In re Bransford

IN RE: KENNETH B. BRANSFORD and JACQUELINE D. BRANSFORD, Debtors.

Case No. 14-30468-dof

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - FLINT

November 1, 2016

Chapter 7 Proceeding

Hon. Daniel S. Opperman

OPINION REGARDING DEBTORS' OBJECTION TO TRUSTEE'S FINAL REPORT

Collene Corcoran, the Chapter 7 Trustee in this matter, ("Trustee") filed a Final Report on July 28, 2016, which the Debtors find objectionable. They contend the major asset in this case, the proceeds of a personal injury lawsuit, is owned by Mr. Bransford and that after payment of the creditors of Mr. Bransford only, there will be surplus funds payable to him. The Trustee, consistent with her Final Report, responds by disputing the Debtors' contentions and by relying on a Settlement Agreement and corresponding Order of this Court that allows the Trustee to pay all creditors of both Debtors, resulting in no surplus to either Debtor. After oral arguments on September 7, 2016, the Court took this matter under advisement.

Findings of Fact

The Debtors filed their joint Chapter 7 Petition with this Court on February 25, 2014. A few days prior, on February 21, 2014, a personal injury lawsuit was filed on behalf of Mr. Bransford alleging a design defect and other claims regarding a surgically implanted device in Mr. Bransford's hip. This lawsuit was not disclosed in the Schedules or raised at the March 24, 2014, first meeting of creditors. Both Debtors received their discharge on May 27, 2014, and their case was closed on August 25, 2014.

Afterward, Mr. Bransford learned of a settlement of his lawsuit and told his attorney, who notified the Trustee. The Trustee moved to reopen the case on February 16, 2015, and the Debtors amended their Schedules B and C on February 20, 2015, to include the lawsuit as Mr. Bransford's asset and exempted the asset as to Mr. and Ms. Bransford. The Trustee objected to the exemptions and filed an adversary proceeding against both Debtors to revoke their respective discharges.

The Trustee's Objection to Exemptions were heard by this Court first. At this preliminary hearing, the Court inquired of the ownership of the lawsuit and the right of either Debtor to exempt that asset. Given the record of the pleadings, the Court granted the Debtors additional time to amend their Schedules B and C.

Thereafter, the parties settled their differences. Relevant portions of the Settlement Agreement include:

2. Settlement Terms.

a. The Debtors agree to amend their Schedule C to limit Mr. Bransford's exemptions for the Personal Injury Claim to $22,975 pursuant to 11 U.S.C. §522(d)(11)(D), and for $367.75 pursuant to 11 U.S.C. §522(d)(5).

b. The Debtors agree that Mrs. Bransford's Schedule C shall be amended to eliminate all exemptions taken relating to the Personal Injury Claim.

c. The Trustee agrees to withdraw the Proof of Claim No. 22 filed on behalf of Great Lakes Higher Education provided that there is documentation provided to her to reflect that the student loan debt is being paid and is current.

d. The Debtors agree that they shall withdraw all objections to all other claims, and will not file any objections to the claims in the future.

e. The parties agree that the Trustee shall pay all allowed claims from the funds recovered from the Personal Injury Claim, regardless of the nature of the claim.

f. The Debtors agree that they shall not file objections to the Trustee's statutory fees, and they agree not to file any objection to the Trustee's attorney fees or expenses.

g. The Trustee agrees that upon approval of the Motion to Compromise Claim and this settlement, that she shall dismiss the adversary proceeding against Mr. Bransford and Mrs. Bransford, case no. 15-03029.

. . .

5. Integration. This Agreement constitutes the entire agreement andunderstanding between the parties relating to the subject matter contained herein, and this Agreement may not be altered, amended, or modified whatsoever, except by a writing duly executed by the parties.

As stated in the Settlement Agreement, the Trustee filed a motion to approve the settlement on November 12, 2015, and on December 9, 2015, the Court entered an order approving the agreement, which states:

This matter having come before the Court on the Trustee's Motion to Resolve Trustee's Objection to Exemptions and Settlement of Adversary Case no. 15-03029 and Resolving Claims Objections filed by Debtors, and after notice to all parties in interest;

IT IS HEREBY ORDERED that the Trustee's Motion is granted, and the Settlement Agreement is approved.

IT IS FURTHER ORDERED that the Trustee's objections to exemptions are resolved as follows: that the Debtor, Kenneth B. Bransford, is allowed an exemption for the personal injury claim in the amount of $22,975 pursuant to 11 U.S.C. §522(d)(11)(D) and $367.75 pursuant to 11 U.S.C. §522(d)(5).

IT IS FURTHER ORDERED that all exemptions taken by Mrs. Jacqueline D. Bransford for the personal injury claim of Kenneth B. Bransford, are denied.

IT IS FURTHER ORDERED that the Trustee will withdraw Proof of Claim no. 22 filed on behalf of Great Lakes Higher Education.

IT IS FURTHER ORDERED that Debtors shall withdraw all objections to all claims, and that Debtors will not file any future objections to the claims on file with the Court as of this date.

IT IS FURTHER ORDERED that the Trustee shall pay all allowed claims from the funds recovered from the Personal Injury Claim, regardless of the nature of the claim.

IT IS FURTHER ORDERED that Debtors shall not file any objections to the administrative claims of the Trustee or her professionals.

IT IS FURTHER ORDERED that the upon entry of this Court's order approving this Motion, that Adversary Case no. 15-03029 is dismissed.

As reported by the Trustee, she has collected $165,955.57, disbursed $103,992.23,¹ leaving a balance of $61,963.34. The Trustee proposes to pay this amount to all creditors of the Debtors, resulting in an anticipated dividend of 98.2%.

In contrast, the Debtors argue that since the remaining monies are proceeds from Mr.Bransford's assets, only his creditors should be paid, leaving approximately $34,000.00 as a surplus to Mr. Bransford.

Jurisdiction

This Court has jurisdiction over this matter per 28 U.S.C. §157, 28 U.S.C. §1334, and E.D. Mich. LR 83.50. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) (confirmations of plans). All issues before this Court arise from Title 11 of the United States Code and are therefore within this Court's jurisdiction.

Analysis

The Court first addresses the issue of whether creditors of Ms. Bransford may receive the proceeds from Mr. Bransford's assets. If not, the Court must then address whether the Settlement Agreement modified the usual distribution of estate assets and proceeds.

A. Status of Property of One Debtor in Joint Petition Proceeding

11 U.S.C. § 302 states:

§ 302. Joint cases

(a) A joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse. The commencement of a joint case under a chapter of this title constitutes an order for relief under such chapter.

(b) After the commencement of a joint case, the court shall determine the extent, if any, to which the debtors' estates shall be consolidated.

Section 302(b) allows a court to consider if the debtors' estates should be consolidated. Bankruptcy Rule of Procedure 1015 in turn states:

Rule 1015. Consolidation or Joint Administration of Cases Pending in Same Court

(a) Cases Involving Same Debtor. If two or more petitions by, regarding, or against the same debtor are pending in the same court, the court may order consolidation of the cases.

(b) Cases Involving Two or More Related Debtors. If a joint petition or two or more petitions are pending in the same court by or against (1) a husband and wife,or (2) a partnership and one or more of its general partners, or (3) two or more general partners, or (4) a debtor and an affiliate, the court may order a joint administration of the estates. Prior to entering an order the court shall give consideration to protecting creditors of different estates against potential conflicts of interest. As order directing joint administration of individual cases of a husband and wife shall, if one spouse has elected the exemptions under § 522(b)(2) of the Code and the other has elected the exemptions under § 522(b)(3), fix a reasonable time within which either may amend the election so that both shall have elected the same exemptions. The order shall notify the debtors that unless they elect the same exemptions within the time fixed by the court, they will be deemed to have elected the exemptions provided by § 522(b)(2).

(c) Expediting and Protective Orders. When an order for consolidation or joint administration of a joint case or two or more cases is entered pursuant to this rule, while protecting the rights of the parties under the Code, the court may enter orders as may tend to avoid unnecessary costs and delay.

Taken together, the statute and the rule dictate that the assets of one debtor, owned separately, stay within that estate and cannot be used to pay creditors of the co-debtor, unless the two estates are consolidated. Two cases illustrate this interaction. In Reider v. FDIC (In re Reider), 31 F.3d 1102, 112 (11th Cir. 1994), the debtor wife's property was to be used to pay her husband's debts. The Eleventh Circuit held that an order of substantive consolidation was an abuse of discretion by the Bankruptcy Court because of the harm to the debtor's wife's creditors.

Likewise, in In re Portell, 557 B.R. 161 (Bankr. W.D. Mo. 2016) the debtor husband inherited property shortly after a joint petition was filed. As the Portell Court framed the issue:

Under this statute, the inheritance received by Keith is his own separate property which, outside of bankruptcy, cannot involuntarily be taken to pay

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