Lead Opinion
This is an appeal from an order of the bankruptcy court
I. Standard of Review
The facts are not in dispute. The allowance or disallowance of an exemption is subject to de novo review. Drenttel v. Jensen-Carter (In re Drenttel),
II. Background
The Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on September 26, 2002. The Debtors reside on approximately 127 acres of contiguous farmland in rural Rock County, Minnesota (the “Property”). They earn rental income from agricultural operations on the Property. The Debtors filed schedules and statements accompanying their petition including a Schedule C in which they asserted a homestead exemption in the Property under 11 U.S.C. § 522(d)(1).
On April 23, 2004, approximately fifteen months after entry of the January 2003 Order, the Debtors filed an amended Schedule C asserting a homestead exemption in the Property under the Minnesota homestead law. The Trustee objected to the amended Minnesota homestead exemption.
At the hearing on the objection to the amended exemption, the Debtors explained that they did not respond to the Trustee’s objection to the federal homestead exemption because they believed they had an absolute right to amend their exemptions pursuant to Federal Rule of Bankruptcy Procedure 1009(a). The court sustained the Trustee’s objection on res judicata grounds and disallowed the Debt- or’s state homestead exemption. This appeal followed.
III. Discussion
This is a simple case of res judicata. The doctrine of res judicata bars a later suit where (1) an earlier suit resulted in a final judgment on the merits; (2) the earlier suit was based on proper jurisdiction; (3) both suits involve the same cause of action; and (4) both suits involve the same parties or their privies. Lovell v. Mixon,
The Debtors argue that res judicata does not apply to bankruptcy motions. They try to distinguish a civil lawsuit from a contested matter within a bankruptcy proceeding, arguing that a civil lawsuit is similar to an entire bankruptcy proceeding, not an isolated contested matter within the bankruptcy proceeding.
The procedural rules which the Debtors cite support our conclusion that once an objection to an exemption is filed, a debtor must raise all theories under which the asset in dispute may be exempted in the context of the resolution of the objection. An objection to an exemption is a contested matter under Federal Rule of Bankruptcy Procedure 9014. Federal Rule of Civil Procedure 54 applies in contested matters. Fed. R. Bankr.P. 9014(c), 7054. The order resolving the objection to the exemption is a final judgment. Fed. R.Civ.P. 54(a). Every final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in the party’s pleadings. Fed.R.Civ.P. 54(c). Consequently, if an objection to an exemption is filed, the debtor has the right to prove his or her entitlement to exemption of the asset at the hearing and the court may allow the exemption under any theory which the debtor proves at trial. Once an objection to the exemption of an asset has been filed, the debtor must raise all theories for the exemption of that asset prior to the resolution of the exemption issue. Otherwise res judicata prevents a later attempt to exempt the asset on a different theory.
The Debtors also argue that Federal Rule of Bankruptcy Procedure 1009 gives them the right to amend their exemptions at any time prior to the closing of their bankruptcy case. This is true. They have the right to file an amended Schedule C asserting exemptions at any time before their case is closed. Fed. R. Bankr.P. 1009(a). However, this does not mean any exemption they assert will be allowed. The Debtors confuse the filing of a schedule of exemptions with the allowance of an exemption.
The Debtors argue that the applicability of res judicata to exemptions places them in an impossible position because the bankruptcy judge before whom their case is pending does not allow alternative pleading of exemptions. In support of their argument, the Debtors cite In re Cochrane,
In Cochrane, the debtor owned a condominium in Florida and asserted a homestead exemption in the condominium under Florida law. During the course of the hearing on several objections to the homestead exemption, the debtor’s counsel “opined in passing” that in any event the debtor was entitled to exclude or exempt the condominium under a tenancy by the entireties theory. Id. at 1015. The court sustained the objections to the homestead exemption and entered a separate order determining that “thus far” the debtor had not formally claimed protection for any of his assets under the Florida law of tenancy by the entireties and directed him to serve and file an amended Schedule C to make that claim if he intended to do so. Id. The court directed the-debtor to file an amended Schedule C no later than a date certain, “setting forth his final election as to his claims of exclusion or exemption in all of this [sic] assets. For the remaining pen-dency of this bankruptcy case, the Debtor shall have no right to file a further amended Schedule C.” Id. at 1017. In that order, the court noted that the debtor “should not be allowed to play an extended game of ‘hide the ball.’ ” Id. In response to the order, the debtor filed an Amended Schedule C asserting exemptions under Florida law and an Alternative Schedule C asserting exemptions under Minnesota law. The court held that the debtor’s tactic for attempting to assert alternative exemptions at that juncture was “just the
The Cochrane court noted that no basis exists in the Federal Rules of Bankruptcy Procedure for proposing an alternative claim of exemptions at the same time as one asserts a main claim in a Schedule C. The Debtors rely on this statement of the court for their argument that the judge does not allow alternative pleadings of exemptions. We disagree. First of all, the statement must be kept in context. The ruling disallowing the “alternative theories” was based on the debtor’s violation of the prior order requiring the debtor to make a final election with respect to exemptions. The statement regarding whether the rules countenance alternative exemptions was dicta. Second, the Coch-rane court had already given the debtor a second bite at the apple after losing his first attempt at exempting his property by directing the debtor to file any amended schedule of exemptions by a date certain. Third, in the present case, at the hearing on the objection to the Debtors’ state exemption, the court acknowledged that a “claim [of exemption] may be resolvable by application of law in the alternative.” (Transcript, p. 11.)
An opinion on the issue of successive claims of exemptions would be incomplete without a mention of Kaelin v. Bassett (In re Kaelin),
The facts in Kaelin differ substantially from the case at hand. In Kaelin, the debtor became aware of an asset during the course of his bankruptcy proceeding and promptly scheduled the asset and attempted to exempt it. Kaelin involved the exemption of an asset that the debtor had not previously exempted. Res judicata was not applicable because there had been no litigation regarding the exemption of the newly discovered and newly exempted asset. Kaelin does not control the present situation and its holding does not preclude the application of res judicata in the exemption context.
Similarly, the recent decision of this court in Ardrey v. Blackwell (In re Ardrey),
We acknowledge the harshness of the result in this case. Had the Debtors timely asserted a homestead exemption under Minnesota law in response to the objection to the federal exemption, the Trustee admits that he would not have objected to the state exemption. However, the Debtors failed to respond to the objection, despite law in Minnesota holding that the resulting order would have res judicata effect. Unfortunately, the Debtors’ failure to consider the doctrine of res judicata does not undo its effect nor change the result in this case.
IV. Conclusion
In conclusion, this is a simple case of res judicata. A debtor’s right to liberally amend schedules does not override the application of res judicata which in this case prevents the Debtors from seeking to revisit the issue of the exemptibility of their homestead. If the Debtors believed they were entitled to a homestead exemption under any theory, including a theory other than the one asserted in their original Schedule C, they should have raised the issue in response to the Trustee’s ob
Notes
. The Honorable Gregory F. Kishel, United States Bankruptcy Judge for the District of Minnesota.
. Minnesota law permits debtors in bankruptcy to claim either the federal exemptions available under 11 U.S.C. § 522(d) or the state exemptions available under Minnesota law. Under 11 U.S.C. § 522(b) a debtor may elect federal or state exemptions unless the state opts out of the federal exemption scheme. Minnesota has not opted out of the federal exemption scheme; therefore debtors domiciled in Minnesota may elect either option.
. If the Debtors' argument that a contested matter is not the equivalent of a civil lawsuit were correct, then the order sustaining the Trustee’s objection to their exemption would not be a final order and they would have no right to this appeal. Such is not the case. McGowan v. Ries (In re McGowan),
. The limited avenues for post-judgment relief are set forth in Federal Rules of Civil Procedure 59 and 60. Those rules apply in the bankruptcy context pursuant to Federal Rules of Bankruptcy Procedure 9023 and 9024. The Debtors have not attempted to seek relief under those options.
. “[T]he right to amend schedules to add exemptions 'is not the same as the right to the exemption.'" Knupfer v. Wolfberg (In re Wolfberg), 255 B.R. 879, 883 (9th Cir. BAP 2000), quoting Andermahr v. Barrus (In re Andermahr),
.The dissent compares Rule 1009(a) to Federal Rule of Bankruptcy Procedure 3008 and to Sections 1112(b)(5), 1208(c)(5), and 1307(c)(5) of the Bankruptcy Code. However,
. See also In re Wolfberg, supra, and Magallanes v. Williams (In re Magallanes),
. The judge presiding over the Debtors’ case published the Walls opinion applying res judi-cata in the exemption context five years after the Cochrane decision. In the present case, he acknowledged the application of alternative theories of resolving an objection to an exemption. We simply disagree with the Debtors and with the dissent that the Debtors could not have sought the allowance of a homestead exemption under state law at the time of the hearing on the Trustee’s original objection to the federal homestead exemption.
Dissenting Opinion
dissenting.
I respectfully dissent. The majority finds, as did the trial court, that once a decision is made denying a claim of exemption under the federal exemption statute, the debtors are forever after precluded from amending their claim of exemption to obtain the benefits of the Minnesota exemption statutes. Such a determination is based upon a misapplication of the “res judicata” doctrine or the “claims preclusion” doctrine. To reach such a result, the majority, as did the trial court, treat the denial of a claim of exemptions as if it is analogous to ordinary civil litigation in the federal courts. By treating the contested claim of exemption as ordinary civil litigation, the majority finds that the doctrine of res judicata bars a later suit where (1) an earlier suit resulted in a final judgment on the merits; (2) the earlier suit was based on proper jurisdiction; (3) both suits involve the same cause of action; and (4) both suits involve the same parties or their privies. Lovell v. Mixon,
In Lovell, it was made clear that the doctrine prohibits relitigation of issues which were actually litigated as well as those “which could have been litigated in the first suit.” Id. (emphasis in original).
However, as the Eighth Circuit Court of Appeals noted in Huebner v. Farmers State Bank (In re Huebner),
I suggest that a contested matter dealing with a claim of exemption under the federal statute and an objection by the trustee is much more analogous to the filing of a proof of claim by a creditor and an objection by an interested party. In such a contested matter, even after a determination favorable to or adverse to the claimant, Federal Rule of Bankruptcy Procedure 3008 permits reconsideration of such an order when a request is made by a party in interest. Rule 1009(a), which gives the debtor the right to amend a petition, list, schedule or statement as a matter of course at any time before the case is closed, is of the same ilk as Rule 3008 which gives the creditors, the trustee, or the debtor a second bite at the apple with regard to claims allowance or denial.
Similarly, the Bankruptcy Code itself permits amendment to Chapter 11, Chapter 12, and Chapter 13 plans after the initial plans have been contested and rejected by the court. See 11 U.S.C. § 1112(b)(5); § 1208(c)(5); § 1307(c)(5); Lewis v. United States,
Next, even if one assumes that the res judicata doctrine applies, it only applies if the issue being raised in the second “lawsuit” could have been litigated in the first suit. Lovell v. Mixon,
If, on the other hand, the federal and state statutes do not constitute separate causes of action, but simply alternative relief that should have been pleaded in the first contested matter, the debtors face another problem. In the District of Minnesota, by virtue of the Marshall and Walls decisions relied upon by the majority and the Cochrane decision to which the majority gives very little consideration, a debtor must choose whether to proceed with a claim of exemption under the federal statute or the Minnesota statutes, and the debtor is precluded from presenting a claim under an alternative statutory scheme. Although the majority suggests that the trial court acknowledges the right of debtors to plead in the alternative, and the majority suggests any contrary language in Cochrane is “dicta,” the language in Cochrane is clear and to the point. Any lawyer who would attempt to list claims of exemption under the federal statute and, alternatively, under the Minnesota statute, would, by virtue of Cochrane, risk sanctions under Rule 9011. The Cochrane language I refer to is as follows:
Second, there is no basis under the Federal Rules of Bankruptcy Procedure for proposing an “alternative” claim of exemptions at the same time as one asserts a “main” claim in a Schedule C. The underlying though[t] could be tagged as, “well, if you don’t like that theory, how do you like this one?” This little dodge, however, runs entirely contrary to the clear purpose of Fed. R. Bankr.P.2007, 4003(a), and 1009: to provide a procedural framework for the raising of exemption issues one at a time, and not two-or-more at a time. The vehicle for this assertion of exemption rights is just not countenanced under the applicable rules or the prescribed forms, and the Debtor is out of bounds for using it.
The majority, although dismissing such language as “dicta,” in this case has fashioned a procedure by which it suggests counsel for debtors may evade the clear import of Cochrane. The majority tells counsel for debtors to ignore Cochrane and plead in the alternative, thereby preserving all appeal rights in case a bankruptcy
Rather than promulgating a procedure which suggests that debtors may somehow get around the Cochrane language, the majority should simply overrule Cochrane to the extent it can be construed to mean debtors cannot plead a claim of exemption under both federal and state laws in the alternative. Of course, such a procedure as suggested by the majority, and an order overruling Cochrane as I suggest, would both be totally unnecessary if the majority would simply acknowledge that litigation of contested matters is, under the Bankruptcy Code and the Bankruptcy Rules, much more complex and much more liberal with regard to amendments than is ordinarily the case with general civil litigation. With such an acknowledgment, the majority would, as I would, reverse the decision of the trial court and remand for a determination of the rights of the debtors with regard to a claim of exemption under the Minnesota statutes.