In re Portell

557 B.R. 161

In re: Keith Allen Portell and Michele Lynn Portell, Debtors.

Case No. 12-44058-13

United States Bankruptcy Court, W.D. Missouri.

Signed September 9, 2016

Rachel Lynn Foley, Independence, MO, for Debtors.

ORDER GRANTING MOTION TO SPEND INHERITANCE and DENYING THE TRUSTEE'S MOTION TO AMEND PLAN and ORDERING THAT THE DEBTORS OTHERWISE AMEND THEIR PLAN

Arthur B. Federman, U.S. Bankruptcy Judge

Chapter 13 Debtors Keith and Michele Portell filed a Motion to spend an inheritance which Keith Portell received postpetition. The Debtors are proposing to use a portion of the inheritance pay off all the debts on which Keith Portell is obligated, including the Debtors' residential mortgage, and keep the rest of the funds; they do not plan to use the funds to pay the debts on which Michele Portell is individually obligated. The Chapter 13 Trustee objects, asserting that all claims in the case should be paid from the inheritance. For the reasons that follow, the Trustee's Objection will be OVERRULED, and the Debtors' Motion to Spend Inheritance will be GRANTED. In addition, the Trustee's Motion to Amend Plan will be DENIED; however, the Debtors will be ordered to amend their Plan to provide that after using the inheritance to pay Keith's creditors, and the joint creditors, they will continue to make payments until Michele's creditors receive the same dividend provided in the plan previously confirmed.

The Debtors filed this Chapter 13 bankruptcy case on September 27, 2012. They are below-median. Pursuant to their confirmed plan, allowed unsecured claims are being paid a liquidation analysis pot of $23,130.07, which results in a dividend of 40.334%. According to the Trustee, the Plan is running approximately 63 approximately months.

On July 23, 2015, which was in the thirty-fourth month of the plan, a relative of Keith Portell passed away, leaving Keith an inheritance which included funds in the amount of $221,510.53. The Trustee does not dispute that the Debtors promptly reported the inheritance to him upon receipt. In this motion, the Debtors are proposing to use the inheritance funds to pay all joint and sole debt owed by Keith, including the joint obligation secured by their homestead. They are proposing not to pay the debts for which only Michele is obligated. According to the parties, this will leave approximately $12,000 of Michele's separate debts unpaid.

The Chapter 13 Trustee objects, asserting that the inheritance should go to pay all of the Debtors' debts, including Michele's separate debts. He asserts that the inheritance is: (i) property of the estate under § 1306(a)(1) ; (ii) income; and (iii) a postpetition change in circumstances under § 1329 of the Bankruptcy Code, requiring a modification of the Plan. The Trustee further asserts that, in considering any modification under § 1329, the good faith requirement of § 1325(a)(3) should be considered, and proposing to pay less than 100% of all claims is lacking in good faith under the circumstances.

Is the Inheritance Property of the Estate?

In a Chapter 13 bankruptcy case such as the one here:

Property of the estate includes, in addition to the property specified in section 541 of this title ... (a) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.¹

Section 541(a)(1) defines property of the estate exceptionally broadly, to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”² Without question, had Keith received this inheritance on the day before the bankruptcy filing, it would have been property of his bankruptcy estate pursuant to § 541(a)(1). While most courts have concluded that such a postpetition inheritance is property of the estate in a Chapter 13 case pursuant to § 1306(a)(1),³ a minority of courts disagree,⁴ and there is no controlling authority in this district.⁵ Since the Debtors here are “presum[ing] for the sake of argument an inheritance may be considered as property of the estate” pursuant to §§ 1306(a) and 541,⁶ and since I am ruling for the Debtors on other grounds, I need not decide that issue here.

However, while the Bankruptcy Code determines what interests constitute property of a bankruptcy estate, state law governs what a debtor's property interests are.⁷

As relevant here, § 451.250.1 of the Missouri Statutes provides:

All real estate and any personal property, including rights in action, belonging to any man or woman at his or her marriage, or which may have come to him or her during coverture, by gift, bequest or inheritance, or by purchase with his or her separate money or means, or be due as the wages of his or her separate labor, or has grown out of any violation of his or her personal rights, shall, together with all income, increase and profits thereof, be and remain his or her separate property and under his or her sole control, and shall not be liable to be taken by any process of law for the debts of his wife or her husband.⁸

Under this statute, the inheritance received by Keith is his own separate property which, outside of bankruptcy, cannot involuntarily be taken to pay Michele's separate debts. The question presented here is whether the filing of the joint bankruptcy case changes that premise.

Section 302 of the Bankruptcy Code authorizes the filing of a joint bankruptcy petition by an individual and the individual's spouse.⁹ However, “[a]lthough § 302(a) allows a husband and wife to file a petition together which is given only one case number, their two estates remain separate.”¹⁰ “Thus, the filing of a joint petition does not in and of itself create a single pool of assets out of which all creditors of the two individuals will be paid, but merely allows the two estates to be jointly administered.”¹¹

Section 302(b) provides that after the commencement of a joint case, “the court shall determine the extent, if any, to which the debtors' estates shall be consolidated.”¹² “Substantive consolidation of two bankruptcy estates ‘means assets and liabilities of both debtors are pooled.’ ”¹³ This case has not been substantively consolidated, and no one has asked that it be consolidated. That said, in considering a request for substantive consolidation, “a court must determine: (1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.”¹⁴ “Ultimately, the court must be persuaded that the creditors will suffer greater prejudice in the absence of consolidation than the debtors (and any objecting creditors) will suffer from its imposition.”¹⁵ “[S]ubstantive consolidation should be invoked ‘sparingly’ when any creditor or debtor objects to its use.”¹⁶ “The determination is made on a case-by-case basis through an examination of the extent of jointly held property and jointly owed debts.”¹⁷ Some courts hold that “[t]he standard for substantive consolidation in the spousal context is whether the affairs of the husband and wife are so intermingled that their respective assets and liabilities cannot be separated.”¹⁸

As stated, no one has expressly asked that the Debtors' estates here be substantively consolidated under § 302(b), but, in asking that Keith's separate property be used to pay Michele's separate debts, that is, in effect, what the Trustee is seeking here.

The Trustee asserts that § 451.250 “was not intended to protect [Keith] and is not a vehicle within which the debtors can exclude a portion of the inheritance proceeds as property of the estate for his benefit.” As stated above, the Trustee is correct that the inheritance is property of Keith's bankruptcy estate. But that does not answer the question of who must be paid from it. On that question, contrary to the Trustee's position, protecting Keith's inheritance from Michele's creditors is very clearly the intent of the statute.

In In re True ,¹⁹ the Honorable Jerry W. Venters found that farm property which was titled in the name of a debtor's non-filing spouse was the non-filing spouse's separate property and, therefore, pursuant to § 451.250.1, the farm was not property of the debtor's bankruptcy case subject to his creditors.²⁰ The Trustee attempts to distinguish In re True on the basis that the debtor in that case had purchased and maintained the farm property for several years. However, that fact was only relevant to Judge Venters' factual finding that the farm was the spouse's separate property, not to the question of whether the statute protected it from the debtor's creditors if it was, in fact, the non-filing spouse's separate property. Here, I need not analyze whether the inheritance is Mr. Portell's separate property under the statute because no one disputes that it was left by his relative to him alone, and the statute expressly says such inheritances are separate property. Judge Venters' discussion of the factual characteristics of the farm is, therefore, not relevant here. His holding that the farm was not available to pay the debtor-spouse's separate debts, on the other hand, is relevant.

The Trustee cites no case, and I found none, where a bankruptcy court held that one spouse's separate property under state law is property of the other spouse's bankruptcy estate under § 541 or, by extension, § 1306. I conclude, therefore, that pursuant to Missouri law, Keith's inheritance is his separate property and is includable in only his bankruptcy estate for the payment of only the debts for which he is liable.

Is the Inheritance a Substantial Change in Circumstances Mandating an Amended Plan?

In conjunction with his objection to the Debtors' motion to spend the inheritance, the Trustee has also filed a Motion to Amend Plan pursuant to § 1329, requesting that the plan be amended to...