In re Buddy Vincent Kalei Maunakea And Kimberly Kuuipo Maunakea

• Decision Date: 04 March 2011
• Docket Number: CV. No. 10–00432 DAE–KSC.
• Citation: 448 B.R. 252
• Parties: In re Buddy Vincent Kalei MAUNAKEA and Kimberly Kuuipo Maunakea, Debtors.Buddy Vincent Kalei Maunakea and Kimberly Kuuipo Maunakea, Appellants,v.Howard M.S. Hu, Standing Trustee, Appellee.In re Iver Kimlan Momi Gaspar, Debtor.Iver Kimlan Momi Gaspar, Appellant,v.Howard M.S. Hu, Standing Trustee, Appellee.
• Court: U.S. District Court — District of Hawaii

448 B.R. 252

In re Buddy Vincent Kalei MAUNAKEA and Kimberly Kuuipo Maunakea, Debtors.Buddy Vincent Kalei Maunakea and Kimberly Kuuipo Maunakea, Appellants,

v.Howard M.S. Hu, Standing Trustee, Appellee.In re Iver Kimlan Momi Gaspar, Debtor.Iver Kimlan Momi Gaspar, Appellant,

v.Howard M.S. Hu, Standing Trustee, Appellee.

CV. No. 10–00432 DAE–KSC.

United States District Court, D. Hawai‘i.

March 4, 2011.

Jean Christensen, Esq., Robert K. Kekuna, Jr., Esq., and Stuart T. Ing, Esq., Honolulu, HI, for Appellants.Bradley R. Tamm, Esq., Seth K. Weaver, Esq., and Lissa D. Shults, Esq., Honolulu, HI, for Appellee.

ORDER AFFIRMING BANKRUPTCY COURT'S DECISION

DAVID ALAN EZRA, District Judge.

On February 28, 2011, the Court heard Appellants' Appeal. Jean Christensen, Esq., Robert K. Kekuna, Jr., Esq., and Stuart T. Ing, Esq., appeared at the hearing on behalf of Appellants; Bradley R. Tamm, Esq., Seth K. Weaver, Esq., and Lissa D. Shults, Esq., appeared at the hearing on behalf of Appellee. After reviewing the motion and the supporting and opposing memoranda, the Court AFFIRMS the Bankruptcy Court's decision.

BACKGROUND

This consolidated bankruptcy appeal stems from the treatment of native Hawaiian debtors' interests in real property leased pursuant to the Hawaiian Homes Commission Act (“HHCA”). Act of July 9, 1921, ch. 42, § 101(b)(1), 42 Stat. 108. At issue on appeal is whether these leaseholds should be considered property of the estate such that their value must be considered in a hypothetical liquidation of debtors' assets conducted pursuant to 11 U.S.C. § 1325(a)(4).¹

I. Maunakea Appeal

Appellants Buddy Maunakea and Kimberly Maunakea (collectively, “Maunakea Appellants”), both native Hawaiians, are debtors who voluntarily filed a chapter 13 bankruptcy petition and plan on October 23, 2009. (“Maunakea App.,” Doc. # 12, ex. 12, at 2.) The Maunakea Appellants' assets include a leasehold interest of real property situated at 89–509 Puakolu Street in Waianae in the City and County of Honolulu (“Maunakea Property”). ( Id., ex. 1, Schedule A.) This property is leased from the Department of Hawaiian Home Lands of the State of Hawaii (“DHHL”) pursuant to the HHCA. ( Id., ex. 7, at 2.)

In their schedules, the Maunakea Appellants valued their interest in the Maunakea Property to be $150,000 subject to a mortgage loan with a balance of $166,093. ( Id. at 3.) Accordingly, the Maunakea Appellants did not claim an exemption for their interest in property because they allegedly had no equity to exempt. ( Id.) The appellants did, however, claim that the entire value of all their real and personal property was subject to exemptions under 11 U.S.C. § 522(d) or secured claims. ( Id., exs. 1, 2.) The plan, therefore, estimated that there would be no distribution for general unsecured creditors in a hypothetical chapter 7 liquidation. ( Id., ex. 7, at 3.)

The Maunakea Appellants' combined net monthly income as listed on Schedules I and J was $350. ( Id., ex. 1, Schedules I, J.) Per their plan, the Maunakea Appellants proposed to make 60 monthly payments of $350, including a monthly payment of $301.24 on their vehicle loan. ( Id., ex. 2.) Under this plan, the Maunakea Appellants would pay 2.73 percent of their total unsecured debt as opposed to the zero percent the plan estimated general unsecured creditors would receive in a hypothetical chapter 7 liquidation. ( Id.)

On January 21, 2010, the Standing Trustee, Howard M.S. Hu (“Appellee”) filed an objection to the chapter 13 plan. ( Id., ex. 3.) The objection asserted that while the “debtors allege the [Maunakea Property's] value to be $166,093 [,] [t]he tax assessed value on the fee simple interest of the property is $278,500.” ( Id.) On April 15, 2010, Appellee supplemented the objection asserting that the property had a market value of $260,000. ( Id., ex. 6, at 2.) As a result, according to Appellee, the Maunakea Appellants had failed to provide the general unsecured creditors at least as much as they would receive in a chapter 7 liquidation. ( Id.) Specifically, the new homestead valuation would make an additional $46,402 available for an estimated distribution of 36.5 percent on general unsecured claims in a chapter 7 liquidation. ( Id. at 3.) Any chapter 13 plan, according to Appellee, therefore had to provide at least this amount to the general unsecured creditors per 11 U.S.C. 1325(a)(4). Because the Maunakea Appellants' plan proposed that they pay general unsecured creditors only 2.73 percent of their total unsecured debt, it was invalid. Instead, according to Appellee, the Maunakea Appellants had to pay “not less than $1,206.16 per month” to general unsecured creditors. ( Id.)

II. Gaspar Appeal

Like the Maunakea Appellants, Appellant Iver Kimlan Momi Gaspar (“Appellant Gaspar”) is a native Hawaiian debtor who voluntarily filed a chapter 13 bankruptcy petition and plan on March 5, 2010. (“Gaspar App.,” 10–CV–00433, Doc. # 12, ex. 11, at 2.) ² Appellant Gaspar's assets include a leasehold interest of real property situated at 86–292 Hokuukali Place in Waianae in the City and County of Honolulu (“Gaspar Property”). ( Id., ex. 1, Schedule A.) This property is also leased from the DHHL pursuant to the HHCA. ( See id., ex. 11, at 2.)

In her schedules, Appellant Gaspar valued the interest in the Gaspar Property to be $66,190 subject to a mortgage loan with a balance of $66,189. ( Id., ex. 1, Schedule A.) Accordingly, Appellant Gaspar did not claim an exemption for her interest in the property. ( Id., Schedule C.) Appellant Gaspar did, however, claim that the entire value of all her real and personal property was subject to exemptions under 11 U.S.C. § 522(d) or secured claims. ( Id.) The plan, like the Maunakea Appellants' plan, estimated that there would be no distribution for general unsecured creditors in a hypothetical chapter 7 liquidation. ( Id., ex. 7, at 3.)

Appellant Gaspar's net monthly income as listed on Schedules I and J was $100. ( Id., Schedules I, J.) Per the plan, Appellant Gaspar proposed making 36 monthly payments of $100, thereby paying 3.42 percent of her total unsecured debt as opposed to the zero percent the plan estimated general unsecured creditors would receive in a hypothetical chapter 7 liquidation. ( Id., ex. 2.)

On May 1, 2010, the Appellee filed an objection to the chapter 13 plan, ( id., ex. 3) and an amended objection on May 5, 2010 ( id., ex. 5). As with the Maunakea Appellants, Appellee contended that Appellant Gaspar understated the worth of her leasehold which should have been valued at $225,000. ( Id., ex. 5, at 3.) As a result, Appellant Gaspar had failed to provide the general unsecured creditors at least as much as they would receive in a chapter 7 liquidation. ( Id.) Specifically, the new homestead valuation would provide sufficient funds for Appellant Gaspar to pay off her general unsecured debt in its entirety. ( Id. at 4.) Any chapter 13 plan, according to Appellee, therefore required a 100 percent distribution to unsecured creditors per 11 U.S.C. § 1325(a)(4). Because Appellant Gaspar's plan proposed that she pay general unsecured creditors only 3.42 percent of their total unsecured debt, it was invalid.

III. Bankruptcy Court's Decision

Before the Bankruptcy Court both the Maunakea Appellants and Appellant Gaspar (collectively, “Appellants”) presented the same legal arguments in response to Appellee's objections. The Bankruptcy Court heard the objections to the Appellants' plans together.³ ( See Gaspar App., ex. 12, at 2.)

Appellants did not contest the value of their leaseholds in the Maunakea and Gaspar Properties (collectively, “the Properties”). Instead, Appellants advanced two legal theories for why the value of their leaseholds should be excluded from the 11 U.S.C. § 1325(a)(4) analysis irrespective of the value ascribed to it. (Gaspar App., ex. 7, at 22, 32; Maunakea App., ex. 7, at 22, 32.) First, Appellants argued that the leaseholds should be excluded from the Appellants' respective estates under the exception provided in 11 U.S.C. § 541(c)(2) which states that “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” (Gaspar App., ex. 7, at 22–32; Maunakea App., ex. 7, at 22–32.) The leaseholds, according to Appellants, are beneficial interests of the property the DHHL holds in trust for all native Hawaiians and therefore exempt under this provision of the code. Appellants alternatively argued that, even if the trust exclusion did not apply to the debtor's interest in a native Hawaiian homestead, the interest should still be excluded per 11 U.S.C. § 365(c).⁴ (Gaspar App., ex. 7, at 32–34; Maunakea App., ex. 7, at 32–34.)

At the hearing on June 21, 2010, the Bankruptcy Court heard the objections and issued the following oral decision:

This strikes me as exactly analogous to the situation, in fact, it is the situation where you have a Trust, and let's just say it's regular private trust, that owns a bunch of real estate and has a bunch of beneficiaries, and the Trust decides to lease out the property, and happens to lease the property to one of the beneficiaries.

In that situation, I think you would not say that the leasehold interest in the property is a beneficial interest in the Trust. There's two—two different things. You can be both the beneficiary of a Trust and a lessee of property from the Trust and the two interests in the Trust properties don't—don't become one in the same.

I don't see anything in the Hawaiian Homes Commission Act that would change that. Certainly, there's a reason to be very cautions when dealing with Hawaiian property, and I'm taking that very seriously, but I don't think that the—the act provides for any different treatment other than that.

There is the restriction on alienation of the leaseholds in the—in the Act. Those restrictions, by virtue of Section 541(...