|||United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT
|||Keywords: preference, lien, exempt property|
|||August 29, 2000
|||IN RE: ROGER EDWARD ARZT AND CAROL ANN ARZT DEBTOR
KIP M. KALER, AS BANKRUPTCY TRUSTEE FOR ROGER EDWARD ARZT AND CAROL ANN ARZT PLAINTIFF-APPELLEE
DAVID A. OVERBOE AND JOHN R. WENTZ DEFENDANTS-APPELLANTS
|||Before Kressel, Schermer, and Federman, *fn1 Bankruptcy Judges
|||The opinion of the court was delivered by: Federman, Bankruptcy
|||Appeal from the United States Bankruptcy Court for the District
of North Dakota
|||Submitted June 30, 2000
|||David A Overboe and John R. Wentz (the Transferees) appeal from a
court order avoiding a pre-petition preferential transfer, and holding
that the property so transferred is property of the bankruptcy
estate. *fn2 For the following
reasons, we affirm the decision of the bankruptcy court.
|||On or before March 26, 1999, assets owned by Roger and Carol Arzt (the
Debtors) included a homestead with approximately $80,000.00 in equity.
The Debtors also had outstanding obligations to the Transferees and the
Internal Revenue Service, among others. On March 26, 1999, the Debtors
granted Transferee David Overboe a mortgage against the homestead, duly
recorded that same day, in the amount of $12,000.00. The Debtors granted
the mortgage in order to secure an antecedent debt in the amount of
$9,135.00, for legal services previously rendered. The remaining
$2,865.00 was to secure payment for future services to be incurred in
relation to an anticipated bankruptcy filing.
|||Also on March 26, 1999, the Debtors granted Transferee John Wentz a
mortgage against the homestead, duly recorded that same day, in the
amount of $58,000.00. The Debtors granted this mortgage to secure a debt
to Mr. Wentz that had been outstanding for a number of years.
|||On March 30, 1999, the Debtors filed a Chapter 7 bankruptcy
petition, and Appellee Kip M. Kaler (the Trustee) was appointed as the
Chapter 7 bankruptcy trustee.
|||On August 24, 1999, the Trustee filed an adversary proceeding against
the Transferees. He sought to avoid the mortgage to Wentz, and all but
$2,865.00 of the $12,000.00 mortgage to Overboe, as preferential
transfers, pursuant to section 547 of the Bankruptcy Code (the
Code). The Trustee also sought to preserve the Debtor's equity in their
homestead for the benefit of the bankruptcy estate, pursuant to
section 551 of the Code. The Transferees conceded that the transfers
were preferential. They argued, however, that the Trustee could not
avoid the transfer by the Debtors of their exempt property because
creditors could not otherwise reach the exempt property.
|||The bankruptcy court, relying on its ruling in Kaler v. Letcher
(In re Wegner), *fn3 ruled in favor of
the Trustee. Transferees appealed. The Transferees make three arguments
on appeal. Theyfirst argue that the Debtors' right to use, transfer, or
encumber their homestead allowance is a fundamental right granted to the
Debtors by state law. They next argue that by the time the Trustee filed
this adversary proceeding, the Debtors had claimed the mortgaged
property as exempt, thus it was no longer property of the bankruptcy
estate, and not subject to the Trustee's avoidance powers. Finally, the
Transferees argue that the Bankruptcy Appellate Panel for the
Eighth Circuit (the BAP) is not constrained by the Eighth Circuit's
summary affirmance of In re Wegner. We will deal with the first two
|||A bankruptcy appellate panel shall not set aside findings of
fact unless clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of
the witness. *fn4 In this case, there
is no factual dispute. We review the legal conclusions of the bankruptcy
court de novo. *fn5
|||Section 541 of the Code provides that the filing of a bankruptcy
petition, without more, creates an estate that contains all property in
which the debtor has a legal or equitable interest:
|||(a) The commencement of a case under section 301, 302, or 303 of this
title creates an estate. Such estate is comprised of all the following
property, 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. *fn6
|||Thus, all of the Debtors' property became property of the
estate on the date the case was filed. That property included Debtors
remaining equity in their homestead, which was less than $10,000.00
after Debtors voluntarily encumbered the homestead pre-petition.
Debtors, however, have the right to exempt certain property from the
estate based on either the Code or applicable state law. *fn7
Residents of North Dakota, where the Debtors resided on the date they
filed their bankruptcy petition, are allowed only to claim
exemptions allowable by North Dakota law. *fn8
|||Under either state or federal law, however, debtors can only exempt
property to the extent there is value in the property over and above
consensual liens against the property. *fn9
On the date they filed their Chapter 7 petition, the Debtors could,
therefore, only claim as exempt, that equity remaining after they had
granted the Transferees consensual liens against their homestead.
|||The Code also vests in a bankruptcy trustee the power to avoid
a transfer of property made by the debtor to a third party, if the
transfer was: (1) made within 90 days of filing the petition; (2) made
while the debtor was insolvent; (3) made on account of an antecedent
debt; and (4) made while the debtor had other unsecured creditors:
|||(B) Except as provided in subsection (c) of this section, the trustee
may avoid any transfer of an interest of the debtor in property --
|||(1) to or for the benefit of a creditor;
|||(2) for or on account of an antecedent debt owed by the debtor before
such transfer was made;
|||(3) made while the debtor was insolvent;
|||(A) on or within 90 days before the date of the filing of the
|||(5) that enables such creditor to receive more than such creditor
would receive if --
|||(A) the case were a case under chapter 7 of this title;
|||(B) the transfer had not been made; and
|||(C) such creditor received payment of such debt to the extent provided
by the provisions of this title. *fn10
|||The Transferees agreed at the outset that the granting of these two
mortgages satisfied the elements of section 547(b), therefore, the
transfers were preferential. The Debtors executed and duly recorded
mortgages within four days of filing their Chapter 7 bankruptcy
petition that, in effect, converted the Transferees' general unsecured
claims into secured claims.
|||But, the Code not only vests a bankruptcy trustee with the
power to avoid a preferential transfer, it also provides that once the
transfer is avoided, the property that was transferred becomes property
of the estate:
|||Any transfer avoided under section 522, 544, 547, 548, 549, or 724(a)
of this title, or any lien void under section 506(d) of this title, is
preserved for the benefit of the estate but only with respect to
property of the estate. *fn11
|||While the Code, thus, provides that once a trustee avoids a
preferential transfer the property becomes property of the estate, *fn12
Section 522(g) also provides that a debtor can exempt any equity created
by the avoided transfer only under certain circumstances:
|||(g) Notwithstanding sections 550 and 551 of this title, the debtor may
exempt under subsection (b) of this section property that the trustee
recovers under sections 510(c)(2), 542, 543, 550, 551, or 553 of this
title, to the extent that the debtor could have exempted such property
under subsection (b) of this section if such property had not been
|||(1) (A) such transfer was not a voluntary transfer of such property by
the debtor; and
|||(B) the debtor did not conceal such property; or
|||(2) the debtor could have avoided such transfer under subsection
(f)(2) this section. *fn13
|||None of those circumstances are present here. Debtors voluntarily
chose to transfer most of the equity in their homestead prior to filing
their Chapter 7 bankruptcy petition, and the Debtors could not
have avoided these two mortgages under section 522(f).
|||The bankruptcy court in North Dakota dealt with this precise
issue in Kaler v. Letcher (In re Wegner). *fn14
In Wegner, the trustee sought to avoid an unrecorded first mortgage
against debtors' homestead and to preserve the mortgage lien for the
benefit of the estate. *fn15 The
holder of the unrecorded first mortgage argued that because the
homestead was exempt property at the commencement of the case, section
551 was ineffective to bring any value to the estate. The court rejected
this argument and found, instead, that a debtor may only exempt property
the trustee recovers under section 551 if the transfer was not a
voluntary transfer. *fn16 The Wegner
Court then stated that the "exemption provisions of section 522
suggest by negative implication that a debtor cannot, by utilizing
exemption statutes, take advantage of the trustee's recovery
efforts." *fn17 The Court then
concluded that the "clear implication here is that property that
was voluntarily transferred by the debtor, but recovered by the trustee
under section 551, cannot be exempted." *fn18
Other courts in the Eighth Circuit have also interpreted section 551 to
so hold. *fn19 As the Court in
Wegner explained, a bankruptcy trustee who avoids a transfer
steps into the shoes of the transferee and acquires the same rights that
the transferee held. *fn20 In other
words, after the Trustee avoided the preferential transfers to the
Transferees, the Trustee held the two mortgages for the benefit of the bankruptcy
estate as a secured creditor. Thus, the only homestead equity Debtors
had available to exempt after the commencement of this Chapter 7 case
was the equity remaining after executing the two mortgages. As such, we
find that the Trustee's recovery from the Transferees does not impair
the Debtor's right to either encumber their homestead, or claim their
homestead as exempt, under North Dakota law.
|||The Transferees argue, however, that section 522(g) notwithstanding,
under the Bankruptcy Act of 1898 (the Act), a bankruptcy
trustee had no authority to avoid a transfer of exempt property because
such property was not subject to the claims of creditors. They also
claim that the Code did not specifically overrule such precedent,
therefore, it is still relevant in this case. We disagree. The United
States Supreme Court recently discussed the precedential value of legal
conclusions, reached under the Act, that conflict with the language of
the Code. In Hartford Underwriters v. Union Planters Bank, N.A. (In re
Hen House Interstate, Inc.) *fn21
the Supreme Court explained that "while pre-Code practice 'informs
our understanding of the language of the Code,' . . . it cannot overcome
that language." *fn22 The Court
then stated that "'[w]here the meaning of the Bankruptcy
Code's text is itself clear . . . its operation is unimpeded by contrary
. . . prior practice." *fn23 We
find that the language in section 551 is clear and unambiguous,
therefore, it leaves "no room for clarification by pre-code
practice." It may be true that creditors cannot reach a debtor's
exempt interest in property, but it is also true that debtors are free
to voluntarily encumber that interest. That is what happened in this
case, and since that voluntary transfer was preferential, the Trustee's
recovery of the transfer is for the benefit of the estate, not the
|||The Transferees make one final argument. They claim that the Eighth
Circuit affirmed both the bankruptcy court and the district
court's holdings inWegner by a summary affirmance, therefore, the BAP is
not bound by that affirmance. The Eighth Circuit recently ruled on that
precise issue. *fn24 InAnastasoff,
the Court declared unconstitutional that portion of Rule 28(A)(i) of the
Federal Procedural Rules Service, Court of Appeals, Eighth Circuit, that
declares that unpublished opinions have no precedential value. *fn25
As the Court stated so eloquently:
|||Inherent in every judicial decision is a declaration and
interpretation of a general principle or rule of law. . . . This
declaration of law is authoritative to the extent necessary for the
decision, and must be applied in subsequent cases to similarly situated
|||The Court found that the precedential effect of judicial opinions
derives from the nature of judicial power, and the limitation place
thereon by Article III of the United States Constitution. *fn27
Any attempt to avoid the precedential effect of a prior decision merely
because of a decision to not publish same would expand judicial power
beyond the bounds envisioned by the Framers of the Constitution. *fn28
We, therefore, affirm the bankruptcy court's conclusions in this
case because we are bound by the Eighth Circuit's opinion in Wegner.
Moreover, we affirm the bankruptcy court's legal conclusions
because we find that sections 522(g)(1)(A) and 551 of the Code preserve
the recovered property for the benefit of the bankruptcy estate.
|||Accordingly, we affirm the judgment of the bankruptcy court.
|||A true copy.
|||CLERK, U.S. BANKRUPTCY APPELLATE PANEL, EIGHTH CIRCUIT
|||*fn1 The Honorable Arthur B. Federman, Chief United States
Judge for the Western District of Missouri, sitting by designation.
|||*fn2 The Honorable William A. Hill,
United States Bankruptcy Judge for the District of North Dakota.
|||*fn3 210 B.R. 799 (Bankr. D. N.D.
1997), aff'd, 162 F.3d 1166 (8 th Cir. 1998) (Table).
|||*fn4 Gourley v. Usery (In re Usery),
123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v. Southwest Mo. Bank (In re
Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th Cir. 1997) (citing
First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609 (8th
Cir.1997)). Fed. R. Bankr. P. 8013.
|||*fn5 First Nat'l Bank of Olathe,
Kansas v. Pontow (In re Pontow) , 111 F.3d 604, 609 (8 th Cir. 1997);
Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8 th Cir. 1997). 3
|||*fn6 11 U.S.C. § 541(a)(1).
|||*fn7 11 U.S.C. § 522(b)(1) and
|||*fn8 N.D. Cent. Code § 28-22-17
(Supp. 1999); In re Reisnour, 56 B.R. 225, 227 (D. N.D. 1985).
|||*fn9 Mund v. Rambough, 432 N.W.2d
50, 56 (N.D. 1988); Karsznia v. Kelsey, 262 S.W.2d 844, 844 (Mo. 1953);
Meeks Leasing Company v. Young, 881 S.W.2d 232, 236 (Mo. Ct. App. 1994);
11 U.S.C. § 522(f)(2)(A). 4
|||*fn10 11 U.S.C. § 547(b).
|||*fn11 11 U.S.C. § 551.
|||*fn13 11 U.S.C. § 522(g).
|||*fn14 210 B.R. 799 (Bankr. D. N.D.
1997), aff'd, 162 F.3d 1166 (1998) (Table).
|||*fn15 Id. at 800.
|||*fn16 Wegner, 210 B.R. at 802
(citing In re Heintz, 198 B.R. 581, 586 (9 th Cir. B.A.P. 1996)).
|||*fn17 Wegner, 210 B.R. at 802.
|||*fn19 See Fox Hill Office
Investors, Ltd v. Mercantile Bank (In re Fox Hill Office Investors,
Ltd.), 101 B.R. 1007, 1023 (Bankr. W.D. Mo. 1989) (holding that section
551 preserves the avoided transfer or lien to the estate). See also In
re Scott, 2000 WL 122360, *1 (Bankr. N.D. Iowa Jan. 3, 2000) (holding
that if a debtor had voluntarily granted a security interest that was
later avoided, the debtor was not entitled to exempt the interest
recovered); Schieffler v. Beshears (In re Beshears), 182 B.R. 235, 240
(Bankr. E.D. Ark. 1995) (holding that debtors cannot claim an exemption
in a homestead after trustee avoided the transfer of the property as a
fraudulent conveyance because the transfer by the debtors was
voluntary); In re Flitter, 181 B.R. 938, 941 (Bankr. D. Minn.
1995)(stating that where a debtor granted a consensual security interest
in property later recovered by the trustee, the debtor voluntarily
parted with the value and, thus, he cannot use section 522(g)(1) as the
basis for a claim of exemption).
|||*fn20 Wegner, 210 B.R. at 802.
|||*fn21 ___ U.S. ___, 120 S. Ct.
1942, ___ L. Ed. 2d ___ (2000).
|||*fn22 Id. at 1949 (quoting Kelly
v. Robinson, 479 U.S. 36, 44, 107 S. Ct. 353, 358, 93 L. Ed. 2d 216
|||*fn23 Id. (quoting BFP v.
Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556
|||*fn24 See Anastasoff v. United
States of America, Case No-993917EM (8 th Cir. Aug. 22, 2000).
|||*fn25 Id. at 3.
|||*fn28 Id. at 4.