THAD J. COLLINS, CHIEF BANKRUPTCY JUDGE.
Two related matters are before the Court. First, a Motion to Define Compromised Claims came before the Court for hearing on September 20, 2017 in Cedar Rapids, Iowa. Kevin Arhenholtz appeared for Debtor Yvonne Ventura ("Debtor"). Casey Rigdon appeared for the Roberto G. Gonzales Estate ("the Gonzales Estate"). Jared Knight appeared for Chapter 7 Trustee Sheryl Schnittjer ("Trustee"). The Court received evidence, heard argument, and took the matter under advisement.
The second matter is Trustee's Objection to Debtor's Claim of Exemptions, which came before the Court for telephonic hearing on December 12, 2017. Kevin Arhenholtz appeared for Debtor, Casey Rigdon appeared for the Gonzales Estate, and Eric Lam appeared for Trustee. The Court received evidence, heard argument, and took the matter under advisement. These are core proceedings under 28 U.S.C. § 157(b)(2).
Debtor was in a long-term relationship with Roberto Gonzales. Debtor filed her bankruptcy. After Debtor's bankruptcy closed, Mr. Gonzales died intestate. Debtor filed probate claims against Mr. Gonzales' estate asserting she was his common-law spouse. This dispute is about whether Debtor's claims against the Gonzales' estate are or were property of the bankruptcy estate. Debtor argues that her claims arose when Mr. Gonzales died, after her bankruptcy and thus were not property of the bankruptcy estate. The Gonzales Estate argues that Debtor's probate claims existed as contingent claims when she filed bankruptcy, before Mr. Gonzales died, and therefore were property of the bankruptcy estate.
The facts are not in dispute. Debtor was in a long-term relationship with Roberto Gonzales. Debtor alleges that she and Mr. Gonzales shared a common-law marriage from November 27, 2002 to his death in December 2015.
Debtor filed this bankruptcy on February 27, 2015. On April 30, 2015, Trustee filed a report of no distribution. On June 18, 2015, Debtor received a discharge and the case was closed.
Mr. Gonzales died without a will in December 2015. On July 22, 2016, Debtor filed claims against the Gonzales Probate Estate. In her Notice and Claim of Surviving Spouse, Debtor "requests distribution to her the share afforded to her as the surviving spouse pursuant to the intestacy laws of the State of Iowa." In particular, she asked for "such amount as the Court deems reasonable for the proper support of a surviving spouse for a period of twelve months following the Decedent's death." She also asked for the estate to pay her "such amount as is justly due to her under the intestacy laws of the State of Iowa as the Decedent's surviving spouse."
Debtor also filed a claim. She claims $39,511.58 plus interest "for reimbursement to her of payment of purchase money, cost and value of improvements made, and payments real estate taxes and other expenses associated with the [home] ...." She also claims "fair and reasonable compensation for the value of [her] labor and time invested in maintaining, repairing and improving the [home]...." Her claim states that it "is contingent upon result of [her] claim she is Decedent's surviving spouse and entitled to her spousal intestate share of the assets of Decedent's estate, including the value asserted in this Claim." She further states that her claim "inheres to the [home]." In neither of these two filings with the probate court (the only documents in the record that set out her probate claims) does she say what specific statutes she relies on for these claims. Debtor simply claims her "spousal share" according to Iowa intestacy law and reimbursement for her contribution to the home.
On January 5, 2017, the United States Trustee ("the UST") filed a Motion to Reopen the bankruptcy case. The UST noted that Debtor had recently filed her Notice and Claim of Surviving Spouse in the Gonzales probate estate claiming a spousal ownership interest in a house. The UST points out that Debtor did not list an ownership interest in real estate on her bankruptcy schedules and did not claim to be married. The UST asked the Court to reopen the case to allow further investigation of this matter. The Court granted the motion.
On January 30, 2017, shortly after the UST's Motion to Reopen to investigate, the Chapter 7 Trustee filed a Motion to Approve Compromise or Settlement. Under the proposed settlement, the Gonzales
On May 9, 2017, the Iowa District Court for Linn County entered an order in the probate proceeding related to this settlement. The Iowa District Court noted that this Court had approved the settlement but that the settlement did not state what claims Trustee and the Gonzales Estate actually settled:
On May 25, 2017, the Gonzales Estate filed the Motion to Define Compromised Claims presently before this Court. In the Motion, the Gonzales Estate asks this Court to decide "precisely what has been compromised." That is, the Gonzales Estate is effectively asking what claims Debtor had against Mr. Gonzales' property, if any, when she filed bankruptcy. The Gonzales Estate argues that all of Debtor's probate claims arose prepetition, became part of the bankruptcy estate when she filed, and were settled in full by the Gonzales Estate with the Chapter 7 Trustee. The Chapter 7 Trustee supports the motion and arguments of the Gonzales Estate. Debtor resists. Debtor asks the Court to find that all of her probate claims against the Gonzales Estate arose postpeition. She claims that her status as a probate claimant arose only when Gonzales
On September 21, 2017, after the hearing on the Motion to Define Compromised Claims, Debtor amended her schedules. She lists: "Any and all matured or unmatured claims to real estate, know or unknown, legal or equitable" as exempt. Debtor listed the value and portion of this exempt property as unknown.
Trustee filed an objection to Debtor's exemption. Trustee argues that Debtor's exemption was inappropriate, untimely, and should be denied. Trustee argues that she had already sold the property interest that Debtor now claims as exempt and distributed the proceeds. Thus, she argues that it is now impossible for Debtor to exempt the property from the estate.
The first issue here is whether the claims that Debtor now asserts in probate existed when she filed bankruptcy and became property of the estate. The second issue is whether the settlement between Trustee and the Gonzales Estate already decided that issue.
The key question is whether Debtor's probate claims (as common law spouse with a property interest) became part of her bankruptcy estate when she filed bankruptcy. More specifically, the Court must decide whether Debtor's spousal and equitable interest claims she asserts against Gonzales' probate estate were "legal or equitable interest of the debtor in property as of commencement of the case." 11 U.S.C. § 541. In deciding this issue, the Court addresses only whether Debtor's claims arose prepetition and became property of the bankruptcy estate — not the actual merits of the probate claims she asserts.
The Gonzales Estate argues that Debtor's probate claims arose in 2002, when Debtor claims she and Mr. Gonzales allegedly began their common law marriage relationship. The Gonzales Estate argues that Debtor's probate claims existed as contingent claims, and came into the bankruptcy estate, when she filed bankruptcy on February 20, 2015. The Gonzales Estate concludes that Debtors' probate claims that arose from her alleged common-law marriage to Gonzales became part of the bankruptcy estate, and remained in the bankruptcy estate until Trustee settled those claims with the Gonzales Estate earlier this year.
Debtor argues that her probate claim arose postpetition, when Mr. Gonzales died. She asserts that her status as a probate claimant arose only after she discovered that Mr. Gonzales died without a will providing for her. Debtor argues that she did not need to list the potential claims on her bankruptcy schedules because they were too speculative and without any value at that time.
In the probate case, Debtor makes claims against the Gonzales Estate for "her share afforded to her as the surviving spouse pursuant to the intestacy laws of the State of Iowa." This interest is generally referred to as the "dower interest." Debtor emphasizes that any dower interest that existed when she filed bankruptcy was speculative and did not vest until Mr. Gonzales died post-petition. Debtor notes that, if Mr. Gonzales had died with a will that equitably provided for Debtor and her financial contributions, she would not have a probate claim. Debtor thus concludes that all of her probate claims arose postpetition
The threshold question here is whether the probate claims became property of the bankruptcy estate under 11 U.S.C. § 541 when Debtor filed bankruptcy in February 2015. Section 541 provides:
11 U.S.C. § 541 (emphasis added). Here, Iowa law determines what constitutes Debtor's "legal and equitable interest" "as of the commencement of the case."
The Iowa Probate Code controls and defines these interests and provides:
Iowa Code § 633.350. Here, it is undisputed that Mr. Gonzales died intestate. As a result, his property "passes ... to the persons who succeeded to the estate as provided in" the Iowa probate code.
With respect to surviving spouses, which Debtor now claims she is (as a common law spouse), the Iowa Probate Code provides:
Iowa Code § 633.211. The next section of the probate code similarly states:
Iowa Code § 633.212.
These statutes are a "codification of the long-held general rule of the wife's inchoate right in land of which her husband may be seised at any time during the existence of their marriage relation."
In applying these statutes, the Iowa Supreme Court has said: "A spouse's statutory dower interest attaches to real property `the instant there is a concurrence of seisin in the husband and marriage relation between the parties.'"
This Court joins those courts that have noted that there is "some difficulty in determining whether a contingent right such as dower should cause real property to be included as property of the estate."
To be clear, the dower interest is not an inheritance or expectancy interest. The Iowa Supreme Court, in applying a previous dower statute that is "remarkably similar" to the present statute,
In so finding, this Court follows bankruptcy courts in Ohio and Arkansas, which have found under applicable state law that: "When an individual with a contingent dower interest in property files a bankruptcy case, that interest becomes property of the bankruptcy estate."
A dower interest, however, is not transferrable: "the wife of the grantor relinquished her inchoate right of dower... but did not (and could not) convey such inchoate right.... The wife had no estate that she could grant or convey."
A bankruptcy court in Arkansas dealt with a similar issue under similar legal concepts in Arkansas law, and reached a similar conclusion.
The Court finds this case provides additional persuasive guidance on how to treat Debtor's dower interest and the question raised here. That interest was not transferred to Trustee during her bankruptcy — even though it was property of the estate. The dower interest is not something that Trustee could "use, sell, or lease under section 363 of this title." 11 U.S.C. § 542(a). In February 2015, when it technically became property of the estate, it had no real value to the estate. Moreover, the right at issue did not fully vest or become valuable to the bankruptcy estate within 180 days of filing, which could make it arguably subject to § 541(a)(5). In fact, it never became a right with any value or potential salability until after the bankruptcy case closed.
Given this conclusion, Trustee could not settle Debtor's dower claims during the original period the bankruptcy was pending because Trustee had no interest in Debtor's dower right that she could sell or any value she could attach to it. Debtor's dower interest — to the extent it was technically part of her bankruptcy estate — practically and effectively remained her own inchoate interest unaffected by the bankruptcy in any real way. Only when Gonzales died, postpetition and after the bankruptcy case closed, did that interest take on potential value.
The Chapter 7 Trustee and the Gonzales Estate argue that the Chapter 7 Trustee would be entitled to that value — arising postpetition — because any property interest not scheduled in Debtor's bankruptcy papers remains in the estate after the close of a case. 11 U.S.C. § 554(d). Chapter 7 Trustee and the Gonzales Estate essentially argue that Debtor's inchoate dower interest remained in the bankruptcy estate, vested in the bankruptcy estate and took on value when Mr. Gonzales died, and was then an interest the Chapter 7 Trustee could sell or convey.
The relevant portion of the statute governing abandonment states:
11 U.S.C. § 554 (emphasis added). Debtor prevails here under either section.
Under subsection (c), if Debtor had scheduled the property (as the Chapter 7 Trustee and the Gonzales estate insist was required) it would have been abandoned back to Debtor because it was not capable of administration. Under subsection (d), the non-listed asset would remain in the estate, "unless the Court orders otherwise." Here, at a minimum, the Court will "order otherwise" because that effects the result that would have occurred if Debtor had listed the property.
"The phrase `unless the court orders otherwise' appears throughout the Bankruptcy Code. In interpreting those statutes, courts have held that the phrase `unless the court orders otherwise' grants a bankruptcy court discretion."
Here, even if the dower claim technically remained in the bankruptcy estate when Mr. Gonzales died, and could be viewed as becoming a valuable asset that Trustee could possess and convey at that time, the Court orders that the claim is deemed
This result would not "reward the Debtor for failing to schedule" her inchoate dower interest.
To answer the question raised by the Gonzales Estate, the settlement between the Gonzales Estate and the Chapter 7 Trustee did not affect any claim Debtor had or has to a dower interest.
In addition to her dower claim, Debtor claims $39,511.58 plus interest "for reimbursement to her of payment of purchase money, cost and value of improvements made, and payments real estate taxes and other expenses associated with the [home]" and "fair and reasonable compensation for the value of [her] labor and time invested in maintaining, repairing and improving the [home]." This is similar to another Iowa case where, like here, an alleged surviving spouse filed a claim in probate "electing to take `her intestate share' of the decedent's property" and also filed "a claim in probate seeking $40,000 as `reimbursement for her joint survivor ownership interest in assets of the estate as well as a lien for improvements made to the estate during the marriage and/or cohabitation of the parties.'"
Section 541 provides:
11 U.S.C. § 541 (emphasis added). As previously noted, Debtor's filings do not set out what specific statutes or doctrines she relies on — Debtor simply claims $39,511.58 plus interest "for reimbursement to her of payment" and "fair and reasonable compensation for the value of [her] labor." From these pleadings, Debtor's reimbursement and compensation claims sound in quasi contract law as unjust enrichment claims.
Here, Debtor's restitution and compensation claims are based on her alleged payments and labor directed to purchasing and improving the home. Thus, Debtor's claims arose when she made the specific alleged payments and performed the specific alleged labor. Debtor's argument that these claims did not arise until Mr. Gonzales died is unpersuasive. They arose when the contributions were made.
While it appears that Debtor made most, if not all, of these contributions before she filed bankruptcy, it is unclear on this record precisely when she made the alleged payments and performed the alleged labor. To the extent that Debtor claims restitution and compensation for payments made and labor performed before she filed bankruptcy (which appears to be the case), those claims became property of the estate and were settled by Trustee as a part of the settlement with the Gonzales Estate. To the extent that Debtor can show any of the restitution and compensation claims are for payments made and labor performed after she filed bankruptcy, those claims are not property of the estate and remain with Debtor.
The Gonzales Estate alternatively argues that the Court's order approving the settlement already determined the issue of who owns Debtor's probate claims. The Estate argues that Debtor had a full and fair opportunity to assert her ownership interest in the claims at that time and did not do so. The Gonzales Estate concludes that res judicata now bars her from doing so.
Debtor argues that the settlement does not bind her because it was between the Trustee and the Estate only. Debtor also argues that the Court did not decide what Debtor or Trustee owned, or when they owned it, before approving the settlement. Debtor argues that the Trustee rushed to convert unsubstantiated allegations about unscheduled assets into a settlement without first identifying what assets, if any, were actually unscheduled and belonged to the bankruptcy estate. Only a few weeks passed between the UST's motion to reopen and Trustee's proposed settlement. Debtor concludes that the settlement agreement between the other two parties does not preclude her from asserting her continued ownership of the probate claims.
"Res judicata bars a party from litigating claims that either were or could have been raised in an earlier proceeding."
The Eighth Circuit has said:
Here, the Gonzales Estate has not shown that claim preclusion or issue preclusion bars Debtor from litigating her ownership of her probate claims. Claim preclusion does not apply because the settlement was between Trustee and the Estate — and resolved only whatever interest the bankruptcy estate held. Debtor was not a party and Debtor's ownership of claims against the probate estate was never adjudicated. Thus, the Court's order approving the settlement was a final determination of whatever the Chapter 7 Trustee had in the way of the probate claims against the Gonzales Estate. The settlement did not address or decide Debtor's ownership of probate claims. Claim preclusion does not apply.
Issue preclusion similarly does not apply because the issue that Debtor now raises (that she, not Trustee, owns the probate claims) was not "actually and necessarily determined" by the order approving the settlement. The Iowa probate court recognized this when it said: "The bankruptcy court approved the compromise
Debtor's dower interest is deemed abandoned as of the close of the case. Thus, it is no longer necessary to decide whether Debtor's dower interest can be treated as exempt property. The issue is moot and need not be decided.
Debtor's unjust enrichment claims, to the extent that they are based on payments made and labor performed before she filed bankruptcy, became part of the bankruptcy estate when she filed her petition in February 2015. Debtor did not list these claims on her petition. Thus, under 11 U.S.C. § 554 these prepetition unjust enrichment claims remained part of the bankruptcy estate after the case closed.
Debtor amended her exemptions to include "Any and all matured or unmatured claims to real estate, know or unknown,
Trustee objects to this exemption. Trustee argues that the exemption is untimely — the case closed in June 2015 — and is barred by estoppel principles. Trustee also argues that allowing the exemption would prejudice the Trustee because she already sold this interest to the Gonzales Estate. Trustee concludes that there is now nothing to return to Debtor as exempt.
Bankruptcy Rule 1009(a) provides: "A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed." Fed. R. Bankr. P. 1009(a). "Amendments under Rule 1009 are permitted before case closure unless there is evidence of bad faith by the debtor or if creditors will suffer prejudice."
This reasoning applies here. Trustee has already sold Debtor's prepetition restitution and compensation claims. Debtor did not claim these as exempt until after Trustee sold the claims and after litigation had begun in this Court about these issues. Had Debtor claimed the exemptions earlier, Trustee would certainly have "taken different actions, or asserted other positions." Allowing the exemption in this case would prejudice Trustee. Accordingly, the Court sustains Trustee's objection to Debtor's exemption as to Debtor's prepetition restitution and compensation claims.