Newman v. Schwartzer (In re Newman)

• Citation: 487 B.R. 193
• Decision Date: 04 February 2013
• Docket Number: BAP No. NV–12–1439–JuKiD.,Bankruptcy No. 11–28663–LBR.
• Parties: In re Eugene Scott NEWMAN, Jr., Debtor. Eugene Scott Newman, Jr., Appellant, v. Lenard Schwartzer, Chapter 7 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

487 B.R. 193

In re Eugene Scott NEWMAN, Jr., Debtor.Eugene Scott Newman, Jr., Appellant,

v.Lenard Schwartzer, Chapter 7 Trustee, Appellee.

BAP No. NV–12–1439–JuKiD.

Bankruptcy No. 11–28663–LBR.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted Jan. 25, 2013.

Decided Feb. 4, 2013.

Malik W. Ahmad, Esq., Law Office of Malik W. Ahmad, Las Vegas, NV, appeared for appellant Eugene Scott Newman, Jr.; Lenard E. Schwartzer, chapter 7 trustee, Las Vegas, NV, appeared pro se.

Before: JURY, KIRSCHER, and DUNN Bankruptcy Judges.

OPINION

JURY, Bankruptcy Judge.

Chapter 7 ¹ debtor Eugene Scott Newman, Jr., appeals the bankruptcy court's order granting the motion to compel turnover of debtor's 2011 tax refund in the amount of $4,727 brought by chapter 7 trustee Lenard Schwartzer. We AFFIRM.

I. FACTS

Debtor and his spouse are married and residents of Nevada. On December 2, 2011, debtor filed his individual chapter 7 petition. Debtor's schedules did not list his 2011 tax refund as an asset nor did he claim any portion of the refund exempt.

In January 2012, debtor made three amendments to his Schedules B and C which related to vehicles.

On March 12, 2012, debtor received his discharge.²

On May 1, 2012, the trustee sent debtor a letter requesting a copy of his 2011 tax return. Debtor complied. The jointly filed tax return showed a refund of $5,135 due.

On May 11, 2012, the trustee sent debtor a second letter stating that a portion of the refund, in the sum of $4,727, constituted property of the estate under § 541 and thus was subject to turnover under § 542(a). The letter further stated that debtor could claim an exemption for the earned income credit if debtor filed an amended Schedule C.

On May 22, 2012, debtor's counsel sent an email to the Help Desk at the bankruptcy court stating:

I have the following cases to reopen for changes in the schedules ³.... Do I need to pay the reopening case fee of $269 in each case. These folks have been discharged. The procedural question is if the fee is payable after discharge or after the closure of the case. As usual thanks for your help.

On May 23, 2012, the Help Desk responded: “Yes, the reopening fee needs to be paid in each case with that motion. Thank you.”

On May 30, 2012, debtor's counsel filed an ex parte motion to reopen debtor's case even though debtor's case was not closed.

On July 9, 2012, the trustee moved for an order compelling turnover of the 2011 tax refund in the amount of $4,727 and for sanctions of $250 (Turnover Motion).

On July 16, 2012, debtor's counsel filed an opposition to the Turnover Motion arguing: (1) the tax refund of the non-debtor spouse was not property of the estate subject to turnover; (2) the non-debtor spouse need not turn over her portion of the refund due to the application of the Withholding Rule, the Proportionate Income Rule, or the 50/50 Refund Rule; ⁴ (3) allocation of a joint tax refund is predicated upon consideration of many factors; and (4) the trustee's motion to compel was “too late” because debtor and his spouse spent the money to pay utility bills, their mortgage and other expenditures.

On August 9, 2012, the bankruptcy court heard the matter and granted the trustee's Turnover Motion by order entered August 19, 2012.⁵

On August 22, 2012, debtor amended his Schedule C to claim the sum of $3,094 exempt under Nev.Rev.Stat. 21.090⁶, the earned income exemption statute, and to claim an additional $1000 exempt under Nev.Rev.Stat. 21.090(1)(z), the wildcard exemption.Debtor's amended Schedule C does not identify the property to which the exemption applies, but we presume it is the tax refund at issue in this appeal.

On August 22, 2012, the same date the amended Schedule C was filed, debtor filed a timely notice of appeal.

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. §§ 1334 and 157(b)(2)(A), (B) and (E). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUE

Whether the bankruptcy court erred in entering the turnover order.

IV. STANDARD OF REVIEW

Whether property is included in a bankruptcy estate and procedures for recovering estate property are questions of law that we review de novo. White v. Brown (In re White), 389 B.R. 693, 698 (9th Cir. BAP 2008).

V. DISCUSSION

A. Debtor Did Not Exempt Any Portion of the Tax Refund Before the Bankruptcy Court Ruled

Debtor first contends that the bankruptcy court erred as a matter of law in holding that debtor's earned income credit of $3,094 is not exempted under Nev.Rev.Stat. 21.090. This contention is erroneous.

Debtor's earned income credit exemption was not listed in his original Schedule B or C, nor did debtor amend his Schedules to claim the exemption in the tax refund prior to the bankruptcy court's ruling on the trustee's Turnover Motion.⁷ It was only after the bankruptcy court entered an order in favor of the trustee on the Turnover Motion that debtor filed his amended Schedule C and, even then, his amended Schedule does not identify the property to which the exemption applies.⁸ Because debtor's amended Schedule C was not before the bankruptcy court with respect to the order on appeal, we do not consider it now. Oyama v. Sheehan (In re Sheehan), 253 F.3d 507, 512 n. 5 (9th Cir.2001) (“Evidence that was not before the [trial] court will not generally be considered on appeal.”) (citing Karmun v. Comm'r, 749 F.2d 567, 570 (9th Cir.1984)); see also Kirshner v. Uniden Corp. of Am., 842 F.2d 1074, 1078 (9th Cir.1988) (“Papers not filed with the [trial] court or admitted into evidence by that court are not part of the clerk's record and cannot be part of the record on appeal.”). As it now stands, the order on appeal necessarilysubsumes a determination that the tax refund at issue is nonexempt property of the estate.

B. The Tax Refund Was Property of Debtor's Estate

Debtor next challenges the bankruptcy court's conclusion that the entire tax refund was property of his estate. Section 541(a)(1) provides that property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. Under § 541(a)(2), the estate also includes “[a]ll interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is ... under the sole, equal or joint management and control of the debtor.” (Emphasis added).

“[T]he right to receive a tax refund constitutes an interest in property.” Nichols v. Birdsell, 491 F.3d 987, 990 (9th Cir.2007). The nature and extent of the debtor's interest in the tax refund is determined by nonbankruptcy law. Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 451, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (citing Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). Nevada law applies here.

Under Nevada law, all property acquired by either spouse during the marriage, with some exceptions not applicable here, is community property. Nev.Rev.Stat. 123.220; see Norwest Fin. v. Lawver, 109 Nev. 242, 849 P.2d 324, 326 (1993) (wages of either spouse during marriage are considered to be community funds regardless of which spouse earns the greater income or which spouse supports the community). Spouses also have joint control of community property. Either spouse may transfer or encumber community property without the consent of the other subject to several exceptions, which are not relevant here. Nev.Rev.Stat. 123.230; Soper v. Crystal Palace Gambling Hall, Inc. (In re Crystal Palace Gambling Hall, Inc.), 36 B.R. 947, 950 (9th Cir. BAP 1984). Therefore, because the tax refund is community property subject to the joint control of either spouse, § 541(a)(2) “dictates that the entire prorated tax refund is property of [d]ebtor's bankruptcy estate.” In re Martell, 349 B.R. 233, 236 (Bankr.D.Idaho 2005).⁹ We thus conclude that the bankruptcy court properly found the tax refund was property of debtor's estate subject to turnover.

C. The Bankruptcy Court Properly Ordered Turnover

Having concluded that the tax refund was property of debtor's estate, we next consider whether the trustee may compel turnover of the property from debtor when he has spent the funds. Section 542(a) provides:

Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property 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, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

Relying on Brown v. Pyatt (In re Pyatt), 486 F.3d 423 (8th Cir.2007), debtor contends that by spending the funds, they are no longer in his “possession, custody or control” within the meaning of § 542(a). In Pyatt, although the debtor had approximately $1,900 in his bank account at the time his petition was filed, the Eighth Circuit found that he could not be compelled to turn over that amount when most of the funds were used to honor prepetition checks that cleared soon after his bankruptcy filing because the funds were no longer in his possession or control. In reaching this conclusion, the court first reasoned that the language of § 542(a) said nothing about whether the obligation to deliver the property to the trustee continued after custody or control ceased. Id. at 428. Next, citing Maggio v. Zeitz, 333 U.S. 56, 68 S.Ct. 401, 92 L.Ed. 476 (1948), the court observed that pre-Code practice suggested that § 542(a) permitted a trustee to compel turnover only from entities which have control of property of the estate or its proceeds at the time of the turnover demand. Id. at 428–29. The court also rejected the argument that present possession was not required in light of the statutory language that authorized the trustee to demand turnover of...