Diamond v. Trawick (In re Trawick)

497 B.R. 572

In re Jeffrey Scott TRAWICK and Stephanie F. Berry, Debtors.Richard K. Diamond, Chapter 7 Trustee, Plaintiff,

v.Jeffrey Scott Trawick and Stephanie F. Berry, individually, and in her capacity as trustee of the Robert P. Berry and Roberta J. Berry Revocable Trust, Defendants.

Bankruptcy No. 2:12–bk–12581–RK.

Adversary No. 2:12–ap–02039–RK.

United States Bankruptcy Court,

C.D. California,

Los Angeles Division.

Aug. 29, 2013.

Kevin Meek, Danning Gill Diamond and Kollitz, Los Angeles, CA, for Plaintiff.

Mark T. Young, Donahoe & Young LLP, Valencia, CA, for Defendants.

MEMORANDUM DECISION ON CROSS–MOTIONS FOR SUMMARY JUDGMENT IN ADVERSARY PROCEEDING AND ON TRUSTEE'S OBJECTION TO DEBTORS' CLAIM OF EXEMPTION IN MAIN BANKRUPTCY CASE

ROBERT KWAN, Bankruptcy Judge.

The disputes between the parties, Stephanie F. Berry (“Berry”) and Jeffrey Scott Trawick (“Debtors”), and Richard K. Diamond, the Chapter 7 Trustee (“Trustee”), arising from Trustee's adversary proceeding seeking turnover of certain assets of Debtors claimed as exempt and from the contested matters of Trustee's objections in the main bankruptcy case to Debtors' amended claims of exemption for these assets on cross-motions for summary judgment came on for hearing before the undersigned United States Bankruptcy Judge on July 2 and 16, 2013. Kevin D. Meek, of the law firm of Danning, Gill, Diamond & Kollitz, L.L.P., appeared for Trustee. Mark T. Young, of the law firm of Donahoe & Young, appeared for Debtors.

Having considered the moving and opposing papers and heard the arguments of the parties, the court now issues this memorandum decision.

FACTUAL BACKGROUND

The facts pertaining to these disputed matters are largely undisputed.

On January 24, 2012, Debtors, who are husband and wife, filed a joint voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Richard K. Diamond was appointed as the Chapter 7 Trustee for the case.

On July 3, 2010, Berry's parents, Robert P. Berry and Roberta J. Berry, executed a trust instrument (“Trust Instrument”) creating a trust called the “Robert P. Berry, Sr. and Roberta J. Berry 2010 Trust” (the “Trust”) in which they were both the settlors and initial trustees pursuant to the laws of the State of North Carolina. See Trust Instrument (Trustee's Motion for Summary Judgment (“Trustee's MSJ”) [AP Docket No. 9] ), Exhibit 1, Article I. The Trust named Berry and her brothers, Robert P. Berry, Jr., and Ronald J. Berry, as trust beneficiaries whom upon the death of their parents are required to receive trust assets in “shares of equal value as may be practicable.” Trust Instrument, Article VI(A). The total value of assets of the Trust is $560,712.59. Declaration of Richard Diamond, dated March 12, 2013 (“ Diamond Declaration ”) (Trustee's MSJ at 20), ¶ 5.

Berry and her brothers were also named by their mother as beneficiaries of an individual retirement account that was maintained at America Financial Life and Annuity Insurance Co. under policy number R0018033 (“Inherited IRA”). Declaration of Stephanie Berry, dated April 13, 2012 (“ Berry Declaration ”) (Trustee's MSJ, Exhibit 2), ¶ 4. The total value of the Inherited IRA is $183,000. Diamond Declaration, ¶ 5.

Both of Berry's parents died in 2011, and upon their death, equal beneficial interests in the Trust and Inherited IRA passed to Berry and her brothers. Berry Declaration, ¶¶ 2 and 4. Berry also became the Trustee of the Trust and had “all duties and powers, including any of a discretionary nature, herein granted to the original Trustees.” Trust Instrument, Article XII; Declaration of Stephanie Berry, ¶ 2.

When Debtors filed their bankruptcy petition, they did not list Berry's beneficial interests in the Trust or the Inherited IRA on Schedules B and C of their original bankruptcy schedules, though they referred to the Trust as “property held for another person” on their original statement of financial affairs. Schedules B and C, filed January 24, 2012 (Trustee's MSJ, Exhibit 3); Statement of Financial Affairs (excerpt), filed January 24, 2012 (Debtors' Opposition to Trustee's MSJ, Exhibit 2).

On August 16, 2012, Trustee initiated an adversary proceeding by filing a complaint seeking (1) declaratory relief that Berry's interest in the Trust constituted property of the bankruptcy estate under 11 U.S.C. § 541(a); and (2) a judgment directing the debtors to turn over Berry's interest in the Trust to the Trustee, or the cash value thereof. Trustee's Complaint did not refer to Berry's interest in the Inherited IRA as Debtors had not then disclosed that interest on their schedules.

On March 16, 2013, Trustee filed a motion for summary judgment in the adversary proceeding against Debtors seeking declaratory relief that Berry's interests in the Trust and Inherited IRA are property of the bankruptcy estate and are not exempt and turnover of these interests to Trustee should be ordered (AP Docket No. 9).

On April 2, 2013, Debtors filed an opposition to Trustee's summary judgment motion. Debtors' Opposition to Trustee's MSJ, AP Docket No. 13. In their opposition to Trustee's summary judgment motion, Debtors contended that Berry's interest in the Trust is an exempt asset under North Carolina law because the Trust contains a spendthrift provision and contains other provisions treating the interest as exempt as a discretionary trust interest or a protective trust interest. As to Berry's interest in the Inherited IRA, Debtors contended that Trustee's Motion should be denied on procedural grounds because the adversary complaint did not include any claim as to Berry's interest in the Inherited IRA and on substantive grounds that the Inherited IRA is exempt pursuant to 11 U.S.C. § 522(b)(3)(C).

Also on April 2, 2013, Debtors filed amended Schedules B and C (BK Docket No. 32). The amended Schedule B listed Berry's interests in the Trust and Inherited IRA as assets, but her interest in the Trust was listed as non-property of the bankruptcy estate. The amended Schedule C claimed Berry's interest in the Trust as exempt pursuant to California Code of Civil Procedure, § 703.140(b)(5), and Berry's interest in the Inherited IRA as exempt pursuant to 11 U.S.C. § 502(b)(3)(C) and California Code of Civil Procedure, § 703.140(b)(10)(E).

On April 10, 2013, Debtors filed a cross-motion for summary judgment (AP Docket No. 19). In support of their motion, Debtors made the same arguments in their opposition to Trustee's summary judgment motion. On May 7, 2013, Trustee filed an opposition to Debtors' cross-motion for summary judgment (AP Docket No. 28) as well as evidentiary objections to certain declarations filed by Debtors in support of their cross-motion for summary judgment (AP Docket Nos. 24, 25, and 27).

On May 1 and 2, 2013, Trustee filed objections to the exemptions claimed by Debtors in their amended schedules with respect to Berry's interests in the Trust (BK Docket No. 33) and Inherited IRA (BK Docket No. 37). On June 18, 2013, Debtors filed oppositions to Trustee's objections to the amended exemptions (BK Docket Nos. 48–49). On June 25, 2013, Trustee filed replies (BK Docket Nos. 50–51) and evidentiary objections to certain declarations filed in support of Debtors' oppositions (BK Docket Nos. 52–56). On May 28, 2013, Debtors filed a reply to Trustee's motion for summary judgment (AP Docket No. 35).

On July 16, 2013, a hearing was held on the parties' cross-motions for summary judgment as well as the Trustee's objections to the exemptions claimed in the Trust and Inherited IRA. The court granted leave for the parties to submit further briefing on a recently decided case, In re Bauer, 2013 WL 2661835 (Bankr.D.S.C. June 12, 2013), and took the cross-motions for summary judgment and the Trustee's objections to the amended exemptions under submission.

On July 30, 2013, Trustee filed a supplemental brief on the applicability of Bauer to this case (BK Docket No. 57). On August 13, 2013, Debtors filed a response to the supplemental brief (BK Docket No. 58) to address the arguments made by Trustee in the supplemental brief and to notify the court that the Seventh Circuit's decision in In re Clark, 714 F.3d 559 (7th Cir.2013) is still subject to review by the United States Supreme Court after the deadline to file a petition for writ of certiorari was extended to September 18, 2013 by Justice Kagan. See Declaration of Denis P. Bartell, dated August 13, 2013, ¶ 4 (BK Docket No. 58). Debtors requested that the court defer its decision on the amended claim of exemption in the Inherited IRA until the Supreme Court ruled on the petition for review in Clark, which request the court now denies.

ANALYSIS

By the adversary proceeding, Trustee seeks the turnover of Berry's interests in the Trust and the Inherited IRA, and by his objections to the amended exemptions, Trustee seeks denial of Debtors' amended claims of exemption in Berry's interest in the Inherited IRA and Trust. In defending Trustee's adversary proceeding and opposing his objections to the amended claims of exemption, Debtors seek determinations that turnover of these assets should not be ordered and that Trustee's objections to the amended claims of exemption should be overruled.

The court has jurisdiction over Trustee's adversary proceeding pursuant to 28 U.S.C. § 1334, and the claims for relief alleged in the adversary complaint arise under the Bankruptcy Code, 11 U.S.C. See Adversary Complaint (“Complaint”), ¶ 1; Answer, ¶ 1. The adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E) and (O). See Complaint, ¶ 2; Answer, ¶ 1. Venue properly lies in this judicial district pursuant to 28 U.S.C. § 1409(a). See Complaint, ¶ 3; Answer, ¶ 1.

The court also has jurisdiction over the contested matters of Trustee's objections to Debtors' amended claims of exemption pursuant to 28 U.S.C. § 1334, and the claims for relief alleged in the objections arise under the Bankruptcy Code, 11...