Warfield v. Salazar (In re Salazar)

Summarized by Scott Schwartz , Rust, Armenis & Schwartz
13 years 10 months ago

Citation:

Warfield v. Salazar (In re Salazar) Case No. 08-11597 (9th Cir. B.A.P. Mar. 14, 2012)

Tag(s):

Ruling:

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the “9th Circuit B.A.P.”) affirmed the decision of the U.S. Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) denying the Chapter 7 Trustee’s motion requesting that the debtors be compelled to pay into their chapter 7 estate the amount of prepetition tax refunds received and spent during their Chapter 13 bankruptcy.

Procedural context:

During their bankruptcy case, the chapter 13 debtors received and spent tax refunds that were property of their bankruptcy estate under § 541 of the Bankruptcy Code. The debtors ultimately failed to confirm a chapter 13 plan and converted their case to chapter 7. The chapter 7 trustee filed a motion requesting that the debtors be compelled to pay into their chapter 7 estate the amount of the prepetition tax refunds. The bankruptcy court denied the chapter 7 trustee’s motion. The 9th Circuit B.A.P. affirmed the Bankruptcy Court’s decision denying the Chapter 7 Trustee’s motion requesting that the debtors be compelled to pay into their chapter 7 estate the amount of the prepetition tax refunds.

Facts:

The case was originally filed as a chapter 13. The appellees Timothy Andrew Salazar and Gena Annette Salazar (the “Salazars”) filed a chapter 13 petition on September 3, 2008 (“Petition Date”). In their Schedule of Personal Property (“Schedule B”), the Salazars marked “None” in response to Schedule B’s request that they disclose “[o]ther liquidated debts owed to debtor including tax refunds.” However, while the chapter 13 case was pending, the Salazars received refunds based upon their 2008 state and federal tax returns. The prepetition pro rata amount of those refunds totaled $4,084.94 (“Prepetition Refund”). The Salazars never amended their Schedule B to disclose the Prepetition Refund. The Salazars used the Prepetition Refund for living expenses while the chapter 13 case was pending. No plan was ever confirmed in their chapter 13 case. The bankruptcy court converted the Salazars’ case from chapter 13 to chapter 7 on August 19, 2009. Appellant Lawrence Warfield was appointed as the chapter 7 trustee (“Trustee”) in the converted case. The Trustee filed a motion to compel the Salazars to turn over the Prepetition Refund. The Salazars responded by asserting that because the Prepetition Refund had been spent, i.e., was not in their possession, it no longer constituted property of the estate pursuant to § 348(f)(1)(A). The bankruptcy court agreed. The Trustee filed a notice of appeal and the Ninth Circuit B.A.P. upheld the bankruptcy court decision. The Ninth Circuit determined Section 348(f)(1)(A), by its terms, contemplates that debtors may use up property of the estate in a chapter 13 bankruptcy and no longer possess it, and any such property of the estate used up in a chapter 13 prior to the conversion of the case to chapter 7 is not property of the estate in the converted case. The Court applied a “plain meaning” interpretation of § 348(f)(1)(A) to determine that a prepetition tax refund spent during a chapter 13 was not property of the estate on conversion to a chapter 7. The court followed the decision in Bogdanov v. Laflamme (In re Laflamme), 397 B.R. 194 (Bankr. D.N.H. 2008) The Laflamme court held that property of the estate following conversion from chapter 13 to chapter 7 will consist of the property in the chapter 13 estate on the petition date, less amounts lawfully removed by the debtors in good faith to pay ordinary and necessary living expenses during the period from the petition date to the conversion date. The Laflamme court declined to adopt a bright-line rule to define under what circumstances and for what purposes a debtor may use chapter 13 estate property other than to stress the use must be reasonable and will usually include normal living expenses, determined by the facts of the case and is subject to “good faith” scrutiny. Following Laflamme and a plain meaning interpretation of § 348(f)(1)(A), the court determined that the debtors spent the prepetition tax refund in good faith to pay ordinary and necessary living expenses during the period from the petition date to the conversion date "in the normal course of living". The court found no error by the bankruptcy court in concluding that the prepetition tax refund, having been used up, did not constitute property of the chapter 7 estate on the conversion date.

Judge(s):

Dunn, Jury, and Pappas

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