Porrett et al

Filing 14

OPINION the 3/10/16, Memorandum Of Decision (Bankr. docket no. 68), and the 3/17/16, Order (Bankr. docket no. 69) holding that the payment at issue is property of the bankruptcy estate are affirmed. Signed by Judge Mark W Bennett. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jp)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
In re:
GARY ALAN PORRETT and
JENNIFER SUE PORRETT,

Bankr. Case No. 09-03881-JDP

Debtors.
GARY ALAN PORRETT and
JENNIFER SUE PORRETT,
District Case No. 1:16-CV-00135-MWB
Appellants,
vs.
NOAH G. HILLEN, U.S. Trustee,

OPINION

Appellee.
___________________________
TABLE OF CONTENTS
I. 

INTRODUCTION........................................................................... 3 
A. 
Factual Background ............................................................... 3 
1. 
Stipulated facts .............................................................. 3 
2. 
Additional stipulated evidence ........................................... 4 
3. 
Additional evidence ........................................................ 5 
B. 
Procedural Background ........................................................... 7 

II. 

ARGUMENTS OF THE PARTIES...................................................... 8 

III. 

LEGAL ANALYSIS ...................................................................... 11 
A. 
Standard Of Review .............................................................. 11 
B. 
An Overview Of Property Under § 541(a).................................... 12 
1. 
Property under § 541(a)(1) ............................................. 13 
2. 
“Proceeds” under § 541(a)(6) ......................................... 15 
3. 
“After-acquired property” under § 541(a)(7) ....................... 16 
4. 
Summary ................................................................... 18 
C. 
Is The Payment Property Of The Bankruptcy Estate? ..................... 18 
1. 
Was there an accrued pre-petition cause of action? ............... 19 

Was the payment “proceeds” of the pre-petition cause
of action? .................................................................. 22 
3. 
Was the payment “after-acquired property” of the
bankruptcy estate? ....................................................... 23 
4. 
Summary ................................................................... 24 
The Debtors’ Contrary Authority .............................................. 24 
1. 
In re Neidorf .............................................................. 24 
2. 
In re Vanwart ............................................................ 27 
3. 
The cases involving relief by governmental action ................. 29 
2. 

D. 

IV. 

CONCLUSION ............................................................................ 31 

In a Chapter 7 case, the bankruptcy court held that a payment of $8,120.23
received by the Trustee from Wells Fargo Bank, in accordance with a post-bankruptcy
Consent Order issued by regulators arising from an investigation of Wells Fargo’s prebankruptcy mortgage lending practices, is property of the bankruptcy estate, not the
debtors. See In re Porrett, 547 B.R. 362 (Bankr. D. Idaho 2016). The debtors have
appealed.

2

I.
A.
1.

INTRODUCTION
Factual Background

Stipulated facts

The parties agreed to disposition by the bankruptcy court of the question of
whether the payment at issue is property of the bankruptcy estate or the debtors on a
stipulated record. The stipulated facts are as follows:1
The debtors, Gary Alan Porrett and Jennifer Sue Porrett, obtained a home loan
from Wells Fargo on June 25, 2007. On December 9, 2009, the debtors filed for relief
under Chapter 7 of the Bankruptcy Code. Jeremy Gugino was appointed as the Chapter 7
trustee. On July 2, 2010, Wells Fargo obtained relief from the bankruptcy stay in order
to pursue its state law remedies as to the debtors’ home.2 Trustee Gugino previously
distributed $2,546.65. On February 17, 2011, the bankruptcy case closed.
In an investigation, the Board of Governors of the Federal Reserve System
discovered that, during the period when the debtors obtained their home loan,3 Wells

1

In restating the Stipulated Facts, I have deleted the parties’ paragraph numbers,
rearranged the order of the factual statements, made editorial changes, and corrected
typographical errors, but I have not changed the substance of any factual statement. See
Appellants’ Appendix, Exhibit G (Joint Statement of Undisputed Facts and Stipulation
Regarding Admission of Exhibits (Bankr. docket no. 60)). I have also made some
additions, based on the record, for the sake of clarity.
2

As the bankruptcy court observed, in the Memorandum Decision underlying the
Order from which the debtors appeal, it is unclear in the record whether Wells Fargo
actually foreclosed on the home. See Appellants’ Appendix, Exhibit C (Memorandum
of Decision (Bankr, docket no. 68), 4 n.4.
3

This statement is drawn from page 2 of what the parties and the bankruptcy court
identified as the Consent Order, that is, the Order to Cease And Desist and Order Of
Assessment of a Civil Money Penalty Issued Upon Consent, entered before the Board of
Governors of the Federal Reserve System. See Appellants’ Appendix, Exhibit G (Joint
3

Fargo improperly funneled certain borrowers’ home loans into sub-prime loans, which
included a higher interest rate than those borrowers qualified for. This conduct by Wells
Fargo resulted in certain classes of borrowers paying more in interest over the life of
their loans to Wells Fargo than they otherwise should have (the difference between the
non-prime and prime loan interest rates). On July 20, 2011, Wells Fargo reached an
agreement with the Federal Reserve Board regarding borrowers who received more
expensive non-prime loans, which may have had higher interest rates than traditional
prime rate loans, between January 1, 2006, and September 30, 2008. The debtors are
included in the class of borrowers addressed in an agreement, i.e., the July 20, 2011,
Consent Order, between Wells Fargo and the Board of Governors of the Federal Reserve
System resolving the regulatory action and providing that Wells Fargo would pay a
penalty and take certain remedial actions as to affected borrowers.4
On April 28, 2015, the bankruptcy case was reopened, and a new Trustee was
appointed shortly thereafter. On July 31, 2015, the Trustee filed a Motion to Approve
Compromise Under Fed. R. Bankr. P. 9019 (the Compromise Motion), seeking to obtain
a $8,120.63 gross settlement.

On September 18, 2015, the Court approved the

Compromise, and the bankruptcy estate is in possession of $8,120.63 paid by Wells Fargo
pursuant to the Compromise.
2.

Additional stipulated evidence

The parties also stipulated to the admission of the Consent Order between the
Board of Governors and Wells Fargo into the record before the bankruptcy court, for
purposes of their Joint Motion for Determination of Property of the Bankruptcy Estate

Statement of Undisputed Facts and Stipulation Regarding Admission of Exhibits (Bankr.
docket no. 60), Attachment A).
4

I have added this summary of the main provisions of the Consent Order to the
parties’ stipulation.
4

(Bankr. docket no. 59). Therefore, I can properly refer to pertinent provisions of the
Consent Order.
For the moment, suffice it to say that the Consent Order required payment of a
penalty and certain remedial actions by Wells Fargo, but it also explicitly stated that it
was not an admission of liability by Wells Fargo. Specifically, the Consent Order stated
that it did not “constitut[e] an admission by Wells Fargo, Financial or any other Wells
Fargo subsidiary of any allegation made or implied by the Board of Governors in
connection with this matter,” and that it was “solely for the purpose of settling this matter
without a formal proceeding being filed and without the necessity for protracted or
extended hearings or testimony.” Consent Order at 6-7. As mentioned briefly, above,
the Consent Order included provisions for remedial compensation to the group of
borrowers addressed in the Consent Order, which includes the debtors. Id. at 10-23.
The Consent Order also authorized Wells Fargo to obtain “an appropriate form of release
not to be executed earlier than notification of the borrower of the amount of remedial
compensation offered” as a document that a borrower “must provide in order to obtain
such remedial compensation.” Id. at 21.
3.

Additional evidence

The bankruptcy court stated in the Memorandum Of Decision underlying the Order
from which the debtors appeal that, “[i]n addition to the Joint Statement of Undisputed
Facts and Stipulation Regarding Admission of Exhibits, Dkt. No. 60, the Court has
referenced its own docket in this bankruptcy case.” Memorandum of Decision (Bankr.
docket no. 68), 3 n.3. On appeal, the Trustee filed a Motion To Augment Record On
Appeal (docket no. 5) seeking to include in the record two items from the docket in the
bankruptcy case: (1) the Trustee’s Motion to Approve Compromise Under Fed. R. Bank.
P. 9019 (the Compromise Motion) (Bankr. docket no. 50); and (2) the Order Granting

5

Motion To Approve Compromise Under Fed. R. Bankr. P. 9019 (the Compromise Order)
(Bankr. docket no. 56).
The Trustee pointed out that, in the bankruptcy court’s Memorandum of Decision,
the bankruptcy court specifically cited both of the documents the Trustee asked to add to
the record. The debtors filed an Objection To Trustee’s Motion To Augment Record On
Appeal (Bankr. docket no. 7), arguing that the Joint Motion For Determination Of
Property Of The Bankruptcy Estate (Bankr. docket no. 59) was based on stipulated facts,
which did not include the documents that the Trustee was attempting to add to the record
on appeal. On May 17, 2016, I granted the Trustee’s Motion, but stated that I could
determine whether or not it is appropriate to consider the documents in question after
consideration of the full record and the parties’ briefs on appeal. See Order (docket no.
8).
In their opening brief on appeal, the debtors argue, in pertinent part, that the
release document, which was an attachment to the Trustee’s Compromise Motion, was
never offered or admitted into evidence in the bankruptcy court. As a practical matter,
however, I find that the fact that Wells Fargo was authorized to obtain “an appropriate
form of release” as a document that a borrower “must provide in order to obtain . . .
remedial compensation” pursuant to the Consent Order, see Consent Order at 21, was
properly before the bankruptcy court, because the parties had stipulated to the admission
of the Consent Order itself in their Joint Statement Of Undisputed Facts And Stipulation
Regarding Admission Of Exhibits (Bankr. docket no. 60). The debtors do not contend
that the form of the release actually signed by the Trustee to obtain the remedial
compensation from Wells Fargo was somehow “inappropriate.”

Furthermore, the

Trustee quoted the actual release in his Memorandum Regarding Joint Motion For
Determination Of Property Of The Bankruptcy Estate (Bankr. docket no. 64), and, in
their Response To Trustee’s Memorandum Regarding Joint Motion For Determination
6

Of Property Of The Bankruptcy Estate (Bankr. docket no. 65), the debtors did not argue
that the release was inadmissible or outside the record that the bankruptcy court could
consider. Rather, the debtors argued that the release was irrelevant to the question of the
ownership of the payment pursuant to the Consent Order, because, in their view, the
Consent Order alone created the right to the payment. Under the circumstances, I believe
that the bankruptcy court could properly consider the language of the actual release, and
that I can do the same.
That release, identified as a “release of liability,” stated as follows:
I understand that by accepting compensation I have been
offered, I am releasing Wells Fargo Financial, Inc. and Wells
Fargo & Company (and their subsidiaries, successors and
assigns) from any and all claims relating to Wells Fargo
Financial’s origination of a more expensive mortgage loan
than the loan for which I potentially qualified.
Appellants’ Appendix, Exhibit E (Trustee’s Memorandum Regarding Joint Motion For
Determination Of Property Of The Bankruptcy Estate (Bankr. docket no. 64)), 3;
Appellant’s Excerpts From Record, 8.
B.

Procedural Background

In a March 10, 2016, Memorandum Of Decision (Bankr. docket no. 68), the
bankruptcy court concluded that the payment from Wells Fargo is property of the
bankruptcy estate, although the bankruptcy court admitted that the applicable case law
required a “close reading.” The bankruptcy court found that the payment pursuant to the
Consent Order was compensation for Wells Fargo’s pre-petition misconduct, so that it
related to a pre-petition claim that was property of the bankruptcy estate pursuant to 11
U.S.C. § 541(a)(1), and that, because the Trustee was required to release potential claims
against Wells Fargo for pre-petition misconduct to receive the payment, the payment was
7

property of the bankruptcy estate pursuant to either 11 U.S.C. § 541(a)(6) or 11 U.S.C.
§ 541(a)(7). On March 17, 2016, the bankruptcy court entered an Order (Bankr. docket
no. 69) formally disposing of the Joint Motion and holding that the payment at issue is
property of the bankruptcy estate.
On March 28, 2016, the debtors filed their Notice Of Appeal And Statement Of
Election (Bankr. docket no. 70), appealing the Order. On March 28, 2016, the Trustee
filed his Statement Of Election To Proceed In District Court (Bankr. docket no. 72), and
on March 29, 2016, the parties were notified that the appeal was referred to the district
court. See (Bankr. docket no. 73). On April 25, 2016, the bankruptcy court granted the
debtors’ Motion To Stay Pending Appeal (Bankr. docket no. 76). See Order (Bankr.
docket no. 82).
On April 27, 2016, the appeal was reassigned to me, as a visiting judge, for all
further proceedings. Docket no. 2. On May 5, 2016, I entered a Briefing Scheduling
Order (docket no. 6). The debtors filed their Brief (docket no. 9) on June 15, 2016. The
Trustee filed his Brief (docket no. 11) on July 12, 2016, and the debtors filed a Response
To Appellee’s Brief (docket no. 13) on July 28, 2016. After examination of the briefs
and record on appeal, I have determined that oral arguments are not needed. Therefore,
I will resolve this appeal based on the written submissions, without oral arguments.
I now enter this Opinion on the debtors’ appeal.
II.

ARGUMENTS OF THE PARTIES

On appeal, the debtors argue that the bankruptcy court’s conclusion that the
payment pursuant to the Consent Order was property of the bankruptcy estate is contrary
to the holding of the Bankruptcy Appellate Panel of the Ninth Circuit in In re Neidorf,
534 B.R. 369 (B.A.P. 9th Cir. 2015). The debtors read In re Neidorf to hold that a
monetary award pursuant to a Consent Order entered into after a bankruptcy petition is
8

filed is not part of the bankruptcy estate, because the “qualifying event”—the one that
created the rights and remedies for the specified class of borrowers—was the Consent
Order, not the liability for some misdeed that may have occurred prior to bankruptcy.
They also cite In re Vanwart, 497 B.R. 207 (Bankr. E.D.N.C. 2013), as holding that
funds pursuant to a post-petition Consent Order relating to a pre-petition foreclosure were
not part of the bankruptcy estate, because those funds were not sufficiently rooted in a
pre-petition event, even though the debtors qualified for the funds because of a prepetition foreclosure action.5
Somewhat more specifically, the debtors argue that, here, a government agency
struck a deal with Wells Fargo leading to the Consent Order that created responsibilities
for Wells Fargo. They argue that, where the government stepped in, post-petition, to
provide relief to a class of citizens to which the debtors belong, and no affirmative action
by the debtors was required to be members of the class described in a consent order, the
consent order creates the property, which belongs to the debtors. Furthermore, they
argue that the release the Trustee signed is only in existence because of the Consent
Order. Indeed, they argue that “there is no evidence the funds would not be received if
the release was not signed.” Appellants’ Brief at 7, ¶ 34. They also argue that there is
no evidence that there was any fraud by Wells Fargo in directing them to their mortgage
loan, and no evidence of any wrongdoing that would require a release, nor is there direct
evidence of any damage that they suffered as a result of conduct by Wells Fargo. They
argue, further, that the Consent Order makes clear that Wells Fargo is not admitting any

5

The debtors also cite In re Vote, 276 F.3d 1024 (8th Cir. 2002); In re Schmitz,
270 F.3d 1254 (9th Cir. 2001); Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234
(11th Cir. 2008); and Hoseman v. Weinschneider, 277 B.R. 894 (N.D. Ill. 2002), as
supporting their contention that, where post-petition action creates rights to payment or
property, resulting property is not property of the estate.
9

wrongdoing. Consequently, they argue that the only certainty is that they were members
of a class described in, and entitled to relief under and because of, the Consent Order.
In short, they argue, without the post-petition Consent Order, the funds at issue would
not exist, so those funds obtained post-petition are not property of the bankruptcy estate.
The Trustee responds that the bankruptcy court correctly concluded that Wells
Fargo made the payment at issue in accordance with the Consent Order in order to
compensate the debtors for the damages that they sustained because of Wells Fargo’s prepetition sharp lending practices. The Trustee argues that, because any cause of action
that the debtors may have against Wells Fargo for those sharp lending practices arose
pre-petition, in 2007, the debtors’ causes of action are property of the bankruptcy estate
pursuant to 11 U.S.C. § 541(a)(1). Furthermore, the Trustee argues, since the payment
resulted from settlement of those causes of action, and the Trustee was required to execute
a release of potential causes of action against Wells Fargo to obtain the payment, the
payment is also bankruptcy estate property pursuant to 11 U.S.C. § 541(a)(7).
The Trustee explains that property of the bankruptcy estate includes any of the
debtors’ causes of action, even if the debtors were unaware that they had the causes of
action when they filed bankruptcy, and that the debtors, here, had such a cause of action
for pre-petition misconduct by Wells Fargo.

Specifically, the Trustee argues, the

bankruptcy court correctly concluded that the Consent Order explains that it addresses
misconduct by Wells Fargo at the time that the debtors obtained their mortgage loan from
Wells Fargo, that the Consent Order also permitted Wells Fargo to require a release of
any claims in order to receive compensation pursuant to the Consent Order, and that the
bankruptcy court authorized the Trustee to execute such a release when the court
approved the Compromise.

Next, the Trustee contends that the bankruptcy court

correctly concluded that causes of action pursuant to Idaho law accrued when the debtors’
loan was originated in 2007. Thus, the Trustee argues, the bankruptcy court correctly
10

concluded that the accrued causes of action were property of the bankruptcy estate
pursuant to 11 U.S.C. § 541(a)(1), and that a post-petition payment upon release of the
causes of action was either “proceeds” of bankruptcy estate property, pursuant to 11
U.S.C. § 541(a)(6), or traceable to and arising out of property of the bankruptcy estate,
pursuant to 11 U.S.C. § 541(a)(7).
The Trustee distinguishes In re Neidorf on the ground that the conduct at issue in
the consent order in that case and the consent order itself were both post-petition, and the
trustee in that case failed to show how the bankruptcy estate acquired an interest in the
post-petition payment. Here, the Trustee argues, he has made such a showing, because
the release establishes that the payment pursuant to the Consent Order is traceable to,
arose from, and is rooted in a potential pre-petition claim.
In reply, the debtors reiterate that the court in In re Neidorf referred to the consent
order as the act giving rise to the property right, rather than any cause of action which
may have accrued beforehand. They also reiterate that, here, there has been no proof of
pre-petition damage that could make the payment pursuant to the post-petition Consent
Order the property of the bankruptcy estate. Indeed, the debtors argue, if a fraud case
was commenced on their behalf, but did not result in a verdict or judgment in their favor,
nothing in the Consent Order would prevent them from receiving compensation pursuant
to the Consent Order. Thus, they argue that there is simply too tenuous a connection, if
one at all, between the funds received pursuant to the Consent Order and estate property
to make the funds also property of the bankruptcy estate.
III.
A.

LEGAL ANALYSIS
Standard Of Review

Whether property or an interest in property is property of the bankruptcy estate
under 11 U.S.C. § 541 is a question of statutory interpretation reviewed de novo. Sierra
11

Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986); accord
In re Harrell, 73 F.3d 218, 219 (9th Cir. 1996) (stating that the bankruptcy court’s
interpretation of the Bankruptcy Code, specifically, 11 U.S.C. § 541 in that case, was
reviewed de novo); In re Goldstein, 526 B.R. 13, 21 (B.A.P. 9th Cir. 2015) (“Whether
property is property of the estate is a question of law reviewed de novo.”).
B.

An Overview Of Property Under
§ 541(a)

As the Ninth Circuit Court of Appeals has explained, “The filing of a Chapter 7
bankruptcy petition automatically creates an estate” pursuant to 11 U.S.C. § 541(a). In
re Mwangi, 764 F.3d 1168, 1173 (9th Cir. 2014). Property of the bankruptcy estate
“includes nine non-exclusive subcategories of property,” stated in subsections (a)(1)(a)(9) of § 541. In re Blixseth, 684 F.3d 865, 871 (9th Cir. 2012). The party seeking to
include property in the bankruptcy estate bears the burden of showing that the property
in question is property of the bankruptcy estate. In re Neidorf, 534 B.R. 369, 372
(B.A.P. 9th Cir. 2015).
The three subcategories of property under § 541(a) at issue here are the following:
(a) . . . Such estate is comprised of all the following
property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of
this section, all legal or equitable interests of the debtor
in property as of the commencement of the case.
***
(6) Proceeds, product, offspring, rents, or profits of or
from property of the estate, except such as are earnings
from services performed by an individual debtor after
the commencement of the case.

12

(7) Any interest in property that the estate acquires
after the commencement of the case.
11 U.S.C. § 541(a)(1), (6), and (7). These subcategories of property require some
further explication.
1.

Property under § 541(a)(1)

Subsection 541(a)(1) specifically defines property of the bankruptcy estate as
“legal or equitable interests of the debtor in property as of the commencement of the
case.” 11 U.S.C. § 541(a)(1) (emphasis added). Section 541(a)(1)’s reference to “as of
the commencement of the case” “sets a ‘date of cleavage’ and establishes the moment at
which the parties’ respective rights in property must be determined.” See In re IndyMac
Bancorp, Inc., Bankruptcy No. 2:08–bk–21752–BB, 2012 WL 1037481, *12 (Bankr.
C.D. Cal. March 26, 2012) (quoting In re Peterson, 106 B.R. 229, 230 (Bankr. D. Mont.
1989), in turn quoting 4 COLLIER ON BANKRUPTCY, § 541.04, p. 541–22 (15th Ed.
1989)). Indeed, “[t]his is a longstanding and fundamental rule of bankruptcy law.” Id.
(citing Everett v. Judson, 228 U.S. 474, 479 (1913)).
It is clear that a debtor’s causes of action or legal claims are “legal or equitable
interests of the debtor in property,” within the meaning of § 541(a)(1). McGuire v.
United States, 550 F.3d 903, 914 (9th Cir. 2008) (“A chose in action is property of the
bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1).” (citing City & County of San
Francisco v. PG & E Corp., 433 F.3d 1115, 1126 (9th Cir. 2006)); Smith v. Arthur
Andersen, L.L.P., 421 F.3d 989, 1002 (9th Cir. 2005) (“The ‘property of the estate’
includes “all legal or equitable interests of the debtor in property as of the commencement
of the case,” [11 U.S.C.] § 541(a)(1), including the debtor’s ‘causes of action.’” (citing
United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9 (1983)); Turner v. Cook,
362 F.3d 1219, 1225-26 (9th Cir. 2004) (stating that property of the bankruptcy estate
includes all “legal or equitable interests,” including a debtor’s causes of actions (quoting
13

11 U.S.C. § 541(a)(1))); In re Goldstein, 526 B.R. 13, 21 (B.A.P. 9th Cir. 2015). Such
causes of action “includ[e] causes of action sounding in tort, such as personal injury, for
which the ultimate amount of recovery is uncertain.” Ileto v. Glock, Inc., 565 F.3d
1126, 1148 n.1 (9th Cir. 2009).
Bankruptcy and appellate courts in and out of the Ninth Circuit agree that property
of the bankruptcy estate includes accrued causes of action, even if the debtors were
unaware of the claims at the time they filed their bankruptcy petition. See, e.g., In re
Michael, 423 B.R. 323, 330 (Bankr. D. Idaho 2009) (““If the cause of action accrued
prior to a debtor’s petition date, it is an asset that must be scheduled. . . . Moreover, the
accrued cause of action is property of the estate even if the debtors were unaware of the
claim when they filed for bankruptcy protection.’” (quoting In re Hettick, 413 B.R. 733,
752 (Bankr. D. Mont. 2009)); In re Brown, 363 B.R. 591, 605 (Bankr. D. Mont. 2007)
(“Moreover, [an] accrued cause of action is property of the estate even if the debtors
were unaware of the claim when they filed for bankruptcy protection.”); accord Tyler v.
DH Capital Mgmt., Inc., 736 F.3d 455, 462 (6th Cir. 2013) (“[A]ll causes of action that
hypothetically could have been brought pre-petition are property of the estate. This is
the case ‘even if the debtor[ ] w[as] unaware of the claim.’” (internal citations omitted;
quoting In re Michael, 423 B.R. at 330)); Guay v. Burack, 677 F.3d 10, 17 (1st Cir.
2012) (explaining that a debtor must disclose all potential claims in a bankruptcy petition,
because such potential claims become property of the bankruptcy estate); Love v. Tyson
Foods, Inc., 677 F.3d 258, 261 (8th Cir. 2012) (explaining that pending and unliquidated
claims, and even potential causes of action, must be disclosed and become property of
the bankruptcy estate); Wieburg v. GTE Southwest, Inc., 272 F.3d 302, 306 (5th Cir.
2001) (holding that, where the debtor filed bankruptcy after the events giving rise to her
discrimination claims had occurred, the claims were property of the bankruptcy estate).

14

More specifically, “[a] cause of action need not be formally filed prior to the
commencement of a bankruptcy case to become property of the estate.” Clift v. BNSF
Ry. Co., No. 2:14–CV–00152–LRS, 2015 WL 4656151, *1 (E.D. Wash. Aug. 5, 2015)
(citing Cusano v. Klein, 264 F.3d 936 (9th Cir. 2001)). Also, “[n]othing in § 541 limits
property of the estate to property scheduled by a debtor.” In re Blixseth, 684 F.3d at
871; Wickenkamp v. Hostetter Law Group, L.L.P., 2:15–CV–296–PK, 2015 WL
9948219, *13 (D. Or. Dec. 3, 2015) (“An accrued cause of action becomes an asset of
the bankruptcy estate, even if it is not scheduled as such.” (citing 11 U.S.C. § 541(a),
and Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001)). Thus, it is not determinative
that the debtors, here, did not know of any potential claim against Wells Fargo, did not
file any such claims or a lawsuit against Wells Fargo, and did not schedule any claims
against Wells Fargo as property of the bankruptcy estate at or prior to the time they filed
for bankruptcy.
2.

“Proceeds” under § 541(a)(6)

Unlike § 541(a)(1), which is specifically limited to interests “as of the
commencement of the [bankruptcy] case,” § 541(a)(6) pertains to “[p]roceeds . . . of or
from property of the estate . . . after the commencement of the [bankruptcy] case.” 11
U.S.C. § 541(a)(1) and (6) (emphasis added). Thus, in light of the plain language of this
provision, there must be some “property” of the bankruptcy estate within the meaning of
§ 541(a)(1) for § 541(a)(6) to bring “proceeds” “of or from that property” into the
bankruptcy estate. “The term ‘proceeds’ in [§ 541(a)](6) is not defined, but the intent of
such provision is to be broadly construed even beyond the definition of proceeds in the
Uniform Commercial Code.” In re Granite Lumber Co., 63 B.R. 466, 471-72 (Bankr.
D. Mont. 1986); accord McLain v. Newhouse, 516 F.3d 301, 312 (5th Cir. 2008). The
Ninth Circuit Court of Appeals has explained that “[t]he term ‘proceeds’ includes all

15

funds ‘traceable to’ or ‘substituted for’ the original property.” In re Magnacom Wireless,
L.L.C., 503 F.3d 984, 992 (9th Cir. 2007) (interpreting § 546(a)(6))).
For example, in In re Jess, 169 F.3d 1204 (9th Cir. 1999), the Ninth Circuit Court
of Appeals, relying on § 541(a)(6), rejected a debtor’s argument that a contingent fee that
he received post-petition for pre-petition services was excludable from the bankruptcy
estate. In re Jess, 169 F.3d at 1207. The court explained, “Payments for pre-petition
services are not excludable from the estate solely because post-petition services are
required to receive payment.” Id. Consequently, the court held, “The estate is entitled
to recover the portion of post-petition payments attributable to pre-petition services.” Id.
By analogy, “proceeds” of property of the bankruptcy estate would include payments
received post-petition on a pre-petition claim, even though post-petition proceedings or
actions on the claim are required to receive the payment. To put it another way, a postpetition payment on a pre-petition claim is “proceeds” of the claim pursuant to
§ 541(a)(6), because the post-petition payment is “traceable to” the original property,
which was the pre-petition claim. Cf. In re Magnacom Wireless, L.L.C., 503 F.3d at
992 (stating the “traceable to” standard for property under § 541(a)(6)).
3.

“After-acquired property” under § 541(a)(7)

Again, unlike § 541(a)(1), which is specifically limited to interests “as of the
commencement of the [bankruptcy] case,” § 541(7) pertains to “[a]ny interest in property
that the estate acquires after the commencement of the [bankruptcy] case.” 11 U.S.C.
§ 541(a)(1) and (7) (emphasis added). “‘Congress enacted § 541(a)(7) to clarify its
intention that § 541 be an all-embracing definition and to ensure that property interests
created with or by property of the estate are themselves property of the estate.’” In re
Neidorf, 534 B.R. at 371 (quoting TMT Procurement Corp. v. Vantage Drilling Co. (In

16

re TMT Procurement Corp.), 764 F.3d 512, 524–25 (5th Cir. 2014), and citing H.R.
REP. 95–595, 549, reprinted in 1978 U.S.C.C.A.N. 5963, 6455 & 6523–24).6
As pertinent, here,
This section presupposes . . . that the estate has an interest in
the property. This section does not expand the debtor’s
interest in the property merely because it was delivered
postpetition. [T]his section is not intended to expand the
property rights that a debtor would possess prepetition under
§ 541(a)(1). See French v. Marion Gen. Hosp. (In re
Patterson), 2008 WL 2276961 at *6 (Bankr.N.D. Ohio June
3, 2008) (stating that § 541(a)(7) does not provide an
independent basis for the creation of estate property and “only
operates when property is encompassed within the estate in
the first instance”).
In re Pettit Oil Co., No. 13-47285, 2016 WL 4132473, *4 (Bankr. W.D. Wash. July 29,
2016). Thus, some “property” of the bankruptcy estate within the meaning of § 541(a)(1)
must be used to acquire the “interest in property” post-petition for § 541(a)(7) to bring
that after-acquired “interest” into the bankruptcy estate. The Bankruptcy Appellate Panel
of the Ninth Circuit has explained when an after-acquired interest is property of the
bankruptcy estate, as follows:
[F]or the after-acquired interest to be considered property of
the estate under § 541(a)(7), the interest (1) must be created
with or by property of the estate; (2) acquired in the estate’s
normal course of business; or (3) otherwise be traceable to or
arise out of any prepetition interest included in the bankruptcy
6

The classic example of an “interest in property that the estate acquires after the
commencement of the case,” within the meaning of § 541(a)(7), “‘would be if the trustee
entered into a contract after commencement of the case”; in such circumstances, “[t]he
estate’s interest in such a contract would . . . be property of the estate.’” In re Carroll,
900 F.2d 1266, 1270 (9th Cir. 1990) (quoting 4 COLLIER ON BANKRUPTCY ¶ 541.20,
541-105 (15th ed. 1990)).
17

estate. [TMT Procurement Corp. v. Vantage Drilling Co. (In
re TMT Procurement Corp.), 764 F.3d 512,] 525 [(5th
Cir.2014)].
In re Neidorf, 534 B.R. at 371-72.
4.

Summary

With these principles in mind, it becomes clear that a cause of action that only
accrues post-petition is neither property of the bankruptcy estate under § 541(a)(1), nor
property of the bankruptcy estate as “proceeds” of or from property of the bankruptcy
estate under § 541(a)(6), nor property of the bankruptcy estate as an after-acquired
“interest” under § 541(a)(7). Cf. In re Wisdom, Case No. 11–01135–JDP, 2016 WL
872102, *2 n.4 (Bankr. D. Idaho March 7, 2016) (“A malpractice action that under
applicable state law only accrues post-petition is neither property of the estate under
§ 541(a)(1) nor property of the estate under § 541(a)(7).”). On the other hand, a cause
of action that accrued pre-petition is property of the bankruptcy estate under § 541(a)(1),
and a post-petition recovery on that cause of action could be either “proceeds” of or from
property of the bankruptcy estate under § 541(a)(6) or property of the bankruptcy estate
as an after-acquired “interest” under § 541(a)(7). Cf. In re Brown, 363 B.R. at 605 (“A
later recovery on the claim is derivative of the cause of action and therefore also property
of the estate.”).
C.

Is The Payment Property Of The
Bankruptcy Estate?

The payment in question, undeniably, came into existence post-petition, so that it
cannot be property of the bankruptcy estate directly, pursuant to § 541(a)(1). Cf. In re
IndyMac Bancorp, Inc., 2012 WL 1037481 at *12 (observing that the filing of the
bankruptcy petition determines a “date of cleavage” concerning what is property of the
bankruptcy estate under § 541(a)(1)). Thus, the questions on this appeal are, first,
18

whether the debtors had an accrued cause of action against Wells Fargo when they filed
their petition in bankruptcy, which became property of the bankruptcy estate pursuant to
§ 541(a)(1), and, if so, whether the payment pursuant to the Consent Order—although it
was post-petition—was “proceeds” of bankruptcy estate property or “acquired” by the
bankruptcy estate, such that the payment is also property of the bankruptcy estate pursuant
to § 541(a)(6) and/or § 541(a)(7), respectively. Cf. In re Brown, 363 B.R. at 605. I will
consider these questions in turn.
1.

Was there an accrued pre-petition cause of action?

As the Ninth Circuit Court of Appeals has explained,
To determine when a cause of action accrues, we look to state
law. In re Folks, 211 B.R. 378, 384 (B.A.P. 9th Cir.1997).
It is important, however, to distinguish principles of accrual
from principles of discovery and tolling, which may cause the
statute of limitations to begin to run after accrual has occurred
for purposes of ownership in a bankruptcy proceeding. In re
Swift, 129 F.3d 792, 796, 798 (5th Cir.1997).
Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001); In re Goldstein, 526 B.R. at 21.
Thus, the court looks at whether an action on the claim “could have been brought” prepetition, even if the state statute of limitations on the claim had not yet begun to run. Id.;
In re Goldstein, 526 B.R. at 21; In re Hettick, 413 B.R. 733, 768 (Bankr. D. Mont.
2009) (“Other courts have used Cusano’s ‘could have been brought’ formulation in
determining when a cause of action is property of the estate, obviously because if a claim
‘could have been brought’—or here, has been brought—it has accrued.” (citing cases));
In re Brown, 363 B.R. at 605 (also observing that “[o]ther courts have used Cusano’s
‘could have been brought’ formulation”).
In this case, the bankruptcy court found,
Here, a cause of action for violation of the Idaho Consumer
Protection Act would have accrued when the Debtors’ loan
19

was originated. See Idaho Code § 48-608(1) (providing that
accrual occurs when a person purchases services and suffers
an ascertainable loss that is the result of a practice declared
unlawful by the ICPA12); In re Beach, 447 B.R. 313, 319
(Bankr. D. Idaho 2011).
A cause of action for fraud, on the other hand, accrues
when the facts constituting the fraud are discovered by the
aggrieved party. Idaho Code § 5 218(4); Mason v. Tucker &
Associates, 871 P.2d 846, 852 (Idaho Ct. App. 1994).
Memorandum Of Decision at 15-16. The bankruptcy court recognized that, using the
“could have been brought” standard applicable to accrual for bankruptcy purposes, a
fraud claim under Idaho law accrued when the last of nine elements, injury, occurred.
Id. at 16. The bankruptcy court then concluded, “[S]ince even the last of those elements,
injury, would have occurred in this case when Debtors began paying the higher rate of
interest on the loan, their cause of action for fraud would have accrued prepetition as
well.” Id.
On appeal, the debtors do not really challenge these conclusions. Rather, they
argue that there was no claim that was property of the bankruptcy estate under
§ 541(a)(1), because there is no evidence that there was any fraud or wrongdoing by
Wells Fargo in directing them to their mortgage loan—and the Consent Order makes clear
that Wells Fargo is not admitting any wrongdoing—nor is there direct evidence of any
damage that they suffered as a result of conduct by Wells Fargo. I disagree with the
debtors.
The Consent Order, itself, is evidence of fraud and wrongdoing by Wells Fargo
in directing a class of borrowers, to which the debtors belong, to their mortgage loans.
Even though Wells Fargo has not admitted, and may even dispute, any wrongdoing, and
no damages have yet been proved, a cause of action had accrued at the time that the

20

debtors began paying the higher rate of interest on their loan.7 As pointed out, above, at
pages 14-14, property of the bankruptcy estate includes potential causes of action that
accrued pre-petition, even if the debtor is unaware of the claim. See, e.g., In re Michael,
423 B.R. at 330.

The “cause of action need not be formally filed prior to the

commencement of a bankruptcy case to become property of the estate,” Clift, 2015 WL
4656151 at *1, so it necessarily need not be proved prior to the commencement of the
bankruptcy case. Indeed, it is clear that unliquidated and disputed causes of action that
have accrued pre-petition are property of the bankruptcy estate. See, e.g., Ileto v. Glock,
Inc., 565 F.3d 1126, 1148 n.1 (9th Cir. 2009) (causes of action that are property of the
bankruptcy estate “includ[e] causes of action sounding in tort, such as personal injury,
for which the ultimate amount of recovery is uncertain.”); In re Coastal Plains, Inc., 179
F.3d 197, 208–09 (5th Cir. 1999) (“It goes without saying that the Bankruptcy Code and
Rules impose upon bankruptcy debtors an express, affirmative duty to disclose all assets,
including contingent and unliquidated claims.”); In re Pace, 132 B.R. 644, 646 (Bankr.
D. Alaska 1991) (“[A] debtor's claim for personal injuries is included as property of the
estate whether the claim is unliquidated at the time of the filing of a bankruptcy petition
or is settled thereafter.”); 11 U.S.C. § 101(5) (defining “claim,” within the meaning of
the Bankruptcy Code, and without limitation to claims of creditors or debtors, as a “right
to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured,
or unsecured”).
7

The existence of the Consent Order applicable to debtors, as members of the
class entitled to relief, provides sufficient facts to make plausible the debtors’ claim to
relief for the alleged wrongdoing by Wells Fargo described in the Consent Order and,
thus, to state a claim upon which relief can be granted under the “Twom-bal standard.”
See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929
(2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
21

The bankruptcy court correctly concluded that the debtors had a cause of action
against Wells Fargo that accrued pre-petition and, consequently, became property of the
bankruptcy estate pursuant to § 541(a)(1).
2.

Was the payment “proceeds” of the pre-petition cause of action?

The fact that the debtors had a cause of action against Wells Fargo that was
property of the bankruptcy estate does not mean that the post-petition payment was also
necessarily property of the bankruptcy estate. On the other hand, the post-petition
payment is property of the bankruptcy estate if it is “proceeds” of the pre-petition cause
of action within the meaning of § 541(a)(6). As explained, above, in the Ninth Circuit,
the test of whether funds are “proceeds” of property of the bankruptcy estate is whether
the funds are “traceable to” or “substituted for” the “original property,” that is, the prepetition cause of action. In re Magnacom Wireless, L.L.C., 503 F.3d at 992.
The payment at issue, here, is “traceable to” the pre-petition cause of action, id.,
pursuant to both the terms of the Consent Order and the release. Specifically, the Consent
Order identified the alleged wrongdoing by Wells Fargo and identified a class of
borrowers, to which the debtors belong, entitled to relief, Consent Order at 10-23, and
the Consent Order authorized Wells Fargo to obtain “an appropriate form of release not
to be executed earlier than notification of the borrower of the amount of remedial
compensation offered” as a document that a borrower “must provide in order to obtain
such remedial compensation.” Id. at 21. Indeed, the release language in the Consent
Order demonstrates that the debtors are simply wrong when they contend that “there is
no evidence the funds would not be received if the release was not signed,” Appellants’
Brief at 7, ¶ 34. Similarly, the debtors are wrong when they contend that they were not
required to take any affirmative action to obtain relief under the Consent Order, because
they (or the Trustee on their behalf) had to execute the release to obtain that remedial
relief. To put it another way, property of the bankruptcy estate includes payments
22

received post-petition on a pre-petition claim, even though, as here, post-petition
proceedings, actions, or settlement on the claim were required to receive the payment,
because such post-petition payment is “proceeds” of the pre-petition claim. Cf. In re
Jess, 169 F.3d at 1207.
The bankruptcy court did not err in concluding that the payment at issue is
“proceeds” of a pre-petition cause of action and, consequently, property of the
bankruptcy estate within the meaning of § 541(a)(6).
3.

Was the payment “after-acquired property” of the bankruptcy
estate?

I also conclude that the bankruptcy court did not err in concluding that the payment
at issue is “[an] interest in property that the estate acquire[d] after the commencement of
the [bankruptcy] case,” within the meaning of § 541(a)(7). This is so under all three
prongs of the test in the Ninth Circuit.
First, the interest in the payment was created by the pre-petition cause of action
that was property of the bankruptcy estate, again as demonstrated by the terms of the
Consent Order and the release it authorized. In re Neidorf, 534 B.R. at 371-72 (citing
In re TMT Procurement Corp., 764 F.3d at 525. The payment was acquired in the normal
course of the bankruptcy estate’s business, id., as the Trustee had sole authority to settle
a cause of action that belonged to the bankruptcy estate, see, e.g., Estate of Spirtos v.
Superior Court, 443 F.3d 1172, 1176 (9th Cir. 2006) (“[T]he bankruptcy code endows
the bankruptcy trustee with the exclusive right to sue on behalf of the estate.”); Canatella
v. Towers (In re Alcala), 918 F.2d 99, 102 (9th Cir. 1990) (causes of action that accrued
before the Chapter 7 petition was filed are part of the bankruptcy estate vested in the
trustee); In re Nuttery Farm, Inc., 467 F. App’x 711, 712 (9th Cir. 2012) (“The
Bankruptcy Code allows the trustee [to seek authorization] to sell or settle a cause of
action.”). Finally, for the reasons explained, above, the payment is “otherwise traceable
23

to or ar[o]se out of [a] prepetition interest included in the bankruptcy estate,” that is, the
pre-petition cause of action against Wells Fargo. In re Neidorf, 534 B.R. at 372.
4.

Summary

Because the debtors had a cause of action against Wells Fargo for the wrongdoing
at issue that accrued pre-petition, which was property of the bankruptcy estate under
§ 541(a)(1), and because a post-petition recovery on that cause of action was obtained by
settlement, in the form of the Consent Order and release, the payment pursuant to that
settlement was either or both “proceeds” of or from property of the bankruptcy estate
under § 541(a)(6) and/or property of the bankruptcy estate as an after-acquired “interest”
under § 541(a)(7). Cf. In re Brown, 363 B.R. at 605 (“A later recovery on the claim is
derivative of the cause of action and therefore also property of the estate.”).
D.

The Debtors’ Contrary Authority

The debtors contend that the case law dictates a different conclusion. As the
bankruptcy court observed, the applicable case law requires a “close reading.” Thus, I
demonstrate why a “close reading” demonstrates the problems with the debtors’
contentions.
1.

In re Neidorf

The debtors contend that the foregoing analysis is the wrong one, because they
read In re Neidorf, 534 B.R. 369 (B.A.P. 9th Cir. 2015), to hold that a monetary award
pursuant to a Consent Order entered into after the bankruptcy petition is not part of the
bankruptcy estate, because the “qualifying event”—the one that created the rights and
remedies for the specified class of borrowers—was the Consent Order, not the liability
for some misdeed that may have occurred prior to bankruptcy.

I agree with the

bankruptcy court that the debtors read In re Neidorf as standing for far too broad a
proposition.
24

In In re Neidorf, the debtor filed her Chapter 7 petition on July 12, 2008; the
mortgage lender obtained relief from the stay on September 29, 2008, to pursue remedies
on the mortgage on the debtor’s residence; the debtor was discharged in bankruptcy on
October 21, 2008; and the residence was sold at a foreclosure sale on July 14, 2009. Id.
at 370. Much later, the debtor disclosed that she had received a Foreclosure Payment on
April 15, 2014, pursuant to a 2011 consent order between the Comptroller of the
Currency and the lender, which had been amended in 2013. Id. at 370, 372. The decision
is silent as to whether any release of claims was necessary to obtain the Foreclosure
Payment. The court held that “it was the postpetition 2011 Consent Order and the 2013
[Amendment of the Consent Order] which created the rights and remedies for the
specified class of borrowers,” including the debtor, and that “[n]owhere has the Trustee
shown how the estate obtained an interest in the Foreclosure Payment itself when the
qualifying events giving rise to Debtor’s legal rights to the payment all occurred
postpetition and were held solely by the borrowers.” Id. (also stating, “The fact that
Debtor’s Residence became property of the estate, in and of itself, does not support the
inclusion of the Foreclosure Payment as after-acquired property under § 541(a) (7).
Rather, Debtor became entitled to the payment only as a result of qualifying events
occurring after her bankruptcy filing.”).
I cannot read In re Neidorf to stand for the proposition that any payment pursuant
to a post-petition consent order is created by the consent order and property of the debtor.
Rather, the court in that case reached the conclusion that the specific Foreclosure Payment
at issue was created by the post-petition consent order at issue and was property of the
debtor in light of the facts presented. In re Neidorf is distinguishable on its facts,
however.
Most obviously, any cause of action that the debtor in In re Neidorf had against
the lender, as a result of wrongdoing by the lender during the post-petition foreclosure,
25

was a cause of action that only accrued post-petition. While the court in In re Neidorf
distinguished between the residence, as property of the bankruptcy estate, and the cause
of action arising from the post-petition foreclosure of that property, as property of the
debtor, the debtor’s cause of action was post-petition, based on post-petition wrongdoing
by the lender. Therefore, in that case, the post-petition cause of action could not be
property of the bankruptcy estate pursuant to § 541(a)(1), because it was not held by the
debtor “as of the commencement of the case.” The debtors are correct that, in In re
Neidorf, there is no reference to any “cause of action” or “claim” that the debtor might
have had against the lender as relevant to the analysis. Rather, the discussion concerned
a consent order related to a post-petition foreclosure action, because it provided for
distributions to “borrowers who had a pending or completed foreclosure on their primary
residence any time from January 1, 2009, to December 31, 2010,” id. at 372, but the
debtor had been discharged in bankruptcy on October 21, 2008. Where there was no
pre-petition property or pre-petition cause of action pursuant to § 541(a)1), there could
be no post-petition property “acquired” with bankruptcy estate property pursuant to
§ 541(a)(7). See In re Pettit Oil Co., 2016 WL 4132473 at *4 (explaining that the
bankruptcy estate must have an interest pursuant to § 541(a)(1) to “acquire” an interest
pursuant to § 541(a)(7)). The debtors are also correct that, in In re Neidorf, there is no
reference to a release of any claim against the lender as a condition of receiving the
Foreclosure Payment. Where there was no pre-petition action on which to base a cause
of action and no release of any pre-petition action as a condition of payment, it is not
surprising that the trustee could not show how the bankruptcy estate had ever acquired
an interest in the post-petition Foreclosure Payment. Id. at 371-72.
Here, however, the debtors’ cause of action against the lender accrued prepetition, so that the debtors’ cause of action was property of the bankruptcy estate
pursuant to § 541(a)(1). Also, here, the Consent Order expressly authorized a release as
26

a requirement for the borrower to obtain relief. The connection between the pre-petition
cause of action (as property of the bankruptcy estate) and the post-petition payment
pursuant to the Consent Order—which was missing in In re Neidorf—is made, here, such
that the post-petition payment is property of the bankruptcy estate pursuant to
§§ 541(a)(6) or 541(a)(7).
In re Neidorf does not require a different result here.
2.

In re Vanwart

Nor does In re Vanwart, 497 B.R. 207 (Bankr. E.D.N.C. 2013), on which the
debtors also rely, require a different result. The circumstances in In re Vanwart differ
from those in In re Neidorf in that a pre-petition foreclosure action qualified the debtors
for a post-petition payment of $25,000 pursuant to a consent order between their
mortgage servicer and the Federal Reserve. 497 B.R. at 208-09. The circumstances
differ from both the circumstances in In re Neidorf and the circumstances in this case in
that the consent order did expressly provide that borrowers would not be required to
execute a waiver of any legal claims they might have against their mortgage servicer as
a condition for receiving the payment, that the payment did not reflect specific financial
injury or harm that may have been suffered by the borrowers, and that, in fact, the
borrowers could still pursue additional actions related to the underlying foreclosure. Id.
at 209-11. The foreclosure action that qualified the debtors for the payment pursuant to
the consent order had been voluntarily dismissed, and only a later foreclosure was
completed. Id. at 208-09. Indeed, the court found “no indication that the debtors were
wrongfully foreclosed upon or ha[d] some other cause of action against” the mortgage
servicer, id. at 212, and suggested that the payment “could be referred to as a ‘windfall,’”
id. at 213 n.6. As the court explained,
Ultimately, the [mortgage servicer] entities, possibly for their
own convenience, decided to forego the Independent
Foreclosure Review [required by an earlier consent order]
27

that would have identified specific deficient foreclosure
actions, and opted instead to make blanket payments to the
entire [group of borrowers in the specified time frame.]
Therefore, the $25,000 payment was not related to a cause of
action held by the debtors at the time of the commencement
of the bankruptcy case.
In re Vanwart, 497 B.R. 212. Under these circumstances, and specifically where there
was no “cause of action” belonging to the debtor related to the post-petition payment, the
court in In re Vanwart concluded that the post-petition payment was not “sufficiently
rooted in the prepetition past” to be property of the bankruptcy estate.

Id. at 212-13

(finding that this test had been established by Segal v. Rochelle, 382 U.S. 375, 380
(1966)). Rather, the court concluded, “The payment stemmed from the 2013 consent
order; however, even at the time that the 2013 consent order was entered, there is no
indication that the debtors were entitled, legally or equitably, to the payment.” Id. at
213.
Here, the event that qualified the debtors for relief under the Consent Order was
pre-petition, as in In re Vanwart—origination of their loan during the specified timeframe,
like foreclosure proceedings during the specified timeframe in In re Vanwart. There,
however, the similarities end. Where the payment in In re Vanwart was a “blanket” one,
to all borrowers within the timeframe, without any indication of pre-petition wrongful
conduct by the lender, without any requirement that the borrower waive any claim to
receive the payment, and with a specific preservation of the borrower’s right to sue for
wrongdoing in relation to the foreclosure notwithstanding the payment, the payment was
not “sufficiently rooted in the prepetition past” to be property of the bankruptcy estate.
Here, in contrast, the Consent Order identified the wrongful conduct to which the
borrowers had potentially been subjected and authorized a release as a requirement for
the borrowers to obtain the relief provided. Thus, here, there is every “indication that
28

the debtors . . . ha[d] some . . . cause of action against” Wells Fargo as of the
commencement of their bankruptcy case, id. at 212 (finding this element was missing),
so that the cause of action, here, was property of the bankruptcy estate, and the settlement
and release of that cause of action pursuant to the Consent Order was “sufficiently rooted
in the prepetition past” to be property of the bankruptcy estate under the Segal test, for
the same reasons it was “proceeds” within the meaning of § 541(a)(6) and/or “afteracquired property” within the meaning of § 541(a)(7).
Thus, In re Vanwart also does not require a different result here.8
3.

The cases involving relief by governmental action

The debtors also cite several cases that they contend support their contention that,
where post-petition governmental action creates rights to payment or property, such as

8

The debtors also rely on Hoseman v. Weinschneider, 277 B.R. 894 (N.D. Ill.
2002), which they contend holds that, even though contractual terms were being
negotiated and other significant efforts were undertaken pre-petition, the contract was not
finalized until after the bankruptcy filing, so the action related to the contract was not
property of the estate. Apparently, they suggest that there was no interest of the debtors,
here, in the payment at issue until the Consent Order was finalized. In Hoseman, the
court concluded that the action on the contract was not “sufficiently rooted” in the prepetition past, under Segal, to be property of the estate. The court reasoned that, to satisfy
the Segal test in a contract case, “there must have been a contract, something that could
have been enforced and assigned or otherwise alienated or levied against.” Hoseman,
277 B.R. at 900. Because there was no contract pre-petition, the court concluded that
there was no prospect of any interest in a breach-of-contract claim pre-petition that would
have “rolled into the bankruptcy estate,” and the contract was not for pre-petition
services. Id. at 901. In the debtors’ case, however, there was a cause of action that
could have been pursued prior to the filing of the debtors’ petition in bankruptcy. While
there is a cause of action for breach of contract only after a contract has been finalized,
a tort cause of action accrues, for purposes of bankruptcy, when the claim “could have
been brought,” that is, when the wrongful conduct and injury have occurred. Cusano v.
Klein, 264 F.3d 936 (9th Cir. 2001). Again, the debtors’ claims against Wells Fargo
accrued pre-petition.
29

the Federal Reserve’s action here, culminating in the Consent Order, the resulting
property is not property of the bankruptcy estate. I do not agree that these cases require
a different result from the one I reached, above.
In none of the case cited by the debtors was there a readily discernable legal
interest at the time of the bankruptcy filing, pursuant to which the property at issue was
subsequently obtained, which would have made the post-petition property bankruptcy
estate property. See Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234 (11th Cir.
2008) (holding that post-petition crop disaster payments authorized by post-petition
legislation for pre-petition crop losses were not property of the bankruptcy estate, because
the debtor had no legal or equitable interest in a payment until passage of the legislation,
only “a hope and maybe an expectation that legislation w[ould] be enacted for his relief,”
but that was not enough); In re Vote, 276 F.3d 1024 (8th Cir. 2002) (rejecting the
trustee’s argument that post-petition crop loss payments for a pre-petition crop failure,
pursuant to post-petition federal crop disaster legislation, were property of the bankruptcy
estate, because the debtor had no existing interest at the time of filing sufficient to “root”
the payments in the pre-petition past under Segal; rather, the debtor “had a mere hope
that his losses might generate revenue in the future”); In re Schmitz, 270 F.3d 1254 (9th
Cir. 2001) (rejecting the trustee’s argument that post-petition fishing quota rights, based
on the debtor’s pre-petition catch history, pursuant to post-petition final regulations of
the Secretary of Commerce, were property of the bankruptcy estate, because the
regulations did not exist at the time the debtor filed his petition and, although the quota
rights were calculated on the basis of the debtor’s pre-filing fishing history, they governed
only his post-filing right to fish; the debtor “might have had a hope, a wish and a prayer
that the Secretary would eventually implement the plan then under consideration, [but]
the fact remains that as of the date of the petition, [the debtor’s] 1988-1990 catch history
had no value”). Because there was a pre-petition cause of action, here, and the payment
30

pursuant to the Consent Order was “proceeds” of that cause of action or “acquired” by
the bankruptcy estate because of and only upon release of that pre-petition cause of action,
the post-petition payment was property of the bankruptcy estate pursuant to § 541(a)(6)
and/or § 541(a)(7) and “sufficiently rooted in the pre-petition past” to be property of the
bankruptcy estate under Segal.
IV.

CONCLUSION

Upon the foregoing, the March 10, 2016, Memorandum Of Decision (Bankr.
docket no. 68), and the March 17, 2016, Order (Bankr. docket no. 69) holding that the
payment at issue is property of the bankruptcy estate are affirmed.
IT IS SO ORDERED.
DATED this 1st day of September, 2016.

______________________________________
MARK W. BENNETT
U.S. DISTRICT COURT JUDGE
NORTHERN DISTRICT OF IOWA
VISITING JUDGE

31