DANIEL P. COLLINS, Bankruptcy Judge.
Before this Court is the Motion of Trustee, Robert A. Mackenzie, ("Trustee") for Reconsideration of Order Overruling Objection to Exemption [FRBP 9024]
In essence, the Motion for Reconsideration does not challenge the Court's finding that Debtor's claimed interest in a Nationwide deferred compensation plan account ("Compensation Account") is exempt. Rather, the Trustee contends Debtor's interest in a stipulated marital settlement agreement ("MSA") may be sold by the Trustee even though payments to the Debtor made under the MSA may ultimately come from the Compensation Account.
After reviewing the parties' briefs and hearing oral argument on the issue, the Court agrees the Trustee may sell this chapter 7 estate's interest in the MSA but that the description of the interest to be sold is inadequate. Moreover, the buyer of the estate's interest in the MSA may not disturb the Debtor's exempt rights as a beneficiary of the Compensation Account.
On September 26, 2018 ("Petition Date"), Debtor filed the instant chapter 7 bankruptcy.
After the Trustee filed a Response to Debtor's Objection to Sale,
Through her counsel Debtor filed her Response to Trustee's Objection to Exemption.
On September 23, 2019, the Court issued its Under Advisement Ruling on Trustee's Objection to Exemption and Amended Sale Motion ("Under Advisement Ruling")
Trustee filed his Motion for Reconsideration.
After a series of hearings in which Trustee and Debtor's new counsel narrowed the issues raised in Trustee's Motion for Reconsideration, the Debtor then filed a Supplemental Response.
Pursuant to 28 U.S.C. § 157(b)(2)(B), this Court has jurisdiction over the allowance or disallowance of claimed exemptions on property of the estate. Pursuant to 28 U.S.C. § 157(b)(2)(N) this Court has jurisdiction over sales of property of a bankruptcy estate.
Whether grounds exist for the Court to grant Trustee's Motion for Reconsideration under Federal Rule of Bankruptcy Procedure 9024.
This Court's Under Advisement Ruling focused on section III of the MSA,
This Court determined that, under Arizona's exemption statutes, Debtor's interest in the Compensation Account was exempt because A.R.S. § 33-1126(B) protected a beneficiary's interest in the type of deferred compensation account referenced in the MSA.
Trustee's Motion for Reconsideration shifted the discussion from whether Debtor's interest in the Compensation Account was exempt to whether the estate had an interest in the MSA which the Trustee could sell. The Trustee acknowledged that Debtor's beneficial interests in the Compensation Account may be exempt but focused on whether Debtor had any exempt interest in the MSA itself. Trustee argued that Debtor's beneficial interests in the Compensation Account were merely "protection in the event of her ex-spouse's demise" and this beneficial interest does not continue if Debtor's Ex-Husband either retires or the March 2024 deadline is reached.
The Motion for Reconsideration argued that the source of the cash payout provided for in the MSA is not the relevant issue. The Trustee contends that whether Debtor's beneficial interests in the Compensation Account are exempt is irrelevant for the purposes of Trustee's Amended Sale Motion. Instead, the Trustee argues that the Court should focus on the Debtor's right to receive $115,000 under the terms of the MSA. The Trustee points out that this right to payment under the MSA has not been claimed exempt nor could Debtor properly claim it exempt.
Under Bankruptcy Rule 9024, Federal Rule of Civil Procedure 60 applies in this contested matter. Rule 60(b) provides, in relevant part:
Rule 60(b)(6) "is a grand reservoir of equitable power that allows courts to grant relief from final judgment for `any' reason that `justifies relief.'"
Upon the filing of a bankruptcy petition, an estate is created that consists of all the legal and equitable interests in property possessed by the debtor at the time of filing "wherever located and by whomever held." 11 U.S.C. § 541(a)(1); In re Pettit, 217 F.3d 1072, 1077 (9th Cir. 2000). The property that a debtor may exempt is determined under § 522 unless the applicable state opted out of the federal exemption scheme. 11 U.S.C. § 522(b)(1). Arizona has opted out of the federal exemption scheme provided in § 522(d) so only Arizona exemptions apply in this case. A.R.S. § 33-1133(B).
A.R.S. § 33-1126(B) states:
Under 26 U.S.C. § 457,
This Court finds that there were extraordinary circumstances that warrant relief under Rule 60(b)(6) for several reasons. First, Debtor has been represented by two attorneys and made multiple appearances pro se in this bankruptcy. This resulted in inconsistent and at times unfocused arguments from Debtor. As a result of the inconsistent arguments, Trustee was forced to respond to conflicting and at times confusing arguments. This confusion ultimately steered the Court's focus to Debtor's beneficial interests in the Compensation Account. Ultimately, the Court came to understand that the Trustee did not oppose Debtor's claimed exemption in the Compensation Account but, rather, sought to sell the estate's interest in the MSA, a non-exempt asset.
Second, in response to Trustee's Amended Sale Motion, Debtor's Objection to Sale was filed pro se and made several confusing arguments. Debtor made the argument that her beneficial interests in the Compensation Account were what the Trustee was seeking to sell. Debtor raised the issue of a qualified domestic relations order, the timing of her ability to receive the $115,000 cash payment and the conditions that must be met prior to receiving the cash payment. Several of these arguments were either contradicted or dismissed at the June 27, 2019 hearing and in Debtor's subsequent filings. Confusion and inconsistent arguments persisted through Debtor's most recent Supplemental Response filed by Debtor's current counsel.
Third, Debtor's amended schedule C shifted the focus from the Amended Sale Motion to Trustee's Objection to Exemption. Further aggravating this confusion, the Debtor temporarily lost her counsel and then pro se filed an amended schedule C and Objection to Sale.
This Court now reconfirms its finding that Debtor's interest in the Compensation Account is exempt. However, it is now clear that the Trustee is attempting to sell Debtor's interest in the MSA, but not the Compensation Account. The Debtor's interest in the MSA is not exempt and has never been claimed by the Debtor as exempt.
For these reasons, the Court now reconsiders its denial of the Trustee's Amended Sale Motion to the extent that it sought to sell the estate's interest in the MSA.
Having determined that relief under Rule 60(b)(6) is warranted, the Court now addresses Trustee's Amended Sale Motion.
This Court finds that Debtor's interests in and rights under the MSA are property of this bankruptcy estate. The Debtor's interests in the MSA are separate and distinct from Debtor's exempt interest in the Compensation Account. However, the estate's interest in the MSA is limited by Debtor's exempt interest in the Compensation Account and vice versa. If, for instance, the Ex-Husband was to retire or pass away prior to his retirement at a time when the Compensation Account held less than $115,000, Debtor would be entitled to receive whatever funds existed in the Compensation Account but the holder of this estate's MSA rights would be entitled to receive from Ex-Husband or his decedent's estate the difference between $115,000 and the funds in the Compensation Account. For example, if the Ex-Husband either retires or passes before his retirement and at a time when $90,000 was in the Compensation Account, the Debtor would be entitled to that $90,000 (as her exempt property) but the holder of this bankruptcy estate's interests in the MSA would be entitled to $25,000 from the Ex-Husband or his decedent's estate. On the other hand, if the Ex-Husband fully satisfies his $115,000 payment obligation under the MSA before he retires or dies, Debtor would no longer have an interest in the Compensation Account, i.e., the entire "cash payout" contemplated by the MSA would have been satisfied and no further sum would be due to Debtor or the holder of this bankruptcy estate's rights under the MSA. Finally, if the MSA remains wholly unpaid by the time of the Ex-Husband's death or retirement or by the end of April 2024, the Compensation Account must be paid to Debtor in an amount up to $115,000. The Compensation Account payment to her would be exempt. Importantly, other than the funds Debtor might be entitled to receive from the Compensation Account, the bankruptcy estate's rights under the MSA are subject to a § 363 sale by the Trustee.
Under 11 U.S.C. § 363(b)(1) "[t]he [T]rustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate..." Trustee's Amended Sale Motion argued that Trustee adequately demonstrated sound business justification for a sale of Debtor's interest in the MSA. However, this Court is concerned that the Trustee's Amended Sale Motion incorrectly describes the asset being sold as "a cash payout of $115,000" and that the proposed buyer, John Marshall/JM Partners LLC ("Buyer"), based his/its $10,000 bid on this incorrect description. As discussed above, it is far from certain that the cash payout to the holder of this bankruptcy estate's interest in the MSA will total $115,000. Although this Court will not dictate the minimum amount a potential buyer must pay for the bankruptcy estate's interest in the MSA, all potential buyers are entitled to an accurate description of the property being sold. For this reason, the Court will not approve the Trustee's Amended Sale Motion proposing to sell to Buyer the estate's interests in the MSA for $10,000.
The Court finds that this bankruptcy estate has an interest in the MSA which the Trustee may sell. The Court does not alter the Under Advisement Ruling with respect to the Trustee's Objection to Exemption but does vacate that portion of the Ruling that denied the Trustee the authority to sell the estate's interest in the MSA. Nonetheless, the Court will not grant Trustee's Amended Sale Motion because the description of the asset to be sold is inadequate.
IT IS HEREBY ORDERED granting Trustee's Motion for Reconsideration to the extent the Under Advisement Ruling denied Trustee's request for the authority to sell this bankruptcy estate's interest in the MSA.
