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In re Lunt

United States District Court, D. Kansas

September 25, 2013

In re Philip Duane LUNT, Debtor.
v.
The Peoples Bank, Trustee, Steven A. Lunt, Intervenor, Elaine L. Stelter, Intervenor, Appellees. Philip Duane Lunt, Appellant, No. 12-1337-CM.

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[Copyrighted Material Omitted]

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Martin R. Ufford, Redmond & Nazar, L.L.P., Wichita, KS, for Appellant.

Steven L. Speth, Speth & King, Wichita, KS, for Appellees.

MEMORANDUM AND ORDER

CARLOS MURGUIA, District Judge.

This is an appeal of the final Memorandum Opinion and Judgment (Doc. 5-18) of the bankruptcy court. Appellant Philip Duane Lunt (" Debtor" ) appeals the bankruptcy court's decision denying Debtor's motion for summary judgment and granting the motion for summary judgment of intervenors Elaine L. Stelter (" Elaine" ) and Steven A. Lunt (" Steven" ). Debtor claims that the bankruptcy court erred in three ways: (1) in deciding that Debtor's bankruptcy eliminated his personal liability for his pre-petition promissory note but

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did not extinguish the underlying debt; (2) in deciding that the doctrine of recoupment applied; and (3) in deciding that The Peoples Bank (" Trustee" )'s actions were permissible under state law and the trust documents. The court has carefully reviewed the record and affirms.

I. Factual Background

The following facts are uncontroverted and were set forth in the bankruptcy court's decision. For reasons of judicial efficiency, the court reproduces them in their entirety here.

The [Harry B. Lunt] Trust [ (" Trust" )] was established in 1978 by Harry B. Lunt (" Harry or Grantor" ), the father of Debtor Lunt, Elaine, and Steven (" the Lunt Children" ). On November 7, 1985, the Trust entered into a contract with Debtor Lunt and his wife, Rose Ann Lunt, for the sale of a farmhouse to Debtor Lunt and Rose Ann[ ]. The purchase price was $50,000.[1] In partial payment for the home, Debtor and Rose Ann executed the Note, dated November 7, 1985, for $33,333.33 payable to The Peoples Bank as Trustee. The Note provides for interest at the rate of 10% per annum, payable from the date of the transfer of the property. The principal is due in five years. Although the contract provides for transfer of the farmhouse to Debtor and Rose Ann, the deed dated November 7, 1985, conveyed the farmhouse only to Rose Ann. But it is uncontroverted that Debtor has lived in the farm house since the transfer.
Debtor filed for relief under Chapter 7 on November 25, 1988. The Peoples Bank and the Trustee were listed as creditors. A proof of claim for payment of the Note was filed. Debtor was granted a discharge on July 19, 1989. The parties agree that the Note was within the scope of the discharge order.
The Grantor created the Trust, which is governed by Kansas law, by an instrument dated December 27, 1978. The Peoples Bank of Pratt is named as the Trustee. The Trust agreement was amended in its entirety by an Amendment to Trust Agreement dated March 29, 1984, and by a limited Amendment of Trust Agreement signed on November 7, 1985, addressing the Note. A purpose of the Trust was to provide for the Grantor during his lifetime. Upon his death, a marital trust and a non-marital trust were created, and distributions from the marital trust were made to Christine Lunt, Harry's wife and the mother of the Lunt Children. The Trust provides that upon the death of Christine, which occurred in 2004, the two trusts are to be administered as one for twenty years, after which the Trust will terminate. Upon termination, the Lunt Children are entitled to distributions of all principal and accrued and unpaid income.
The following specific terms of the Trust are relevant. The Trustee is given " all powers expressly set forth in the Uniform Trustees Power Act (K.S.A. 58-1201, et seq[.] ) as may be amended from time to time" and other powers set forth in the 1984 Amendment to Trust Agreement.[2] After Christine's death, Article VI(A)(3)(b) of the 1984 Amendment to Trust Agreement, a subsection

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of the marital trust provisions, gives the Trustee discretion to make distributions of income to the Lunt Children as follows:
[T]hen upon the death of Grantor's wife, the Trustee shall continue to hold any accumulated income and principal in trust and shall administer the same as follows:
....
b. All or any part of the income of this trust may be distributed at any time and from time to time and for any reason for the benefit of the Grantor's children in such proportions and amounts as the Trustee may determine, it being the intention hereof to vest in the Trustee the sole and absolute power to distribute or not distribute amounts of income at such times and in such proportions among said individuals as it deems appropriate.
Also, under Article VI(C) of the 1984 Amendment to Trust Agreement, after the death of Christine, the marital trust and the non-marital trust are treated as one and administered as provided in the Amendment for a period of twenty years, when the Trust terminates. Upon termination of the Trust, Article VI(C)(4) provides for equal distributions to the Lunt Children, as follows:
Upon termination, the Trustee shall distribute the principal and any accrued and undistributed income of the trust in equal shares to the children of the Grantor, provided, the Trustee is authorized and empowered to make unequal distribution of the principal and any accrued and undistributed income in cash or in kind in order to carry out the desires of the Grantor for the Trustee to consider all transfers to Grantor's children that have been made by the Grantor or his wife by Will or otherwise. Any loans made by Grantor or his wife which have not been repaid shall be treated as transfers by the Trustee, whether or not the statutes of limitation have run.
The Amendment of Trust Agreement executed on November 7, 1985, the date of the Note, states in part:
The Trustee is hereby directed to enter into the attached contract on behalf of the Trust, to accept the notes as required in such contract ... and to execute the deed in the form as attached hereto, to carry out the terms of the contract.
The Trustee is further directed that upon the death of the survivor of myself and my wife ... and collection of the note to the Trustee in the amount of ... $33,333.33 ..., whichever event shall last occur, to distribute one-half ( 1/2 ) of the principal of such note to my son, ...

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