Inc. v. Lundy's Const., Inc., 762 F. Supp. 1430, 1434 (D. Kan. 1991); Dun-Par Engineered
Form Co. v. Vanum Const. Co., Inc., 49 Kan. App. 2d 347, 352, 310 P.3d 1072 (2013)
(Obligation of surety bond is to be measured by the bond itself and may not be extended by
implication or enlarged by construction beyond the terms of the executed bond); U.S. ex rel.
C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533, 1542-32 (10th
Cir. 1987) (Miller Act case; government subcontractor who prevailed against contractor on
quantum meruit theory not entitled to recover prevailing party attorneys' fees under Miller
Act absent a provision in the contract or payment bond or establishing an exception to the
American Rule that each party bears its own fees); F.D. Rich Co. v. United States ex rel.
Industrial Lumber Co., 417 U.S. 116, 126-31 (1974) (Successful plaintiff in Miller Act case
not entitled to recover attorneys' fees);
Embedded in the third cause of action, DDI also claims that it is entitled to
disgorgement of all fees it paid SLS up to the $378,662 it has been unable to collect
from BCE and that this also issues from SLS's failure to segregate its billings.
30 Adv. Dkt. 17, ¶ 49.
31 A disgorgement award is an equitable remedy flowing from unjust enrichment and serves
as restitution for benefits wrongfully obtained. In the contractual context, a contracting
party's deliberate or conscious breach of contract that results in profits to the breaching
party may give rise to a claim for restitution for the profit realized from the intentional
breach if a damage award does not adequately compensate the non-breaching party. It is an
alternative to a remedy in contract damages that is rarely available. See RESTATEMENT
(THIRD) OF RESTITUTION AND UNJUST ENRICHMENT, § 39 (2011). See also Shamberg,
Johnson & Bergman, Chtd v. Oliver, 289 Kan. 891, 220 P.3d 333 (2009) (recognizing
disgorgement of fees as a proper remedy for attorney fees that were wrongfully received); In
re Kinderknecht, 470 B.R. 149 (Bankr. D. Kan. 2012) (disgorgement of fees may be ordered
if the attorney fees charged and collected were unreasonable).
Having determined that DDI's third cause of action is not ripe for adjudication,
it fails to state a plausible claim against SLS and this court lacks subject matter
jurisdiction; SLS's motion is GRANTED and the third claim for relief under the
amended complaint is DISMISSED without prejudice. The second claim for relief
against SLS is also DISMISSED as MOOT due to the fact that SLS's answer to the
original complaint "waives, disclaims, and releases" any claim or lien it has against
DDI for outstanding attorneys' fees.
32 Adv. Dkt. 11.
# # #
14-11766 Gaines and Watson (Doc. # 54)
- Details
- Category: Judge Nugent
- Published: 03 June 2015
- Written by Judge Nugent
- Hits: 1267
In Re Gaines and Watson, 14-11766 (Bankr. D. Kan. May 15, 2015) Doc. # 54
Click here for the pdf document.
SIGNED this 14th day of May, 2015.
ROBERT DALE GAINES and ) Case No. 14-11766
TINA LEA WATSON, ) Chapter 13
Debtors. )
Kansas recognizes common law marriages. If each member of a couple has
capacity to marry, intends to be married, and holds themselves out as husband and
wife, common law deems them wed. Married couples may file joint bankruptcy cases.
But if the couple's marital status is challenged, it is their burden to prove that they
are married as a matter of law and therefore entitled to relief. Kansas homestead law
preserves the exempt character of a debtor's homestead unless a creditor can
demonstrate by "positive and clear evidence" that the debtor has abandoned the home
Case 14-11766 Doc# 54 Filed 05/14/15 Page 1 of 20
without intention to return. This case presents an interesting intersection of those
two state law principles.1
After Robert Gaines and his former wife were divorced, he became romantically
involved with Tina Watson, living with her in Salina, Kansas. When she became ill,
he and she declared to Robert's employer that they were domestic partners and he
enrolled her in his employer's health insurance plan. Each testified to their devotion
to one another, that they consider themselves married, and that they hold themselves
out as married. When they began to live together, both had been divorced. If they
demonstrated that they met the three standards for common law marriage on the
date they filed this case, they are eligible to be joint debtors. Robert owns the home
that Tina periodically inhabited in Oberlin (first from 2008-2010 and again later from
July 2013 to and including the date of the bankruptcy petition), but both debtors
relocated to Salina for work in 2010 where they lived together part of the time during
which they claimed they were married. They claim the Oberlin house as their
homestead, stating that they intend to return to Oberlin to live. Whether they're
married or not, if each debtor has demonstrated the requisite intent to return to and
inhabit the house in Oberlin as their homestead, the Oberlin house retains its exempt
1 The chapter 13 trustee Laurie B. Williams appears by her attorney Karin N.
Amyx. The debtors appear by their attorney Rick Hodge.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 2 of 20
Sometime in the late 1990s, Robert and Tina met while they were working for
the school district in Brighton, Colorado and formed a friendship. Each was married
to someone else then, but they were both having marital issues. Robert had lived in
Oberlin, Kansas as a child and relocated there from Colorado in 2000 when he
purchased a home on Beaver Street. He worked out of his garage as a mechanic and
lived there with his wife, Celeste, until they left Oberlin sometime around 2008.
Robert eventually took a job at Phillips Lighting in Salina, about 200 miles east of
Oberlin. Though it isn't clear when, it appears that he and Celeste relocated to Salina
in 2010, renting a home on Seitz Avenue. He and Celeste separated in 2010 and were
divorced by the Saline County District Court in 2011.
Meanwhile, Tina had moved with her mother and daughter to Oberlin
sometime in 2008. Now divorced, Tina moved her family into the Beaver Street
property, apparently with Robert's permission.2 He stated that she was in trouble
and he was helping to extricate her from "a bad situation." She lived there until 2010
when her job at the Oberlin Chamber of Commerce was eliminated. Robert
encouraged her to come to Salina where he found her a place to live and a job at
Casey's General Store. According to the Statement of Financial Affairs (SOFA),
Question 15, she lived at 330½ South 8th in Salina beginning in July of 2010.3 Robert
testified that after he got divorced, he moved in with her. The SOFA suggests that
2 When Tina moved from Colorado to Kansas she obtained a Kansas driver's license.
Issued on November 4, 2008, it expired on September 11, 2014 but Tina has not
renewed it. It bears the Beaver Street, Oberlin address. See Ex. 3.
3 When Tina moved to Salina, Robert rented the Oberlin property out to tenants
between July 2010 and July 2013.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 3 of 20
they also occupied a property on Briarwood in Salina (August 2011 to June 2013)
before they leased the current Hartford address property in Salina, where Robert
lived at the time this case was filed.
Robert owns the Oberlin house outright; Tina and he have possessions in both
places. Tina moved back to Oberlin sometime in 2013 after the tenants vacated the
Beaver Street property. For some indefinite period after that, Robert would travel to
Oberlin on weekends to see Tina or vice versa. Robert described Tina's move back to
Oberlin as a "cost-cutting" measure. Since July 2013, Tina has lived at various times
in both Oberlin and Salina. They occupied a series of residences, though it is
somewhat unclear in what order or how long they resided at each. It does appear that
they lived together at various times but, on July 31, 2014, the date of the petition,
they were living apart.4 Both debtors testified that they intend to return to Oberlin
to live full time because the Salina Phillips Lighting plant is for sale and may well
close. To this end, they purportedly mailed an undated letter to their landlord a week
before the trial of this matter to advise the landlord of their intent to terminate the
tenancy on Hartford and move out by the end of April 2015.5 Robert testified that he
intends to live permanently in the Beaver house – as his retirement home. Tina is
not currently working but may return to Casey's General Store to complete training
for a management position to enable her to transfer to a store near Oberlin.
4 The petition shows Robert having a current address at the Hartford property inSalina while Tina has a current address at the Beaver property in Oberlin. ScheduleJ, line 24 indicates they are currently living apart.
5 Ex. 4. This undated document introduced into evidence is the only one where Tina
used the "Gaines" surname.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 4 of 20
Tina became ill at some point in their relationship and required
hospitalization. She has a chronic illness that apparently manifested itself in
February of 2014. There are no physician specialists in Oberlin so she seeks periodic
medical care in Salina. When Tina became acutely ill in February of 2014, Robert and
she decided it was time for them to "quit playing house" as he put it. According to
Robert, Tina's health event was the definitive moment when he and Tina became
husband and wife. He then took measures to place her on Phillips Lighting's employee
health plan as his dependent. He enrolled Tina shortly thereafter, claiming her as his
"domestic partner." As part of the paperwork, both Tina and Robert executed a
"Phillips Health Plans Document of Domestic Partnership" or DDP.6 The DDP states
the signers "certify" that they are eligible for coverage as "domestic partners" under
the company's health plan and that they are, among other things, at least 18, not
related by blood or adoptions, live together in a committed monogamous relationship,
and have been in such a relationship for the prior six months. They also certify that
they "are not married to each other or legally married to, or in a domestic partnership
with, any other person." The DDP that debtors offered in evidence is undated.
Additional documentation accompanying the DDP that appears to have been
printed from the company benefits website defines "domestic partner" as someone of
the same or opposite sex who is an adult partner of the employee living together for
at least six months, mutually dependent and financially responsible for one another's
wellbeing, not related to one another and not married to or a domestic partner of a
6 Ex. 8, p. 18.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 5 of 20
third party. The domestic partner definition doesn't exclude a person who is married
to the employee.7 At the same time, a spouse qualifies as a dependent and Robert
could have enrolled Tina as his spouse if they were in a common law marriage at that
It is unclear if Robert was able to add Tina to his employer's health coverage
when they executed the DDP document mid-year. The same website screenshot
suggests that he was outside the enrollment window to add Tina as a dependent to
his employer's health plan in 2014.9 Both of Robert's 2014 and 2015 Enrollment
Summaries that show Tina as his dependent for health coverage were "selected" as
of December 2, 2014, suggesting that Tina was not actually enrolled as a dependent
domestic partner under Robert's health plan until late 2014 or more likely, 2015.10
Finally, Robert also named Tina as his beneficiary under a life insurance policy
obtained through his employment.11
Robert and Tina filed separate Form 1040 tax returns for 2012, 2013, and 2014.
Each filed as a "single" taxpayer. They amended their respective 2014 returns to file
as "married filing separately," signing those amended returns on March 11, 2015, a
week before the trial of this matter.12 They testified that they amended their 2014
7 Id. at p. 22.
8 A domestic partner is clearly a separate and distinct dependent category from a
married person under the health plan. Both relationships qualify as eligible
dependents of the employee under Robert's health plan. See Ex. 8, p.21.
Id. The screen also cautions that "[a]dding a dependent here does NOT
automatically enroll him/her in any benefits."
10 Id. at pp. 19-20.
11 Id. at p. 23.
12 Ex. 6 and 7.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 6 of 20
returns because their accountant told them that filing as single persons could be
construed as tax fraud. Their explanation provided on the amended returns states
that they are common law husband and wife and that their attorney advised them
they "had to file married filing separate."13
In his testimony, Robert insisted that he often referred to Tina as his wife in
conversations with third parties. She agreed that he acted like a husband, bringing
her lunch to work, for instance, and that they had acted as husband and wife as early
as 2012 when Robert proposed to her while they were on a motorcycle ride. There was
no evidence that they obtained or wore wedding rings. According to Robert, Tina was
a signatory on his bank account but not an account owner due to her prior history of
unpaid debts. Their bankruptcy intake questionnaire dated June 10, 2014 shows Tina
as Robert's spouse and both living at the Hartford address in Salina.14
Robert and Tina filed their joint chapter 13 petition on July 31, 2014. Robert
listed his address as the Hartford Street, Salina address while Tina, as joint debtor,
listed her address as the 302 N. Beaver, Oberlin address.15 On Schedule J, line 24,
debtors state that they "live apart right now," but anticipate Robert moving to Oberlin
if he loses his employment with Phillips in Salina. They claimed this Beaver property
as their exempt homestead. In their first amended chapter 13 plan they propose to
13 Ex. 6 and 7, Part III of Form 1040X. Both amended returns listed the Hartford
address in Salina as their current home address.
14 Ex. 1.
15 The Court notes that on December 2, 2014, Tina filed a change of address from "302
N. Beaver, Oberlin, KS 67749" to "306 N. Beaver Ave., Oberlin, KS 67749." See Dkt.
28. On the notice, Tina used the surname of Gaines. This change of address was not
mentioned at trial.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 7 of 20
pay $250 per month over an applicable commitment period of 60 months but seek to
deviate from the disposable income calculation on Form 22C under In re Lanning,
due to Tina's unemployment, and propose no distribution to unsecured creditors.16
The chapter 13 trustee objects to the claimed homestead exemption on the basis that
Robert does not occupy the Oberlin property as his principal residence.17 She also
objects to confirmation of the plan and filed a motion for dismissal under 11 U.S.C. §
302 on the basis that debtors are not married and ineligible to file a joint case.18 At
trial, the evidence focused on the debtors' eligibility to be joint debtors and their
homestead exemption. In post-trial briefing, debtors submitted a certified copy of
Robert's divorce decree from Celeste entered by the Saline County District Court on
February 2, 2011 to support his trial testimony.19 The trustee objects to admission of
this document as part of the evidentiary record and asks that it be stricken and not
considered by the Court.20 The Court will address the propriety of considering the
divorce decree when it addresses the common law marriage issue below.
Is the 302 N. Beaver, Oberlin residence the debtors' homestead?
16 Dkt. 36.
17 Dkt. 16.
18 Dkt. 22 and 38.
19 Dkt. 50. In closing argument, the chapter 13 trustee questioned Robert's capacity
to marry Tina because she challenged Robert's proof that he had obtained a divorce
from Celeste as he testified. The trustee had offered no proof into evidence that Robert
remained married to Celeste but suggested that she was unable to find any record of
their divorce decree. Robert's divorce from Celeste was essential to demonstrate that
he had the capacity to marry Tina.
20 Dkt. 51.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 8 of 20
The Trustee objects to the debtors' homestead exemption.21 She argues that
Robert's and Tina's repeated absence amounts to an abandonment of the homestead.
Kansas residents may claim their home as a homestead if they meet the following
criteria set out in the Kansas Constitution and statutes. KAN. STAT. ANN. § 60-2301
implements the homestead exemption afforded all Kansans in the Kansas
Constitution at Article 15, § 9. Section 9 provides that—
A homestead to the extent of one hundred and sixty acres of farming land, orof one acre within the limits of an incorporated town or city, occupied as a
residence by the family of the owner, together with all the improvements on
the same, shall be exempted from forced sale under any process of law, and
shall not be alienated without the joint consent of husband and wife, when thatrelation exists; . . .22
The statutory exemption § 60-2301 contains the same provisions almost
verbatim.23 11 U.S.C. § 522(b)(2) authorizes a debtor to elect to claim property exempt
for his bankruptcy estate if it is exempt at state law and if such an election is
permitted under state law. Kansas law directs that, with certain exceptions not
relevant here, debtors may only claim state law exemptions.24 Parties in bankruptcy
cases who file timely objections to exemptions bear the burden of proving the
exemption is not properly claimed.25 Here, the trustee's principle objection is that
21 Dkt. 16.
22 KAN. CONST. Art. 15, § 9.
23 KAN. STAT. ANN. § 60-2301 (2014 Supp.). In addition to the language in the state
constitution, the statutory provision makes clear that a homestead exemption may
be claimed in a manufactured home or mobile home occupied as a residence. It also
clarifies that when property outside a city is claimed exempt, the homestead rights
are not lost when the property is subsequently annexed by the city. See KAN. STAT.
ANN. § 12-524a (2014 Supp.).
24 KAN. STAT. ANN. § 60-2312(a) (2005).
25 Fed. R. Bankr. P. 4003(c); In re Letterman, 356 B.R. 540, 542 (Bankr. D. Kan. 2006).
Case 14-11766 Doc# 54 Filed 05/14/15 Page 9 of 20
Robert is absent from Oberlin and maintains a residence in Salina. Robert credibly
testified that he has retained the house, which is unencumbered, as a retirement
home. He also testified that his employer was about to sell its plant in Salina and
that he would move back to Oberlin and live in the home there. He acted upon this
intent by giving notice to his landlord of his intent to terminate his Salina tenancy at
the end of April, 2015, and move back to "our home in Oberlin." He allowed Tina to
live there as his wife or domestic partner since July of 2013 and they had belongings
and furnishings in the Oberlin home. The trustee did not effectively controvert any
of this testimony.
A long line of Kansas cases holds that when an absent homesteader shows an
intention to return, the uninhabited homestead retains its exempt character. In
Bellport v. Harder, the Kansas Supreme Court said that "[W]hile occupancy as a
residence is essential to the establishment of a homestead, once a residence has been
established, such residence is presumed to continue until the contrary is clearly
shown."26 Even a debtor's acquiring property and residing in another state does not
terminate the homestead in the absence of "positive and clear" evidence.27 Nor does
the fact that Robert rented the Oberlin home to tenants for a few years during his
absence establish an abandonment of the homestead.28 The trustee didn't show that
Robert had taken any steps, other than being absent for an extended period of time,
to terminate his homestead interest. She certainly did not prove by positive and clear
26 Bellport v. Harder, 196 Kan. 294, 298, 411 P.2d 725 (1966).
27 Elliott v. Parlin & Orendorff Co., 71 Kan. 665, 81 Pac. 500, 501 (1905).
28 Bellport, supra at 298.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 10 of 20
evidence that he has abandoned the Oberlin property; nor did she meet the
presumption that a homestead continues once it has been established. To the
contrary, while working his job in Salina, Robert comes and goes from there
frequently and allows Tina to live there, too. They have personal belongings at the
Oberlin home. He and she pay utilities and otherwise maintains the property. At a
minimum, Robert has clearly demonstrated his intent to return to the Oberlin
property upon ending his employment in Salina and retiring to his permanent
residence with Tina.29
The same rules apply to determining whether Tina's homestead exemption
claim is valid, though she is in a different position because she has inhabited the
property since 2013, as either Robert's domestic partner, his common law wife, or
simply at Robert's sufferance. She moved from Salina back to Oberlin in the summer
of 2013 and has occupied the property since that time, with periodic trips to Salina
for medical care or to spend time with Robert. Tina listed the Oberlin property as her
current address on the bankruptcy petition. Her lack of a record title interest does
not weaken her homestead claim if she occupies the home as a family residence.
Indeed, in Redmond v. Kester, the Kansas Supreme Court held that the term "owner"
in both the Constitution and the statute includes occupants who hold any type of
interest, including the equitable interest that a beneficiary of a self-settled living
29 See Beard v. Montgomery Ward and Co., 215 Kan. 343, 348, 524 P.2d 1159 (1974)
(Residence means the place adopted by a person as his place of habitation, and towhich, whenever he is absent, he has the intention of returning.).
Case 14-11766 Doc# 54 Filed 05/14/15 Page 11 of 20
trust holds.30 So even if Tina is not married to Robert and cannot claim a homestead
interest as his spouse, her previously-established occupancy of that property as his
domestic partner would suffice to render her interest in the home exempt as well.31
Nothing the trustee has presented overcomes Tina's established occupancy nor her
intent to continue to occupy the home with Robert, either as his domestic partner or
his common law spouse. Keeping in mind Kansas policy to liberally construe claims
of homestead exemption and the trustee's burden of proof on an exemption claim, the
trustee's objection to Robert and Tina's homestead exemption must be overruled.32
Were Robert Gaines and Tina Watson married when the bankruptcy
case was filed?
This is a much closer question. Kansas has long recognized common law
marriages. In general, if a man and a woman have the capacity to marry, if they
presently agree to be married, and if they hold themselves out to the public as being
married, state law recognizes them as husband and wife.33 It is essential that the
30 Redmond v. Kester, 284 Kan. 209, 216, 159 P.3d 1004 (2007). See also In re Estate
of Fink, 4 Kan. App. 2d 523, 532-33, 609 P.2d 211 (1980) (Even though wife lefthomestead due to husband's drinking, and property was sold after his death to herchildren, she intended to inhabit the home they intended to build for her. Her
homestead interest through her husband continued without regard to her loss ofactual record title ownership of the fee.).
31 Redmond v. Kester, supra at 216 (Debtors may claim homestead exemption basedon any interest in real estate, whether legal or equitable, as long as they have notabandoned their occupation or intent to occupy the property.). See also In re Brown,
408 B.R. 262 (Bankr. D. Minn. 2009) (Debtor who occupied homestead with hisdomestic partner had equitable interest in property and could claim property exempt
even though it was titled in the name of the other partner.).
32 Redmond v. Kester, supra at 212.
33 Fleming v. Fleming, 221 Kan. 290, 291, 559 P.2d 329 (1977).
Case 14-11766 Doc# 54 Filed 05/14/15 Page 12 of 20
parties have a present mutual intention to be married; evidence of consent to cohabit,
without a present marriage agreement between them, is insufficient.34 The party
asserting a common law marriage has the burden of proving it.35 Only married
debtors may file a joint bankruptcy case under 11 U.S.C. § 302. Here, the trustee
asserts that Robert Gaines and Tina Watson were not married as a matter of law on
the date of the petition, July 31, 2014, and cannot seek joint relief.
Both debtors testified that they were divorced from their prior spouses before
moving in together. Nothing in the record sheds doubt on their being free to marry at
any time after Robert's divorce in 2011.36 At trial, each testified that they consider
themselves married and described generally how they hold themselves out to the
world as being married. But the evidence that was presented requires deeper
examination because whether Robert and Tina shared a present intention to be
married is less than clear. The Court did not have the benefit of any independent
witnesses regarding the debtors' relationship to corroborate the debtors' testimony
and is left to determine the credibility of the debtors' testimony and the weight to be
given the limited documentary evidence presented to ascertain the debtors' intent.
The Court is troubled by the inconsistencies in the debtors' testimony and the lack of
34 Id.
35 Driscoll v. Driscoll, 220 Kan. 225, 227, 552 P.2d 629 (1976).
36 Robert Gaines testified affirmatively that he obtained a divorce from his then-wifeCeleste in 2011, but did not offer at trial a copy of his divorce decree. Debtors' counsel
appended a certified copy of the Saline County District Court decree to his post-trialbrief and the trustee moved to strike it. Because Robert's testimony was not refutedwith evidence at trial, there is sufficient evidence in the record without the decree to
find that he had the capacity to marry at the time he and Tina began cohabiting.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 13 of 20
corroborating documents that would have been within the debtors' control to
Robert and Tina reconnected after several years in 2010, the same year that
Robert separated from his then-wife. Tina had been living in Oberlin (in Robert's
home) and after she lost her job there, he arranged for her to move to Salina and
helped her find a job. He testified that when he lost his home in Salina, after getting
divorced, he moved in with her. Thus, sometime in 2011, they began cohabitating.
Each testified that they began "seeing" one another romantically in 2012 and that
Robert asked Tina if she wanted to get married in 2012 while they were on a
motorcycle ride. But neither Robert nor Tina testified that they considered
themselves married as early as 2012; in fact, neither of them testified clearly how
long they had been in a common law marriage. Robert cited Tina's illness in February
2014 as the defining moment and time to "quit playing house." By contrast, Tina
testified that she "sometimes thinks" they might get married. Even if the Court
accepts Robert's testimony, their actions belie their words.
37 For example, no lease agreement was offered into evidence showing Robert and
Tina as joint tenants of the Hartford property, or any other rented property, in Salina.
No bank records or other financial records were introduced to show that theycombined their financial affairs. No utility billing statements were presented to showthat utilities were set up in both of their names. No car titles were introduced showing
joint ownership of vehicles. In fact, the only documents admitted into evidence that
suggesting a marital relationship, were the debtors' bankruptcy intake
questionnaire, an undated notice of vacating the Hartford tenancy signed by "Boband Tina Gaines," and an amended 2014 tax return. The latter two documents were
generated about a week before trial.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 14 of 20
While they lived together in Salina, Robert and Tina jointly occupied several
leased homes and purchased a storage shed. They received their mail at Salina and
sometimes received mail addressed to them both. They began referring to each other
as husband and wife to third parties. Tina returned to Robert's home in Oberlin in
July of 2013 while Robert remained in Salina and worked. At that point, they both
went back and forth between Salina and Oberlin. Robert traveled on weekends to
spend time with Tina and Tina would travel to Salina periodically for medical care or
to be with Robert. Robert testified that they decided to stop "playing house" and to do
whatever was necessary to get Tina on Robert's workplace health plan after she
became ill in February of 2014. There is no evidence of when they executed the DDP.
When they sought bankruptcy advice from their counsel, they represented
themselves as husband and wife on the intake sheet. When they filed this case they
listed separate addresses – Tina in Oberlin and Robert in Salina. After they filed this
case, they filed their 2014 federal income tax returns as single taxpayers, then
amended them in March of 2015 to file as "married filing separately." On their
amended returns, they each listed the Hartford address in Salina as their current
home address. Their 2012 and 2013 returns were filed as single taxpayers. But
shortly before trial of this matter, debtors signed an undated notice of their vacating
the Hartford tenancy as "Bob and Tina Gaines." This is the only document in evidence
where Tina used Robert's surname.
The question of whether a couple is married at common law arises in many
different legal settings and is highly fact-intensive. Several cases illustrate this point.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 15 of 20
In Fleming v. Fleming, the parties divorced in 1969. Mrs. Fleming received an
alimony award that terminated upon her death or remarriage. She moved in with
another man, prompting Mr. Fleming to move to terminate his alimony obligation by
claiming she'd remarried. The state district court held that Mrs. Fleming and her
companion were not married as a matter of law. The Supreme Court affirmed, finding
that there was no evidence that the companion had undertaken to support Mrs.
Fleming or that there was any "present agreement" between them to be married. Her
cohabitation did not supply Mr. Fleming grounds to terminate his alimony
In Eaton v. Johnston, the Supreme Court considered the legal relationship of
a couple who were divorced in 1977 after a 20 year marriage, but who reestablished
a common residence together shortly thereafter, remaining together for another 30
months. They incorporated a business and jointly purchased a home. When they split
up again, Ms. Eaton filed an action seeking a declaration that she and Mr. Johnston
had not remarried or, in the alternative, for divorce. The state district court concluded
that Ms. Eaton had consistently denied the existence of a marriage agreement, that
on several occasions Mr. Johnston asked her to remarry him, and that they filed
separate tax returns as single taxpayers. Mr. Johnston was also involved with
another woman whom he told his family he planned to marry. On these facts, the
court concluded that no common law marriage had occurred and that the couple's
property could not be divided under KAN. STAT. ANN. § 60-1606 (now KAN. STAT. ANN.
38 221 Kan. 290, 293.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 16 of 20
§ 23-2706) which specifically applied to the division of marital property whether or
not a decree of divorce or separate maintenance was granted. The Supreme Court
affirmed this finding and held that the trial court had authority independent of § 601606
to divide the parties' property.39
Another case in which the court found a lack of present marriage agreement is
Schrader v. Schrader.40 There, the parties divorced after just six years (and two
children), but again began living together, "this time without bothering with anything
so trivial as legal formalities."41 They displayed some public characteristics of being
married, but their personal behavior toward each other and to the outside world
indicated otherwise. The court found that while the parties filed joint income tax
returns and lived together, there was no present understanding that they were
married. Mrs. Schrader testified that she didn't formally marry Mr. Schrader again
because she wasn't sure enough of their relationship to do so and would have an out
if things went badly again. Mr. Schrader corroborated this, stating that they agreed
to live together for their children and, if things worked out, they'd remarry. So, while
there was evidence of their holding themselves out as married, there was none of a
present intention to be married. The Supreme Court affirmed.42
These three cases suggest that the existence of a publicly visible and complex
joint living arrangement may satisfy the "holding out" factor, but is not enough to
39 Eaton v. Johnston, 235 Kan. 323, 328-29, 681 P.2d 606 (1984).
40 207 Kan. 349, 484 P.2d 1007 (1971), disapproved on other grounds by Eaton v.
Johnston, 235 Kan. 323, 681 P. 2d 606 (1984).
41 207 Kan. 349, 350.
42 Id. at 351.
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demonstrate a shared present intention to be married, particularly where the parties
have an "out" or their relationship is subject to a future contingency. The cases also
state that the parties cannot take actions or legal positions that suggest contrary
intent. These parties did.
Two pieces of documentary evidence are particularly damning to debtors' claim
of a present marriage agreement necessary to establish a common law marriage.
First, Robert and Tina did not file tax returns as married people until they filed their
2014 returns, doing so long after this case was filed and long after the trustee had
filed her § 302 motion to dismiss, making it clear to debtors that she was challenging
their eligibility to be joint debtors. Even then, the 2014 returns offered in evidence
were amended returns that were filed in March of 2015 to reflect that they were
changing their filing status from single to "married filing separately," and were
amended upon their attorney's advice.43 Second, when they signed the DDP to obtain
health care coverage for Tina as a dependent under Robert's employer's plan, they
certified that they were "not married to each other."44 This all occurred within a few
months of their filing this bankruptcy petition and, according to Robert, was the
definitive moment when he considered himself married to Tina. The inconsistency
here is that, according to the employer's website, a "spouse" qualifies as a dependent
of the employee and is eligible for coverage under the employer's health plan.45 Tina
43 See Ex. 6 and 7. No evidence was presented that debtors amended their filing status
for tax years 2012 or 2013.
44 See Ex. 8, p. 18.
45 Id. at p. 21.
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was not claimed as an eligible dependent as Robert's spouse, but as his domestic
partner. Both he and she signed the DDP, suggesting that they did not consider
themselves to be married at this time. Nor did they offer any evidence that debtors
subsequently formed a present marriage agreement between May of 2014 and the
date of filing, July 31, 2014.
These are not the only proof problems, either. Further undercutting their
position is the testimony that Robert proposed to Tina in 2012 and that Tina testified
she sometime thinks they will get married eventually, suggesting that she doesn't
think they're married now. They do not consistently cohabitate. In fact, on the
petition date, Robert and Tina were living in towns 200 miles apart. Other than their
living in leased property together and purchasing a shed, there is no evidence of joint
economic activity. Nor is there any evidence that beyond placing her on the Phillips
health insurance plan as a domestic partner, Robert has actually undertaken to
provide Tina with support, though he clearly does support her. They did not prove
how, or even if they have combined their finances, whether they have ever affirmed
their commitment to each other in the presence of other witnesses, whether they have
exchanged rings, or if they have otherwise manifested the require present intent.
Proof that they have lived together prior to filing their bankruptcy and proof that
they intend to ultimately live together in Robert's Oberlin home is insufficient to
establish a common law marriage. While I am persuaded that Robert and Tina may
hold themselves out as married, they failed to carry their burden to prove that they
presently intended to be married when the case was filed on July 31, 2014.
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Because the debtors were not married on the petition date, this case cannot
proceed as a joint case.46 This leaves the debtors two alternatives. They can seek to
deconsolidate and proceed in separate chapter 13 cases. Failing that, I must deny
confirmation and dismiss the case because they are ineligible to proceed jointly and
therefore have not complied with the provisions of Title 11 and chapter 13, meaning
that they cannot demonstrate their compliance with 11 U.S.C. § 1325(a)(1). The
debtors shall have 14 days to file a motion to deconsolidate or their case will be
dismissed without further notice.
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