In re Richardson

• Decision Date: 08 October 2002
• Docket Number: No. 97-21561-13.,97-21561-13.
• Citation: 283 B.R. 783
• Parties: In re John Marceau RICHARDSON and Dorothy Evelyn Richardson, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

Page 783

283 B.R. 783

In re John Marceau RICHARDSON and Dorothy Evelyn Richardson, Debtors.

No. 97-21561-13.

United States Bankruptcy Court, D. Kansas.

October 8, 2002.

COPYRIGHT MATERIAL OMITTED

Eric C. Rajala, Overland Park, KS, for Debtors.

MEMORANDUM OPINION¹

JOHN T. FLANNAGAN, Bankruptcy Judge.

John and Dorothy Richardson filed their Chapter 13 petition on June 6, 1997. Their plan was confirmed on October 10, 1997. Ten months later, and fourteen months after their case was filed, their adult son died, leaving them $400,000 as beneficiaries of his life insurance policy. The Richardsons claimed the insurance proceeds exempt under 11 U.S.C. § 522(b), which provides that "an individual debtor may exempt from property of the estate property listed in ... this subsection." (Emphasis added.) No one objected to the exemption.

Are the insurance proceeds property of the estate that can be exempted under § 522(b)? The court answers in the negative. Although no one objected to the exemption, before property can be exempted from property of the estate, it must first be property of the estate. As this opinion will explain, these insurance proceeds were never property of the estate, thus they cannot be exempted from it. The result is that the insurance proceeds are outside the estate and not within reach of the trustee for payment through the plan.

When the Richardsons completed their plan payments, they moved for a discharge.² The Chapter 13 Standing Trustee, William H. Griffin, objected. Among other things, he maintained that the insurance proceeds were disposable income that should be paid through the plan.³

Are the insurance proceeds disposable income that should be paid through the plan? The court rules that the insurance proceeds are not disposable income payable through the plan because they are not the debtors' projected disposable income nor property devoted to the plan. Therefore, the trustee's objection lacks merit and does not bar a discharge. And all this notwithstanding, the Chapter 13 trustee has no statutory authority to recover the insurance proceeds from the debtors.

I. Motion for Partial Summary Judgment

These questions are before the court because the Richardsons filed a motion for partial summary judgment in response to the trustee's objection to discharge. The summary judgment motion seeks a ruling that the insurance proceeds are exempt.⁴

In the trustee's objection to discharge, he also complained that following confirmation, the Richardsons misrepresented their income and expenses and acted in bad faith.⁵ The Richardsons did not address this aspect of his objection in their motion for partial summary judgment, however. Therefore, this aspect of the trustee's objection is not before the court.

This proceeding is core under 28 U.S.C. § 157. The court has jurisdiction under 28 U.S.C. § 1334 and the general reference order of the District Court effective July 10, 1984 (D. Kan. Rule 83.8.5).

II. Undisputed Facts

The summary judgment motion contains the requisite statement of uncontroverted material facts, to which the trustee has responded. The relevant, undisputed facts are:

The Richardsons filed their Chapter 13 petition on June 6, 1997.⁶ Their plan proposed to pay the trustee $64,800 over 36 months at $1,800 per month. They began making the plan payments on July 10, 1997, and on October 10 of that year, the court confirmed their plan.

On August 14, 1998, approximately 14 months after the petition filing date and 10 months after the confirmation date, the Richardsons' adult son, John C. "Chris" Richardson, died from injuries suffered in an automobile accident.⁷ In due course, the Richardsons received the benefits of a life insurance policy on his life in the amount of $400,000.

The following documents attached to the memorandum in support of the motion for partial summary judgment and referred to in the statement of uncontroverted facts support these events: (1) a letter to the trustee from the Richardsons' attorney dated May 31, 2000; (2) a U.S. Financial Beneficiary's Statement and Payment Direction form; (3) a State of Colorado death certificate; and (4) a funeral notice.⁸

On May 8, 2000, the Richardsons filed Supplemental Schedules B and C,⁹ listing the insurance proceeds and claiming them exempt under Kansas Statutes Annotated § 40-414 in the following terms: "Life Insurance Death Benefit Proceeds Paid on Death of Chris Richardson" having a fair market value of $400,000.

The trustee did not object to the Richardsons' claim of exemption.¹⁰

In August 2000, the Richardsons filed a motion for discharge. In their motion for discharge, the Richardsons maintained that they had completed the payments according to the plan terms. The trustee filed a timely objection to the their motion, alleging (in part) that the insurance proceeds should be deemed disposable income and made available for payment of claims under the plan.

III. Discussion

A. The Debtors' Exemption Contention

The only contention in the Richardsons' brief on summary judgment is that the insurance proceeds are exempt property. There is no dispute that the trustee failed to object to the exemption claim. Nor does the trustee deny that he received notice of the supplemental schedules claiming the exemption or that he failed to object to the exemption. The Richardsons therefore point to the rule announced by the United States Supreme Court in Taylor v. Freeland & Kronz.¹¹ Taylor holds that failure to object to an exemption of property from the estate within the allowed time validates the exemption claim. Consequently, the Richardsons argue that the trustee's failure to object renders the exemption valid.¹²

Furthermore, they argue that even if the Taylor rule were not applicable, Kansas law allows them the exemption. Kansas, like most states, has opted to apply its own exemption statutes in bankruptcy cases, as § 522(b) permits. The specific Kansas exemption statute applicable to life insurance is K.S.A. § 40-414. And it does grant the Richardsons an exemption for life insurance proceeds.¹³

Unfortunately, neither party has addressed the express condition of § 522(b) requiring that before property can be exempted from the estate, it must be in the estate: "[A]n individual debtor may exempt from property of the estate the property listed in either paragraph (1) or ... paragraph (2) of this subsection." (Emphasis added.) The court's research discloses that the interplay between two Code sections, § 1306(a)(1) and § 1327(b), forces the conclusion that the insurance proceeds are not property of the estate subject to exemption.

B. The Relevant Code Sections

1. Section 1306(a)

Section 1306(a) addresses property of the estate in a Chapter 13 case. Subsection (a)(1) includes within the estate all property that the debtor acquires from the commencement of the case until the case is closed, dismissed, or converted. Subsection (a)(2) includes earnings from the debtor's services performed before the case is closed, dismissed, or converted:

(a) Property of the estate includes, in addition to the property specified in section 541 of this title —

(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title whichever occurs first; and

(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.¹⁴

Obviously, § 1306(a)(1) can be read to include the insurance proceeds within the Chapter 13 estate. The insurance proceeds are, after all, property the Richardsons acquired while the case was not closed, dismissed, or converted. Under this reading of § 1306(a)(1), the insurance proceeds would be property of the estate, and both the Kansas statute and the Taylor v. Freeland & Kronz decision would exempt them from the estate.

2. Section 1327(b)

But, another Code section influences the meaning of § 1306(a) and the scope of property of the estate in a Chapter 13 case. Section 1327(b) "vests all of the property of the estate in the debtor" upon confirmation:

(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.¹⁵

Numerous courts have given consideration to this Code section in relation to § 1306(a)(1) and to the way the two sections interact to determine the scope of a Chapter 13 estate.

C. The Tenth Circuit Bankruptcy Court Cases

Within the Tenth Circuit, several bankruptcy courts have opined on the interrelationship of §§ 1306(a)(1) and 1327(b). The first such decision, In re Adams,¹⁶ emphasizes that Chapter 13 does not prevent certain creditors from reaching property of the debtor. In this 1981 decision, the Hon. Ralph R. Mabey, a Utah bankruptcy judge, held that the automatic stay did not bar the collection of nondischargeable alimony and child support from property that was vested in the debtor by confirmation of the Chapter 13 plan.

Before filing for Chapter 13 relief, Mr. Adams had incurred an alimony and child support obligation in a divorce. After Adams's Chapter 13 plan was confirmed, his ex-spouse initiated state court proceedings to collect past due alimony and child support. In response, Adams sought a show cause order against her in the bankruptcy case for violating the automatic stay.

Under § 362(b)(2)(B), the automatic stay does not stay "the collection of alimony, maintenance, or support from property that is not property of the estate."¹⁷ Therefore, the question confronting the court was, in Judge Mabey's words, "[W]hat property, if any, was not property of the Chapter 13 estate and, therefore, was available for satisfaction of this nondischargeable debt"?¹⁸

Judge Mabey noted that taken together, ...