In re Bowden, Bankruptcy No. 03-40575.

• Decision Date: 27 August 2004
• Docket Number: Bankruptcy No. 03-40575.,Adversary No. 03-4178.
• Citation: 315 B.R. 903
• Parties: In re Leslie Eugene Lee BOWDEN, Debtor. Leslie Eugene Bowden, Plaintiff, v. Structured Investments Co. LLC, a foreign corporation doing business in Washington, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Washington

315 B.R. 903

In re Leslie Eugene Lee BOWDEN, Debtor Leslie Eugene Bowden, Plaintiff, v. Structured Investments Co. LLC, a foreign corporation doing business in Washington, Defendant.

Bankruptcy No. 03-40575.

Adversary No. 03-4178.

United States Bankruptcy Court, W.D. Washington.

August 27, 2004.

COPYRIGHT MATERIAL OMITTED

Dorothy A. Bartholomew, Fife, WA, for plaintiff.

Robert L. Beale, Tacoma, WA, for defendant.

David M. Howe, Chapter 13 Trustee.

CORRECTED DECISION ON SUMMARY JUDGMENT and CLAIM OBJECTION

PHILIP H. BRANDT, Chief Judge.

This is an adversary proceeding to determine the secured status of the claim Structured Investments Co. LLC ("SICO") filed in debtor Leslie Bowden's chapter 13 case. I have for decision cross-motions for summary judgment: plaintiff for a declaration that SICO's claim is unsecured, and defendant for a declaration that the parties' agreement created an express trust. Bowden also filed an objection to SICO's claim as untimely, which was consolidated with the adversary proceeding.

For the reasons set forth below, I will GRANT plaintiff's motion for summary judgment, DENY defendant's cross-motion, and SUSTAIN the objection.

I. FACTS

The facts are undisputed. Early in 2001, Bowden, a retired Navy enlisted man, was experiencing financial difficulties. He responded to SICO's local newspaper advertisement offering lump sum cash payments in exchange for pledges of future military benefits, and on 23 May 2001 entered into an "Annuity Utilization Agreement" (the "Agreement") with SICO. The Agreement provides that Bowden, who is entitled to monthly Navy retirement pay of $580, and a Veterans Affairs ("VA") monthly disability benefit of $201, would receive a lump sum payment of $25,864 in exchange for an agreement to remit to SICO 96 monthly combined benefits payments of $762.

The Agreement allowed SICO to open a bank account into which the combined benefits would be directly deposited, and gave SICO power of attorney to instruct the payor (the Defense Finance Accounting Service: "DFAS") to deposit in that account and allowed SICO to withdraw the funds. The Agreement prevented Bowden from withdrawing any funds without a SICO representative's signature. He was never informed of the bank's name, location, or account number.

The Agreement purports to grant SICO a perfected first priority security interest in the bank account, but SICO does not identify any means of perfection. The Agreement expressly states that it is not a loan contract, and that it does not give SICO a security interest in Bowden's benefits, which, under federal law, are not assignable.

Although Bowden intended to repay the loan, his work hours were cut and his hourly wage reduced. Bowden requested that DFAS cancel the SICO allotment. When he failed to receive his next retirement and disability payments, he contacted DFAS, which told Bowden that the allotment had been reinstated. At Bowden's request, DFAS again cancelled the allotment and noted his file to preclude reinstatement without Bowden's permission.

Thereafter, Bowden filed a petition for chapter 13¹ relief, scheduling an unsecured debt to SICO of $26,000. His plan is a 36-month best efforts plan, which was confirmed without objection on 10 April 2003. Unsecured creditors are projected to receive nothing on their claims, regardless of whether SICO's claim is included.

SICO was sent timely notice of the claims bar date (28 May 2003), but did not file its secured proof of claim for $84,562 until 11 June 2003. Bowden filed an adversary proceeding seeking a determination that SICO's claim to his future retirement pay and disability benefits is unsecured, and then an objection to the claim as untimely. SICO answered, asserting that the Agreement was a declaration of trust. Respecting the timeliness objection, SICO responded that Bowden's scheduling of its claim was an informal proof of claim, which its proof of claim merely amended.

II. JURISDICTION

This court has jurisdiction under 28 U.S.C. § 157(b)(2)(B) and (O) and GR 7, W.D. Wash.

III. ISSUES

1. Is SICO's claim time-barred?

2. Was the Agreement an effective declaration of trust, removing debtor's military retirement pay and disability benefits from the estate, and precluding termination except in accordance with its terms?

IV. DISCUSSION

The parties agree that the issues are purely legal, appropriate for resolution by summary judgment. Rule 7056.

A. Late Claim

Under § 502(b)(9), an untimely creditor's claim must be disallowed if it is objected to. In re Gardenhire, 209 F.3d 1145, 1147 (9th Cir.2000). As noted, SICO's claim was filed after the bar date, and debtor has objected to the claim as late-filed.

Regardless of whether a claim is secured or unsecured, a proof of claim must be filed for the claim to receive a distribution through a chapter 13 plan. In re Avery, 272 B.R. 718, 724 n. 5 (Bankr.E.D.Cal.2002); In re Alderman, 150 B.R. 246, 252 (Bankr.D.Mont.1993). A claim disallowed under § 502 is generally discharged in a chapter 13. Gardenhire, 209 F.3d at 1147.

SICO argues that the debtor's scheduling of its claim was an informal proof of claim, and the proof of claim it filed was an amendment thereto. In support, SICO cites In re Holm, 931 F.2d 620 (9th Cir.1991). There, following the "so-called rule of liberality in amendments" to proofs of claim, the Circuit held that a disclosure statement filed by a judgment creditor was an informal proof of claim amendable after the bar date. To constitute an informal proof of claim, a document "must state an explicit demand showing the nature and amount of the claim against the estate, and evidence an intent to hold the debtor liable." Id. at 622 (citation omitted).

The parties have not cited any Ninth Circuit authority holding that a debtor's schedules suffice as an informal proof of claim. Bankruptcy courts in the Fourth Circuit, which follows a standard similar to the Ninth, have held that listing a debt in the debtor's schedules, standing alone, is not an informal proof of claim. See In re Faust, 180 B.R. 432, 434-35 (Bankr.D.S.C.1994) (listing in debtor summary of chapter 12 plan insufficient to constitute informal proof of claim; creditor must take some affirmative action to constitute notice that he has a claim against the estate); and In re Elleco, Inc., 295 B.R. 797, 802 (Bankr.D.S.C.2002) (filing a notice of appearance, participating in § 341 first meeting of creditors, taking Rule 2004 exam of debtor's president, and negotiating settlement of a claim on debtor's behalf did not add up to an informal proof of claim). These cases are persuasive, and the requirements for an informal proof of claim implicitly assume that the creditor has taken some action to assert its claim. SICO's claim will be disallowed as untimely.

Disallowance of SICO's claim in Bowden's chapter 13 case does not resolve this adversary proceeding, for if, as SICO argues, the Agreement created an enforceable trust, debtor's ongoing military retirement and disability pay are not property of the estate, and SICO has a beneficial interest in those payments.

B. Trust?

State law determines whether the Agreement created an express trust. See In re Stanifer, 236 B.R. 709, 714 (9th Cir. BAP 1999). The Agreement (¶ 16) makes California law applicable. Washington courts generally give effect to a choice of law clause in a contract as expressing the intent of the parties. McGill v. Hill, 31 Wash.App. 542, 547, 644 P.2d 680, 683 (1982). In any event, the law pertaining to the creation of trusts is essentially identical in California and Washington.

The elements of an express trust under California law are (a) a competent trustor, (b) trust intent, (c) trust property, (d) trust purpose, and (e) a beneficiary. Keitel v. Heubel, 103 Cal.App.4th 324, 337, 126 Cal.Rptr.2d 763, 773 (2002). Under Washington law, an express trust is "a fiduciary relationship with respect to property, subjecting the person by whom the title to property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." In re Marriage of Lutz, 74 Wash.App. 356, 365, 873 P.2d 566, 571 (1994) (citing 1 William F. Fratcher, Scott on Trusts § 2.3, at 41 (4th ed.1987)). See also Restatement (Third) of Trusts § 2 (2003) (stating essentially the same definition). Both jurisdictions follow the Restatement. See, e.g., Gonsalves v. Hodgson, 38 Cal.2d 91, 98, 237 P.2d 656, 660-61 (1951); Niemann v. Vaughn Cmty. Church, 118 Wash.App. 824, 77 P.3d 1208, 1213 (2003).

A trust may be created by a declaration by an owner of property that he or she holds that property as trustee for another. Cal. Prob.Code § 15200; Restatement (Third) of Trusts § 10 (2003). No particular manner of expression is necessary to manifest the trust intention. Id. § 13 cmt. b. However, a trust cannot be created unless there is trust property in existence at the time of the creation of the trust, id. § 2 cmt. i, and the property generally must be transferable to make an effective declaration of trust. Id. § 40 cmt. d.

SICO argues that Bowden's promises to remit his benefits to SICO (¶¶ 1, 2.1(iii), and 2.2), and have all benefits deposited into the account (¶¶ 2.3 and 10.6), together with the Agreement's acknowledgment that the benefits are not assignable (¶ 14.5), support its contention that the Agreement is a declaration of trust, and not an assignment. According to SICO, because the Agreement states that it is not an assignment, sale, or pledge, it can only be an express trust.

However, in the words of Gabby Hayes, "Sayin' it don't make it so."² Rather, I must look to the substance of the transaction, regardless of the label assigned by the parties. Shafford v. Otto Sales Co., 119 Cal.App.2d 849, 859-60, 260 P.2d 269, 275 (1953) ("[M]ere words and the ingenuity of contractual expression ... cannot be used to prevent a showing of the real nature...