In re: Stuart M. Starky and Cheryl M. Starky
AZ-14-1106-DJuKi
| 9th Cir. BAP | Dec 8, 2014Background
- Debtors Stuart and Cheryl Starky filed Chapter 7 on Oct. 8, 2012 and claimed exemptions in two 529 plans and two SunAmerica educational accounts.
- Debtors initially disclosed only two Chase bank accounts but actually had eight Chase accounts; six were undisclosed until amended schedules in May 2013.
- Trustee filed an Exemption Objection (Dec. 4, 2012) requesting documentation to verify the exemptions and a Notice of Bar Date; Debtors did not timely respond and the court entered an Exemptions Order (Feb. 20, 2013) ordering turnover.
- Trustee then sought turnover and an accounting (Turnover Motion) and moved to employ counsel; after demands and discovery (including Rule 2004 exams), Debtors amended schedules and contested turnover, arguing some accounts were not estate property and that an adversary proceeding was required.
- After extended briefing and hearings, the bankruptcy court ordered turnover of $1,000 from the 529 plans, denied relief from the Exemptions Order, and awarded the Trustee’s reasonable attorneys’ fees and costs against the Debtors; Debtors appealed.
Issues
| Issue | Appellants' Argument | Trustee/Respondent's Argument | Held |
|---|---|---|---|
| 1) Did Trustee breach duty to investigate before seeking turnover? | Debtors: Trustee failed to request documents until July 2013, violating §704 duties. | Trustee: Debtors failed to cooperate and supply documentation; precautionary objection filed timely; trustee acted appropriately. | Court: No breach — trustee’s early objection and requests were proper; debtor’s noncooperation was primary problem. |
| 2) Was an adversary proceeding required (Rule 7001(2))? | Debtors: Property-of-estate determinations require an adversary proceeding. | Trustee: An uncontested Exemptions Order and Rule 7001(1) exception allowed turnover by contested matter; no prejudice to Debtors. | Court: No adversary required; even if arguable, any error was harmless due to notice and opportunity to be heard. |
| 3) Were attorney fees awarded to Trustee unreasonable? | Debtors: Fees/costs are excessive and trustee’s conduct contributed to delay; award improper. | Trustee: Fees were reasonably incurred to investigate and recover estate assets; itemized billing provided. | Court: No abuse of discretion — Debtors waived detailed challenges and fees were reasonable given Debtors’ conduct. |
Key Cases Cited
- Cal. Emp. Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147 (9th Cir. 1996) (standard of appellate review for fee awards)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (deadlines for objections to exemptions produce finality)
- Schwab v. Reilly, 560 U.S. 770 (2010) (assets become estate property subject to claimed exemptions)
- Cogliano v. Anderson (In re Cogliano), 355 B.R. 792 (9th Cir. BAP 2006) (Rule 7001(2) requires adversary unless waived or harmless error)
- Korneff v. Downey Reg’l Med. Ctr.–Hosp., Inc. (In re Downey Reg’l Med. Ctr.–Hosp., Inc.), 441 B.R. 120 (9th Cir. BAP 2010) (harmless error analysis for failure to require adversary)
- USA/Internal Revenue Serv. v. Valley Nat’l Bank (In re Decker), 199 B.R. 684 (9th Cir. BAP 1996) (procedural requirements and harmless error in property disputes)