Opinion
NOT FOR PUBLICATION
Argued and Submitted at San Francisco, California: February 23, 2007
Appeal from the United States Bankruptcy Court for the Northern District of California. Honorable Alan Jaroslovsky, Bankruptcy Judge, Presiding. Bk. No. 04-11142. Adv. No. 05-01075.
Before: BRANDT, SMITH and KURTZ, [ Bankruptcy Judges.
Hon. Frank L. Kurtz, United States Bankruptcy Judge for the Eastern District of Washington, sitting by designation.
MEMORANDUM
Pre-petition, appellee Great American Life Insurance Company (" GALIC") acquired a lien under Ohio law in debtor Morley P. Thompson's right to withdraw annual payments as beneficiary of his deceased wife's testamentary trust. Thompson filed a chapter 11 petition, then filed an adversary proceeding to determine the validity, priority, and extent of GALIC's lien, and/or to avoid the lien. After conversion, the chapter 7 trustee substituted in as plaintiff, and moved for summary judgment. GALIC cross-moved. Relying on the Ohio Court of Appeals' interpretation of the trust provisions, the bankruptcy court ruled that GALIC's lien was superior to the estate's interest, and dismissed the complaint.
Absent contrary indication, all " Code, " chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 prior to its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23, as the case from which this appeal arises was filed before its effective date (generally 17 October 2005).
We AFFIRM.
I. FACTS
In November 2002 GALIC obtained a $5.5 million judgment against Thompson and the Patricia Smith Thompson Trust (" Trust") in the Hamilton County, Ohio, Court of Common Pleas. Thereafter GALIC filed an action in the same court against Thompson and the Trust seeking a creditor's bill under Ohio Rev. Code § 2333.01. A creditor's bill enables a creditor to execute upon a debtor's equitable interests in satisfaction of a judgment when there is insufficient real or personal property to execute upon. In re Wiener, 276 B.R. 810, 812-13 (Bankr.N.D.Ohio 2001).
Ohio Rev. Code § 2333.01 provides:
The Trust is an Ohio testamentary trust established by Thompson's deceased wife which grants Thompson a right to annual withdrawals:
In any taxable year of the trust for federal income tax purposes, my spouse shall have the right to withdraw from principal, property not exceeding five thousand dollars ($5, 000.00) in the aggregate, valued as of the date of the receipt of the related instrument of withdrawal, and, if my spouse shall be living on the last day of the year, to withdraw property having a value on that day equal to an amount, if any, by which five percent (5%) of the then market value of the principal . . . exceeds the value of the property previously withdrawn by my spouse for such year.
Trust, pages 5-6. It further provides that distributions of such withdrawals, if requested, are to " be made within 30 days after the close of the year, " and that " [t]he right of withdrawal . . . shall not be cumulative." Id. at 6.
In the creditor's bill proceeding, GALIC sought to attach and execute on Thompson's right to withdraw. The state court entered a creditor's bill judgment on 5 November 2003. The Trust appealed the judgment to the Ohio Court of Appeals.
Thereafter, on 6 May 2004, Thompson filed for chapter 11 relief. A stipulated order for relief from stay was entered 14 April 2005 to allow the Ohio appeal to proceed; the judgment was affirmed 27 January 2006. Great American Life Insur. Co. v. Thompson Trust, 2006 Ohio 304, 2006 WL 199751 (Ohio App. 1 Dist. 2006) appeal not allowed, 109 Ohio St.3d 1496, 2006 Ohio 2762, 848 N.E.2d 858 (Jun. 7, 2006). The Ohio Court of Appeals held that the assets subject to Thompson's demand were not protected by the Trust's spendthrift provisions, 2006 Ohio 304, id. at *2, and that under Ohio law the creditor's bill had given GALIC a lien in the distributions that was senior to any unsecured interest of the Trust (Thompson was indebted to the Trust). 2006 Ohio 304, Id. at *3. The court characterized Thompson's power to withdraw money from the trust as the equivalent of " money in the bank." 2006 Ohio 304, Id. at *2. Thompson has continued to exercise his right to withdraw from the trust during the pendency of the bankruptcy.
Prior to the court of appeals' ruling, Thompson filed an adversary proceeding to determine the nature and extent of GALIC's and the Trust's interests in Thompson's right to withdraw. See Amended Complaint dated 29 July 2005. The complaint also sought avoidance of GALIC's lien under § 544 as a secret lien, a preference, and a post-petition transfer. The bankruptcy case was converted to chapter 7 on 8 February 2006, and the chapter 7 trustee, Andrea A. Wirum, was substituted into the action as plaintiff.
On 11 May 2006 the trustee moved for summary judgment determining that GALIC's creditor's bill lien does not attach to any post-petition withdrawals from the Trust, and declaring that the trustee may avoid GALIC's lien under Ohio state law and § 544 as an unperfected, secret lien. GALIC cross-moved for summary judgment dismissing the complaint.
The bankruptcy court granted GALIC's motion and denied the trustee's, entering a written memorandum on 12 June 2006 and an order and judgment dismissing the adversary proceeding on 11 July 2006. The trustee timely appealed.
The record reflects no explicit determination as to the remaining claims under § § 547 and 549. The trustee has apparently abandoned them.
II. JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 and § 157(b)(1) and (b)(2)(A), (F), (K), and (O), and we do under 28 U.S.C. § 158(c).
III. ISSUE
Whether the bankruptcy court erred in granting GALIC's motion for summary judgment and denying the trustee's.
IV. STANDARD OF REVIEW
A bankruptcy court's ruling on a motion for summary judgment is reviewed de novo. In re Baldwin, 245 B.R. 131, 134 (9th Cir. BAP 2000), aff'd, 249 F.2d 912 (9th Cir. 2001). We must determine, viewing the evidence in the light most favorable to the non-moving party, whether there is any genuine issue of material fact, and whether the trial court correctly applied relevant substantive law. In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc., 819 F.2d 214, 215 (9th Cir. 1987). We may uphold summary judgment on any basis supported by the record. See In re Comark, 971 F.2d 322, 324 (9th Cir. 1992).
V. DISCUSSION
A. Nature of GALIC's and the estate's interest in property
This appeal turns on the nature of the property interest encumbered by the creditor's bill lien, and the timing of attachment. " For a lien to exist, both the property and the obligation must exist at the same time." In re Baker, 217 B.R. 609, 613 (Bankr. N.D. Cal. 1998). If the property interest is the right to withdraw funds, that right existed prepetition, and it would have come into the estate encumbered by the creditor's bill lien. If, as the trustee contends, the property interest is the withdrawn funds, which were withdrawn (came into existence) postpetition, they are unencumbered by GALIC's lien. See In re Fuller, 134 B.R. 945, 947 (9th Cir. BAP 1992) (automatic stay prevents pre-petition liens from attaching to property acquired post-petition).
Bankruptcy courts look to state law to determine legal or equitable interests in property as of the petition date. In re Pettit, 217 F.3d 1072, 1078 (9th Cir. 2002) (citing Butner v. U.S., 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). " State law controls the validity and effect of liens in the bankruptcy context." In re Southern California Plastics, Inc., 165 F.3d 1243, 1247 (9th Cir. 1999) (citations omitted).
Under Ohio law, the filing of a complaint for a creditor's bill automatically creates a lien on all the judgment debtor's equitable assets. In re Wiener, 276 B.R. 810, 814 (Bankr.N.D.Ohio 2001); see also Gaib v. Gaib, 14 Ohio App.3d 97, 99, 14 Ohio B. 111, 470 N.E.2d 189, 191 (1983). In Weiner, a creditor filed a complaint in state court for a creditor's bill seeking to attach insurance renewal commissions that were owed to Weiner. Weiner's bankruptcy petition stayed adjudication of the complaint. The trustee challenged the creditor's claim of a lien on the commissions, predicated on an alleged procedural error in the complaint (failure to allege that defendant lacked sufficient real or personal property subject to levy to satisfy the judgment). The bankruptcy court overruled the trustee's objection. Despite the omitted allegation and the fact that the complaint had not been adjudicated, the bankruptcy court held that the creditor held a valid lien against the debtor's insurance renewal commissions. Id.
In other contexts, federal courts have held that a right to future payments is a property right that is attachable. The " important consideration is the breadth of control" that the recipient could have over the property. Drye v. U.S., 528 U.S. 49, 61, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999). For example, federal tax liens have been held to attach to rights to receive pension payments, In re Connor, 27 F.3d 365, 366 (9th Cir. 1994); distributions from a spendthrift trust, In re Orr, 180 F.3d 656, 664 (5th Cir. 1999); disability benefits, In re Stinnett, 321 B.R. 477, 484-85 (S.D. Ind. 2005), amended in part on rehearing, 2005 WL 928528, aff'd in part, denied in part, 465 F.3d 309 (7th Cir. 2006); and social security benefits, In re Anderson, 250 B.R. 707, 710-11 (Bankr. D. Mont. 2000). On the other hand, a pre-petition wage garnishment arising out of a judgment lien did not attach to post-petition earnings because those earnings did not exist on the petition date. Baker, 217 B.R. at 610 (citing Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)).
In invalidating the Trust's spendthrift provision with respect to the year-end distributions, the Ohio Court of Appeals characterized Thompson's right to withdraw as follows:
Here, Thompson's power to withdraw $5000 and five percent of the trust corpus at the end of each year was unconditional. He merely needed to be alive at the end of each year. Because Thompson essentially had an " unfettered ability to possess and own" trust assets, the assets subject to Thompson's demand were not protected by the spendthrift provision and sheltered from creditors. Here, the power to withdraw money from the trust was akin " to having money in the bank."
Great American Life Ins. Co., 2006 Ohio 304, 2006 WL 199751 at *2 (footnotes omitted).
Under Ohio law, then, the right to withdraw was a choate interest to which the creditor's bill lien attached pre-petition. This conclusion is consistent with both Weiner and the creditor's bill statute, which provides for attachment of equitable interests only.
The trustee argues that Thompson's right to withdraw did not mature until it was exercised. She contends the year-end withdrawals are not unqualified because they are subject to two conditions: (1) debtor must be alive on 31 December of the applicable year; and (2) the election to withdraw must be made by 30 January of the subsequent year. The trustee's articulation of the latter condition is not entirely accurate: the trust instrument does not require election by 30 January, but requires the trustee of the trust to complete distribution of the yearend withdrawal no more than 30 days after the " close of the year." On the other hand, the trust does provide that the right to withdraw is not cumulative, implying that if a request is not made for a particular year, the opportunity to do so will be lost. But these considerations do not change the outcome. The choice of whether to make the withdrawal is exclusively in Thompson's hands, thus, his property right was mature on the petition date.
The trustee takes issue with the bankruptcy court's reliance on the Ohio court's holding as a definitive statement of Ohio law. However, the trustee has pointed out no contrary Ohio law.
In her reply brief, the trustee contends that GALIC is judicially estopped from relying on the Ohio Court of Appeals' decision because it previously represented to the bankruptcy court that lifting the stay to allow the state court appeal to proceed would not prejudice the estate. It is not self-evident how the estate is prejudiced by a creditor obtaining what is essentially a declaration of its rights under state law. Nor did the trustee explicitly address the judicial estoppel argument in her opening brief; she has therefore waived it. In re Sedona Inst., 220 B.R. 74, 76 (9th Cir. BAP 1998), aff'd, 21 Fed.Appx. 723 (9th Cir. 2001). In any event, judicial estoppel does not apply. Judicial estoppel is an equitable doctrine that precludes a party from asserting one position, and then seeking an advantage by taking an inconsistent position in a subsequent matter. Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782-83 (9th Cir. 2001). In the Ninth Circuit, application of the doctrine is limited to situations where the court relied on the earlier position. Id. at 783. Nothing in the record indicates that such is the case here, nor does the trustee so argue.
The bankruptcy court did not err in ruling that GALIC's lien attached pre-petition.
B. Avoidability under Section 544
Section 544 provides:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by--
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists[.]
. . . .
This provision confers " strong-arm" powers on the trustee to avoid, among others, unperfected and secret pre-petition liens. In re Commercial Money Center, Inc., 350 B.R. 465, 474 (9th Cir. BAP 2006); In re Tleel, 79 B.R. 883, 887 (9th Cir. BAP 1987), aff'd, 876 F.2d 769 (9th Cir. 1989). The bankruptcy court properly rejected the trustee's arguments that GALIC's lien was both unperfected and secret. Under Ohio law, the lien arose upon filing of the creditor's bill complaint; the bankruptcy court concluded that the lien was perfected upon entry of judgment in the creditor's bill action and was thus not avoidable under § 544. See In re Wind Power Systems, Inc., 841 F.2d 288, 292-93 (9th Cir. 1988) (applying similar California law). Nor was it secret: GALIC's action and judgment were matters of public record.
The trustee argued in the bankruptcy court that the lien was never perfected because GALIC took no action beyond filing the creditor's bill action and obtaining a judgment. But as GALIC pointed out, Ohio law provides no mechanism for perfecting a creditor's bill lien. In similar circumstances, the Ninth Circuit Court of Appeals has held in two cases, applying California law, that certain liens were not subject to avoidance by the trustee. See In re Hilde, 120 F.3d 950 (9th Cir. 1997) (ORAP-order to appear-lien); In re Loretto Winery Ltd., 898 F.2d 715 (9th Cir. 1990) (producer's lien). Although it is not clear that the lien was " perfected" upon entry of the creditor's bill judgment (or that perfection is required under Ohio law), the cited cases support the conclusion that the lien is not avoidable under § 544(a). The bankruptcy court did not err.
VI. CONCLUSION
The trustee has not shown that the bankruptcy court erred in ruling that GALIC's lien attached pre-petition, or that the lien was not avoidable under § 544. Accordingly, we AFFIRM.
All " Rule" references are to the Federal Rules of Bankruptcy Procedure, and all " FRCP" references are to the Federal Rules of Civil Procedure.
When a judgment debtor does not have sufficient personal or real property subject to levy on execution to satisfy the judgment, any equitable interest which he has in real estate as mortgagor, mortgagee, or otherwise, or any interest he has in a banking, turnpike, bridge, or other joint-stock company, or in a money contract, claim, or chose in action, due or to become due to him, or in a judgment or order, or money, goods, or effects which he has in the possession of any person or body politic or corporate, shall be subject to the payment of the judgment by action.