Birdsell v. Petersen
ORDER - For all of these reasons, although this court AFFIRMS the bankruptcy courts decision allowing defendant to recoup $27,412.50, it REVERSES and VACATES that decision insofar as that court awarded defendant a one-half interest in the commun ity property. As explained herein, the bankruptcy estate is entitled to 100 percent of the community property, $110,881.34, in defendants possession at the filing of debtors bankruptcy petition. The bankruptcy court is thus ordered to vacate its prior judgment and enter judgment in accordance herewith. (See document for further details). Signed by Judge Robert C Broomfield on 9/27/10. (LAD)
Birdsell v. Petersen
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA
In re DAWN PETERSEN,
) ) Debtor, ) ______________________________) ) DAVID BIRDSELL, Trustee, ) ) Appellant, ) ) vs. ) ) DAVID A. PETERSEN, ) ) Appellee. ) )
No. CIV 09-1600 PHX RCB BK 02-01937 - PHX SCC Adversary No. 02-0576 BAP No. AZ-09-1210 ORDER
Introduction This adversary proceeding is before the court now for the Once again the broad issue is what funds, if any,
22 third time.
23 defendant/appellee, David A. Petersen ("defendant"), must turn over 24 to Trustee/appellant, David Birdsell ("Trustee"), as part of the 25 bankruptcy estate pursuant to the Bankruptcy Code ("the Code"), 11 26 27 28
1 U.S.C. §542.1
Despite finding community property assets of
2 $110,881.34, the bankruptcy court found that the bankruptcy estate 3 and defendant each had a one-half interest in that community 4 property, i.e., $55,440.62. Id. at 18:2-4. After also allowing
5 defendant "credits or setoffs" totaling $27,412.50, the bankruptcy 6 court held that defendant "still owed . . . $28,028.122 . . . to 7 the bankruptcy estate." Id. at 18:15-16 (footnote added). Adding
8 $344.40 in costs, and deducting $14,000.00 which defendant had 9 previously paid to the Trustee, the bankruptcy court entered a 10 final judgment against defendant, ordering him to pay $14,372.52 to 11 the Trustee. 12 R. (Doc. 4-8) at 2, ¶ 1.
The Trustee argues that judgment should have been entered in
13 his favor, however, in the full amount of the community property 14 assets $110,881.34. Appellant's Br. (Doc. 3) at 9. R. (Doc. 4-9). Therefore,
15 he timely filed a Notice of Appeal.
16 timely filed a Statement of Election, in accordance with 28 U.S.C. 17 § 158(c) and Fed. R. Bank. Pro. 8001(e), electing to have his 18 appeal heard by this district court rather than by a three-judge 19 panel of the bankruptcy appellate panel service. 20 21 22 23 24 25 26 27 28
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 10019037 in effect prior to October 17, 2005, the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, April 20, 2005, 119 Stat. 23, as debtor's case was filed prior to that effective date. In its "conclusion," however, the bankruptcy court incorrectly noted "that the bankruptcy estate is entitled to the sum of $27,412.50." R. (Doc. 4-7) at 18:22-23. That sum is the amount of setoffs to which the court found defendant Evidently the bankruptcy court was entitled, however. See id. at 18:13. inadvertently transposed defendant's setoffs with the amount which it found he owes the bankruptcy estate.
1 to 28 U.S.C. § 158(a),3 this district court has jurisdiction to 2 hear the Trustee's appeal. No party has requested oral argument
3 and the court will not require it because "the facts and legal 4 arguments are adequately presented in the briefs and record and the 5 decisional process would not be significantly aided by oral 6 argument." 7 8 Fed. R. Bank. Pro. 8012. Background The stipulated facts are simple and straightforward. On April
9 10, 2000, debtor Dawn L. Petersen served a Petition for Dissolution 10 of Marriage upon defendant. R. (Doc. 4-3) at 1, ¶ I(A). Nearly
11 four years later, on February 23, 2004, the Superior Court in 12 Maricopa County entered a Decree of Dissolution of Marriage. 13 at 1, ¶ I(C). Id.
In the intervening years, prior to the entry of the
14 Decree of Dissolution, on February 8, 2002, Ms. Petersen filed a 15 Chapter 7 bankruptcy petition. Id. at 1, ¶ I(B). On June 14, Br.
16 2002, Ms. Petersen received a discharge of all of her debts. 17 (Doc. 3) at 1:23-25 (citation omitted). 18 On April 12, 2002, the Trustee commenced an adversary
19 proceeding to recover from defendant the community property 20 allegedly belonging to the bankruptcy estate. See R. (Doc. 4-2).
21 By stipulation, the parties resolved the issue which dominated the 22 prior two appeals - the community's interest in the marital 23 residence. The parties finally agreed, and hence the bankruptcy
24 court found, that $50,000.00 represents the community's interest in 25 the improvements on that residence. 26 27 28
That statute provides in relevant part that "district courts . . . shall have jurisdiction to hear appeals . . . from final judgments . . . of bankruptcy judges[.]" 28 U.S.C. § 158(a)(1).
R. (Doc. 4-7) at 3:1-13; and 3
1 n. 9.
Additionally, also pursuant to the parties' agreement, the
2 bankruptcy court found that the community held the following 3 interests: 4 5 6 1. 2. 3. "38[%] of the IRA account" valued at $22,636.48; a "cash management account" valued at $11,778.24; and a "Wells Fargo Account" valued at $18,034.22. Based upon the foregoing
7 Id. at 3:17-18 - 4:1 (footnote omitted).
8 assets, the bankruptcy court found that "the interests in community 9 property to be taken into consideration" totaled "$110,881.34." 10 Id. at 17:19-20; and 18:1. 11 The bankruptcy court "technically agree[d] with the Trustee"
12 that pursuant to 11 U.S.C. § 541(a)(2) the "bankruptcy estate 13 includes," inter alia, "all of the community property of the Debtor 14 and [the defendant], . . . , as of the time of the filing of the 15 bankruptcy petition on February 8, 2002[,]" i.e., $110,881.34. 16 at 9:14-16 (footnote omitted). Id.
Nevertheless, the bankruptcy court
17 "allocate[d] one-half of the value of the community assets to [the 18 defendant]," and the other half to the bankruptcy estate. 19 at 9:17-18; and at 18:3-4. Id.
The bankruptcy court apportioned the
20 community property assets in that way relying upon Arizona statutes 21 governing division of community property in a dissolution 22 proceedings, as more fully discussed herein. The bankruptcy court
23 further relied upon what it perceived to be the "inequit[y]" which 24 would arise from "allow[ing] the bankruptcy estate to retain a 100 25 percent interest in the community assets." 26 Id. at 13:2-3.
Concomitantly, the bankruptcy court found that defendant
27 "shall receive . . . credits or setoffs" of $27,412.50 against the 28 amount he owes to the bankruptcy estate. -4The bankruptcy court
1 offered two reasons for allowing those setoffs.
First, it found
2 that defendant met the three criteria for a setoff pursuant to 3 section 553 of the Code. 4 Second, invoking the equitable doctrine of recoupment, the Id. at
5 bankruptcy court allowed "the setoff of mutual debts." 6 16:8-9.
When the bankruptcy court did that, as just noted, it
7 allowed $27,412.50 in setoffs, and found that defendant still owed 8 the bankruptcy estate $28,028.12. 9 Id. at 18:12-14.
The Trustee's appeal presents two fairly narrow legal Did the bankruptcy court commit "reversible error" by:
11 (1) "failing to order the Defendant to turn over the full value of 12 the community property to the [T]rustee[;]" and (2) "allowing the 13 defendant to assert offsets against property of the bankruptcy 14 estate[.]" Appellant's Br. (Doc. 3) at 1:11-16. The court will
15 address these issues in turn. 16 17 I. 18 Standards of Review In reviewing the bankruptcy court's decision, "[t]he Discussion
19 applicable standard of review is identical to that employed by 20 circuit courts of appeal in reviewing district court decisions." 21 Brooks v. Brooks, 2010 WL 1416702, at *2 (E.D.Cal. April 5, 2010) 22 (citing Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 23 1997)). A bankruptcy court's "factual findings are reviewed for Ormsby v. First Am. Title Co. of Nev., 591 F.3d
24 clear error."
25 1199, 1205 n. 2 (9th Cir. 2010) (citation and internal quotation 26 marks omitted). However, "a bankruptcy court's legal conclusions,
27 including its interpretation of the bankruptcy code and state law," 28 are subject to "de novo" review. -5Heilman v. Heilman, 430 B.R.
1 213, 216 (9th Cir. BAP 2010) (citation omitted).
Mixed questions of In re
2 law and fact are, likewise, subject to de novo review. 3 Cerchione, 414 B.R. 540, 545 (9th Cir. BAP 2009).
"Such issues are
4 reviewed de novo because they require consideration of legal 5 concepts and the exercise of judgment about the values that animate 6 legal principles." 7 omitted). 8 This court "may affirm, modify, or reverse [the] bankruptcy Id. (citation and internal quotation marks
9 judge's judgment, order, or decree or remand with instructions for 10 further proceedings." Fed. R. Bank. P. 8013. An affirmance "may"
11 be based "on any ground supported by the record, even if it differs 12 from the bankruptcy court's stated rationale." 13 at 545 (citation omitted). 14 On this appeal the Trustee is challenging the bankruptcy Cerchione, 414 B.R.
15 court's determination that the bankruptcy estate is entitled to 16 one-half the value of community assets, as opposed to "retain[ing] 17 a 100 percent interest in th[os]e assets." R. (Doc. 4-7) at 13:3.
18 The issue of "[w]hether property is property of the [bankruptcy] 19 estate is a question of law reviewed de novo." In re Mwangi, 2010 "De
20 2723204, at *3 (9th Cir. BAP June 30, 2010) (citation omitted). 21 novo means review is independent, with no deference given to the 22 trial court's conclusion." 23 Id. (citation omitted).
The Trustee also challenges the bankruptcy court's allowance
24 of certain setoffs to defendant based upon section 553 of the Code. 25 Decisions to allow or disallow setoffs under that section are 26 subject to review for abuse of discretion. Brown & Cole Stores,
27 LLC v. Associated Grocers, Inc. (In re Brown & Cole Stores, LLC), 28 375 B.R. 873, 877 (9th Cir. BAP 2007) (citations omitted). -6Reversal
1 on abuse of discretion grounds is not proper "unless [the court] 2 ha[s] a definite and firm conviction that the bankruptcy court 3 committed a clear error of judgment in the conclusion it reached 4 after weighing the relevant factors." In re Gould, 401 B.R. 415,
5 429 (9th Cir. BAP 2009) (citation omitted), aff'd on other grounds, 6 603 F.3d 1100 (9th Cir. 2010). By the same token though, "a
7 bankruptcy court necessarily abuses its discretion if it bases its 8 decision on an erroneous view of the law or clearly erroneous 9 factual findings." Id. (citation omitted). "Absent such abuse,"
10 the court "will not set aside the disallowance[,]" or, conversely, 11 the allowance. See United States v. Carey (In re Wade Cook Fin.
12 Corp.), 375 B.R. 580, 588 (9th Cir. BAP 2007) (citation omitted). 13 In according setoffs to defendant, alternatively, the
14 bankruptcy court relied upon the equitable doctrine of recoupment. 15 The Trustee did not explicitly address the bankruptcy court's 16 reliance upon recoupment. Regardless, as with the decision to
17 allow setoffs under section 553, a bankruptcy court's "use" of 18 recoupment is "reviewed for an abuse of discretion." Aalfs v.
19 Wirum (In re Straightline Invs., Inc.), 525 F.3d 870, 882 (9th Cir. 20 2008) (citations and internal quotation marks omitted). With these
21 standards of review firmly in mind, the court will examine the 22 Trustee's two issues on appeal. 23 II. Issues on Appeal 24 25 A. Bankruptcy Estate's Entitlement to Community Property
Because the bankruptcy court required defendant to turn over
26 to the Trustee only one half of the community property assets in 27 his possession, the Trustee charges that court with "confus[ing] 28 its responsibilities in the bankruptcy proceeding with the -7-
1 responsibilities of the Arizona divorce courts in dissolution 2 proceedings." Appellant's Br. (Doc. 3) at 4:3-5. Essentially the
3 Trustee contends that the bankruptcy court committed "legal error" 4 when it relied upon "equitable principals [sic][,]" and "state law 5 presumptions that apply to the division of community property in a 6 divorce case" to justify its decision to require the defendant to 7 "turn over to the trustee only half of the community assets in his 8 possession[.]" Id. at 5:19; 4:20; 4:22-23; and 5:17-18. 9 Defendant counters that "[a]fter the filing of a petition for
10 dissolution, Arizona marital property does not fall within" the 11 ambit of section 541(a)(2)(A).4 Resp. Br. (Doc. 8) at 3.
12 Defendant posits that A.R.S. §§ 25-214 and 25-315, "sever the 13 spouse's rights to independently manage, control and dispose of 14 community property[.]" Id. at 5. Absent that statutory right to
15 independently manage and control community property, defendant 16 asserts that after the filing of a dissolution petition in Arizona, 17 community property "does not come into the bankruptcy estate under 18 §541(a)(2)(A)." 19 Id. at 6.
The Trustee replies, first of all, that the defendant
20 waived the "defense" that A.R.S. §§ 25-214(C)(3) and 25-315 21 "`sever[ed]' the community property of the Petersens such that 22 the community property which was being litigated before the 23 bankruptcy court never came `into the bankruptcy estate under 11 24 U.S.C. § 541(a)(2)(A).'" Reply Br. (Doc. 9) at 2:12-15 (quoting 25 26 27 28
Defendant further contends that the "Trustee has failed to establish that any marital property in this case falls within § 541(a)(2)(B)." Resp. Br. (Doc. 8) at 3, § III (A)(1) (emphasis added). The Trustee's reply brief makes clear, however, that he is relying only upon section 541(a)(2)(A). Thus, there is no need for the court to, and it will not, consider the potential applicability of section 541(a)(2)(B) here.
1 Resp. Br. (Doc. 8) at 5).
That defense has been waived, the
2 Trustee argues, because it is being raised for the first time on 3 this appeal. Turning to the merits, the Trust contends that
4 A.R.S. § 25-214(B), which, inter alia, gives spouses "equal 5 management, control and disposition rights over their community 6 property[,]" when read in conjunction with section 541(a)(2)(A), 7 "make[s] it clear that community property in Arizona is property of 8 the bankruptcy estate." Id. at 3:23-24. Lastly, the Trustee
9 strenuously disagrees with the defendant that he was entitled to 10 certain setoffs, as the bankruptcy court allowed, as part of an 11 "equitable distribution of marital assets[.]" See Resp. Br. (Doc. 12 8) at 8. 13 1. Waiver
Preliminarily, the court must address the fact that the
14 Trustee is raising the waiver argument for the first time in his 15 reply brief. Ordinarily, that "is improper . . . because the other See A.D. v. California
16 party does not have a chance to respond."
17 Highway Patrol, 2009 WL 733872, at *9 (N.D.Cal. March 17, 2009) 18 (citing, inter alia, Lentini v. Cal. Ctr. for the Arts, 349 F.3d 19 608, 614 n.2 (9th Cir. 2003)). In the present case, however, the
20 Trustee cannot be faulted for not having raised this waiver 21 argument sooner because, as explained below, the defendant did not 22 make the argument which the Trustee claims has been waived, until 23 the filing of the defendant's response brief on this appeal. 24 Moreover, addressing the Trustee's waiver argument does not result 25 in any prejudice to the defendant because, as will be seen, the 26 court finds no waiver here. 27 The bankruptcy court did not address defendant's argument that
28 he is entitled to one-half of the community property assets because -9-
1 in Arizona, "after the petition for dissolution is filed," 2 community property "does not come into the bankruptcy estate under 3 § 541(a)(2)(A)." Resp. Br. (Doc. 8) at 5-6. Understandably, the
4 bankruptcy court did not address that argument because, as the 5 record shows, there is no mention of that argument anywhere in 6 defendant's bankruptcy court brief. See R. (Doc. 4-4).
7 Consequently, the court could find, as the Trustee maintains, that 8 the defendant has waived this argument because defendant is making 9 it for the first time on appeal. See Sigma Micro Corp. v.
10 Healthcentral.com (In re Healthcentral.com), 504 F.3d 775, 789 (9th 11 Cir. 2007) (citation omitted) (declining to consider and deeming 12 "waived" arguments made on appeal which a party did not "assert" 13 before the bankruptcy court, and hence that court did not 14 consider); see also Levitt v. Levitt, 2007 WL 1651062, at *4 15 (E.D.Cal. June 5, 2007) (declining to "consider theories asserted 16 for the first time on appeal" which "were never directly or 17 properly raised at the bankruptcy court level"), aff'd unpub'd 18 opinion, Levitt v. Maxwell-Stratton, 310 Fed.Appx. 127, 128 (9th 19 Cir. 2009) (citation omitted) ("district court properly declined to 20 consider the other issues raised by Mr. Levitt because he did not 21 raise them before the bankruptcy court"). 22 23 rule. As with most legal rules, there are exceptions to the waiver One exception is that a court may consider an issue raised
24 for the first time on appeal "when the issue is one of law and does 25 not depend on the factual record, or the record has been fully 26 developed." Countrywide Home Loans, Inc. v. Hoopai (In re Hoopai),
27 581 F.3d 1090, 1096 (9th Cir. 2009) (citations and internal 28 quotation marks omitted). Here, the issue of whether the filing of - 10 -
1 a petition for dissolution under Arizona law takes community 2 property outside the scope of the bankruptcy estate under section 3 541(a)(2)(A) is one of law. Resolution of that issue involves
4 primarily statutory interpretation, as the parties argue it. 5 There is no need to resort to the factual record or for further 6 development of that record. Having found that the defendant did
7 not waive his argument that Arizona domestic relations law removes 8 community property from the bankruptcy estates as section 9 541(a)(2)(A) defines it, the court will turn to the merits of that 10 argument. 11 12 2. Merits
When, as in the present case, "a chapter 7 bankruptcy petition
13 is filed, an estate automatically is created that comprises 14 essentially all property owned by the debtor." In re Mwangi, 2010
15 WL 2723204, at *3 (citing, inter alia, § 541(a)); see also Rooz v. 16 Kimmel (In re Kimmel), 378 B.R. 630, 638 (9th Cir. BAP 2007) 17 ("Section 541 is self effectuating.") With limited exceptions not
18 relevant here, that bankruptcy estate includes "all legal or 19 equitable interests of the debtor in property as of the 20 commencement of the case." 11 U.S.C. § 541(a)(1). A bankruptcy
21 estate under section 541 also includes, among other things, "[a]ll 22 interests of the debtor and the debtor's spouse in community 23 property as of the commencement of the case that is . . . under 24 the sole, equal or joint management and control of the debtor[.]" 25 11 U.S.C. § 541(a)(2)(A). Thus, "[i]n a non-dissolving marriage, In re
26 community property is property of the [bankruptcy] estate."
27 Keller, 185 B.R. 796, 799 (9th Cir. BAP 1995) (citations omitted). 28 Likewise, "[w]hen," as here, "a bankruptcy petition is filed - 11 -
1 prior to the final disposition of property between divorcing 2 spouses, the community property comes within the jurisdiction of 3 the bankruptcy court[.]" Id. The underlying rationale is that it
4 permits the bankruptcy court to "assure fairness to the creditors 5 of the individual spouses and the marital estate." Id. Consistent
6 with the foregoing, the Ninth Circuit recognizes that "[f]or 7 purposes of § 541(a)(2), all community property not yet divided by 8 a state court at the time of the bankruptcy filing is property of 9 the bankruptcy estate." Dumas v. Mantle (In re Mantle), 153 F.3d
10 1081, 1085 (9th Cir. 1998); see also In re Bauer, 2005 WL 4705284, 11 at *3 (Bankr. D. Idaho Aug. 22, 2005) ("In the event a divorce 12 action is pending, so long as a state court has not yet divided the 13 couple's property, all community property of the spouses becomes 14 property of the bankruptcy estate of the first spouse to file a 15 petition.") (citation omitted). 16 There is no dispute in the present case that the debtor's
17 filing of her bankruptcy petition preceded final dissolution of her 18 marriage to the defendant. There also is no dispute, as the
19 bankruptcy court pointed out, that "the parties . . . chose to 20 litigate the issue of the recovery of community property assets by 21 the bankruptcy estate in th[at] [bankruptcy] [c]ourt." 22 7) at 12:4-5. R. (Doc. 4-
In fact, the bankruptcy court expressly acknowledged
23 that "any community property owned by the parties, as of the filing 24 of the Debtor's bankruptcy petition, would have become property of 25 the bankruptcy estate." R. (Doc. 4-7) at 10:18-20 (citing, inter
26 alia, In re Kimmel, 378 B.R. 360). 27 Despite accurately reciting the applicable rule of law, the Instead, the bankruptcy
28 bankruptcy court chose to disregard it. - 12 -
1 court relied upon general principles of equitable distribution 2 under Arizona's domestic relations law. In so doing, the
3 bankruptcy court faulted the Trustee for not "present[ing] [any] 4 evidence which would allow the bankruptcy estate to retain a 100 5 percent interest in the community assets, when the presumption 6 under Arizona law is to divide the assets, each spouse to receive 7 one-half of the value of the community assets." Id. at 12:21-23.
8 Further, the bankruptcy court found that it would be "inequitable 9 to . . . allow the bankruptcy estate to retain a 100 percent 10 interest in the community assets." Id. at 13:2-3. From the
11 bankruptcy court's viewpoint, that inequity arose from "the posture 12 of th[e] case," in that for "many years . . . the parties have 13 [been] pursu[ing] their rights and remedies, at the trial-court and 14 appellate level[.]" Id. at 13:1-2. 15 In light of the well-settled legal principles outlined above,
16 however, the court agrees with the Trustee that the bankruptcy 17 court's decision to apply Arizona domestic relations law pertaining 18 to equitable distribution of community property was legal error. 19 The bankruptcy court must be "guided by the dictates of the 20 Bankruptcy Code and not by supposition as to what actions the state 21 court might have taken to ensure an equitable distribution of 22 community property between the" debtor and defendant. 23 Entz, 44 B.R. 483, 484 (Bankr. D. Ariz. 1984). 24 Defendant attempts, in two ways, to justify the bankruptcy See In re
25 court's erroneous legal conclusion, and refute the Trustee's 26 argument that community property is part of the bankruptcy estate 27 under section 541. 28 Trustee cites, First, he argues that the cases to which the
In re Kimmel, 378 B.R. 630, In re Maynard, 264 B.R. - 13 -
1 209 (9th Cir. BAP 2001); and In re Teel, 34 B.R. 762 (9th Cir. BAP 2 1983), are distinguishable. In Maynard and Teel, notwithstanding
3 pending marital dissolution proceedings, upon the debtor/spouse's 4 filing of a bankruptcy petition, the Bankruptcy Appellate Panel 5 ("BAP") held that community property, including that of the non6 debtor spouse, became part of the bankruptcy estate under section 7 541. The defendant correctly notes that as a basis for bringing
8 the non-debtor spouse's community property within the bankruptcy 9 estate under section 541, in both Teel and Maynard the BAP did rely 10 upon California statutes providing that each spouse has equal 11 rights of management and control of community property. See Teel,
12 34 B.R. at 765 (citations omitted); See Maynard, 264 B.R. at 214 13 (citation omitted). Defendant unsuccessfully attempts to
14 distinguish those cases from the present one because the courts 15 relied upon California community property law, which defendant 16 baldly asserts "differ[s]" from Arizona law. 17 8) at 4. 18 California and Arizona law are nearly identical on the See Resp. Br. (Doc.
19 fundamental issue of spousal control over community property 20 though. As in California, in Arizona "[t]he spouses have equal
21 management, control and disposition rights over their community 22 property[.]" A.R.S. § 25-214(B). Moreover, the Ninth Circuit BAP
23 has expressly recognized that "[t]he jurisdiction of the bankruptcy 24 court is exclusive because the initiation of divorce or dissolution 25 proceedings does not terminate either spouses [sic] management and 26 control over community property by placing the community property 27 in custodia legis of the divorce court." In re Keller, 185 B.R. at
28 799 (citations and internal quotation marks omitted). - 14 -
1 Consequently, there is no merit to defendant's suggestion that this 2 court should disregard Teel and Maynard because those cases "arise 3 out of California." 4 See Resp. Br. (Doc. 8) at 4.
Similarly unavailing is defendant's argument that A.R.S.
5 §§ 25-214(C)(3) and 25-315 "sever the spouse's rights to 6 independently manage, control and dispose of community property" 7 so that "after the petition for dissolution is filed" in Arizona, 8 community property "does not come into the bankruptcy estate under 9 § 541(a)(2)(A)." See id. at 5 and 6. Section 25-214(C)(3) does
10 limit a spouse's ability to "bind the community . . . after service 11 of a petition for dissolution . . . if th[at] petition results in a 12 decree of dissolution[.]" A.R.S. § 25-214(C)(3). Further, A.R.S.
13 § 25-315 authorizes entry of a "temporary order or preliminary 14 injunction" in dissolution proceedings which prohibits, inter alia, 15 both spouses from "transferring, encumbering, concealing, selling 16 or otherwise disposing of any of the . . . , community property of 17 the parties." A.R.S. § 25-315(A)(1)(a). Nothing in the plain
18 language of those statutes supports defendant's interpretation that 19 they take community property outside the ambit of the bankruptcy 20 estate under section 541, however. 21 Despite defendant's assertion to the contrary, A.R.S. §§ 25-
22 214(C)(3) and 25-315 do not "sever," "divest," Resp. Br. (Doc. 23 8) at 5, or in any way impair, impede or defeat the "equal 24 management and control" which A.R.S. § 25-214(B) explicitly allows. 25 In fact, one bankruptcy court within this District has found that 26 sections 541(a)(2)(A) and (B) "are generally satisfied with respect 27 to Arizona community property," and hence "`the community property 28 of both spouses becomes property of the estate when one spouse - 15 -
1 files a bankruptcy petition.'" In re Monroe, 282 B.R. 219, 222 2 (Bankr. D. Ariz. 2002) (quoting Maynard, 264 B.R. at 214). 3 That is certainly the case here. A plain reading of section
4 541 of the Code and A.R.S. § 25-214(B) readily shows, as discussed 5 earlier, that in the present case, the bankruptcy estate includes 6 defendant's interests in community property as of the date the 7 debtor filed her chapter 7 bankruptcy petition, i.e., February 8, 8 2002. Moreover, even if there is a conflict between Arizona law
9 regarding division of community property and the Bankruptcy Code, 10 the latter would "control under the supremacy clause, Article VI, 11 Clause 2, of the United States Constitution." 12 764 (citations omitted). 13 As the foregoing discussion shows, the bankruptcy court erred See Teel, 34 B.R. at
14 in "award[ing] [defendant] a one-half interest in th[e] community 15 property[,]" and in holding that "the bankruptcy estate has an 16 interest in the community property equal to one-half of 17 $110,881.34, or the amount of $55,440.62." 18 18:2-4. See R. (Doc. 4-7) at
Hence, this court vacates that aspect of the bankruptcy
19 court's decision finding that "the bankruptcy estate has an 20 interest in the community property equal to one-half of 21 $110.881.32, or the amount of $55,440.62." 22 23 B. "Setoffs" See id. at 18:3-4.
Next, the court will address the Trustee's argument that
24 contrary to the bankruptcy court's holding, "the defendant is not 25 entitled to `offsets' against [the bankruptcy] estate property." 26 Appellant's Br. (Doc. 3) at 5:22-23 (emphasis omitted). The
27 bankruptcy court held that defendant "shall receive" $27,412.50 in 28 setoffs against the amount that it held defendant "still owed . . . - 16 -
1 to the bankruptcy estate."
R. (Doc. 4-7) at 18:5; and 18:15-16.
2 Pursuant to section 553 of the Code, the bankruptcy court found 3 that defendant was entitled to setoffs totaling $27,412.50. 4 Alternatively, the bankruptcy court relied upon the equitable 5 doctrine of recoupment as a "legal theory" for allowing setoffs in 6 that amount. See id. at 16:8-9. The bankruptcy court arrived at
7 that $27,412.50 figure based upon the following undisputed facts. 8 First, the bankruptcy court allowed defendant a setoff of
9 $24,000.00, representing one-half of his interest in the total 10 proceeds ($48,000.00) from the sale of debtor's insurance business. 11 Id. at 4:6-9 (footnote omitted). 12 during her marriage to defendant. Debtor started that business Id. at 4:6-7. The court
13 observes, as did the bankruptcy court, that "[t]he parties have not 14 questioned this factual finding." 15 See id. at 4:25-26, n. 12.
The second setoff which the bankruptcy court allowed is based
16 upon a pre-petition state court order of distribution of community 17 funds. Defendant presented evidence that on June 25, 2000, he paid
18 debtor $2,000.00 of the $4,000.00 which the state court had 19 previously ordered him to pay her. 20 omitted). See id. at 5:6-7 (footnote
However, because defendant "was only able to show that
21 he paid $2,000 of th[at] $4,000[,]" the bankruptcy court permitted 22 him a setoff of "only . . . $2,000.00." 23 Id. at 5:13-15.
Third, despite proof before the bankruptcy court that the
24 "Debtor withdrew funds [in the amount of $2,825.00] from [a] 25 deposit account just prior to commencing the domestic relations 26 proceedings against [defendant][,]" the bankruptcy court found that 27 the defendant did not provide "the requisite evidence that the 28 funds in that account were . . . his sole and separate property." - 17 -
1 Id. at 5:20-21 (footnote omitted); and 6:2-3.
2 bankruptcy court stressed that the state court "[m]inute [e]ntry 3 reflects that th[at] . . . Court believed that whatever funds were 4 left in the deposit account were community funds, since it ordered 5 . . . [defendant] [to] provide one-half of the funds on deposit to 6 the Debtor." Id. at 6:4-6 (footnote omitted). Thus, "[g]iven the
7 timing of the Debtor's withdrawal of the funds and the apparent 8 lack of notice of such action by the [State] Court[,]" the 9 bankruptcy court "allow[ed] [defendant] a credit for one-half of 10 the funds that the Debtor withdrew just prior to the divorce 11 proceedings[,]" i.e., $1,412.50. 12 Id. at 6:6-9 (footnote omitted).
The Trustee contends that the bankruptcy court's setoff
13 "analysis was fundamentally flawed" because from his perspective 14 "[t]his case is not about a right of setoff under 11 U.S.C. § 533." 15 Appellant's Br. (Doc. 3) at 6:4 and 7:24. So instead of discussing
16 the bankruptcy court's section 553 analysis, the Trustee singularly 17 focused on what he contends was the sole issue for the bankruptcy 18 court "to determine the community assets [which] existed on the 19 date of the bankruptcy filing." Id. at 6:18-19. Because the
20 parties stipulated and the bankruptcy court found that those assets 21 totaled $110,881.34, the Trustee argues that "[t]h[at] . . . court 22 improperly allowed the Defendant to offset his `divorce court' 23 claims against estate property." Id. at 8:9-10. In sum, the
24 Trustee strenuously maintains that the entire $110,881.34 should be 25 turned over to the bankruptcy estate. Therefore, he is seeking an
26 order to set aside the judgment and to "remand this matter . . . 27 with instructions to deny the offsets asserted by the Defendant." 28 Id. at 8:11-12. - 18 -
Somewhat surprisingly, the defendant did not adopt one or both
2 of the bankruptcy court's reasons - section 553 or recoupment for 3 allowing him $27,412.50 in setoffs. Rather, without offering any
4 legal support, the defendant maintains that "the Bankruptcy Court 5 was to apportion and recover the bankruptcy estate's interest in 6 the parties' community assets" in accordance with state law. 7 Resp. Br. (Doc. 8) at 8. That task of "equitable distribution" See
8 fell to the bankruptcy court, explains defendant, because it "had 9 not been completed by the state court[.]" Id. Defendant contends
10 that adopting the Trustee's position would impermissibly "tie the 11 hands of the Bankruptcy Court . . . forc[ing] a decision for 12 turnover without consider[ing] the parties' relative rights and the 13 equities of the case." Id. at 9. Thus, the defendant seeks to
14 have this court affirm the judgment of the bankruptcy court, which 15 allowed him certain setoffs. 16 Disagreeing with the defendant's apportionment theory, the
17 Trustee emphasizes that the plain language of section 541(a)(2)(A) 18 provides in relevant part that "`all interests of the debtor and 19 the debtor's spouse in community property' is property of the 20 bankruptcy estate." Reply Br. (Doc. 9) at 11-13 (emphasis added by After "identify[ing]
21 Trustee) (quoting 11 U.S.C. § 541(a)(2)(A)).
22 [the] community property," which the bankruptcy court did, the 23 Trustee asserts that pursuant to section 541(a)(2)(A), all of that 24 property became part of the bankruptcy estate, i.e., $110,881.34, 25 and should be turned over to him in accordance with section 542 of 26 the Code. Id. at 6:5. The Trustee is adamant that the defendant
27 "does not get to keep all or some portion of that property ahead of 28 creditors." Id. at 6:7-8. - 19 -
Perhaps because he realizes the futility of arguing that the
2 bankruptcy court erred in applying the doctrine of recoupment here, 3 the Trustee does not mention that doctrine anywhere in his appeal. 4 Similarly, the defendant did not mention recoupment, as noted 5 earlier. Nonetheless, given the Trustee's broad assertion that Reply Br.
6 "[t]he offset is unsupportable under bankruptcy law[,]"
7 (Doc. 9) at 5:17 (emphasis omitted), and because recoupment has 8 been "preserved through judicial decisions" in the bankruptcy 9 context, Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 10 270 B.R. 749, 753 (B.A.P. 9th Cir. 2001), the court will consider 11 whether the bankruptcy court properly relied upon recoupment as a 12 basis for allowing $27,412.50 in setoffs to defendant. 13 Assuming arguendo that setoff pursuant to section 553 is not
14 available to defendant,5 this court will consider whether, as the 15 bankruptcy court found, the defendant should be allowed setoffs 16 based upon the doctrine of recoupment. Before turning to the
17 merits of that court's recoupment analysis, there is a preliminary 18 procedural issue which this court must address. "Under recoupment,
19 a defendant may meet a plaintiff's claim with a countervailing 20 claim that arose out of the same occurrence or transaction as the 21 plaintiff's claim." Wade Cook, 375 B.R. at 601 (citation omitted).
22 "For this reason, recoupment has been analogized to both compulsory 23 counterclaims and affirmative defenses." 24 internal quotation marks omitted). 25 26 27 28
Despite sometimes being used interchangeably, recoupment and section 553 of the Code are two distinct, albeit related, concepts. Thus, a party "is allowed to assert that certain mutual claims extinguish one another . . . in spite of the fact that they could not be `setoff' under 11 U.S.C. § 553." Madigan, 270 B.R. at 754 (citation and internal quotation marks omitted).
Id. (citations and
- 20 -
In the present case, defendant did assert a counterclaim in Defendant couches that
2 his answer to the Trustee's complaint.
3 counterclaim as one for "setoff[,]" but he does not mention section 4 553; nor does he mention recoupment as a possible basis for that 5 counterclaim. See Answer (Doc. 3-2) at 2:9. Federal Rules of
6 Civil Procedure 13(a), governing compulsory counterclaims, 7 "requires the defendant to assert a counterclaim in its responsive 8 pleading or otherwise lose that counterclaim forever." 9 375 B.R. at 601 (citation omitted) (emphasis added). 10 Bankruptcy Rule 7013 "incorporates" Fed. R. Civ. P. 13(a) Id. (citation omitted). Of Wade Cook,
11 "with a few variations" however.
12 particular importance here is that "Rule 7013 differs from FRCP 13 13(a) in that "a party sued by a trustee or debtor in possession 14 need not state as a counterclaim any claim that the party has 15 against the debtor, the debtor's property, or the estate, unless 16 the claim arose after the entry of an order for relief." Id.
17 (emphasis added) (internal quotation marks and citations omitted). 18 "Thus, if a trustee initiates an adversary proceeding against a 19 creditor, who has a prepetition claim against the debtor, that 20 creditor does not need to assert that claim as a counterclaim in 21 its answer to the trustee's complaint." 22 Id. (citation omitted).
Obviously, in the present case the Trustee initiated an Further, given the Code's
23 adversary proceeding against defendant.
24 broad definition of a creditor, it is equally clear that the 25 Trustee is pursuing this action against defendant as a creditor. 26 Pursuant to the Code, a creditor is an "entity that has a claim 27 against the debtor that arose at the time of or before the order 28 for relief concerning the debtor[.]" 11 U.S.C. § 101(10)(A) - 21 -
1 (emphasis added).
In turn, the Code defines the term entity to Pursuant to the
2 "include [a] person[.]" 11 U.S.C. § 101(15).
3 Code, "[t]he term `claim' means right to payment, whether or not 4 such right is reduced to judgment, liquidated, unliquidated, fixed, 5 contingent, mature, unmatured, disputed, undisputed, legal, 6 equitable, secured, or unsecured[.]" 11 U.S.C. §101(5)(A). 7 the "breadth of th[a]t definition ensures that all legal 8 obligations of the debtor, no matter how remote or contingent will 9 be able to be dealt with in the bankruptcy case." Heilman, 430 Indeed,
10 B.R. at 218 n. 7 (citations and internal quotation marks omitted). 11 In his counterclaim defendant asserts, inter alia, a "right to
12 receive half of the proceeds from the sale of debtor's business, a 13 community property asset, believed to be worth $24,000.00." 14 (Doc. 3-2) at 2:13-14. Answer
As already discussed, that asserted "right" Therefore,
15 is based upon 2000 state court divorce proceedings. 16 that "right" arose pre-petition.
Thus, because defendant has a
17 pre-petition claim against the debtor, the fact that he did not 18 explicitly assert recoupment in his counterclaim does not preclude 19 him from obtaining relief under that doctrine if he is otherwise 20 entitled. Similarly, the fact that defendant did not specifically
21 mention the $2,000 "Deposit Account Credit" and the $1,412.50 22 "Credit for one-half the amount withdrawn by Debtor at [the] time 23 of [the] divorce proceedings[,]" does not preclude him from 24 asserting a counterclaim based upon those claimed "credits." 25 R. (Doc. 4-7) at 18:8-11. 26 Lastly, recognizing that "[u]nder the Federal Rules of Civil See
27 Procedure and Bankruptcy Rules, all pleadings are to be construed 28 so as to do substantial justice[,]" In re California Canners and - 22 -
1 Growers, 62 B.R. 18, 22 (9th Cir. BAP 1986) (Elliott, J., 2 concurring) (citation omitted), defendant's failure to explicitly 3 refer to recoupment in its counterclaim is not a sufficient reason 4 for the court to disregard that theory. See id. (citations
5 omitted) (whether recoupment is "viewed as an affirmative defense 6 or a counterclaim, . . . [d]istributors['] failure to label their 7 well pleaded claim as a `recoupment' was an insufficient reason for 8 the court to ignore the argument"). Having found that there is
9 no procedural bar to recoupment, the court will turn to the issue 10 of whether the bankruptcy court properly invoked that doctrine 11 here. 12 "Recoupment is an equitable doctrine, similar to setoff, that In re Miller, 2009
13 has been recognized in bankruptcy proceedings."
14 WL 2868441, at *5 (Bankr. D. Idaho Aug. 28, 2009) (citing Sims v. 15 U.S. Dept. of Health and Human Servs. (In re TLC Hosps. Inc.), 224 16 F.3d at 1001). Basically, recoupment "involves a netting out of Straightline, 525 F.3d at In other words,
17 debt arising from a single transaction."
18 882 (citation and internal quotations omitted).
19 "recoupment is the setting up of a demand arising from the same 20 transaction as the plaintiff's claim or cause of action, strictly 21 for the purpose of abatement or reduction of such claim." Wade
22 Cook, 375 B.R. at 600 (citations and internal quotation marks 23 omitted) (emphasis in original). Thus, recoupment is "only a
24 challenge to the validity and extent of the plaintiff's claim, and 25 no affirmative recovery is permitted." In re Conrad, 2007 WL
26 3273441, at *4 (Bankr. W.D. Wash. Nov. 2, 2007) (citations and 27 internal quotation marks omitted). The underlying theory of
28 recoupment is that "`the defendant should be entitled to show that - 23 -
1 because of matters arising out of the transaction sued on, he or 2 she is not liable in full for the plaintiff's claim.'" 3 F.3d at 1401 (quoting Collier ¶ 553.03, at 553-17)). Newbery, 95 In this
4 respect, "[t]he common-law claim for recoupment is analogous to a 5 compulsory counterclaim interposed solely to defeat or diminish 6 plaintiff's recovery." Madigan, 270 B.R. at 755 (citation and
7 internal quotation marks omitted). 8 In the Ninth Circuit, "[f]or recoupment to apply, the
9 competing claims must arise out of the same transaction or 10 occurrence." In re Coast Grain Co., 317 B.R. 796, 807 (Bankr.
11 E.D.Cal. 2004) (citations and internal quotation marks omitted). 12 "[T]he crucial factor in determining whether two events are part of 13 the same transaction[,]" according to the Ninth Circuit, is whether 14 there "is [a] `logical relationship' between the two." 15 224 F.3d at 1012 (citation omitted). TLC Hosps.,
"The word `transaction' is
16 given both a liberal and flexible construction" under that 17 standard. 18 at 755). Conrad, 2007 WL 3273441, at *5 (citing Madigan, 270 B.R. Consequently, "a `transaction' may include `a series of
19 many occurrences, depending not so much upon the immediateness of 20 their connection as upon their logical relationship.'" TLC Hosps., 21 224 F.3d at 1012 (quoting Moore v. New York Cotton Exch., 270 U.S. 22 593, 610, 46 S.Ct. 367, 70 L.Ed. 750 (1926)). Therefore, "[c]ourts
23 applying this standard `have permitted a variety of obligations to 24 be recouped against each other, requiring only that the obligations 25 be sufficiently interconnected so that it would be unjust to insist 26 that one party fulfill its obligation without requiring the same of 27 the other party.'" In re Coast Grain Co., 317 B.R. at 807 (quoting 28 Madigan, 270 B.R. at 755 (other citation omitted)). - 24 So although
1 "[r]ecoupment often arises in contract cases, it is not limited to 2 contractual obligations, nor must the amount to be recouped be 3 liquidated in order for the right to apply." 4 added). 5 "The recoupment doctrine draws its authority from principles Id. at 806 (emphasis
6 of equity[,]" as stated at the outset, "and is thereby subject to 7 the facts in each individual case." Coast Grain, 317 B.R. at 807.
8 In this case, applying the "logical relationship" test, the 9 bankruptcy court made several factual findings. First, it found
10 that "the Debtor filed for a dissolution of marriage, but then 11 waited almost two years before filing her bankruptcy petition." 12 R. (Doc. 407) at 17:7-8. Second, the bankruptcy court found that
13 during that interim "the Superior Court entered various orders[,]" 14 including some pertaining to the distribution of community assets. 15 Id. at 17:8-9. Also during that interim period, debtor and
16 defendant "continued to hold community and separate property 17 acquired before marriage and after the petition for dissolution was 18 filed." Id. at 17:11-13. Based upon the foregoing, the bankruptcy
19 court reasoned that "this matter should be treated as if the 20 parties were engaged in one transaction, with the various expenses 21 of the Defendant to be netted from the final amount that he must 22 pay the bankruptcy estate." Id. at 17:13-15. Thus, despite using
23 the terms "credits and setoffs[,]" the bankruptcy court effectively 24 held that defendant was entitled to recoup a total of $27,412.50 25 from the amount that court found he still owes the bankruptcy 26 estate. 27 See id. at 18:5-16.
After undertaking the requisite de novo review, this court
28 affirms the bankruptcy court's use of the recoupment doctrine. - 25 -
1 There is ample support in the record for the bankruptcy court's 2 factual findings in that regard, and the Trustee does not suggest 3 otherwise. 4 erroneous. 5 Additionally, the bankruptcy court soundly found that there is Plainly, those factual findings are not clearly
6 a logical relationship between the debtor's bankruptcy and the 7 debtor and defendant's divorce proceeding, so as to justify 8 allowing defendant to recoup certain monies. Clearly, the debtor's
9 and defendant's state court imposed obligations logically relate to 10 their obligations arising from debtor's subsequent bankruptcy 11 petition. Those mutual obligations are "sufficiently
12 interconnected so that it would be unjust to insist that one party 13 fulfill its obligation without requiring the same of the other 14 party." See Madigan, 270 B.R. at 755 (citation omitted). More
15 specifically, it would be unjust to insist that the defendant 16 fulfill his obligation to turn over all community property in his 17 possession to the bankruptcy estate without also recognizing that 18 the state court previously determined that debtor was required to 19 "turn over" certain community property assets to defendant, i.e., 20 half the proceeds from the sale of debtor's business. 21 Moreover, the bankruptcy court did not abuse its discretion in
22 applying the doctrine of recoupment to the facts before it. This 23 court cannot reverse on abuse of discretion grounds, as earlier 24 discussed, "unless [it] ha[s] a definite and firm conviction that 25 the bankruptcy court committed a clear error of judgment in the 26 conclusion it reached after weighing the relevant factors." 27 Gould, 401 B.R. at 429 (citation omitted). In re
There is simply no
28 basis for finding that the bankruptcy court abused its discretion - 26 -
1 in allowing recoupment here. 2 The court is keenly aware that recoupment is only available See Straightline,
3 when the equities of the situation permit it. 4 525 F.3d at 882.
Those equities, as discussed herein, readily
5 support that court's conclusion that defendant be allowed to recoup 6 $27,412.50 from the amount which he still owes the bankruptcy 7 estate. Indeed, it would be inherently inequitable to require that
8 all community property here become part of the bankruptcy estate, 9 including that of the non-debtor/defendant spouse, while 10 simultaneously disallowing him to recoup monies which the state 11 court previously found he was entitled to during debtor's divorce 12 from defendant. 13 Several other aspects of recoupment convince this court of the
14 propriety of relying upon the recoupment doctrine under the 15 somewhat unique facts of the present case. The first is that
16 because "recoupment is neither a claim nor a debt, it is unaffected 17 by either the automatic stay or the debtor's discharge." 18 270 B.R. at 754 (citations omitted). Madigan,
So, despite the Trustee's
19 suggestion to the contrary, the debtor's discharge does not mean 20 that defendant's "setoffs or claim would have been discharged as 21 well." See R. (Doc. 4-7) at 13:16. Additionally, allowing
22 defendant to recoup certain monies is in keeping with the settled 23 rule that "[t]he bankruptcy trustee takes property subject to the 24 rights of recoupment." See Madigan, 270 B.R. at 754 (citations Lastly, because defendant is recouping
25 omitted) (emphasis added).
26 some community property assets, which were divided by the state 27 court prior to the filing of debtor's bankruptcy petition, those 28 assets are not part of the bankruptcy estate for purposes of - 27 -
1 section 541(a)(2) of the Code.
See In re Mantle, 153 F.3d at 1085.
2 In sum, allowing recoupment here, as did the bankruptcy court, 3 clearly serves the purpose of that doctrine "which is to do justice 4 viewing one transaction as a whole." See In re National Audit
5 Defense Network, 332 B.R. 896, 913 (Bankr. D. Nev. 2005) (citations 6 and internal quotation marks omitted). The court thus affirms that
7 aspect of the bankruptcy court's decision allowing defendant to 8 recoup $27,412.50 from the amount he still owes the bankruptcy 9 estate. 10 For all of these reasons, although this court AFFIRMS the
11 bankruptcy court's decision allowing defendant to recoup 12 $27,412.50, it REVERSES and VACATES that decision insofar as that 13 court awarded defendant a one-half interest in the community 14 property. As explained herein, the bankruptcy estate is entitled
15 to 100 percent of the community property, $110,881.34, in 16 defendant's possession at the filing of debtor's bankruptcy 17 petition. The bankruptcy court is thus ordered to vacate its prior
18 judgment and enter judgment in accordance herewith. 19 20 21 22 23 24 25 26 27 28 Copies to counsel of record - 28 DATED this 27th day of September, 2010.
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