Kaler v. Kana (In re Kana)

• Citation: 478 B.R. 373
• Decision Date: 15 August 2012
• Docket Number: Bankruptcy No. 10–30455.,Adversary No. 11–07025.
• Parties: In re Dale C. KANA and Barbara LoAnn Kana, Debtors. Kip M. Kaler, in his capacity as Chapter 7 Trustee of the Estate of the Debtors Dale C. Kana and Barbara LoAnn Kana, Plaintiff, v. Dale C. Kana and Barbara LoAnn Kana, and the University of North Dakota Foundation, Defendants.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of North Dakota

478 B.R. 373

In re Dale C. KANA and Barbara LoAnn Kana, Debtors.

Kip M. Kaler, in his capacity as Chapter 7 Trustee of the Estate of the Debtors Dale C. Kana and Barbara LoAnn Kana, Plaintiff,

v.Dale C. Kana and Barbara LoAnn Kana, and the University of North Dakota Foundation, Defendants.

Bankruptcy No. 10–30455.

Adversary No. 11–07025.

United States Bankruptcy Court,

D. North Dakota.

Aug. 15, 2012.

Kip M. Kaler, Fargo, ND, pro se.

David L. Johnson, McNair, Larson & Carlson, Ltd., Fargo, ND, for Defendants.

University of North Dakota Foundation, pro se.

MEMORANDUM AND ORDER

SHON HASTINGS, Bankruptcy Judge.

Before the Court are a Motion to Dismiss filed by Debtors–Defendants Dale C. Kana and Barbara LoAnn Kana on January 17, 2012 and converted to a Motion for Summary Judgment at the hearing on August 14, 2012, a Motion for Summary Judgment filed by Plaintiff Kip M. Kaler, Chapter 7 Bankruptcy Trustee, on January 17, 2012, and a Motion for Relief filed by the Trustee on February 16, 2012. Both the Trustee and Debtors filed responses to the opposing party's motions.

On October 7, 2011, the Trustee brought this adversary proceeding against Debtors, alleging Debtors' rights and interest in the Dale and LoAnn Kana Unitrust (Unitrust) is property of the bankruptcy estate that must be turned over to the Trustee. The Trustee filed this action pursuant to 11 U.S.C. §§ 506, 541, 542, and 725 and Federal Rule of Bankruptcy Procedure 7001 to determine the interests of the respective parties in the Unitrust.

In their Motion to Dismiss, Debtors seek dismissal of this adversary proceeding, arguing res judicata and collateral estoppel bar the adversary proceeding. Conversely, the Trustee contends dismissal is inappropriate and the Court should grant his Motion for Relief and consider information not previously received as evidence. The Trustee also argues summary judgment should be granted because the Unitrust distributions are property of the bankruptcy estate, North Dakota Century Code section 59–13–01 does not permit Debtors to retain distributions, there is no room for “equitable considerations” in the Bankruptcy Code to allow Debtors to retain nonexempt assets, and the claim is not barred by res judicata.

In their Motion to Dismiss, Debtors requested oral argument, which the Court granted. A hearing was held on August 14, 2012.

I. Factual Background

Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on April 23, 2010. On Schedule I, Debtors indicated they each receive monthly income from the Unitrust. At the section 341 meeting of creditors and subsequent to it, the Trustee requested that Debtors deliver to him all documents, information and property related to the Unitrust. Pursuant to this request, Debtors provided the Trustee a document titled “Dale and LoAnn Kana Unitrust,” describing a unitrust held by the University of North Dakota Foundation.

After reviewing the documents, the Trustee filed a Motion for Turnover on November 23, 2010, requesting the Bankruptcy Court issue an order finding that Debtors' interest in the Unitrust is property of the bankruptcy estate and requiring that any distributions Debtors received after the commencement of the bankruptcy case be delivered to the Trustee as the bankruptcy estate's representative. Debtors opposed the Trustee's motion arguing the Unitrust is a valid spendthrift trust, which is not property of the bankruptcy estate that the Trustee may liquidate because Debtors have no right to possess or alienate the assets in the trust. Debtors' Resp. to Mot. for Turnover 1–2. Debtors maintain they have “only a qualified right to support and an equitable interest only in the income.” Id.

The Bankruptcy Court ¹ held an evidentiary hearing on the Motion for Turnover on January 6, 2011. Both parties were granted the opportunity to present argument and offer evidence. Debtors offered the testimony of Mrs. Kana and two exhibits, the proof of claim filed by the IRS and Debtors' Schedules I and J. The proof of claim and schedules were received into evidence without objection. Debtors also asked the Bankruptcy Court to take judicial notice of the Unitrust documents. The Bankruptcy Court did not respond to this request.

The Trustee cross-examined Mrs. Kana, but he did not call any witnesses or offer any documentary evidence. At the conclusion of the hearing, the Bankruptcy Court took the matter under advisement.

The Bankruptcy Court issued its Memorandum and Order on May 6, 2011. After considering the evidence received during the hearing, it concluded that the Trustee failed to satisfy the burden of proof necessary to grant his Motion for Turnover. Specifically, the Bankruptcy Court found: “Debtor Barbara Kana's testimony did not include sufficient details about the unitrust's provisions for the Court to conclude that there is clear and convincing evidence that Debtors[ ] have an interest in the unitrust that constitute[s] estate property.” In reaching this conclusion, the Bankruptcy Court did not consider the copy of the Unitrust attached to the Trustee's Motion for Turnover because pleadings and their attached exhibits are not evidence and the Unitrust documents were not received into evidence during the hearing.

After the Bankruptcy Court issued its decision, the Trustee filed a notice of appeal. He elected to appeal the Bankruptcy Court's order to the District Court pursuant to 28 U.S.C. § 158(c)(1). In the Trustee's appellate brief, he first argued the Unitrust documents should have been considered as evidence and then addressed specific terms of the Unitrust to support his argument that turnover was warranted. Debtors maintained the Bankruptcy Court's decision was correct because the Unitrust documents were not received into evidence.

A hearing was held before the District Court.² On September 13, 2011, the District Court entered its Memorandum and Order, affirming the Bankruptcy Court's decision. The District Court noted that “[t]he crux of this appeal can be succinctly stated: Did the Bankruptcy Court err in concluding that the Trustee's failure to introduce evidence relating to the existence and terms of a charitable remainder unitrust was fatal?” After examining the sufficiency of the evidence presented before the Bankruptcy Court, the District Court determined: “Because the Court is convinced that the debtor[s] made no admissions as to the terms and existence of the trust and because the debtors took no steps that induced the Trustee to rest without proof of the existence and terms of the trust the ruling of the Bankruptcy Court is correct.” The District Court rested its decision upon the same premise the Bankruptcy Court advanced: “One may not rest on documents attached to a motion.... the Trustee simply never offered nor were the trust documents ever received. The trustee has the burden of proof in a motion to turnover property.” Neither party appealed the District Court's order.

Less than a month after the District Court entered its order, the Trustee filed this adversary proceeding. In his adversary Complaint, the Trustee seeks an order determining that Debtors' interest in the Unitrust is property of the bankruptcy estate and requiring that all distributions Debtors were entitled to receive after filing their bankruptcy petition be delivered to the Trustee. This remedy is virtually identical to the relief he sought in his Motion for Turnover.

II. Conclusions of LawA. Collateral Estoppel

Collateral estoppel, also referred to as issue preclusion, bars relitigation of “legal or factual issues ‘actually and necessarily determined,’ ” with the determination becoming “ ‘conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.’ ” W.A. Lang Co. v. Anderberg–Lund Printing Co. (In re Anderberg–Lund Printing Co.), 109 F.3d 1343, 1346 (8th Cir.1997) (quoting Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)). “[T]he normal rules of ... collateral estoppel apply to the decisions of bankruptcy courts.” Katchen v. Landy, 382 U.S. 323, 334, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); Hobson Mould Works, Inc. v. Madsen (In re Madsen), 195 F.3d 988, 989 (8th Cir.1999). “[P]roceedings within a single bankruptcy case which adjudicate issues of law and fact can, for the purposes of res judicata and collateral estoppel, preclude relitigation of those same issues at later stages of the bankruptcy suit.” In re Miller, 153 B.R. 269, 273–74 n. 3 (Bankr.D.Minn.1993) (citation omitted).

The party asserting collateral estoppel has the burden of proving the following elements:

(1) the party sought to be precluded in the second suit must have been a party, or in privity with a party, to the original lawsuit;

(2) the issue sought to be precluded must be the same as the issue involved in the prior action; (3) the issue sought to be precluded must have been actually litigated in the prior action;

(4) the issue sought to be precluded must have been determined by a valid and final judgment; and

(5) the determination in the prior action must have been essential to the prior judgment.

Sells v. Porter (In re Porter), 539 F.3d 889, 894 (8th Cir.2008) (quoting Robinette v. Jones, 476 F.3d 585, 589 (8th Cir.2007)); see also Johnson v. Miera (In re Miera), 926 F.2d 741, 743 (8th Cir.1991) (citing Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir.1983)). When analyzing a collateral estoppel defense, courts consider whether the party against whom collateral estoppel is asserted received a ‘full and fair’ opportunity to litigate the issue in the prior adjudication. In re Miera, 926 F.2d at 743 (citing Lovell, 719 F.2d at 1376). “The purpose of collateral estoppel is not to foreclose a party of its right to put contested facts before the Court, but is to prevent their submission twice.” In re Yagow, 62 B.R. 73, 78 (Bankr.D.N.D.1986) (citation omitted).

1. The Trustee was a Party to Previous Litigation

Debtors...