MEMORANDUM DECISION ON CHAPTER 7 TRUSTEE’S OBJECTIONS TO DEBTOR’S CLAIM OF EXEMPTIONS
Debtor Isaías Arellano filed a chapter 7
At the initial section 341(a) meeting, however, new information came to light. The Debtor, in response to questioning, identified additional personal property assets not previously disclosed. As a result, the Debtor amended his schedule B to add a сredit union checking account with a balance of $4,958.65 and an anticipated tax refund of $2,000 based on an amended 2011 income tax return. Concurrent with scheduling the omitted assets, the Debtor modified his schedule C and claimed the omitted assets exempt pursuant to California Code of Civil Procedure (“CCP”) § 703.140(b). The Debtor also paid the filing fee in full notwithstanding the fee waiver order.
Debtor’s chapter 7 Trustee objected to the Debtor’s newly claimed еxemption of the omitted assets. As relevant here, he based his objection on the Debtor’s alleged bad faith. Through his counsel’s declaration, the Debtor opposed and contested the allegations of bad-faith.
DISCUSSION
The Bankruptcy Code authorizes a debtor to exempt certain assets. 11 U.S.C. § 522(b). The debtor’s exercise of this right directly impacts creditors as exempt assets are not available for payment of either pre-рetition claims or administrative expenses. 11 U.S.C. § 522(c), (k). Notwithstanding, the Bankruptcy Code allows a debtor significant latitude in selecting assets for exemption. The debtor also has significant flexibility in the timing of an exemption claim. Under Rulе 1009(a), a debtor may amend his or her schedules, including to add or alter claimed exemptions, as a matter of course at any time prior to the closing of the case. See also Tyner v. Nicholson (In re Nicholson),
In the Ninth Circuit, however, a judicially created limit on this latitude and flexibility arose. It was accepted that a bankruptcy court could deny leave to amend or disallow a claimed exemption if the trustee or other party in interest timely objected and showed thаt either: (1) the debtor acted in bad faith; or (2) the creditors were prejudiced. Martinson v. Michael (In re Michael),
The United States Supreme Court’s recent decision in Law v. Siegel, — U.S. -,
The Court acknowledges that tension between the Supreme Court authority and prior circuit precedent is not enough to require rejection of otherwise binding circuit authority. Instead, the Supreme Court must have undercut the theory or reasoning underlying the prior circuit precedent in such a way that the cases arе clearly irreconcilable. See Rodriguez,
In Law v. Siegel, the Supreme Court held that the bankruptcy court exceeded both its statutory and equitable powers when it permitted the surcharge of Mr. Law’s homestead exemption to pay administrative expenses incurred as a result of Mr. Law’s misconduct.
The Supreme Court reversed. At the outset, it determined that surcharge was “unauthorized [as] it contravened a specific provision of the Code.” Id. аt 1195. The Supreme Court first observed that section 522 and California law entitled Mr. Law to exempt equity in his home. Id. Second, it noted that section 522(k) expressly prohibited the use of exempt property for the payment of administrаtive expenses. Id. As the attorneys’ fees incurred by the trustee were “indubitably an administrative expense,” the Supreme Court concluded that the bankruptcy court violated section 522 by ordering the surcharge to pay such fees. Id.
The Supreme Court also rejected the argument that a bankruptcy court’s exemption denial when based on its equitable powers, whether arising under section 105(a) or its inherent authority, could “comfortably coexist” with the Bankruptcy Code. See id. at 1195-97. Observing first that nothing in section 522 gave the bankruptcy court “discretion to grant or withhold exemptions based on whatever considerations [it] deem[s] appropriate,” the
The Supreme Court further determined that section 522’s thorough enumeration of exemptions — and exceptions to exemptions — “confirm[ed] that сourts are not authorized to create additional exceptions.” Id. (emphasis added). It, thus, emphatically rebuffed the .theory that the general, equitable powers of the bankruptcy court somehow conferred a basis for exemption denial based on a debtor’s bad-faith conduct, resolving that the “Code admits no such power.” Id. In doing so, it effectively abrogated three circuit court cases, including In re Doan. See id.
Thus, in Law v. Siegel, the Supreme Court made clear that where the Bankruptcy Code is silent, the only basis for dеnial of a state law exemption must arise under state law. See id. at 1196-97. And, the Supreme Court emphasized that “federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.” Id. at 1197 (emphasis in original).
Finally, the Supreme Court noted that there is no real distinction between disallowing or denying an exemption and barring a debtor from amending
The Court, thus, determines that its ability to disallow the Debtor’s claimed exemptions in the omitted assets — whether indirectly by denying leave to amend to include a new exemption or directly by disallowing the exemption itself — when based solely on its equitable powers and the existence of bаd-faith or prejudice is clearly irreconcilable with Law v. Siegel. First, it is reasonably assumed that the Trustee seeks an order denying the exemption so that the omitted assets are available for payment of administrative or prе-petition unsecured claims. Thus, dis-allowance of the exemption in the omitted assets would result in contravention of specific language of section 522(c) and (k). This is actually the same result that the Supreme Court found improper in Law v. Siegel.
Second, the only authority for disallowing the Debtor’s claimed exemption in the omitted assets is the bankruptcy court’s equitable powers. See In re Nicholson,
The Court’s conclusion is strengthened by Law v. Siegel’s effective abrogation of In re Doan. The Ninth Circuit in In re Michael adopted the bad-faith or prejudice exception to debtor exemptions from Doan. See
To be clear, Law v. Siegel did not deprive this Court of the essential authority to respond to the Debtor’s misconduct, if and when established, with meaningful sanctions. The Trustee’s present objections to the claimed exemptions, however, cannot stand as a form of sanction when based on the Court’s equitable powers. Such a sanction would enlarge the source of payment for administrative or unsecured claims in a manner directly contrary to section 522(c) and (k).
Further, as Law v. Siegel explained, the Code provides for no such grounds for exemption denial. Thus, any objection to these CCP § 703.140(b) exemptions must arise under California law. See Law v. Siegel,
CONCLUSION
For the foregoing reasons, the Trustee’s objections to the Debtor’s claimed exemptions are OVERRULED.
Notes
. Unless otherwise indicatеd, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All "Rule” references are to the Federal Rules of Bankruptcy Procedure.
. Moreover, the term "leave to amend” is inapt; аs stated under Rule 1009, a debtor may amend a claimed exemption as a matter of course, without requesting leave to amend from the bankruptcy court. This is in contrast to the rule in the past that required application for leave to amend a petition or schedule. See General Order 11, General Orders and Forms in Bankruptcy of the United States Supreme Court (1939) (abrogated 1973). Thus, while at one time a material difference between amending a debtor’s claim of exemptions and denying an exemption may have existed, it long ago became a distinction without a difference.