MEMORANDUM OF DECISION

Honorable JIM D. PAPPAS, United States Bankruptcy Judge.

Introduction

In this chapter 71 case, the Court addresses an issue about the scope of property included in the bankruptcy estate.

Debtors Gary Alan Porrett and Jennifer Sue Porrett ("Debtors"), together with trustee Noah Hillen ("Trustee"), filed a Joint Motion for Determination of Property of the Bankruptcy Estate ("the Joint Motion"). Dkt. No. 59. In the Joint Motion,2 the parties asked the Court to settle their disagreement over a knotty issue: whether an $8,120.23 payment from Wells Fargo Bank, now held by Trustee, is property of the bankruptcy estate to be distributed to creditors, or instead, should be released to Debtors. To support their positions, the parties submitted a stipulation of facts, as well as briefs. Dkt. Nos. 60, 63, 64, 65. The Court conducted a hearing on the Joint Motion on February 23, 2016 at which Debtors' counsel and Trustee offered oral arguments. Dkt. No. 66. Having taken the issues under advisement, and having duly considered the stipulated facts, briefs, and arguments of counsel, as well as the applicable law, this Memorandum constitutes the Court's findings, conclusions, and explains the reasons for its disposition of the Joint Motion. See Rules 9014, 7052.

Facts3

Debtors obtained a home mortgage loan from Wells Fargo on June 25, 2007. On December 9, 2009, Debtors filed the chapter 7 petition commencing this case. On June 10, 2010, Wells Fargo filed a motion for relief from the automatic stay to foreclose on Debtors' home, alleging that Debtors were delinquent in making payments on the loan; that Debtors had not provided Wells Fargo adequate protection of its interest in the home; and further, that Debtors' intention was to surrender the home. Dkt. No. 21. On July 2, 2010, without objection from Debtors or the former chapter 7 trustee, the Court entered an order for stay relief allowing Wells Fargo to foreclose. Dkt. No. 26.4

On February 17, 2011, Debtors' bankruptcy case was closed and the trustee was discharged. Dkt. No 41.

A few months later, on July 20, 2011, in proceedings pending before the Board of Governors of the Federal Reserve, Wells Fargo agreed to the entry of a consent order ("the Consent Order"). Exhibit A, Dkt. No. 60. In those proceedings, the federal regulators alleged that Wells Fargo had engaged in prohibited, sharp lending practices in making loans to its borrowers between 2006 and 2008. In particular, it was alleged that Wells Fargo had diverted otherwise qualified borrowers away from "prime" loans, into more expensive "nonprime" loans, to their financial detriment. Wells Fargo denied it had acted improperly, and through the terms of the Consent Order, the dispute was settled. Among other actions, the Consent Order required Wells Fargo to identify those borrowers who may have been injured as a result of taking out nonprime loans during the relevant time window, and to offer them what the Consent Order referred to as "restitution" or "remedial compensation." Consent Order at 5.5

Apparently, Debtors were identified by Wells Fargo as borrowers entitled to a compensatory payment under the Consent Order. After learning that Debtors may be entitled to a payment under the Consent Order,6 in April 2015, the U.S. Trustee filed a motion to reopen Debtors' bankruptcy case and to appoint a trustee to administer Debtors' settlement claim, which had not been listed in Debtors' schedules. Dkt. No. 43. The Court granted the motion, reopened the bankruptcy case, and Trustee was appointed. Dkt. Nos. 44, 45.

On July 31, 2015, Trustee filed a motion to approve a compromise between Wells Fargo and the bankruptcy estate. Mot. to Approve Compromise, Dkt. No. 50. In the motion, Trustee sought authority to accept Wells Fargo's offer to pay him $8,120.23 (the "Payment") pursuant to the Consent Order in exchange for his execution of an "Acceptance of Compensation and Release" releasing Wells Fargo from any potential claims arising from its loan to Debtors. Id. at 2-3 and Exhibit A; Trustee Status Report at ¶¶ 2-3, Dkt. No. 49.

Debtors objected to the compromise motion, arguing that, because the Consent Order was entered post-bankruptcy, the Payment from Wells Fargo under the Consent Order was not property of the estate. Thus, they urged, Trustee was not entitled to settle any claim against Wells Fargo and the compromise motion should be denied. Obj. to Mot. to Approve Compromise at 1-2, Dkt. No. 53.

At a hearing on September 15, 2015, the Court granted the motion and approved the compromise with Wells Fargo. However, in doing so, the Court allowed the parties to reserve their rights to thereafter ask the Court to determine if the Payment was property of the estate, and required Trustee to hold the Payment in trust until the Court resolved whether it was property of the bankruptcy estate. See Min. Entry, Dkt. No. 55; and Order Granting Mot. to Approve Compromise, Dkt. No. 56 at ¶ 2. The parties then submitted the Joint Motion. Dkt. No. 60.

Issue

To resolve the Joint Motion, the Court must decide whether the Payment received by Trustee from Wells Fargo in accordance with the post-bankruptcy Consent Order to resolve claims arising from Wells Fargo's prebankruptcy lending practices is property of the estate. The Court concludes that the Payment is indeed property of this bankruptcy estate for the reasons that follow.

Analysis and Disposition

I.

As a general rule, the Code provides that the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case". § 541(a)(1). "The scope of the bankruptcy estate is extremely broad, including both tangible and intangible property." In re Pegrom, 395 B.R. 692, 695 (Bankr.D.Idaho 2008) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). But, the scope of the estate is not so broad as to "expand a debtor's rights in property over what existed as of the date of filing." Id. (quoting Farmers Ins. Group v. Krommenhoek (In re Hiatt), 2000 WL 33712218, 00.3 IBCR 131, 132 (Bankr.D.Idaho 2000).

Despite the temporal limitation in § 541(a)(1), property of the estate also includes certain kinds of property coming into existence after bankruptcy. For example, the estate will also include "[p]roceeds, product, offspring, rents, or profits from property of the estate" and "any interest in property that the estate acquires after the commencement of the case." § 541(a)(6), (a)(7).

"According to the legislative history of [§ 541(a)(6) ], `proceeds' is not to be defined as narrowly as in the Uniform Commercial Code." In re Hyman, 123 B.R. 342, 346 (9th Cir. BAP 1991) aff'd, 967 F.2d 1316 (9th Cir.1992) (citing S.Rep. No. 989, 95th Cong.2d Sess. 82, (1978); H.R.Rep. No. 595, 95th Cong. 1st Sess. 368 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5868, 6323). The result is a meaning that is "exceedingly broad." Id. (citing In re Calder, 94 B.R. 200, 201 (Bkrtcy.D.Utah 1988).

Furthermore, "Congress enacted § 541(a)(7) to clarify its intention that § 541 be an all-embracing definition and to ensure that property interests created with or by property of the estate are themselves property of the estate." MacKenzie v. Neidorf, 534 B.R. 369, 372 (9th Cir. BAP 2015) (quoting TMT Procurement Corp. v. Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512, 524-25 (5th Cir.2014) and citing H.R. Rep. 95-595, 549, reprinted in 1978 U.S.C.C.A.N. 5963, 6455 & 6523-24). Property acquired by the estate after commencement of the bankruptcy case is included in the estate under § 541(a)(7) if it was created with or by property of the estate; acquired in the estate's normal course of business; or is otherwise traceable to, or arises out of, any prepetition interest included in the bankruptcy estate. Id. at 372 (citations omitted).

As the party arguing that the Payment is property of the estate, Trustee bears the burden of proof. Id. (citations omitted).

II.

Trustee argues that the Payment was made to him by Wells Fargo in accordance with the Consent Order, to compensate Debtors as borrowers who were subjected to Wells Fargo's prebankruptcy sharp lending practices. Because any claim by Debtors against Wells Fargo would have arisen in 2007 when they received the loan, that claim would constitute property of the estate under § 541(a)(1). Since the Payment effected by the Consent Order was clearly intended as compensation for Debtors' claim, the Payment is also property of the estate under § 541(a)(7). To support his characterization of the purpose for the Payment, Trustee points out that, as a condition of his receipt of the Payment, and with the approval of the regulators, Wells Fargo required Trustee to release the lender from "any and all claims relating to [Wells Fargo's] origination of a more expensive mortgage loan [to Debtors] that the loan for which [they] potentially qualified." Acceptance of Compensation and Release at 2, Dkt. No. 50 Exh. A; Trustee's Memo. at 2-4, Dkt. No 64.

Debtors contest Trustee's attempts to tie the Payment to prebankruptcy events. Instead, Debtors argue that the Payment is not property of the estate because any right to receive it arose solely as a result of the 2011 Consent Order, which was entered long after their 2009 bankruptcy case was commenced. They note that there is no evidence that Wells Fargo in fact engaged in any wrongful conduct regarding their particular loan. Debtors' Memo at 4, Dkt. No. 63. In effect, Debtors argue that they are merely the indirect beneficiaries of the government's regulatory action, and they analogize these facts to those in cases involving the post-bankruptcy enactment of legislation bestowing cash and other benefits upon debtors, like fishermen and farmers, which rights or cash awards the courts have decided were not property of the debtors' bankruptcy estates. Id. at 3-4 citing In re Schmitz, 270 F.3d 1254 (9th Cir.2001); In re Vote, 276 F.3d 1024 (8th Cir.2002).

III.

While the case law admittedly requires a close reading, the Court concludes Trustee's position is the correct one.

The Consent Order and release documents make clear that the Payment was intended to constitute compensation for any financial detriment Debtors may have suffered as the result of having taken out a nonprime loan from Wells Fargo in 2007, when they may have been eligible for a cheaper, prime loan. Put another way, the Payment was intended to discharge any claim Debtors may have held against Wells Fargo as a result of the loan transaction, a claim that would have existed at the time of their bankruptcy filing.

In addition to the compensatory nature of the Payment, the role played by the release is a critical factor in the Court's analysis in this case. Because Trustee was required to release potential claims against Wells Fargo in order to receive the Payment, if the Payment was property of the estate, the Payment is likewise property of the estate pursuant to either § 541(a)(6) or § 541(a)(7).

A.

"Legal causes of action are included within the broad scope of § 541." In re Goldstein, 526 B.R. 13, 21 (9th Cir. BAP 2015) (citations omitted). This is true "even if the debtors were unaware of the claim when they filed for bankruptcy protection." In re Michael, 423 B.R. 323, 330 (Bankr.D.Idaho 2009). Also, a later recovery on a claim is derivative of the cause of action and therefore also property of the estate. In re Brown, 363 B.R. 591, 605 (Bankr.D.Mont.2007) (citing In re Smith, 293 B.R. 786, 788 (Bankr.D.Kan. 2003); In re Ballard, 238 B.R. 610, 624 (Bankr.M.D.La.1999).

The Consent Order explains the regulators' contentions concerning Wells Fargo's lending practices. It alleges that it was Wells Fargo knowingly diverted borrowers away from the prime loans for which they may be qualified, and into more expensive and onerous nonprime loans,7 without informing them of what was occurring. Consent Order at 4-5. The Consent Order alleged that Wells Fargo's conduct amounted to "unsafe or unsound banking practices" and constituted:

Id. at 5.

It is true that, as Debtors point out, in its agreement for entry of the Consent Order, Wells Fargo was not required to admit any specific wrongdoing, and there is no evidence in the record that, in particular, Debtors' transaction with Wells Fargo was tainted by Wells Fargo's alleged unlawful conduct.8 Even so, that Debtors qualified for payment under the Consent Order is evidence that they received a nonprime loan when they were eligible for a prime loan,9 and that they did so to their financial detriment.10 This, coupled with the fact that the Consent Order allowed Wells Fargo to require borrowers eligible to receive payments to release the lender from any possible claims described in the factual allegations,11 persuades the Court that Debtors held a cause of action against Wells Fargo based upon the loan transaction, even if that claim was only potential or disputed.

B.

"To determine when a cause of action accrues, and therefore whether it accrued pre-bankruptcy and is an estate asset, the Court looks to state law." Goldstein, 526 B.R. at 21 (citations omitted). Here, a cause of action for violation of the Idaho Consumer Protection Act would have accrued when the Debtors' loan was originated. See Idaho Code § 48608(1) (providing that accrual occurs when a person purchases services and suffers an ascertainable loss that is the result of a practice declared unlawful by the ICPA12); In re Beach, 447 B.R. 313, 319 (Bankr.D.Idaho 2011).

A cause of action for fraud, on the other hand, accrues when the facts constituting the fraud are discovered by the aggrieved party. Idaho Code § 5-218(4); Mason v. Tucker & Associates, 125 Idaho 429, 871 P.2d 846, 852 (1994). However, "it is important to distinguish between accrual of an action for purposes of ownership in a bankruptcy proceeding and accrual for purposes of the statute of limitations." In re Brown, 363 B.R. at 605 (citing Cusano v. Klein, 264 F.3d 936, 947 (9th Cir.2001); see also In re Endresen, 530 B.R. 856, 863 (Bankr.D.Or.2015). For purposes of determining when a cause of action is property of the estate, a claim accrues when it "could have been brought." Brown, 363 B.R. at 605 (citing Cusano, 264 F.3d at 947). Under Idaho law, a claim for fraud accrues only when nine elements are met.13 But since even the last of those elements, injury, would have occurred in this case when Debtors began paying the higher rate of interest on the loan, their cause of action for fraud would have accrued prepetition as well.

Therefore, although Wells Fargo disputed it, and it was unknown to Debtors at the time they filed their bankruptcy petition, as described in the Consent Order and release documents, Debtors held a potential cause of action against Wells Fargo arising from its dealings with them in 2007 for the financial harm they may have suffered as a consequence of borrowing from Wells Fargo. Because the potential claims against Wells Fargo existed at the time Debtors commenced the bankruptcy case, there were property of the estate under § 541(a)(1). And, because Trustee was required to release those claims as a condition of receipt of the Payment, those funds are also property of the estate either under § 541(a)(6) as proceeds from the potential causes of action, or under § 541(a)(7), because the Payment is traceable to, and arose out of, property of the estate.

IV.

The Court's conclusion is not inconsistent with other case law.

For example, in Neidorf, a secured creditor obtained stay relief on a chapter 7 debtor's home and foreclosed. Id. at 371. Almost six years later, while the estate was still open,14 the debtor received a payment pursuant to a national settlement between banking regulators and certain financial institutions based upon their alleged improper foreclosure practices. Id. The chapter 7 trustee filed a motion for turnover of the payment arguing that it was property of the estate pursuant to § 541(a)(7) because the payment arose from the debtors prepetition interest in the residence that was the subject of the foreclosure. Id. In holding that the payment was not property of the estate, the BAP stated:

Payment as after-acquired property under § 541(a)(7). Rather, Debtor became entitled to the payment only as a result of qualifying events occurring after her bankruptcy filing.

In re Neidorf, 534 B.R. 369, 372 (9th Cir. BAP 2015) (emphasis added).

Here, in order to receive the Payment, Trustee was required to execute a release of the potential claims that had inured to the estate as of the filing of the petition. Because of this, Trustee has shown, as the trustee in Neidorf could not, that the Payment is traceable to and arose from a prepetition interest in the bankruptcy estate. Moreover, the post-bankruptcy Consent Order alone did not create Debtors' right to the Payment. While the Consent Order provided a framework to identify the parties eligible for the payment, and how to calculate those payments, Trustee did not have a right to the payment until he released the estate's potential claims against Wells Fargo. The release further evidences that the Payment is proceeds from the potential causes of action, and the right to the Payment arose from Debtors' prepetition interest in the potential causes of action. Neidorf is distinguishable.

The release requirement in this case also differentiates it from In re Vanwart, 497 B.R. 207 (Bkrtcy.E.D.N.C.2013). In Vanwart, the debtors received a payment pursuant to a consent order entered post-petition against a lender who had attempted to foreclose on the residence prepetition. In holding that the payment was not property of the estate, the bankruptcy court stated that:

Vanwart, 497 B.R. at 212 (emphasis added). While the Consent Order in this case is also not an admission of any wrongdoing by Wells Fargo, unlike in Vanwart, Trustee was indeed required to release any potential claims against the lender to obtain the Payment. In contrast, the consent order in Vanwart stated, "In no event shall [lender] request or require any borrower to execute a waiver of any claims against [lender] in connection with any payment [provided pursuant to] this Order." Id. at 210. Because a release was required here, Vanwart is also inapposite.

Finally, Schmitz and Vote do not help Debtors. As the Ninth Circuit BAP observed in Goldstein,15 "[i]n both cases, the rights under review, crop disaster assistance and fishing rights . . . were created postpetition by legislation enacted postpetition. In re Vote 261 B.R. [439] at 442 [(8th Cir. BAP 2001)]; In re Schmitz, 270 F.3d at 1255-56." 526 B.R. at 23. For example, while the fishing quota rights in Schmitz were based on the Debtor's pre-filing catch history, it was not until the regulations were promulgated postpetition that fishermen obtained any future fishing quota rights. Schmitz, 270 F.3d at 1255. Because of this, the Ninth Circuit reasoned, "as of the date of the petition, Schmitz's [prepetition] catch history had no value."16

Here, Debtors' claims against Wells Fargo were "based on common law causes of action and other legislation that were already in place" and "did not require enactment of new legislation." Goldstein, 526 B.R. at 23. Thus, unlike the debtors' fishing history in Schmitz, or the crop loss in Vote, Debtors' prepetition right to prosecute a claim against Wells Fargo had value and was property of the estate. As such, when Trustee was required to release that right in exchange for the Payment, the Payment became part of the estate. In other words, "both [Schmitz and Vote are factually and legally distinguishable."17 Id.

Conclusion

While the issue is a close one, for these reasons, the Court concludes that the Payment is property of the estate. The parties shall submit an approved form of order for entry by the Court.