In re: Ronald J. Smith and Susan M. Smith
EC-16-1140-BJuTa
| 9th Cir. BAP | Apr 24, 2017Background
- Ronald and Susan Smith filed chapter 7 in 2010, received discharge, and case closed; Mr. Smith later retained counsel (PI Counsel) for a decades‑old childhood sexual abuse claim. The case was reopened in 2013 and a Chapter 7 trustee (Parker) was appointed.
- Trustee and counsel pursued settlement; a global plan in the Diocese's bankruptcy included a settlement producing net funds for Mr. Smith (~$39,700 net; gross $69,399.17). PI Counsel’s contingency fee lien attached and counsel was paid by court order.
- Debtors initially did not list or exempt the claim; after the court suggested exemptions might apply at an October 2015 hearing, Debtors (now with counsel) amended Schedule C to claim the full settlement under California CCP § 704.140 as necessary for support.
- Trustee objected, arguing (1) equitable estoppel/laches barred the late exemption amendment because Debtors delayed while Trustee expended effort to liquidate the claim, and (2) the funds were not "necessary for support" given VA/Medicare benefits and Debtors’ income.
- The bankruptcy court held an evidentiary posture was waived and, after reviewing the papers, overruled Trustee’s objections, finding: no equitable estoppel or laches, and that Debtors met their California burden to show the settlement funds were necessary for their support; Trustee appealed.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Smiths) | Held |
|---|---|---|---|
| Whether equitable estoppel or laches bars Debtors from amending Schedule C to exempt settlement funds | Debtors unreasonably delayed exemption claim, Trustee relied on that delay and incurred expense; he was on notice but not required to anticipate amendment | Debtors were pro se, unaware an exemption applied to the settlement funds until the court raised it in Oct 2015; they promptly amended thereafter | Court affirmed: no estoppel or laches. Trustee had inquiry notice that an exemption was possible; but Debtors lacked knowledge element and amended promptly once apprised, so no abuse of discretion in denying equitable estoppel/laches |
| Whether the settlement proceeds are exempt under CCP § 704.140 as "necessary for support" | Funds were not necessary; Debtors had VA and Medicare benefits, sufficient income, and overstated expenses; Trustee’s evidence (web printouts) undermined need | Debtors’ Schedules I/J showed negative disposable income, medical/dental needs, and modest assets; needs are forward‑looking and the funds are needed for support | Court affirmed: factual findings not clearly erroneous. Despite thin evidence, court credited Debtors’ sworn declaration and schedules and concluded full amount was necessary for support |
Key Cases Cited
- Schwab v. Reilly, 560 U.S. 770 (statutory framework: property of estate and debtor exemptions)
- Law v. Siegel, 134 S. Ct. 1188 (limits on bankruptcy court denying state law exemptions on federal equitable grounds)
- Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (exemption rights determined as of petition date)
- Gose v. McGranahan (In re Gose), 308 B.R. 41 (personal injury exemption requires necessity for support)
- Simmons v. Ghaderi, 44 Cal.4th 570 (elements for equitable estoppel under California law)
- Anderson v. Bessemer City, 470 U.S. 564 (standard for reviewing factual findings)