In re Cohen

Citation305 B.R. 886
Decision Date24 February 2004
Docket NumberAdversary No. 02-03586-tmb.,BAP No. OR-03-1306-KMuB.,Bankruptcy No. 02-35671-tmb13.
PartiesIn re Lewis Irving COHEN and Peggy Lynn Chesnut-Cohen, Debtors. Christine Houston and Helen Getsey, Appellants, v. Kenneth S. Eiler, Chapter 7 Trustee; IRA Freydkis; Bank of Astoria; Lewis Irving Cohen; Peggy Lynn Chesnut-Cohen; Appellees.
CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

Tara J. Schleicher, Farleigh, Wada & Witt, Portland, OR, for Christine Houston and Helen Getsey.

Robert Vanden Bos, Vanden Bos & Chapman, Portland, OR, for Lewis I. Cohen and Peggy Chesnut-Cohen.

Before KLEIN, MUND,1 and BRANDT, Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

The substantive question is whether appellants' contractual right to receive funds from the settlement of a tort action can evade the trustee's "strong-arm" avoiding power either as an automatically-perfected "payment intangible" under Revised Article 9 of the Uniform Commercial Code ("UCC"), or as an enforceable equitable assignment not subject to UCC Article 9.

The jurisdictional question is whether chapter 13 debtors have standing to exercise the trustee's avoiding powers for the benefit of the estate.

We conclude that chapter 13 debtors have standing to exercise trustee avoiding powers for the benefit of the estate and, agreeing with the bankruptcy court that the interest in the settlement fund reflects neither a UCC Revised Article 9 "payment intangible" nor an equitable assignment under Oregon law, we AFFIRM the judgment under the trustee's "strong-arm" powers avoiding appellants' interest in the tort settlement proceeds.

FACTS

In 1999, three years before filing a bankruptcy case, Lewis Cohen and Peggy Chesnut-Cohen were plaintiffs in an automobile personal injury action in a California superior court.

Fred Houston, a neighbor and a principal in "The Investment Partnership" (which factors accounts receivable for businesses and does not ordinarily loan money to individuals), agreed to have "The Investment Partnership" make a loan to the Cohens to help cover expenses associated with the automobile accident.

"The Investment Partnership" and the Cohens executed a "Straight Promissory Note Secured by Deed of Trust of the Same Date and Settlement Lien Agreement of the Same Date" ("Note 1") dated May 28, 1999, for $53,577 plus 13% interest per annum.

As security, the Cohens pledged anticipated proceeds of the tort claim. Thus, Note 1 incorporated a lien agreement in which the Cohens' tort lawyer was directed to pay "The Investment Partnership" $53,577, plus interest, from proceeds of the suit. Note 1 was amended October 28, 1999, to change the principal to $66,577, reflecting an additional loan by "The Investment Partnership" of $10,000, plus a $3,000 fee.

"The Investment Partnership" subsequently transferred Note 1 to Christine Houston and Helen Getsey ("appellants"). The transfer to appellants was accomplished by way of a new substituted note and lien agreement as between the Cohens and Houston and Getsey. Thus, Note 1 was replaced when the Cohens executed a "Straight Promissory Note Secured by Settlement Lien Agreement" ("Note 2") dated November 20, 2001, in favor of appellants for $83,877 plus interest. Note 2 also incorporated a lien agreement directing the Cohens' tort lawyer to pay appellants $83,877 plus interest from the proceeds of the tort claim. Note 2 included as principal unpaid interest on Note 1.

Note 2 was for a one-year term, with interest payments due monthly thereafter until the principal and interest were paid in full. Note 2 specified that the "loan may be paid sooner, upon borrower receiving money from Insurance Settlement."

Although the Cohens were residents of California at the time of the execution of Note 1, they soon moved to Oregon and were residents of Oregon at the time of the execution of Note 2.

The Cohens filed a chapter 13 bankruptcy on May 24, 2002, and soon thereafter settled the tort claim for $195,000.

In an effort to use the proceeds to help fund their plan, debtors proposed to contest the secured status of appellants in the proceeds of the personal injury suit. The chapter 13 plan provided that the order of confirmation would not preclude debtors from suing to avoid appellants' liens.2

The chapter 13 trustee executed an "Assignment of Trustee's Avoidance Claims to Debtors," according to the terms of which the trustee purported to assign the "Estate's rights, powers, and standing to avoid transfers" under 11 U.S.C. §§ 544-48, in exchange for the Cohens' promise to pay net proceeds to the trustee. The court did not expressly approve the assignment.

The Cohens filed an adversary proceeding using the trustee's § 544 "strong-arm" powers to avoid the security interest of appellants in the settlement proceeds, contending that it was an unperfected security interest.3 The defense was that the interest in the proceeds was either: (1) absolute ownership due to an equitable assignment; or (2) a security interest based on an assignment of a "payment intangible" that is automatically perfected under Revised Article § 9-309 without need for filing.

On summary judgment, the bankruptcy court ruled that the "secured" interest in the settlement proceeds constituted an interest in a general intangible that could only be perfected by filing a UCC financing statement, that it was not a "payment intangible," and that it was not an equitable assignment. Because no financing statement was filed, the security interest was unperfected and avoidable per 11 U.S.C. § 544(a).

The creditors appealed. The case was later converted to chapter 7. The chapter 7 trustee, Kenneth S. Eiler, took over the appeal from the Cohens as real party in interest.

JURISDICTION

The bankruptcy court had subject-matter jurisdiction per 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).

ISSUES

1. Whether the chapter 13 debtors had standing to maintain an action based on the trustee's avoiding powers.

2. Whether appellants' interest in the settlement proceeds was an enforceable equitable assignment of title to the proceeds.

3. Whether appellants' interest in the settlement proceeds was a security interest in a UCC Revised Article 9 "payment intangible" that is automatically perfected without filing.

STANDARD OF REVIEW

We review summary judgment de novo. Paine v. Griffin (In re Paine), 283 B.R. 33, 36 (9th Cir. BAP 2002). We are entitled to raise the jurisdictional question of standing sua sponte, which question we consider de novo. Menk v. LaPaglia (In re Menk), 241 B.R. 896, 903 (9th Cir. BAP 1999).

DISCUSSION

We must resolve the jurisdictional question of chapter 13 debtor standing to exercise trustee avoiding powers,4 before addressing the substantive questions regarding the § 544 "strong arm" powers and Revised Article 9.

I

The issue of the standing of chapter 13 debtors to exercise trustee avoiding powers for the benefit of the estate is an open question in this circuit.

Although the debtors' chapter 13 plan provides that they will prosecute the avoiding action and use net litigation proceeds to help fund the plan, a plan term does not create standing if none otherwise exists.

The contractual "assignment" of avoiding powers that the chapter 13 trustee executed does not suffice without explicit court approval.5

Nor does the intervention of the chapter 7 trustee attendant to the conversion of the case that occurred after the judgment was entered necessarily cure any defect in standing.

The general rule regarding standing in the context of intervention is that intervention by one with standing does not retroactively cure a jurisdictional standing defect. United States ex rel. Texas Portland Cement Co. v. McCord, 233 U.S. 157, 163-64, 34 S.Ct. 550, 58 L.Ed. 893 (1914); Fuller v. Volk, 351 F.2d 323, 328 (3d Cir.1965); cf., Benavidez v. Eu, 34 F.3d 825, 829 n. 4 (9th Cir.1994); 7C Charles A. Wright, Arthur R. Miller & Mary K. Kane, Federal Practice & Procedure § 1917 (2d ed.1986). Thus, our jurisdiction is doubtful unless the chapter 13 debtors have independent standing to bring the avoiding action.6

A

The problem of whether chapter 13 debtors can prosecute trustee avoiding actions for the benefit of the estate is a subject of considerable controversy.

No court of appeals has squarely decided whether chapter 13 debtors have standing to exercise trustee avoiding powers for the benefit of the estate. Lower courts are divided on the question. See, e.g., Wood v. Mize (In re Wood), 301 B.R. 558, 561-63 (Bankr.W.D.Mo.2003) (cataloguing cases); ALAN N. RESNICK, BANKRUPTCY LAW MANUAL § 10:8 (5th ed.2003); KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY 3d §§ 52.1-53.1 (2000 & Supp.2002) ("LUNDIN").

In contrast, there is substantial agreement among the courts that § 522(h) confers standing on all debtors, including chapter 13 debtors, to assert trustee avoiding powers to recover property the debtor can exempt in whole or part.

11 U.S.C. § 522(h);7 DeMarah v. United States (In re DeMarah), 62 F.3d 1248, 1250 (9th Cir.1995); accord Realty Portfolio, Inc. v. Hamilton (In re Hamilton), 125 F.3d 292, 295-98 (5th Cir.1997); LUNDIN § 53.1. Any such recovery is preserved for the benefit of the debtor to the extent of the available exemption, with the balance preserved for the benefit of the estate. 11 U.S.C. § 522(i)(2). Thus, the debtor can attack a $1 million avoidable transfer under § 522(h) but only if there is some amount of the recovery — even $1.00 — that the debtor can exempt.

Even where there is the hook of at least $1.00 of exempt proceeds, however, the § 522(h) authorization to exercise trustee avoiding powers is of no utility where the original transfer by the debtor was either concealed or, as here, voluntary. 11 U.S.C. § 522(g)(1). In such cases, trustee avoiding powers can only be exercised...

To continue reading

Request your trial
55 cases
  • In re Dawson
    • United States
    • United States Bankruptcy Courts. District of Columbia Circuit
    • April 9, 2008
    ...(5th Cir.2000); Hansen v. Green Tree Servicing, LLC (In re Hansen), 332 B.R. 8 (10th Cir. BAP 2005); but see Houston v. Eiler (In re Cohen), 305 B.R. 886, 897 (9th Cir. BAP 2004). 19. In the floor statements to § 1303 it was Section 1303 of the House amendment specifies rights and powers th......
  • In re Hansen
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit
    • October 14, 2005
    ...short, while the arguments for statutory standing have some superficial appeal, the weight of authority adopts the "no standing" rule.38 The Cohen court neither cites nor addresses Hartford Underwriters. We think the "no standing" rule is the better view, in light of the plain language of §......
  • In re Funches, Bankruptcy No. 07-13883ELF.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • February 5, 2008
    ...trustee's avoidance powers without regard to 11 U.S.C. § 522(g)(1) and (h).38 The most thorough analysis is found in In re Cohen, 305 B.R. 886, 895-90 (9th Cir. BAP 2004). In Cohen, the court employed a "holistic" approach to construction of the Code and, after considering the interrelation......
  • Tyler v. Banks (In re Tyler)
    • United States
    • United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia
    • June 6, 2013
    ...trustee does not mean that there are no other powers that the debtor holds concurrently with the trustee.” Houston v. Eiler (In re Cohen), 305 B.R. 886, 894 (9th Cir. BAP 2004). These courts look to the legislative history behind § 1303, which indicates that this list of exclusive powers “d......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT