In re Pierson

• Decision Date: 25 March 2011
• Docket Number: No. 08–32793.,08–32793.
• Citation: 447 B.R. 840
• Parties: In re Stephen/Betty PIERSON, Debtor(s).
• Court: U.S. Bankruptcy Court — Northern District of Ohio

447 B.R. 840

In re Stephen/Betty PIERSON, Debtor(s).

No. 08–32793.

United States Bankruptcy Court, N.D. Ohio.

March 25, 2011.

Gordon R. Barry, Toledo, OH, for Betty J. Pierson, Stephen G. Pierson.Patti H. Bass, Tucson, AZ, Alane A. Becket, Becket & Lee LLP, Malvern, PA for eCAST Settlement Corp.Henry J. Geha, III, Roetzel & Andress, Toledo, OH, for Structured Investments Co., LLC.Thomas J. Kelley, Toledo, OH, for Directions Credit Union.Stacey A. O'Stafy, Manley Deas & Kochalski LLC, Columbus, OH, for JPMorgan Chase Bank N.A.Richard J. Szczepaniak, Toledo, OH, for Structured Investments Co., LLC.Elizabeth A. Vaughan, Office of the Chapter 13 Trustee, Toledo, OH, for John P. Gustafson.

DECISION AND ORDER

RICHARD L. SPEER, Bankruptcy Judge.

This cause comes before the Court after an Evidentiary Hearing on the Debtors' Objection to the Claim of Structured Investments Company, Claim No. 28. At the conclusion of the Hearing, the Court took the matter under advisement so as to afford the opportunity to further consider the evidence and arguments presented by the Parties. The Court has now had this opportunity, and for the reasons now explained, finds that the Debtors' Objection is Overruled as provided herein.

FACTS

The Debtor, Stephen Pierson, is entitled to receive a military pension for the remainder of his life. The pension benefits are received on a monthly basis. In the year 2000, the Debtor answered an advertisement placed by the Claimant, Structured Investments Company, LLC. In the advertisement, Structured Investments offered individuals, such as Mr. Pierson, the opportunity to exchange their military pension benefits for a lump-sum payment.

On November 24, 2000, Mr. Pierson and Structured Investments executed an agreement, entitled “Annuity Utilization Agreement.” In this Agreement it was set forth, in bold, that “This contract is not a loan.” It was also provided that the law of California would govern all aspects of the Parties' Agreement.

Under their Agreement, Mr. Pierson agreed that he would pay Structured Investments the monthly sum of $849.00, the source of which was his monthly military pension. These payments would be made for 96 months, or 120 months if there was a default. In exchange, the Debtor received a lump-sum distribution from Structured Settlements in the amount $28,810.00. The Agreement provided that the Debtor intended to use the lump-sum distribution for the following purpose: “home improvements & debt consolidation.”

The Parties later made two addenda to their Agreement. The first was made on April 6, 2005, and was based upon Mr. Pierson receiving an additional distribution of $15,156.00. In exchange, Mr. Pierson's monthly payment, as paid from his military pension, was increased to $966.78 per month. The Agreement's maturity date was also extended.

On June 21, 2007, a second addendum was made to the Parties' Agreement under which Mr. Pierson received a third distribution of $9,344.91. In exchange for this distribution, Mr. Pierson agreed to pay from his military pension the sum of $1,032.09 per month. In both of the addendums, it was provided that the terms of the Parties' original agreement remained in effect.

In order to effectuate their transaction, the Parties' Agreement provided that Mr. Pierson would establish a deposit account, and that he would cause his military pension to be placed into the account. The Agreement then set forth that Structured Investments was granted a security interest in any deposit account used by Mr. Pierson to maintain his military pension. Thereafter, consistent with their Agreement, Mr. Pierson's military pension was electronically transferred to a deposit account maintained in Mr. Pierson's name; once the funds were on deposit, Structured Investments caused a debit of the account in the amount contractually due under the Parties' Agreement.

On May 30, 2008, Mr. Pierson, together with his spouse, filed a petition in this Court for relief under Chapter 13 of the United States Bankruptcy Code. In their bankruptcy filing, the Debtors disclosed an unsecured obligation to Structured Settlements in the amount of $58,824.00. Since filing for bankruptcy relief, Mr. Pierson no longer has his military pension deposited into the account from which Structured Investments was making its debits. At the present, said deposit account holds little, if any, funds.

On October 2, 2008, the Claimant, Structured Investments, filed a proof of claim against the Debtors' estate in the amount of $84,631.38. In its proof of claim, the Claimant set forth that its claim was secured and that it arose from its “Annuity Utilization Agreement” with the Mr. Pierson, a copy of which was attached to its proof of claim. The Debtors filed an objection to the claim, asking that the claim be disallowed in its entirety because the “claim is void and unenforceable as a matter of law.” (Doc. No. 94). At the Hearing held on their objection, the Debtors also asked that, if the claim of Structured Investments is allowed, the amount of the claim be reduced to the sum of $58,824.00, and that the claim be treated as unsecured. (Doc. No. 47).

After the Debtors filed their objection, settlement discussions between the Parties took place. Eventually a proposed Stipulation and Order was drafted and exchanged between the Parties. In substance, the proposed Stipulation and Order provided that the claim of Structured Investments would be treated as a separate class of unsecured creditors and that they shall receive the fixed amount of $40,000.00 on their claim. The Stipulation and Order, however, was never signed by any of the Parties or their legal counsel; nor was the Stipulation and Order ever entered by the Court.

DISCUSSION

Before this Court is the Debtors' Objection to Claim No. 28 filed by the Claimant, Structured Investments Company. A determination concerning the allowance or disallowance of a claim against the estate is deemed to be a “core proceeding” over which this Court has been conferred with the jurisdictional authority to enter final orders and judgments. 28 U.S.C. § 157(b)(2)(B).

A timely filed proof of claim is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). If, as here, an objection to a claim is made, subsection (b) of § 502 directs that a court is to determine the amount of the claim as of the date the petition was filed. Thereafter, § 502(b) provides that a court “shall allow such claim ... except to the extent that” any of the exceptions set forth in subsection (b) are applicable.

The overall burden of persuasion to establish the allowance and amount of a claim in bankruptcy is placed upon the claimant. Morton v. Morton (In re Morton), 298 B.R. 301, 307 (6th Cir. BAP 2003). As an initial matter, however, Bankruptcy Rule 3001(f) provides that a “proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” All indications show this Rule to be applicable, with the claim filed by Structured Investments complying with the applicable rules governing the filing of proofs of claim. For purposes of their objection, therefore, the Debtors are charged first with coming forth with evidence contradicting the proof of claim filed by Structured Investments. See, In re Morton, 298 B.R. at 307. (“debtor has the initial burden of establishing a colorable challenge to a properly filed proof of claim”).

In their objection, the Debtors contested both the amount and the allowance of the proof of claim filed by Structured Investments. The Debtors also challenged the secured status of Structured Investments' claim. Because only allowed claims are entitled to be paid from estate assets, any determination concerning the amount and status of the claim held by Structured Investments only becomes relevant if its claim is first allowed. Accordingly, whether Structured Investments holds an allowed claim will be the first issue addressed.

Section 502(b) sets forth nine grounds for a claim's disallowance. The grounds for a claim's disallowance are exclusive and are contained in paragraphs (1) through (9) of § 502(b). B–Line, LLC v. Kirkland (In re Kirkland), 379 B.R. 341, 345 (10th Cir. BAP 2007). See also Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 1204, 167 L.Ed.2d 178 (2007) (“where a party in interest objects, the court ‘shall allow’ the claim ‘except to the extent that’ the claim implicates any of the nine exceptions enumerated in § 502(b).”).

The Debtors' objection to the proof of claim filed by Structured Investments relies on § 502(b)(1) as the basis for the claim's disallowance. Section 502(b)(1) provides, in relevant part: a creditor's proof of claim may be disallowed when “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law ...” According to the Debtors, this provision is applicable because Structured Investments' “claim is void and unenforceable as a matter of law.” (Doc. No. 94). As the legal basis for this position, the Debtors contend that their Agreement with Structured Investments was an impermissible assignment of Mr. Pierson's military pension, thereby making the transaction void under applicable law.

Assignments of personal earnings, whether it involves a military pension, as is the situation here, or simply a person's wages, are not favored. See In re Moorhous, 108 F.3d 51, 55–56 (4th Cir.1997) (public policy prohibits assignment of military retired pay). See also R.C. 3121.31–33 (limiting wage assignments). Based on this, the permissibility of wage assignments and assignments of other personal earnings is normally governed by statute, with many statutes either prohibiting or constraining a person's ability to assign their wages. In re Moorhous, 108 F.3d 51 at 56 (absent authorizing statute, assignment of wages is invalid). For this purpose,...