Theoretically, an individual bankruptcy debtor may amend property claimed as exempt on his or her Schedule C at any time until the close of the bankruptcy proceeding.[1] The debtor must give notice of the amendment to the trustee and to “any entity affected thereby,” which is usually all creditors.[2] Under 11 U.S.C. § 522(l), a party in interest may object to the debtor’s list of exempt property:
(l) The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. If the debtor does not file such a list, a dependent of the debtor may file such a list, or may claim property as exempt from property of the estate on behalf of the debtor. Unless a party in interest objects, the property claimed as exempt on such list is exempt.[3]
Section 522(l) on its face provides no guidance as to how long a party in interest has to object to a claim of exemption or what criteria a bankruptcy court should use to decide whether to allow an objection. Rule 4003 of the Federal Bankruptcy Rules of Procedure provides some additional guidance. The rule states that a motion objecting to a claimed exemption must be brought within 30 days after the conclusion of the meeting of creditors or 30 days after the filing of the original or amended Schedule C, whichever comes later (the deadline may be extended for cause).[4] However, a trustee (but not other parties in interest) may pursue an allegedly fraudulent claim of exemption for one year.[5] Still, Rule 4003 provides no guidance as to what rationale a bankruptcy judge should use to uphold or deny a claim of exemption.
In general, debtors do not have to show good cause to amend their Schedule Cs.[6] However, presumed good cause is not the end of the inquiry. Parties in interest have had more success objecting to the proposed amendment of the exemption schedule on the basis that the debtor is acting in bad faith or that the debtor acted with reckless indifference as to the truth of the previously filed Schedule C.[7] Usually, but not always, an objection alleges that the debtor hid or knowingly undervalued an asset. In the past, courts have routinely asserted the authority to preclude a debtor from amending his or her exemption schedule to add that presumptively exempt asset under various theories, including the use of § 105(a).[8]
On March 4, 2014, the U.S. Supreme Court issued its decision in Law v. Siegel,[9] finding that a bankruptcy court cannot use 11 U.S.C. § 105(a) to surcharge an allowed exemption for payment of administrative expenses, even where the debtor has claimed the exemption fraudulently, since 11 U.S.C. § 522(k) specifically forbids surcharge of exempt property.[10] In its opinion, the Siegel Court dealt with a deductive argument that Trustee Siegel made with regard to the use by lower courts of § 105(a) to deny the debtors the power to amend their Schedule C. Trustee Siegel pointed out that many courts had forbidden debtors to amend their lists of exempt property where the trustee had learned that the debtor’s original schedules had intentionally omitted the property now seeking to be claimed exempt:
[Trustee] Siegel points out that a handful of courts have claimed authority to disallow an exemption (or to bar a debtor from amending his schedules to claim an exemption, which is much the same thing) based on the debtor's fraudulent concealment of the asset alleged to be exempt. He suggests that those decisions reflect a general, equitable power in bankruptcy courts to deny exemptions based on a debtor's bad-faith conduct. For the reasons we have given,… federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.”[11]
To bolster this holding, the Siegel Court pointed out that there were “carefully calibrated exceptions and limitations”[12] related to debtor’s misconduct contained in § 522, citing §§ 522(c),[13] 522(o)[14] and 522(q).[15] The Court called the misconduct limitations in § 522 “meticulous”[16] and “mind-numbingly detailed exceptions and exceptions to exceptions.”[17] The Court found that since § 522 had an extensive list of what could not be exempted for misconduct, whatever was not in the list could not be used by parties in interest to object to exemptions.[18] The Court further found that the Bankruptcy Code contained no “general equitable power to deny exemptions based on a debtor’s bad-faith conduct.”[19]
It did not take long for lower courts to seize on this collateral holding in Siegel to deny a bankruptcy trustee’s attempt to halt the allegedly improper filing of an amended Schedule C. A mere eight days after Siegel was decided, Judge Thomas Perkins of the Central District of Illinois cited to the language in Siegel quoted above and found that the trustee had no power to equitably limit an exemption that was otherwise available under law.[20] In Franklin, Judge Perkins found that a trustee could not stop a debtor from claiming that all of his traceable Social Security proceeds were exempt, even if, as the trustee alleged, the Social Security funds had been “hoarded” pre-bankruptcy under the advice of bankruptcy counsel and even if the debtor did not have “any present need to use the funds for living expenses.”[21] While the facts in Franklin were not the typical “the debtor hid the asset” scenario, many other courts have used the Supreme Court’s pronouncement in Siegel to hold that more garden-variety fraud objections to exemption amendments are foreclosed by Siegel.[22]
Balanced against these many cases is one lone decision declaring that a bankruptcy court can still rule on equitable objections to claims of exemption.[23] On equitable grounds, in In re Woolner, Bankruptcy Judge Walter Shapero upheld an objection to a debtor’s attempt to amend his Schedule C to exempt a previously undervalued Corvette ZR-1 and undervalued tax refunds.[24] The Woolner opinion found the Supreme Court’s declarations concerning the inability to use equitable powers to invalidate exemptions claimed in bad faith to be dicta.[25] Judge Shapero pointed out that the 2008 one year-fraud deadline amendment to Rule 4003(b)(2) (that was approved by the Supreme Court) was made to “permit the court to review and, in proper circumstances, deny improperly claimed exemptions.[26]” While admitting that procedural rules cannot create law, Judge Shapero could not believe that such a rule would have been passed had there been no authority for a judge to make such a decision.[27] Further, the Woolner Court indicated that to throw out such an important power would invite fraud and undermine the purposes of the Bankruptcy Code.[28] He found that he would not validate what he deemed to be dicta in Siegel until the Bankruptcy Code was amended or until there was binding decisional authority on the same issue.[29]
The points Judge Shapero makes about the basic underpinnings of the Bankruptcy Code, such as encouraging honesty in debtors, are important. The only citation to Woolner since it was decided in December 2014 was an opinion from the Western District of Wisconsin strongly disapproving of Woolner.[30] It remains to be seen whether Woolner will turn the tide on the otherwise-uniform reading of Siegel as to a bankruptcy court’s inability to deny exemptions for bad faith, or whether bankruptcy courts will be simply use other mechanisms, such as dismissal or denial of discharge, to enforce the Bankruptcy Code’s admonition that debtors must be honest in their dealings with the court.[31]
[1] Fed. R. Bankr. P. 1009(a).
[2] Id.
[3] 11 U.S.C. § 522(l).
[4] Fed. R. Bankr. P. 4003(b). The rule refers to the meeting of creditors mandated under 11 U.S.C. § 341; however, there is nothing in § 341 that connects the holding of a meeting of creditors to any deadline to object to a claim of exempt property.
[5] Fed. R. Bankr. P. 4003(b)(2). The one-year fraud time-limit extension was added by amendment in 2008.
[6] See, e.g., Tignor v. Parkinson (In re Tignor), 729 F.2d 977, 978 (4th Cir. 1984).
[7] See, e.g., In re Barrows, 408 B.R. 239, 243 (B.A.P. 8th Cir. 2009).
[8] See, e.g., In re Hannigan, 409 F.3d 480 (1st Cir. 2005); Martinson v. Mitchell, 163 F.3d 526 (9th Cir. 1998); Lucius v. McLemore, 741 F.2d 125 (6th Cir. 1984); Arnold v. Gill, (In re Arnold), 252 B.R. 778, 784 (B.A.P. 9th Cir. 2000); In re Hamlett, 304 B.R. 737, 742 (Bankr. M.D.N.C. 2003); In re Agee, 456 B.R. 740 (Bankr. M.D.N.C. 2011). In re Daniels, 270 B.R. 417 (Bankr. E.D. Mich. 2001); In re White, 455 B.R. 241 (Bankr. M.D. Fla. 2010); In re Opra, 365 B.R. 728 (Bankr. E.D. Mich. 2007).
[9] Law v. Siegel, ___ U.S. ___, 134 S. Ct. 1188 (2014).
[10] 134 S. Ct. at 1195.
[11] Id. at 1196-97, citing, with disapproval, In re Yonikus, 996 F.2d 866, 872-73 (7th Cir. 1993), In re Doan, 672 F.2d 831 (11th Cir. 1982), and Stewart v. Ganey, 116 F.2d 1010 (5th Cir. 1940).
[12] Id. at 1198.
[13] Id. If a debtor obtains a discharge, under § 522(c) the holder of a domestic support order can seek collection of their debt even from the debtor’s (formerly) exempt property; § 522(c) also excludes post-discharge exemptions from being exerted against properly filed pre-petition liens, tax liens, certain claims under § 523(a)(4) and (6) and claims based on fraudulently obtained student loans.
[14] Id. Section 522(o) limits homestead exemptions under certain conditions where there is evidence of “hindering, delaying or defrauding” creditors by exchanging nonexempt property for exempt property.
[15] The Court stated: “Secton 522(q) caps a debtor’s homestead exemption at approximately $150,000 (but does not eliminate it entirely) where the debtor has been convicted of a felony that shows ‘that the filing of the case was an abuse of the provisions of’ the Code, or where the debtor owes a debt arising from specified wrongful acts — such as securities fraud, civil violations of the Racketeer Influenced and Corrupt Organizations Act, or ‘any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.’” Id.
[16] Id.
[17] Id.
[18] Id., citing Hillman v. Maretta, 569 U.S. ___, ___, 133 S. Ct. 1943, 186 L. Ed. 2d 43 (2013), and TRW Inc. v. Andrews, 534 U.S. 19, 28-29, 122 S. Ct. 441, 151 L. Ed. 2d 339 (2001).
[19] Id. at 1196.
[20] In re Franklin, 506 BR 765 (Bankr. C.D. Ill. 2014).
[21] Id. at 770.
[22] See, e.g., In re Elliott, 523 BR 128 (B.A.P. 9th Cir. 2014) (hidden homestead, trustee’s objections overruled on bad faith grounds, no applicable bad faith exemption under state law; however § 522(g)(1) would apply, remanded for further hearing); In re Arellano, 517 B.R. 228, 232 (Bankr. S.D. Cal. 2014) (hidden personal property of in forma pauperis filer, court indicated prior Ninth Circuit case, In re Mitchell, was no longer good law, suggested potential for state law to provide alternative objection); In re Caillaud, 2014 Bankr. LEXIS 4527 at *9-11 (Bankr. W.D.N.C. Oct. 21, 2015) (trustee’s objection to amendment of schedules to disclose previously hidden inheritance overruled under Siegel; no relief available to trustee under state law, but debtor might lose her discharge as Siegel indicated); In re Baker, 514 B.R. 860, 863-64 (E.D. Mich. 2014), appeal docketed, 14-2149 (6th Cir. Sept. 5, 2014) (trustee cannot equitably object to failure to schedule wrongful foreclosure action); In re Davis, 2015 B.R. Bankr. LEXIS 818 (Bankr. N.D. W.Va. March 16, 2015) (under Siegel, estoppel and laches not available to overrule an amended exemption in previously listed by not exempted property interest in a divorce); accord, In re Dunaway, 2015 Bankr. LEXIS 819 (Bankr. N.D. W.Va. March 16, 2015); In re Gress, 517 B.R. 543, 547-48 (Bankr. M.D. Pa. 2014) (undisclosed assets subject to four amendments to Schedule C, no disallowance on equitable grounds; however, previous order disallowing certain exemptions prior to Siegel stands for failure to appeal); In re Gutierrez, 2014 Bankr. LEXIS 2637 (Bankr. E.D. Cal. June 12, 2014) (undervalued homestead, in light of Siegel, court sua sponte reversed its previous ruling disallowing the homestead exemption amendment and also disallowed arguments under waiver, laches, judicial estoppel, equitable estoppel and res judicata); In re Mitchell, No. 13-14494, 2014 Bankr. LEXIS 1946 at *11-12 (Bankr. N.D. Ohio April 30, 2014) (objection to homestead exemption where clear misconduct disallowed, also no authority to deny exemption under state law but suggested Rule 9011 sanctions might be sought); In re Pipkins, 2014 Bankr. LEXIS 2654 (Bankr. N.D. Cal. June 16, 2014) (no ability to object to multiple amendments to exemptions involving undisclosed contingent interest in annuity for bad faith, evidentiary hearing set for remaining issues); In re Reade, 2014 Bankr. LEXIS 5140 (Bankr. C.D. Cal. Dec. 23, 2014) (objection to late-filed homestead exemption on bad-faith grounds disallowed); In re Scotchel, 2014 Bankr. LEXIS 3640 (Bankr. N.D. W. Va. Aug. 28, 2014); aff’d, Scotchel v. Sheehan (In re Scotchel), 2014 U.S. App. LEXIS 21661 (4th Cir.) (claim of $1.00 in exempt asset later amended to claim full wild-card value in attorney fee award from contingent-fee case, court overturned pre-Siegel decision disallowing exemption and denied request for sanctions); In re Warner, 2015 Bankr. LEXIS 795 (Bankr. N.D. W.Va. March 13, 2015) (mistaken failure to list interest in farm, later corrected and claimed exempt could not be overruled on any equitable considerations).
[23] In re Woolner, 2014 Bankr. LEXIS 5048 at *11 (Bankr. E.D. Mich. Dec. 15, 2014).
[24] Id. at *10.
[25] Id.
[26] Id. at 6, quoting the Advisory Committee Notes.
[27] Id. at 7.
[28] Id. at 10.
[29] Id.
[30] In re Bogan, 2015 Bankr. LEXIS 1164 (W.D. Wis. April 7, 2015). In Bogan, Judge Martin pointed out that even if the Supreme Court speaks in dicta, lower courts can’t simply ignore it, and that in this case there was a “clear directive” by the Supreme Court concerning the limits of a bankruptcy court’s power. Id. at *8.
[31] There is considerable controversy even among bankruptcy practitioners and writers over whether this portion of the Siegel decision is dicta or not. Two articles coming to opposite conclusions have been recently been published in the ABI Journal. Compare Neil C. Gordon and Jonathan H. Azoff, “Law v. Siegel Dicta Leads Lower Courts Astray,” ABI Journal, Feb. 2015 at 34; Ozturk, “Law v. Siegel: U.S. Supreme Court Limits Reach of § 105(a),” ABI Journal, May 2014 at 28.