Nessan v. Lovald

Filing 19

MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT DECISION and denying 5 MOTION to Continue MOTION to Stay Pending Appeal Signed by U. S. District Judge Roberto A. Lange on 3/16/12. (DJP)

FILED
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA

CENTRAL DIVISION

CURTIS ARLEN NESSAN,
Appellant,

vs.
JOHN S. LOVALD,
Appellee.

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CIV 11-3008-RAL

MAR 16 2012

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OPINION AND ORDER
AFFIRMING BANKRUPTCY
COURT DECISION

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This is an appeal by Curtis Arlen Nessan ("Nessan"), a Chapter 7 Bankruptcy Debtor, from
a decision by the Honorable Bankruptcy Judge Charles L. Nail, Jr. Nessan contends that the
bankruptcy court erred in ordering a turnover ofa 2002 Chevrolet pickup, a 2000 Triton boat, a 175­
horse mercury motor, a Triton trailer, and a claim against AIG insurance company. For the reasons
explained below, this Court affirms the ruling of the bankruptcy court.

I. FACTS
On November 8, 2010, Nessan filed a Chapter 7 Bankruptcy. Nessan scheduled as an asset
a 2002 Chevrolet pickup, a 2000 Triton boat, a 175-horse mercury motor, and a Triton trailer. The
pickup, boat, motor, and trailer serve as security for a loan from BankWest. At the time it financed
Nessan's acquisition ofthe pickup, boat, motor, and trailer, BankWest sold Nessan a disability credit
insurance policy, issued by AIG. Nessan paid BankWest for the coverage. At some point thereafter,
Nessan was injured at work and became permanently disabled. Nessan submitted a proofofloss in
accordance with the AIG disability credit policy, which provides that AIG will make a monthly
payment of $725.00 directly to BankWest. AIG has discontinued payments under the policy and
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contends that Nessan must file a monthly application for disability benefits. The terms of the AIG
disability credit policy neither require a monthly application nor allow AIG to condition payment on
a monthly application. Nessan intends to sue AIG for specific performance of the contract and
damages for bad faith refusal to pay.
In Schedule C ofhis bankruptcy petition, Nessan claimed as exempt under SDCL § 43-45-4
his pickup, boat, motor, and trailer. Nessan believes that the fair market value of the pickUp is
$8,000, and that the fair market value of the boat, motor, and trailer is $7,500. In the "value of
claimed exemption" column of his Schedule C, Nessan listed $1.00 in the pickup and $1.00 in the
boat, motor, and trailer. Doc. 17-1. At the time he filed bankruptcy, Nessan's debt to BankWest
exceeded the value ofthe pickup, boat, motor, and trailer. Nessan also claimed as exempt his "claim
against AIG and BankWest for insurance bad faith." Id. In regard to his claim against AIG, Nessan
listed both the "value of the claimed exemption" and the "current value of property without
deducting exemptions" as $1.00. Id.
On January 7,2011, Trustee Lovald filed an objection to Nessan's exemption ofthe claim
against AIG and moved for turnover of" [a]11 asset equity created by the application ofAIG insurance
policy payments upon the secured loan at BankWest." Doc. 16-1 at 4. On February 10,2010, the
bankruptcy court ruled that any amount recovered on Nessan's potential claim against AIG above
the $1.00 Nessan claimed as exempt was property of the bankruptcy estate. Doc. 16-1 at 6. Based
on this ruling, Trustee Lovald sent Nessan's attorney a letter instructing Nessan to tum over his
pickup, boat, motor, and trailer to BankWest. Doc. 16-1 at 7. The letter contained a check for $3.00
to pay Nessan the value of his claimed exemptions in the pickup, boat, motor, trailer, and claim
against AIG. Doc. 16-1 at 7.

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Nessan and his attorney refused to turn over the property, indicating that they believed the
property was exempt and that the bankruptcy court's February 10, 2010 order did not support Trustee
Lovald's position. Doc. 16-1 at 10-11. Trustee Lovald filed a motion for clarification of the
bankruptcy court's February 10 order and for tum over of the pickup, boat, motor, and trailer. Doc.
16-1 at 12-13. On April 7,2011, the bankruptcy court granted Trustee Lovald's motion and ordered
Nessan to tum over the pickUp, boat, motor, trailer, and AIG-related cause of action. Doc. 16-1 at
16. The bankruptcy court directed Trustee Lovald to pay Nessan $3 .00 for Nessan' s claimed exempt
interest in the property. Trustee Lovald had paid $3.00 when requesting that the items at issue be
turned over. This appeal followed.

II. STANDARD OF REVIEW
"When a bankruptcy court's judgment is appealed to the district court, the district court acts
as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings
of fact for clear error." Knudsen v. I.R.S., 581 F.3d 696, 704 (8th Cir. 2009) (citation omitted).
"Whether property is included in the bankruptcy estate is a question oflaw." In re Parsons, 280 F.3d
1185, 1188 (8th Cir. 2002).

III. DISCUSSION
"When a debtor files a Chapter 7 bankruptcy petition, all of the debtor's assets become
property of the bankruptcy estate." Schwab v. Reilly, 130 S. Ct. 2652,2657 (2010). The federal
Bankruptcy Code allows a debtor to withdraw property from the bankruptcy estate (and thus from
his creditors) by claiming an exemption. Owen v. Owen, 500 U.S. 305, 308 (1991). Section 522(d)
of the Code lists categories of property that may be exempted by a Chapter 7 debtor. "The general
rule under the Bankruptcy Code is that a debtor is permitted to choose between the scheme offederal

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exemptions prescribed in § 522(d) of the Code or the exemptions available under other federal law
and the law of the state in which the debtor is domiciled." 14 Collier on Bankruptcy Intro-2 (l5th
ed. rev. 2006).
A state has the ability to "opt out" of the exemptions set forth in § 522(d), however. 11
U.S.C. § 522(b)(2). "In that case, the debtor may exempt only property that is exempt under federal
law other than § 522( d), or state or local law that is applicable as of the date of the bankruptcy
filing." In re Benn, 491 F.3d 811, 813 (8th Cir. 2007); see also Owen, 500 U.S. at 308 ("If a State
opts out, then its debtors are limited to exemptions provided by state law. "). South Dakota has
joined the majority ofstates in opting out ofthe Bankruptcy Code's exemptions. See SDCL § 43-45­
13. South Dakota Codified Law 43-45-13 provides:
In accordance with the provisions of § 522(b) ofthe Bankruptcy Code
of 1978 (11 U.S.C. § 522(b», residents ofthis state are not entitled to
the federal exemptions provided in § 522(d) of the Bankruptcy Code
of 1978 (11 U .S.C. § 522(d», exemptions which this state specifically
does not authorize. Nothing herein affects the exemptions given to
residents ofthis state by the State Constitution and the South Dakota
statutes.
ld. This Court, therefore, looks to South Dakota law to determine the scope ofNess an's exemptions.
See Hanson v. First Nat'l Bank in Brookings, 848 F.2d 866, 868 (8th Cir. 1988).
Nessan relied on SDCL § 43-45-4 in claiming as exempt the pickup, boat, motor, trailer, and
claim against AIG. South Dakota Codified Law 43-45-4 states:
In addition to the property provided for in § 43-45-2 and 43-45-3, the
debtor, if the head of a family, may, personally, or by agent or
attorney, select from all other of the debtor's personal property, not
absolutely exempt, goods, chattels, merchandise, money, or other
personal property not to exceed in the aggregate six thousand dollars
in value; and, if not the head of a family, property as aforesaid ofthe
value of four thousand dollars, which is also exempt, and which shall

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be chosen and appraised as provided by law.

Nessan framed the issue presented as "Whether a debtor claiming exemption under the laws
of South Dakota is entitled to retain exempt property." Doc. 16 at 4. Nessan argues that when a
debtor in South Dakota claims a specific item of property as exempt, the debtor is entitled to retain
that specific property, rather thanjust an interest in the property. The plain language ofSDCL § 43­
45-4 does not support Nessan' s argument. South Dakota Codified Law 43-45-4 allows a debtor such
as Nessan to exempt personal property not to exceed the value of $4,000 ifhe is not head of the
family or $6,000 if he is head of the family. Thus, under § 43-45-4, a debtor claims exemptions
according to the dollar value ofthe property rather than an exemption of an entire item. By contrast,
other exemptions under South Dakota law list a specific type ofproperty and allow a debtor to retain
that property in its entirety, regardless of the property's value. See SDCL § 43-45-2(1) (family
pictures); SDCL § 43-45-2(2) (a pew or other sitting in any house of worship); SDCL § 43-45-2(3)
(a lot or lots in any burial ground); SDCL § 43-45-2(5) (all wearing apparel and clothing of the
debtor and his family). Here, Nessan exempted $1.00 in value from the pickup, $1.00 in value from
the boat, motor, and trailer, and $1.00 in value from the AIG claim. By doing so, Nessan effectively
removed $3.00 in value, rather than the specific items themselves, from the bankruptcy estate. This
view ofSouth Dakota law has long been applied in bankruptcy cases in the District ofSouth Dakota.
See In re Benedict, No. 08-30008, 2009 WL 212411, at *2 n.6 (Bankr. D.S.D. Jan. 23,2009); In re
Ludwig, No. 01-40473 (Bankr. D.S.D. 2001); see also Soost v. NAH. Inc. (In re Soost), 262 RR.
68, 73-74 (RAP. 8th Cir. 2001) ("[T]he debtor's $1.00 exemption effectively exempted an interest
in the subject [property] equal to $1.00 in value, nothing more.").

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Furthermore, by exempting only $1.00 ofthe value ofthe items, Nessan' s schedules "did not
fairly disclose an intent to exemptll the items in their entirety. Soost, 262 B.R. at 73 (citing Hyman
v. Plotkin (In re Hyman), 967 F.2d 1316, 1319 (9th Cir. 1992». The right to claim an exemption is
a privilege, and the burden is on the debtor to declare an item ofproperty exempt. Layton v. Chase,
144 N.W.2d 561,564 (S.D. 1966).
Nessan argues that because South Dakota has"opted outll ofthe federal exemption provisions,
other aspects ofthe federal bankruptcy code cannot be applied to his case. Specifically, he argues that
11 U.S.C. § 363(t) cannot govern the administration of his bankruptcy estate. Doc. 16 at 7. Section
363 describes the rights and powers ofthe trustee in regard to the use, sale, or lease ofproperty ofthe
bankruptcy estate. 11 U.S.c. § 363(t) states:
(t) The trustee may sell property under subsection (b) or (c) of this
section free and clear of any interest in such property ofan entity other
than the estate, only if­

(l) applicable nonbankruptcy law permits sale of such property free
and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be
sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding,
to accept a money satisfaction of such interest.

South Dakota's substitution of its own exemption laws does not preclude the rest of the
bankruptcy code from applying to cases in South Dakota. The South Dakota bankruptcy court applies
other provisions ofthe federal bankruptcy code in making determinations about a bankruptcy estate.

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The argument Nessan makes was addressed and rejected in In re Hughes, 244 B.R. 805, 813
(Bankr. D.S.D.,1999). The Court in In re Hughes reasoned" [0 ]nce the property ofthe estate has been
determined and the exempt property has been removed, the trustee must liquidate the estate property
to pay creditors. If the bankruptcy estate and another entity both hold an interest in some estate
property, the trustee may seek court approval to sell the property if one of several circumstances
exist." Id. at 813 (citing II U.S.C. § 704(1) and 11 U.S.c. § 363(f)). Though the debtors in In re
Hughes argued that only state law should be applied in determining whether the trustee could sell
their homestead, the court disagreed. ''Thus, it is §§ 363(f) and 704(1) of the Bankruptcy Code, not
S.D.C.L. ch. 21-19 alone, that allow the Trustee to sell the homestead. II Id. at 814. The court further
reasoned that § 363(f) would apply in the sale of other exempt property, not just a homestead.
II[Section 363(f)] allows the Court to authorize the trustee to sell any property in which both the
bankruptcy estate and another entity hold an interest. For example, if a debtor could claim only
$3,000 of an $8,000 boat exempt under S.D.C.L. § 43-45-4, the trustee would seek court approval to
sell the boat under 11 U.S.c. § 363(f) to realize the $5,000 equity for the bankruptcy estate. The
trustee's sale of the boat, if approved, would be a product of federal bankruptcy law, not solely the
product of any underlying non bankruptcy law incorporated by § 363(f)." Id. This Court agrees with
the reasoning in In re Hughes.
Here, the bankruptcy court authorized trustee Lovald to retain and sell the property at issue
provided that Lovald compensate Nessan for his interest in the item, satisfying the requirements of
11 U.S.c. § 363(f). Lovald did so. The bankruptcy court did not err in ordering turnover and in its
rulings in that regard.

IV. CONCLUSION
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For the reasons stated above, it is hereby
ORDERED that the bankruptcy court's decision ordering Nessan to tum over the 2002
Chevrolet pickup, the 2000 Triton boat, the 175 horse mercury motor, the Triton trailer, and the AIG
claim is affirmed. It is further
ORDERED that the Motion to Stay Pending Appeal (Doc. 5) is denied.

Dated March J.k!!::., 2012.

BY THE COURT:

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