FILED
MAR 09 2012
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. AZ-11-1505-JuPaD
)
6 CYNTHIA L. MESSER, ) Bk. No. 11-03007
)
7 Debtor. )
______________________________)
8 CYNTHIA L. MESSER, )
)
9 Appellant, )
)
10 v. ) M E M O R A N D U M*
)
11 EDWARD J. MANEY, Chapter 13 )
Trustee, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on February 24, 2012
at Phoenix, Arizona
15
Filed - March 9, 2012
16
Appeal from the United States Bankruptcy Court
17 for the District of Arizona
18 Honorable Redfield T. Baum, Sr., Bankruptcy Judge, Presiding
____________________________
19
Appearances: David Allegrucci, Esq. of Allegrucci Law Office,
20 PLLC argued for appellant Cynthia L. Messer;
Stuart Bradley Rodgers, Esq. of Lane & Nach, P.C.
21 argued for appellee Edward J. Maney, Chapter 13
Trustee.
22 ______________________________
23
Before: JURY, PAPPAS, and DUNN, Bankruptcy Judges.
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
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1 Chapter 71 debtor, Cynthia L. Messer, claimed as exempt
2 100% of the fair market value of her vehicle listed at $12,000.
3 This amount was over the $5,000 statutory limit for vehicle
4 exemptions under Arizona law. Debtor also claimed that her
5 $2,000 monthly benefit from a structured settlement annuity was
6 not property of her estate. The bankruptcy court sustained the
7 chapter 7 trustee’s objection to debtor’s claimed exemption in
8 her vehicle and found that her annuity payments were property of
9 her estate. This timely appeal followed. We AFFIRM.
10 I. FACTS
11 On February 7, 2011, debtor filed her chapter 7 petition.
12 Jill H. Ford was appointed the chapter 7 trustee.
13 In Schedule C, debtor claimed 100% of the fair market value
14 (“FMV”) of her 2007 Honda Accord, listed at $12,000,2 as exempt
15 under Ariz. Rev. Stat. (“ARS”) §33-1125(8). That statute allows
16 a debtor to exempt “[o]ne motor vehicle not in excess of a fair
17 market value of five thousand dollars.”
18 Debtor also claimed as exempt her $2,000 monthly benefit
19 from a 1985 annuity under ARS §33-1126(B).3 The record shows
20 that the annuity arose from a settlement for the wrongful death
21
22 1
As explained below, debtor converted her case to one under
23 chapter 13 before this appeal was taken. Unless otherwise
indicated, all chapter and section references are to the
24 Bankruptcy Code,
11 U.S.C. §§ 101-1532, and rule references are
to the Federal Rules of Bankruptcy Procedure.
25
2
26 Debtor’s Schedule D showed that the vehicle was encumbered
by a lien in an amount over $15,000.
27
3
ARS §33-1126(B) was inapplicable to the annuity because
28 that section concerns the exemption of certain retirement plans.
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1 of debtor’s husband. The insurer, United States Fidelity and
2 Guaranty Company (“USF&G”), owned the annuity and it was not
3 assignable.
4 Debtor amended Schedule C to show that her basis for
5 claiming 100% of the FMV of her vehicle exempt was the holding
6 in Schwab v. Reilly, __ U.S. __,
130 S.Ct. 2652, 2668 (2010).
7 Debtor also changed the statutory basis for her exemption in the
8 annuity to ARS §33-1126(A)(7) which authorizes as exempt “an
9 annuity contract where for a continuous unexpired period of two
10 years that contract has been owned by a debtor and has named as
11 beneficiary the debtor . . . .”
12 The chapter 7 trustee objected to debtor’s exemptions,
13 asserting that the claimed exemption in her vehicle was over the
14 $5,000 statutory limit set forth in ARS §33-1125(8) and her
15 exemption in the annuity under ARS §33-1125(A)(7) should be
16 denied because that statute applied only to annuities owned by a
17 debtor. In response, debtor asserted that the annuity was not
18 property of her estate because (1) it contained an anti-
19 alienation provision; (2) she did not own the annuity; and
20 (3) the annuity qualified as a spendthrift trust under Arizona
21 law.
22 On July 28, 2011, the bankruptcy court heard the matters.
23 At the hearing, the court found that the Supreme Court’s
24 decision in Schwab did not authorize debtor to claim an
25 exemption in her vehicle greater than the $5,000 limit under ARS
26 §33-1125(8). The bankruptcy court took the matter of debtor’s
27 exemption in the annuity under advisement.
28 On August 25, 2011, the bankruptcy court issued its ruling
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1 on the annuity exemption. Siding with the trustee, the court
2 found that because the annuity was never owned by debtor, debtor
3 could not claim it exempt under ARS §33-1126(A)(7). The
4 bankruptcy court also found that there was nothing in the record
5 that established the annuity qualified as a spendthrift trust
6 under Arizona law. The court reasoned that the facts, analysis,
7 and holding in In re Kent,
396 B.R. 46 (Bankr. D. Az. 2008),
8 were very similar to this case and compelled the conclusion that
9 the annuity was not exempt and was property of the estate.
10 On September 7, 2011, the bankruptcy court entered the
11 order sustaining the trustee’s objection to debtor’s claimed
12 exemption in the annuity and finding that it was property of her
13 estate. As a result of the court’s ruling, debtor converted her
14 case to chapter 13 on September 14, 2011. On October 11, 2011,
15 the court entered the order denying debtor’s claim of exemption
16 in her vehicle above the statutory limit of $5,000 allowed under
17 Arizona law. Debtor timely appealed the orders.
18 II. JURISDICTION
19 The bankruptcy court had jurisdiction over this proceeding
20 under
28 U.S.C. §§ 1334 and 157(b)(2)(A) and (B). We have
21 jurisdiction under
28 U.S.C. § 158.
22 III. ISSUES
23 A. Whether the bankruptcy court erred in sustaining the
24 chapter 7 trustee’s objection to debtor’s claimed exemption for
25 100% of the FMV of her vehicle; and
26 B. Whether the bankruptcy court erred by finding that the
27 annuity was property of debtor’s estate.
28
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1 IV. STANDARDS OF REVIEW
2 We review de novo a bankruptcy court’s conclusions of law,
3 including statutory interpretations. Simpson v. Burkart (In re
4 Simpson),
557 F.3d 1010, 1014 (9th Cir. 2009). Whether the
5 Arizona exemption statutes at issue apply to debtor’s claimed
6 exemptions is a question of statutory interpretation.
Id.
7 Whether property is property of the estate is a question of
8 law reviewed de novo. Mwangi v. Wells Fargo Bank, N.A. (In re
9 Mwangi),
432 B.R. 812, 818 (9th Cir. BAP 2010).
10 V. DISCUSSION
11 When debtor filed her chapter 7 petition, all of her assets
12 became property of her bankruptcy estate under § 541, subject to
13 her right to reclaim certain property as exempt. Schwab, 130
14 S.Ct. at 2656–58. “Property a debtor claims as exempt will be
15 excluded from the bankruptcy estate ‘[u]nless a party in
16 interest’ objects.” Id. (citing § 522(l)).
17 Section 522(b) allows debtors to choose the exemptions
18 afforded by state law or the federal exemptions listed under
19 § 522(d). Arizona has enacted legislation “opting out” of the
20 federal bankruptcy exemption scheme under § 522(d). ARS §33-
21 1133(B). Therefore, Arizona law governs substantive issues
22 regarding debtor’s claimed exemptions. See In re Simpson,
23
557 F.3d at 1014.
24 A. The Bankruptcy Court Properly Denied Debtor’s Claimed
Exemption In Her Vehicle Over $5,000
25
26 ARS § 33-1125(8) provides that debtor may exempt one motor
27 vehicle not in excess of a FMV of $5,000. Debtor ignores the
28 statutory cap under the statute, instead arguing that under the
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1 holding in Schwab she can validly claim 100% of the FMV of her
2 vehicle exempt if she did so in good faith. Debtor contends her
3 claim of exemption for the full FMV of her vehicle was made in
4 good faith because there was no equity in her vehicle and the
5 trustee did not contest the value of her vehicle. On this
6 basis, debtor contends her exemption should stand. We disagree.
7 Debtor misunderstands the holding in Schwab and the scope
8 of the decision. In Schwab, the debtor claimed exemptions in
9 catering equipment equal to the value which she had listed for
10 the items themselves. The trustee did not object to the
11 exemptions even though he had an appraisal which showed the
12 equipment worth more than the amount debtor had listed. The
13 trustee sought permission to auction the equipment. The
14 bankruptcy court and Third Circuit Court of Appeals agreed that
15 the trustee could not sell the equipment because he failed to
16 object to the exemptions. The Supreme Court disagreed, holding
17 that when the debtor’s schedule of exempt property accurately
18 describes the asset and declares the “value of [the] claimed
19 exemption” in that asset to be an amount within the limits which
20 the Code prescribes, an interested party such as the trustee
21 “need not object to an exemption claimed in this manner in order
22 to preserve the estate’s ability to recover value in the asset
23 beyond the dollar value the debtor expressly declared exempt.”
24
130 S.Ct. at 2657. The court reasoned that all the debtor
25 received for her properly listed exemption in the catering
26 equipment was the dollar value that she had claimed.
27 The facts in Schwab are distinguishable from those here.
28 In contrast to the debtor in Schwab, debtor did not properly
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1 list the exemption in her vehicle in an amount prescribed by ARS
2 §33-1125(8) on her Schedule C. Therefore, her claimed exemption
3 was objectionable on its face. Accordingly, the trustee was
4 required to object to her exemption under the holding of Taylor
5 v. Freeland & Kronz,
503 U.S. 638 (1992). See Schwab,
130 S.Ct.
6 at 2666 (noting that Taylor established and applied “the
7 straightforward proposition that an interested party must object
8 to a claimed exemption if the amount the debtor lists as the
9 ‘value claimed exempt’ is not within statutory limits . . . .”).
10 Debtor’s reliance on the following passage in Schwab to
11 support her position is also misplaced.
12 Where, as here, it is important to the debtor to
exempt the full market value of the asset or the asset
13 itself, our decision will encourage the debtor to
declare the value of her claimed exemption in a manner
14 that makes the scope of the exemption clear, for
example, by listing the exempt value as ‘full fair
15 market value (FMV)’ or ‘100% of FMV.’ Such a
declaration will encourage the trustee to object
16 promptly to the exemption if he wishes to challenge it
and preserve for the estate any value in the asset
17 beyond relevant statutory limits. If the trustee
fails to object, or if the trustee objects and the
18 objection is overruled, the debtor will be entitled to
exclude the full value of the asset.
19
20
130 S.Ct. at 2668. While this passage provides guidance to
21 debtors who intend to exempt the actual value of the asset by
22 listing its value claimed exempt as “100% of FMV,” it does not
23 stand for the proposition that such a listing constitutes a
24 “valid and unobjectionable scheduling of a claimed exemption
25 value where the relevant exempting statute, such as the
26 [Arizona] Code, expressly limits the exemption to a maximum cash
27 value.” In re Stoney,
445 B.R. 543, 552 (Bankr. E.D. Va. 2011).
28 The Stoney court noted that “to interpret Schwab as such would
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1 permit a judicial superseding of the state statutory
2 requirements for exemptions and functionally negate the express
3 authority of a state to opt out and impose its exemption
4 limitations — as well as the procedural and substantive
5 requirements necessary to perfect those exemptions — on debtors
6 who are citizens of the opt-out state.”
Id.
7 Further, as the bankruptcy court observed, debtor
8 overlooked a crucial part of the passage cited above: “If the
9 trustee objects and the objection is sustained, the debtor will
10 be required either to forfeit the portion of the exemption that
11 exceeds the statutory allowance, or to revise other exemptions
12 or arrangements with her creditors to permit the exemption.”
13 Schwab,
130 S.Ct. at 2668. At the hearing on the matter in the
14 bankruptcy court, debtor’s counsel explained that because both
15 sides agreed that there was no equity in the vehicle, this
16 sentence would never apply. However, the record shows there was
17 no agreement regarding the lack of equity in debtor’s vehicle.
18 The trustee stated on the record that he objected to debtor’s
19 exemption in case it turned out there was actually less owed on
20 the vehicle than what was reported on debtor’s schedules.
21 Therefore, the trustee properly objected, preserving the value
22 in excess of debtor’s exemption, if any, for the creditors of
23 her estate.
24 Debtor does not contend on appeal that the basis for the
25 trustee’s objection was invalid, nor could she, when her counsel
26 acknowledged at the hearing that debtor’s statutory exemption
27 for her vehicle was limited to $5,000 under Arizona law. Under
28 these circumstances, we conclude the bankruptcy court correctly
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1 sustained the trustee’s objection to debtor’s exemption in her
2 vehicle over the $5,000 statutory limit.4
3 B. The Bankruptcy Court Properly Found That The Annuity Was
Property Of Debtor’s Estate And Not Exempt
4
5 Section 541(c)(2) provides an exception to the general rule
6 set forth in § 541(a)(1) that all legal or equitable interests
7 of the debtor become property of the estate as of the
8 commencement of the case. Section 541(c)(2) provides that “[a]
9 restriction on the transfer of a beneficial interest of the
10 debtor in a trust that is enforceable under applicable
11 nonbankruptcy law is enforceable in a case under this title.”
12 This provision excludes from the property of the bankruptcy
13 estate interests in trusts that are protected under a
14 spendthrift clause that is enforceable under applicable state
15 law. See Patterson v. Shumate,
504 U.S. 753, 758 (1992) (“The
16 natural reading of the provision entitles a debtor to exclude
17 from property of the estate any interest in a plan or trust that
18 contains a transfer restriction enforceable under any relevant
19 nonbankruptcy law.”).
20 Debtor contends that her annuity falls within the scope of
21 § 541(c)(2) because it constitutes a valid spendthrift trust
22
4
23 Technically, because debtor’s vehicle was overencumbered,
she had no equity or “interest” in her vehicle to remove from her
24 estate. From what we can tell, debtor’s claim of 100% FMV in her
vehicle was apparently to protect any eventual equity she might
25 have once she paid off the vehicle. However, as the bankruptcy
26 court noted, debtor’s counsel confused the concept of abandonment
with the exemption process. If debtor properly listed the
27 vehicle and it was not administered at the time her case was
closed, the vehicle would be abandoned by operation of law,
28 thereby protecting her equity vis-a-vis her estate.
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1 under the Arizona Trust Code. In support of this conclusion,
2 debtor begins by citing ARS §14-10102, which provides that the
3 Arizona Trust Code “applies to express trusts, charitable or
4 noncharitable trusts and trusts created pursuant to a statute,
5 judgment or decree that requires the trust to be administered in
6 the manner of an express trust.” According to debtor, her
7 annuity income falls within the scope of the Arizona Trust Code
8 because it was the result of a state court judgment or decree.
9 To support this premise, debtor relies on two documents that
10 relate to a probate proceeding regarding the approval of a
11 separate settlement arising out of the wrongful death of
12 debtor’s husband which was for the benefit of debtor’s minor
13 daughter. The first document is a petition for a protective
14 proceeding under ARS §14-5409(b) which debtor brought on behalf
15 of her minor daughter and the second is a petition for an order
16 approving the settlement of the wrongful death claim of the
17 minor daughter which simply contains a reference to the annuity
18 payable to debtor.
19 We are not persuaded by debtor’s argument. Notably, the
20 documents were simply petitions and not orders. We thus fail to
21 see how the documents prove that the alleged trust arose from a
22 “judgment or decree.” Further, even if we could get past that
23 requirement, neither of the documents prove that a trust was
24 created for her benefit through the probate proceeding. Debtor
25 was neither a protected person in the proceeding nor would the
26 probate court have had jurisdiction over her assets.
27 There is also nothing in either document that is consistent
28 with a trust arrangement. Under Arizona law, the essential
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1 elements of a valid trust include (1) a competent settlor, (2) a
2 trustee, (3) an intention to create a trust, (4) the trustee has
3 duties to perform and (5) the same person is not the sole
4 trustee and sole beneficiary. ARS §14-10402. On appeal, debtor
5 simply makes conclusory statements that these elements are
6 satisfied. However, the documents in the record do not identify
7 a settlor or trustee nor do they come close to establishing that
8 the probate court or USF&G intended to create a trust for the
9 benefit of debtor.5 Compare In re Kent,
396 B.R. at 52.
10 We are also unpersuaded by debtor’s argument that the so-
11 called trust qualifies as a spendthrift trust. Under ARS §14-
12 10502(A), “a spendthrift provision is valid only if it restrains
13 either voluntary or involuntary transfer of a beneficiary’s
14 interest.” ARS §14-10502(B) provides: “[a] term of a trust
15 providing that the interest of a beneficiary is held subject to
16 a spendthrift trust, or words of similar import, is sufficient
17 to restrain both voluntary and involuntary transfer of the
18 beneficiary’s interest.” Thus, the statute governing
19 spendthrift trusts contemplates that the trust document itself
20 would manifest the parties’ intent to create a spendthrift
21 trust, although no specific language is required.
22 Instead of relying on a trust document, which debtor
23
5
24 Besides not offering a written trust instrument into
evidence, debtor’s argument that an oral trust was somehow
25 created also fails. ARS § 14-10407 states in relevant part:
26 “[T]he creation of an oral trust shall be established only by
clear and convincing evidence and the terms of the oral trust
27 shall be established by a preponderance of the evidence. . . .”
Debtor’s evidence does not come close to meeting the clear and
28 convincing standard of proof required under the statute.
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1 apparently does not have, she contends that ARS §12-2902 serves
2 as a “statutory restraint” on debtor’s transfer of her interest
3 which proves her trust was a spendthrift trust. ARS §12-2902
4 provides that structured settlement payments are transferable if
5 authorized by a court after finding that such transfer is “in
6 the best interests of the payee, taking into account the welfare
7 and support of the payee’s dependents.” ARS §12-2902(B)(3).
8 Debtor contends that because she can transfer her stream of
9 income only upon an “express finding” that it is in her best
10 interests to do so, that limitation takes her annuity out of her
11 creditors’ reach.
12 We are not convinced that ARS §12-2902, which authorizes a
13 payee of a structured settlement to transfer payments upon court
14 approval, constitutes the kind of “restraint” envisioned for a
15 spendthrift trust under Arizona law.6 Debtor’s argument makes
16 no sense when the statute itself authorizes transfers of
17 structured settlement payments. This authorization is contrary
18 to the very nature of spendthrift trusts. Furthermore, statutes
19 such as this were enacted for the protection of payees under
20 structured settlements to “prevent serious overreaching by
21 factoring companies and to prevent the sale of payments at a
22 mere fraction of their present or future value.” Jay M. Zitter,
23 Annotation, Construction and Application of State Structured
24 Settlement Protection Acts,
27 A.L.R. 6th 323 (2007). This
25 purpose does not evidence an intent by the Arizona legislature
26
6
27 Note that we do not find that ARS § 12-2902 applies to
debtor because she provided no court order that pertained to her
28 annuity at all.
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1 to turn every structured settlement into a spendthrift trust
2 under Arizona law.
3 In sum, as there is no evidence in the record to the
4 contrary, we conclude that as a matter of law debtor’s annuity
5 was not a spendthrift trust. Therefore, despite the restrictive
6 language contained in the March 29, 2011 letter also in the
7 record (which stated that debtor’s benefit could not be
8 assigned), we agree with the bankruptcy court that debtor’s
9 annuity payments were property of her estate for the reasons
10 explained in In re Kent,
396 B.R. 45. See also In re Jackus,
11
442 B.R. 365 (Bankr. D.N.J. 2011).
12 Finally, debtor’s annuity is not exempt under ARS §33-
13 1125(A)(7) because that statute applies only to annuities owned
14 by a debtor. Debtor conceded that she did not own the annuity.
15 VI. CONCLUSION
16 For the reasons stated, we AFFIRM.
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