Marchand v. Whittick (In re Whittick)

• Decision Date: 17 March 2016
• Docket Number: Adv. No.: 15–2146–ABA,Case No.: 14–32124–ABA
• Parties: In re: Joseph P. Whittick, Debtor. Joseph D. Marchand, Chapter 7 trustee, Plaintiff, v. Joseph P. Whittick and Camille Lynn Whittick, Defendants.
• Court: U.S. Bankruptcy Court — District of New Jersey

547 B.R. 628

In re: Joseph P. Whittick, Debtor.Joseph D. Marchand, Chapter 7 trustee, Plaintiff,

v.Joseph P. Whittick and Camille Lynn Whittick, Defendants.

Case No.: 14–32124–ABA

Adv. No.: 15–2146–ABA

United States Bankruptcy Court, D. New Jersey.

Hearing Date: March 15, 2016

Signed March 17, 2016

Paul Stadler Pflumm, Joseph A. McCormick, Jr., P.A., Haddonfield, NJ, for Plaintiff.

Ellen M. McDowell, Daniel L. Reinganum, McDowell Posternock Apell & Detrick, PC, Maple Shade, NJ, for Defendants.

MEMORANDUM DECISION

Andrew B. Altenburg, Jr., United States Bankruptcy Judge

I. INTRODUCTION

Joseph D. Marchand, the chapter 7 trustee ("Trustee"), filed a motion for judgment on the pleadings ("Motion") on all three of his counts alleged against the Debtor/Defendant Joseph P. Whittick ("Debtor") and his wife, the co-defendant Camille Lynn Whittick. The defendants responded with a cross motion for judgment on the pleadings ("Cross–Motion"). The court concludes that the Motion is granted in part only to the extent that the court finds that the loan proceeds/funds are property of the estate, but denied as to all other matters. The Cross–Motion is denied in its entirety.

II. JURISDICTION AND VENUE

The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (E), and (O). Venue is proper in this court pursuant to 28 U.S.C. § 1408. The statutory predicates for the relief sought herein are 11 U.S.C. §§ 542 and 549. Pursuant to Fed. R. Bankr. P. 7052, the court issues the following findings of fact and conclusions of law.

III. PROCEDURAL HISTORY

On September 1, 2015, the Trustee file the Complaint in this adversary proceeding. The Trustee seeks turnover from the Debtor of funds pursuant to section 542 of the Bankruptcy Code. The Trustee also seeks avoidance of a transfer to the Debtor's wife as an unauthorized postpetition transfer, pursuant to section 549 of the Bankruptcy Code. In connection therewith, the Trustee seeks an accounting of the Debtor's and his wife's records to assure that he can identify all mediate transfers that might be avoidable pursuant to sections 549 and 550 of the Bankruptcy Code. Finally, the Trustee seeks costs of suit and reasonable attorney fees, and such other and further relief as is just and equitable.

On October 2, 2015, the Defendants filed an Answer admitting to all of the facts¹ of the Complaint but denying any liability. The parties declined mediation and thereafter, the Trustee filed his Motion. The defendants responded with their Cross–Motion. A hearing was held on the Motion and Cross–Motion on March 15, 2016 at which time the parties presented their arguments to the court. The matter is now ripe for consideration.

IV. FACTS

The Debtor applied for and was approved for a loan from his Public Employees' Retirement System ("PERS") retirement plan prior to his filing for bankruptcy protection. PERS issued a check to the Debtor in the amount of $13,642 (the "Check"). The Check was issued on October 29, 2014 and received by the Debtor. Loan payments were to start on December 1, 2014. Doc. 1–1. The Debtor filed his individual chapter 7 bankruptcy case on October 30, 2014 (the "Petition Date"). The Debtor had not deposited or cashed the Check by the Petition Date. The Debtor signed his Voluntary Chapter 7 Bankruptcy Petition on the day it was filed. Doc. 1 in the main bankruptcy case, Case No. 14–32124.² While the Debtor disclosed an interest in his PERS account on his bankruptcy Schedule B, he did not disclose that he was in possession of the Check.

On the day after the Petition Date, October 31, 2014, the Debtor deposited the Check into in a joint bank account owned by him and his wife. Then, on November 3, 2014, the Debtor transferred $10,750 of the funds from the PERS loan to an account held solely by the Debtor's wife.

On June 16, 2015, the Trustee filed a notice of abandonment of the Debtor's 1964 Ford Thunderbird, stating a fair market value of $22,230, a lien of $12,021, and the Debtor's claim of exempt equity under section 522(d)(2) in the amount of $3,675, and under section 522(d)(5) in the amount of $6,633. On June 30, 2015, the Trustee filed a notice of assets. On February 29, 2015, the Debtor filed amended schedules A, B and C, exempting the funds from the PERS loan in their entirety under section 522(d)(10)(E), and $11,786 of the value of the Thunderbird under section 522(d)(5).

V. DISCUSSION

The Trustee seeks turnover from the Debtor of the funds from the PERS loan pursuant to section 542 of the Bankruptcy Code, alleging that the funds represent a prepetition asset. He asserts that, once received, the funds ceased to enjoy the protection afforded to ERISA-qualified accounts.³ The Trustee also seeks avoidance of the transfer of the funds to the Debtor's wife as an unauthorized postpetition transfer, pursuant to section 549 of the Bankruptcy Code. The Trustee seeks an accounting of the Debtor's and his wife's records to assure that he can identify all mediate transfers that might be avoidable pursuant to sections 549 and 550 of the Bankruptcy Code.

The defendants argue that since the loan proceeds were not received until after the bankruptcy filing, they are not property of the estate, citing Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). They also aver that the funds are exempt under section 522(d)(10)(E), having amended their Schedule C on February 29, 2016 to so exempt. They state that if the court does not find that the funds are exempt under section 522(d)(10)(E), then they will amend Schedule C again to exempt $11,786.97 of the funds under section 522(d)(5).

The Trustee responds that to determine what is property of the estate, one does not look to the time of transfer, but to when the debtor gained an interest in the funds. As this debtor obtained the loan approval and Check prepetition, that interest became property of the estate. The Trustee also argues that section 522(d)(10)(E) is not applicable, as it is not a pension distribution. Moreover, he argues that the Debtor should not be permitted to now exempt the funds as he concealed the property by not disclosing them on his original schedules, amending Schedule B 16 months into the case and six months after the Trustee filed this adversary proceeding, and he amended his exemptions in bad faith. The Trustee avers that permitting amending the exemptions would prejudice creditors and be prejudicial to the Trustee who relied on the original Schedule C in filing this adversary proceeding. He argues that it is bad faith for the Debtor to threaten to amend his Schedule C again, particularly since the wildcard exemption that he would change had been applied to his Thunderbird vehicle, which the Trustee relied upon when abandoning that vehicle. Moreover, the Debtor cannot use section 522(d)(2), applied to the Thunderbird, to the loan proceeds, as that section applies only to vehicles. The Debtor could only shift the $6,633 of the 522(d)(5) exemption used on the Thunderbird to the loan proceeds.

The defendants respond that the loan was not complete until the check was cashed, citing language from a pension information page that states that if the Debtor is not satisfied with the loan amount or repayment schedule when he receives his check, he can cancel the loan by returning the uncashed check. But by cashing the check he would be agreeing to the loan amount and the terms and conditions of the repayment schedule. Therefore no interest was gained until the Debtor cashed the check postpetition.

A motion for judgment on the pleadings is authorized by Federal Civil Rule of Procedure 12(c), incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b). When based on the theory that the plaintiff failed to state a claim, then a motion on the pleadings is reviewed under the same standard that applies to a motion to dismiss under Civil Rule 12(b)(6). Caprio v. Healthcare Revenue Recovery Grp., LLC, 709 F.3d 142, 146–47 (3d Cir.2013). But otherwise, the Third Circuit has generally applied a summary judgment standard, that "[t]he facts, and any inferences drawn from them, are viewed in the light most favorable to the nonmoving party and the motion should not be granted ‘unless the moving party has established that there is no material issue of fact to resolve, and that it is entitled to judgment as a matter of law.’ " Perez v. Griffin, 304 Fed.Appx. 72, 74 (3d Cir.2008) (quoting Mele v. Fed. Reserve Bank of N.Y., 359 F.3d 251, 253 (3d Cir.2004) ). In any case, if a court considers attachments to parties' memorandums of law and supplements, then it should consider the motions under the summary judgment standard. Fed. R. Civ. P. 12(d).

Here, though the defendants appear to be claiming a failure to state claims, as the parties attached documents to their pleadings and submissions, the court will apply a summary judgment standard.

A. Count One—Turnover

Section 542 provides for turnover from "an entity, other than a custodian, in possession, custody, or control, during the case, of property of the estate that the trustee may use, sell or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title[.]" 11 U.S.C. § 522(a). The property must be turned over to the trustee, "unless such property is of inconsequential value or benefit to the estate." Id.

A section 542(a) claim requires the trustee to prove

(1) the property is in the possession, custody or control of another entity;

(2) the property can be used in accordance with the provisions of section 363; and

(3) the property has more than inconsequential value to the debtor's estate.

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