Lunt v. Peoples Bank, The
Filing
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MEMORANDUM AND ORDER - The bankruptcy court's order granting the motion for summary judgment by intervenors Steven and Elaine and denying Debtor's motion for summary judgment is affirmed. The final Memorandum Opinion and Judgment of the bankruptcy court is affirmed. See Order for further details. Signed by District Judge Carlos Murguia on 9/25/2013. (kao)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
IN RE:
PHILIP DUANE LUNT,
Debtor.
PHILIP DUANE LUNT,
Appellant,
v.
THE PEOPLES BANK, Trustee,
STEVEN A. LUNT, Intervenor,
ELAINE L. STELTER, Intervenor,
Appellees.
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Bankr. No. 10-13712
Chapter 7
Case No. 12-1337-CM
MEMORANDUM AND ORDER
This is an appeal of the final Memorandum Opinion and Judgment (Doc. 5-18) of the
bankruptcy court. Appellant Philip Duane Lunt (“Debtor”) appeals the bankruptcy court’s decision
denying Debtor’s motion for summary judgment and granting the motion for summary judgment of
intervenors Elaine L. Stelter (“Elaine”) and Steven A. Lunt (“Steven”). Debtor claims that the
bankruptcy court erred in three ways: (1) in deciding that Debtor’s bankruptcy eliminated his personal
liability for his pre-petition promissory note but did not extinguish the underlying debt; (2) in deciding
that the doctrine of recoupment applied; and (3) in deciding that The Peoples Bank (“Trustee”)’s
actions were permissible under state law and the trust documents. The court has carefully reviewed the
record and affirms.
I.
Factual Background
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The following facts are uncontroverted and were set forth in the bankruptcy court’s decision.
For reasons of judicial efficiency, the court reproduces them in their entirety here.
The [Harry B. Lunt] Trust [(“Trust”)] was established in 1978 by Harry B. Lunt
(“Harry or Grantor”), the father of Debtor Lunt, Elaine, and Steven (“the Lunt
Children”). On November 7, 1985, the Trust entered into a contract with Debtor Lunt
and his wife, Rose Ann Lunt, for the sale of a farmhouse to Debtor Lunt and Rose
Ann[ ]. The purchase price was $50,000.1 In partial payment for the home, Debtor and
Rose Ann executed the Note, dated November 7, 1985, for $33,333.33 payable to The
Peoples Bank as Trustee. The Note provides for interest at the rate of 10% per annum,
payable from the date of the transfer of the property. The principal is due in five years.
Although the contract provides for transfer of the farmhouse to Debtor and Rose Ann,
the deed dated November 7, 1985, conveyed the farmhouse only to Rose Ann. But it is
uncontroverted that Debtor has lived in the farm house since the transfer.
Debtor filed for relief under Chapter 7 on November 25, 1988. The Peoples
Bank and the Trustee were listed as creditors. A proof of claim for payment of the Note
was filed. Debtor was granted a discharge on July 19, 1989. The parties agree that the
Note was within the scope of the discharge order.
The Grantor created the Trust, which is governed by Kansas law, by an
instrument dated December 27, 1978. The Peoples Bank of Pratt is named as the
Trustee. The Trust agreement was amended in its entirety by an Amendment to Trust
Agreement dated March 29, 1984, and by a limited Amendment of Trust Agreement
signed on November 7, 1985, addressing the Note. A purpose of the Trust was to
provide for the Grantor during his lifetime. Upon his death, a marital trust and a nonmarital trust were created, and distributions from the marital trust were made to
Christine Lunt, Harry’s wife and the mother of the Lunt Children. The Trust provides
that upon the death of Christine, which occurred in 2004, the two trusts are to be
administered as one for twenty years, after which the Trust will terminate. Upon
termination, the Lunt Children are entitled to distributions of all principal and accrued
and unpaid income.
The following specific terms of the Trust are relevant. The Trustee is given “all
powers expressly set forth in the Uniform Trustees Power Act (K.S.A. 58-1201, et
seq[.]) as may be amended from time to time” and other powers set forth in the 1984
Amendment to Trust Agreement.2 After Christine’s death, Article VI(A)(3)(b) of the
1984 Amendment to Trust Agreement, a subsection of the martial trust provisions, gives
the Trustee discretion to make distributions of income to the Lunt Children as follows:
1
The Note was therefore for two-thirds of the purchase price. There is no evidence that Debtor Lunt paid the Trust the
other one-third of the value. In essence therefore, through the Note, Debtor agreed to pay the Trust Elaine and
Steven’s share of the value of the home.
2
1984 Amendment to Trust Agreement, Article VII.
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[T]hen upon the death of Grantor’s wife, the Trustee shall
continue to hold any accumulated income and principal in trust and shall
administer the same as follows:
....
b. All or any part of the income of this trust may
be distributed at any time and from time to time and for
any reason for the benefit of the Grantor’s children in
such proportions and amounts as the Trustee may
determine, it being the intention hereof to vest in the
Trustee the sole and absolute power to distribute or not
distribute amounts of income at such times and in such
proportions among said individuals as it deems
appropriate.
Also, under Article VI(C) of the 1984 Amendment to Trust Agreement, after the death
of Christine, the marital trust and the non-marital trust are treated as one and
administered as provided in the Amendment for a period of twenty years, when the
Trust terminates. Upon termination of the Trust, Article VI(C)(4) provides for equal
distributions to the Lunt Children, as follows:
Upon termination, the Trustee shall distribute the principal and
any accrued and undistributed income of the trust in equal shares to the
children of the Grantor, provided, the Trustee is authorized and
empowered to make unequal distribution of the principal and any
accrued and undistributed income in cash or in kind in order to carry out
the desires of the Grantor for the Trustee to consider all transfers to
Grantor’s children that have been made by the Grantor or his wife by
Will or otherwise. Any loans made by Grantor or his wife which have
not been repaid shall be treated as transfers by the Trustee, whether or
not the statutes of limitation have run.
The Amendment of Trust Agreement executed on November 7, 1985, the date of
the Note, states in part:
The Trustee is hereby directed to enter into the attached contract
on behalf of the Trust, to accept the notes as required in such contract . . .
and to execute the deed in the form as attached hereto, to carry out the
terms of the contract.
The Trustee is further directed that upon the death of the survivor
of myself and my wife . . . and collection of the note to the Trustee in the
amount of . . . $33,333.33 . . . , whichever event shall last occur, to
distribute one-half (½) of the principal of such note to my son, Steven A.
Lunt and one-half (½) to my daughter, Elaine Lunt Stelter.
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As found above, the home transferred from the Trust to Debtor and his wife was valued
at $50,000. Since the Note, the only consideration which Debtor paid for the home, was
for two-thirds of the home’s value, Debtor received his one-third interest in that portion
of the Trust assets at the time of the transfer, and the other two beneficiaries, Elaine and
Steven, were to receive their share through distributions after payment of the Note.
Ted Loomis was The Peoples Bank trust officer primarily responsible for the
Trust from 1984 until 2006 or 2007. Thereafter, Richard Mullin was the primary trust
officer for the Trust, until he retired in December 2010. No distributions from the Trust
to the Lunt Children were made in 2004, 2005, or 2006. Beginning in 2007, equal cash
distributions were made on behalf of each child.3
By an e-mail to Richard Mullin, copied to Ted Loomis, dated December 16,
2009, Debtor complained about the administration of the Trust as it related to Luntacres
Farm, Inc., a family farming operation, the stock of which is held at least in part by the
Trust. Debtor stated that he believed that his sister and Ted Loomis were “calling the
shots” and alleged that Ted Loomis was “running money through the Trust,” or
laundering money through the Trust. Debtor concluded the correspondence by stating
that he had been thinking about what type of legal action could be taken. The following
day, Debtor sent to the same individuals another e-mail concerning similar allegations of
mismanagement and stating that he firmly believed that Steven and Elaine “are
managing the Harry B. Lunt Trust.”
By letter dated December 18, 2009, Richard Mullin responded to the allegations
and also stated the following regarding distributions from the Trust:
Historically, we have tried to make distribution of the net income of the
trust to the three current beneficiaries. As you know, the trust agreement
gives the trust the full discretion as to whether or not to make such
distributions and, if so, in what amounts. In other words, the trust
agreement does not require us to make distributions of income, nor must
any such distributions necessarily be equal between beneficiaries.
The reason I point this out is that we are quite concerned regarding your
failure, since 1985, to make any payments on the note that had a face
value of $33,333.33. Under its terms and with accrued interest, you now
owe over $112,000. In accordance with the terms of an amendment to
the trust, your Father wanted for us to distribute the cash from the note
payment to Elaine and Steve after the death of your Mother. Not only
are we not able to do that since you have not made payments on the note,
but the note continues to accrue interest. While we intend to carry out
the terms of the trust regarding any discretionary distribution of principal
and/or interest to you, we must begin making any income payments that
have historically been paid to you and use those amounts to make
3
Adjustments were made to the cash distributions to Elaine and Steven to account for withholding of taxes, but these
adjustments are not relevant to this case.
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payments on your liability to the trust. If your circumstances would
warrant a reconsideration of making a distribution directly to you, please,
at any time, make application for us to reconsider our position.4
On December 19, 2009, Debtor again sent an e-mail to Richard Mullin and Ted
Loomis in which he referred to a “civil law suit” against the bank. By an e-mail dated
April 15, 2010, to Ted Loomis, Debtor’s attorney threatened to sue the bank for breach
of fiduciary duty and conversion relating to the farm corporation.
In 2010, Richard Mullin recognized that Debtor’s failure to make payments on
the Note would preclude the express purpose of the Trust to divide the Trust assets
equally among the three children. He testified in a deposition as follows:
The primary thing was that I’d run an amortization schedule of
that note plus its accrued interest, and I don’t remember whether it had
already reached but it was not too far from reaching a one-third share of
the trust as it was valued at that time. And I was concerned that if we
waited until 2024 that we would not be able to satisfy a one-third
distribution of the trust to the three beneficiaries.5
On June 2, 2010, the Trustee determined to distribute $4,811 in accrued income
to each beneficiary. But Debtor’s distribution of $4,811 was not paid to him in cash.
Instead it was applied to “interest on Notes.” At the same time, cash distributions of
$4,811 were made to Elaine and Steven, and the $4,811 to which Debtor would have
been entitled was divided into two additional cash distributions of $2,405.50 that were
made to Steven and Elaine.
(Doc. 5-18 at 3–8 (original formatting and citations retained).)
II.
Legal Standard
This court employs a de novo standard of review of the bankruptcy court’s conclusions of law.
Cohen v. Borgman (In re Borgman), 698 F.3d 1255, 1259 (10th Cir. 2012) (citation omitted). Further,
“[t]his [c]ourt must . . . reach its own conclusions regarding state law legal issues, without deferring to
the bankruptcy court’s interpretation of state law.” Id. (citation omitted).
III.
Discussion
A. Whether the Discharge Injunction under 11 U.S.C. § 524(a)(2) Applies to the Debt
Evidenced by the Note
4
Doc. [5-3] at 27–28.
5
Doc. [5-6] at 3.
-5-
As is stated above, on November 25, 1988, Debtor filed for Chapter 7 bankruptcy. Debtor
received a discharge under 11 U.S.C. § 524(a)(2), which went into effect on July 19, 1989. The list of
discharged debts included the Note. 11 U.S.C. § 524(a)(2) states that a discharge “operates as an
injunction against . . . an act, to collect, recover or offset any such debt as a personal liability of the
debtor, whether or not discharge of such debt is waived.” The parties agree that the discharge
injunction applies to Debtor’s personal liability on the Note. The parties disagree, however, on
whether the debt evidenced by the Note was discharged in bankruptcy.
A discharge in bankruptcy eradicates the debtor’s personal liability on the obligation, but it
does not eliminate the underlying debt. See Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)
(stating that “a bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an
action against the debtor in personam—while leaving intact another—namely, an action against the
debtor in rem.”); 3 William L. Norton, Jr., & William L. Norton III, Norton Bankr. Law & Practice 3d
§ 58:2 (Thomson Reuters/West 2012) (noting that discharge extinguishes personal liability on a debt,
but does not “absolve the underlying debt retroactively”). Therefore, although Debtor’s bankruptcy
eliminated his personal liability on the Note, the underlying debt remains.
A. Whether the Doctrine of Recoupment Applies and Whether the Trustee’s Actions
Were Permissible under State Law and the Trust Documents
After determining that the debt evidenced by the Note was not discharged in bankruptcy, the
court must determine whether the Trustee’s actions in offsetting Debtor’s interest obligation on the
Note against the income distribution violates the discharge injunction. The answer depends on
whether the doctrine of recoupment applies. If recoupment applies, then no “debt” or “claim” exists as
defined in the Bankruptcy Code, and the Trustee did not violate the injunction. See Beaumont v.
Dep’t. of Veteran Affairs (In re Beaumont), 586 F.3d 776, 781 (10th Cir. 2009) (citing Aetna U.S.
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Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 754 (B.A.P. 9th Cir. 2001) (“Since
recoupment is neither a claim nor a debt, it is unaffected by either the automatic stay or the debtor’s
discharge.”) (citations omitted)). Recoupment allows the creditor to use the discharged debt
defensively, despite the discharge injunction. Anthem Life Ins. Co. v. Izaguirre (In re Izaguirre), 166
B.R. 484, 493 (Bankr. N.D. Ga. 1994) (noting the propriety of the use of recoupment as a defense).
As it applies in bankruptcy law, the equitable doctrine of recoupment allows a creditor to
withhold funds owed to another party “to offset a claim that arises from the same transaction as the
debtor’s claim, without reliance on the setoff provisions and limitations of [11 U.S.C. §] 533, because
the creditor’s claim . . . is essentially a defense to the debtor’s claim against the creditor . . . .”
Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1537 (10th Cir. 1990) (per curiam) (internal
citations omitted). The doctrine essentially “allows a creditor to recover a pre-petition debt out of
payments owed to the debtor post-petition.” Beaumont, 586 F.3d at 780 (internal citation omitted).
In bankruptcy cases, courts narrowly construe the doctrine of recoupment “because it violates
the basic bankruptcy principle of equal distribution to creditors.” Conoco, Inc. v. Styler (In re Peterson
Distrib., Inc.), 82 F.3d 956, 959 (10th Cir. 1996) (citing Ashland Petroleum Co. v. Appel (In re B & L
Oil Co.), 782 F.2d 155, 158 (10th Cir. 1986)). For the doctrine to apply, the two debts must arise out
of the “same transaction.” Id. (citation omitted). As the bankruptcy court noted, the Tenth Circuit has
adopted the “single integrated transaction” definition of “same transaction.” See id. at 960 (citing
Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr., Inc.), 973 F.2d 1065, 1081 (3d Cir. 1992)). This
definition requires that “both debts arise out of a single integrated transaction so that it would be
inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations.”
Id. (citation omitted). In deciding whether offset violates a discharge injunction, courts must carefully
consider the equities involved and “determine whether the claims ‘are so closely intertwined that
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allowing the debtor to escape its obligation would be inequitable.’” Beaumont, 586 F.3d at 781
(quoting Peterson Distrib., 82 F.3d at 960).
The bankruptcy court provided a thorough analysis of Tenth Circuit recoupment decisions
employing the “same transaction” test. (Doc. 5-18 at 18–21.) This court will briefly analyze these
cases as well. In Peterson Distributing, the Tenth Circuit adopted the Third Circuit’s “single
integrated transaction” test. 82 F.3d at 960. There, the Tenth Circuit put great emphasis on the
equities of the case. The court found that—despite the existence of a single franchise agreement that
covered both obligations at issue—the obligations were not “so closely intertwined” that it would be
equitable to allow Conoco (the creditor) to recover its losses at the expense of the other creditors. Id.
at 962. Further, as the bankruptcy court noted, the Tenth Circuit noted there was “no overriding
equitable reason . . . that compels the application of the doctrine of recoupment in this case” Id.
Davidovich involved an attorney (the debtor) who sued his former law partner to recover an
amount awarded to him in an arbitration proceeding between the debtor and the former law partner.
901 F.2d 1533. The law partner attempted to set the debtor’s claim off against two claims he himself
had against the debtor. Id. at 1536. The Tenth Circuit applied the doctrine of recoupment and allowed
offset of the law partner’s claim arising out of the same arbitration proceeding; however, the claim
arising from a separate partnership venture was not allowed. Id. at 1537–38. In explaining its
decision, the Tenth Circuit noted that the debts from the arbitration proceeding originated from “a
single integrated transaction . . . such that it would be inequitable for [the debtor] to enjoy the benefits
of that transaction without meeting its obligations.” Id. at 1537. In contrast, recoupment did not apply
to the claim arising from the separate partnership venture because the debt arose under a separate
partnership agreement, and not the arbitration proceeding. Id. at 1538.
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In Beaumont, the debtor, a disabled veteran, was receiving disability payments from the
Department of Veteran Affairs (“VA”). 586 F.3d at 778. He failed to notify the VA—as he was
required to do—after he received a large inheritance. Id. at 779–80. After learning of the inheritance,
the VA determined it had overpaid the debtor and notified the debtor of its intention to recoup the
claim by offsetting future disability payments owed to the debtor, as was explicitly allowed by statute.
Id. The VA continued to offset the debtor’s benefits even after the debtor filed for bankruptcy, and the
debtor argued that this conduct violated the discharge injunction. Id. Applying the “single integrated
transaction” test, the Tenth Circuit found that the debtor’s “inheritance was directly related to or
intertwined with the amount of benefits [the VA] was obligated to pay to him, and the resulting
overpayment of benefits.” Id. at 781. In determining that the doctrine of recoupment applied, the
court found that “it would be inequitable for the [debtor] to receive his inheritance, continue to receive
benefits as if his income was zero, then be able to discharge in bankruptcy the overpayments . . . .” Id.
As is stated above, the discharge injunction did not eradicate Debtor’s obligation to the Trust.
Interest continues to accrue on the Note at the rate of $3,333.33 per year. Debtor’s obligation to the
Trust is his liability for interest on the Note. In June 2010, the Trustee applied Debtor’s 2010 income
distribution to the interest on the Note. Debtor’s one-third share of the income totaled $4,811.
The court finds that—for the year in which the income distribution was made—Debtor’s right
to receive income distributions from the Trust and his obligation to the Trust are closely intertwined.
Both are part of the same transaction: administration of the Trust. (Doc. 5-18 at 21 (“Both relate to the
administration of the Trust during the same time period and to Debtor’s then current rights and
obligations.”).) Further, Debtor’s obligation to the Trust and his right to receive income distributions
are so closely intertwined that it would be inequitable to allow him to receive distributions while at the
same time failing to honor his obligation to the Trust.
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Unlike the multiple creditors involved in Peterson Distributing, the rights of other creditors are
not involved here, as this case deals with recoupment to the Trust from disbursements made by the
Trust. See 82 F.3d at 961–63. Instead, it appears that only Elaine and Steven will be prejudiced if
recoupment does not apply. And, as the bankruptcy court noted, the recoupment here bears a close
resemblance to the recoupment in Davidovich upheld by the Tenth Circuit. See 901 F.2d at 1537–38
(upholding recoupment where both debts arose from the same arbitration award). Further, the
inequities to Elaine and Steven in this case surpass those in Beaumont, where it was unfair for the
debtor to receive benefits payments as if he received no income and also enjoy his inheritance. See
586 F.3d at 781. It would also be inequitable for Debtor to receive Trust assets belonging to his
siblings—represented by two-thirds of the value of the farmhouse—and continue to receive equal
income distributions from the Trust.
Considering the equities involved in this case, the court finds that Debtor’s receipt of an income
distribution for the same period of time for which he was not honoring his obligation to pay interest
would be inequitable. Debtor’s 2010 interest obligation of $3,333.33 and Debtor’s 2010 income
distribution were part of the same transaction and the doctrine of recoupment applies.
As to the Trustee’s offset of the remaining $1,477.67 against Debtor’s interest obligation for a
prior year, the court agrees that the “single integrated transaction” test is still met and the Trustee did
not violate the discharge injunction. As the bankruptcy court explained, the Note plus accrued interest
would eventually total more than Debtor’s one-third share in the principal of the Trust. Like in
Beaumont, where the VA recouped past overpayments from current benefits, non-bankruptcy law
supports recoupment here. The bankruptcy court provided a very thorough discussion of the authority
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of the Trustee under the Trust and state law6 to apply Debtor Lunt’s income distribution to payment of
interest on the Note.
Although the court will not repeat in full that discussion here, the court—upon performing an
independent review—concurs that the Trustee’s application of Debtor’s income distribution to the
interest remaining on the Note was a valid method of carrying out the Grantor’s intent that
distributions of principal to the beneficiaries be equal when the Trust terminates in 2024. Article
VI(C)(4) of the 1984 Trust Amendment states this intent. (See Doc. 5-3 at 11, 1984 Amendment to
Trust Agreement, Article VI (“Upon termination, the Trustee shall distribute the principal and any
accrued and undistributed income of the trust in equal shares to the children of the Grantor . . . .”).)
This provision also directs the Trustee to consider all transfers to the Grantor’s children in
accomplishing equal distributions to the beneficiaries. (Id.) As is stated above, the Trustee realized in
2010 that if the Note remained unpaid and interest continued to accrue, then the Note plus total accrued
interest would exceed the amount of principal expected to be distributed to Elaine and Steven. To
rectify this, the Trustee exercised its discretion and decided to apply income payments that had
otherwise been paid to Debtor toward Debtor’s liability to the Trust. These actions were supported by
the Trustee’s offset authority under Kansas law.7
6
Debtor argues that the Trustee’s actions constituted an impermissible setoff and that the bankruptcy court’s reliance on
state law was in error. But setoff and recoupment are distinct; setoff involves mutual debts that arise from different
transactions, while recoupment involves claims arising from the same transaction. Peterson Distrib., 82 F.3d at 959.
Because the equitable defense of recoupment applies—as explained above—there is no impermissible setoff. See
Davidovich, 901 F.2d at 1537 (“[Recoupment] has evolved to permit a creditor to offset a claim that ‘arises from the
same transaction as the debtor’s claim,’ without reliance on the setoff provisions and limitations of [11 U.S.C. §] 553,
because the creditor’s claim in this circumstance is essentially a defense to the debtor’s claim against the creditor rather
than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable.”) (quoting B
& L Oil Co., 782 F.3d at 157 (internal citation omitted)).
7
See Doc. 5-18 at 11–16 (citing K.S.A. § 58a-815(a)(2)(A) (granting to trustees of express trusts the same powers as an
unmarried competent owner has over individually-owned property); K.S.A. § 58a-816(18) (allowing trustees to make
loans out of trust property and hold a lien on future distributions for repayment); George Gleason Bogert, George
Taylor Bogert, & Amy Morris Hess, The Law of Trusts & Trustees, § 814, text associated with footnote 56 (current
through 2011 update) (available under database identifier BOGERT at www.westlaw.com) (describing a trustee’s
authority to set off a distribution due to a beneficiary against a sum due to the trustee from a beneficiary); and a variety
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B. Debtor’s Remaining Arguments
Debtor puts forth several arguments why the bankruptcy court erred in determining the doctrine
of recoupment applies in this case. Each of these arguments fails. First, Debtor argues that the
bankruptcy court’s decision violates the bankruptcy code’s policy of providing debtors with a “fresh
start.” Debtor is correct that affording debtors with a fresh start is one purpose under the bankruptcy
code. In re Stewart, 109 B.R. 998, 1006 (D. Kan. 1990). But as the bankruptcy court aptly explained:
[A]llowing recoupment promotes equity. Because of Debtor’s discharge, the Trustee is
prohibited from enforcing the note as a personal liability of Debtor. As a result, Elaine
and Steven will not receive their distributions of the Note principal, which distributions
are specifically provided for in the Trust Amendment authorizing the Note. Application
of the discharge injunction as a shield to prevent the offset of income distributions
against Debtor’s interest obligations would compound the injustice by allowing Debtor
to benefit from current distributions from the Trust without having to comply with his
duties to the Trust.
(Doc. 5-18 at 22.) The court agrees that the “interest in a fresh start pales when compared with
the Trustee’s interest in carrying out the Grantor’s intent to equalize the principal distributions
to the beneficiaries upon termination of the Trust.” (Id.)
Second, Debtor contends that the 1984 and 1985 Amendments and the Note are all distinct
contracts entered into at different times, and thus cannot be part of the same transaction for recoupment
purposes. Debtor’s argument falls short. The 1984 Trust Amendment contains the Grantor’s intention
that his children share equally in the principal of the Trust and authorized the Trustee to consider
transfers to children and/or loans in making unequal distributions to achieve this goal. The Note bears
a direct relation to the farmhouse Debtor received from the Trust. Moreover, the 1985 Trust
Amendment expressly discusses the $33,333.33 obligation on the Note, and the requirement that the
obligation be paid one-half each to Steven and Elaine. Thus, the 1984 Trust Amendment, the Note, the
of Kansas probate law cases (discussing the equitable right of offset in cases where an heir or distributee owes a debt to
the estate)).
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transfer of the farmhouse, and the 1985 Trust Amendment are all integrated into a single, integrated
transaction—administration of the Trust.
Debtor’s argument is overly simplistic. Just as the court in Peterson Distributing determined
that the “same transaction” requirement was not met merely because the claims arose from a single
franchise agreement, the existence of multiple amendments and different documents does not mean the
“same transaction” requirement is not met. See 82 F.3d at 960–63. A close examination of the Note,
the 1984 and 1985 Amendments, the transfer, and the equities of this case lead to the conclusion that
both Debtor’s obligation to Trust and his right to an income distribution involve a single integrated
transaction. As stated by the bankruptcy court, “both relate to the administration of the Trust during
the same time period and to Debtor’s then current rights and obligations.” (Doc. 5-18 at 21.)
Third, Debtor argues that the transfer of the farmhouse to Debtor and his wife was not a
“loan” and therefore the Trustee cannot consider the transfer of the farmhouse when making
distributions to the beneficiaries. Article VI(C)(4) of the 1984 Amendment provides:
Upon termination, the Trustee shall distribute the principal and any accrued and
undistributed income of the trust in equal shares to the children of the Grantor,
provided, the Trustee is authorized and empowered to make unequal distribution of the
principal and any accrued and undistributed income in cash or in kind in order to carry
out the desires of the Grantor for the Trustee to consider all transfers to the Grantor’s
children that have been made by the Grantor and his wife by Will or otherwise. Any
loans made by Grantor or his wife which have not been repaid shall be treated as
transfers by the Trustee, whether or not the statute of limitations have run. The decision
of the amounts of the transfers shall be in the Trustee’s sole and absolute discretion and
the decision of the Trustee shall be final.
(Doc. 5-3 at 11–12 (emphasis added).) Debtor focuses on the sentence regarding “[a]ny loans made by
Grantor . . .” to support his contention. (See id. at 11.) However, the sentence immediately preceding
that one allows the Trustee to “consider all transfers to the Grantor’s children that have been made by
the Grantor and his wife by Will or otherwise.” (Id.) The bankruptcy court correctly dismissed
Debtor’s argument, noting that the Trustee need not rely on the provision regarding “loans” and can
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instead “consider all transfers.” (Doc. 5-18 at 16.) The Trust’s conveyance of real property to Debtor
and his wife on credit was a transfer and the Trustee properly considered it in exercising its
discretionary authority to make unequal distributions. Debtor’s reliance on the “loans” provision is
misplaced.
Fourth, Debtor argues that even if the conveyance of the farmhouse was a transfer, the
farmhouse was conveyed only to Debtor’s spouse, Rose Ann, and not to Debtor, and thus was
improperly considered by the Trustee. It is undisputed that the deed conveys the property only to Rose
Ann Lunt. However, it is also undisputed that both Debtor and his wife executed the Note, and both
signed the contract for purchase of the home from the Trust. How the deed was titled is not important;
substance prevails over form. Debtor derived significant value from the transfer, as he has lived in the
house for almost thirty years. And in signing the Note, Debtor acknowledged that he received value
for the transfer of the farmhouse. As Steven and Elaine point out, “the farmhouse distributed to Debtor
in exchange for the promissory note came from the Trust.” (Doc. 12 at 14.) The Trustee properly
considered the transfer of the farmhouse to Debtor and his wife, regardless of how the deed is titled.
Debtor’s argument fails.
Finally, Debtor at first appeared to argue that the 1984 Trust Amendment does not allow the
Trustee to make unequal income distributions.8 But Debtor’s reply clarifies that he instead argues that
“if the note cannot be collected without violating the discharge injunction, [the Trustee]’s distribution
of unequal income payments in June, 2010 was not permitted under the express terms of either the
1984 Trust Amendment or the 1985 Trust Amendment.” (Doc. 16 at 10.) The Debtor then argued that
the Trustee’s broad discretion in making distributions in proportions as it deems necessary is limited
by the Trustee’s duty to act in good faith, as required by K.S.A. § 58a-814. Debtor claims the Trustee
8
As Elaine and Steven pointed out, and as is quoted in full in Section I above, Article VI(A)(3)(b) of the 1984
Amendment to Trust Agreement gives the Trustee discretion to make distributions of income to the Lunt Children after
the Grantor’s wife’s death in “such proportions and amounts as the Trustee may determine.” (Doc. 5-3 at 6.)
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did not act in good faith when it allowed interest to accrue on the discharged debt, did not seek to
collect the debt from Debtor’s wife, and then began to collect the debt through an “improper setoff.”
(Id.)
As is stated several times throughout this opinion, one of the main purposes of the Trust was to
treat the Lunt children equally. The Trustee properly exercised his discretion in distributing unequal
income distributions in order to fulfill the Grantor’s intent. The Trustee’s actions complied with the
statute cited by Debtor, which also requires a trustee to act “in accordance with the terms and purposes
of the trust and the interests of the beneficiaries.” K.S.A. § 58a-814. And because the doctrine of
recoupment applies as set out above, there was no “improper setoff” or attempt to collect the debt.
Debtor points to no evidence that the Trustee failed to act in good faith, and the court cannot find that
the Trustee’s actions were taken for any other purpose than to carry out the Grantor’s intent. This
argument fails.
C. Conclusion
After careful review, the court affirms that the bankruptcy court’s well-reasoned decision. The
bankruptcy court correctly determined that the discharge injunction did not extinguish the underlying
debt on the Note, and that the doctrine of recoupment applied. Careful consideration of the facts and
the equities of this case support that finding. The 1984 and 1985 Trust Amendments, the Note, and the
transfer of the farmhouse all are part of a single, integrated transaction—administration of the Trust.
The Trust documents and Kansas law support the Trustee’s actions in applying Debtor’s income
distribution to his obligation on the Note. And carrying out the Grantor’s intent—to treat the Lunt
siblings equally—was also achieved by the Trustee’s actions. For the reasons above, the bankruptcy
court’s order granting the motion for summary judgment by intervenors Steven and Elaine and denying
Debtor’s motion for summary judgment is affirmed.
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IT IS THEREFORE ORDERED that the final Memorandum Opinion and Judgment of the
bankruptcy court is affirmed.
Dated this 25th day of September, 2013, at Kansas City, Kansas.
s/ Carlos Murguia
CARLOS MURGUIA
United States District Judge
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