In re Coby R. Duffin And Jeanie Marie Duffin

• Decision Date: 19 September 2011
• Docket Number: Bankruptcy No. 09–28879.,BAP No. UT–10–023.
• Citation: 457 B.R. 820
• Parties: In re Coby R. DUFFIN and Jeanie Marie Duffin, Debtors.Stephen W. Rupp, Trustee, Appellant,v.Coby R. Duffin and Jeanie Marie Duffin, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

457 B.R. 820

In re Coby R. DUFFIN and Jeanie Marie Duffin, Debtors.Stephen W. Rupp, Trustee, Appellant,

v.Coby R. Duffin and Jeanie Marie Duffin, Appellees.

BAP No. UT–10–023.

Bankruptcy No. 09–28879.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Sept. 19, 2011.

Stephen W. Rupp, Trustee (Jamie L. Nopper and Michelle W. Kasteler of McKay, Burton & Thurman, Salt Lake City, UT, with him on the brief), for Appellant.Geoffrey C. Dietrich of G.C. Dietrich Law, P.C., Salt Lake City, UT, for Appellees.Before CORNISH, Chief Judge, BROWN, and KARLIN, Bankruptcy Judges.BROWN, Bankruptcy Judge.

The issue before this Court is whether the bankruptcy court properly allowed debtors Coby and Jeanie Duffin (“Debtors”) to claim a Utah state law exemption in proceeds and avails of their unmatured life insurance policies, including payments made on the policies in the year preceding their bankruptcy filing. Appellant Stephen W. Rupp, Chapter 7 trustee (“Trustee”) contends the bankruptcy court incorrectly interpreted the Utah exemption statute and that the exemption should not extend to premium payments made within one year of commencement of Debtors' bankruptcy case. For the following reasons, we REVERSE the decision of the bankruptcy court.

I. Background

The Debtors filed a Chapter 7 bankruptcy petition on August 20, 2009. In their schedules, the Debtors disclosed ownership of two $250,000 life insurance policies, having a combined cash value of $8,500. The parties stipulated that, during the year prior to the petition date, Debtors made monthly premium payments on the policies totaling $2,712. The Debtors claimed an exemption for the policies under a Utah statute that provides an exemption for the “proceeds and avails of any unmatured life insurance contracts owned by the debtor ... excluding any payments made on the contract during the one year immediately preceding a creditor's levy or execution.” ¹ The Trustee objected to the Debtors' claimed exemption, arguing that, while the value of the policies was covered under the statute, the exemption did not extend to the $2,712 the Debtors paid in premiums in the year prior to bankruptcy. The Debtors apparently conceded that a portion of the $2,712 was non-exempt under the statute, but argued that only those premium payments that were allocated to the investment portion of the policies should be excluded. The bankruptcy court rejected both parties' arguments, holding that the Debtors were entitled to claim an exemption for the entire $2,712, along with the value of the policies. The Trustee moved for post-judgment relief, which the bankruptcy court also denied.

II. Standard of Review

This appeal involves interpretation of a statute, which is a matter of law this Court reviews de novo.² A bankruptcy court's denial of a motion to alter or amend a judgment under Rule 59(e) or denial of a motion to reconsider under Rule 60(b) is reviewed for an abuse of discretion.³ “An abuse of discretion may occur if a court bases its ruling on a view of the law that is erroneous.” ⁴

III. Bankruptcy Court Decision

The bankruptcy court issued two written orders regarding the Debtors' claimed exemption. In the first order (“Duffin I”), the court rejected the Trustee's interpretation of the Utah life insurance exemption.⁵ The court held that the plain language of the statute only excludes payments made on life insurance contracts during the one year immediately preceding “a creditor's levy or execution.” No actual creditor had executed or levied on the Debtors' assets prior to their bankruptcy filing.⁶ Following a strict interpretation, the court declined to read additional “triggering events,” such as a bankruptcy filing, into the second clause of the statute. The bankruptcy court compared the life insurance exemption to a neighboring subsection of the Utah exemptions statute, which grants an exemption in funds contributed into various types of retirement plans, except for any amount contributed within one year “before a debtor files for bankruptcy.” ⁷ Based on the rule of statutory construction known as expressio unius est exclusio alterius, the bankruptcy court found it significant that the Utah legislature included an explicit bankruptcy filing limitation in one section of the same statute, but omitted it in the life insurance subsection. The bankruptcy court concluded that this disparity in statutory language dispelled any argument that the Utah legislature meant to include the event of a bankruptcy filing as a triggering event for the exception to the life insurance exemption. In fact, the retirement plan exemption subsection preceded the present version of the life insurance exemption.⁸ It is, therefore, reasonable to assume that the Utah legislators made a conscious choice to refer to “levy and execution” rather than a “bankruptcy filing,” because they had already made reference to a bankruptcy filing in the earlier retirement plans subsection.

Shortly after the issuance of Duffin I, the Trustee filed his Motion under Federal Rules of Civil Procedure 59 and 60 seeking relief from, or to alter or amend, the judgment (“Relief Motion”).⁹ In the Relief Motion, the Trustee complained that Duffin I was at odds with the Debtors' prior concession that some portion of the premium payments was not exempt, and that the Trustee had not been given an opportunity to argue the applicability of his strong arm powers under 11 U.S.C. § 544.¹⁰ The bankruptcy court held a hearing on the Relief Motion, during which the Trustee was given a full opportunity to present his arguments under § 544. The court subsequently issued a second order denying the Relief Motion (“ Duffin II ”). ¹¹

In Duffin II bankruptcy court reiterated its previous interpretation of Utah's exemption statute. The bankruptcy court also rejected the Trustee's argument that his powers under § 544(a)(2) triggered the one-year exception to the Utah life insurance exemption. The court reasoned that § 544(a)(2) does not give the Trustee the powers of a creditor that has levied or executed on the debtor's property. Rather, the court held that it gives the Trustee the rights and powers of a creditor that obtains a writ of execution “that is returned unsatisfied.” ¹² If a writ of execution is returned unsatisfied, the bankruptcy court concluded, it means there was no property available for levy, no lien was created on any property, and the creditor has exhausted his legal remedies. As such, the court concluded that the Trustee's powers under § 544(a)(2) could not invoke the one-year exception under Utah law.

Further, the bankruptcy court emphasized that a trustee's powers under § 544(a) are purely hypothetical and based on fictional events, whereas the exemption statute comes into play as the result of actual events. The court disagreed with the general proposition that § 544, which gives a trustee avoidance powers, provides a basis for objecting to exemptions. The court found a conflict between the spirit of § 522(b), which specifically allows debtors to claim state law exemptions, and employing the fiction created by § 544 to defeat those very exemptions.

IV. DiscussionA. Due Process

On appeal, the Trustee's first argument is that he was denied due process of law when the bankruptcy court issued Duffin I because that order allowed the Debtors' exemption based on a interpretation of the Utah statute that was not argued by the parties. The Trustee characterizes this as the bankruptcy court issuing an order “based solely on a new issue that was raised sua sponte by the court, not previously raised or brought up in the parties' pleadings or at hearing, and not otherwise briefed or heard.” ¹³

In this context, the Court views as inapplicable the general principle that “[a] court may not, without the consent of all persons affected, enter a judgment which goes beyond the claim asserted in the pleadings.” ¹⁴ The bankruptcy court's decision did not go beyond the claim asserted in the pleadings. Instead, both the Duffin I and Duffin II orders addressed whether Debtors were entitled to claim an exemption under Utah Code Ann. § 78B–5–505(1)(a)(xiii). The pleadings required the bankruptcy court to interpret the statute and that is precisely what the court did. The fact that the bankruptcy court ultimately interpreted the exemption statute in a manner at odds with the interpretation offered by both parties does not constitute a denial of due process.¹⁵ Moreover, the bankruptcy court was not bound by the Debtors' apparent concession that they could not exempt all premium payments made in the year prior to bankruptcy. “[I]t is well-settled that a court is not bound by stipulations of the parties as to questions of law.” ¹⁶ To the extent the Trustee is arguing he was denied the opportunity to make arguments regarding the application of § 544, that notion is belied by the record. The Trustee raised his § 544 arguments in his Relief Motion and presented oral arguments to the bankruptcy court at the hearing on that Motion. The bankruptcy court then fully and carefully considered the Trustee's arguments on the merits in Duffin II. Thus, the bankruptcy court afforded the Trustee an adequate opportunity to be heard and this Court holds the basic requirements of due process have been satisfied.

B. “Execution or Levy”

The key phrase of the Utah exemption statute at issue here is “excluding any payments made on the contract during the one year immediately preceding a creditor's levy or execution.” ¹⁷ Like the bankruptcy court, this Court sees no ambiguity in this clause. The Utah exemption statute defines the term “levy” as “the seizure of property pursuant to any legal process issued for the purpose of collecting an unsecured debt.” ¹⁸ The term “execution” is not specifically defined by the exemption statute, but must mean something different from levy.¹⁹ “[W]hen a word is not defined by statute, we normally construe it in accord with its...