SARAH CURLEY, Bankruptcy Judge
I. PRELIMINARY STATEMENT
Based upon the decision of the United States District Court for the District of Arizona, certain issues were remanded to this Court for resolution. The Court conducted numerous pretrial proceedings to narrow the issues, to have the parties stipulate to as many facts as possible based upon renewed discovery on the valuation issue, and to resolve the matter. A great deal of progress was made in this third attempt to determine what funds, if any, should be turned over by David A. Petersen, the Defendant, to David Birdsell, the Chapter 7 Trustee ("Trustee"). For instance, the parties did agree to use one appraiser to value the real property at issue, and they ultimately stipulated that there would be only one valuation date of the real property. After an initial stipulation was presented by the parties, oral argument was conducted on May 29, 2008, and September 11, 2008, a further hearing was held on October 21, 2008, and a Stipulation was filed on November 12, 2008. Other than the stipulations of the parties, no additional evidence was presented to the Court. The Court has set forth hereinafter its findings of fact and conclusions of law. Fed.R.Civ.P. 52, Bankr.R. 7052. This Court has jurisdiction over this matter, and this is a core proceeding. 28 U.S.C. §§ 1334 and 157. (West 2008).
The United States District Court decision, dated September 24, 2007, may be reviewed at Docket Entry No. 173.
Docket Entry No. 191, July 15, 2008 Joint Stipulation of Contested and Uncontested Facts and Issues.
Docket Entry No. 218, Stipulation re Community Interest in Real Property.
II. FACTUAL BACKGROUND
David and Dawn Petersen were married on December 4, 1992. On April 10, 2000, Dawn Petersen, the Debtor herein, served a petition for the dissolution of their marriage on her husband. The Debtor filed her Chapter 7 petition on February 8, 2002. The Decree of Dissolution of Marriage was entered by the Maricopa County Superior Court on February 23, 2004. From 2000 to the present, Mr. Petersen has earned real estate commissions from the sale of real estate in the metropolitan Phoenix area.
Docket Entry No. 191, supra n. 2.
Id.
Id.
Docket Entry No. 212, Declaration of Defendant.
Because the Superior Court never resolved the issue of how to distribute the sole and separate property and the community property of the Petersens, the Trustee commenced this adversary proceeding, on April 12, 2002, in the Bankruptcy Court.
During most of the marriage, the couple lived in the residence located at 841 E. Desert Park Lane, Phoenix, Arizona ("Property"). Mr. Petersen inherited the Property from his mother in July 1993. During the course of the marriage, community funds were utilized to improve the Property, and community funds were utilized to pay the mortgage. The parties have now stipulated that the sum of $8,432.40, in community funds, was utilized to pay the mortgage, and that an amount of $50,000 was the community's interest in the improvements to the Property that were made over the years while the parties were still married. The parties have agreed that it is no longer necessary for this Court to determine whether April 10, 2000, the date of the service of the petition for dissolution of marriage on the Defendant, or February 8, 2002, the date of the entry of the decree of dissolution of marriage, is the proper valuation date of the Property to determine the community's interest therein. The parties have agreed, as noted, that the Court need only focus on the $50,000 amount as being the community's interest in the improvements to the Property.
Docket Entry No. 191, Page 2, ¶ F, 1.
Docket Entry No. 218, Page 1, first full paragraph. The Defendant also agreed in this Stipulation to withdraw his Motion for a Mini-Hearing to determine to what extent he utilized his sole and separate property to improve the Property after April 10, 2000, the date of the service of the divorce petition on him. The parties, after agreeing upon an appraiser to value the improvements made to the Property and reviewing his findings, arrived at a stipulation as to the appropriate figure representing the community's interest in the Property.
Docket Entry No. 218.
As to the remaining personal property held by the couple, the parties have agreed that the community held the following interests: Asset: Value: 38 percent of the IRA account $22,636.48 The cash management account $11,778.24 Wells Fargo Account $18,034.22 The Defendant also owned a boat, a timeshare, rental property, and vacant land as his sole and separate property, which the Trustee does not contest. Hence, the Trustee has not sought turnover of same.
The Debtor sold her insurance business for the sum of $48,000. The business was started after the parties were married. The Court concludes that Mr. Petersen is entitled to a credit of $24,000 for his one-half interest in that business against any funds that he may owe the bankruptcy estate.
Docket Entry No. 136, Memorandum Decision dated September 20, 2006, Page 5, Lines 10-13. The parties have not questioned this factual finding.
The Court previously set forth its findings of fact as to the setoffs to which the Defendant was entitled. On remand, the parties did not present any additional evidence on the issue. The Trustee has asserted a legal issue as to why no setoffs should be permitted to the Defendant. However, for purposes of this decision, the Court concludes that Mr. Petersen did present some evidence previously concerning his setoffs or credits to which he was entitled. Hence, the Court has incorporated its previous factual findings on the matter in this decision.
a. Credit for $2,600 in school expenses.
Mr. Petersen, at the earlier trial, conceded that he did not have an order from the domestic relations proceedings commenced by the Debtor which accorded him a setoff for the $2,600 in school expenses. He also conceded that he claimed his children as dependents, and received a tax credit for them, in 2000, 2001, and 2002. Given the lack of documentation to support Mr. Petersen's claim, and the separate State Court Order that Mr. Petersen pay a certain amount in support, the Court sees no basis to grant Mr. Petersen any credit for the school expenses, particularly in light of the tax credit that he has already received in 2000, 2001, and 2002. Mr. Petersen has failed to meet his burden of proof on this expense.
See Exhibit D at 2 entered into evidence at May 17, 2006 hearing.
b. Credit for money paid to the Debtor from a bank account.
Mr. Petersen provided evidence that the Superior Court did order a distribution of community funds from one of the deposit accounts maintained during the marriage with the Debtor in 2000. He also provided a check which reflected that he paid$2,000 of the required $4,000 payment on June 25, 2000. However, Mr. Petersen testified that the balance of the $2,000 that he was required to pay pursuant to the Superior Court Minute Entry Order was paid through his expending funds for his children to travel to San Diego. Mr. Petersen has no documentation reflecting such a trip or that he paid that much money for his children on that trip. However, more importantly, the Superior Court directed that he pay the Debtor from the deposit account maintained during the marriage. There is nothing in the Superior Court Order which allows Mr. Petersen to claim any kind of credit for travel with his children. Since Mr. Petersen was only able to show that he paid $2,000 of the $4,000 that was ordered by the Court, the Court will only give him a credit of $2,000.
Id at 5.
See Exhibit J entered into evidence at May 17, 2006 hearing.
c. Credit for unauthorized checks.
Mr. Petersen testified that the Debtor obtained funds, on an unauthorized basis, from a deposit account which consisted of Mr Petersen's sole and separate property. Mr. Petersen presented the checks from the account which he alleged were unauthorized withdrawals by the Debtor. The evidence does reflect that the Debtor withdrew the funds from the deposit account just prior to her commencing the domestic relations proceedings against Mr. Petersen. However, given two opportunities to present evidence on this point at two separate trials, Mr. Petersen has still failed to provide the requisite evidence that the funds in that account were indeed his sole and separate property.
See Exhibit G entered into evidence at May 17, 2006 hearing.
The Debtor served the divorce papers on Mr. Petersen on April 10, 2000. See Docket Entry No. 191, supra n. 2.
In fact, the Superior Court Minute Entry reflects that the State Court believed that whatever funds were left in the deposit account were community funds, since it ordered that Mr. Petersen provide one-half of the funds on deposit to the Debtor. Given the timing of the Debtor's withdrawal of the funds and the apparent lack of notice of such action by the Superior Court, this Court will allow Mr. Petersen a credit for one-half of the funds that the Debtor withdrew just prior to the divorce proceedings for which the Superior Court made no findings. Thus, Mr. Petersen shall be accorded a credit of one-half of the $2825 improperly withdrawn by the Debtor, which is equal to the sum of $1,412.50.
See Exhibit D entered into evidence at May 17, 2006 hearing.
See Exhibit 6 entered into evidence at May 17, 2006 hearing. Check No. 1136 was made payable to Dawn Petersen in the amount of$2,825 just prior to her serving Mr. Petersen with the documentation commencing the divorce proceedings.
d. Credit for $1,400 loan.
The Court is still at a loss as to this credit claimed by Mr. Petersen. Initially Mr. Petersen testified that a promissory note in the amount of $1,400 was executed by the Debtor, that the Note was his sole and separate property, and that the Debtor had not repaid him. However, Mr. Petersen provided no evidence of such a Note. A note that he did provide was in the amount of $13,428, which was executed by the Debtor. However, there is no indication as to what remains unpaid on this note, there is no indication as to whether the note is community property or the sole and separate property of Mr. Petersen, and the proffered note does not match the request for reimbursement of $1,400. The difficulty of assuming that such a separate obligation is still due and owing by the Debtor to Mr. Petersen for which he should receive some type of credit was brought out by the Trustee's special counsel in her examination of Mr. Petersen. Counsel noted that Mr. Petersen had commenced another proceeding against the Debtor in 2001, seeking $23,587.87 in loans that Mr. Petersen had allegedly made to the Debtor which constituted his sole and separate property for which he should be repaid. However, the Superior Court ultimately entered a minute entry, noting that the nature and the amount of at least one obligation that Mr. Petersen claimed as his sole and separate property had not been resolved and whether it was a community obligation or a sole and separate obligation would be resolved in the domestic relations proceedings. Again, Mr. Petersen carried the burden of proof on the nature, extent, and amount of this setoff. The Court is still unclear as to whether such an obligation still exists, the amount of the obligation, and whether it is a community obligation or the sole and separate obligation of the Debtor owed to Mr. Petersen. The Court will not give Mr. Petersen any setoff or credit for this obligation.
See Exhibit F entered into evidence at May 17, 2006 hearing.
See Exhibit 7 entered into evidence at May 17, 2006 hearing.
Id.
e. Credit for $9,559.85 for paying the Debtor's obligations.
Mr. Petersen relies on documentation from 1993 reflecting that he repaid various credit card obligations of the Debtor at the commencement of their marriage for which he is now entitled to reimbursement. Mr. Petersen and the Debtor did execute a promissory note in 1993 in the amount of $10,443.00 in favor of Sun Country Financial Services. However, there is nothing to indicate that this is the repayment of a sole and separate obligation of the Debtor. Although Mr. Petersen testified that the Debtor conceded that this was her sole and separate obligation and made payments on the obligation each month, there is no evidence to support these assertions. The presumption is that the obligation was incurred by the community and repaid through community funds. Schlaefer v.Financial Management Service, Inc., 196 Ariz. 336, 996 P.2d 745 (App.Div. 1 2000);MacCollum v. Perkinson, 185 Ariz. 179, 913 P.2d 1097 (App.Div. 1 1996); Garrett v. Shannon, 13 Ariz.App. 332, 476 P.2d 538 (1970).
See Exhibit H entered into evidence at May 17, 2006 hearing.
It also appears that Mr. Petersen decided to refinance all of the debt on the Property in December of 1996. At that time, Mr. Petersen acquired a loan from Alliance West to repay the obligations then owing to Western Bank, which had a first lien on the Property, and Bank One Financial, which had a second lien on the Property. However, there is no indiction that the Sun Country obligation was somehow a part of this refinancing. Moreover, the documentation reflecting the refinancing states that Mr. Petersen was acting on behalf of his sole and separate property and incurring the obligations as his sole and separate obligations. The Debtor did not execute any of the documentation concerning this refinancing. However, as noted, the presumption is that the obligation was incurred by the community and repaid through community funds. Since Mr. Petersen's salary, a community asset, was providing the funding to repay the loan from 1996 on, the community was making payments on the refinanced obligation. As such, it would be the Trustee, on behalf of the bankruptcy estate, that would have been entitled to a credit, if any, concerning the refinanced obligation. The argument is that Mr. Petersen should have used his sole and separate property to repay the refinanced obligation. However, no evidence was presented that he did that, and the presumption would have been that he used community assets to repay it. If anything, the bankruptcy estate would normally have been entitled to the credit, if any, not Mr. Petersen. However, the Court will simply conclude that Mr. Petersen has failed to show that he is entitled to any credit for the refinanced obligation, and he has failed to show that he is entitled to any credit for the Sun Country obligation.
Id.
Id.
III. LEGAL ISSUES
A. Whether the bankruptcy estate is entitled to the entire value of the community property.
B. Whether the Defendant is entitled to any setoffs or credits.
At times, the parties have described this issue as to whether the Defendant is entitled to any offsets.
IV. LEGAL ANALYSIS
A. Whether the bankruptcy estate is entitled to the entire value of the community property.
In his memorandum of law dated September 2, 2008, the Defendant argues that the Trustee is now estopped from raising the issue as to whether the bankruptcy estate is entitled to the entire value or one-half of the value of the community property. The Defendant relies on the fact that the joint pretrial statements over the years did not raise the issue and that this Court previously allocated one-half of the value of the community property to the Defendant in its decision dated September 20, 2006. The Trustee counters that 11 U.S.C. § 541(a)(2) specifically provides that the bankruptcy estate includes all of the community property of the Debtor and her spouse, and the separate property of the Debtor, as of the time of the filing of the bankruptcy petition on February 8, 2002. This Court technically agrees with the Trustee's position, but for the reasons explained hereinafter will still allocate one-half of the value of the community assets to Mr. Petersen.
Docket Entry No. 199.
Docket Entry No. 136.
Docket Entry No. 200, Trustee's Brief, dated September 2, 2008.
The Trustee is correct that the general rule concerning parties in a community property state is that if the parties are married at the time one of the spouses files a bankruptcy petition, then the community property is included as property of the bankruptcy estate. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007); In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001); In re Moore, 318 B.R. 233 (Bankr. D. Idaho 2005). However, under Arizona law, a statutory change now provides that as of the service of the petition for dissolution of marriage, each spouse shall create a separate estate from the property that he or she receives from that date onward. See ARS §§ 25-211 and 25-213. Since the Arizona statutory change occurred in 1998, well before the Debtor instituted divorce proceedings and well before this bankruptcy case was commenced, it is applicable to this proceeding. The statutory change may affect the nature of the bankruptcy estate. For instance, if the non-debtor spouse acquires an asset, with the wages that he has earned after the petition for dissolution of marriage has been served, that asset has been acquired with the sole and separate property of the non-debtor spouse and is classified as the sole and separate property of that spouse even if the other spouse should subsequently file a bankruptcy petition.
In this case, the petition was served on Mr. Petersen, the Defendant, on April 10, 2000. Mr. Petersen continued to receive commissions from the sale of real estate from 2000 to the present. Those commissions would be considered the separate property of the Defendant. When the Debtor filed her bankruptcy petition, Mr. Petersen's commissions would have continued to remain his separate property, and any assets that he acquired with that separate property would have remained his alone. However, any community property owned by the parties, as of the filing of the Debtor's bankruptcy petition, would have become property of the bankruptcy estate. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007); In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001); In re Moore, 318 B.R. 233 (Bankr. D. Idaho 2005).
Of course, the Debtor filed a Chapter 7 petition, so her wages would not have become property of the bankruptcy estate either. 11 U.S.C. § 541(a)(6). Before the change in Arizona law, the property of the separated spouses would have been presumed community property unless the presumption were rebutted under Arizona law. American Exp. Travel Related Services Co., Inc. v. Parmeter, 186 Ariz. 652, 925 P.2d 1369 (App.Div. 2 1996); Bender v. Bender, 123 Ariz. 90 (App.Div. 1 1979).
The Court is unable to entertain the Defendant's argument of estoppel. In its March 29, 2004 opinion, the District Court was unsure why the bankruptcy court included the entire amount of the community property in determining the amount that initially became property of the bankruptcy estate. The District Court suggested that one-half of the community's interest in the Property would belong to the bankruptcy estate, the other half to the Defendant. This Court subsequently utilized the District Court's view in its decisions. However, the District Court has vacated the previous orders and judgments entered in this matter, and this Court believes that the final judgment entered in this matter should be consistent with applicable statutory and case law in the bankruptcy area. The Trustee has also specifically raised the issue at this juncture. It is best to correct the record at this point.
See March 29, 2004 Opinion, at 4, Docket Entry No. 44 in Civil Case No. 03-896.
The Trustee also argues that the comment by the District Court was dictum, since it was not necessary to the decision of the Court. The Trustee relies on a number of decisions for the proposition that this Court should follow the law and need not rely on dictum. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 379 (1994); Russell v. C. I. R., 678 F.2d 782, 784-785 (9th Cir. 1982); In re Gurr, 194 B.R. 474 (Bkrtcy.D.Ariz., 1996); Vegas Franchises, Limited v. Culinary Workers Union, Local No. 226, 83 Nev. 422, 425, 433 P.2d 263 (1967). This Court agrees that the parties did not raise the issue on appeal and that it was the District Court that first raised the issue. However, since the District Court ultimately vacated the order and judgment and remanded the matter to the bankruptcy court for further proceedings, this Court may revisit the issue since it has been raised as a matter of law.
As noted in the Preliminary Statement, the Trustee commenced this adversary proceeding in 2002 to apportion and recover the bankruptcy estate's interest in the parties' community assets. The Superior Court never apportioned the community assets and liabilities of the parties. At the time this proceeding was commenced, the Arizona bankruptcy court normally vacated the stay and allowed the Superior Court to divide the assets and liabilities of the divorcing spouses. Indeed the Ninth Circuit case law at the time emphasized that the bankruptcy courts should normally defer to the state courts when it involved their area of expertise, and the divorce, custody, child support and the other issues that normally arose in a domestic relations proceeding were within that area of expertise of the state courts. In re Mac Donald, 755 F. 2d 715 (9th Cir. 1985). However, the parties herein chose to litigate the issue of the recovery of the community property assets by the bankruptcy estate in this Court.
Back in 2002 when the divorce proceedings were commenced by the Debtor, the state court would have divided the community assets, relying on the then applicable Arizona statutory and case law. The general presumption was that each spouse made a valuable contribution to the community, so that if the community assets were divided during the course of a domestic relations proceeding, each spouse would have been entitled to a one-half interest in each community asset. A.R.S. § 25-318; Britz v. Britz, 95 Ariz. 247, 389 P.2d 123 (1964) (division of community property should be substantially equal absent some reason requiring a contrary result); Kelly v. Kelly, 198 Ariz. 307, 9 P.3d 1046 (2000). For instance, without additional evidence, Mr. Petersen would have received one-half of whatever community assets came into the estate on the date that the Debtor filed her bankruptcy petition. In this case, that would have been one-half of the 38 percent interest in the IRA account, one-half of the cash management account, and one-half of the Wells Fargo Account.
See Factual Discussion, supra, and the parties' Stipulation, Docket Entry No. 191, ¶ F, 2, 3, and 4 as to what community assets came into the bankruptcy estate.
Because the Trustee raised this issue now, on remand, as solely a legal issue, the Court must include the assets as part of the bankruptcy estate, but must then apportion the assets, one-half to the Debtor and one-half to Mr. Petersen, in accordance with Arizona law. The Trustee has presented no evidence which would allow the bankruptcy estate to retain a 100 percent interest in the community assets, when the presumption under Arizona law is to divide the assets, each spouse to receive one-half of the value of the community assets. In essence, the presumption is against what the Trustee is now requesting. At a more fundamental level, given the posture of this case, and the many years that the parties have pursued their rights and remedies, at the trial-court and appellate level, it would be inequitable to now allow the bankruptcy estate to retain a 100 percent interest in the community assets.
B. Whether the Defendant is entitled to any setoffs.
The Trustee also raises the issue of whether Mr. Petersen, the Defendant, is entitled to any setoffs at this point. This Court previously made factual findings as to the various credits or offsets to which the Defendant might be entitled as a result of the evidence presented. The Defendant has presented no additional evidence on the issue of credits or setoffs. Therefore, the Court's factual findings have been incorporated into this decision. To the extent the Defendant was unable to support a credit or offset at the trial in 2006, the Court sees no basis to re-open the issue and award a different amount at this time. Indeed the Defendant does not appear to want to present any further evidence on the matter.
Docket Entry No. 199, Brief of the Defendant, dated September 2, 2008, at 6.
Therefore, is there a legal theory to deny the Defendant his credits or setoffs? The Trustee argues that once the Debtor received her discharge, any unsecured debt of any creditor could no longer be legally pursued. Since the Defendant is an unsecured creditor of the Debtor, the Trustee asserts that his setoffs or claims would have been discharged as well. The Trustee principally relies on the decision of In re Ter Bush, 273 B.R. 625 (Bankr. S.D. Ca. 2002). There are apparently no appellate decisions which have considered the issue.
In the Ter Bush decision, a prospective purchaser ("Purchaser") of the Chapter 7 debtors' residence sought to confirm an arbitration award and enter a judgment granting him specific performance of his pre-petition purchase agreement with the debtors. After entering into the agreement, the debtors learned that the husband had inoperable cancer that would require treatment, and decided to cancel escrow. The Purchaser commenced a lawsuit, seeking damages and specific performance. In the ensuing mandatory arbitration, the Purchaser was granted specific performance and awarded the costs of continuing the escrow and reasonable attorney's fees as damages. Before the arbitration award could be confirmed, the debtors filed their Chapter 7 bankruptcy petition.Id. at 627. The Purchaser subsequently moved for an order to confirm the arbitration award and to enter a judgment granting him specific performance. He concomitantly moved for relief from stay, so that he could obtain entry of the arbitration award. The Purchaser also sought to offset his damages, consisting of his reasonable attorney's fees and related costs and an amount not to exceed $500.00 for continuing the escrow services, against the purchase price that he was to pay the debtors for the Property.Id.
The bankruptcy court preliminarily ruled that since the arbitration proceedings had been concluded pre-petition, with only the ministerial acts of confirming the award and entering a judgment thereon, the parties no longer had an executory contract which could be rejected by the debtors as a part of the bankruptcy proceedings. The court also held that since under applicable state law, a breach of the contract to purchase real property could not "be adequately relieved by pecuniary compensation," the property must be transferred to the Purchaser. Finally, the court concluded that since pecuniary compensation could not be awarded to the Purchaser, the Purchaser did not have a "claim" under bankruptcy law. However, the court did not consider the implications of not having a claim.
See 11 U.S.C. § 101(5)(B), which provides, in pertinent part, that the term "claim" means a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment . . ."
See the headnotes to the decision as drafted by Westlaw, which state at (2), that the right to specific performance was not a "`claim,' such as could be discharged in bankruptcy . . ." However, in the decision, the court only stated that the debtors raised the issue of whether the Purchaser had a claim in bankruptcy, asserting that he did, and that he could not enforce the arbitration award. The court disagreed with the debtors' position. See Id. at 627-629.
In its setoff analysis, the court recognized that whether to allow a setoff was left to the sound discretion of the bankruptcy court. Id. at 629. The party asserting a right of setoff must show that (1) the debtor owed the creditor a pre-petition debt, (2) the creditor owed the debtor a pre-petition debt, and (3) the debts were mutual. See 11 U.S.C. 553; Id. The debtors argued that the debts did not arise from the same transaction and that the debts were not mutual. Id. The court outlined the concept of "mutuality," concluding that all elements had been met by the Purchaser. Id. The court never discussed whether the debts arose out of the same transaction. However, Section 553 does not require this element. Matter of U.S. Abatement Corp, 79 F.3d 393 (5th Cir. 1996); Westinghouse Elec. Corp v. Fidelity and Deposit Co. of Maryland, 63 B.R. 18 (E.D. Pa 1986). While the Court found that all the requirements of Section 553 had been met, it denied the Purchaser the right to a setoff based upon public policy grounds. Id. at 630-631.
The court outlined a three-pronged test to establish mutuality. However, the elements, as outlined, do overlap with the definition of a setoff under Section 553. The first element is that the debts must be in the "same right." The courts have interpreted this concept to mean that a pre-petition debt is not being offset against a post-petition debt, which is already in the text of Section 553. Some courts have also stated that it includes the concept that the debt is not owed jointly by some other entity. The second element is that the debts must be between the same individuals, which appears to subsume the first element to the extent that a court includes the concept that the debt is not jointly owed as a part of the "same right" element. The final element is that the individuals must stand in the same capacity, which has been interpreted to mean that an individual acting in a fiduciary capacity may not offset such a debt against a debt that he owes in an individual capacity.
The court focused on the facts that the debtors had previously utilized the property as a homestead, that one of the debtors was in poor health, that the debtors would require the proceeds received from the purchase of their home to obtain a new home and to pay for medical costs, and that public policy favored allowing the debtors to retain the net proceeds from the sale without any deductions to be accorded to the Purchaser.
In this case, the Debtor incurred certain pre-petition obligations as to Mr. Petersen which she had not repaid prior to the filing of her bankruptcy petition. Those debts are discussed in the credits portion and other parts of this decision, including her obligation to turn over one-half of the proceeds that she received from the sale of her business that she operated during her marriage to Mr. Petersen. In turn, Mr. Petersen incurred certain pre-petition obligations to the Debtor, including his use of community funds to improve the Property, which was his sole and separate property. The creditor preserves the ability to assert a right of setoff even though the debtor's filing of a bankruptcy petition creates a bankruptcy estate. Thus, as in Ter Bush, Mr. Petersen has shown that he and the Debtor had pre-petition debts that were owed to the other, a pre-petition debt is not being setoff against a post-petition debt, the debts are between the same individuals, and the individuals are standing in the same capacity to the other. There are no public policy issues which would prohibit a setoff; rather given that these obligations are to be resolved as a part of the domestic relations proceedings between Mr. Petersen and the Debtor, public policy would encourage the setoff of such mutual debts.
The issue of whether a party has a claim or whether a discharge had been granted to the debtor was not at issue, or of concern to the court, in the Ter Bush decision.
However, there is another legal theory that also appears to support the setoff of mutual debts. The Ninth Circuit has allowed offsets in those situations where the parties have an ongoing course of conduct that allows the parties to net what they owe to each other pursuant to the doctrine of recoupment. "Recoupment" is the doctrine of allowing a demand arising from the same transaction as the basis to abate or reduce the claim of the other party. In re Straightline Investments, Inc, 525 F.3d 870 (9th Cir. 2008). In the decision of In re TLC Hospitals, Inc., 224 F.3d 1008 (9th Cir. 2000), the Court rejected the Third Circuit's narrow definition of "transaction," which had limited the right of recoupment to claims between the parties which arose out of the identical transaction. The Ninth Circuit expanded the concept, stating that the important issue in determining whether the two events were part of the same transaction was to consider whether there was a "logical relationship" between the two events. Id. at 1012, citing Newberry Corp. v. Fireman Fund Ins. Co., 95 F.3d 1392, 1402 (9th Cir. 1996). Thus, the Ninth Circuit concluded that a "transaction," for the purposes of recoupment, may include a "series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship." Id. at 1012, citing Moore v. New York Cotton Exc., 270 U.S. 593, 46 S.Ct. 367 (1926). The party alleging such a right has the burden of proof by a preponderance of the evidence. In re National Audit Defense Network, 332 B.R. 896 (Bankr. D. Nev. 2005).
Recoupment is an equitable remedy that may not be invoked to compensate someone for inequitable conduct. In re TLC Hospitals, Inc., 224 F.3d 1008 (9th Cir. 2000).
The Ninth Circuit stated that the Third Circuit had rejected the ability of a creditor, in its contract with the debtor, to reduce a claim arising in one year by setting off against a claim that is to be paid to it in the following year, since the setoff did not fall withing the parameters of the "same transaction." In re TLC Hospitals, Inc., supra at 1014.
In this case, the Debtor filed a petition for dissolution of marriage, but then waited almost two years before filing her bankruptcy petition. In the interim, the Superior Court entered various orders concerning temporary support, including the requirement that the Defendant pay certain ongoing expenses as to the children, the Defendant generated separate property from his earning commissions from the sale of real estate, and the parties continued to hold community and separate property acquired before the marriage and after the petition for dissolution was filed. As in the Ninth Circuit cases concerning offsets, this matter should be treated as if the parties were engaged in one transaction, with the various expenses of the Defendant to be netted from the final amount that he must pay the bankruptcy estate. Therefore, the Court will set forth the appropriate amount of the community property interest to be considered, minus the credits and offsets to which Mr. Petersen is entitled to determine what funds should be turned over by Mr. Petersen to the Chapter 7 Trustee for the benefit of the estate.
As provided for in the Court's opinion, the interests in community property to be taken into consideration include the following: (1.) Community interest in the Property $50,000.00 (2.) Community funds used to pay the mortgage $8,432.40 (3.) Community interest in the IRA $22,636.48 (4.) Community interest in cash management account $11,778.24 (5.) Community interest in Wells Fargo Account $18,034.22 Total: $110,881.34 Based upon the analysis in this decision, the Court shall award Mr. Petersen a one-half interest in this community property. Thus, the bankruptcy estate has an interest in the community property equal to one-half of $110,881.34, or the amount of $55,440.62. Mr. Petersen shall receive the following credits or setoffs: (1.) His interest from the sale of the Debtor's business $24,000.00 (2.) Deposit Account Credit $2,000.00 (3.) Credit for one-half the amount $1,412.50 withdrawn by the Debtor at time of divorce proceedings Total: $27,412.50 $55,440.62 minus $27,412.50 equals the amount of $28,028.12 that is still owed by Mr. Petersen to the bankruptcy estate.
V. CONCLUSION
Based upon the foregoing, the Court concludes that the bankruptcy estate is entitled to the sum of $27,412.50.
Special counsel to the Trustee shall submit a form of judgment to the Court consistent with the Court's decision. Notice Recipients District/Off: 0970-2 User: mathusm Date Created: 1/30/2009 Case: 2:02-ap-00576-SSC Form ID: pdf008 Total: 9 Recipients submitted to the BNC (Bankruptcy Noticing Center) without an address: intp DESERT SCHOOLS FEDERAL CREDIT UNION TOTAL: 1 Recipients of Notice of Electronic Filing: pla DAVID A. BIRDSELL dab@azbktrustee.com aty TERRY A. DAKE tdake@cox.net TOTAL: 2 Recipients submitted to the BNC (Bankruptcy Noticing Center): dft DAVID A. PETERSEN 3113 E LINCOLN DR PHOENIX, AZ 85016 intp WELLS FARGO BANK ARIZONA NA LEVY PROCESSING PO BOX 29779 PHOENIX, AZ 85038-9779 intp MERRILL LYNCH, PIERCE, FENNER SMITH 222 BROADWAY 13TH FL NEW YORK, NY 10038 aty DAVID B MEDANSKY ROMERO MEDANSKY 2600 NORTH CENTRAL AVE., #850 PHOENIX, AZ 85004 aty DONALD W. POWELL CARMICHAEL POWELL, P.C. 7301 N. 16TH ST., #103 PHOENIX, AZ 85020 ust U.S. TRUSTEE OFFICE OF THE U.S. TRUSTEE 230 NORTH FIRST AVENUE SUITE 204 PHOENIX, AZ 85003 TOTAL: 6