In re Hoover
574 B.R. 413
Bankr. D. Mass.2017Background
- Debtor filed Chapter 11 (converted to Chapter 7); original Schedule B disclosed a prepetition personal-injury tort claim valued at $0.00 and Schedule C claimed $0.00 exemption under Massachusetts law.
- Trustee was appointed, employed debtor’s prepetition lawyer as special counsel, and sued on the tort claim in state court; insurer later offered settlement proceeds.
- Trustee moved to approve a compromise allocating $15,500 to the estate (after liens and reduced fees); debtor objected to the settlement as inadequate.
- Nearly two years post-petition, debtor moved to amend schedules to value the claim at $100,000 (defendant’s policy limit) and claim $34,190 in federal exemptions instead of the prior $0.00 state exemption.
- Trustee objected to the amendment as fraudulent/bad-faith undervaluation and relied on Fed. R. Bankr. P. 4003(b)(2) to preserve a late objection; he said he would not pursue the settlement if the amendment were allowed.
- Court had to decide whether post-Siegel authority allows denial of an exemption amendment based on bad faith and whether Rule 4003(b)(2) provides an independent basis to deny the amendment.
Issues
| Issue | Debtor's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether debtor may amend exemptions post-petition despite alleged bad-faith undervaluation | Siegel bars equitable denial of federal exemptions for bad faith; Rule 1009 permits amendment before case closure | Bad faith/fraud in initial schedules justifies denying amendment; Rule 4003(b)(2) allows late trustee objection for fraud | Allowed amendment; court concluded Siegel limits courts from denying federal exemptions for bad faith and Rule 4003(b)(2) does not supply independent substantive basis to deny amendment |
| Whether Rule 4003(b)(2) permits denying an exemption amendment when debtor fraudulently asserted exemption | Rule 4003(b)(2) timing exception is inapplicable to bar amendment; debtor not seeking to close case | Rule 4003(b)(2) lets trustee object up to one year after case closing for fraudulent assertions, so can defeat amendment | Rejected trustee’s reliance on Rule 4003(b)(2); rule is procedural/timing and does not create a substantive authority to deny an exemption contrary to Siegel |
| Whether trustee can surcharge or otherwise strip an allowed exemption for debtor misconduct | Siegel forbids surcharging a statutory exemption under § 105 or otherwise absent Code basis | Trustee seeks remedies for misconduct (surcharge or denial) to protect estate/creditors | Court followed Siegel: bankruptcy courts lack authority to surcharge or disallow federal exemptions on equitable/bad-faith grounds; other remedies (§ 727, § 105 sanctions, avoidance actions, Rule 9011) remain available |
| Effect on trustee’s settlement motion if amendment allowed | Debtor asked amendment; settlement fairness contested separately | Trustee said he would not proceed with settlement if amendment allowed | Because amendment was allowed, Trustee declined to pursue settlement; court denied settlement motion without prejudice |
Key Cases Cited
- Law v. Siegel, 134 S. Ct. 1188 (2014) (Supreme Court: bankruptcy courts cannot surcharge or deny federal exemptions on equitable grounds not provided by Code)
- United States v. Ledee, 772 F.3d 21 (1st Cir. 2014) (First Circuit recognizing Siegel’s limitation on denying exemptions for bad faith)
- Ellmann v. Baker (In re Baker), 791 F.3d 677 (6th Cir. 2015) (Sixth Circuit holding lower courts must follow Siegel dicta; bad-faith disallowance not permitted)
- Hannigan v. White (In re Hannigan), 409 F.3d 480 (1st Cir. 2005) (pre-Siegel case allowing denial/amendment limits for bad-faith scheduling conduct)
- Malley v. Agin, 693 F.3d 28 (1st Cir. 2012) (pre-Siegel precedent permitting surcharge against exemption for fraudulent concealment)
- Owen v. Owen, 500 U.S. 305 (1991) (estate includes debtor interests at filing; exemptions remove interests from estate)