Appendix — DeAtley v. Barnett, 127 S. Ct. 123 (2006) (No. 05-1569)
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APPENDIX A
Published opinion, Court of Appeals, State of
Wenetiattens, Bay 27, DOGG .......cccercccscscccosecsssovececseseveeee A-1
Order Granting Defendants’ Motion to Dismiss,
Superior Court of the State of Washington for
Yakima County, November 13, 2008 ....................000008 A-9
Order — Supreme Court of Washington, March 8,
RCRA Se ce ASM At NEP OO RD eC ER A-12
APPENDIX B
11 U.S.C., § 541 Property of the Estate ..................:ccce B-1
11 U.S.C., § 524 — Effect of Discharge .................:s000008 B-20
APPENDIX C
Petitioner’s Motion for Reconsideration filed March
EISELE RR Py oo ee Oe CC C-1
Petition for Review to Supreme Court of Washing-
SI TI oi ia csresrnstireiigunenacicinnetntsninbieeivbiovedieeeurias C-23
127 Wash. App. 478
IN THE COURT OF APPEALS
OF THE STATE OF WASHINGTON
ALAN DeATLEY and )
DEBRA DeATLEY, )
husband and wife, ) No. 22780-4-I1I cons.w/
Appellants, ) No. 22977-7-III
v. ) Division Three
LYNN BARNETT, ) Panel One
MARLENE BARNETT, ) PUBLISHED OPINION
rane hg POINT —_) (Filed May 17, 2005)
Respondents. )
BROWN, J. — This is a contract dispute to enforce a
first right of refusal brought by Alan and Debra DeAtley
against developers Lynn and Marlene Barnett and the
Barnetts’ partnership, Lookout Point Partners (the
Barnetts unless otherwise indicated). The Barnetts traded
land and the first right of refusal for road work to be done
by the DeAtleys. After the Barnetts discovered an inter-
vening DeAtley bankruptcy, the trial court granted sum-
mary dismissal of the complaint on the Barnetts’ theory
that the DeAtleys’ bankruptcy discharged the Barnetts’
first right of refusal obligations. The judge awarded the
Barnetts attorney fees under the contract relating solely to
the dismissal motion. The bankruptcy and judicial estop-
pel vitiate the DeAtleys’ claim. We affirm and grant the
Barnetts and Lookout Point their attorney fees here.
A-2
FACTS
In January 1986, the Barnetts purchased around 500
acres of undeveloped land in Yakima County by real estate
contract. In February 1986, the Barnetts entered into the
Lookout Point partnership with John and June Cotten to
develop the land.
In January 1988, the Barnetts contracted with the
DeAtleys for road work on the land in exchange for 86
acres and a first right of refusal. Mr. DeAtley agreed to
“pioneer” the road and later complete it. The parties
disputed if the 1988 pioneering work done was according
- to the contract, but agree the final road work was never
completed. The contract provided in the event Mr. Barnett
“desires to sell or assign his contract with Anderson or to
make any sales of property of three lots or tracts or more,
that he will grant to DeAtley the first right of refusal to
acquire same.” Clerks Papers (CP) at 806:
In 1990, Mr. DeAtley met with Mr. Cotten after Mr.
Cotten became ill and wanted to sell his partnership
interest, but Mr. DeAtley decided against it. The DeAtleys’
right of first refusal was not mentioned. In early 1991, the
Barnetts bought out the Cottens’ partnership interest. In
July 1991, George A. Lagerquist and Henry and Nova Van
Baalen joined the partnership, like the Cottens, to “own,
‘maintain, develop, sell and otherwise deal with” the land.
CP at 865.
In 1992, the DeAtleys petitioned for Chapter 7 bank-
ruptcy relief in New Mexico, listing Mr. Barnett as a
creditor for the road construction obligation. The DeAtleys
did not separately list their right of first refusal as an
asset. Mr. Barnett received notice of the bankruptcy, and
later said he had only “a vague recollection” of it. CP at
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518. The DeAtleys discharged the Barnett obligation in
the 1992 New Mexico Bankruptcy.
In May 1997, the DeAtleys sued the Barnetts, alleging
the 1991 transfers violated the DeAtleys’ right of first
refusal. The Barnetts denied the allegations, asserting
several affirmative defenses, including waiver, estoppel,
laches, and failure to perform conditions precedent regard-
ing the completion of the final road.
Just before the scheduled 2003 trial date, the
DeAtleys unsuccessfully moved to amend their complaint
to add specific performance. On the day of trial, after
expedited briefing, the DeAtleys’ successfully argued the
1991 transfers triggered the DeAtleys’ right of first re-
fusal. About this time, when deposing Mr. DeAtley’s father
the Barnetts learned of the New Mexico bankruptcy.
Investigating, the Barnetts learned the DeAtleys dis-
charged the underlying obligation in the New Mexico
bankruptcy. Immediately, the Barnetts’ requested dis-
missal, successfully arguing the bankruptcy vitiated the
first right of refusal. The DeAtleys’ motion for reconsidera-
tion, based partly on the DeAtleys’ alleged transfer of the
parties’ contract to a wholly-owned subsidiary, Wildones,
Inc., d/b/a AD3 Company, was denied.
The Barnetts were partially successful in asking for
attorney fees under the contract. The trial court limited
the fees and costs to those associated with the motion to
dismiss. The DeAtleys appeal the dismissal, the denial of
their request for partial summary judgment regarding the
final road issues, and the denial of their request to amend
their complaint. The Barnetts cross-appeal the initial
summary judgment order, regarding the DeAtleys’ breach
A-4
of contract claims and the partial award of attorney fees.
The appeals have been consolidated.
ANALYSIS
A. Impact of Bankruptcy
The dispositive issue is whether the trial court erred
in dismissing the DeAtleys’ complaint based upon its
conclusion that the bankruptcy discharge of the Barnett-
DeAtley contract obligation precluded the DeAtleys’ right
of first refusal claims. We review questions of law de novo.
Wolstein v. Yorkshire Ins. Co., 97 Wn. App. 201, 206, 985
P.2d 400 (1999).
The DeAtleys were required to disclose all assets,
including potential causes of action in their bankruptcy
petition. 11 U.S.C.A. § 521(1), Fed. R. Bankr. P. 1007. A
discharged debtor lacks legal capacity to pursue an un-
scheduled claim simply because the trustee, having no
knowledge of the claim, took no action with respect to the
claim. Linklater v. Johnson, 53 Wn. App. 567, 570, 768
P.2d 1020 (1989); Marks v. Benson, 62 Wn. App. 178, 184-
85, 813 P.2d 180 (1991). Even so, the DeAtleys contend
their contract right assignment to AD3 Company before
filing for bankruptcy effectively saved the first right of
refusal.
However, if the DeAtleys wanted to assume the
benefits of the allegedly triggered right of first refusal,
they would have to assume the underlying obligation, the
contract obligation to complete the road. Since the
DeAtleys chose to discharge the burdens of that contract
obligation and did not list their allegedly matured right of
first refusal as an asset, we reason they lost their right to
A-5
claim benefits under the right of first refusal. Accordingly,
we conclude the DeAtleys lacked standing to commence
their breach of contract complaint.
Moreover, judicial integrity, finality of judgments and
respect for the judicial process bar the DeAtleys’ claim.
Together these considerations are referred to as the
Washington doctrine of judicial estoppel. See, e.g., Markley
v. Markley, 31 Wn.2d 605, 614-15, 198 P.2d 486 (1948);
Johnson v. Si-Cor, Inc., 107 Wn. App. 902, 906, 28 P.3d 832
(2001).
Nonexclusive factors promote court discretion in
applying judicial estoppel: “(1) The inconsistent position
first asserted must have been successfully maintained; (2)
a judgment must have been rendered; (3) the positions
must be clearly inconsistent; (4) the parties and questions
must be the same; (5) the party claiming estoppel must
have been misled and have changed his position; (6) it
must appear unjust to one party to permit the other to
change.” Falkner v. Foshaug, 108 Wn. App. 113, 125 n.35,
29 P.3d 771 (2001) (quoting Raymond, 47 Wn. App. at 785.
The focus is upon the inconsistent position. Falkner, 108
Wn. App. at 125.
Judicial estoppel has been recently applied in a
similar bankruptcy context. Cunningham v. Reliable
Concrete Pumping, Inc. __ Wn. App. __, 108 P.3d 147
(2005). In Cunningham, Division One of this court invoked
judicial estoppel to approve the summary dismissal of a
personal injury claim when the plaintiffs had previously
petitioned for bankruptcy, but failed to list in their bank-
ruptcy schedules a third-party personal injury claim
arising out of a workplace injury.
A-6
On the federal level judicial estoppel is well en-
trenched. In New Hampshire v. Maine, 532 U.S. 742, 121
S. Ct. 1808, 149 L. Ed. 2d 968 (2001), the United States
Supreme Court invoked judicial estoppel, describing the
doctrine as preventing “‘perversion of the judicial proc-
ess’” by not allowing parties to “‘gain an advantage by
litigation on one theory, and then seek[ing] an inconsistent
advantage by pursuing an incompatible theory.’” Id. at 749
(quoting In re Cassidy, 892 F.2d 637, 641, cert. denied, 498
U.S. 812 (1990); 18B Charles A. Wright, Federal Practice
and Procedure § 4477, at 549 (2002)). ,
The DeAtleys inconsistently received bankruptcy
relief, and thereafter sought contradictory relief. Under
these facts, we conclude judicial estoppel applies here to
foreclose the DeAtleys’ claim.
In sum, the lack of standing and judicial estoppel
leads us to conclude the trial court did not err in dismiss-
ing the DeAtleys’ complaint or in denying reconsideration.
Therefore, it is unnecessary to analyze the parties other
issues and contentions except those related to the
Barnetts’ attorney fees.
B. Attorney Fees at the Superior Court
The issue is whether the trial court erred in limiting
the Barnetts’ award of attorney fees to those incurred to
bring their motion to dismiss. The Barnetts contend the
court erred as a matter of law in finding the Barnetts
delayed in bringing their motion to dismiss without just
cause because the delay was caused by the DeAtleys’ delay
in providing requested discovery.
A-7
We review trial court’s attorney fees award for an
abuse of discretion. Mahler v. Szucs, 1385 Wn.2d 398, 435,
957 P.2d 632 (1998). Abuse of discretion occurs when the
trial court’s decision rests on untenable grounds or unten-
able reasons. State ex rel. Carroll v. Junkel, 79 Wn.2d 12,
26, 482 P. 775 (1971).
The trial court reasoned the bankruptcy issue was
known to the Barnetts well prior “to the end of 2003 and
now here in 2004, the motion was always available to the
defendants.” Report of Proceedings at 3. The record sup-
ports the trial court’s reasoning. For example, Mr. Barnett
admitted he received notice of the DeAtleys’ bankruptcy
proceeding in 1992. Mr. Barnett assumed the DeAtleys
abandoned the road building project so the bankruptcy
notice did not make “an impression” on him. CP at 519.
While the bankruptcy schedules were not received until
2003, the discharge of the road building obligation was
sufficiently known to him to charge him with notice of the
critical fact bearing upon the viability of the first right of
refusal.
We defer » the trial court’s personal and exhaustive
contact with the issue. We limit our review to whether the
judge’s exercise of his discretion was manifestly unreason-
able or based on untenable grounds or reasons. Mr. Bar-
nett’s recollection of the bankruptcy notice, while vague,
was a tenable basis for the trial court to find the motion to
dismiss could have been brought sooner. The trial court
did not abuse its discretion in limiting the award.
C. Attorney Fees on Appeal
The Barnetts and Lookout Point request fees and
costs on appeal pursuant to RAP 18.1. Attorney fees are
A-8
awarded pursuant to contract, statute, or a recognized
ground of equity. Wilkerson v. United Inv., Inc., 62 Wn.
App. 712, 716, 815 P.2d 293 (1991). By statute, attorney
fees are awarded to the prevailing party in an action on a
contract that specifically provides for attorney fees and
costs incurred to enforce its provisions. RCW 4.84.330.
The parties’ agreement provides, “In the event any
suit or action shall be instituted under this Agreement ...
the prevailing party in such suit or action shall be entitled
to reasonable attorney’s fees, together with such other
assessable costs.” CP at 807. A contract providing for the
payment of attorney fees “‘includes both fees necessary for
trial and those incurred on appeal as well.’” Boyd v. Davis,
127 Wn.2d 256, 264, 897 P.2d 1239 (1995) (quoting Granite
Equip. Leasing Corp. v. Hutton, 84 Wn.2d 320, 327, 525
P.2d 223 (1974)). As the prevailing parties on appeal, the
Barnetts and Lookout Point are entitled to their attorney
fees and costs here.
Affirmed.
/s/ Brown, J.
Brown, J.
WE CONCUR:
/s/ Kato C.J.
Kato, C.J.
/s/ Sweeney, J.
Sweeney, J.
A-9
SUPERIOR COURT OF THE STATE OF WASHINGTON
FOR YAKIMA COUNTY
ALAN DeATLEY and
DEBRA DeATLEY, husband | NO. 97-2-01023-2
and wife, ORDER GRANTING
_— DEFENDANTS’ MOTION
a TO DISMISS
is ASSIGNED TO THE
LYNN BARNETT and HONORABLE
ors pert ROBERT HACKETT
usband and wife, an
LOOKOUT POINT see DATE:
PARTNERS, a partnership, ovember 13, 2003
Defendants. (Filed Nov. 13, 2003)
THIS MATTER came before the Court upon Defen-
dants’ Motion to Dismiss, with defendants Barnett appear-
ing by and through their attorney of record. Annette
Fitzsimmons, defendant Lookout Point Partners appear-
ing by and through its attorney of record. Margaret Archer
of Gordon, Thomas, Honeywell, Malanca, Peterson and
Daheim, LLP and plaintiffs appearing by and through
their attorney of record, James Perkins of Larson &
Perkins, PLLC. The Court heard the argument of counsel
and examined the records and files herein, including the
following pleadings:
1. Defendants’ Motion to Dismiss
2. Defendants’ Memorandum in Support of
Motion to Dismiss
3. Declaration of Margaret Archer in Support
of Motion to Dismiss with attachments
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4. Declaration of Lynn Barnett in Support of
Motion to Dismiss
5. Declaration of Margaret Y. Archer Re: Fac-
simile Signature
6. Declaration of Donna Cratsenberg in Sup-
port of Motion to Dismiss
7. Declaration of Margaret Y. Archer Re: Fac-
simile Signature
8. Plaintiff's Memorandum in Opposition to
Dismiss and Cross-Motion to Dismiss Road
Claims
9. Alan DeAtley’s Declaration in Opposition to
Motion to Dismiss with attachments
10. Declaration of Jennie Deden Behles in Op-
position to Motion to Dismiss with attach-
ments
11. James A. Perkins’ Declaration Opposing
Motion to Dismiss with attachments
12. Supplemental Declaration of Margaret
Archer in Support of Motion to Dismiss with
attachments
IT IS HEREBY ORDERED, ADJUDGED AND DE-
CREED that Defendant’s Motion to dismiss is GRANTED
and plaintiffs’ claims are dismissed in their entirety with
prejudice. Defendants-may-present-a-motion fer -atterneys”
fees-unteeste at adaterdate [RN J.
DONE IN OPEN COURT this 13 day of Nov, 2003.
/s/ Robert N. Hackett, J.
THE HONORABLE
ROBERT HACKETT
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Presented by:
GORDON, THOMAS, HONEYWELL,
MALANCA, PETERSON & DAHEIM, P.L.L.C.
Attorneys for Defendant Lookout Point Partners
By: /s/ Margaret Y. Archer
Margaret Y. Archer, WSBA #21224
ANNETTE T. FITZSIMMONS, P.S.
Attorney for Defendants Barnett
By: /s/ Margaret Y. Archer
(Mlegible] Annette T. Fitzsimmons,
WSBA #22295
Approved, Notice of Presentation Waived by:
LARSON & PERKINS, PLLC
Attorneys for Plaintiffs
By:
James A. Perkins, WSBA #13330
A-12
THE SUPREME COURT OF WASHINGTON
ALAN DeATLEY and +)
DEBRA DeATLEY, )
husband and wife, )
Petitioners, ‘ NO. 77442-1
v. ) _ ORDER
LYNN BARNETT and ?) (C/ANO. 22780-4-III
MARLENE BARNETT, ? & 22977-7-IIl
husband and wife, and ? (consolidated)
LOOKOUT POINT )
PARTNERS,
Respondents. )
Department II of the Court, composed of Chief Justice
Alexander and Justices Madsen, Bridge, Owens, and J.M.
Johnson (Justice Fairhurst sat for Justice Bridge), consid-
ered this matter at its March 7, 2006, Motion Calendar,
and unanimously agreed that the following order be
entered.
IT IS ORDERED:
That the Petition for Review is denied. The motion to
strike reply is granted.
DATED at Olympia, Washington this 8th day of
_ March, 2006.
For the Court
/s/ Gerry L. Alexander
CHIEF JUSTICE
B-1
11 USCS § 541 (1992) Property of the estate
(a) The commencement of a case under section 301, 302,
or 303 of this title [11 USCS § 301, 302, or 303] creates an
estate. Such estate is comprised of all the following prop-
erty, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of
this section, all legal or equitable interests of the debtor in
property as of the commencement of the case.
(2) All interests of the debtor and the debtor’s spouse
in community property as of the commencement of the |
case that is —
(A) under the sole, equal, or joint managerient
and control of the debtor; or
(B) liable for an allowable claim against the
debtor, or for both an allowable claim against the debtor
and an allowable claim against the debtor’s spouse, to the
extent that such interest is so hable.
(3) Any interest in property that the trustee recovers
under section 329(b), 363(n), 543, 550, 553, or 723 of this
title [11 USCS § 329(b), 363(n), 543, 550, 553, or 723].
(4) My interest in property preserved for the benefit
of or ordered transferred to the estate under section 510(c)
or 551 of this title [11 USCS § 510(c) or 551].
(5) Any interest in property that would have been
property of the estate if such interest had been an interest
of the debtor on the date of the filing of the petition, and
that the debtor acquires or becomes entitled to acquire
within 180 days after such date —
(A) by bequest, devise, or inheritance;
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(B) as a result of a property settlement agree-
ment with the debtor’s spouse, or of an interlocutory or
final divorce decree; or
(C) as a beneficiary of a life insurance policy or
of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or
from property of the estate, except such as are earnings
from services performed by an individual debtor after the
commencement of the case.
(7) Any interest in property that the estate acquires
after the commencement of the case.
(b) Property of the estate does not include —
(1) any power that the debtor may exercise solely for
the benefit of an entity other than the debtor;
_ (2) any interest of the debtor as a lessee under a
lease of nonresidential real property that has terminated
at the expiration of the stated term of such lease before
the commencement of the case under this title, and ceases
to include any interest of the debtor as a Iessee under a
lease of nonresidential real property that has terminated
at the expiration of the stated term of such lease during
the case;
(3) any eligibility of the debtor to participate in
programs authorized under the Higher Education Act of
1965 (20 U.S.C. 1001 et seq.; 42 U.S.C. 2751 et seq.), or
any accreditation status or State licensure of the debtor as
an educational institution;
(4) any interest of the debtor in liquid or gaseous
hydrocarbons to the extent that —
B-3
(A)
(i) the debtor has transferred or has agreed
to transfer such interest pursuant to a farmout agreement
or any written agreement directly related to a farmout
agreement; and
(ii) but for the operation of this paragraph,
the estate could include the interest referred to in clause
(i) only by virtue of section 365 or 544(a)(3) of this title [11
USCS § 365 or 544(a)(3)); or
(B)
(i) the debtor has transferred such interest
pursuant to a written conveyance of a production payment
to an entity that does not participate in the operation of
the property from which such production payment is
transferred; and
(ii) but for the operation of this paragraph,
the estate could include the interest referred to in clause
(i) only by virtue of section 365 or 542 of this title [11
USCS § 365 or 542);
(5) funds placed in an education individual retire-
ment account (as defined in section 530(b)(1) of the Inter-
nal Revenue Code of 1986 (26 USCS § 530(b)(1)]) not later
than 365 days before the date of the filing of the petition in
a case under this title, but —
(A) only if the designated beneficiary of such
account was a child, stepchild, grandchild, or stepgrand-
child of the debtor for the taxable year for which funds
were placed in such account;
(B) only to the extent that such funds —
B-4
(i) are not pledged or promised to any entity
in connection with any extension of credit; and
(ii) are not excess contributions (as de-
scribed in section 4973(e) of the Internal Revenue Code of
1986 [26 USCS § 4973(e)]); and
(C) in the case of funds placed in all such ac-
counts having the same designated beneficiary not earlier
than 720 days nor later than 365 days before such date,
only so much of such funds as does not exceed $5,000;
(6) funds used to purchase a tuition credit or certifi-
cate or contributed to an account in accordance with
section 529{b)(1)A) of the Internal Revenue Code of 1986
[26 USCS § 529(b)(1)(A)] under a qualified State tuition
program (as defined in section 529b)(1) of such Code [26
USCS § 529(b)(1)]) not later than 365 days before the date
of the filing of the petition in a case under this title, but —
(A) only if the designated beneficiary of the
amounts paid or contributed to such tuition program was a
child, stepchild, grandchild, or stepgrandchild of the
debtor for the taxable year for which funds were paid or
contributed;
(B) with respect to the aggregate amount paid or
¢ontributed to such program having the same designated
beneficiary, only so much of such amount as does not
exceed the total contributions permitted under section
529(b\(7) of such Code [26 USCS § 529(b)(7)] with respect
to such beneficiary, as adjusted beginning on the date of
the filing of the petition in a case under this title by the
annual increase or decrease (rounded to the nearest tenth
of 1 percent) in the education expenditure category of the
B-5
Consumer Price Index prepared by the Department of
Labor; and
(C) in the case of funds paid or contributed to
such program having the same designated beneficiary not
earlier than 720 days nor later than 365 days before such
date, only so much of such funds as does not exceed $5,000;
(7) any amount —
(A) withheld by an employer from the wages of
employees for payment as contributions —
(i) to—
(I) an employee benefit plan that is
subject to title I of the Employee Retirement Income
Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an
employee benefit plan which is a governmental plan under
section 414(d) of the Internal Revenue Code of 1986 [26
USCS § 414(d)];
(II) a deferred compensation plan under
section 457 of the Internal Revenue Code of 1986 [26
USCS § 457]; or
(II) a tax-deferred annuity under
section 403(b) of the Internal Revenue Code of 1986 [26
USCS § 403(b)]; except that such amount under this
subparagraph shall not constitute disposable income as
defined in section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
(ii) to a health insurance plan regulated by
State law whether or not subject to such title; or
(B) received by an employer from employees for
payment as contributions —
(i) to -
. (I) an employee benefit plan that is
subject to title I of the Employee Retirement Income
Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an
employee benefit plan which is a governmental plan under
section 414(d) of the Internal Revenue Code of 1986 [26
USCS § 414(d));
(II) a deferred compensation plan under
section 457 of the Internal Revenue Code of 1986 [26
USCS § 457]; or
(III) a tax-deferred annuity under
section 403(b) of the Internal Revenue Code of 1986 [26
USCS § 403(b));
except that such amount under this subpara-
graph shall not constitute disposable income, as defined in
section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
(ii) to a health insurance plan regulated by
State law whether or not subject to such title;
(8) subject to subchapter III of chapter 5 {11 USCS
§§ 541 et seq.], any interest of the debtor in property
where the debtor pledged or sold tangible personal prop-
erty (other than securities or written or printed evidences
of indebtedness or title) as collateral for a loan or advance
of money given by a person licensed under law to make
such loans or advances, where —
(A) the tangible personal property is in the
possession of the pledgee or transferee;
B-7
(B) the debtor has no obligation to repay the
money, redeem the collateral, or buy back the property at a
stipulated price; and
(C) neither the debtor nor the trustee have
exercised any right to redeem provided under the contract
or State law, in a timely manner as provided under State
law and section 108(b) [11 USCS § 108(b)]; or
(9) any interest in cash or cash equivalents that
constitute proceeds of a sale by the debtor of a money
order that is made —
(A) on or after the date that is 14 days prior to
the date on which the petition is filed; and
(B) under an agreement with a money order
issuer that prohibits the commingling of such proceeds
with property of the debtor (notwithstanding that, con-
trary to the agreement, the proceeds may have been
commingled with property of the debtor),
unless the money order issuer had not taken action,
prior to the filing of the petition, to require compliance
with the prohibition.
Paragraph (4) shall not be construed to exclude from the
estate any consideration the debtor retains, receives, or is
entitled to receive for transferring an interest in liquid or
gaseous hydrocarbons pursuant to a farmout agreement.
(c)
(1) Except as provided in paragraph (2) of this
subsection, an interest of the debtor in property becomes
property of the estate under subsection (a)(1), (a)(2), or
(a)(5) of this section notwithstanding any provision in an
B-8
agreement, transfer instrument, or applicable nonbank-
ruptcy law —
(A) that restricts or conditions transfer of such
interest by the debtor; or
(B) that is conditioned on the insolvency or
financial condition of the debtor, on the commencement of
a case under this title, or on the appointment of or taking
possession by a trustee in a case under this title or a
custodian before such commencement, and that effects or
gives an option to effect a forfeiture, modification, or
termination of the debtor’s interest in property.
(2) A restriction on the transfer of a_ beneficial
interest of the debtor in a trust that is enforceable under
applicable nonbankruptcy law is enforceable in a case
under this title.
(d) Property in which the debtor holds, as of the com-
mencement of the case, only legal title and not an equita-
ble interest, such as a mortgage secured by real property,
or an interest in such a mortgage, sold by the debtor but
as to which the debtor retains legal title to service or
supervise the servicing of such mortgage or interest,
becomes property of the estate under subsection (a)(1) or
(2) of this section only to the extent of the debtor’s legal
title to such property, but not to the extent of any equita-
ble interest in such property that the debtor does not hold.
(e) In determining whether any of the relationships
specified in paragraph (5)(A) or (6)(A) of subsection (b)
exists, a legally adopted child of an individual (and a child
who is a member of an individual’s household, if placed
with such individual by an authorized placement agency
for legal adoption by such individual), or a foster child of
B-9
an individual (if such child has as the child’s principal
place of abode the home of the debtor and is a member of
the debtor’s household) shall be treated as a child of such
individual by blood.
(f) Notwithstanding any other provision of this title,
property that is held by a debtor that is a corporation
described in section 501(c)(3) of the Internal Revenue Code
of 1986 [26 USCS § 501(c)(3)] and exempt from tax under
section 501(a) of such Code [26 USCS § 501(a)] may be
transferred to an entity that is not such a corporation, but
only under the same conditions as would apply if the
debtor had not ined a case under this title.
HISTORY:
(Nov. 6, 1978, P.L. 95-598, Title I, § 101, 92 Stat. 2594;
July 10, 1984, P.L. 98-353, Title III, Subtitle C, § 363(a),
Subtitle H, § 456, 98 Stat. 363, 376; Nov. 5, 1990, P.L. 101-
508, Title III, Subtitle A, § 3007(a)(2), 104 Stat. 1388-28;
Oct. 24, 1992, PL. 102-486, Title XXX, Subtitle B,
§ 3017(b), 106 Stat. 3130; Oct. 22, 1994, P.L. 103-394, Title
II, §§ 208(b), 223, 108 Stat. 4124, 4129.)
(As amended April 20, 2005, PL. 109-8, Title II,
Subtitle C, § 225(a), Title ITI, § 323, Title XII, §§ 1212,
1221(c), 1230, 119 Stat. 65, 97, 194, 196, 201.)
HISTORY; ANCILLARY LAWS AND DIRECTIVES
Prior law and revision:
Legislative Statements
Section 541(a)(7) is new. The provision clarifies that
any interest in property that the estate acquires after the
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commencement of the case is property of the estate; for
example, if the estate enters into a contract, after the
commencement of the case, such a contract would be
property of the estate. The addition of this provision by the
House amendment merely clarifies that section 541(a) is
an all-embracing definition which includes charges on
property, such as liens held by the debtor on property of a
third party, or beneficial rights and interests that the
debtor may have in property of another. However, only the
debtor’s interest in such property becomes property of the
estate. If the debtor holds bare legal title or holds property
in trust for another, only those rights which the debtor
would have otherwise had emanating from such interest
pass to the estate under section 541. Neither this section
nor section 545 will affect various statutory provisions
that give a creditor a lien that is valid both inside and
outside bankruptcy against a bona fide purchaser of
property from the debtor, or that creates a trust fund for
the benefit of creditors meeting similar criteria. See
Packers and Stockyards Act § 206, 7 U.S.C. 196 (1976).
Section 541(c)(2) follows the position taken in the
House bill and rejects the position taken in the Senate
amendment with respect to income limitations on a spend-
thrift trust.
Section 541(d) of the House amendment is derived
from section 541(e) of the Senate amendment and reiter-
ates the general principle that where the debtor holds bare
legal title without any equitable interest, that the estate
acquires bare legal title without any equitable interest in
the property. The purpose of section 541(d) as applied to
the secondary mortgage market is identical to the purpose
of section 541(e) of the Senate amendment and section
541(d) will accomplish the same result as would have been
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accomplished by section 541(e). Even if a mortgage seller
retains for purposes of servicing legal title to mortgages or
interests in mortgages sold in the secondary mortgage
market, the trustee would be required by section 541(d) to
turn over the mortgages or interests in mortgages to the
purchaser of those mortgages.
The seller of mortgages in the secondary mortgage
market will often retain the original mortgage notes and
related documents and the seller will not endorse the
notes to reflect the sale to the purchaser. Similarly, the
purchaser will often not record the purchaser’s ownership
of the mortgages or interests in mortgages under State
recording statutes. These facts are irrelevant and the
seller’s retention of the mortgage documents and the
purchaser’s decision not to record do not change the
trustee’s obligation to turn the mortgages or interests in
mortgages over to the purchaser. The application of section
541(d) to secondary mortgage market transactions will not
be affected by the terms of the servicing agreement be-
tween the mortgage servicer and the purchaser of the
mortgages. Under section 541(d), the trustee is required to
recognize the purchaser’s title to the mortgages or inter-
ests in mortgages and to turn this property over to the
purchaser. It makes no difference whether the servicer and
the purchaser characterize their relationship as one of
trust, agency, or independent contractor.
The purpose of section 541(d) as applied to the secon-
dary mortgage market is therefore to make certain that
secondary mortgage market sales as they are currently
structured are not subject to challenge by bankruptcy
trustees and that purchasers of mortgages will be able to
obtain the mortgages or interests in mortgages which they
have purchased from trustees without the trustees asserting
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that a sale of mortgages is a loan from the purchaser to
the seller.
Thus, as section 541(a)(1) clearly states, the estate is
comprised of all legal or equitable interests of the debtor in
property as of the commencement of the case. To the
extent such an interest is limited in the hands of the
debtor, it is equally limited in the hands of the estate
except to the extent that defenses which are personal
against the debtor are not effective against the estate.
Property of the estate: The Senate amendment pro-
vided that property of the estate does not clude amounts
held by the debtor as trustee and any taxes withheld or
collected from others before the commencement of the
case. The House amendment removes these two provi-
sions. As to property held by the debtor as a trustee, the
House amendment provides that property of the estate
will include whatever interest the debtor held in the
property at the commencement of the case. Thus, where
the debtor held only legal title to the property and the
beneficial interest in that property belongs to another,
such as exists in the case of property held in trust, the
property of the estate includes the legal title, but not the
beneficial interest in the property.
As to withheld taxes, the House amendment deletes
the rule in the Senate bill as unnecessary since property of
the estate does not include the beneficial interest in
property held by the debtor as a trustee. Under the Inter-
nal Revenue Code of 1954 (section 7501) [26 U.S.C. 7501],
the amounts of withheld taxes are held to be a special fund
in trust for the United States. Where the Internal Revenue
Service can demonstrate that the amounts of taxes withheld
are still in the possession of the debtor at the commencement
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of the case, then if a trust is created, those amounts are
not property of the estate. Compare In re Shakesteers
Coffee Shops, 546 F.2d 821 (9th Cir. 1976) with In re Glynn
Wholesale Building Materials, Inc. (S.D. Ga. 1978) and In re
Progress Tech Colleges, Inc., 42 Aftr 2d 78-5573 (S.D. Ohio
1977).
Where it is not possible for the Internal Revenue
Service to demonstrate that the amounts of taxes withheld
are still in the possession of the debtor at the commence-
ment of the case, present law generally includes amounts
of withheld taxes as property of the estate. See, e.g.,
United States v. Randall, 401 U.S. 513 (1973) [91 S. Ct.
991, 28 L.Ed.2d 273] and In re Tamasha Town and County
Club, 483 F.2d 1377 (9th Cir. 1973). Nonetheless, a serious
problem exists where “trust fund taxes” withheld from
others are held to be property of the estate where the
withheld amounts are commingled with other assets of the
debtor. The courts should permit the use of reasonable
assumptions under which the Internal Revenue Service,
and other tax authorities, can demonstrate that amounts
of withheld taxes are still in the possession of the debtor at
the commencement of the case. For example, where the
debtor had commingled that amount of withheld taxes in
his general checking account. it might be reasonable to
assume that any remaining ::mounts in that account on
the commencement of the case are the withheld taxes. In
addition, Congress may consider future amendments to
the Internal Revenue Code [title 26] making clear that
amounts of withheld taxes are held by the debtor in a
trust relationship and, consequently, that such amounts
are not property of the estate.
B-14
Senate Report No. 95-989
This section defines property of the estate, and speci-
fies what property becomes property of the estate. The
commencement of a bankruptcy case creates an estate.
Under paragraph (1) of subsection (a), the estate is com-
prised of all legal or equitable interest of the debtor in
property, wherever located as of the commencement of the
case. The scope of this paragraph is broad. It includes all
kinds of property, including tangible or intangible prop-
erty, causes of action (see Bankruptcy Act § 70a(6) [section
110(a)(6) of former title 11]), and all other forms of prop-
erty currently specified in section 70a of the Bankruptcy
Act § 70a [section 110(a) of former title 11], as well as
property recovered by the trustee under section 542 of
proposed title 11, if the property recovered was merely out
of the possession of the debtor, yet remained “property of
the debtor.” The debtor’s interest in property also includes
“title” to property, which is an interest, just as are a
possessory interest, or lease-hold interest, for example.
The result of Segal v. Rochelle, 382 U.S. 375 (1966), is
followed, and the right to a refund is property of the
estate.
Though this paragraph will include choses in action
and claims by the debtor against others, it is not intended
to expand the debtor’s rights against others more than
they exist at the commencement of the case. For example,
if the debtor has a claim that is barred at the time of the
commencement of the case by the statute of limitations,
then the trustee would not be able to pursue that claim,
because he too would be barred. He could take no greater
rights than the debtor himself had. But see proposed 11
U.S.C. 108, which would permit the trustee a tolling of the
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statute of limitations if it had not run before the date of
the filing of the petition.
Paragraph (1) has the effect of overruling Lockwood v.
Exchange Bank, 190 U.S. 294 (1903), because it includes
as property of the estate all property of the debtor, even
that needed for a fresh start. After the property comes into
the estate, then the debtor is permitted to exempt it under
proposed 11 U.S.C. 522, and the court will have jurisdic-
tion to determine what property may be exempted and
what remains as property of the estate. The broad jurisdic-
tional grant in proposed 28 U.S.C. 1334 would have the
effect of overruling Lockwood independently of the change
made by this provision.
Paragraph (1) also has the effect of overruling Lines v.
Frederick, 400 U.S. 18 (1970).
Situations occasionally arise where property ostensi-
bly belonging to the debtor will actually not be property of
the debtor, but will be held in trust for another. For exam-
ple, if the debtor has incurred medical bills that were
covered by insurance, and the insurance, company had
sent the payment of the bills to the debtor before the
debtor had paid the bill for which the payment was reim-
bursement, the payment would actually be held in a
constructive trust for the person to whom the bill was
owed. This section and proposed 11 U.S.C. 545 also will
not affect various statutory provisions that give a creditor
of the debtor a lien that is valid outside as well as inside
bankruptcy, or that creates a trust fund for the benefit of a
creditor of the debtor. See Packers and Stockyards Act
§ 206, 7 U.S.C. 196.
Bankruptcy Act § 8 [section 26 of former title 11) has
been deleted as unnecessary. Once the estate is created, no
B-16
interests in property of the estate remain in the debtor.
Consequently, if the debtor dies during the case, only
property exempted from property of the estate or acquired
by the debtor after the commencement of the case and not
included as property of the estate will be available to the
representative of the debtor’s probate estate. The bank-
ruptcy proceeding will continue in rem with respect to
property of the state, and the discharge will apply in
personam to relieve the debtor, and thus his probate
representative, of liability for dischargeable debts.
The estate also includes the interests of the debtor
and the debtor’s spouse in community property, subject to
certain limitations; property that the trustee recovers
under the avoiding powers; property that the debtor
acquires by bequest, devise, inheritance, a property
settlement agreement with the debtor’s spouse, or as the
beneficiary of a life insurance policy within 180 days after
the petition; and proceeds, product, offspring, rents, and
profits of or from property of the estate, except such as are
earning from services performed by an individual debtor
after (ae commencement of the case. Proceeds here is not
used in a cvafining sense, as defined in the Uniform
Commercial Code, but is intended to be a broad term to
encompass all proceeds of property of the estate. The
conversion in form of property of the estate does not
change its character as property of the estate.
Subsection (b) excludes from property of the estate
any power, such as a power of appointment, that the
debtor may exercise solely for the benefit of an entity other
than the debtor [see the 1984 amendment of subsec. (b) of
this section]. This changes present law which excludes
powers solely benefiting other persons but not other
entities.
B-17
Subsection (c) invalidates restrictions on the transfer
of property of the debtor, in order that all of the interests
of the debtor in property will become property of the
estate. The provisions invalidated are those that restrict
or condition transfer of the debtor’s interest, and those
that are conditioned on the insolvency or financial condi-
tion of the debtor, on the commencement of a bankruptcy
case, or on the appointment of a custodian of the debtor’s
property. Paragraph (2) of subsection (c), however, pre-
serves restrictions on a transfer of a spendthrift trust that
the restriction is enforceable nonbankruptcy law to the
extent of the income reasonably necessary for the support
of a debtor and his dependents.
Subsection (d) [now (e)], derived from section 70c of
the Bankruptcy Act [section 110(c) of former title 11], gives
the estate the benefit of all defenses available to the
debtor as against an entity other than the estate, includ-
ing such defenses as statutes of limitations, statutes of
frauds, usury, and other personal defenses, and makes
waiver by the debtor after the commencement of the case
ineffective to bind the estate [this subsec. was repealed by
Act July 10, 1984; see the 1984 Amendments note to this
section].
Section 541(e) [now (d)] confirms the current status
under the Bankruptcy Act [former title 11] of bona fide
secondary mortgage market transactions as the purchase
and sale of assets. Mortgages or interests in mortgages
sold in the secondary market should not be considered as
part of the debtor’s estate. To permit the efficient servicing
of mortgages or interests in mortgages the seller often
retains the original mortgage notes and related docu-
ments, and the purchaser records under State recording
statutes the purchaser’s ownership of the mortgages or
B-18
interests in mortgages purchased. Section 541(e) [now (d)]
makes clear that the seller’s retention of the mortgage
documents and the purchaser’s decision not to record do
not impair the asset sale character of secondary mortgage
market transactions. The committee notes that in secon-
dary mortgage market transactions the parties may
characterize their relationship as one of trust, agency, or
independent contractor. The characterization adopted by
the parties should not affect the statutes in bankruptcy on
bona fide secondary mortgage market purchases and sales.
Effective date of section:
This section became effective on October 1, 1979,
pursuant to § 402(a) of Act Nov. 6, 1978, P.L. 95-598, which
appears as 11 USCS prec § 101 note.
Amendments:
1984. Act July 10, 1984, in subsec. (a), in the introduc-
tory matter, deleted “under” following “under” and in-
serted “and by whomever held”, in para. (3), inserted
“329(b), 363(n),” in para. (5), in the introductory matter,
substituted “Any” for “An”, and, in para. (6), substituted
“or” for “and” preceding “profits”; substituted subsec. (b)
for one which read: “Property of the estate does not include
any power that the debtor may only exercise solely for the
benefit of an entity other than the debtor.”; in subsec.
(c(1), in the introductory matter, inserted “in an agree-
ment, transfer instrument, or applicable nonbankruptcy
law”, and in sub para. (B), substituted “taking” for “the
taking” and inserted “before such commencement”, in
subsec. (d), inserted “(1) or (2)”; and deleted subsec. (e),
which read: “The estate shall have the benefit of any
defense available to the debtor as against an entity other
than the estate, including statutes of limitation, statutes
B-19
of frauds, usury, and other personal defenses. A waiver of
any such defense by the debtor after the commencement of
the case does not bind the estate.”.
1990. Act Nov. 5, 1990 (effective as provided by
§ 3007(a)(3) of such Act, which appears as 11 USCS § 362
note), in subsec. (b), in para. (1), deleted “or” after the
concluding semicolon, in para. (2), substituted “; or” for the
concluding period, and added para. (3).
1992. Act Oct. 24, 1992 (effective and applicable as
provided by § 3017(c) of such Act, which appears as 11
USCS § 101 note), in subsec. (b), in para. (2), deleted “or”
following the semicolon, in para. (3), substituted “or” for
the concluding period, added para. (4), and added the
concluding matter.
1994. Act Oct. 22, 1994 (effective on enactment and
inapplicable with respect to cases commenced before
enactment, as provided by § 702 of such Act, which ap-
pears as 11 USCS § 101 note), in subsec. (b), in para. (3),
substituted the concluding semicolon for “or”, in para. (4),
in subpara. (A), designated the existing provisions as cl.
(i), redesignated former subpara. (B) as subpara. (A), cl.
(ii), and in cl. (ii) as so designated, substituted “the inter-
est referred to in clause (i)” for “such interest” and substi-
tuted “; or” for a concluding period, and added a new
subpara. (B), and added para. (5).
Such Act further (effective as above) purported to
amend subsec. (b)(4) by striking a period at the end and
inserting “; or”; however, the amendment was executed by
substituting “; or” for a concluding semicolon in order to
effectuate the probable intent of Congress.
B-20
2005. Act April 20, 2005 (effective 180 days after
enactment and inapplicable to cases commenced before the
effective date, as provided by § 1501 of such Act, which
appears as 11 USCS § 101 note), in subsec. (b), in para. (4),
in subpara. (B)(ii), inserted “365 or”, and deleted “or”
following the concluding semicolon, redesignated para. (5)
as para. (9), and inserted paras. (5)-(8); and added subsec.
(e).
Such Act further (applicable as provided by § 1221(d) :
of such Act, which appears as 11 USCS § 363 note), added
subsec. (f).
11 USCS § 524 (1992) Effect of discharge
(a) Adischarge in a case under this title [11 USCS §§ 101
et seq.] —
(1) voids any judgment at any time obtained, to the
extent that such judgment is a determination of the
personal liability of the debtor with respect to any debt
discharged under section 727, 944, 1141, 1228, or 1328 of
this title [11 USCS § 727, 944, 1141, 1228, or 1328],
whether or not discharge of such debt is waived;
(2) operates as an injunction against the com-
mencement or continuation of an action, the employment
of process, or an act, to collect, recover or offset any such
debt as a personal liability of the debtor, whether or not
discharge of such debt is waived; and
(3) operates as an injunction against the com-
mencement or continuation of an action, the employment
of process, or an act, to collect or recover from, or offset
against, property of the debtor of the kind specified in
B-21
section 541(a)(2) of this title [11 USCS § 541(a)(2)] that is
acquired after the commencement of the case, on account of
any allowable community claim, except a community claim
that is excepted from discharge under section 523, 1228(a)(1),
or 1328(aX1) {11 USCS § 1228aX1), or 1328(a\X(1)], or that
would be so excepted, determined in accordance with the
provisions of sections 523(c) and 523(d) of this title [11
USCS §§ 523(c) and 523(d)], in a case concerning the
debtor’s spouse commenced on the date of the filing of the
petition in the case concerning the debtor, whether or not
discharge of the debt based on such community claim is
waived.
(b) Subsection (a)(3) of this section does not apply if -
(1) (A) the debtor’s spouse is a debtor in a case
under this title, or a bankrupt or a debtor in a case under
the Bankruptcy Act, commenced within six years of the
date of the filing of the petition in the case concerning the
debtor; and
(B) the court does not grant the debtor’s spouse
a discharge in such case concerning the debtor’s spouse; or
(2) (A) the court would not grant the debtor’s spouse
a discharge in a case under chapter 7 of this title [11
USCS §§ 701 et seq.] concerning such spouse commenced
on the date of the filing of the petition in the case concern-
ing the debtor; and
(B) a determination that the court would not so
grant such discharge is made by the bankruptcy court
within the time and in the manner provided for a determi-
nation under section 727 of this title [11 USCS § 727] of
whether a debtor is granted a discharge.
B-22
(c) An agreement between a holder of a claim and the
debtor, the consideration for which, in whole or in part, is
based on a debt that is dischargeable in a case under this
title is enforceable only to any extent enforceable under
applicable nonbankruptcy law, whether or not discharge of
such debt is waived, only if —
(1) such agreement was made before the granting of
the discharge under section 727, 1141, 1228, or 1328 of
this title [11 USCS § 727, 1141, 1228, or 1328];
(2) the debtor received the disclosures described in
subsection (k) at or before the time at which the debtor
signed the agreement;
(3) such agreement has been filed with the court
and, if applicable, accompanied by a declaration or an
affidavit of the attorney that represented the debtor
during the course of negotiating an agreement under this
subsection, which states that —
(A) such agreement represents a fully informed
and voluntary agreement by the debtor;
(B) such agreement does not impose an undue
hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the
legal effect and consequences of —
(i) an agreement of the kind specified in this
subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at
any time prior to discharge or within sixty days after such
B-23
agreement is filed with the court, whichever occurs later,
by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section
have been complied with; and
(6) (A) in a case concerning an individual who was
not represented by an attorney during the course of
negotiating an agreement under this subsection, the court
approves such agreement as —
(i) not imposing an undue hardship on the
debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the
extent that such debt is a consumer debt secured by real
property.
(d) In a case concerning an individual, when the court
has determined whether to grant or not to grant a dis-
charge under section 727, 1141, 1228, or 1328 of this title
{11 USCS § 727, 1141, 1228, or 1328], the court may hold a
hearing at which the debtor shall appear in person. At any
such hearing, the court shall inform the debtor that a
discharge has been granted or the reason why a discharge
has not been granted. If a discharge has been granted and
if the debtor desires to make an agreement of the kind
specified in subsection (c) of this section and was not
represented by an attorney during the course of negotiat-
ing such agreement, then the court shall hold a hearing at
which the debtor shall appear in person and at such
hearing the court shall —
B-24
(1) inform the debtor —
(A) that such an agreement is not required
under this title, under nonbankruptcy law, or under any
agreement not made in accordance with the provisions of
subsection (c) of this section; and
(B) of the legal effect and consequences of —
(i) an agreement of the kind specified in
subsection (c) of this section; and
(ii) a default under such an agreement; and
(2) determine whether the agreement that the
debtor desires to make complies with the requirements of
subsection (c)(6) of this section, if the consideration for
such agreement is based in whole or in part on a consumer
debt that is not secured by real property of the debtor.
(e) Except as provided in subsection (a)(3) of this section,
discharge of a debt of the debtor does not affect the liabil-
ity of any other entity on, or the property of any other
entity for, such debt.
(f) Nothing contained in subsection (c) or (d) of this
section prevents a debtor from voluntarily repaying any
debt.
(g) (1) (A) After notice and hearing, a court that enters
an order confirming a plan of reorganization under chap-
ter 11 [11 USCS §§ 1101 et seq.] may issue, in connection
with such order, an injunction in accordance with this
subsection to supplement the injunctive effect of a dis-
charge under this section.
(B) An injunction may be issued under subpara-
graph (A) to enjoin entities from taking legal action for the
B-25
purpose of directly or indirectly collecting, recovering, or
receiving payment or recovery with respect to any claim or
demand that, under a plan of reorganization, is to be paid
in whole or in part by a trust described in paragraph
(2)(B)(i), except such legal actions as are expressly allowed
by the injunction, the confirmation order, or the plan of
reorganization.
(2) (A) Subject to subsection (h), if the requirements
of subparagraph (B) are met at the time an injunction
described in paragraph (1) is entered, then after entry of
such injunction, any proceeding that involves the validity,
application, construction, or modification of such injunc-
tion, or of this subsection with respect to such injunction,
may be commenced only in the district court in which such
injunction was entered, and such court shall have exclu-
sive jurisdiction over any such proceeding without regard
te the amount in controversy.
(B) The requirements of this subparagraph are
that -
(i) the injunction is to be implemented in
connection with a trust that, pursuant to the plan of
reorganization —
(I) is to assume the liabilities of a
debtor which at the time of entry of the order for relief has
been named as a defendant in personal injury, wrongful
death, or property-damage actions seeking recovery for
damages allegedly caused by the presence of, or exposure
to, asbestos or asbestos-containing products;
(II) is to be funded in whole or in part
by the securities of 1 or more debtors involved in such plan
B-26
and by the obligation of such debtor or debtors to make
future payments, including dividends;
(III) is to own, or by the exercise of
rights granted under such plan would be entitled to own if
specified contingencies occur, a majority of the voting
shares of —
(aa) each such debtor;
(bb) the parent corporation of each
such debtor; or
(cc) a subsidiary of each such
debtor that is also a debtor; and
(IV) is to use its assets or income to pay
claims and demands; and
(ii) subject to subsection (h), the court
determines that —
(I) the debtor is likely to be subject to
substantial future demands for payment arising out of the
same or similar conduct or events that gave rise to the
claims that are addressed by the injunction;
(II) the actual amounts, numbers, and
timing of such future demands cannot be determined;
(II) pursuit of such demands outside
the procedures prescribed by such plan is likely to
threaten the plan’s purpose to deal equitably with claims
and future demands;
(IV) as part of the process of seeking
confirmation of such plan —
B-27
(aa) the terms of the injunction
proposed to be issued under paragraph (1)(A), including
any provisions barring actions against third parties
pursuant to paragraph (4)(A), are set out in such plan and
in any disclosure statement supporting the plan; and
(bb) a separate class or classes of
the claimants whose claims are to be addressed by a trust
described in clause (i) is established and votes, by at least
75 percent of those voting, in favor of the plan; and
(V) subject to subsection (h), pursuant
to court orders or otherwise, the trust will operate through
mechanisms such as structured, periodic, or supplemental
payments, pro rata distributions, matrices, or periodic
review of estimates of the numbers and values of present
claims and future demands, or other comparable mecha-
nisms, that provide reasonable assurance that the trust
will value, and be in a financial position to pay, present
claims and future demands that involve similar claims in
substantially the same manner.
(3) (A) If the requirements of paragraph (2B) are
met and the order confirming the plan of reorganization
was issued or affirmed by the district court that has juris-
diction over the reorganization case, then after the time for
appeal of the order that issues or affirms the plan —
(i) the injunction shall be valid and enforce-
able and may not be revoked or modified by any court
except through appeal in accordance with paragraph (6);
(ii) no entity that pursuant to such plan or
thereafter becomes a direct or indirect transferee of, or
successor to any assets of, a debtor or trust that is the
subject of the injunction shall be liable with respect to any
B-28
claim or demand made against such entity by reason of its
becoming such a transferee or successor; and
(iii) no entity that pursuant to such plan or
thereafter makes a loan to such a debtor or trust or to
such a successor or transferee shall, by reason of making
the loan, be liable with respect to any claim or demand
made against such entity, nor shall any pledge of assets
made in connection with such a loan be upset or impaired
for that reason;
(B) Subparagraph (A) shall not be construed to —
(i) imply that an entity described in sub-
paragraph (A)(ii) or (iii) would, if this paragraph were not
applicable, necessarily be liable to any entity by reason of
any of the acts described in subparagraph (A);
(ii) relieve any such entity of the duty to
comply with, or of liability under, any Federal or State law
regarding the making of a fraudulent conveyance in a
transaction described in subparagraph (A)(ii) or (iii); or
(iii) relieve a debtor of the debtor’s obliga-
tion to comply with the terms of the plan of reorganiza-
tion, or affect the power of the court to exercise its
authority under sections 1141 and 1142 [11 USCS §§ 1141
and 1142) to compel the debtor to do so.
(4) (A) Gi) Subject to subparagraph (B), an injunc-
tion described in paragraph (1) shall be valid and enforce-
able against all entities that it addresses.
(ii) Notwithstanding the provisions of
section 524(e) [11 USCS § 524(e)], such an injunction may
bar any action directed against a third party who is
identifiable from the terms of such injunction (by name or
B-29
as part of an identifiable group) and is alleged to be
directly or indirectly liable for the conduct of, claims
against, or demands on the debtor to the extent such
alleged liability of such third party arises by reason of —
(I) the third party’s ownership of a
financial interest in the debtor, a past or present affiliate
of the debtor, or a predecessor in interest of the debtor;
(II) the third party's involvement in the
management of the debtor or a predecessor in interest of
the debtor, or service as an officer, director or employee of
the debtor or a related party;
(III) the third partys provision of
insurance to the debtor or a related party; or
(IV) the third party’s involvement in a
transaction changing the corporate structure, or in a loan
or other financial transaction affecting the financial
condition, of the debtor or a related party, including but
not limited to —
(aa) involvement in _ providing
financing (debt or equity), or advice to an entity involved
in such a transaction; or
(bb) acquiring or selling a financial
interest in an entity as part of such a transaction.
(iii) As used in this subparagraph, the term
“related party” means —
(I) a past or present affiliate of the
debtor;
(II) a predecessor in interest of the
debtor; or
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(IIT) any entity that owned a financial
interest in —
(aa) the debtor;
(bb) a past or present affiliate of
the debtor; or
(cc) a predecessor in interest of the
debtor.
(B) Subject to subsection (h), if, under a plan of
reorganization, a kind of demand described in such plan is
to be paid in whole or in part by a trust described in
paragraph (2)(B)i) in connection with which an injunction
described in paragraph (1) is to be implemented, then such
injunction shall be valid «nd enforceable with respect to a
demand of such kind made, after such plan is confirmed,
against the debtor or debtors involved, or against a third
party described in subparagraph (A)(ii), if —
(i) as part of the proceedings leading to
issuance of such injunction, the court appoints a legal
representative for the purpose of protecting the rights of
persons that might subsequently assert demands of such
kind, and
(ii) the court determines, before entering
the order confirming such plan, that identifying such
debtor or debtors, or such third party (by name or as part
of an identifiable group), in such injunction with respect to
such demands for purposes of this subparagraph is fair
and equitable with respect te the persons that might
subsequently assert such demands, in light of the benefits
provided, or to be provided, to such trust on behalf of such
debtor or debtors or such third party.
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(5) In this subsection, the term “demand” means a
demand for payment, present or future, that —
(A) was not a claim during the proceedings
leading to the confirmation of a plan of reorganization;
(B) arises out of the same or similar conduct or
events that gave rise to the claims addressed by the
injunction issued under paragraph (1); and
(C) pursuant to the plan, is to be paid by a trust
described in paragraph (2)(B)i).
(6) Paragraph (3)A)(i) does not bar an action taken
by or at the direction of an appellate court on appeal of an
injunction issued under paragraph (1) or of the order of
confirmation that relates to the injunction.
(7) This subsection does not affect the operation of
section 1144 [11 USCS § 1141] or the power of the district
court to refer a proceeding under section 157 of title 28 or
any reference of a proceeding made prior to the date of the
enactment of this subsection [enacted Oct. 22, 1994].
(h) Application to existing injunctions. — For purposes of
subsection (g) —
(1) subject to paragraph (2), if an injunction of the
kind described in subsection (g)(1)(B) was issued before
the date of the enactment of this Act, as part of a plan of
reorganization confirmed by an order entered before such
date, then the injunction shall be considered to meet the
requirements of subsection (g)(2)(B) for purposes of sub-
section (g)(2)(A), and to satisfy subsection (g)(4A)(ii), if —
(A) the court determined at the time the plan
was confirmed that the plan was fair and equitable in
B-32
accordance with the requirements of section 1129(b) [11
USCS § 1129(b)];
(B) as part of the proceedings leading to issu-
ance of such injunction and confirmation of such plan, the
court had appointed a legal representative for the purpose
of protecting the rights of persons that might subsequently
assert demands described in subsection (g)(4)(B) with
respect to such plan; and
(C) such legal representative did not object to
confirmation of such plan or issuance of such injunction;
and
(2) for purposes of paragraph (1), if a trust described
~ in subsection (g\(2)(B)(i) is subject to a court order on the
date of the enactment of this Act staying such trust from
settling or paying further claims —
(A) the requirements of subsection (g)(2\B)(jiXV)
shall not apply with respect to such trust until such stay is
lifted or dissolved; and
(B) if such trust meets such requirements on the
date such stay is lifted or dissolved, such trust shall be
considered to have met such requirements continuously
from the date of the enactment of this Act.
(i) The willful failure of a creditor to credit payments
received under a plan confirmed under this title, unless
the order confirming the plan is revoked, the plan is in
default, or the creditor has not received payments required
to be made under the plan in the manner required by the
plan (including crediting the amounts required under the
plan), shall constitute a violation of an injunction under
subsection (a)(2) if the act of the creditor to collect and
B-33
failure to credit payments in the manner required by the
plan caused material injury to the debtor.
(j) Subsection (a2) does not operate as an injunction
against an act by a creditor that is the holder of a secured
claim, if —
(1) such creditor retains a security interest in real
property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business
between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining peri-
odic payments associated with a valid security interest in
lieu of pursuit of in rem relief to enforce the lien.
(k) (1) The disclosures required under subsection (c)(2)
shall consist of the disclosure statement described in
paragraph (3), completed as required in that paragraph,
together with the agreement specified in subsection (c),
statement, declaration, motion and order described,
respectively, in paragraphs (4) through (8), and shall be
the only disclosures required in connection with entering
into such agreement.
(2) Disclosures made under paragraph (1) shall be
made clearly and conspicuously and in writing. The terms
“Amount Reaffirmed” and “Annual Percentage Rate” shall
be disclosed more conspicuously than other terms, data or
information provided in connection with this disclosure,
except that the phrases “Before agreeing to reaffirm a
debt, review these important disclosures” and “Summary
of Reaffirmation Agreement” may be equally conspicuous.
Disclosures may be made in a different order and may use
terminology different from that set forth in paragraphs (2)
through (8), except that the terms “Amount Reaffirmed”
B-34
and “Annual Percentage Rate” must be used where indi-
cated.
(3) The disclosure statement required under this
paragraph shall consist of the following:
(A) The statement: “Part A: Before agreeing to
reaffirm a debt, review these important disclosures:”;
(B) Under the heading “Summary of Reaffirma-
tion Agreement”, the statement: “This Summary is made
pursuant to the requirements of the Bankruptcy Code”;
(C) The “Amount Reaffirmed”, using that term,
which shall be —
(i) the total amount of debt that the debtor
agrees to reaffirm by entering into an agreement of the
kind specified in subsection (c), and
(ii) the total of any fees and costs accrued as
of the date of the disclosure statement, related to such
total amount.
(D) In conjunction with the disclosure of the
“Amount Reaffirmed", the statements —
(i) “The exnount of debt you have agreed to
reaffirm”; and
(ii) “Your credit agreement may obligate you
to pay additional amounts which may come due after the
date of this disclosure. Consult your credit agreement.”
(E) The “Annual Percentage Rate”, using that
term, which shall be disclosed as —
(i) if, at the time the petition is filed, the
debt is an extension of credit under an open end credit
B-35
plan, as the terms “credit” and “open end credit plan” are
defined in section 103 of the Truth in Lending Act [15
USCS § 1602], then —
(I) the annual percentage rate deter-
mined under paragraphs (5) and (6) of section 127(b) of the
Truth in Lending Act [15 USCS § 1637(b)], as applicable,
as disclosed to the debtor in the most recent periodic
statement prior to entering into an agreement of the kind
specified in subsection (c) or, if no such periodic statement
has been given to the debtor during the prior 6 months,
the annual percentage rate as it would have been so
disclosed at the time the disclosure statement is given to
the debtor, or to the extent this annual percentage rate is
not readily available or not applicable, then
(If) the simple interest rate applicable
to the amount reaffirmed as of the date the disclosure
statement is given to the debtor, or if different simple
interest rates apply to different balances, the simple
interest rate applicable to each such balance, identifying
the amount of each such balance included in the amount
reaffirmed, or
(III) if the entity making the disclosure
elects, to disclose the annual percentage rate under
subclause (I) and the simple interest rate under subclause
(II); or
(ii) if, at the time the petition is filed, the
debt is an extension of credit other than under an open
end credit plan, as the terms “credit” and “open end credit
plan” are defined in section 103 of the Truth in Lending
Act [15 USCS § 1602], then —
B-36
(Tl the annual percentage rate under
section 128(a)(4) of the Truth in Lending Act [15 USCS
§ 1638(a)(4)], as disclosed to the debtor in the most recent
disclosure statement given to the debtor prior to the
entering into an agreement of the kind specified in subsec-
tion (c) with respect to the debt, or, if no such disclosure
statement was given to the debtor, the annual percentage
rate as it would have been so disclosed at the time the
disclosure statement is given to the debtor, or to the extent
this annual percentage rate is not readily available or not
applicable, then
(II) the simple interest rate applicable
to the amount reaffirmed as of the date the disclosure
statement is given to the debtor, or if different simple
interest rates apply to different balances, the simple
interest rate applicable to each such balance, identifying
the amount of such balance included in the amount reaf-
firmed, or
(II) if the entity making the disclosure
elects, to disclose the annual percentage rate under (I) and
the simple interest rate under (II).
(F) If the underlying debt transaction was
disclosed as a variable rate transaction on the most recent
disclosure given under the Truth in Lending Act, by
stating “The interest rate on your loan may be a variable
interest rate which changes from time to time, so that the
annual percentage rate disclosed here may be higher or
lower.”
(G) If the debt is secured by a security interest
which has not been waived in whole or in part or deter-
mined to be void by a final order of the court at the time of
the disclosure, by disclosing that a security interest or lien
B-37
in goods or property is asserted over some or all of the
debts the debtor is reaffirming and listing the items and
their original purchase price that are subject to the as-
serted security interest, or if not a purchase-money secu-
rity interest then listing by items or types and the original
amount of the loan.
(H) At the election of the creditor, a statement of
the repayment schedule using 1 or a combination of the
following —
(i) by making the statement: “Your first
payment in the amount of $__ is due on __ but the
future payment amount may be different. Consult your
reaffirmation agreement or credit agreement, as applica-
ble.”, and stating the amount of the first payment and the
due date of that payment in the places provided;
(ii) by making the statement: “Your pay-
ment schedule will be:”, and describing the repayment
schedule with the number, amount, and due dates or
period of payments scheduled to repay the debts reaf-
firmed to the extent then known by the disclosing party; or
(iii) by describing the debtor’s repayment
obligations with reasonable specificity to the extent then
known by the disclosing party.
(I) The following statement: “Note: When this
disclosure refers to what a creditor ‘may’ do, it does not use
the word ‘may’ to give the creditor specific permission. The
word ‘may’ is used to tell you what might occur if the law
permits the creditor to take the action. If you have ques-
tions about your reaffirming a debt or what the law
requires, consult with the attorney who helped you negoti-
ate this agreement reaffirming a debt. If you don’t have an
B-38
attorney helping you, the judge will explain the effect of
your reaffirming a debt when the hearing on the reaf-
firmation agreement is held.”.
(J)
(i) The following additional statements:
“Reaffirming a debt is a serious financial decision. The
law requires you to take certain steps to make sure the
decision is in your best interest. If these steps are not
completed, the reaffirmation agreement is not effective,
even though you have signed it.
“1. Read the disclosures ia this Part A carefully.
Consider the decision to reaffirm carefully. Then, if you
want to reaffirm, sign the reaffirmation agreement in Part
B (or you may use a separate agreement you and your
creditor agree on).
“2. Complete and sign Part D and be sure you
can afford to make the payments you are agreeing to make
and have received a copy of the disclosure statement and a
completed and signed reaffirmation agreement.
“3. If you were represented by an attorney
during the negotiation of your reaffirmation agreement,
the attorney must have signed the certification in Part C.
“4. If you were not represented by an attorney
during the negotiation of your reaffirmation agreement,
you must have completed and signed Part =.
“5. The original of this disclosure must be filed
with the court by you or your creditor. If a separate reaf-
firmation agreement (other than the one in Part B) has
been signed, it must be attached.
—B-39
“6. If you were represented by an attorney
during the negotiation of your reaffirmation agreement,
your reaffirmation agreement becomes effective upon
filing with the court unless the reaffirmation is presumed
to be an undue hardship as explained in Part D.
“7. If you were not represented by an attorney
during the negotiation of your reaffirmation agreement, it
will not be effective unless the court approves it. The court
will notify you of the hearing on your reaffirmation
agreement. You must attend this hearing in bankruptcy
court where the judge will review your reaffirmation
agreement. The bankruptcy court must approve your
reaffirmation agreement as consistent with your best
interests, except that no court approval is required if your
reaffirmation agreement is for a consumer debt secured by
a mortgage, deed of trust, security deed, or other lien on
your real property, like your home.
“Your right to rescind (cancel) your reaffirmation
agreement. You may rescind (cancel) your reaffirmation
agreement at any time before the bankruptcy court enters
a discharge order, or before the expiration of the 60-day
period that begins on the date your reaffirmation agree-
ment is filed with the court, whichever occurs later. To
rescind (cancel) your reaffirmation agreement, you must
notify the creditor that your reaffirmation agreement is
rescinded (or canceled).
“What are your obligations if you reaffirm the debt? A
reaffirmed debt remains your personal, legal obligation. It
is not discharged in your bankruptcy case. That means
that if you default on your reaffirmed debt after your
bankruptcy case is over, your creditor may be able to take
your property or your wages. Otherwise, your obligations
B-40
will be determined by the reaffirmation agreement which
may have changed the terms of the original agreement.
For example, if you are reaffirming an open end credit
agreement, the creditor may be permitted by that agree-
ment or applicable law to change the terms of that agree-
ment in the future under certain conditions.
“Are you required to enter into a reaffirmation agree-
ment by any law? No, you are not required to reaffirm a
debt by any law. Only agree to reaffirm a debt if it is in
your best interest. Be sure you can afford the payments
you agree to make.
“What if your creditor has a security interest or lien?
Your bankruptcy discharge does not eliminate any lien on
your property. A ‘lien’ is often referred to as a security
interest, deed of trust, mortgage or security deed. Even if
you do not reaffirm and your personal liability on the debt
is discharged, because of the lien your creditor may still
have the right to take the security property if you do not
pay the debt or default on it. If the lien is on an item of
personal property that is exempt under your State’s law or
that the trustee has abandoned, you may be able to re-
deem the item rather than reaffirm the debt. To redeem,
you make a single payment to the creditor equal to the
current value of the security property, as agreed by the
parties or determined by the court.”
(ii) In the case of a reaffirmation under
subsection (m)(2), numbered paragraph 6 in the disclo-
sures required by clause (i) of this subparagraph shall
read as follows:
“6. If you were represented by an attorney
during the negotiation of your reaffirmation agreement,
B-41
your reaffirmation agreement becomes effective upon
filing with the court.”
(4) The form of such agreement required under this
paragraph shall consist of the following:
“Part B: Reaffirmation Agreement. I (we) agree to
reaffirm the debts arising under the credit agreement
described below.
“Brief description of credit agreement:
“Description of any changes to the credit agreement
made as part of this reaffirmation agreement:
“Signature: Date:
“Borrower:
“Co-borrower, if also reaffirming these debts:
“Accepted by creditor:
“Date of creditor acceptance:”.
(5) The declaration shall consist of the following:
(A) The following certification:
“Part C: Certification by Debtor’s Attorney (If Any).
“I hereby certify that (1) this agreement represents a
fully informed and voluntary agreement by the debtor; (2)
this agreement does not impose an undue hardship on the
debtor or any dependent of the debtor; and (3) I have fully
advised the debtor of the legal effect and consequences of
this agreement and any default under this agreement.
“Signature of Debtor’s Attorney: Date:”.
B-42
(B) Ifa presumption of undue hardship has been
established with respect to such agreement, such certifica-
tion shall state that in the opinion of the attorney, the
debtor is able to make the payment.
(C) In the case of a reaffirmation agreement
under subsection (m)(2), subparagraph (B) is not applica-
ble.
(6) (A) The statement in support of such agreement,
which the debtor shall sign and date prior to filing with
the court, shall consist of the following:
“Part D: Debtor’s Statement in Support of Reaf-
firmation Agreement.
“1. I believe this reaffirmation agreement
will not impose an undue hardship on my dependents or
me. I can afford to make the payments on the reaffirmed
debt because my monthly income (take home pay plus any
other income received) is $__, and my actual current
monthly expenses including monthly payments on post-
bankruptcy debt and other reaffirmation agreements total
$__, leaving $___ to make the required payments on this
reaffirmed debt. I understand that if my income less my
monthly expenses does not leave enough to make the
payments, this reaffirmation agreement is presumed to be
an undue hardship on me and must be reviewed by the
court. However, this presumption may be overcome if I
explain to the satisfaction of the court how I can afford to
make the payments here: ___.
“2. I received a copy of the Reaffirmation
Disclosure Statement in Part A and a completed and
signed reaffirmation agreement.”
B-43
(B) Where the debtor is represented by an
attorney and is reaffirming a debt owed to a creditor
defined in section 19(b)(1AXiv) of the Federal Reserve
Act [12 USCS § 461(b)(1)(A)(iv)], the statement of support
of the reaffirmation agreement, which the debtor shall
sign and date prior to filing with the court, shall consist of
the following:
“I believe this reaffirmation agreement is in my
financial interest. I can afford to make the payments on
the reaffirmed debt. I received a copy of the Reaffirmation
Disclosure Statement in Part A and a completed and
signed reaffirmation agreement.”
(7) The motion that may be used if approval of such
agreement by the court is required in order for it to be
effective, shall be signed and dated by the movant and
shall consist of the following:
“Part E: Motion for Court Approval (To be completed
only if the debtor is not represented by an attorney.). I
(we), the debtor(s), affirm the following to be true and
correct:
“I am not represented by an attorney in connection
with this reaffirmation agreement.
“I believe this reaffirmation agreement is in my best
interest based on the income and expenses I have dis-
closed in my Statement in Support of this reaffirmation
agreement, and because (provide any additional relevant
reasons the court should consider):
“Therefore, I ask the court for an order approving this
reaffirmation agreement.”
B-44
(8) The court order, which may be used to approve
such agreement, shall consist of the following:
“Court Order: The court grants the debtor’s motion
and approves the reaffirmation agreement described
above.”.
(1) Notwithstanding any other provision of this title the
following shall apply:
(1) A creditor may accept payments from a debtor
before and after the filing of an agreement of the kind
specified in subsection (c) with the court.
(2) A creditor may accept payments from a debtor
under such agreement that the creditor believes in good
faith to be effective.
(3) The requirements of subsections (cX2) and (k)
shall be satisfied if disclosures required under those
subsections are given in good faith.
(m) (1) Until 60 days after an agreement of the kind
specified in subsection (c) is filed with the court (or such
additional period as the court, after notice and a hearing
and for cause, orders before the expiration of such period),
it shall be presumed that such agreement is an undue
hardship on the debtor if the debtor’s monthly income less
the debtor’s monthly expenses as shown on the debtor’s
completed and signed statement in support of such agree-
ment required under subsection (k)(6)(A) is less than the
scheduled payments on the reaffirmed debt. This pre-
sumption shall be reviewed by the court. The presumption
may be rebutted in writing by the debtor if the statement
includes an explanation that identifies additional sources
of funds to make the payments as agreed upon under
the terms of such agreement. If the presumption is not
B-45
rebutted to the satisfaction of the court, the court may
disapprove such agreement. No agreement shall be disap-
proved without notice and a hearing to the debtor and
creditor, and such hearing shall be concluded before the
entry of the debtor’s discharge.
(2) This subsection does not apply to reaffirmation
agreements where the creditor is a credit union, as defined
in section 19(b)(1AXiv) of the Federal Reserve Act [12
USCS § 461(b)(1)(A)iv)].
HISTORY:
(Nov. 6, 1978, P.L. 95-598, Title I, § 101, 92 Stat. 2592;
July 10, 1984, P.L. 98-353, Title III, Subtitle A, § 308,
Subtitle H, § 455, 98 Stat. 354, 376; Oct. 27, 1986, P.L. 99-
554, Title II, Subtitles B, C, §§ 257(0), 282, 283(k), 100
Stat. 3115-3117; Oct. 22, 1994, P.L. 103-394, Title I, §§ 103,
111(a), Title V, § 501(d)(14), 108 Stat. 4108, 4113, 4145.)
(As amended April 20, 2005, PL. 109-8, Title II,
Subtitle A, §§ 202, 203(a), Title XII, § 1210, 119 Stat. 43,
194.)
HISTORY; ANCILLARY LAWS AND DIRECTIVES
Prior law and revision:
Legislative Statements
Section 524(a) of the House amendment represents a
compromise between the House bill and the Senate
amendment. Section 524(b) of the House amendment is
new, and represents standards clarifying the operation of
section 524(a\3) with respect to community property.
B-46
Sections 524(c) and (d) represent a compromise
between the House bill and Senate amendment on the
issue of reaffirmation of a debt discharged in bankruptcy.
Every reaffirmation to be enforceable must be approved by
the court, and any debtor may rescind a reaffirmation for
30 days from the time the reaffirmation becomes enforce-
able [see the 1984 amendment of subset. (c) of this sec-
tion]. If the debtor is an individual the court must advise
the debtor of various effects of reaffirmation at a hearing.
In addition, to any extent the debt is a consumer debt that
is not secured by real property of the debtor reaffirmation
is permitted only if the court approves the reaffirmation
agreement, before granting a discharge under section 727,
1141, or 1328, as not imposing a hardship on the debtor or
a dependent of the debtor and in the best interest of the
debtor; alternatively, the court may approve an agreement
entered into in good faith that is in settlement of litigation
of a complaint to determine dischargeability or that is
entered into in connection with redemption under section
722. The hearing on discharge under section 524(d) will be
held whether or not the debtor desires to reaffirm any
debts.
Senate Report No. 95-989
Subsection (a) specifies that a discharge in a bank-
ruptcy case voids any judgment to the extent that it is a
determination of the personal liability of the debtor with
respect to a prepetition debt, and operates as an injunction
against the commencement or continuation of an action,
the employment of process, or any act, including telephone
calls, letters, and personal contacts, to collect, recover, or
offset any discharged debt as a personal liability of the
debtor, or from property of the debtor, whether or not the
debtor has waived discharge of the debt involved. The
B-47
injunction is to give complete effect to the discharge and to
eliminate any doubt concerning the effect of the discharge
as a total prohibition on debt collection efforts. This
paragraph has been expanded over a comparable provision
in Bankruptcy Act § 14f [section 32(f) of former title 11] to
cover any act to collect, such as dunning by telephone or
letter, or indirectly through friends, relatives, or employ-
ers, harassment, threats of repossession, and the like. The
change is consonant with the new policy forbidding bind-
ing reaffirmation agreements under proposed 11 U.S.C.
524(b), and is intended to insure that once a debt is
discharged, the debtor will not be pressured in any way to
repay it. In effect, the discharge extinguishes the debt, and
creditors may not attempt to avoid that. The language
“whether or not discharge of such debt is waived” is
intended to prevent waiver of discharge of a particular
debt from defeating the purposes of this section. It is
directed at waiver of discharge of a particular debt, not
waiver of discharge in toto as permitted under section
727(a)(9).
Subsection (a) also codifies the split discharge for
debtors in community property states. If community
property was in the estate and community claims were
discharged, the discharge is effective against community
creditors of the nondebtor spouse as well as of the debtor
spouse.
Subsection (b) [subsec. (c) of this section] gives further
effect to the discharge. It prohibits reaffirmation agree-
ments after the commencement of the case with respect to
any dischargeable debt. The prohibition extends to agree-
ments the consideration for which in whole or in part is
based on a dischargeable debt, and it applies whether or
not discharge of the debt involved in the agreement has
B-48
been waived. Thus, the prohibition on reaffirmation
agreements extends to debts that are based on discharged
debts. Thus, “second generation” debts, which included all
or a part of a discharged debt could not be included in any
new agreement for new money. This subsection will not
have any effect on reaffirmations of debts discharged
under the Bankruptcy Act [former title 11]. It will only
apply to discharges granted if commenced under the new
title 11 bankruptcy code.
Subsection (c) [subsec. (d) of this section] grants an
exception to the anti-reaffirmation provision. It permits
reaffirmation in connection with the settlement of a
proceeding to determine the dischargeability of the debt
being reaffirmed, or in connection with a redemption
agreement permitted under section 722. In either case, the
reaffirmation agreement must be entered into in good
faith and must be approved by the court.
Subsection (d) [subsec. (e) of this section] provides the
discharge of the debtor does not affect co-debtors or guar-
antors. .
References in text:
The “Bankruptcy Act”, referred to in this section, is
Act July 1, 1898, ch 541, 30 Stat. 544, which appeared
generally as 11 USCS §§ 1 et seq., was repealed by Act
Nov. 6, 1978, P.L. 95-598, Title IV, § 401, 92 Stat. 2682,
effective Oct. 1, 1979, as provided by § 402(a) of Act Nov. 6,
1978. Such Act Nov. 6, 1978 also enacted the Bankruptcy
Code which generally appears as 11 USCS §§ 101, et seq.
As used in subsec. (h), the “date of the enactment of
this Act” probably means the date of enactment of Act Oct.
22, 1994, P.L. 103-394, which enacted subsec. (h).
B-49
Effective date of section:
This section became effective on October 1, 1979,
pursuant to § 402(a) of Act Nov. 6, 1978, P.L. 95-598, which
appears as 11 USCS prec § 101 note.
Amendments:
1984. Act July 10, 1984 (applicable to cases filed 90
days after enactment, as provided by § 552(a) of such Act,
which appears as 11 USCS § 101 note), in subsec. (a), in
para. (2), substituted “an act” for “any act” and deleted “or
from property of the debtor,” following “liability of the
debtor,” and, in para. (3), substituted “an act” for “any act”;
in subsec. (c), substituted para. (2) for one which read: “the
debtor has not rescinded such agreement within 30 days
after such agreement becomes enforceable;”, redesignated
former para. (3) as para. (5), and added new part (3),
redesignated former para. (4) as para. (6) and added new
para. (4), and substituted new para. (6) for the redesig-
nated one which read:
“in a case concerning an individual, to the extent that
such debt is a consumer debt that is not secured by real
property of the debtor, the court approves such agreement
as —
“(A)
(i) not imposing an undue hardship on the
debtor or a dependent of the debtor; and
“(ii) in the best interest of the debtor; or
“<B)
(i) entered into in good faith; and
B-50
“(ii) in settlement of litigation under section 523
of this title, or providing for redemption under section 722
of this title.”.
Such Act further, in subsec. (d), in part (2), substituted
“subsection (cX6)” for “subsection (c)(4)”; and added subsec.
(f).
1986. Act Oct. 27, 1986 (effective 30 days after enact-
ment on 10/27/86, and applicable as provided by § 302 of
such Act, which appears ae 26 USCS §581 note), in
subsec. (a), in para. (1), inserted “1228,”, and in para. (3),
purported to substitute “, 1228(aX1), or 1328(a)(1)” for “or
1328(c)(1)” however, “1228(a)(1), or 1328(c)(1)” was substi-
tuted for “or 1328(c\1)” for conform to the probable intent
of Congress; in subsec (c)(1), inserted “1228,”; in subsec.
(d), in the introductory matter, inserted “1228,”, substi-
tuted “the court may hold” for “the court shall hold”,
substituted “At any such” for “At such”, and inserted “the
cow:t shall hold a hearing at which the debtor shall appear
in person and”, and in para. (2), substituted “section” for
“subsection” following “of this”.
1994. Act Oct. 22, 1994 (effective on enactment and
inapplicable with respect to cases commenced prior to
enactment, as provided by § 702 of such Act, which ap-
pears as 11 USCS § 101 note), in subsec. (a)(3), substituted
“1328(a)(1)” for “1328(c)(1)”; in subsec. (c), in para. (2),
designated the existing provision as subpara. (A), in
subpara. (A), as so designated, added “and” following “such
claim;”, and added subpara. (B), in para. (3), in the intro-
ductory matter, deleted “such agreement” following “which
states that”, in subpara. (A), inserted “such agreement”,
and deleted “and” following “the debtor;”, in subpara. (B),
inserted “such agreement” and inserted “and” following
B-51
“the debtor;”, and added subpara. (C), and, in para. (4),
substituted “rescission” for “recission”; and in subsec. (d),
in the introductory matter, inserted “and was not repre-
sented by an attorney during the course of negotiating
such agreement”, and, in para. (1)(B)ii) added “and” after
the semicolon.
Such Act further (effective and applicable as provided
by § 702 of such Act, which appears as 11 USCS § 101
note), added subsecs. (g) and (h).
2005. Act April 20, 2005 (effective 180 days after enact-
ment and inapplicable to cases commenced before the
effective date, as provided by § 1501 of such Act, which
appears as 11 USCS § 101 note), in subsec. (aX3), substituted
“section 523, 12221), or 1328(a)(1), or that” for “section
523 or, 1228(aX1), or 1328(aX1) of this title, or that”; in
subsec. (c), substituted para. (2) for one which read:
“(2)
(A) such agreement contains a clear and con-
spicuous statement which advises the debtor that the
agreement may be rescinded at any time prior to discharge
or within sixty days after such agreement is filed with the
court, whichever occurs later, by giving notice of rescission
to the holder of such claim; and
“(B) such agreement contains a clear and con-
spicuous statement which advises the debtor that such
agreement is not required under this title, under non-
bankruptcy law, or under any agreement not in accordance
with the provisions of this subsection;”;
and added subsets. (i)-(k).
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C-1
SUPREME COURT
OF THE STATE OF WASHINGTON
ALAN DeATLEY and ) NO. 77442-1
DEBRA DeATLEY ) ,
aT PETITIONER’S
husband and wife, MOTION FOR
Petitioners, ) RECONSIDERATION
vs. )
LYNN BARNETT and )
MARLENE BARNETT, )
husband and wife; )
LOOKOUT POINT PARTNERS, ?
a Washington partnership,
Respondents. )
PETITIONERS DeATLEY hereby move, pursuant to
RAP 12.4, that the court reconsider its recent refusal to
accept review of the Court of Appeals’ decision issued in
this case. This motion is based upon the Points and Au-
thorities accompanying the motion and all other portions
of the record and authorities set forth in prior briefs which
address or support motion issues.
DATED this 24 day of March, 2006.
Respectfully submitted,
LARSON & PERKINS P.L.L.C.
Attorneys for Petitioners
By: /s/ James A. Perkins
James A. Perkins, WSBA #13330
C-2
CERTIFICATE OF SERVICE
I hereby certify that on the 24th day of March, 2006, I
caused to be served by forwarding via Federal Express
Priority Overnight service, a true and correct copy of
Petitioners’ Motion for Reconsideration to:
Margaret Archer Annette T. Fitzsimmons
Gordon, Thomas, Annette T. Fitzsimmons, PS.
Honeywell, et al. 3121 Soundview Drive West
1201 Pacific Avenue, #2200 Tacoma, WA 98466
Tacoma, WA 98401
LARSON & PERKINS P.L.L.C.
/s/ Dianne L. Puhrmann_
Dianne L. Puhrmann,
Legal Assistant to
James A. Perkins,
WSBA #13330
Attorneys for Petitioners
C-3
SUPREME COURT
OF THE STATE OF WASHINGTON
ALAN DeATLEY and
DEBRA DeATLEY,
husband and wife,
Petitioners, NO. 77442-1
vs. MEMORANDUM OF POINTS
AND AUTHORITIES
LYNN BARNETT and
SUPPORTING PETITIONER'S
MARLENE BARNETT, MOTION FOR
husband and wife; LOOK-
OUT POINT PARTNERS, eeieneneninae
a Washington partnership,
Respondents.
Petitioners and appellants, Alan DeAtley and Debra
DeAtley, husband and wife, (DeAtley) request the court to
reconsider its refusal to accept appellants petition for
review filed March 8, 2006.
I ONS ON.
1. Do federal bankruptcy laws require that a con-
tract transferred more than one year before the DeAtley’s
bankruptcy to their wholly owned non-debtor corporation
be separately disclosed on the DeAtley’s personal bank-
ruptcy schedules.
2. Does respondent Barnett proven conduct create a
sufficient fact dispute about judicial estoppel applicability
so that the Court of Appeals decision must be reversed
and/or review accepted?
C-4
Relevant Record Facts.
On or about January 1, 1988, DeAtley and Barnett
executed a contract agreement (DeAtley Agreement) (CP
802-808). The DeAtley Agreement provided that if Barnett
latex transferred a contract interest which he had in real
property to any future party, DeAtley would have a first
refusal right to purchase the assigned interest (CP 806).
In January 1990, DeAtley assigned their interest in
the DeAtley Agreement to their wholly owned company,
Wild Ones, Inc. d/b/a AD3 Company (AD3 Company) (CP
298-361). Approximately two years later in March 1992,
the DeAtley’s filed for bankruptcy (CP 298-361). On their
bankruptcy schedules, the DeAtley’s correctly disclosed
they owned all AD3 Company’s stock. Later, particulars
about this company’s debts and assets were also disclosed
by the DeAtley’s amended schedules (CP 326, 347-348).
Because two bankruptcy creditors placed at issue AD3
Company's finances, DeAtley’s bankruptcy lawyer con-
firmed that she specifically discussed the DeAtley Agree-
ment first refusal rights and AD3 Company obligations
under the DeAtley Agreement with the bankruptcy trustee
(CP 198-200). It is undisputed that because of the two
creditor’s inquiries, the trustee conducted an investigation
into AD3 Company’s assets, and eventually concluded that
AD3 Company's known assets and debts were “evenly
matched.” Accordingly, by later pleading filed September
22, 1992, the trustee subsequently abandoned all stock in
AD3 Company back to the DeAtleys (CP 407).
It is undisputed that during the bankruptcy DeAtley
never knew DeAtley Agreement first refusal rights were
exercisable, or that Barnett had breached the parties’ con-
tract by not informing DeAtley that in 1991 the purchase
C-5
contract for the property had been assigned by Barnett to
a newly formed partnership (CP 862-883).
Not until approximately 1995, several years after
DeAtley’s personal bankruptcy had been concluded, did
DeAtley first learn that DeAtley Agreement first refusal
rights had matured and/or lawsuit claims might exist (CP
1224-1227).
Although DeAtley did not own the DeAtley Agreement
during the bankruptcy, post-bankruptcy when AD3 Com-
pany dissolved, the ownership of its remaining assets,
including the DeAtley Agreement, returned to DeAtley (CP
303).
At no point during the bankruptcy and at no point
post-bankruptcy did DeAtley ever claim the DeAtley
Agreement had terminated or that Barnetts or AD3’s
contract rights as against each other were in any way
effected by DeAtley’s bankruptcy.
To subsequently support their request for lawsuit
dismissal, the respondents have argued the DeAtley’s, on
their personal bankruptcy schedules had to identify not
just their ownership of AD3 Company stock, but all assets
AD3 Company now owned, including the DeAtley Agree-
ment, and further had to disclose that as part of the
DeAtley Agreement there were first refusal rights that
might have value.
In fact, the respondent’s entire judicial estoppel
argument is based upon the assertion that federal law
required this information to be put on DeAtley’s personal
bankruptcy schedules and that because federal law was
allegedly breached by DeAtley’s failure to do so, judicial
estoppel applies.
C-6
It necessarily follows however, that if the respondents
are wrong about what federal law required DeAtley to do,
then judicial estoppel does not apply, this court should
accept review, and the Court of Appeals ruling that sum-
mary judgment properly issued should be reversed.
A. Do Lawsuit Claims or Contract Rights Belong-
in on-Debtor ration or Partnershi
Need to be Li as As on a Debtor’s Per-
sonal Bankruptcy Schedules?
If the answer to this question is no, then reconsidera-
tion should now issue and this court should accept case
review.
The answer to this question under federal law is
unequivocally no. The federal bankruptcy court in the case
In re Russell, 121 B.R. 16 (Bankr. W.D.Ark. 1990) con-
firmed that corporations have a separate legal existence
from shareholders and that accordingly, while a trustee
may have an equitable interest in the assets represented
by the corporation’s stock, the assets themselves are not
part of the property of the estate and a trustee has no
right to possess directly the underlying assets. This same
conclusion was reached by the 7th Circuit in the case
Fowler v. Shadel, 400 F.3d 1016 (7th Cir. Wis. 2005). In
that case, the court held that while the interest held by a
debtor in a partnership or corporation would be the prop-
erty of the estate, the underlying assets of the partnership
or corporation are not part of the property over which the
trustee has control. (See also In re People’s Bankshares
Ltd., 68 B.R. 536, 539 (Bankr.N.D. Iowa 1986)). The
federal district court in Washington has also upheld that
causes of action including shareholder derivative suits are
the intangible assets of a corporation, and are not the
C-7
property of an individual shareholder. (See Turner v.
Officers. Directors and Employees of Mid Valley Bank, 712
F. Supp. 1489, 1497 (E.D. Wash. 1988)).
As further federal authority for this proposition,
DeAtley would also cite the court to Jn re Walker, 198 B.R.
476 (Bankr. E.D.Va. 1996). In that case, the debtor, Robert
Walker, was part owner of a partnership known as the
“Walker Partnership.” Mr. Walker filed a Chapter 11
bankruptcy petition, and proposed and had a plan con-
firmed.
Post-confirmation, the Walker Partnership, filed suit
against a creditor lender, NationsBank, seeking $10
million in damages for the partnership under a lender
liability claim. This suit wasn’t filed until three years after
the underlying bankruptcy plan had been approved and
the bankruptcy file closed.
As in this case, the defendant bank subsequently
asked that the state suit be dismissed upon a number of
grounds, including judicial estoppel. Addressing this issue,
the court said:
Much of NationsBank argument focused on the
fact that the cause of action was not disclosed by
the debtor. The failure of the debtor to disclose
the potential cause of action in his bankruptcy
schedules, disclosure statement or plan of reor-
ganization does not carry dispositive weight un-
der the facts of this particular case.
Walker at 479.
The court noted:
A debtor cannot be expected to unerringly predict
the future, but rather must provide information
C-8
on all factors known to him at the time that bear
upon the success or failure of the proposals set
forth in the plan. Jn re Ligon, 50 B.R.127, 130
(Bankr.M.D.Tenn. 1985), [Citation omitted]. The
facts before the Court are that the cause of action
was not the debtor’s, rather it was that of the
Walker Partnership. The debtor was to have been
a guarantor on the proposed loan and was a gen-
eral partner of the Walker Partnership, but that
still does not make it his cause of action to assert.
The debtor’s interest in the partnership was fully
disclosed in the schedules and plan of reorgani-
zation and we hold that the debtor was under no
duty in the case sub judice to disclose this poten-
tial cause of action against NationsBank. [Em-
phasis added.]
In decision footnote 7, the court further said:
The plan discloses thirteen related entities of the
debtor. The plan confirmation process would be
hopelessly complicated were the debtor required
to disclose evert detail about related entities. This
would have the potential to lead to situations
where a case would turn into a “global” bank-
ruptcy dealing with every entity of the debtor. In
our view. this is not what the disclosure require-
ments of the Bankruptcy Code contemplate. [Em-
phasis added.]
Walker at 480.
Almost identical facts are presented by this case.
Here, under federal law AD3 Company, not DeAtley,
owned the DeAtley Agreement. To the extent any potential
lawsuit claim might exist, AD3 Company, not DedAtley,
owned that claim. At the time of the DeAtley bankruptcy,
the record proves that DeAtley had no notice the contract’s
C-9 :
first refusal rights had matured, making the contract a
valuable corporate asset. As noted above however, the fact
AD3 Company owned the contract option was nevertheless
fully disclosed to the trustee. The DeAtleys, no more than
the trustee, had the “crystal ball” ability to know that
several years in the future, information would be discov-
ered to support that contract option rights had matured.
Given these proven facts, to now suggest that federal
bankruptcy law required DeAtley to “unerringly predict
the future” by stating on schedules that a contract right
owned by his non-debtor company might someday ripen
into an asset or a lawsuit claim, is to put it mildly, unrea-
sonable, and as the Walker court noted, inconsistent with
the disclosure obligations imposed by federal law. Yet the
Superior Court, Court of Appeals, and now as a practical
matter, this court, have all affirmatively imposed this
obligation upon DeAtley as a consequence of the case
orders which have been entered.
Factually, even less justification for applying judicial
estoppel exists in this case than existed in Walker. Here,
both prior to and during the bankruptcy, it is proven that
DeAtley had no knowledge any lawsuit claims or potential
lawsuit claims existed or that first refusal right had
matured. In contrast, Robert Walker admitted he knew of
the facts supporting the underlying NationsBank lawsuit
prior to his bankruptcy, because they took place in 1989
and 1990.
That claims or assets belonging to non-debtor compa-
nies are not “property of the debtor” and accordingly are
not part of the estate for scheduling purposes is a well-
settled rule under federal law.
C-10
For example, the bankruptcy court in the case In re
Magnani, 223 B.R. 177 (1997) addressing this specific
issue in the context of a discharge denial proceeding
specifically upheld:
While a debtor may be denied a discharge under
§ 727(a)(4) for a failure to schedule his interest in
a separate business entity, failure to schedule
property belonging to another entity is generally
not grounds for denial of discharge.
Bank alleges in { 9(a) of the complaint that
Magnani made a false oath by omitting informa-
tion from his statement of financial affairs. The
alleged omissions were not material to Magnani’s
case because they involve assets and transactions
of the partnership, a non-debtor entity. Magnani
disclosed his interest in the partnership on his
schedule B in answer to question 13. Magnani is
entitled to summary judgment on Bank’s claim
under § 727(a)(4). [Emphasis added.]}
Magnani, id at 184.
Similarly, in the case In re Beeber, 239 B.R. 13 (1999),
the court said: .
However, Plaintiffs fail to meet their burden of
proving, as required by § 727(a)(2), that the
Debtor “transferred, removed, destroyed, muti-
lated or concealed — (A) property of the debtor ...
or, (B) property of the estate. 11 U.S.C. § 727(aX2).
[Emphasis added]. The Plaintiffs’ claim that the
Debtor’s conveyance of his stock interest and
goodwill of RBPC to himself constituted a misap-
propriation of RBPC’s assets. However, a misap-
propriation of RBPC property was a not a
misappropriation or transfer by the Debtor of his
own property. An examination of caselaw finds
C-11
that §727(a)(2) requires that the property in ©
question be property of the Debtor or property of
the estate, not merely assets of a corporation
where the Debtor is a shareholder of that corpora-
tion. [Emphasis added].
Beeber at 26.
Addressing this same issue, Tenth Circuit Court of
Appeals has held:
- The words: “Property of the debtor,” are not the
same as “property in which the debtor has a de-
rivative interest.” To the contrary, the language of
the statute is sufficiently circumscriptive to elimi-
nate such an interpretation. MBank contends the
Bankruptcy Code defines “property” to include
equitable interests of the debtor, 11 U.S.C.
§ 541(a)(1). Hence, the creditor maintains the
transfer of an asset of a corporation is the trans-
fer of property in which a stockholder has an eq-
uitable interest to which § 727 (X24) would
extend. We disagree.
The purpose of § 541(a)(1) is to define “property of
the estate.” If MBank’s theory is correct, the estate
of a debtor who holds a share in a corporation
would not only include the value that share
would bring, but also a liquidatable interest in
any asset owned by that corporation. That is not
the scope of § 541(a)(1).
Congress intended to limit the reach of § 727(a)(2)(A)
only to those transfers of property in which the
debtor has a direct proprietary interest. MBank’s
argument to the contrary is creative, indeed in-
genious, but it is not persuasive, and the district
and bankruptcy courts correctly so concluded.
[Emphasis added.]
C-12
In Thurman, 901 F.2d 839 (C.A. 10 (Okl.) 1990); See also,
BPS Guard Services, Inc. v. Woodhead, 172 B.R. 628, 633
(Bankr.D.Neb. 1994); Riumbau v. Colodner, (In re Colod-
ner) 147 B.R. 90, 93 (Bankr.S.D.N.Y. 1992); CIT Group/
Factoring Manufacturers Hanover, Inc. v. Srour, 138
B.R.413 (Bankr.S.D.N.Y. 1992); In re Wong, 291 B.R. 266
(Bankr. S.D.N.Y. 2003).
As these federal cases make dispositively clear, assets
belonging tga debtor’s non-bankruptcy partnerships or
corporations not under federal law the “property of the
debtor” and since only property of the debtor must be
listed on schedules under 11 U.S.C. § 541(a), there are
simply no grounds for the Court of Appeals or for this
court to now conclude that the DeAtley Agreement or any
contingent lawsuit claim which might arise from the
DeAtley Agreement had to be listed by the DeAtleys on
schedules in their bankruptcy. Absent a requirement to
disclose or list such information on schedules, there simply
are no facts or law that would now support a judicial
estoppel bar.
Further, the admitted disclosure of the DeAtley
Agreement’s existence and right of first refusal to the
bankruptcy trustee specifically prevents judicial estoppel
from being an issue.
A case particularly on point is the recent case In re
Bargar, 279 B.R. 900 (Bkrtcy.N.D.Ga. 2002). In that case, a
debtor admittedly had a personal lawsuit claim which she
had filed against her employer, and which admittedly was
not disclosed on her later filed bankruptcy schedules. At
her subsequently scheduled 34l1(a) creditor meeting
however, claim existence was specifically brought to the
Chapter 7 trustee’s attention.
C-13
Notwithstanding her verbal disclosure, the trustee
subsequently issued a no distribution report, confirming
there were no assets which could be recovered for the
creditors’ benefit. As in this case, although debtors’ counsel
and the debtors both recalled disclosing this information to
the trustee and so testified, by the time of the hearing, the
transcript of the 341 meeting had been lost and the trustee
did not appear at the motion hearing to provide any added
" information about what had occurred.
After discovering this scheduling omission, the defen-
dant moved to dismiss the state case upon the grounds of
judicial estoppel. Analyzing this issue, the federal court
had no difficulty in confirming that judicial estoppel did
not apply. The court stated:
Debtor in the instant case voluntarily disclosed
the claim to the Chapter 7 trustee who is respon-
sible for pursuing it on behalf of creditors in the
estate. There was no concealment. Debtor was
not “caught” after being challenged.
In any event, although debtor did not amend her
schedules to list the litigation as a matter of tech-
nical bankruptcy pleading, her voluntary disclo-
sure of it to the Chapter 7 trustee at the section
341 meeting had the same substantive effect of an
amendment from the standpoint of the Chapter 7
trustee’s knowledge and duties. The claim was
(and is) property of the estate under 11 U.S.C.
§ 541, and the trustee had authority to pursue it
under Fed. R. Bankr. P. 6009. Ultimately, it is the
trustee’s duty to investigate the lawsuit as prop-
erty of the estate — its merits, it posture, and its
value to the estate. Debtor’s amendment of her
C-14
schedules would not have changed the trustee’s
knowledge of the claim or his duties.
Debtor had litigation counsel and bankruptcy
counsel who were advising her as to her rights
and duties. Had her counsel prepared an
amendment to her schedules for her, she would
presumably have signed it and it would have
been filed, as the Federal Rules of Bankruptcy
Procedure authorize. [Citation]. Because counsel
did not prepare an amendment admittedly be-
cause of oversight, she justifiably could have con-
cluded that she had no further obligations. It
would patently unfair to attribute counsel’s error
to debtor in these circumstances. Her counsel’s
failure to amend the schedules does not render
debtor’s conduct offensive and, in the circum-
stances of this ease, was nothing more than in-
advertence on counsel’s part. Clearly, neither
debtor nor debtor’s counsel acted with an inten-
tional or manipulative disregard of the legal sys-
tem... . [Emphasis added.]
Bargar at 906-907.
Here, as in Bargar, the record facts are not disputed.
The Chapter 7 trustee was told of the DeAtley contract
and first refusal rights. The trustee later provably investi-
gated the company’s debts and assets, an investigation
that went far beyond just the DeAtley Agreement, before
concluding that in his judgment and to his knowledge, the
company’s debts and assets were “evenly matched” so that
AD3 Company stock had no value. Here, as in Bargar,
given the trustee’s conduct following disclosure, it is
impossible to conclude that any amendment to DeAtleys’
bankruptcy disclosure pleadings would have made any
C-15
difference to .«e administration of the case. Accordingly,
the appellate court’s dismissal of DeAtleys’ claim as a
consequence of alleged judicial estoppel was in error.
Indeed, the principal difference between Bargar and
the present case is that in Bargar, the lawsuit claim was
admittedly owned personally by they debtor and was by
definition, “property of the estate,” while in this case, by
definition, the contract and potential lawsuit claim at
issue weren't property of the estate for which any disclosure
duty was imposed. (See preceding section).
Unfortunately, as noted in DedAtleys’ initial filed
petition, these federal bankruptcy law issues were not
addressed by the superior court or Court of Appeals in its
decision, yet they are central to the proper determination
of DeAtleys’ lawsuit rights. It follows that this court must
accept review so that federal law is now fairly considered
and properly applied. As a matter of justice, the DeAtleys
deserve no less.
B. Judicial Estoppel Doesn ly If Claims Weren’t
Listed Because They Were Unknown.
Federal law has long upheld that judicial estoppel
doesn’t apply to prevent later prosecution of lawsuit claims
if the facts show the debtor had no knowledge the claims
existed during the bankruptcy. For example, in Burnes uv.
Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. Ala. 2002),
the court said:
The Fifth Circuit concluded that, “the debtor’s
failure to satisfy its statutory disclosure duty is
‘inadvertent’ [only] when, in general, the debtor
either lacks knowledge of the undisclosed claims
or has no motive for their concealment.
C-16
Burnes at 1287; see also, In re Coastal Plains, Inc., 179
F.3d 197 (5th Cir. Tex. 1999); Browning v. Levy, 283 F.3d
761 (6th Cir. Ohio 2002); U.S. v. Hussein, 178 F.3d 125,
130 (2nd Cir. N.Y. 1999); King v. Herbert J. Thomas
Memorial Hosp., 159 F.3d 192, 196-97 (4th Cir. W.Va.
1998); Helfand v. Gerson, 105 F.3d 530, 536 (9th Cir.
Hawaii 1997); Matter of Cassidy, 892 F.2d 637, 642 (7th
Cir. Ill. 1990).
Here, the record facts establish that DeAtley had no
knowledge the DeAtley Agreement option had any value
as an asset or that lawsuit claims existed, because Barnett
illegally kept from them, from the bankruptcy court, and
from the bankruptcy trustee, the fact contract rights had
matured. These proven facts are dispositive in this case.
Specifically, in every judicial estoppel case, state or
federal, which petitioners have found, all have one thing in
common. Based on the record presented, the court was
able to conclude the debtors knew they had something of
value which they tried to hide.
In this case, the record facts prove exactly the oppo-
site. Here, DeAtley had no knowledge the DeAtley Agree-
ment option had any value, because Barnett hid from
them he had breached the contract, and that contract first
refusal rights had matured. The facts in this case actually
show DeAtley had no reason to hide the contract, because
to the best of their knowledge it had no value and quite
likely would never have value. The record facts further
prove the DeAtleys didn’t hide the contract option or its
existence from the bankruptcy court or the trustee.
Rather, DeAtley’s bankruptcy lawyer has confirmed by her
declaration this information was disclosed. (See, CP 198-
200; 364-366; CP 198-200).
C-17
Where record facts prove that to the best of the
debtors’ and trustee’s knowledge, the asset in question had
no value, not one case throughout the country has ever
held that judicial estoppel applies. Nevertheless, neither
the Superior Court nor Court of Appeals has ever ex-
plained why, contrary to applicable law, the authorities
mentioned above should be disregarded in order to apply
judicial estoppel against the DeAtleys here.
Further, bankruptcy courts have specifically held that
judicial estoppel is not applicable where the debtor’s lack
of knowledge about claim rights is directly attributable to
the complaining party’s own non-disclosures:
The defendants argue that Neptune is precluded
from pursuing recovery causes of action against
them because Neptune’s disclosure statement
makes a clear, affirmative statement that there
were no claims worth attempting to recover and
that it elected to forego collection of potential
preferences or fraudulent transfers because there
were no meaningful avenues of recovery for it or
its creditors.
In the instant case, Neptune maintains that the
defendants concealed and altered documents
which prevented Neptune from learning about po-
tential recoveries under their agency agreement
until after confirmation of its Chapter 11 plan.
Neptune argues that it could not reveal in its dis-
closure statement that it possessed potential
causes of action against Neptune. because the
documents and facts supporting its adversary
proceeding were concealed by the defendants. Ac-
cordingly, Neptune contends that a defendant’s
acts to conceal these facts prevented it from
C-18
learning about its potential recovery claims until
after it filed an objection to the defendant’s proof
of claim on October 6, 1987.
Neptune’s contentions with respect to being mis-
lead and prevented from disclosing potential re-
covery actions in its disclosure statement raise
substantial questions of fact with respect to the
application of the doctrine of judicial or equitable
estoppel which cannot be decided under a motion
to dismiss pursuant to Fed. R. Civ. P. 12(b)(1)
and (6) as adopted by bankruptcy rule 7012(b).
This is so because the doctrine of estoppel, either
judicial or equitable, “has never been applied
where the party’s assertions were based on fraud,
inadvertence or mistake ... In re Cory, 892 F.2d
829, 836 (9th Cir. 1989) (quoting Konstantinidis
v. Chin, 626 F.2d 933, 939 (D.C. Cir. 1980) and
Johnson Service Co. v. Transamerica Ins. Co.,
485 F.2d 164, 175 (5th Cir. 1973)). [Emphasis
added.]
In re Neptune Worldwide Moving, Inc., 111 B.R. 457
(Bkrtcy. S.D.N.Y. 1990).
Those are precisely the facts on record before the court
here. Barnett, not DeAtley, is the proven wrongdoer in this
case. On November 14, 2003, the Superior Court issued an
order finding that Barnett had breached the DeAtley
agreement when he transferred his contract interest to a
new partnership in 1991 and did not tell DeAtley. (CP 189-
190). Barnett admittedly kept these contract breach facts
from DeAtley, the bankruptcy court and bankruptcy
trustee, as a consequence of which DeAtley had no knowl-
edge that claims against Barnett might exist, or that
contract option rights had matured.
C-19
Given these proven record facts, what federal or state
law now supports that Barnett, the at-fault party, should
have his liability extinguished, while the DeAtleys, whom
the proven record shows are innocent, should be punished
by now having the lawsuit’s claims dismissed?
Petitioner’s counsel has spent hours searching for
even one bankruptcy case throughout the entire United
States which holds that a specific contract or a specific
lawsuit claim held by a debtor’s non-bankrupt corporation
must be listed on bankruptcy schedules or is considered to
be the property of the debtor’s estate as opposed to the
property of the non-bankrupt corporation. Not one such
case has been found, and not one such case has been cited
by the Superior Court, by the Court of Appeals, or by the
respondents.
A similar search has been made with respect to
whether any bankruptcy case in the entire United States
says that judicial estoppel exists or can be appuied when
the complaining creditor has provably failed to disclose .
facts that would have put the debtor, the bankruptcy court
and/or bankruptcy trustee on notice that a lawsuit claim
or valuable contract right might exist. Again, not one case
has been found, and not one case previously cited disputes
the federal law which supports DeAtley’s position as set
forth.
The logical reason no such cases exist is that if facts
show the debtor or trustee believed an asset was valueless,
there simply is no evidence to prove a debtor was playing
“fast and loose” with the court about a claim or asset, and
at most all that can be said was that the debtor and/or
trustee were “inadvertently mistaken” about the need to
C-20
more fully discuss the particular claim or asset in the
bankruptcy.
CONCLUSION
This is a substantial case involving hundreds of
thousands of dollars. The central issues are governed by
federal law and federal bankruptcy law, a technical area
not commonly before the superior court or Court of Ap-
peals. It is in precisely this type of case where an error of
law by the Superior Court and/or Court of senate is most
likely to occur.
If as part of any prior briefing or as part of the Court
of Appeals’ decision, any on-point federal law had been
cited which specifically said that property belonging to a
non-debtor corporation was for some reason “property of
the estate” so that its listing on schedules was required,
DeAtleys could understand why review might be denied.
Similarly, if any federal case law had been cited which said
the failure to list a contract or lawsuit claim belonging to a
debtor’s non-bankrupt partnership or corporation had to
be disclosed or judicial estoppel applied, DeAtleys could
accept that grounds existed for denying review. There are
no such cases however. There is instead abundant federal
law to the contrary, dispositive law which it does not
appear has been fairly or reasonably considered.
Particularly disturbing, the record facts prove
DeAtleys did nothing wrong in their bankruptcy. They
disclosed the DeAtley Agreement and first refusal right to
the trustee. They identified their ownership of AD3 Com-
pany and all of its assets in their schedules. There is no
evidence they sought to hide anything, much less the
DeAtley Agreement or its contingent option, and there is
C-21
no evidence that anyone, much less DeAtley, knew until
three years after barikruptcy completion that because of
Barnett’s contract breach, contract first refusal rights had
any value. It is simply absurd to suggest that DeAtleys
were ever playing “fast and 'oose” with the court over a
contingent contract right considered valueless by all
bankruptcy parties who examined it.
Particularly galling, the DeAtley contract was consid-
ered valueless for bankruptcy purposes, precisely because
of Barnett’s proven illegal contract breach failure to
disclose. It is Barnett, not DeAtley, who is the proven “bad
actor” in this case. It is acknowledged Barnett hid from
DeAtley the contract was breached. Barnett also hid from
the bankruptcy court and bankruptcy trustee, that first
refusal rights had matured. It’s Barnett who has been
shown to have violated his contractual disclosure duties in
this case, not DeAtley. Since judicial estoppel is an equita-
ble doctrine, why, given Barnett’s proven contract breach
failure to disclose, is it equitable to now hold him harm-
less, but punish the innocent party, who as a direct conse-
quence of Barnett’s bad acts, didn’t know there were any
added relevant bankruptcy facts to disclose.
DeAtley challenges the respondents, and similarly
beseeches this court to now identify any federal case law
precedent that has ruled differently on the issues now
presented than the federal case law which petitioners cite.
If, as DeAtley’s believe, none can be found (and to date
none have been), DeAtleys would respectfully request this
court to give this case a “fresh” look. Upon doing so, the
DeAtleys in good faith believe this court will correctly
conclude dispositive federal law does support DeAtley’s
lawsuit and appeal position, warranting acceptance of
review.
C-22
DATED this 24th day of March, 2006.
Respectfully submitted,
LARSON & PERKINS P.L.L.C.
Attorneys for Petitioners
/s/ James A. Perkins
James A. Perkins, WSBA #13330
CERTIFICATE OF SERVICE
I hereby certify that on the 24th day of March, 2006, I
caused to be served by forwarding via Federal Express
Priority Overnight service, a true and correct copy of
Memorandum of Points and Authorities Supporting
‘Petitioners’ Motion for Reconsideration to:
Margaret Archer Annette T. Fitzsimmons
Gordon, Thomas, - Annette T. Fitzsimmons, PS.
Honeywell, et al. 3121 Soundview Drive West
1201 Pacific Avenue, #2200 Tacoma, WA 98466
Tacoma, WA 98401
LARSON & PERKINS P.L.L.C.
/s/ Dianne L. Puhrmann
Dianne L. Puhrmann,
Legal Assistant to
James A. Perkins,
WSBA #13330
Attorneys for Petitioners
C-23
No. 22780-4-III
No. 22977-7-II1
THE COURT OF APPEALS
OF THE STATE OF WASHINGTON
DIVISION III
ALAN DeATLEY and DEBRA DeATLEY,
_ husband and wife,
Petitioners,
v.
LYNN BARNETT and MARLENE BARNETT,
husband and wife;
LOOKOUT POINT PARTNERS, a partnership,
Respondents.
PETITION FOR REVIEW
James A. Perkins. WSBA #13330
LARSON & PERKINS P.L.L.C.
P. O. Box 550
Yakima, WA 98907
(509) 457-1515
TABLE OF CONTENTS
ay ce a ii
A. IDENTITY OF PETITIONER/APPELLANTS..... 1
B. COURT OF APPEALS DECISION ...........:00c000+ 1
C. ISSUES PRESENTED FOR REVIEW................. 1
ae 2
C-24
E. ARGUMENT WHY REVIEW SHOULD BE
DEITIES TAME yeenereseerecienrevsiannmeinnivtntniaiesianeeinnnen 7
. 1. The Appellate Court Erred by Refusing to
Accept as True Ail Evidence Most Favorable
Ci BRIO niciicinitinianinnitiareniinicsisibianiaiiavanatenislosenas 7
2. The Appellate Court’s Conclusion About
Federal Bankruptcy Schedule Requirements
i We victrisnsniiesicienaietinchaiicihicsidcanipendninrpedkisanteintndhcslaiestn 10
3. The Appeals Court Decision Conflicts With
Both Federal and State Law...................::0000 13
4. The Court Did Not Correctly Apply State or
Federal Judicial Estoppel Case Law .............. 14
5. The Court of Appeals Erred in Not Applying
The Most Favorable Facts to Washington Ju-
GEE OES ED sccctcctnerictecimencscamnstunnininn 17
Fr, COU cocensncvsessroreecesnensetenenisnnotenesianemecsion 19
TABLE OF AUTHORITIE
CASES PAGE
Ban-Mac, Inc. v. King County, 69 Wn.2d 49, 416
winced aise linha ciatencch li ciind caatiieal tents 10
Baxter v. Greyhound Corp., 65 Wn.2d 421, 397 P.2d
Se I cieiskecieveniceiiedisiccetaihainibaceitia iii chia daa eccelceac ia itln 8
Browning v. Levy, 283 F.3d 761 (6th Cir. (Ohio)
EERE OL AES LO EPRI 14, 15
Cunningham v. Reliable Concrete Pumping, Inc.,
tok” ¢. ee saree ere ane 17
Estate of Jordan by Jordan v. Hartford Acc. and
Indem. Co., 120 Wn.2d 490, 844 P.2d 403 (1999).......... 13
Estate of Lellock v. Prudential Ins. Co. of America,
$11 F.3d 186 (Sed Cir.(Pa.) 1967)...cocccsocsceccscesssescecsseccees 13
C-25
Fowler v. Shadel, 400 F.3d 1016 (7th Cir. (Wis.)
2005) ssssesvenseeessssssessnsesssenscsssnsesssesessnsasensesstenseseeee bly 12, 19
Helfand v. Gerson, 105 F.3d 530. 536 (9th Cir.
I ad dete eiiecmceiiaaieal 14
In re Cassis, 220 B.R. 979 (Bankr.M.D.Iowa 1998).... 12, 19
In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir.
EU I ie iieedilani aac linea lata ican 14, 15
In re DeVore, 223 B.R. 193 (9th Cir. BAP 1998)................. 17
In re Keller, 229 B.R. 900 (Bankr.S.D. Ohio 1998)............ 17
In re Miner, 185 B.R. 362, 367 (Bankr.N.D.Fla.
I ci iheda nicest diese a coed cestileabaaeleaiaiennipeiideia abate 11, 19
In re Murray, 147 B.R. 688, 690 (Bankr.E.D.Va.
OU ccsissrissehcisiaiebcicin thie iciebihghehinidiiaideseetsadantiiiiaia 12, 19
In re Peoples Bankshares, Lid., 68 B.R. 536, 539
CR TE EG, BO ccccccvcvenstsvsncssnesvinescovsewnens 11, 12, 19
In re Resource Technology Corp., 254 B.R. 215
I TE Sits SN cissiisssicisebibiesiadicdsecinescnonimmniinnnics 10, 19
In re Russell, 121 B.R. 16 (Bankr. W.D.Ark. 1990)..... 11, 19
In re Sills, 126 B.R. 974, 976 (Bankr.S.D. Ohio
UII isteach tala aaa ama 17
In re Swartwout, 123 B.R. 794 (Bankr.S.D. Ohio
TT cides cite la 13
International Commercial Collecturr, Inc. v. Mazel
Co., Inc., 48 Wn. App. 712, 716 ' 740 P.2d 363
3s ERECT EN OE tt SOL I eA OTTER SCRA Seto 9
Johnson v. Associated Sand & Gravel Co., 71
Wn.2d 738, 740, 430 P.2d 944 (1967) ...............ccceeeeerees 7-8
King v. Herbert J. Thomas Memorial Hosp., 159
F.3d 192, 196-97 (4th Cir. (W.Va.) 1998) .......... ee eeeeeee 14
C-26
Lambert v. Smith, 54 Wn.2d 348, 340 P2d 774
AEs sciences sieaingctadeaantieaes dash oceiabeiah rgaadiincaloiasivs 8
Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983)........ 13
Lindberg v: Steele, 5 Wn.2d 54, 55-6, 104 P.2d 940
TTI nuisitsepiheiiicnidersivi-eiaibiarpenietcauabiiociniasiiaconcsbeaaecaelsesiaanmimmidibialds 8
Linklater v. Johnson, 53 Wn. App. 567, 768 P.2d
Be UE iirosekiniteiciiniititebnscctiacoiicaihicentieibeleinka ines vabastanmealii 15-16
Markley v. Markley, 31 Wn.2d 605, 615, 198 P.2d
A Ce inckcseieessvitnssincwsnsvisinbecikarcidellaisuheuiidibncaitieleainmebipiocinn 18
Marks v. Benson, 62 Wn. App. 178, 813 P.2d 180
i |_| SEADOO ee onCde Herta and a eet mas UE Ae Ne RI LLON 16, 17
Miller v. Payless Drug Stores of Wash., Inc., 61
Wn.2d 651, 370 P.2d 9S2.(1G6B) .....ccccssesosccccssccsesessssecssees 8
Miner v. Bay Bank & Trust Co., 83 F.3d 436 (11th
Ce id ee ichtsniedadinvisiicaiteinaiincctubaiatieticesacidatabiodiatel 11
Old Nat. Bank of Washington v. Arneson, 54 Wn.
App. 717, 776 P-2d 145, review denied, 113 Wn.2d
RE FO Fe Fee Ca snticecsincesentviaieniiasindercisinnneene 9
Phennah v. Whalen, 28 Wn. App. 19, 22, 621 P.2d
Se insta vatsitinseesstsnnsncetiihilnsaitceatabsaieiaeadbaaiaiddaaniah 8
Raymond v. Ingram, 47 Wn. App. 781, 737 P.2d 314
CUTIE Y cnssicininsiatdedinaakanbieknsinapdineliatanitesippuciieneaasasananimniainin 18
State of California v. Tax Commission of State, 55
Wn.2d 155, 157, 346 P.2d 1006 (1959) ...... eee eeeeeee 12
State, Dept. of Revenue v. Martin Air Conditioning
and Fuel Co., Inc., 35 Wn. App. 678, 668 P.2d
BEE IID scannssiviarcusesntgnnacitenicceeseubigeiesbteldeantatkauaindacetd 15
Turner v. Officers, Directors and Employees of Mid
Valley Bank, 712 F. Supp. 1489, 1497 (1988)................ 13
U.S. v. Hussein, 178 F.3d 125, 130 (2nd Cir. (N.Y.)
DGG evccrcercensnsenceserveccsnsvevsosesounsecnsentensnsnceqnontecsmonntsreanenes 14
C-27
Washington State Dept. of Revenue v. Security
Pacific Bank of Washington N.A., 109 Wn. App.
ee ee itinecsiacetnnntensssevnenitnniiteeiusipeinaiies 13
Williams v. Hofer, 30 Wn.2d 253, 256-57, 191 P.2d
I ITUIUINY isieis iosskasiisicidipnsciahadeisniikudidgneiniehustabiliaediiphiniiitesduiinin 8
Zimmerman v. Kyte, 53 Wn. App. 11, 17, 765 P.2d
TIED saci cibcciscerhnsirehcienieseitcheenesielindebbaiatacinnniaiasetiiddeiatiaieiichd 10
STATUTES
Be ata OF UII cneicciiasoniiiasassinnsensinbthderpintnabioounbesaeaniaintions 16
Be Se: Oe IED chinerinennsnitcccnisinenpeneenimeametabniabiamaies 1, 10
a i ndennienwtecteshintisiicneiinnianiinasbatinnnsabalanstaaiiiiile 16
LE | __- E an eeE RT S mD eae eT e 11
SE ATE URE sitecipecncienintiesitnenintecieinidinsiacemmminnannipniiiiieues 10
RULES
Se ILI SITET csivviridttctiiciesttniecusepaninsicnietitesinininisuiibueinttie 1,10
TIE SINICA acasedelstebidaitesceieieedbitiiinnineniatiolitaieinesianiinaibicaasedl 7
RA RITIES
Collier on Bankruptcy, § 101.30[3], p. 101-96 (5th
as Tai icicicicsslcelpildaiilashiai epalocatuabcdicesiiiaacnbediiid deisedteiiniadibdaiutidiiaes 12
Ginsberg & Martin on Bankruptcy, § 5.01[B)...............00.. 12
A. IDENTITY OF PETITIONER/APPELLANTS.
Alan DeAtley & Debra DeAtley (DeAtley) ask this
court to accept review of the Division III, Court of Appeals
decision captioned Alan DeAtley and Debra DeAtley. hus-
band and wife v. Lynn Barnett and Marlene Barnett, hus-
band and wife, and Lookout Point Partners, a partnership,
C-28
(collectively Barnett), Court of Appeals Cause No. 22780-4-
Ill, consolidated with Court of Appeals Cause No. 22977-7-
III, filed February 20, 2004.
B. COURT OF APPEALS DECISION.
A copy of the decision is in the Appendix at pages A-1
to A-9. A copy of the order Denying Petitioner’s Motion for
Reconsideration is in the Appendix at page B-1.
C. ISSUES PRESENTED FOR W.
1. Did the Appeals Court err by failing to accept as
true all record facts most favorable to DeAtley.
2. Did the Court of Appeals err in ruling that
DeAtley failed to comply with the requirements of 11
U.S.C.A. §521(1) (App. C-1), and Fed.R.Bankr.P. 1007
when filing their bankruptcy schedules.
3. Did the Appeals Court err by not <orrectly apply-
ing federal and state judicial estoppel case law to those
facts most favorable to DeAtley.
D. CASE STATEMENT.
On January 29, 1986, Lynn and Marlene Barnett
contracted to purchase approximately 500 acres between
the Naches River and Selah, Washington. (CP 951-959).
After contracting, on February 11, 1986, a written part-
nership agreement was signed by Barnett with third
parties John and June Cotton (Barnett/Cotton Partner-
ship). (CP 1423-1431). Under this partnership, Cotton
made a $60,000 capital contribution and Barnett agreed to
contribute the contract right to purchase the property. (CP
C-29
1423-1431). Notwithstanding agreement terms, during the
partnership’s existence the contract was never assigned to
the Barnett/Cotton Partnership. (CP 778).
In 1987 Barnett first spoke to DeAtley about a pro-
posed 86-acre transfer in return for DeAtley constructing a
utilities trench and road at the property. (CP 772). Even-
tually, on January 1, 1988, DeAtley rd Barnett executed
a contract (DeAtley Agreement). (CP 502-808). At no time
prior to DeAtley Agreement executicn did Barnett disclose
the Barnett/Cotton Partnership existed and the DeAtley
Agreement does not mention this partnership. (CP 774-
777, 802-808).
The DeAtley Agreement said any later contract
assignment by Barnett would trigger a DeAtley first
refusal right to purchase the assigned property. (CP 806).
After signing, DeAtley promptly performed part of the
work called for by the DeAtley Agreement. (CP 780-781).
Subsequently, Cotton became ill and told Barnett he
wanted to seil his interest in their partnership. (CP 782-
783). Unknown to DeAtley, on or about February 28, 1991,
Barnett offered to buy back Cotton’s partnership interest.
(CP 820). Cotton agreed and the repurchase terms were
confirmed in writing. (CP 823). Barnett subsequently paid
Cotton $210,000 for his partnership interest and released
Cotton from any obligation to further pay on the purchase
contract. (CP 820, 822). Consistent with this buy-out, a
final tax return was prepared to evidence the Bar-
nett/Cotton Partnership’s termination. (CP 825-833). After
this partnership terminated, in July 1991 Barnett formed
a new partnership with third parties George Lagerquist, et
al. (Barnett/Lagerquist Partnership). (CP 862-883). Con-
current with forming this new partnership, Barnett
C-30
assigned their contract rights to this second partnership.
(CP 791, 792). DeAtley however was not told his first
refusal rights had matured and could be exercised. (CP |
791, 792). Although all of DeAtley’s contract work was
originally to be done no later than January 1991 (CP 803-
804) prior to this date Barnett told DeAtley not to do the
remaining work. (CP 421-425; 785; 794; 795; 799-800). He
did so because Barnett intended to petition Selah to annex
the property and until the Selah annexation was con-
cluded, he couldn’t tell DeAtley how the final contract
work was to be done. DeAtley agreed to delay final con-
tract work until Barnett had the necessary information
and instructed him to proceed. (CP 1173-1174; 798-800;
902-903; 1173-1181; 1232-1240; 1242-1246).
While waiting for Barnett’s instructions, in January
1990 DeAtley assigned their interest in the DeAtley
Agreement to their wholly-owned Washington company,
Wild Ones, Inc. d/b/a AD3 Company (AD3). (CP 298-361).
DeAtley intended to use AD3 as the development entity for
the 86 acres. (CP 298-361). Consistent with this contract
assignment, a quit claim deed for the 86 acres was given to
AD3 by DeAtley and recorded October 10, 1991. (CP 298-
361). ,
After these transfers occurred, in March 1992
DeAtley’s personally filed for bankruptcy in New Mexico
(where Alan DeAtley was then living). (CP 298-361).
Because both the 86 acres and the DeAtley Agreement
were owned by AD3 when DeAtley filed bankruptcy,
neither the property nor the DeAtley Agreement were
specifically listed as personal assets on DeAtley’s bank-
ruptcy schedules. (CP 321-352). Instead, DeAtley’s per-
sonal schedules simply disclosed they owned all AD3
C-31
Company stock and that their corporation now owned the
previously transferred 86 acres, etc. (CP 326-347; 348).
Since Barnett had never released DeAtley personally
from DeAtley Agreement construction obligations, DeAtley’s
personal schedules accurately said DeAtley owed an esti-
mated $50,000 unfulfilled debt to Barnett. (CP 336). Pre-
bankruptcy, Barnett admittedly knew the DeAtley/Barnett
contract had been assigned to AD3. (CP 414-417). Barnett
also does not deny later receiving all bankruptcy notices
sent to creditors. (CP 518-519).
As part of their bankruptcy filing, DeAtley disclosed to
their bankruptcy lawyer, Jennifer Behles (Behles), the
Barnett/DeAtley contract existed and had been assigned to
AD3, along with the 86 acres. (CP 198-200; 364-366).
Consistent with this disclosure. Behles told the bankruptcy
trustee about the transferred Barnett/DeAtley contract and
also discussed its first refusal rights with the trustee. (CP
198-200). Because Barnett never told anyone DeAtley’s first
refusal rights had matured however, no one knew the
contract’s rights were exercisable and thereby had value.
(CP 364-365). Since no one knew option rights were exer-
cisable, the trustee eventually concluded all of AD3’s
known assets and debts were “evenly matched” and so by
specific motion and later bankruptcy court order, the
trustee abandoned all AD3 stock back to DeAtley. (CP
407).
Despite being notified. Barnett paid no attention to
DeAtley’s personal bankruptcy. (CP 518-519). In particu-
lar, Barnett never considered Barnett/DeAtley contract
obligations to have been discharged by DeAtley’s personal
bankruptcy. This is proven by a later May 25, 1995 letter
sent by Barnett offering to “release DeAtley from further
C-32
road building obligations.” (CP 1226). Also, after DeAtley’s
complaint was filed, Barnett alleged that DeAtley was still
liable for damages for allegedly breaching Barnett/DeAtley
contract terms. (CP 1277).
Not until 1995 did DeAtley first learn Barnett’s
purchase contract interest had been assigned. After
learning these facts, on May 2, 1997, DeAtley commenced
this litigation. (CP 1460-1462). Shortly afterward DeAtley
filed a partial summary judgment motion. (CP 1373-1403).
In response an amended answer was filed and again
DeAtley’s prior bankruptcy was not mentioned. (CP 1274-
1278). Instead, respondents falsely claimed the second
Barnett/Lagerquist partnership was not a “new partner-
ship” and that accordingly, Barnett’s contract assignment
did not cause the contract’s first refusal rights to mature.
After DeAtley later proved the Barnett/Cotton Part-
nership had been dissolved and that accordingly respon-
dent’s claims were false, on November 14, 2003 the
superior court issued a partial summary judgment in
DeAtley’s favor, finding Barnett had breached the DeAtley
Agreement. Subsequently, barely a month before trial,
respondents moved to dismiss DeAtley’s complaint upon
the grounds their personal bankruptcy now defeated
DeAtley’s claims. (CP 526-527). On November 13, 2003,
the court granted respondent’s motion (CP 213-215) and
this appeal followed.
Despite the fact DeAtley appealed from a motion to
dismiss, requiring the court to accept as true, only those
facts most favorable to DeAtley, Division III denied
DeAtley’ s appeal. As a basis for denial the court held that
because DeAtley did not specifically list on their personal
bankruptcy schedules the Barnett/DeAtley contract. “We
C-33
reason they lost their right to claim benefits under the
right of first refusal.” (See App. A-5), The court also based
its decision upon its erroneous understanding of Washing-
ton judicial estoppel law. (See App. A-5 to A-6).
Although DeAtley filed a motion for reconsideration,
DeAtley’s motion for reconsideration was denied. (See App.
B-1).
E. ARGUMENT WHY REVIEW SHOULD BE AC-
CEPTED.
The Court of Appeals’ decision should be reviewed
because there are issues of substantial public interest that
’ should be determined by the Supreme Court and because
the Court of Appeals’ decision provably conflicts with
Washington law as set forth by other Washington Appeal’s
courts and this court. (RAP 13.4(b)).
1. The Appellate Court Erred by Refusing to
Accept as True All Evidence Most Favorable
to DeAtley.
When considering a motion to dismiss, Washington
law requires the court to accept as true all facts and to
interpret all evidence, in a manner most favorable to the
non-moving party. Johnson v. Associated Sand & Gravel
Co., 71 Wn.2d 738, 740, 430 P.2d 944 (1967) (citing Baxter
v. Greyhound Corp., 65 Wn.2d 421,.397 P.2d 857 (1964));
Lindberg v. Steele, 5 Wn.2d 54, 55-6, 104 P.2d 940 (1940);
Phennah v. Whalen, 28 Wn. App. 19, 22, 621 P.2d 1304
(1980).
“No element of discretion is involved. A mo-
tion to dismiss can only be granted when it can
C-34
be held as a matter of law that there is no evi-
dence or reasonable inference therefrom to sus-
tain a verdict for the opposing party.” [Emphasis
added]. Miller v. Payless Drug Stores of Wash.,
Inc., 61 Wn.2d 651, 379 P.2d 932 (1963) (citing
Lambert v. Smith, 54 Wn.2d 348, 340 P.2d 774
(1959); Williams v. Hofer, 30 Wn.2d 253, 256-57,
191 P.2d 306 (1948).
Consistent with these settled legal rules, the following
facts apply. In 1990 DeAtley assigned their interest in the
Barnett/DeAtley contract to AD3. (CP 298-305, 311). In
1991, pre-bankruptcy DeAtley deeded their interest in the
contract transferred 86 acres to AD3. (CP 298-305, 318-
320). In exchange, AD3 assumed the contract obligation to
complete all remaining contract work whenever Barnett so
instructed. (CP 298-305). Pre-bankruptcy Barnett knew
the parties’ contract had been assigned to AD3 (CP 414-
417), yet respondents elected not to participate actively in
the bankruptcy. (CP 518-519).
Critically, attorney Behles knew the Barnett/DeAtley
contract had been assigned pre-bankruptcy to AD3. (CP
198-200, 364-366). The bankruptcy trustee also knew
about the transferred Barnett/DeAtley contract as well as
its first refusal rights. (CP 198-200). Although these two
bankruptcy experts (Behles and the trustee) both knew
these facts, DeAtley were not required to amend their
bankruptcy schedules, supporting the conclusion the
schedules were properly filed as required by federal law.
During the bankruptcy, no one knew DeAtley Agree-
ment first refusal rights were exercisable. Due solely to
Barnett’s breach, the trustee instead concluded AD3’s
known assets and debts were “evenly matched,” and so by
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specific motion and by confirming court order the trustee
abandoned all AD3 stock back to DeAtley. (CP 407).
Since contract rights are freely assignable under
Washington law unless forbidden by statute or public
policy (Old Nat. Bank of Washington v. Arneson, 54 Wn.
App. 717, 776 P.2d 145, review denied, 113 Wn.2d 1019,
781 P.2d 1321 (1989); International Commercial Collectors,
Inc. v. Mazel Co., Inc., 48 Wn. App. 712, 716-17, 740 P.2d
363 (1987)) and because the DeAtley/Barnett contract does
not preclude assignment, DeAtley’s pre-bankruptcy
assignment to AD3 was lawful. Since AD3 owned the
contract pre-bankruptcy and because AD3 was not in
bankruptcy, DeAtley were not required to separately list
the DeAtley/Barnett contract on their bankruptcy sched-
ules. Similarly, because the contract belonged to AD3, at
no time did DeAtley ever claim the contract’s rights or
obligations (now held by AD3) had been extinguished by
their personal bankruptcy.
Post-bankruptcy in 1996, AD3 was administratively
dissolved. (CP 303). At that point the corporation’s assets
and obligations, including the DeAtley Agreement, once
more became DeAtley’s personal property, subject to
existing creditors’ claims. Zimmerman v. Kyte, 53 Wn. App.
11, 17, 765 P.2d 905 (1988); RCW 23B.14.050(1)(d) (App. C-
2); Ban-Mac. Inc. v. King County, 69 Wn 2d 49. 416 P.2d
694 (1966). After the contract was returned, DeAtley was
entitled by law as AD3’s successor to sue Barnett for
contract breach. Accordingly, complaint dismissal should
not have occurred.
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2. The Appellate Court’s Conclusion About Fed-
eral Bankruptcy Schedule Requirements is
Wrong.
In its decision, the court says DeAtley were required
to disclose all assets, including potential causes of action,
in their bankruptcy schedules, citing as support 11
U.S.C.A. § 521(1) and Fed.R.Bankr.P. 1007. (App. A-4).
Contrary to the court’s statement however, 11
U.S.C.A. § 521(1) does not require listing a potential cause
of action belonging to a non-debtor company. Similarly,
Fed.R.Bankr.P. 1007 does not say potential causes of
action by a non-debtor company must be listed on a
debtor’s personal schedules. Bankruptcy courts have
instead long held a debtor’s property includes only those
—eontract rights held by the debtor at the time of bank-
ruptcy filing (Jn re Resource Technology Corp., 254 B.R.
215 (Bankr.N.D. Ill. 2000). This has been the consistent
holding of bankruptcy courts for quite awhile. (Ownership
of stock in a corporation does not mean the corporation is
property of the estate.) In re Peoples Bankshares, Ltd., 68
B.R. 536, 539 (Bankr.N.D.Iowa 1986) (where corporate
property was transferred and the debtor was a share-
holder of the corporation, debtor had no interest in the
property transferred, and no 11 U.S.C.A. § 548(a) (App. C-
3) claim exists as a matter of law.) See In re Miner, 185
B.R. 362, 367 (Bankr.N.D.Fla. 1995) aff'd by Miner v. Bay
Bank & Trust Co., 83 F.3d 436 (11th Cir. (Fla.) 1996).
As the bankruptcy court noted in Jn re Russell, 121
B.R. 16 (Bankr. W.D.Ark. 1990):
The trustee’s argument that the estate has an
equitable interest in the funds solely by virtue of
an 82% stock ownership is also without merit. A
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corporation has a separate legal existence from its
shareholders, and the corporation, not its share-
holders, owns the corporate assets and owes the
corporate debts. [Citations] ... Consequently, as-
sets of a corporation are not distributable as part
of an individual shareholder’s estate until all
creditor claims are paid. [Citations] Therefore,
the funds in question do not constitute property of
the estate, and the trustee is without authority to
retain possession of the funds for the benefit of
creditors of the estate. [Emphasis added).
Indeed, the 7th Circuit in 2005, in the case of Fowler
v. Shadel, 400 F.3d 1016 (7th Cir. (Wis.) 2005), addressed
this very question.
The corporate assets of Fowler Trucking, Inc. are
not property of the debtor and therefore cannot
become property of Fowler’s bankruptcy estate.
Hence, the question of an exemption does not
arise. See Collier on Bankruptcy, § 101.30{3]}, p.
101-96 (5th Ed. Rev.) Stating that while the indi-
vidual’s interest in the partnership or corpora-
tion (which could be 100 percent) would be
property of the estate, the assets of the partner-
ship or corporation would not be. See also Gins-
berg & Martin on Bankruptcy, § 5.01[B), stating
that the interest in question [an interest in-
cluded in the estate] must be the debtor’s prop-
erty. For example, if the debtor owns shares in a
corporation, the shares become part of the estate;
the assets of the corporation do not. [Emphasis
added.] [Emphasis added].
Fowler at 1019. See also, In re Murray, 147 B.R. 688, 690
(Bankr.E.D.Va. 1992); In re Cassis, 220 B.R. 979
(Bankr.M.D.lowa 1998); In re Peoples Bankshares, Ltd., 68
B.R. 536, 539 (Bankr.N.D. Iowa, 1986) (“Although a debtor
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owns 100 percent of the stock of a corporation, the prop-
erty interest of the debtor’s bankruptcy estate extends
only to the intangible property rights represented by the
stock certificates ...”).
Washington law is also clear on the ownership of
corporate assets. For example, the court in State of Cali-
fornia v. Tax Commission of State, 55 Wn.2d 155, 157, 346
P.2d 1006 (1959), held that:
A corporation is, by legislative enactment, an en-
tity. It is such, separate and distinct from the
persons who own its stock. This statutory entity,
so long as it exists, is the owner of all property
which the corporation possesses. An individual
shareholder has no property interest in its physi-
cal corporate assets. The persons who are share--
holders have only rights of participation in the
management of the corporate affairs. [Emphasis
added].
Washington’s federal district courts have also held
“(clauses of action, including shareholder derivative suits,
are intangible assets of a corporation ... ” [Emphasis
added]. Turner v. Officers, Directors and Employees of Mid
Valley Bank, 712 F. Supp. 1489, 1497 (1988) (citing Lewis
v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983)). These
decisions prove the Court of Appeals was wrong. Federal
law did not require the DeAtley Agreement to be listed on
DeAtleys personal bankruptcy schedules. DeAtley’s
Petition for Review should accordingly be accepted.
C-39
3. The Appeals Court Decision Conflicts With
Both Federal and State Law.
A contract assignee has all rights of the assignor,
including the right to independently prosecute or defend
any claims or causes of action. Estate of Jordan by Jordan
v. Hartford Acc. and Indem. Co., 120 Wn.2d 490, 844 P.2d
403 (1993), recons. denied; Washington State Dept. of
Revenue v. Security Pacific Bank of Washington N.A., 109
Wn. App. 795, 38 P.3d 354 (2002). Property validly as-
signed prior to any bankruptcy preference period is not
part of the debtor’s estate. In re Swartwout, 123 B.R. 794
(Bankr.S.D. Ohio 1991); Estate of Lellock v. Prudential Ins.
Co. of America, 811 F.2d 186 (3rd Cir(Pa.) 1987). In
contrast to these authorities, not one statute or case is
cited which requires indivicual debtors to list on personal
schedules, anything more than stock ownership in a non-
debtor company and the debtor’s belief as to its value, both
of which appeared in DeAtley’s schedules. Accordingly,
before the Appeals Court through its published opinion
now imposes a substantive obligation upon all debtors in
this state which no federal courts and no other state courts
impose, this issue should be considered by the Supreme
Court, and this Petition for Review should be accepted.
4. The Court Did Not Correctly Apply State or
Federal Judicial Estoppel Case Law.
The Fifth Circuit in In re Coastal Plains, Inc., 179
F.3d 197 (5th Cir. (Tex.) 1999), the Sixth Circuit in the case
Browning v. Levy, 283 F.3d 761 (6th Cir. (Ohio) 2002), the
Second Circuit in U.S. v. Hussein, 178 F.3d 125, 130 (2nd
Cir. (N.Y.) 1999), the Fourth Circuit in King v. Herbert J.
Thomas Memorial Hosp., 159 F.3d 192, 196-97 (4th Cir.
(W.Va.) 1998), and the Ninth Circuit in Helfand v. Gerson,
C-40
105 F.3d 530, 536 (9th Cir. (Hawaii) 1997) have all held
the application of judicial estoppel is inappropriate in
cases where a debtor’s conduct amounts to nothing more
than “mistake or inadvertence.”
Both the Fifth Circuit in Jn re Coastal Plains, supra,
and the Sixth Circuit in Browning v. Levy, supra, have
identified two circumstances in which a debtor’s failure to
disclose a cause of action in a bankruptcy action will be
deemed, as a matter of law, “inadvertent.”
One is where the debtor lacks knowledge of the
factual basis of the undisclosed claims, and the
other is where the debtor has no motive for con-
cealment.
In re Coastal Plains at 210; Browning v. Levy at 776.
Critically because DeAtley are appealing from a
motion to dismiss, this court must determine whether
accepting all facts favoring DeAtley are true, judicial
estoppel applies.
Applying this two-part test, the record first shows no
one involved in DeAtley’s bankruptcy knew any lawsuit
claims against Barnett existed, because Barnet’s breach
wasn't discovered until years after the bankruptcy. (CP
364-365; 1406). Since no one, including DeAtley, had
knowledge first refusal rights had value, the record
secondly proves DeAtley had “no motive to conceal” that
contingent claims against Barnett might exist. Since these
“true” record facts satisfy the two federal court tests, as a
matter of law judicial estoppel does not apply and the
Court of Appeals erred in holding it did apply.
Washington law too precludes judicial estoppel when
only “mistake or inadvertence” is evidenced by the record
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(State, Dept. of Revenue v. Martin Air Conditioning and
Fuel Co., Inc., 35 Wn. App. 678, 668 P.2d 1286 (1983)), yet
dispositively, nowhere in the appellate court’s decision is
this controlling law mentioned. Instead, ignoring control-
ling law, the Appellate Court based its decision upon
distinguishable cases. Linklater v. Johnson, 53 Wn. App.
567, 768 P.2d 1020 (1989) for example says only that
rights of “action in which the debtor had an interest”
become property of the estate under 11 U.S.C.A. § 541.
Here, because the DeAtley Agreement belonged to AD3,
DeAtley no longer owned any contract claims, so they were
not by definition “property of the estate.” Similarly, in
Marks v. Benson, 62 Wn. App. 178, 813 P.2d 180 (1991) the
court ruled debtors lacked the standing to bring an action,
solely because the “obligation on which it was based” was
not disclosed nor administered in the Chapter 7 bank-
ruptcy. The Court of Appeals cites to Benson, because not
having carefully read the record, the court says DeAtley
“did not list their allegedly mature right of first refusal as
an asset.” (App. A-5). The court ignores that nobody knew
a first refusal right had matured. How can parties list
something tl 7 don’t know? The court next ignores the
assigned DeAtley Agreement “on which the later claim is
based” was disclosed and administered by the trustee as
part of the Chapter 7 bankruptcy. (CP 198-200). Indeed,
the record confirms the trustee actively investigated AD3’s
assets and debts for the specific purpose of determining
stock value. (CP 199, 362-367). The Court of Appeals
further ignores that consistent with 11 U.S.C.A. § 554(a)
(App. C-4) the trustee did take action to abandon AD3’s
stock when a motion for that purpose was specifically filed.
(CP 407).
C-42
Under federal law, upon specific abandonment, all
property so abandoned “ceases to be property of the estate
and reverts to the debtor.” Jn re Keller, 229 B.R. 900
(Bankr.S.D. Ohio 1998); In re DeVore, 223 B.R. 193 (9th
Cir.BAP 1998); In re Sills, 126 B.R. 974, 976 (Bankr.S.D.
Ohio 1991). This issued abandonment order is in complete
contrast to the facts in Marks supra, where no specific
abandonment order was filed. In short, the Court of
Appeals relied upon Marks because it had the record facts
wrong.
Equally troubling is the appellate court citation to the
recent case Cunningham v. Reliable Concrete Pumping,
Inc., 108 P.3d 147 (2005). In that case the debtor, prior to
filing a bankruptcy petition, was already suing on a
personal injury claim which he owned. He did not disclose
this known personal lawsuit claim on his schedules. These
case facts a
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