Morris v. Vulcan Chemical Credit Union (In Re Rubia)

§ 71- requirement plain language IT ORDERED IS the Debtors’ Motion 1-318(3). If Montana in- legislature for Turnover and for Sanctions Violation of 71-1-318(3) § tended require Stay, recor- July Automatic filed is de- dation for a operate trustee’s deed to as nied.

provided therein, it would have it drafted language include must be deed convey

recorded purchaser grantor’s just rights, legislature subsection, preceding

drafted the 71-1- 318(2). Since Montana legislature did

not include a requirement recordation 71-1-318(3), this Court declines to do so. RUBIA, Robert Max re Debtor. 71-1-318(3) operates

Section to transfer grantor’s purchaser interest to the re- Trustee, Morris, Michael J. recordation, gardless subject pro- Plaintiff-Appellant, 70, 21, chapter visions of Title Mont.Code Ann. which not at issue in the instant

case7. Union, Chemical Vulcan Credit

Defendant-Appellee, CONCLUSION Rubia, Max Robert Defendant. stay

The automatic did not ef- become fective Chapter until the Debtor filed her BAP No. KS-00-008. 362(a). 13 bankruptcy petition. By Bankruptcy No. 98-14903. then the had completed trustee trust- Adversary No. 99-5141. ee’s sale and delivered trustee’s deed to Appellate United States Panel law, § Rinke. Under Montana 71-1- of the Tenth Circuit. 318(3), the conveyed trustee’s deed all Rinke the Debtor’s and interests 3, Jan. 2001. in the at sold sale. trustee's Just as in Pettit where the debtors re- legal equitable

tained no ownership or in- terests in property once judgment was

entered, in the instant case the re- Debtor tained legal equitable in- ownership

terests in the property sold at trust-

ee’s filing sale as of the petition. of her Pettit, at F.3d 36 B.C.D. at Thus,

94. the property sold at the trust- ee’s sale did not become 541(a) pursuant upon petition,

of Debtor’s and the sale sub- sequent recordation of the trustee’s deed subject were never stajr. to the automatic Pettit, 217 F.3d at at B.C.D.

94. The has no right Debtor to turnover the property, and has not shown vio- lation of the stay by automatic Advanta. Compare Bebensee-Wong, In re 248 B.R. prepetition sale on the actual date of sale even 2000) (California 822-23 Cir. though purchaser BAP recorded the trustee’s perfected effect). relation-back statute stay the trustee’s deed after automatic took Morris, Mitchell, Klenda,

J. Michael Wichita, Zuercher, L.L.C., Austerman & Kansas, Plaintiff-Appellant. for Holt, Bruce, Bruce,

Eric D. Bruce & Wichita, Kansas, L.L.C., for Defendant- Appellee. McFEELEY, Judge, Chief

Before McNIFF,1 CLARK, Bankruptcy Judges.

OPINION

CLARK, Judge. Bankruptcy Morris, Chapter 7 trustee J. Michael (“Trustee”), appeals an Order of the Unit- ed Court of the District Bankruptcy States complaint seeking dismissing his Kansas funds from Vulcan of certain turnover (“VCCU”). For the Chemical Credit Union below, we set forth AFFIRM reasons court’s Order. Background I. obtained three loans

The debtor Rang- a 1993 Ford one secured VCCU: Ford a 1993 (“Ranger”); er one secured Taurus; and a loan. The signature loan appeal to this is the loan relevant Loan”) (“Ranger Agree- in a Credit which is memorialized Request Voucher ment and an Advance Security Agreement. Although the Se- February dated curity Agreement is security perfect VCCU did September until filed the debtor On November Chap- petition seeking protection At that Bankruptcy Code. ter 7 of the McNiff, sitting by Wyoming, District J. United States Court 1. Honorable Peter Bankruptcy designation. Judge, United States ¶ time, approximate- the debtor Rubia owed dated Oct. 2. Further- $10,440.00 ly more, on Loan. default judgment directed the possess debtor continued to to name the Trustee as the loss it postpetition, claiming exempt. to be We payee regard insurance policy have record that the debtor’s claimed respecting the Ranger, provide and to exemption challenged. Although was with proof Trustee continuous of insur- Loan, the Ranger debtor did not reaffirm ance. payments he continued to make on it after moved VCCU to dismiss the Complaint date, petition paying total VCCU a subject jurisdiction, for lack of matter ar- $1,186.00 (“Postpetition Payments”). of (1) guing that the Trustee had in rem proof filed a of claim in

VCCU the debtor’s Ranger, personam not in case, asserting portions a claim for the (2) against VCCU, claims and the Postpeti- the three loans that unpaid remained Payments tion were property not of the the debtor on In petition date. addition estate. The court bankruptcy denied claim, an unsecured VCCU asserted dismiss, motion holding VCCU’s it that based, in part, Rang- secured claim jurisdiction dispute. had over the Loan. er trial, bankruptcy After court ruled 1999, February In an Trustee filed from the bench Postpetition Pay- that the Application bankruptcy rep- court ments were recoverable the Trustee resenting agreed that he and VCCU had they property were not that VCCU’s lien on the inasmuch they estate were made from perfected avoidable because it was within postpetition earnings. In a ninety days of the debtor’s date. separate incorporating Order its bench rul- bankruptcy The approved court the Trust- ing, court dismissed the Application, avoiding ee’s and VCCU’s lien Complaint against with prejudice. VCCU preserving the for the benefit of the Order”). (“Agreed estate The timely Trustee filed a ap- notice of peal the bankruptcy court’s final Or- Order, entry Agreed After the der, all parties have consented to this possess debtor continued to jurisdiction by failing Court’s to elect to Although he making payments ceased appeal have the heard the United VCCU, he continued to make postpetition States District Court for the District of payments related to the Ranger to 158(a)(1) (c)(1); Kansas. 28 U.S.C. & Trustee. proof VCCU amended its claim 8001-8002, Fed. R. Bankr.P. 10th Cir. to reduce the amount claim 8001-1; Quackenbush BAP L.R. see v. All- due the avoidance of its hen on the Co., 706, 712, state Ins. 517 U.S. 116 S.Ct. Ranger and correspondingly increase (1996) (order 1 135 L.Ed.2d is final if the amount of its unsecured claim. “it ‘ends the litigation on the merits and subsequently Trustee filed a Com- nothing leaves for the court to do but plaint Turnover to Determine ”) execute the judgment.’ (quoting Catlin Rights (“Complaint”) against States, 229, 233, v. 324 United U.S. 65 debtor, alleging Postpetition (1945)). S.Ct. 89 L.Ed. 911 Payments were recoverable from VCCU as property of the estate. The debtor failed II. Discussion answer the and a Complaint, judg- default against him, ment was pro- entered which appeal The issue this is whether payments vided that “all respecting the Trustee recover the Postpetition lien of the ... [VCCU] from VCCU. We review this will be question made to the estate.” Appellant’s of law de novo. See Fed. R. Appendix, p. 8013; Underwood, Default Granting Order Bankr.P. Pierce v. 487 Judgment Against Defendant Max Robert 108 U.S. S.Ct. 101 L.Ed.2d

327 (In 541(a)(4). (1988); re under & C v. Young Bros. See C Co. Fowler Cir.1996). 1367, 1370(10th (In re Young), 91 F.3d First Nat’l Bank Coal-X Seattle (Bankr.D.Utah “76”), Ltd. argues that the The Trustee However, (citing authority). contrary Complaint his dismissing court erred position, the nature of that to the Trustee’s re- Postpetition Payments are because the give does not the Trustee the coverable as of the estate. to collect debt from the VCCU’s maintains the avoided particular, he Closson, postpetition. In re the estate lien in (Bankr.S.D.Ohio 1989). B.R. 345 541(a)(4),2 Post- under 11 and the U.S.C. thereof petition Payments are “proceeds” Rather, as Agreed a result of the question While we Order, an unsecured claim VCCU holds Payments are Postpetition whether the the debtor’s estate for the entire against will not this issue “proceeds,” we address represented by of its debt amount as VCCU, of the of rights a review 502(h). Agreement. 11 U.S.C. Credit See debtor, that the and the reveals Trustee VCCU, Trustee, Only right not the has Postpeti- is not entitled to the Trustee Closson, 100 that debt. to collect See tion Payments. 347-48; see & C Co. v. Seattle at also C filing Chap- of Prior to the the debtor’s (In “76”), Ltd. First Nat’l Bank re Coal-X against 7 ter VCCU held a claim petition, (D.Utah 276, (“By 103 B.R. 280 debtor, Rang- aby lien on the lien, avoiding preserving trust pursu- owed er. The debtor VCCU debt steps simply [secured ee into credi Agreement, ant terms of the to the Credit the [creditor’s] shoes succeeds to tor’s] to If right he had the use the lien.”) regard (emphasis rights with terms of the debtor defaulted under the added), ajfd part and rev’d in relevant Agreement, could look Credit VCCU 865, Cir.1989); 881 F.2d 866 5 part, satisfy Ranger against to to its claim (Law ¶ 551.02[1] on Bankruptcy Collier the debtor. rev.2000) ed., King (pres rence P. 15th ed. petition, After the of the debtor’s only, rights is of lien not other ervation rights and the debtor the same VCCU held creditor). held The avoidance of the prepetition. The Trustee they that held merely lien means that fixing of its VCCU as against held an avoidance action VCCU to longer Ranger look to the satis may no the lien on the perfection result of of course, required is debt. Of VCCU fy the ninety the debtor’s Ranger days within of against reduce its unsecured claim petition date. debt, of its any to reflect reduction Order, entry Agreed After the of including any resulting reduction from the was Ranger lien on the fixing of VCCU’s Postpetition Payments. debtor’s avoided, fixing and the of that hen may The debt to VCCU be benefit of automatically “preserved for the and, so, he, Trustee, if not the discharged 551; S.Rep. 11 U.S.C. see estate.” may not have a cause action may or (1978), Cong., No. 91 95th 2d Sess. any postpetition against pay VCCU for p. Cong. & AdmimNews U.S.Code on that ments that he made to VCCU 5963; Cong., 1st ELR.Rep. No. 95th (1977), discharged debt. If the debtor’s debt to Ad- Cong. & Sess. 376 U.S.Code post- the debtor’s discharged, VCCU is not that lien p. (providing 5787 min.News payments merely satisfaction petition automatically preserved upon avoid- is is, debt, ance). action that and no cause of arising This interest Trustee, of the would exist.3 VCCU argued has remained in statutory to title 11 3. The debtor this case references are All future Ranger paying possession of the and has been of United States Code. postpetition. Our record contains the Trustee position The lien made payment Trustee holds the Trustee has debt, prior held in but rather he that VCCU See, in the e.g., Retail Clerks rights Ranger up avoidance. has to the amount lien’s (In McCarty Trust v. re Van de petition debt on the date.5 VCCU’s Welfare Bakeries), Dutch F.2d Kamp’s states that dissent its rationale (9th Cir.1990) (it 2n. well-estab 519 & based on fairness inasmuch as the “that a who an inter lished trustee avoids may required of the be the amount priority est succeeds to the that Postpetition twice: once over enjoyed competing interests” and VCCU, and once to the Trustee. The may pointless) (citing succession be such Trustee recover from the cases); accord Collier on amount the debtor’s debt date ¶ (Lawrence ed., King 551.01[l]-[2] P. 15th VCCU, if the Ranger is worth that rev.2000). ed. The value of the Trustee’s amount. If the not worth is measured value of position by the amount, the Trustee’s rights Ranger, but it is limited the amount to what are limited VCCU’s would debtor’s debt on the peti to VCCU have been had its hen not been avoided-the Coal-X, 280 & at tion date. 103 B.R. Ranger. Assuming value of the (“[T]he pre n. 6 extent and value is discharged, debt to VCCU the debtor ... in served lien the trustee’s hands ... liability has no on the It prepetition debt. on the amount turns of the [creditor’s] only because the record the shows that underlying [prepetition] against claim the possession debtor retained of has the debtor.”), ajfd in part relevant and rev’d Ranger that the dissent the assumes that (lien part, in properly 881 F.2d at 866 required to pay debtor is the amount ow- to the Trustee, limited amount of the creditor’s ing to the includ- debtor).4 prepetition against claim ing any the amounts that the unable Trustee is against Ranger. no information related to the contin- explanation the This lack mistaken, however, possession Ranger, postpeti- ued of the of a or not we inasmuch as do agreement tion between the Trustee and the only not issue to view that be before us. The right under which debtor the Trustee has to may issue in this case is whether the Trustee postpetition payment from the debtor. Fur- Postpetition Payments recover from thermore, party the debtor such, is not a this deciding recovery against VCCU. In whether appeal. may As we not assume facts not appropriate, VCCUis we need not decide how record, ruling in the or make related to regard will the Trustee act in to the avoided postpetition rights the Trustee’s vis-a-vis the against Ranger, lien and we do not have jurisdiction. over debtor whom we have no jurisdiction or record over the debtor to Rather, only do so. we can whether decide Thus, Postpeti- junior is liable estate for the in this case where no liens exist, Payments by made against the tion to it We the Trustee is enti- debtor. not, dissent, Ranger, subject any exemption tled to the stated argue to do as exist, rights junior right the debtor. If a lien did "the has Postpetition estate to collect $10,400.00, the Trustee would be entitled Payments virtue of the estate’s claim.” We debt, prepetition the amount of VCCU’s merely say that the Trustee cannot collect Ranger, junior taking any debtor, with the lienor prepetition debt VCCU’s from the and Postpetition Pay- residual value. The debtor's Postpeti- that the Trustee cannot recover the not, argued by ments to VCCU do as such, Payments tion from VCCU.As we never dissent, reduce the amount of the Trustee’s issue Postpetition reach the of whether the Ranger, only claim rather but "proceeds” are of the reduce amount of VCCU’s unsecured and, therefore, property of the dissent, against the estate. claim Unlike But, § even if we were to address unwilling we are to base on a our decision issue, disagree we with the dissent lien, speculated Ranger or valuation of the Postpetition Payments "proceeds” rationale, of the above we have this word defined as "whatever is received to. no need upon ... the ... collection collateral....” 84-9-306(1) § (emphasis Kan. ed). Ann. Stat. add- correctly simply 5. The dissent that we do not This case collec- states does not involve explain how the estate realizes claim tion of collateral. flaw in However, demonstrates the lien avoidance absent recover from VCCU. majority’s argument. the Trustee and between agreement an pay for the the debtor to requiring begun, case has bankruptcy aOnce has no collect the Trustee Ranger, certain “avoidance” given trustee is inasmuch as anything from the debtor See, e.g., 11 U.S.C. §§ powers. solely in the rights are Trustee’s 544(a) of the 548. Under no information about record contains Our code, “strong known as the arm commonly not a and the debtor is agreement, such an clause,” authority has the a trustee appeal. We therefore do party to this same hens to the extent unperfected avoid what, has anything, if the debtor know ideal creditors.1 hypothetical as certain Trustee, may agreed agree or by the trustee under Any transfer avoided agreement an would even whether such 544(a) for the benefit of preserved “is and we not assume appropriate, be respect proper- the estate but is the value of that the value 551.2 ty of the estate.” U.S.C. we have no prepetition debt because cre- of a case The initiation has been valued. record that the legal that includes all ates an estate unsecured creditors Finally, we note that in prop- of the debtor equitable interests and, fact, were bene- were not harmed pe- erty as of the date Postpetition Payments be- fitted 541(a). Included in tition. U.S.C. been unsecured debt has cause VCCU’s “any interest of the estate is reduced. the benefit of or preserved for to the estate under ordered transferred III. Conclusion 510(c) of this title.” or 551 section above, set forth For the reasons 541(a)(4). conjunc- § the Through U.S.C. the Post- is not entitled to recover Trustee 541(a) §§ a lien avoided tion and, therefore, the 544(a) § property becomes is AFFIRMED. bankruptcy court’s Order estate. Here, the lien on the Trustee avoided McFEELEY, dissenting: Judge, Chief lien re- avoidance of the the The wheth- I dissent. At issue is respectfully of the bank- filing back to the date lated on an post petition payments a Debtor’s er It the of the lien ruptcy petition. value proceeds of that lien constitute chapter 7 that entered the on that date issue majority does not reach this lien. The the estate. an asset of estate and became a that a Trustee never has as it maintains a lien as “a bankruptcy code defines repre- The collect the debt amount right to property in charge against or the avoidance of by the lien because sented performance or payment of a debt posi- the secure only preserve serves to the lien 101(37). § Pur- obligation.” 11 U.S.C. the other of an respect tion of the estate code, the estate below, suant to the disagree I explain As I creditors. by virtue the of has a claim point. An examination with them on this Bankruptcy Code defines of the lien. The operates a way code 544(a) moving up pri- junior (giving lienholders § the trustee 1. See 11 U.S.C. Cong., following: 1st powers ority. H.R.Rep. as the No. 95th the same avoidance creditor; 2) 1) judicial (1977); Cong., a creditor hold- S.Rep. a lien No. 95th Sess. execution; 3) ing returned an unsatisfied (1978); also C & C Co. 2d Sess. 91 see purchaser fide hypothetical or real bona (In re Coal-X Ltd. First Nat'l Bank Seattle property). real (Bankr.D.Utah "76”), 910-12 comprehensive discussion (providing a bringing purpose legislative behind 2. The legislative history of language on is to maintain preserved lien into the estate 551). § position vis-a-vis each priority of creditors is, prevent legislature wanted to other-that “right payment, precisely “claim” as the whether this is the issue before this court: right postpetition payments or Are on a lien judgment, not such is reduced proceeds of that lien? expressly provid- As liquidated, unliquidated, contingent, fixed Code, ed matured, unmatured, trustee has disputed, undisputed, any proceeds to claim of property legal equitable, secured or unsecured.” Id. estate. 101(5)(A). 541(a)(6) expands Section the reach of gives Since the avoided lien the estate a “property of the estate” to include “pro claim against property, how is the ... ceeds of or from of the es amount of that claim to be determined? tate.” 11 U.S.C. The bankrupt The only amount of the claim can be mea- cy explicitly “proceeds.” code never defines sured the debt represented by the lien. Because property interests are created While it the lien that enters the estate law, through defined state Butner v. asset, only as an can trustee determine States, United 440 U.S. 99 S.Ct. the value of the lien to the through (1979), 59 L.Ed.2d 136 courts must a valuation of the If property. look to Kansas state law to obtain a defini done, security valuation of the the lien is “proceeds.” tion of adopted Kansas has secured, fully and the value of the may (“UCC”). Uniform Commercial Code Pur through be determined scrutinizing UCC, suant “proceeds” include underlying obligation. debtor’s The val- sale, upon “whatever is received ex fully ue of a secured hen and the value of change, or disposition collection other underlying obligation are the same. proceeds.” collateral or Kan. Stat. Ann. Therefore, the Trustee must look to the 84-9-306(1). As explained by the Tenth underlying obligation to deter- Circuit, the term “collection” in the context mine the value of the hen to the estate. of a debt or claim be defined as Here, date, as of the filing Debtor’s “payment liquidation of it.” In re Hast underlying value of the obligation ap- ie, 1042, 1045 r.1993). 2 F.3d Ci $10,440.00. proximately Consequently, this Chapter After his petition, sum was the value of the hen brought into Debtor obligation reduced his to VCCU 544(a). pursuant the estate making post petition payments totaling $1,136.00. majority acknowledges Here, fully because the lien is secured, thus, preservation avoidance and and of the hen the lien and the obli- gation entwined, are gives inextricably a estate claim in the the Debt- up post or’s petition payments to the reduced the amount of VCCU’s debt on the obligation concurrently and However, majority date. never post lien. Because the petition payments explains how the estate realizes that claim. reduced the value of the by liquidating They argue they that do not address the portion a of the underlying obligation, question of whether the collect payments these proceeds are of the lien.3 Postpetition Payments by virtue of the estate’s claim because that issue is not In argument an that majority never clearly addresses, before them. This is incorrect as VCCU contends that pay- lien, addressing specific Two cases this issue question Closson does not resolve the clearly were found. The most articulated ex post petition payments pro- whether the are planation denying recovery for a trustee on ceeds of the lien. post petition payments given is in In re Clos- The other case that addressed this issue is son, (Bankr.S.D.Ohio 100 B.R. 347 (In Smith), Kelley Chevy v. Chase Bank re 1989). Closson, bankruptcy judge found (Bankr.M.D.Ga.1999). However, post petition that a trustee could not recover guidance; In re Smith also offers no it asserts payments grounds on an avoided lien on the explanation post petition without further that 550 limits the extent of a trustee's payments recovery they are not property recoverable because value of the trans post petition ferred. are earnings, Id. Because in this case the value made with and therefore, property equivalent to the value of the there is no loss to the estate. Id. avoidance, lien, the lien the Debtor following a collection on the merits were not he had merely payments redirected the payment of merely post petition a to the Trust- depositing been argument hinges debt.4 VCCU’s unsecured payments prop- these are Presumably ee. that there was a secured premise Illogieally, estate. VCCU and erty of the owed it. portion an unsecured of debt suggest identity that it is the majority por and unsecured If there were secured payments of those that deter- payor obligation, the Debtor tions of the Debtor’s payments proceeds are mines whether voluntarily payments to make could choose argument avoided lien. This of an Gerwer portion. on the unsecured making a determination as flawed. When (In Gerwer), re 253 B.R. Salzman may come into payments whether such 2000) (explaining BAP that a Cir. lien, an proceeds the estate as to direct the allocation Debtor has must look at court However, voluntary payments). are made. payments context in which such valuation was ever done on the prevailing this result. The Equity demands the record indicate that either nor does behind the code is policy valuation, I pre asked must party every with a fresh start provide was the sume that the value equitably. creditors To compensating while obligation. Since the value of payments retain the permit VCCU secured, fully the Debtor could not a windfall at would be to allow it to receive make to reduce payments have chosen to of either the Debtor expense any payments obligation; unsecured Potentially, the Debtor could be Creditors. obligation could have made on Debtor’s lien avoidance relates harmed because a applied only fully secured lien.5 been valued as of the date of back usually happens petition. Lien avoidance Alternatively, VCCU contends that petition date. original months after the “pro- cannot be post petition payments conceivably be forced to The Debtor could cannot proceeds ceeds of the lien” because twice; again once to VCCU earn- post petition come from a debtor’s if Trustee re- Alternatively, Trustee.6 on lan- grounds argument this ings. VCCU to the sum obligation duces the Debtor’s 541(a)(6) provides §in which guage following post petition payments, owed are of the estate “ex- proceeds be harmed be- the other creditors would earnings from services cept such as are in the estate to there will be less cause individual debtor after performed by an claims. satisfy their the case.” 11 U.S.C. the commencement of reasons, I reverse the For these would limiting this VCCU misreads bankruptcy court. Clearly, post petition earnings per phrase. However, se of the estate. out, the Debtor has points

as VCCU itself determine what he wants to do fact, post petition earnings. with his Here, payments were to be made. Since there the diminution in the total value of portion to the estate. lien is a loss no secured and unsecured debt, points are irrelevant here. these response arguments, 4.In to the Trustee's argues following points: also Additionally, testified that his 5. the Debtor pay- voluntary involuntary nature of the the in rem debt-the was to down intention improperly as it was not raised ment is raised lien-on the trial, furthermore, the trustee lacks at it; 2) properly standing make if the issue is raised, irrelevant to the intent of the Debtor is sums than the that more substantial I note pay- post petition the issue of whether dispute. here be in For one at issue could Trustee; 3) by the even ments are recoverable potentially be example, could the lien relevant, payments were volun- if intent is date. years until two after designated how tary the Debtor who as it was

Case Details

Case Name: Morris v. Vulcan Chemical Credit Union (In Re Rubia)

Court Name: Bankruptcy Appellate Panel of the Tenth Circuit

Date Published: Jan 3, 2001

Citation: 257 B.R. 324

Docket Number: BAP No. KS-00-008. Bankruptcy No. 98-14903. Adversary No. 99-5141

Court Abbreviation: 10th Cir. BAP