In Todd v. Rothschild (In re Todd), 2015 WL 1544585 (9th Cir. BAP 2015), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that a bankruptcy court lacked jurisdiction to determine the debtor’s claim of exemption in property, where the bankruptcy court had previously approved a settlement between the trustee and a creditor in which the trustee acknowledged and agreed that the property belonged to the creditor.
To read the full unpublished decision, click here: http://1.usa.gov/1Gdz8E7.
Brenda Todd suffered serious injuries in a car accident, and ultimately received a settlement of $2.5 million; she deposited $1.5 million of the proceeds into a pre-existing Solomon Smith Barney account which at the time had a balance of about $535,000 (the “Account”). Subsequently, a judgment was entered against Todd for $18.5 million due to Todd having improperly transferred the plaintiff’s property into Todd’s personal accounts. The judgment enjoined the transfer of assets that were traceable proceeds of the judgment creditor’s assets and which were in the name of the debtor and others, including funds in the Account.
Todd filed for bankruptcy, and her case was converted to chapter 7. The debtor purported to claim an exemption in the settlement proceeds under a Nevada statute permitting her to exempt compensation for loss of future earnings.
Over a year later, the chapter 7 trustee and the judgment creditor entered into a settlement to avoid litigation over ownership of the debtor’s assets. The terms of the settlement included the following:[The trustee] acknowledges and agrees that all funds held in the [Account and certain other accounts], all in the name of Todd . . . are properly owned by, and the assets of, [the judgment creditor] . . .. [The trustee] agrees that such funds will be turned over to [the judgment creditor] on the Effective Date . . ..
The debtor objected, arguing that the settlement ignored her exemption rights. On the record at the hearing on the trustee’s motion for approval of the settlement, the bankruptcy court confirmed its understanding that the settlement did not resolve any issues as to what exemptions the debtor might have had, and that the estate wouldn’t get the asset if the debtor was entitled to the exemptions to begin with. The trustee’s and judgment creditor’s attorneys both confirmed that the bankruptcy court’s understanding was correct. The bankruptcy court then approved the settlement, saying:
Everybody agrees. All right. So to the extent there are exemptions, those exemption issues are preserved. If you have outstanding objections to exemptions, you better bring them back on calendar. Otherwise, the exemptions stand.
Technically, however, neither the settlement agreement nor the bankruptcy court’s order expressly preserved the debtor’s alleged exemption rights. Nor did they expressly provide for the carve-out of any funds in the Account pending the determination of those rights. The bankruptcy court approved the proposed settlement in August 2011. In its order, the bankruptcy court instructed Solomon Smith Barney and others to “accept any and all instructions for account transactions from [the judgment creditor], who is the owner of the accounts as of the date of this Order.”
Thereafter, the judgment creditor filed an objection to the debtor’s claimed exemptions. The bankruptcy court initially issued summary judgment in favor of the judgment creditor, but that judgment was reversed by the district court because there were genuine issues of material fact to be tried. Then, after a trial, the bankruptcy court found that (a) $986,769 of the $1.34 million in the Account on the petition date was attributable to the settlement proceeds, and (b) the debtor was entitled to exempt about $462,000 of those funds for loss of future earnings. The debtor appealed, and the judgment creditor cross-appealed.
Exercising its obligation to consider the presence or absence of subject matter jurisdiction, the BAP vacated the bankruptcy court’s order and dismissed the appeal because the bankruptcy court lacked jurisdiction to determine the debtor’s claimed exemption.
The BAP made this determination based on the settlement, which “placed ownership of the [Account] in [the judgment creditor]. When property is no longer property of the estate the court’s jurisdiction ends.” Once the bankruptcy court entered its order approving the settlement, the bankruptcy court’s jurisdiction over the Account lapsed “since it was no longer property of the estate nor was it property of the Debtor.” Parties cannot create subject matter jurisdiction by consent, so it was irrelevant that the bankruptcy court and the parties all understood that the debtor’s exemption rights were preserved.
The BAP opined that the inability of the bankruptcy court to preserve the debtor’s exemption rights also flowed from the plain language of § 522, which provides that a debtor may exempt property “from property of the estate.” “Once the [Account] was transferred out of [the] estate, there was nothing to exempt per the plain language of § 522(b).”
The BAP also concluded that the bankruptcy court lacked “related to” jurisdiction because the outcome of the proceeding would have no effect on the debtor’s estate. Because the settlement “transferred 100% ownership of the [Account] to [the judgment creditor], the chapter 7 trustee gave up any rights to the funds.”
Approval of a settlement under FRBP 9019 only requires that a court find that the settlement is minimally fair, reasonable, and adequate. But unless the court makes specific findings, approval of a settlement does not constitute a judicial determination as to the accuracy of all stipulations set forth therein. Nevertheless, parties situated similarly to the debtor in this case perhaps should insist that the court’s order (or better yet the settlement agreement itself) reflect that the settlement is not intended to and shall not be construed so as to strip the objecting party of his or her rights and interests.
The trustee validly exercised his business judgment to agree in the settlement to an objectively inaccurate fact, simply to avoid litigation. The bankruptcy court and all parties seem to have understood that the trustee’s “acknowledgment” and “agreement” that the Account belonged to the judgment creditor only applied to non-exempt funds in which the estate might have otherwise claimed an interest. The debtor’s exemption rights (and implicitly the debtor’s right to show that funds in the Account constituted property of the debtor on the petition date) were understood to be preserved. Indeed, after trial, the bankruptcy court found that $986,769 in the Account on the petition date was attributable to the settlement proceeds (and, at least implicitly, was property of the debtor – not the judgment creditor – as of that date). The fact that a trustee agrees in a settlement to transfer (or disclaim) the estate’s ownership (or claim of ownership) in an allegedly exempt asset should not divest the bankruptcy court of jurisdiction to determine (a) whether the asset was property of the debtor on the petition date, and (b) whether the debtor is entitled under the Bankruptcy Code to claim an exemption in that asset.
These materials were written by ILC member John N. Tedford, IV (firstname.lastname@example.org), of Danning, Gill, Diamond & Kollitz, LLP in Los Angeles, California. Editorial contributions were provided by ILC member Peter Jazayeri (email@example.com), of Jaz, A Professional Legal Corporation in Los Angeles, California.
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