Allen Wisdom v. Jeremy Gugino ( 2016 )

FILED
NOT FOR PUBLICATION
MAY 11 2016
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
ALLEN L. WISDOM No. 13-35409
Appellant, D.C. No. 1:12-cv-00530-BLW
v. MEMORANDUM*
JEREMY J. GUGINO
Appellee.
Appeal from the United States District Court
for the District of Idaho
B. Lynn Wynmill, Chief District Judge, Presiding
Argued and Submitted March 9, 2016
Portland, Oregon
Before: FISHER and WATFORD, Circuit Judges, and WALTER,** District
Judge.
Allen Wisdom, a Chapter 7 bankruptcy debtor, appeals the district court’s
judgment upholding the bankruptcy court’s determination that trustee Jeremy
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Donald E. Walter, Senior United States District Judge
for the Western District of Louisiana, sitting by designation.
Gugino properly liquidated five of Wisdom’s life insurance policies. We have
jurisdiction under 28 U.S.C. § 158(d), and we affirm.
The bankruptcy court properly upheld Gugino’s objection to the exemptions
Wisdom sought to claim under Idaho Code § 11-605(10) (“subsection 10”).
Gugino correctly objected that subsection 10 permitted Wisdom to exempt $5,000
of total value across all of his life insurance policies, rather than permitting him to
exempt $5,000 of value from each policy. See In re Oxford, 274 B.R. 887, 891-93
(Bankr. D. Idaho 2002).
The bankruptcy court also properly rejected Wisdom’s argument that his
claim under subsection 10 prevented Gugino from liquidating his life insurance
policies. Wisdom did not claim an exemption under Idaho Code § 11-605(9)
(“subsection 9”), which would have exempted the policies themselves from
inclusion in the bankruptcy estate. His Amended Schedule C instead claimed an
exemption under subsection 10 alone, which protected only a portion of his interest
in the policies. See Schwab v. Reilly, 560 U.S. 770, 781–82 (2010) (distinguishing
between exempting a portion of the debtor’s “interest” in an asset and exempting
the asset itself).
The bankruptcy court also properly held that Gugino did not violate any
fiduciary duty to Wisdom. A bankruptcy trustee is a representative and fiduciary
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of the estate, see 11 U.S.C. § 323; In re AFI Holding, Inc., 530 F.3d 832, 844 (9th
Cir. 2008), charged primarily with conserving estate assets and maximizing
distributions to creditors, see In re Rigden, 795 F.2d 727, 730 (9th Cir. 1986).
When a debtor retains an interest in estate assets—either by properly claiming
exemptions or because surplus property will remain in the estate after all creditors
have been compensated—the trustee owes a fiduciary duty to the debtor as well.
See U.S. Dep’t of Justice, Executive Office for the United States Trustees,
Handbook for Chapter 7 Trustees 4-2 (2012). Here, Gugino correctly objected to
Wisdom’s claimed exemptions to the extent they were improper, but did not object
to Wisdom’s exemption of $5,000 from Policy No. 344. After liquidating all the
policies, Gugino promptly sent Wisdom a check for $5,000, which Wisdom
cashed. To the extent Gugino owed a duty to preserve Wisdom’s interest in the
exempt value of his life insurance, Gugino fulfilled that duty by paying over the
exempt liquidation proceeds.1
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Nor did Gugino violate his fiduciary duties when he applied the subsection
10 exemption solely to Policy No. 344. Gugino’s objection made clear he was not
objecting to Wisdom’s $5,000 claim on Policy No. 344. Wisdom had an
opportunity to challenge that allocation or to rearrange how he allocated the $5,000
value by either responding to Gugino’s objection or filing another Amended
Schedule C which claimed no more than $5,000 total across all his policies.
Because he did neither, Gugino had no obligation to second-guess Wisdom’s intent
once the bankruptcy court sustained the objection.
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We agree with Wisdom, however, that Gugino breached his procedural
obligations under 11 U.S.C. § 363(b)(1) by liquidating Wisdom’s insurance
policies without providing separate notice and opportunity for a hearing.
Independent of any fiduciary duties, § 363(b)(1) requires a trustee to provide notice
and opportunity for a hearing before using, selling or leasing an estate asset outside
the ordinary course of the debtor’s business. In our view, the liquidation of Policy
No. 344 for its cash surrender value qualified as the “use” or “sale” of an estate
asset within the meaning of § 363. See 3 Collier on Bankruptcy ¶ 363.02 (Alan N.
Resnick & Henry J. Sommer eds., 16th ed. 2015) (“Section 363(b) has been
applied to other uses that one might not ordinarily posit as a question of use of
property, but rather as entering into transactions out of the ordinary course of
business.”); cf. In re Lavigne, 114 F.3d 379, 384 (2d Cir. 1997) (holding the
cancellation of a debtor-in-possession’s malpractice insurance policy violated
§ 363 because the debtor-in-possession failed to comply with the notice
requirements of that section).
Because Wisdom had actual notice of the impending liquidation of his
policies, however, he was not prejudiced by Gugino’s failure to satisfy § 363(b).
Both parties agree bankruptcy sales may be set aside in appropriate circumstances,
but on these facts, we decline to set aside the liquidation of the policies or award
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Wisdom the monetary damages he seeks. See In re CADA Investments, Inc., 664
F.2d 1158, 1161–63 (9th Cir. 1981) (describing the power to set aside transactions
as a matter of equity within the discretion of the court). The record reveals that
Wisdom received actual notice of the impending liquidation when New York Life
sent him a letter several weeks before Policy No. 344 was liquidated. When
Wisdom received that letter, his deadline for responding to Gugino’s objection had
not yet expired. Thus, Wisdom had the opportunity to prevent the liquidation,
notwithstanding Gugino’s failure to comply with § 363(b)(1).
In sum, Wisdom’s claims against the trustee are without merit. We
recognize, however, that Wisdom may have been ill served by his bankruptcy
lawyers. (Our admonition does not extend to Wisdom’s pro bono appellate
counsel, whose advocacy in this case was excellent.) Wisdom’s failure to respond
to Gugino’s objection appears to have been due to his bankruptcy lawyers’
inaction. In addition, Wisdom’s policies would have remained intact had his
bankruptcy lawyers claimed an exemption under subsection 9 in lieu of or in
addition to subsection 10. The efficacy of Wisdom’s legal representation is not
before us, however, as Wisdom’s bankruptcy lawyers are not parties to this appeal
and this is not a malpractice case.
AFFIRMED.
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