In re Johnson

• Decision Date: 19 July 2007
• Docket Number: Adversary No. 4:06-ap-1331.,Bankruptcy No. 4:05-bk-17184E.
• Citation: 371 B.R. 380
• Parties: In re Randall Edwin JOHNSON and Michelle R. Johnson, Debtors. M. Randy Rice, Trustee, Plaintiff, v. Randall Edwin Johnson and Michelle R. Johnson, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

371 B.R. 380

In re Randall Edwin JOHNSON and Michelle R. Johnson, Debtors.

M. Randy Rice, Trustee, Plaintiff, v. Randall Edwin Johnson and Michelle R. Johnson, Defendant.

Bankruptcy No. 4:05-bk-17184E.

Adversary No. 4:06-ap-1331.

United States Bankruptcy Court, E.D. Arkansas, Little Rock Division.

July 19, 2007.

COPYRIGHT MATERIAL OMITTED

M. Randy Rice, Rice & Associates, Little Rock, AR, pro se.

Stephen B. .Niswanger, Niswanger Law Firm PLC, Little Rock, AR, for Plaintiff.

David A. Grace, Hardin & Grace, P.A., North Little Rock, AR, for Defendant.

AMENDED MEMORANDUM OPINION

AUDREY R. EVANS, Bankruptcy Judge.

This Order was originally entered on July 18, 2007, and is hereby amended only to correct a typographical error in footnote 1.

On March 22, 2007, a trial was held in the above-captioned adversary proceeding. David A. Grace appeared on behalf of the Defendants/Debtors ("Debtors"). Stephen B. Niswanger appeared on behalf of the Trustee, M. Randy Rice (the "Trustee"). Also before the Court were the following matters filed in the Debtors' case-in-chief: an Amended Motion to Compel Debtors to Turnover Records and Property filed by the Trustee (the "Amended Motion to Compel") (docket # 179); a Motion to Compel Debtors to Turnover Records filed by the Trustee ("Motion to Compel") (docket # 164); and a Response to Amended Motion to Compel Debtors to Turnover Records and Property (docket # 182) filed by the Debtors. The Debtors had also filed a Motion in Limine and Objection to Trustee's Proposed Exhibit # 6 (AP docket # 9), but the Trustee did not seek to enter such exhibit into evidence, and accordingly, the motion is moot. The Trustee's Amended Motion to Compel sought turnover of certain tax refunds; however, two days before trial, the Debtors turned over these tax refunds asserting that they had "settled" the issue. The Trustee maintains the issue was not settled although the refunds were tendered to him; accordingly, the Trustee seeks an award of attorneys fees for having to bring the Amended Motion to Compel with respect to the tax refunds. The Court ruled that the issue of attorney fees would be reserved for a later hearing.

The remaining issue before the Court is whether certvin private school tuition payments made prior to the Debtors' bankruptcy constitute property of the Debtors' estate and whether the Trustee waited too long to file his complaint with respect to those tuition payments. This matter constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E), and the Court has jurisdiction to enter a final judgment in this case. The following constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

FACTS

At trial, the parties stipulated to the following fact,:

(1) Debtors made a payment of $2,500 to Catholic High School on April 11, 2005, representing Mitchell Johnson's 9th grade tuition for the 2005-06 school year.¹

(2) Debtors made a payment of $4,318 to Christ the King School on April 12, 2005, representing Michael and Megan Johnson's tuition for the 2005-06 school year.

(3) Debtors filed a bankruptcy petition under Chapter 7 on June 3, 2005.

(4) Debtors filed their schedules and statement of affairs on July 15, 2005.²

(5) The Debtors' first meeting of creditors ("341(a) Meeting") was held August 4, 2005.

(6) A second 341(a) Meeting was held September 1, 2005.

(7) A third 341(a) Meeting was held January 19, 2006.

(8) The Trustee filed the Motion to Compel and Complaint on October 16, 2006.

(9) The Debtors tendered the tax refunds sought by the Trustee on March 20, 2007.

Trial in this matter was held March 22, 2007. In addition to the stipulated facts listed above, it was further elicited at trial that the payments to Catholic High and Christ the King were only listed on the Debtor's Statement of Financial Affairs under:

3. Payments to creditors.

a. List all payments on loans, installment purchases of goods or services, and other debts, aggregating more than $600 to any creditor made within 90 days immediately preceding the commencement of this case.

The payment to Christ the King was listed at $5,918.³ No indication was made that the payments were for the following year's school tuition rather than a debt. It was also stipulated that the tuition payments were never claimed as exempt, and were not included or intended to be included in the Debtors' repurchase of non-exempt assets.⁴

Barbara Pierce, the bookkeeper at Catholic High School, testified that before students are registered in early August, parents may seek a full refund of tuition already paid. Pierce testified that after registration, the school will usually work with parents to give them a refund of the tuition while allowing the child to remain enrolled if the parents agree to a monthly automatic draft for the tuition. Pierce explained that whether such an arrangement can be made is within the principal's discretion.

Jackie Kaufman, finance officer for Christ the King Church, testified that prior to August 1 of each year, parents can withdraw their children and receive a full refund for tuition already paid. She also testified that when parents do not wish to withdraw their children, but seek a refund of prepaid tuition, the school, in its discretion, may issue them a refund on the condition they consent to a monthly automatic draft from their bank account.

Debtor Randall Johnson testified that in prior years, he had paid tuition in a variety of ways, sometimes paying the entire year in advance, sometimes paying bi-annually, and sometimes paying monthly. Mr. Johnson was aware that he had the option to pay monthly, but also knew he could receive a discount for paying in advance.

At the August 4, 2005 341(a) Meeting, Mr. Johnson told the Trustee that the prepaid tuition payments were for the 2005-2006 school year. The Trustee testified that although he had the information regarding the prepaid tuition payments at the August 4, 2005 341(a) Meeting, there were so many other issues in the case that he did not fully comprehend that the prepaid tuition payments were property of the estate until the third and last meeting of creditors on January 19, 2006. To demonstrate the volume of issues with which he was dealing, the Trustee testified that the August 4, 2005 transcript was 97 pages long, the September 1, 2005 transcript was 74 pages long, and the January 19, 2006 transcript was 156 pages long. In addition to the complexity of the case, the Trustee attributed his delay in filing the Complaint and Motion to Amend, in part, to his belief that the debtors would want to negotiate a purchase of the tuition payments along with other non-exempt assets. The Trustee testified that he did not pick up any of the Debtors' non-exempt assets because at a 341(a) Meeting, Debtors' counsel had said, "`Well, it's our intention to try to negotiate with the Trustee to acquire nonexempt property.'" (Transcript, p. 86). The Trustee testified, "[s]o my thought also was that this potential asset — and keep in mind I wasn't certain what it was at that point anyway — but, you know, these debtors have children in school, and you know, based on [Debtors' counsel's] statement there I assumed that they would want to negotiate that asset as well." (Transcript p. 87). The Trustee did not contact either Catholic High or Christ the King about the tuition because he felt they would not turn over the funds without permission of the Debtors or a Court order, but made a demand on the Debtors for the funds in August 2006. The Trustee filed the complaint and Motion to Compel on October 16, 2006.

ANALYSIS

The Trustee asserts that the Debtors' right to a refund of certain tuition payments made prior to their bankruptcy filing constitute property of the estate, and because the Debtors did not request a refund and the tuition payments were thereafter earned, the Debtors should be required to reimburse the estate for those payments. The Debtors contend that the tuition payments were not property of their bankruptcy estate because they did not have control over such payments at the time they filed bankruptcy. The Debtors further assert that the Trustee has waited too long to demand reimbursement for the tuition payments.

A. Tuition Payments as Property of The Estate

Property of the estate is defined as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). State law determines the nature and extent of a debtor's interest in property. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). In this case, the question is whether payments made by the Debtors for private school tuition for the following school year⁵ were property of the Debtors' bankruptcy estate. Counsel for both parties and this Court found no case directly on point with respect to prepaid tuition for private school. However, similar issues are presented by cases dealing with payments to attorneys for services not yet earned and other prepaid items for services or goods not yet provided, and in those cases, courts have consistently concluded that payments made prior to filing bankruptcy for services to be provided after filing bankruptcy are indeed property of the estate. The case of In re Hines, 147 F.3d 1185 (9th Cir.1998)⁶ is particularly illustrative of this point, and sets forth the applicable law as follows:

As a legal matter that prepaid right to future legal services-because it exists at the outset of the bankruptcy case-becomes property of the debtor's estate, for subject to a few enumerated exceptions (none of which applies here) Section 541(a) provides that estate property includes "all legal or equitable interests of the debtor" in property, wherever located and by whomever held, as of the time the bankruptcy petition is filed. That statutory language reflects Congress' intent to define estate property in the broadest...