John David Pfiester

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
JOHN DAVID PFIESTER,
Debtor. 	No. 7-08-13109 SA
MEMORANDUM OPINION ON
DEBTOR’S EXEMPTION CLAIMS
This matter came before the Court for hearing on Debtor’s
Objection to the Trustee’s Final Report and Application for
Compensation. 	Docs 42 and 40 respectively. 	The ground for the
objection was an unresolved objection to Debtor’s exemptions of a
retirement account and of preference recovered by the Trustee.
(Doc 20.) 	The parties resolved the retirement account issue on
their own, leaving only the exemption of the preference as an
issue for the Court. 	Debtor is represented by his attorney Don
Provencio. 	The Trustee is represented by Moore, Berkson &
Gandarilla, P.C. (Bonnie G. Gandarilla and George M. Moore).
This is a core proceeding. 	28 U.S.C. § 157(b)(2)(A). 	The
parties agreed to waive an evidentiary hearing, preferring to
submit stipulated facts and written arguments. 	For the reasons
set forth below, the Court finds that Debtor may not exempt any
part of the preference recovery. 	The Trustee’s objection will be
sustained.
FACTS
The parties agreed to the following facts:
1. 	The Debtor filed a Chapter 7 bankruptcy on September 19,
2008.
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2. 	The Debtor listed certain assets on Schedule B of his
Petition. 	At line 12 of Schedule B he set out an Individual
Retirement Account valued at $10,000.00 and at line 35 of
Schedule B he set out a Preference Recovery by Trustee
valued at $7,500.00.
3. 	The Trustee recovered a preferential transfer from AT&T
Universal Card and presently holds approximately $9,000.00
which is related to the preferential recovery set out in
Debtor's Schedule B.
4. 	Accompanying his Petition, the Debtor filed Schedule C which
claimed as exempt the assets listed on Line 12 and 35 of
Schedule B of the Petition.
5. 	The Trustee timely filed an Objection to Debtor's Claims Of
Exempt Property objecting to the claim set out on Line 12
because the Trustee "has not verified the value of the
Debtor's interest or the source of the funds deposited in
the IRA."
6. 	The objection to the claim set out on Line 12 has been
resolved because the Trustee has verified the value of the
Debtor's interest or the source of the funds deposited in
the IRA, the exemption is allowed and the Trustee will agree
to an Order withdrawing his objection to this exemption.
7. 	The Trustee timely filed an Objection to Debtor's Claims Of
Exempt Property objecting to the claim set out on Line 35
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because "upon information and belief, the preference
described was for funds in the amount of $15,500.56 that
Debtor voluntarily paid to AT&T Universal Card in the ninety
days prior to the filing of his chapter 7 petition."
8. 	The only issue before this Court is whether, as set out
under, U.S.C. §522(g)(1)(A) the payment to AT&T Universal
Card made within the ninety days prior to the filing of his
chapter 7 petition was an involuntary or a voluntary
transfer by the Debtor.
9. 	Prior to filing bankruptcy, Debtor was involved in a divorce
proceeding in the Second Judicial District Court Numbered
DM-2007-03713.
10. 	On February 12, 2008, Debtor and Heather Pfiester entered
into a Marital Settlement Agreement (the “MSA”) in which the
Debtor agreed to pay the outstanding balance on the
community’s AT&T credit card from the proceeds of the sale
of marital residence located at 7128 Boxwood Ave NE,
Albuquerque, NM 87113. 	(A copy of the MSA was attached as
Exhibit A.)
11. 	The Debtor and Heather Pfiester were both represented by
counsel in the negotiation of the MSA. 	The MSA stated on
page 1 that it was “a compromise agreement as to their
rights and obligations” and was for consideration.
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12. 	On June 18, 2008, the District Court Judge entered a Minute
Order in Case No. DM-2007-03713 on a hearing on “Report Back
and Motion to Enforce,” and at paragraph 1 required that
"All sales proceeds after cost of sale mortgages shall be
paid to AT&T Credit Card by Land America Title." 	The Court
also ordered at paragraph 3 that “This Court is enforcing
the Marital Settlement Agreement.” 	(A copy of the Minute
Order was attached as Exhibit B.)
13. 	On June 16, 2008, Land America New Mexico Title Company
handled the distribution of proceeds from the sale of real
property sold by the Debtor in which the Title Company paid
funds in the amount of $15,500.56 to AT&T as required under
the Minute Order entered in Case No. DM-2007-03713. (A copy
of the Settlement Statement was attached as Exhibit C.)
DISCUSSION
The only issue for the Court it how to apply Bankruptcy Code
§ 522(g), which provides, in relevant part:
[T]he debtor may exempt under subsection (b) of this
section property that the trustee recovers under
section 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 transferred, if--
(1)(A) such transfer was not a voluntary transfer
of such property by the debtor; and
(B) the debtor did not conceal such property[.]
(Emphasis added.)
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The Bankruptcy Code does not define the term “voluntary.”
Tackett v. Dixon (In re Tackett), 21 B.R. 107, 108 (Bankr. D.
N.M. 1982). 	The cases interpreting section 522(g) suggest that
there is a broad spectrum with “voluntary” at one end, and
“involuntary” at the other. 	Id. 	Black’s Law Dictionary defines
a “voluntary payment” as one “made by a debtor of his own will
and choice, as distinguished from one exacted from him by process
of execution or other compulsion.” 	In re Sims, No. 13-05-20101-
SR, slip op. at 11 n. 10 (Bankr. D. N.M. April 3, 2007)(quoting
Black’s Law Dictionary 1129 (6 th ed. 1990)). 	Furthermore, “by
and large, the bankruptcy courts have refused to consider any
transfer other than one that takes place by operation of law to
be necessarily a voluntary transfer for purposes of section
522(g)(1).” 	Davis v. Suderov (In re Davis), 148 B.R. 165, 173
(Bankr. E.D. N.Y. 1992), aff’d, 169 B.R. 285 (E.D. N.Y. 1994).
In a very widely cited case from South Dakota, Bankruptcy Judge
Peder K. Ecker stated:
For purposes of this decision, this Bankruptcy Court
holds that an 11 U.S.C. Section 522(g)(1)(A) voluntary
transfer occurs when a debtor, with knowledge of all
essential facts and free from the persuasive influence
of another, chooses of her own free will to transfer
property to the creditor. 	A voluntary transfer does
not occur where a creditor has harassed, insulted, and
shamed a debtor into transferring the property to the
creditor. 	Nor has a voluntary transfer occurred where
a creditor has concealed or failed to inform a debtor
of essential facts necessary for the debtor to make an
intelligent decision on whether to transfer the
property to the creditor. 	This is especially true
where a debtor can show that she would not have made
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the transfer had she been informed of all the essential
facts.
Reaves v. Sunset Branch, Nat’l Bank of South Dakota (In re
Reaves), 8 B.R. 177, 181 (Bankr. D. S.D. 1981). 	But see Tanton
v. Nolen (In re Nolen), 40 B.R. 6, 10 (Bankr. M.D. Ala. 1984)
(Criticizing Reaves for injecting elements of “knowing” and
“freely made” into the definition of voluntary, and using a more
common-sense “own free will” definition.)
The transfer at issue in this case resulted from a
settlement of domestic relations litigation between Debtor and
his former spouse.
The law favors resolving controversies through
compromise and settlement rather than through
litigation. 	Williams v. First National Bank, 216 U.S.
582, 592, 30 S.Ct. 441, 444, 54 L.Ed. 625 (1910).
Settlement of litigation is usually a compromise of
disputed liability by the parties and is favored as a
matter of public policy. 	Smith v. Munro, 134 Vt. 417,
365 A.2d 259 (1976).
The settlement of a lawsuit embodies the essence
of freedom of choice. 	Rather than have a court of
competent jurisdiction or a jury adjudicate the
dispute, the parties to a settlement choose to
compromise, ending the litigation themselves and
eliminating an uncertain outcome. 	A compromise or
settlement agreement is a contract, and as such,
requires the necessary ingredients of contractual
formation, including freedom from duress or force.
Terry v. Witten & Carter, P.C. (In re Terry), 56 B.R. 538, 540
(Bankr. D. Vt. 1986). 	Accord Builders Contract Interiors, Inc.
v. Hi-Lo Industries, Inc., 139 N.M. 508, 511, 134 P.3d 795, 798,
2006-NMCA-053, {8} (Ct. App. 2006)(“Because a settlement
agreement is a species of contract, we also recognize and give
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effect to the intersecting strong public policy of freedom to
contract that has been enforced in New Mexico.”)(Citations and
internal quotation marks omitted.); Herrera v. Herrera, 126 N.M.
705, 708, 974 P.2d 675, 678, 1999-NMCA-034, {9} (Ct. App.
1999)(“All settlement agreements are contracts and therefore are
subject to contract law.”) and 126 N.M. at 710, 974 P.2d at 680,
1999-NMCA-034 at {18}(“A voluntary marital settlement agreement
entered into by spouses is sacrosanct and will not be upset by
the court absent fraud, duress, mistake, breach of fiduciary duty
or other similar equitable grounds for invalidating an
agreement.”)(Citations and internal quotation marks omitted.)
The marital settlement agreement in this case was entered
into by parties in litigation. 	Each was represented by an
attorney. 	There are no allegations of fraud, coercion, duress or
unequal bargaining position. 	It appears that the agreement was
voluntarily entered into by the parties. 	Therefore, the Court
concludes that either under the Davis or Nolen definitions,
Debtor voluntarily transferred property.
This conclusion is further supported by a Tenth Circuit
Bankruptcy Appellate Panel case dealing with a domestic relation
issue. 	In Thompson v. Unruh (In re Thompson), Barbara Unruh
executed an antenuptial agreement with the future debtor that
provided that if she sold any real estate she currently owned and
the proceeds were invested in jointly held real estate, she would
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retain a lien on the new property in the amount she invested.
240 B.R. 776, 778 (10 th Cir. BAP 1999). 	Nothing in the case
indicates that the agreement was ever recorded. 	After their
marriage, she mortgaged separately owned real estate and used
$50,000 of the proceeds as a down payment on real estate
purchased as joint tenants with right of survivorship. 	Id.
Barbara then died intestate. 	Id. 	The administrator of her
estate sought instructions from the probate court concerning the
effect of the antenuptial agreement on the administration of the
estate. 	Id. 	After a trial, the probate court ruled that the
antenuptial agreement was clear and unambiguous and that the
agreement was valid. 	Id. at 779. 	The probate court then valued
the claim and entered an order establishing a lien in the amount
of $41,154.97 against the property. 	Id. 	Debtor filed a chapter
13 petition, declared the property an exempt homestead, and filed
a chapter 13 plan that would avoid the lien under section 522(f).
Id. 	The bankruptcy court denied confirmation. 	Id. 	On appeal,
the BAP ruled:
The debtor seeks to avoid the lien created by the
antenuptial agreement pursuant to 11 U.S.C. § 522(f).
Section 522(f)(1)(A) allows the debtor to avoid the
fixing of a lien on an interest of the debtor in
property to the extent it impairs an exemption if the
lien is a judicial lien. 	A “lien” is defined as a
“charge against or interest in property to secure
payment of a debt or performance of an obligation.” 	11
U.S.C. § 101(37). 	A “judicial lien” is defined as:
“lien obtained by judgment, levy, sequestration, or
other legal or equitable process or proceeding.” 	11
U.S.C. § 101(36). 	A security interest is a “lien
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created by an agreement.” 	11 U.S.C. § 101(51). 	There
are three categories of liens, which are mutually
exclusive: (1) security interests; (2) judicial liens;
and (3) statutory liens. 	In re Sanders, 61 B.R. 381,
383 (Bankr. D. Kan. 1986) (citing In re Jones, 13 B.R.
945, 947 (Bankr. E.D. Pa. 1981)). “It is the origin of
the creditor's interest rather than the means of
enforcement that determines the nature of the lien.”
Id. 	Just because a creditor resorts to the judicial
process to enforce the lien, it does not mean the lien
is a judicial lien. 	Id. 	Congress intended for
consensual liens or liens by agreement to be defined as
security interests. 	Naqvi v. Fisher, 192 B.R. 591, 595
(D. N.H. 1995) (citing H.R.Rep. No. 95-595, 95th Cong.,
1st Sess. at 314 (1977); S.Rep. No. 95-989, 95th Cong.,
2d Sess. at 26 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5813, 6271; In re Dunn, 109 B.R. 865, 867 (Bankr.
N.D. Ind. 1988)). 	Courts have determined that liens
created by settlement agreements which are incorporated
into divorce decrees are consensual liens. 	Id. at 596
(citations omitted). ...
This [antenuptial] agreement has been determined
valid and unambiguous by the state court. 	The state
court further found the antenuptial agreement created a
lien against the debtor's homestead. 	It was not the
action in state court that created the lien. 	The lien
came into existence when the mortgage proceeds were
used as a down payment on the marital residence. 	Even
though the Appellees brought an action in state court
which ultimately settled the amount of the lien, it is
not a “judicial lien.”
240 B.R. at 781.
Admittedly, Thompson is a lien avoidance case dealing with
Section 522(f). 	This case deals with Section 522(g). 	Section
522(f) allows avoidance of judicial liens, but not the avoidance
of security interests, to protect an exemption. 	“The term
‘judicial lien’ means lien obtained by judgment, levy,
sequestration, or other legal or equitable process or
proceeding.” 	11 U.S.C. § 101(36). 	“The term ‘security interest’
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means lien created by an agreement.” 	Id., § 101(51). 	Therefore,
section 522(f) distinguishes between a lien imposed upon the
debtor through process from a lien created by agreement. 	The
term “agreement” connotes voluntary action. 	Schwegmann Bros. v.
Calvert Distillers Corp., 341 U.S. 384, 390 (1951)(“Contracts or
agreements convey the idea of a cooperative arrangement, not a
program whereby recalcitrants are dragged in by the heels[.]”)
See also Life Music, Inc. v. Edelstein, 309 F.2d 242, 243 (2 nd
Cir. 1962)(“[A]greement usually connotes a voluntary undertaking
of two or more parties[.]”); Black’s Law Dictionary 67 (6 th ed.
1990)(“A meeting of two or minds; a coming together in opinion or
determination; the coming together in accord of two minds on a
given proposition.”) 	Therefore, section 522(f) allows exemption
of property taken from a debtor, but not property a debtor
voluntarily agreed to transfer. 	Section 522(g) is structured to
the same end; it only allows exemption of property that was not
voluntarily transferred.
“The purpose of section 522(g) is to prevent a debtor from
claiming an exemption in recovered property which was transferred
in a manner giving rise to the trustee's avoiding powers, where
the transfer was voluntary or where the transfer or property
interest was concealed.” 	Russell v. Kuhnel (In re Kuhnel), 495
F.3d 1177, 1180 (10 th Cir. 2007)(citing Zubrod v. Duncan (In re
Duncan), 329 F.3d 1195, 1201 (10 th Cir. 2003)). 	In this case,
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the Trustee filed suit and used his avoiding powers to recover
the property in question. 	Denying Debtor’s exemption in this
case comports with the stated policy of section 522(g). 	The
Court will enter an Order Sustaining Trustee’s Objection and
Denying the Exemption of the preference recovery.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	January 24, 2011
Copies to:
Donald Provencio
1721 Carlisle Blvd NE
Albuquerque, NM 87110-5621
Bonnie Bassan Gandarilla
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
Philip J Montoya, Trustee
PO Box 159
Albuquerque, NM 87103-0159
Alice Nystel Page
Office of US Trustee
PO Box 608
Albuquerque, NM 87103-0608
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