In Re Wolf
- Reporters:
- , , ,
- Before:
- Shapero
OPINION ON THE ISSUE OF TIMELINESS OF THE TRUSTEE’S OBJECTION TO DEBTOR’S EXEMPTION
WALTER SHAPERO, Bankruptcy Judge.
Debtor filed an individual Chapter 11 proceeding on January 23, 1997. At the
*755
time of the filing the Debtor claimed certain exemptions (the principal ones being Debtor’s home and a pension plan). A § 341 hearing was held and concluded on February 25, 1997, and no objections to the exemptions were filed within the following thirty (30) day period provided for such under
The threshold issue is whether or not the objection of the Trustee was timely. That depends on whether there is a second period within which exemptions can be objected to after a case has been converted from an individual Chapter 11 case to a Chapter 7 proceeding. The Trustee argues yes and the Debtor no. The arguments for either result are aptly stated in In re Havanec, 175 B.R. 920, 922-24 (Bankr.N.D.Ohio 1994) (yes) and In re Ferretti, 230 B.R. 883, 886-91 (Bankr.S.D.Fla.1999) (no) and cases cited therein which need not be repeated in full. There is a fairly even split of legal thinking on the issue at least as noted by the cases cited in the briefs of thе parties. 1 In Havanec, the conversion was from a Chapter 11 to a Chapter 7, whereas, in Ferretti, the conversion was from a Chapter 13 to a Chapter 7. See 175 B.R. at 921; 230 B.R. at 884. Whether or not this makes a difference will be discussed.
The provisions at issue include § 348(a) of the Code, which states that “[cjonversion of a case ... constitutes an order for relief.”
The principal arguments advanced by the Trustee depend on finding that
is not universal, but of limited, use and application. It is an aid to construction, not a rule of law. It is not conclusive, is applicable only under certain conditions, is subject to exceptions, may not be used to create an ambiguity, requires great caution in its application ... [and] is applied only to assist in arriving at the real intention оf the lawmakers, where such is not manifest. It may not be used to defeat or override clear and contrary evidences of legislative intent.
73 Am.Jur.2d
Statutes
§ 212 at 405-06 (1974) (citations and footnotes omitted). Thus, the failure to affirmatively provide a new filing period for objections to exemptions in
Assuming, for purposes of argument, that the maxim is of equal force in interpreting a
rule
as it is a statute, its application here requires a closer look.
Additionally and importantly, it should be noted that all three of the referred to “new time period” situations set forth in
Aside from the fact that time limitations on the filing or initiation of actions are often treated more inflexibly than time limits for answers or responses, there is another maxim of construction that is also arguably applicable. That is the maxim that where there is ambiguity or conflict the warring provisions should be construed, if at all possible, in a way that gives them both effect. In this Court’s view
If one is not persuaded by the foregoing, the policy arguments advanced by the Trustee, on balance, dictate a similar result. The Trustee asserts policy arguments that were rejected by Judge Sehermer in
Ferretti,
but largely on the basis they were considerations not applicable to a conversion from a Chapter 13 case (which that case involved). First, Judge Sehermer pointed to the fact that the 1994 amendments to § 348(f)(2), relating to the effect of a convеrsion of a Chapter 13 case, “eliminates the policy concern that debtors may use conversion to abuse the bankruptcy process.”
Ferretti,
230 B.R. at 889. Second § 348(f)(1), which covers only a conversion from a Chapter 13 case, sets “the relevant date for determining property of the Chapter 7 estate after conversion from Chapter 13[as] the original filing date.”
Id.
In those cases in which policy considerations are deemed material and rеlevant to the result, the
Ferretti
court noted that, in a Chapter 13 case particularly, the issue of exemptions is important at the outset. This is primarily because § 1325(a)(4) requires a showing that creditors will receive more under the Chapter 13 plan than under a Chapter 7 liquidation.
Id.
at 890. In making that determination, exempt property is eliminated from consideration, so what truly is or is not exempt becomes crucial. Thus, the standing Chapter 13 Trustee, and creditors, are required to focus early and importantly on the issue of exemptions, the determination of which is essential to confirmation and satisfaction of § 1325(a)(4). Indeed in this district the model plan in general use includes a liquidation analysis with separate column(s) setting forth exempt items and values. Under our local rules, debtors must file the Chapter 13 plan when the petition is filed (and thus well
before
the § 341 hearing conclusion date from which the thirty day period to object to exemptiоns is calculated). This is generally consistent with the national rule requirement that the plan be filed no later than fifteen days after the petition.
See
This Court agrees with that part of
Fer-retti
as to the place and relative importance of exemption considerations in the
Chapter IS
pre-confirmation setting. This case, however, involves a conversion from a
Chapter 11
case. Contrasted with the situation in a Chapter 13 case, the Chapter 11 debtor (individual or corporate) has the exclusive right to a file a plan for 120 days after the order for relief. Furthermore, the 120 day period is very often extended. Meanwhile, the § 341 meeting is required to have been held no later than forty days after the order for relief.
See
To conclude otherwise and in favor of the Chapter 11 debtor would also in practice and reality require some sort of protective filing of objections to exemptions by some party in interest in absolutely every single individual Chapter 11 case. Such objections would have to be filed at a time when (1) there is no real trustee; (2) it is unreasonable to expect a debtor-in-possession to object; (3) there is no factual basis or context necessary for determining’ whether such an objection is justified; (4) thе only persons really who might have an interest in objecting, or the right to do so, are a creditor body, ninety-nine percent of whom do not attend the § 341 meeting, and thus have no idea what occurred there or what is in the debtor’s schedules (including claimed exemptions); and (5) a creditors’ committee, if one is even formed, would likely not be in place nor represented, nor be in a position to deal with the exemption objection issue by the objection deadline date. Such a result neither makes sense nor is mandated by the rules.
Debtor argues that a debtor, as early as possible in the administration of the case, must be afforded some finality as to his affairs. Debtor also notes a potential pitfall, where a debtor could easily conclude. (after the thirty (30) day objection period ran during the Chapter 11 phase of the case) that he or she was then free to dispose of his or her exempt property, and the complications that might arise if it turned out later during the Chapter 7 period that the property in fact was not exempt. The reasoning and analysis underlying the argument is set forth in In re Brown, 178 B.R. 722 (Bankr.E.D.Tenn.1995). That court first questioned the concept that creditors should be given a second chance to object to exemptions, “because it is not normal for them to worry much about exemptions in Chapter 11s.” Brown, 178 B.R. at 726. Instead, the court noted that “the usual legal rule is that parties in interest in any case must know the law and foresee its consequences or suffer them.” Id. The court then went on the point out the “widespread agreement that the effect of an exemption is to remove property from the bankruptcy estate and to vest it in the debtor.” Id. The Brown court concluded, in light of the Supreme Court ruling in Taylor v. Free-land & Kronz, that “[tjherefore, unless there is some mechanism for the debtor’s property to reenter the bankruptcy estate upon conversion, it would seem thаt exemptions in the Chapter 11, once considered final and unobjectionable under the rule in Taylor, must be considered final and unobjectionable in the converted case-as well.” Id. at 727 (relying on Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992)).
*760 This Court disagrees, for a number of reasons. First, as noted, this Court believes that there is insufficient ambiguity-in the applicable rules to even bring into play either policy arguments, or the rather technical arguments about when exempt property was or is property of the estate, in order to achieve what otherwise appears to be an undesirable result. Second, to the extent they do or influence the result, the policy arguments on balance, favor the Trustee’s position. Third, individual Chapter 11 cases (the only type in which exemptions can potentially be an issue) are infrequent and it seems doubtful that the framers of the applicable rules wrote them with such cases in mind. Fourth, if a Chapter 11 individual debtor had in faсt disposed of exempt property, the impact on third parties whose rights thus acquired might be adversely affected, such might legitimately be something to consider. That apparently is not the case here, however, and this Court believes that the theoretical possibility of such occurring is not sufficient to outweigh the clearer, more realistic and practical arguments in favor of the Trustee’s position. Fifth, if third party rights were involved, the more apрropriate remedy would be a balancing of a trustee and a third party’s rights in a specific factual setting rather than on the wholesale basis that Debtor seeks here. Sixth, the concept expressed in Broim that parties must know the law and foresee the consequences at their peril, can be similarly applied to a Chapter 11 debtor who, like this one, never filed a plan and never filed a disclosure statement (or who may file such but never еven attempt to have them approved or confirmed and thus never serves them on the parties in interest). The likelihood that such a case would eventually be converted (or dismissed) is sufficiently and comparatively high (i.e.; the likelihood of such “consequences”) as to minimize Debtor’s theoretical concerns about either finality or disposition of property claimed exempt. Third parties who deal with a debtor are on notice оf these possible issues, particularly when acquiring property from a debtor which in most instances in an individual Chapter 11 situation would likely require court approval anyway. Finally, the statement in Brown in a sense begs the question. The question is — what is the law, the consequences of which creditors or parties in interest (and the debtor) should foresee at their peril? If the law turns out to be what this Court concludes, individual Chapter 11 debtors will know their claimed exemptions will not be finalized until after confirmation, dismissal or сonversion — a result that does not appear to impose an undue hardship on a debtor or elevate proper regard for finality over other, more important, considerations.
Finally, it would clearly not be appropriate to have the result determined on the basis of some factual showing that, in a particular individual Chapter 11 case, the issue of exemptions somehow was at the forefront and in the minds of the interested pаrties from the very beginning, and therefore in that situation, the result should be decided in favor of the debtor. This issue demands a bright line rule because we are dealing with critical time limits, the potential rights of third parties, and matters clearly impheating the efficient administration of bankruptcy eases, particularly those converted after some prior, often substantial, period of administration, as well as the potential rights of third parties.
Accordingly, for the indicated reasons the Court concludes that the Trustee timely filed his objections to Debtor’s exemptions and the matter should proceed to a full hearing on the substance of those objections.
Notes
. Interestingly, of the six or so cited cases favoring debtor‘s position, two were Chapter 13’s converted to Chapter 7, and four were Chapter ll‘s; of the six or so cited cases favoring the trustee‘s position, the same division was true.
. In this connection one is rеminded of the somewhat analogous controversy under *757 § 546(a) involving whether or not a debtor in possession is considered a “trustee” for purposes of those time limitations. This Court was among those concluding that a Chapter 11 debtor in possession should not be considered a “trustee,” partially on policy considerations not dissimilar to those involved in this case. See Everlock Fastening Systems, Inc. v. American Steel and Wire Corp. (In re Everlock Fastening Systems, Inc.), 1993 WL 739640 (Bankr.E.D.Mich.1993).
. In this district about one in ten Chapter 13 cases are converted to a Chapter 7; and, about one in twenty-two Chapter 11 cases are filed by individuals and most of those individual cases are eventually converted to Chapter 7 cases. The raw numbers are small (i.e. in the first eleven months of 1999, 117 Chapter 11 cases were filed of which five were individuals). The Court is also advised that during the last three years or so, some 480 Chapter 11 cases were filed; 142 were confirmed, 113 were converted and 125 were dismissed and 100 are still pending. Of the 142 that were confirmed, only five were individual cases.