MIKE K. NAKAGAWA, Bankruptcy Judge.
On November 27, 2019, the court heard final arguments on the Motion to Employ Special Counsel, Nunc Pro Tunc, Approve Settlement, Approve Special Counsel's Fees and Costs and Authorize Special Counsel to Disburse Settlement Proceeds ("Motion"), brought in the above-captioned case. The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
On March 6, 2015, a voluntary joint Chapter 13 petition was filed by Scott A. Bliss and Sarah E. Bliss ("Debtors"). (ECF No. 1). The case was assigned to standing Chapter 13 trustee Kathleen Leavitt ("Trustee").
On March 16, 2016, an order was entered confirming the Debtors' modified Plan #4 ("Confirmed Plan"). (ECF No. 71).
On August 6, 2019, Debtors filed the instant Motion. (ECF No. 156).
On August 15, 2019, Debtors filed proposed modified Plan #6 ("Plan #6"). (ECF No. 158).
On August 22, 2019, the Trustee filed an opposition to confirmation of Plan #6 ("Trustee Plan Opposition"). (ECF No. 163).
On August 29, 2019, the Trustee filed an objection to the instant Motion ("Trustee Objection"). (ECF No. 164).
On September 9, 2019, Debtors filed amended Schedules I and J, reflecting their separate regular incomes, as well as the expenses for separate households.
On September 16, 2019, Debtors filed an amended property Schedule A/B listing a post-petition personal injury claim ("PI Claim") having a value of $30,000. (ECF Nos. 170 and 172). On the same date, Debtors claimed on their Schedule C an exemption of the PI Claim in the amount of $31,550.
On September 25, 2019, Debtors filed another amended property Schedule A/B claiming an exemption of the PI Claim in the amount of $16,150 ("PI Exemption") pursuant to NRS 21.090(1)(u). (ECF No. 173).
On September 25, 2019, the instant Motion was heard, granted in part, and continued for further argument.
On October 4, 2019, an order was entered granting the Motion in part ("Interim Order"). (ECF No. 176).
On October 23, 2019, Debtors filed a supplemental brief ("Debtor Supplement"). (ECF No. 178).
On October 25, 2019, the Trustee filed an objection to the PI Exemption ("Exemption Objection"). (ECF No. 180).
On November 6, 2019, the Trustee filed a supplemental brief ("Trustee Supplement"). (ECF No. 186).
On November 20, 2019, Debtors filed a reply ("Debtor Reply"). (ECF No. 187).
After the Debtors commenced their voluntary Chapter 13 proceeding, Sarah Bliss was involved in a car accident giving rise to the PI Claim.
As previously mentioned, Debtors filed the instant Motion on August 6, 2019, and the Trustee filed her objection on August 29, 2019. The Motion included four related requests for relief: (1) to approve the employment of the Powell Firm retroactive to January 23, 2018; (2) to approve a settlement of the PI claim for the gross amount of $30,000 ("Settlement Funds"); (3) to approve compensation of the Powell Firm in accordance with the contingency fee agreement; and (4) to approve disbursement of the Settlement Funds ("Proposed Disbursement"). According to the Proposed Disbursement, the Powell Firm seeks compensation of $4,580.95 as attorney's fees rather than $10,000 of the gross settlement authorized by the Fee Agreement (plus $500.00 in costs). After deduction of various reduced medical expenses as well as the reduced subrogation claim of the applicable health insurance carrier (totaling $20,338.09), the remaining balance of the gross Settlement Funds is $4,580.96. The Proposed Disbursement therefore sought to distribute $5,080.95 to the Powell Firm, $20,338.09 to the medical service providers and insurance carrier, and the remaining $4,580.96
The Trustee objected to the Proposed Disbursement being made by the Powell Firm inasmuch as the Debtor had never claimed the PI Claim or the Settlement Funds as exempt.
At the initial status hearing on September 25, 2019, Debtors raised a concern that was never expressed in their Motion: that having the gross Settlement Funds pass through the Trustee would generate statutory trustee's fees of ten percent under 28 U.S.C. § 586.
Debtors maintain that the Proposed Disbursement of the settlement proceeds should be made directly by the Powell Firm rather than through the Trustee. They argue that a disbursement of the settlement proceeds by special counsel would not constitute a payment "received by" the Trustee "under" their Confirmed Plan. As a result, the ten percent statutory fee to the Trustee ($3,000.00) would not apply, which would be sufficient for Sarah Bliss to receive the full remaining amount ($2,980.96) of her PI Exemption.
The Trustee maintains that the settlement proceeds are property of the Chapter 13 estate that she is obligated to administer. She argues that the result decried by the Debtors is the product of the statutory scheme for administration of property of the Chapter 13 estate and for the compensation of Chapter 13 trustees.
Having considered the oral and written arguments of the parties, as well as the record in the case, the court concludes that the Settlement Funds must be disbursed by the Trustee under the circumstances of this case, subject to certain reservations. Several reasons support this conclusion.
First, there is no question that the PI Claim accrued after the Chapter 13 was commenced. A cause of action is a legal interest that would be property of a bankruptcy estate under Section 541(a)(1).
Second, the PI Claim and the Settlement Funds did not vest in the Debtors when their prior Chapter 13 plan was confirmed on March 16, 2016. Section 5.03 of the Confirmed Plan states in pertinent part that "Any property of the estate
Third, the PI Claim and the Settlement Funds remain property of the Chapter 13 estate due to the pending Exemption Objection. Debtors never claimed the PI Exemption until they filed their amended Schedule C on September 25, 2019. Under FRBP 4003(b)(1), an objection to a claimed exemption may be filed within 30 days after the exemption appears on a debtor's amended schedule. Under Section 522(l), property claimed as exempt is exempt if a timely objection is not filed. Here, the Trustee timely filed her objection to the PI Exemption on October 25, 2019. The Exemption Objection was noticed to be heard on December 5, 2019. That objection has not been withdrawn by the Trustee nor has it been resolved in favor of the Debtors. In fact, the Exemption Objection has not been resolved for or against either party.
Fourth, the bankruptcy estate's interest in the PI Claim and the Settlement Funds have not been abandoned. Section 554(a) and (b) permit property of a bankruptcy estate to be abandoned if the property is "burdensome to the estate or that is of inconsequential value and benefit to the estate." Property of a bankruptcy estate that has been abandoned pursuant to Section 554 ceases to be property of the estate.
Fifth, neither the Debtors nor the Trustee may use property of the estate outside the ordinary course of business under Section 363(b) without prior authorization from the court. Presumably, the PI Claim accrued outside the ordinary course of business. Thus, while the Settlement Funds remain property of the Chapter 13 estate, neither the Debtors nor the Trustee legally control the distribution of the funds. The funds are, at all times, subject to the jurisdiction of this court.
Finally, Debtors are not required to remain in Chapter 13.
The court is sympathetic to the Debtors inasmuch as they have slogged their way through this case for approximately fifty-seven months, with their fresh start through a Chapter 13 discharge still somewhat uncertain. Debtors presumably did not anticipate being involved in a car accident in January 2018, but that hopefully is true of most people. Debtors may not have anticipated dissolving their marriage before the bankruptcy was completed, but that unfortunately occurs with frequency. Likewise, the Debtors may not have anticipated receiving an inheritance after they filed their Chapter 13 petition, but that also likely is true for most people. Stuff happens. But both the post-petition PI Claim and the post-petition inheritance still constitute property of the Debtors' bankruptcy estate.
As a fiduciary to all creditors of the Chapter 13 estate, the Trustee is obligated to ensure that all property of the estate is accounted for and properly administered until such property is no longer property of the estate. Avenues are available for a debtor to remove property from a bankruptcy estate. In this case, however, Debtors apparently foreclosed such avenues from effectively being pursued when they failed to inform their bankruptcy counsel of the PI Claim or to inform their personal injury counsel that they were still in bankruptcy.
