A trustee has no obligation to investigate the facts underlying a claimed exemption before invoking an extension of the time for objecting under Bankruptcy Rule 4003(b)(2).
Rule 4003 generally provides that a trustee must object to a claimed exemption within 30 days of the conclusion of the meeting of creditors. If a trustee intends to object to fraudulent assertion of an exemption, subsection (b)(2) requires the trustee to act within a year after the case is closed.
In a case that came before the Ninth Circuit Bankruptcy Appellate Panel, the debtor had claimed a homestead exemption on a house in which she said she continually resided. After the ordinary time for objecting had run out, the trustee acquired evidence that the debtor did not in fact reside in the home and that several other statements in her schedules and elsewhere were incorrect.
The bankruptcy judge held that the trustee’s attempt to object was untimely because there were statements in pleadings putting him on notice to investigate further. For failing to investigate timely, the bankruptcy judge upheld the exemption.
On appeal, the trustee won in a panel opinion by Bankruptcy Judge Robert J. Faris of Honolulu.
There is no duty to investigate under Rule 4003(b)(2), Judge Faris held. At common law and under Section 523(a)(2)(A), “the perpetrator of an alleged fraud cannot avoid liability by showing that the victim could have uncovered the fraud had the victim investigated more carefully.”
Judge Faris reversed and remanded, with instructions for the bankruptcy judge to revisit the objection to the exemption.