In re: Steven John Wharton and Josephina Jessie Wharton
NV-16-1218-JuFY
| 9th Cir. BAP | Feb 13, 2017Background
- Debtors (Steven and Josephina Wharton) listed a 1965 Corvette as nonexempt in their Chapter 7 schedules; Steven’s brother Robert claimed a nonpurchase-money security interest but did not perfect it on the Nevada certificate of title.
- Steven executed a promissory note for an $80,000 loan that stated the note was “partially secured by [the] 1965 Corvette;” Debtors delivered the title and keys to Robert but retained possession of the car.
- Trustee determined Robert’s lien was unperfected, demanded turnover or payment, and filed a Turnover Motion after purchase negotiations with Debtors failed.
- Two weeks before the turnover hearing Debtors amended Schedule C to claim the Corvette exempt (CarMax appraisal $23,000); Trustee raised an objection to that exemption in his reply to the Turnover Motion within 30 days of the amendment.
- The parties submitted stipulated facts; the bankruptcy court ruled Trustee’s reply constituted a timely Rule 4003(b) objection, held §522(g)(1)(A) barred Debtors’ exemption (finding a voluntary transfer and Trustee ‘‘recovered’’ the interest), and granted turnover. Debtors appealed; the BAP affirmed.
Issues
| Issue | Plaintiff's Argument (Debtors) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Timeliness and sufficiency of Trustee's objection to the amended exemption under Fed. R. Bankr. P. 4003(b) | Trustee’s reply brief was not a proper or timely objection; a separate objection pleading was required | Reply brief was filed within 30 days of the amendment and provided timely notice of the objection; Rule 4003(b) does not require a particular form | The reply brief was a timely and sufficient objection under Spenler; Rule 4003(b) satisfied |
| Applicability of 11 U.S.C. § 522(g)(1)(A): whether Debtors made a voluntary prepetition transfer of a security interest preventing exemption | No enforceable security interest attached because the promissory note lacked an adequate collateral description; thus no voluntary transfer occurred and § 522(g) is inapplicable | Promissory note is an authenticated security agreement describing the collateral as the “1965 Corvette,” value was given, and Debtors voluntarily transferred the security interest; attachment occurred under Nevada UCC | The transfer element satisfied: Nevada law finds attachment (authenticated security agreement, value, debtor rights); Debtors voluntarily transferred a security interest, so §522(g)(1)(A) applies |
| Whether the Trustee “recovered” the property for § 522(g) (recovery requirement) | Debtors argued they retained possession and had not been formally subject to an avoidance action; thus no recovery occurred | Trustee’s avoidance threat and actions induced release of the lien and return/reconveyance of the property interest; formal adversary not required | Recovery satisfied: trustee’s use/threat of avoidance powers induced reconveyance; formal adversary not required per Glass |
| Turnover under 11 U.S.C. § 542 | Debtors asserted the Corvette was exempt and not subject to turnover | Because §522(g) bars the exemption and the vehicle is estate property, turnover is proper | Turnover ordered: vehicle is estate property and not exempt under §522(g), so Trustee entitled to turnover |
Key Cases Cited
- Spenler v. Siegel, 212 B.R. 625 (9th Cir. BAP 1997) (pleadings not styled as "objection to exemption" may suffice under Rule 4003(b) if they timely give notice and basis)
- Glass v. Hitt (In re Glass), 60 F.3d 565 (9th Cir. 1995) (trustee may “recover” property for §522(g) purposes without formal adversary by taking action that induces reconveyance)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (U.S. 1992) (timeliness of exemption objections under Rule 4003(b))
- Sutton (In re Sutton), 365 B.R. 900 (8th Cir. BAP 2007) (distinguishing cases where no authenticated security agreement existed and thus no transfer/attachment occurred)