In re Porrett

• Decision Date: 10 March 2016
• Docket Number: Bankruptcy Case No. 09–03881–JDP
• Parties: In re: Gary A. Porrett and Jennifer S. Porrett, Debtors.
• Court: U.S. Bankruptcy Court — District of Idaho

547 B.R. 362

In re: Gary A. Porrett and Jennifer S. Porrett, Debtors.

Bankruptcy Case No. 09–03881–JDP

United States Bankruptcy Court, D. Idaho.

Signed March 10, 2016

Patrick Geile, FOLEY FREEMAN, PLLC, Meridian, Idaho, Attorney for Debtors.

Noah Hillen, Boise, Idaho, Chapter 7 Trustee.

MEMORANDUM OF DECISION

Honorable Jim D. Pappas, United States Bankruptcy Judge

Introduction

In this chapter 7¹ case, the Court addresses an issue about the scope of property included in the bankruptcy estate.

Debtors Gary Alan Porrett and Jennifer Sue Porrett ("Debtors"), together with trustee Noah Hillen ("Trustee"), filed a Joint Motion for Determination of Property of the Bankruptcy Estate ("the Joint Motion"). Dkt. No. 59. In the Joint Motion,² the parties asked the Court to settle their disagreement over a knotty issue: whether an $8,120.23 payment from Wells Fargo Bank, now held by Trustee, is property of the bankruptcy estate to be distributed to creditors, or instead, should be released to Debtors. To support their positions, the parties submitted a stipulation of facts, as well as briefs. Dkt. Nos. 60, 63, 64, 65. The Court conducted a hearing on the Joint Motion on February 23, 2016 at which Debtors' counsel and Trustee offered oral arguments. Dkt. No. 66. Having taken the issues under advisement, and having duly considered the stipulated facts, briefs, and arguments of counsel, as well as the applicable law, this Memorandum constitutes the Court's findings, conclusions, and explains the reasons for its disposition of the Joint Motion. See Rules 9014, 7052.

Facts³

Debtors obtained a home mortgage loan from Wells Fargo on June 25, 2007. On December 9, 2009, Debtors filed the chapter 7 petition commencing this case. On June 10, 2010, Wells Fargo filed a motion for relief from the automatic stay to foreclose on Debtors' home, alleging that Debtors were delinquent in making payments on the loan; that Debtors had not provided Wells Fargo adequate protection of its interest in the home; and further, that Debtors' intention was to surrender the home. Dkt. No. 21. On July 2, 2010, without objection from Debtors or the former chapter 7 trustee, the Court entered an order for stay relief allowing Wells Fargo to foreclose. Dkt. No. 26.⁴

On February 17, 2011, Debtors' bankruptcy case was closed and the trustee was discharged. Dkt. No 41.

A few months later, on July 20, 2011, in proceedings pending before the Board of Governors of the Federal Reserve, Wells Fargo agreed to the entry of a consent order ("the Consent Order"). Exhibit A, Dkt. No. 60. In those proceedings, the federal regulators alleged that Wells Fargo had engaged in prohibited, sharp lending practices in making loans to its borrowers between 2006 and 2008. In particular, it was alleged that Wells Fargo had diverted otherwise qualified borrowers away from "prime" loans, into more expensive "nonprime" loans, to their financial detriment. Wells Fargo denied it had acted improperly, and through the terms of the Consent Order, the dispute was settled. Among other actions, the Consent Order required Wells Fargo to identify those borrowers who may have been injured as a result of taking out nonprime loans during the relevant time window, and to offer them what the Consent Order referred to as "restitution" or "remedial compensation." Consent Order at 5.⁵

Apparently, Debtors were identified by Wells Fargo as borrowers entitled to a compensatory payment under the Consent Order. After learning that Debtors may be entitled to a payment under the Consent Order,⁶ in April 2015, the U.S. Trustee filed a motion to reopen Debtors' bankruptcy case and to appoint a trustee to administer Debtors' settlement claim, which had not been listed in Debtors' schedules. Dkt. No. 43. The Court granted the motion, reopened the bankruptcy case, and Trustee was appointed. Dkt. Nos. 44, 45.

On July 31, 2015, Trustee filed a motion to approve a compromise between Wells Fargo and the bankruptcy estate. Mot. to Approve Compromise, Dkt. No. 50. In the motion, Trustee sought authority to accept Wells Fargo's offer to pay him $8,120.23 (the "Payment") pursuant to the Consent Order in exchange for his execution of an "Acceptance of Compensation and Release" releasing Wells Fargo from any potential claims arising from its loan to Debtors. Id. at 2–3 and Exhibit A; Trustee Status Report at ¶¶ 2–3, Dkt. No. 49.

Debtors objected to the compromise motion, arguing that, because the Consent Order was entered post-bankruptcy, the Payment from Wells Fargo under the Consent Order was not property of the estate. Thus, they urged, Trustee was not entitled to settle any claim against Wells Fargo and the compromise motion should be denied. Obj. to Mot. to Approve Compromise at 1–2, Dkt. No. 53.

At a hearing on September 15, 2015, the Court granted the motion and approved the compromise with Wells Fargo. However, in doing so, the Court allowed the parties to reserve their rights to thereafter ask the Court to determine if the Payment was property of the estate, and required Trustee to hold the Payment in trust until the Court resolved whether it was property of the bankruptcy estate. See Min. Entry, Dkt. No. 55; and Order Granting Mot. to Approve Compromise, Dkt. No. 56 at ¶ 2. The parties then submitted the Joint Motion. Dkt. No. 60.

Issue

To resolve the Joint Motion, the Court must decide whether the Payment received by Trustee from Wells Fargo in accordance with the post-bankruptcy Consent Order to resolve claims arising from Wells Fargo's prebankruptcy lending practices is property of the estate. The Court concludes that the Payment is indeed property of this bankruptcy estate for the reasons that follow.

Analysis and Disposition

I.

As a general rule, the Code provides that the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case". § 541(a)(1). "The scope of the bankruptcy estate is extremely broad, including both tangible and intangible property." In re P e grom, 395 B.R. 692, 695 (Bankr.D.Idaho 2008) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). But, the scope of the estate is not so broad as to "expand a debtor's rights in property over what existed as of the date of filing." Id. (quoting Farmers Ins. Group v. Krommenhoek (In re Hiatt), 2000 WL 33712218, 00.3 IBCR 131, 132 (Bankr.D.Idaho 2000).

Despite the temporal limitation in § 541(a)(1), property of the estate also includes certain kinds of property coming into existence after bankruptcy. For example, the estate will also include "[p]roceeds, product, offspring, rents, or profits from property of the estate" and "any interest in property that the estate acquires after the commencement of the case." § 541(a)(6), (a)(7).

"According to the legislative history of [§ 541(a)(6) ], ‘proceeds' is not to be defined as narrowly as in the Uniform Commercial Code." In re Hyman, 123 B.R. 342, 346 (9th Cir. BAP 1991)aff'd, 967 F.2d 1316 (9th Cir.1992) (citing S.Rep. No. 989, 95th Cong.2d Sess. 82, (1978); H.R.Rep. No. 595, 95th Cong. 1st Sess. 368 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5868, 6323). The result is a meaning that is "exceedingly broad." Id. (citing In re Calder, 94 B.R. 200, 201 (Bkrtcy.D.Utah 1988).

Furthermore, "Congress enacted § 541(a)(7) to clarify its intention that § 541 be an all-embracing definition and to ensure that property interests created with or by property of the estate are themselves property of the estate." MacKenzie v. Neidorf, 534 B.R. 369, 372 (9th Cir. BAP 2015) (quoting TMT Procurement Corp. v . Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512, 524–25 (5th Cir.2014) and citing H.R. Rep. 95–595, 549, reprinted in 1978 U.S.C.C.A.N. 5963, 6455 & 6523–24). Property acquired by the estate after commencement of the bankruptcy case is included in the estate under § 541(a)(7) if it was created with or by property of the estate; acquired in the estate's normal course of business; or is otherwise traceable to, or arises out of, any prepetition interest included in the bankruptcy estate. Id. at 372 (citations omitted).

As the party arguing that the Payment is property of the estate, Trustee bears the burden of proof. Id. (citations omitted).

II.

Trustee argues that the Payment was made to him by Wells Fargo in accordance with the Consent Order, to compensate Debtors as borrowers who were subjected to Wells Fargo's prebankruptcy sharp lending practices. Because any claim by Debtors against Wells Fargo would have arisen in 2007 when they received the loan, that claim would constitute property of the estate under § 541(a)(1). Since the Payment effected by the Consent Order was clearly intended as compensation for Debtors' claim, the Payment is also property of the estate under § 541(a)(7). To support his characterization of the purpose for the Payment, Trustee points out that, as a condition of his receipt of the Payment, and with the approval of the regulators, Wells Fargo required Trustee to release the lender from "any and all claims relating to [Wells Fargo's] origination of a more expensive mortgage loan [to Debtors] that the loan for which [they] potentially qualified." Acceptance of Compensation and Release at 2, Dkt. No. 50 Exh. A; Trustee's Memo. at 2–4, Dkt. No 64.

Debtors contest Trustee's attempts to tie the Payment to prebankruptcy events. Instead, Debtors argue that the Payment is not property of the estate because any right to receive it arose solely as a result of the 2011 Consent Order, which was entered long after their 2009 bankruptcy case was commenced. They note that there is no evidence that Wells Fargo in fact engaged in any wrongful conduct regarding their particular loan. Debtors' Memo at 4, Dkt. No. 63. In effect, Debtors argue that they are merely the indirect beneficiaries of the government's regulatory action, and they analogize these facts to those in cases involving the...