In re Chambers
RULING ON TRUSTEE’S OBJECTION TO EXEMPTION AND DEBTORS’ MOTION FOR AUTHORIZATION TO USE, TRANSFER AND/OR DISPOSE OF EXEMPT ASSETS
Thеse matters came on for hearing in Cedar Rapids, Iowa. Derek Hong ap
STATEMENT OF THE CASE
This case is about whether Debtors’ voluntary transfer of potentially fully exempt property-while it is still property of the estate—destroys Debtors’ ability to claim the exemption. Trustee argues that it does. Trustee argues that 11 U.S.C. § 522(g) bars the exemption because Debtors voluntarily transferred the property. Trustee also argues that, because Debtors transferred the property, there is now nothing to return to Debtors as exempt. Debtors argue that exemptions are determined as of the petition date. Debtors also argue that transfer of fully exempt property, even though technically property of the estate, was harmless to the estate. Debtors assert that this transfer is like every debt- or’s routine use of exempt food and clothes post-petition. Debtors also ask the Court for retroactive authorization to use the property. Trustee argues that the Court does not have the authority to authorize Debtors’ transfer of the property.
UNDISPUTED PACTS AND ARGUMENTS
The facts in this case are not in dispute. In April 2016, Mrs. Chambers received a $29,964 personal injury award because of a motorcycle accident. Debtors deposited $13,000 of this award into Roth IRAs and used the remainder to pay for living expenses.
At about 12:45 PM on May 5, 2016, Debtors filed this Chapter 7 bankruptcy. Later that same day, at about 4:58 PM, Debtors withdrew the funds from both IRAs and transferred the money into their checking account. The next day, Debtors paid $12,575 from these funds to TRG as a down payment on a house and a first month’s mortgage payment. They used the remaining $425 to pay for living expenses.
On May 18, almost two weeks after filing, Debtors filed their bankruptcy schedules. On their schedules, Debtors claimed as exempt the full $13,000 value of their IRAs, which they had already liquidated and transferred to TRG. Debtors also used, spent, or otherwise disposed of other exempt food, clothes, gasoline, and cash after filing, as many debtors do.
Trustee objected only to Debtors’ IRA exemption claim. Trustee argued that these exemptions exceeded their respective maximum exemption amounts for 2016 under Iowa Code § 627.6(8)(f). Trustee arguеd that $1,625 of Mr. Chambers’ Roth IRA was not exempt because Mr. Chambers had only earned $3,875 in 2016 when he filed his bankruptcy petition. Trustee concluded that Mr. Chambers thus was not entitled to make the full $5,500 annual contribution for 2016. Trustee urged this argument at the hearing and in her initial brief. In their brief, Debtors responded that, under the relevant tax provisions, contributions are limited to an individual’s gross income for the taxable year—not year-to-date—with a thorough analysis. In her reply brief, Trustee did not respond to these arguments. Given Debtors’ thorough brief on this issue, the Court will view the Trustee as having conceded this issue. See W. Heritage Ins. Co. v. Love, No. 4:13-CV-0034-DGK,
Trustee notes that, even if the IRAs were fully exempt when Debtors filed
Debtors argue that exemptions are determined as of the petition date. Debtors argue that whatever happened after filing is irrelevant. Debtors argue that they did not need authorization to transfer the IRAs before the time for objections to exemptions had run. Debtors reason that, in every case, debtors use, spend, or dispose of their exempt property before the deadline and that the IRAs in this case are no different. Debtors argue that, if the Trustee is correct, debtors will have to file first day motions seeking authorization to use their fully exempt assets to survive. Debtors argue that this cannot be the proper interpretation of the Code’s exemptiоn provisions. Debtors argue that, as a practical matter, their transfer of the IRA funds was harmless because the funds were fully exempt and would have been returned to them after the deadline for objecting to exemptions if they had not made the transfer. In short, they argue that their transfer did not deprive the estate oj: value that rightfully belonged to it.
TRG also appeared, argued, and filed a brief on this issue. TRG argues that § 522(g) does not apply if the Trustee has not yet recovered the property under § 550. TRG argues that property that is exempt on the petition date is not recoverable under § 550 anyway. TRG argues that the Cоurt should determine whether the property is exempt before determining whether the transfer of that property is avoidable.
Debtors further argue that even if they do need authorization to transfer exempt assets before the time for objections runs, the Court should retroactively authorize their transfer of the IRA funds to TRG. Trustee argues that the Court does not have the power to do so. Trustee argues that only she can authorize a transfer of estate property.
TRG argues that the Court should treat Debtors’ motion for authorization as a motion to compel abandonment. Trustee argues that TRG cannot requеst this relief because it is not a party in interest. Trustee claims she cannot abandon the IRAs because the Debtors already transferred them.
CONCLUSIONS OF LAW AND'ANALYSIS
This case involves a number of complicated and important issues about the interplay of exempt property, estate property, debtors’ duties, and trustees’ rights. At its core, this case is about whether debtors who voluntarily transfer exempt property before it reverts to them as exempt lose
I. Property of the Estate and Exempt Property
“Chapter 7 of the bankruptcy code provides a means for insolvent debtors to receive a ‘fresh start.’ ” CRP Holdings, A-1, LLC v. O’Sullivan (In re O’Sullivan),
“To ensure that debtors have sufficient property to realize fully that fresh start, the code permits debtors to exempt certain property from their bankruptcy estate.” In re O’Sullivan,
When evaluating an objection to a debtor’s exemption claim, “Only the facts existing on the date of filing are relevant” to the analysis. In re Peterson,
As a general rule, after debtors file bankruptcy, and before the time for objections expires (under Rule 4003(b), 30 days after debtors filed their exemptions), debtors’ exempt property is still property of the estate and they technically have no absolute right to use it. In re Bucchino,
In spite of this general rule, debtors nevertheless routinely use, spend, and dispose of exempt property before it actually reverts after the objection period passes. The following case explains this reality and debtors’ duties with respect to such property:
In reality, chapter 7 debtors continue to use property of the estate post-petition. The debtor continues to live in his home, cook his food in his рots and pans, wear his clothing, drive his car, and watch programs on his expensive flat screen television. Is this post-petition use prohibited? Section 521(a)(4) sets forth a chapter 7 debtor’s obligation in regard to property of the estate at the outset of a case. It requires a debtor to surrender to the trustee all property of the estate and any records whenever a trustee is serving in the case.
[T]he duty of surrender implies a yielding or offering of property of the estate to the trustee, in recognition of his superior rights, as well as a ready willingness to deliver it, either physically or in whatever manner is necessary to transfer rights in the type of property interest at issue. This further “delivery” obligation, however, is triggered by a request or an agreement with the trustee to effectuate the transfer of the property.
On the petition date, legal title to assets of the estate vests in the trustee immediately by operation of law, but actual transfer or delivery may not take place for some period of time. In the case of property that eventually becomes exempt or that is burdensome or of inconsequential value to the estate, the transfer or delivery may never take place. On the other hand, if the trustee makes a request for delivery and the debtor fails to comply, then the trustee may utilize § 542(a) to obtain a court order for turnover, as the debtor is included within the scope of the Code’s definition of an “entity” that may be compelled to turnover property.
Unless and until, however, a debtor has received the request for delivery, he has fulfilled his obligation to surrender his property to the trustee by listing it accurately, as required by § 521(a)(1), and standing ready to deliver it upon request. If his continued use or possession in the meantime diminishes its value or the estate’s rights in and to it, then he may be liable to compensаte the estate for its “value.”
In re Trujillo,
Similarly, debtors routinely spend exempt funds in their bank accounts to pay for living expenses:
As a practical matter, individual chapter 7 debtors who claim funds on deposit in a bank account as exempt often use those funds when there is no reasonable basis to object to the exemption in order to pay ordinary and necessary living expenses despite the fact that such funds constitute property of the estate until the time to object to the claim of exemрtion expires. Use of funds claimed as exempt in the debtor’s bank account pri- or to that time often can be critical to a debtor making a mortgage or car payment, buying food or medicine, or paying a utility bill .... Because the value of the funds in a bank account is readily quantifiable, and funds can be claimed exempt up to specified dollar limits, usually no party in interest, including the Chapter 7 Trustee, objects to the claimed exemption or to the debtor’s use of the funds before they are exempt. No harm results to the estate from the debtor’s use of funds prior to the allowance of the claimed exemption because the exemption is nearly always allowed as a result of the expiration of the time to object to the claim of exemption.
In re Bucchino,
Here, Debtors transferred IRA funds while the funds were still technically property of the estate. The time for objections to exemptions had not run. Trustee now concedes that the IRAs met the relevant requirements to be fully exempt when Debtors filed bankruptcy. In spite of the general rule outlined above—that use of fully exempt property of the estate is harmless—Trustee argues that Debtors’ transfer of the IRA funds destroyed Debtors’ exemption in those funds. Trustee bases this argument on the interplay between §§ 549(a), 550, and 522(g). Section 549 provides:
(a) ... the trustee may avoid a transfer of property of the estate— -
(1) that occurs after the commencement of the case; and
(2) ...
(B) that is not authorized under this title or by the court.
11 U.S.C. § 549(a). Section 550 provides:
(a) ... to the extent that a transfer is avoided under section ... 549 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer
11 U.S.C. § 550(a). Trustee has already filed an adversary proceeding against TRG seeking to avoid the transfer under § 549(a) and recover it under § 550. Trustee argues that under the specific terms of § 522(g), when debtors voluntarily transfer property of the estate and the trustee could recover it, debtors cannot claim an exemption in that property:
the debtor may еxempt ... property that the trustee recovers under section ... 550 ... to the extent that the debtor could have exempted such property ... if such property had not been transferred, if—
(1)(A) such transfer was not a voluntary transfer of such property by the debtor
11 U.S.C. § 522(g). Trustee objects to Debtors’ exemption based on this statutory language and Debtors’ voluntary transfer.
Generally speaking, § 522(g)’s purpose is “to allow an exemption where a property interest has been involuntarily taken from a debtor by means such as an execution, repossession or certification of judgment, [because] it would be inequitable not to permit a debtor to assert an otherwise allowable exemption.” In re Ringham,
By its terms, howevеr, § 522(g) is not limited to pre-petition transfers. Courts have applied it to post-petition transfers, concluding that debtors cannot exempt property that' they voluntarily transferred post-petition that the trustee has subsequently recovered for the estate. See, e.g., In re OBrien,
One case addressing § 522(g) in the context of pre-petition transfers does contain some language that appears to contradict this recovery requirement: “The Trustee cites several cases which hold that the Debtor’s claim of exemption may be disallowed under 11 U.S.C. § 522(g) even though the Trustee has not brought an adversary proceeding and recovered the property.” In re Kelley,
Here, Trustee has not recovered the property. Trustee has simply filed an avoidance action. The Court has stayed Trustee’s avoidance action pending its ruling on the exemption issue. It is undisputed that Trustee has not actually recovered the property for the estate. The funds remain with TRG. Because Trustee has not recovered the property, § 522(g) does not apply and cannot bar Debtors’ exemption.
The Court notes that order in which it decides these related issues— whether it starts with the Trustee’s objection to exemption based on § 522(g) or the Trustee’s § 549(a) adversary—clearly has consequences. Had the Court addressed Trustee’s avoidance action first and ruled that Trustee was entitled to recover the IRA funds, § 522(g) would probably bar Debtors from exempting the property. One Court addressed this situation and found that courts generally should rule on the exemption issue first:
When an action to avoid or recover' a post-petition transfer is filed, it is prudent for the court to first determine whether the property has been properly exempted by the debtor or not. When an amended еxemption is pending, and a trustee’s timely objection needs to be litigated, the exemption determination should be made prior to the post-petition transfer litigation. Although the trustee will be a party in the contested exemption determination and the post-petition transfer adversary proceeding, the other parties will differ. (The debtor is a party to the exemption matter; a non-debtor transferee is a party to the post-petition transfer adversary proceeding.) Before it is determined whether an avoidable post-petition transfer has occurred, it must be known whether the transfer involvеd property of the estate. (In thepost-petition transfer action itself, often this cannot be litigated because the transferee cannot assert the debtor’s personal exemption rights.) Of course, after a trustee avoids a transfer, a recovery is awarded or a turnover is ordered, only then is it “too late” for a debtor to exempt the property.
In re Obrien,
III. Trudell and other cases
Trustee also argues that Debtors’ transfer of the IRA money before it reverted to them as exempt was a transfer of nonexempt estate property and there is now nothing left to return to Debtors as exempt. Trustee argues this case is like In re Trudell,
In Trudell, debtors spent what would have been a fully exempt tax refund post-petition while the funds were still property of the estate. Id. at 788. Trustee argued, among other things, that debtors could not exempt the tax refund because they had already spent it. Id. at 788-89. The Court agreed and used the example of a potentially exempt vehicle to illustrate its reasoning:
[Tjhe exemption is not accomplished— i.e., the interest in the vehicle is not removed from the estate and returned to the debtor for his enjoyment—until all parties in interest, including thе trustee, have had an opportunity to object. Therefore, it follows that if the debtor were to have transferred what is now the estate’s interest in his car either before the trustee had an opportunity to object or while the trustee’s objection was pending, then there is nothing to return to him as exempt when the process is completed. Moreover, as Trustee also points out, property that has been voluntarily transferred from the estate but then recovered as a post-petition transfer is no longer eligible for exemption, Cfi 11 U.S.C. § 522(g).
Id. at 793 (footnote omitted) (citation omitted). The Court agreed with Trustеe and concluded, “[Tjhe Trudells no longer have anything to exempt.” Id. at 794. The Court did not sustain the Trustee’s exemption, however. Id. Instead, it found that:
the appropriate relief in this instance is ... simply a recognition that Trustee’s objection has been rendered moot by the Trudells’ premature expenditure of the refund claimed. Indeed, it is fair to ask why the court even needed to address Trustee’s actual objections to the exemptions claimed given that the refunds are no longer part of the estate and would not be exemptible even if they are ultimately recovered.
Id.
This Court declines to follow the reаsoning of Trudell. Trudell rejects the two things established in the rationale above. First, Trudell seems to suggest that the estate, is in fact harmed in some way by allowing property to be treated as exempt before the time for objecting to exemptions has passed. The Court rejected that reasoning in Section I, finding that Debtors’ use of fully exempt property here, while it was still technically property of the estate, is harmless.
Second, Trudell’s analysis applies § 522(g) even though Trustee did not recover the property. This Court concluded in Section II that .the Trustee must actually recover the property for § 522(g) to aрply.
The Court in Obrien addressed Trudell and a case that followed Trudell (In re Davidson, Bankr. No. 10-00374,
Both of these opinions seem to state that if a debtor makes a post-petition transfer of property, and a trustee could seek to avoid and recover the transfer (even if the trustee has not actually filed or completed an adversary proceeding to do so), a debtor is legally prohibited from exempting the property. The opinions seem to say that what a trustee could do (i.e., avoid a transfer) is treated as accomplished.
In re OBrien,
Trustee also cites In re Villegas to support her argument that Debtors lost their potential exemption in the IRA funds when they transferred them post-petitiоn. In re Villegas.
Trustee cites other cases that have denied debtors’ exemptions when debtors dispose of property of the estate before it reverts to them as exempt. In these cases, however, the offending transfer was accompanied by bad faith—such as undervaluing, fraud, or concealment. E.g., In re Price, Bankr. No. 05-42744,
The Court concludes that Debtors did not lose their exemption in the IRA funds when they transferred them to TRG post-petition. Debtors’ IRA funds are exempt. The Court overrules Trustee’s objection to exemption.
IV. Authorization
This ruling does not change the fact that the funds were technically property of the estate when Debtors trans
Debtors note that trustees can avoid a post-petition transfer only if the transfer is “not authorized under this title or by the court.” § 549(a) (emphasis added). Debtors argue that this indicates that the Court can in fact authorize post-petition transfers. Debtors argue that because there was no harm to the estate (their use of the IRA funds was no different from their use of their exempt food, cash, or clothes) the Court should use its power under § 105 to authorize their transfer of whаt was technically estate property to TRG.
Trustee objects. Trustee argues that the Court does not have the power to authorize Debtors’ transfer. Trustee argues that § 363(b)(1) gives her and only her authority to “use, sell, or lease ... property of the estate,” such that the Court cannot authorize a transfer of exempt property of the estate. Trustee also argues that allowing debtors to dispose of property of the estate before the property reverts will result in debtors abusing the bankruptcy process.
Bankruptcy courts have authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code. § 105. Bankruptcy courts’ power under § 105 is limited, however: “it is quite impossible to [carry out the Code’s provisions] by taking action that the Code prohibits.” Law,
At least one Court has found that § 549 itself gives courts power to authorize transactions—such • as preferential payments—that the Code would otherwise prohibit debtors from making:
[SJection 549 authorizes a Chapter 7 trustee to set asidе only those post-petition payments of pre-petition obligations that are “not authorized under this title or by the court.” Thus, the Code recognizes that the court has some limited power to authorize preferential treatment to certain creditors. The question is when it is appropriate to exercise that power.
In re Payless Cashways, Inc.,
The Court adopts thе reasoning from Payless Cashways. The Court finds that it has authority to authorize post-petition transfers of exempt property of the estate under §§ 105 and 549. Unlike preferential transfers, authorizing the transfer here would not violate the principle behind any critical code sections. At most, the transfer violated a technicality: the property had not yet reverted to Debtors as exempt. As the Court noted in Section I, every debtor uses her exempt food, clothes, and cash while they are property of the estate. This use of what is temporarily estate property
The Court finds that authorization is appropriate here because there is no harm to the estate. It is undisputed that the transfer would have been entirely appropriate if the objection period had lapsed. It is similarly undisputed that the Trustee had no real basis for objecting to the exemption. Trustee’s position would benefit the estate at the expense of Debtors on a technicality and deprive them of a valuable right that the estate otherwise had no claim to.
The Court finds that, in light the harmlessness of Debtors’ use of their fully exempt property, retroactive authorization of the transfer is appropriate under §§ 105 and 549.
CONCLUSION
WHEREFORE, Trustee’s Objection to Exemption is OVERRULED.
FURTHER, Debtors’ Motion for Authorization to, Use, Transfer and/or Dispose of Exempt Assets is GRANTED.