In re: Ian Nehemiah Gray and Cynthia Jackson Gray
AZ-13-1502-JuKiD
| 9th Cir. BAP | Dec 9, 2014Background
- Debtors Ian and Cynthia Gray filed Chapter 7 and initially did not list a $2,707 prepaid rent payment as an asset or exempt.
- At the § 341 meeting trustee questioned the payment; trustee later sought turnover of $900 representing post-petition prepaid rent for June 2013.
- Debtors amended Schedules B and C to claim a $900 exemption under Arizona law for prepaid rent.
- Trustee objected, arguing the initial nondisclosure was bad faith and moved to disallow the amended exemption.
- Bankruptcy court sustained the trustee’s objection without an evidentiary hearing, finding bad faith and disallowing the amended exemption.
- Debtors appealed; the BAP vacated and remanded based on the Supreme Court’s decision in Law v. Siegel, which limits courts’ equitable power to deny exemptions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a bankruptcy court may disallow an amended exemption or deny leave to amend based on debtor bad faith | Trustee: equitable powers and Ninth Circuit precedent permit denying or disallowing amended exemptions for bad faith or prejudice | Debtors: Rule 1009(a) allows amendment as of right; exemption presumptively valid absent statutory basis to deny | Court: Under Law v. Siegel, federal bankruptcy courts lack authority to disallow or bar amended exemptions on equitable grounds like bad faith; remand to consider state-law grounds |
| Whether the bankruptcy court abused its discretion by not holding an evidentiary hearing | Debtors: factual finding of bad faith required hearing | Trustee: hearing unnecessary because facts were clear | Court: Moot — did not decide because federal law forecloses equitable denial of exemption |
Key Cases Cited
- Law v. Siegel, 134 S. Ct. 1188 (2014) (Supreme Court: bankruptcy courts may not use equitable powers to deny or surcharge exemptions contrary to § 522)
- Martinson v. Michael (In re Michael), 163 F.3d 526 (9th Cir. 1998) (Ninth Circuit recognized bad-faith/prejudice exceptions to amendment under Rule 1009)
- Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir. 1982) (articulated judicial exceptions allowing denial of post-petition schedule amendments for bad faith or prejudice)
- Magallanes v. Williams (In re Magallanes), 96 B.R. 253 (9th Cir. BAP 1988) (applied Doan test to disallow amended exemptions)