In re Benedict, Bankr. No. 08-30008 (Bankr.S.D. 1/23/2009)

• Decision Date: 23 January 2009
• Docket Number: Bankr. No. 08-30008.
• Parties: In re Leroy Dennis Benedict and Betty L. Fairbanks-Benedict, Chapter 7.
• Court: U.S. Bankruptcy Court — District of South Dakota

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In re Leroy Dennis Benedict and Betty L. Fairbanks-Benedict, Chapter 7.

Bankr. No. 08-30008.

United States Bankruptcy Court, D. South Dakota.

January 23, 2009.

Forrest C. Allred, Esq., Chapter 7 Trustee, Aberdeen, South Dakota.

James E. Carlon, Esq., Attorney for Debtors, Pierre, South Dakota.

CHARLES L. NAIL Jr., Bankruptcy Judge

Dear Trustee Allred and Mr. Carlon:

The matter before the Court is Trustee Forrest C. Allred's Motion for Sanctions. This is a core proceeding under 28 U.S.C. § 157(b)(2). This letter decision and accompanying order shall constitute the Court's findings and conclusions under Fed.Rs.Bankr.P. 7052 and 9014(c). As discussed below, Trustee Allred's motion will be granted, and an order for sanctions will be entered.

Summary. Leroy Dennis Benedict and Betty L. Fairbanks-Benedict ("Debtors") filed a petition for relief under chapter 7 of the bankruptcy code (doc. 1). On their schedule C (property claimed as exempt), Debtors included two Wells Fargo bank accounts.¹ Debtors valued one account at $0.00 and the other at $42.17 and claimed both exempt under S.D.C.L. § 43-45-4. Debtors did not list or claim exempt any accrued but unpaid wages that were owed to them on the petition date.

Trustee Allred filed a Motion for Turnover (doc. 21). He requested turnover of, among other things, the $420.33 balance of the first Wells Fargo bank account; the $50.72 balance of the second Wells Fargo bank account, less the $42.17 Debtors had claimed exempt; $346.12 of accrued but unpaid wages owed to Debtor Leroy Benedict; and $1,309.64 of accrued but unpaid wages owed to Debtor Betty Fairbanks-Benedict.

Apparently in response to Trustee Allred's motion for turnover, Debtors amended their schedule C (doc. 22). They claimed $1,309.64 (the entire amount) of Debtor Betty Fairbanks-Benedict's accrued but unpaid wages exempt under S.D.C.L. § 43-45-2(6), $0.00 of those same wages exempt under 11 U.S.C. § 541(d), and $0.00 of those same wages exempt under S.D.C.L. § 43-45-4; they claimed $0.00 of Debtor Leroy Benedict's accrued but unpaid wages exempt under S.D.C.L. § 43-45-4, $0.00 of those same wages exempt under 11 U.S.C. § 541(d), and $346.12 (the entire amount) of those same wages exempt under S. D. C. L. § 43-45-2(6); they claimed $420.33 (the entire balance) of the first Wells Fargo bank account exempt under 11 U.S.C. § 541(d) and $0.00 of that account exempt under S.D.C.L. § 43-45-4; and they claimed $42.14 (all but $.03 of the balance) of the second Wells Fargo bank account exempt under 11 U.S.C. § 541(d) and $0.00 of the balance of that account exempt under S.D.C.L. § 43-45-4.²

Debtors also filed a response to Trustee Allred's motion for turnover (doc. 30).³ They argued Trustee Allred's motion should be denied because: (1) they had amended their schedule C, thus rendering his motion moot; (2) the property he sought to have turned over was not property of the estate; (3) the property he sought to have turned over was not in their possession; (4) their "2008 prorated taxes" were improperly valued; and (5) "the prorated wages through the date of filing [were] subject to prorated claims for expenses, extensions of credit[,] and supplies provided to the Debtors prior to filing bankruptcy with the understanding that the claims would be paid from the Debtors['] wages."

Trustee Allred withdrew his motion for turnover (doc. 33) and filed an objection to Debtors' amended exemptions (doc. 35). He argued "[D]ebtors have claimed accrued unpaid wages exempt under [S.D.C.L. § ]43-45-2(6) as provisions, which statute does not apply," citing In re Hogg, 76 B.R. 735 (Bankr. D.S.D. 1987), aff'd, 877 F.2d 691 (8th Cir. 1989). He also argued "[D]ebtors have claimed bank accounts exempt using a federal exemption, . . . which option is not available to South Dakota debtors."

Debtors filed a response to Trustee Allred's objection to their amended exemptions (doc. 36). They argued while the Court in Hogg denied an exemption in cash the debtors intended to use to purchase provisions, their wages had actually been used to purchase provisions. They also argued 11 U.S.C. § 541(d) applies to all debtors in all jurisdictions and for the first time suggested their wages were subject to S.D.C.L. § 55-1-6 (which governs implied trusts), stating: "Debtors received the benefits of provisions and supplies furnished to them with the expectation they would use their wages to pay for the things provided, and their wages were used for those provisions." Debtors did not mention their bank accounts.

Trustee Allred filed an amended objection to Debtors' exemptions (doc. 41). He reiterated his argument that Debtors could not claim their wages exempt under S.D.C.L. § 43-45-2(6), again citing Hogg, 76 B.R. at 745. He also argued Debtors held "full legal and equitable right, title[,] and interest" in their bank accounts and thus 11 U.S.C. § 541(d) did not apply to those bank accounts "in any way."

Debtors filed a response to Trustee Allred's amended objection to their amended exemptions (doc. 44).⁴ They renewed their earlier response to Trustee Allred's original objection and stated they "[did] not have possession of any cash claimed exempt under [S.D.C.L. §] 43-45-2(6). Those provisions and supplies have already been acquired, paid for, and consumed." They also reiterated their position that 11 U.S.C. § 541(d) must be considered in conjunction with S.D.C.L. § 43-45-2(6) and S.D.C.L. § 55-1-6. Debtors again did not mention their bank accounts.

Trustee Allred then filed a Motion for Sanctions (doc. 48), the matter that is presently before the Court. He argued Debtors could not make a nonfrivolous argument in support of either their contention that their accrued but unpaid wages were exempt under S.D.C.L. § 43-45-2(6) or their contention that their bank accounts were excluded from the estate under 11 U.S.C. § 541(d).

Debtors filed a response to Trustee Allred's Motion for Sanctions (doc. 49). They argued their accrued wages and their bank accounts were subject to an implied trust under S.D.C.L. §§ 55-1-6 through 55-1-11⁵ and were thus excluded from the bankruptcy estate, citing N.S. Garrott & Sons v. Union Planters National Bank of Memphis (In re N.S. Garrott & Sons), 772 F.2d 462, 467 (8th Cir. 1985).⁶ They also argued, having spent their wages and the funds in their bank accounts for provisions, they had done all Hogg required them to do to be permitted to claim those assets exempt under S.D.C.L. § 43-45-2(6).⁷

The Court held an evidentiary hearing on Trustee Allred's amended objection to Debtors' amended exemptions (doc. 53). Debtors offered the testimony of Debtor Betty Fairbanks-Benedict. At the conclusion of the hearing, the Court sustained Trustee Allred's amended objection.⁸ The Court also afforded both Trustee Allred and Debtors the opportunity to submit additional authority regarding Trustee Allred's Motion for Sanctions.

Trustee Allred filed a brief in support of his Motion for Sanctions (doc. 55). Debtors did not file a brief in support of their response to Trustee Allred's motion for sanctions. The matter was taken under advisement.

Discussion. By his motion, Trustee Allred asks the Court to impose sanctions against Debtors and their attorney pursuant to Fed.R.Bankr.P. 9011, which provides in pertinent part:

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; [and]

(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery . . . .

Fed.R.Bankr.P. 9011(b). Debtors signed a declaration concerning their schedules, including their schedule C (doc. 1), and their amended schedule C (doc. 22). Debtors' attorney filed Debtors' schedules, including their schedule C (doc. 1), and their amended schedule C (doc. 22), and signed Debtors' response to Trustee Allred's motion for turnover (doc. 30), their response to Trustee Allred's objection to exemptions (doc. 36), their response to Trustee Allred's amended objection to exemptions (doc. 44), and their response to Trustee Allred's Motion for Sanctions (doc. 49). Debtors are thus potentially liable for a violation of Rule 9011 only with respect to their schedules and their amended schedule C. Debtors' attorney, on the other hand, is potentially liable for a violation of Rule 9011 with respect to each of the listed papers.

Rule 9011 is designed to prevent abuses of the bankruptcy process by parties and their attorneys. In re Paul Huffman, Bankr. No. 94-50106, slip op. at 4 (Bankr. D.S.D. Feb. 15, 1995); In re Coones Ranch, Inc., Bankr. 91-40183, slip op. at 10 Bankr. D.S.D. Mar. 9, 1992), aff'd sub nom. Grunewaldt v. Mutual Life Ins. Co. of New York (In re Coones Ranch, Inc.), 7 F.3d 740 (8th Cir. 1993). The determination of whether a violation has occurred is within the court's discretion. Huffman, Bankr. No. 94-50106, slip op. at 4.

With respect to their accrued but unpaid wages, Debtors' legal contention was those wages were provisions within the meaning of S.D.C.L. § 43-45-2(6), which permits a debtor to claim absolutely exempt "[t]he provisions for the debtor and his family necessary for one year's supply, either provided or growing, or both, and fuel necessary for one year;" ...