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In re Porrett

United States District Court, D. Idaho

September 1, 2016

In re GARY ALAN PORRETT and JENNIFER SUE PORRETT, Debtors.
v.
NOAH G. HILLEN, U.S. Trustee, Appellee. GARY ALAN PORRETT and JENNIFER SUE PORRETT, Appellants,

          OPINION

          MARK W. BENNETT U.S. DISTRICT COURT JUDGE.

         TABLE OF CONTENTS

         I. INTRODUCTION ........................................................................... 3

         A. Factual Background ............................................................... 3

1. Stipulated facts .............................................................. 3
2. Additional stipulated evidence ........................................... 4
3. Additional evidence ........................................................ 5

         B. Procedural Background ........................................................... 7

         II. ARGUMENTS OF THE PARTIES ...................................................... 8

         III. LEGAL ANALYSIS ...................................................................... 11

         A. Standard Of Review .............................................................. 11

         B. An Overview Of Property Under § 541(a) .................................... 12

1. Property under § 541(a)(1) ............................................. 13
2. “Proceeds” under § 541(a)(6) ......................................... 15
3. “After-acquired property” under § 541(a)(7) ....................... 16
4. Summary ................................................................... 18

         C. Is The Payment Property Of The Bankruptcy Estate? ..................... 18

1. Was there an accrued pre-petition cause of action? ............... 19
2. Was the payment “proceeds” of the pre-petition cause of action? .................................................................. 22
3. Was the payment “after-acquired property” of the bankruptcy estate? ....................................................... 23
4. Summary ................................................................... 24

         D. The Debtors' Contrary Authority .............................................. 24

1. In re Neidorf .............................................................. 24
2. In re Vanwart ............................................................ 27
3. The cases involving relief by governmental action ................. 29

         IV. CONCLUSION ............................................................................ 31

         In a Chapter 7 case, the bankruptcy court held that a payment of $8, 120.23 received by the Trustee from Wells Fargo Bank, in accordance with a post-bankruptcy Consent Order issued by regulators arising from an investigation of Wells Fargo's pre-bankruptcy mortgage lending practices, is property of the bankruptcy estate, not the debtors. See In re Porrett, 547 B.R. 362 (Bankr. D. Idaho 2016). The debtors have appealed.

         I. INTRODUCTION

         A. Factual Background

         1. Stipulated facts

         The parties agreed to disposition by the bankruptcy court of the question of whether the payment at issue is property of the bankruptcy estate or the debtors on a stipulated record. The stipulated facts are as follows:[1]

         The debtors, Gary Alan Porrett and Jennifer Sue Porrett, obtained a home loan from Wells Fargo on June 25, 2007. On December 9, 2009, the debtors filed for relief under Chapter 7 of the Bankruptcy Code. Jeremy Gugino was appointed as the Chapter 7 trustee. On July 2, 2010, Wells Fargo obtained relief from the bankruptcy stay in order to pursue its state law remedies as to the debtors' home.[2] Trustee Gugino previously distributed $2, 546.65. On February 17, 2011, the bankruptcy case closed.

         In an investigation, the Board of Governors of the Federal Reserve System discovered that, during the period when the debtors obtained their home loan, [3] Wells Fargo improperly funneled certain borrowers' home loans into sub-prime loans, which included a higher interest rate than those borrowers qualified for. This conduct by Wells Fargo resulted in certain classes of borrowers paying more in interest over the life of their loans to Wells Fargo than they otherwise should have (the difference between the non-prime and prime loan interest rates). On July 20, 2011, Wells Fargo reached an agreement with the Federal Reserve Board regarding borrowers who received more expensive non-prime loans, which may have had higher interest rates than traditional prime rate loans, between January 1, 2006, and September 30, 2008. The debtors are included in the class of borrowers addressed in an agreement, i.e., the July 20, 2011, Consent Order, between Wells Fargo and the Board of Governors of the Federal Reserve System resolving the regulatory action and providing that Wells Fargo would pay a penalty and take certain remedial actions as to affected borrowers.[4]

         On April 28, 2015, the bankruptcy case was reopened, and a new Trustee was appointed shortly thereafter. On July 31, 2015, the Trustee filed a Motion to Approve Compromise Under Fed.R.Bankr.P. 9019 (the Compromise Motion), seeking to obtain a $8, 120.63 gross settlement. On September 18, 2015, the Court approved the Compromise, and the bankruptcy estate is in possession of $8, 120.63 paid by Wells Fargo pursuant to the Compromise.

         2. Additional stipulated evidence

         The parties also stipulated to the admission of the Consent Order between the Board of Governors and Wells Fargo into the record before the bankruptcy court, for purposes of their Joint Motion for Determination of Property of the Bankruptcy Estate (Bankr. docket no. 59). Therefore, I can properly refer to pertinent provisions of the Consent Order.

         For the moment, suffice it to say that the Consent Order required payment of a penalty and certain remedial actions by Wells Fargo, but it also explicitly stated that it was not an admission of liability by Wells Fargo. Specifically, the Consent Order stated that it did not “constitut[e] an admission by Wells Fargo, Financial or any other Wells Fargo subsidiary of any allegation made or implied by the Board of Governors in connection with this matter, ” and that it was “solely for the purpose of settling this matter without a formal proceeding being filed and without the necessity for protracted or extended hearings or testimony.” Consent Order at 6-7. As mentioned briefly, above, the Consent Order included provisions for remedial compensation to the group of borrowers addressed in the Consent Order, which includes the debtors. Id. at 10-23. The Consent Order also authorized Wells Fargo to obtain “an appropriate form of release not to be executed earlier than notification of the borrower of the amount of remedial compensation offered” as a document that a borrower “must provide in order to obtain such remedial compensation.” Id. at 21.

         3. Additional evidence

         The bankruptcy court stated in the Memorandum Of Decision underlying the Order from which the debtors appeal that, “[i]n addition to the Joint Statement of Undisputed Facts and Stipulation Regarding Admission of Exhibits, Dkt. No. 60, the Court has referenced its own docket in this bankruptcy case.” Memorandum of Decision (Bankr. docket no. 68), 3 n.3. On appeal, the Trustee filed a Motion To Augment Record On Appeal (docket no. 5) seeking to include in the record two items from the docket in the bankruptcy case: (1) the Trustee's Motion to Approve Compromise Under Fed. R. Bank. P. 9019 (the Compromise Motion) (Bankr. docket no. 50); and (2) the Order Granting Motion To Approve Compromise Under Fed.R.Bankr.P. 9019 (the Compromise Order) (Bankr. docket no. 56).

         The Trustee pointed out that, in the bankruptcy court's Memorandum of Decision, the bankruptcy court specifically cited both of the documents the Trustee asked to add to the record. The debtors filed an Objection To Trustee's Motion To Augment Record On Appeal (Bankr. docket no. 7), arguing that the Joint Motion For Determination Of Property Of The Bankruptcy Estate (Bankr. docket no. 59) was based on stipulated facts, which did not include the documents that the Trustee was attempting to add to the record on appeal. On May 17, 2016, I granted the Trustee's Motion, but stated that I could determine whether or not it is appropriate to consider the documents in question after consideration of the full record and the parties' briefs on appeal. See Order (docket no. 8).

         In their opening brief on appeal, the debtors argue, in pertinent part, that the release document, which was an attachment to the Trustee's Compromise Motion, was never offered or admitted into evidence in the bankruptcy court. As a practical matter, however, I find that the fact that Wells Fargo was authorized to obtain “an appropriate form of release” as a document that a borrower “must provide in order to obtain . . . remedial compensation” pursuant to the Consent Order, see Consent Order at 21, was properly before the bankruptcy court, because the parties had stipulated to the admission of the Consent Order itself in their Joint Statement Of Undisputed Facts And Stipulation Regarding Admission Of Exhibits (Bankr. docket no. 60). The debtors do not contend that the form of the release actually signed by the Trustee to obtain the remedial compensation from Wells Fargo was somehow “inappropriate.” Furthermore, the Trustee quoted the actual release in his Memorandum Regarding Joint Motion For Determination Of Property Of The Bankruptcy Estate (Bankr. docket no. 64), and, in their Response To Trustee's Memorandum Regarding Joint Motion For Determination Of Property Of The Bankruptcy Estate (Bankr. docket no. 65), the debtors did not argue that the release was inadmissible or outside the record that the bankruptcy court could consider. ...


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