A district judge in Chicago misapplied a chapter 7 case to chapter 13 and held that a chapter 13 debtor does not have standing to pursue a claim that is exempt property until the debtor’s exemptions have been finally allowed.
An individual filed a lawsuit against his home mortgage lender for allegedly violating the Telephone Consumer Protection Act. One week later, he filed a chapter 13 petition, scheduling the lawsuit as exempt property under Illinois law.
The lender filed a motion to dismiss the lawsuit for lack of standing, which District Judge Amy J. St. Eve granted without prejudice in a May 15 opinion.
The lender contended that only the chapter 13 trustee had standing to sue, because the claim arose before bankruptcy. Judge St. Eve rejected the argument, citing Seventh Circuit authority for the proposition that a chapter 13 debtor has concurrent standing alongside the trustee to prosecute claims belonging to the estate. See Smith v. SIPI LLC (In re Smith), 811 F.3d 228, 241 (7th Cir. Jan. 20, 2016). For ABI’s discussion of Smith, click here.
But because the bankruptcy court “has yet to determine the validity” of the debtor’s claimed exemption, Judge St. Eve said that the debtor “does not have standing to bring this lawsuit for his own benefit.” She went on to say that a debtor does not have standing until a final determination about the validity of a claimed exemption, citing Ball v. Nationscredit Financial Services Corp., 207 B.R. 869, 872 (N.D. Ill. 1997).
However, Judge St. Eve failed to note that Ball involved a chapter 7 debtor, not a chapter 13 debtor. In chapter 7, unlike chapter 13, the debtor has no authority to prosecute claims belonging to the estate. Logically, therefore, a chapter 7 debtor cannot pursue an exempt asset until the exemption has been determined finally.
Judge St. Eve’s decision is problematic because the debtor in her court was in chapter 13. The claim was either exempt or it was not. If it was not exempt, the Seventh Circuit has held that the debtor has concurrent standing. If the claim was exempt, then the debtor has standing. Citing a chapter 7 case about lack of standing before final determination of an exemption is arguably inapposite.
Judge St. Eve dismissed the suit without prejudice, presumably enabling the debtor to refile once his exemptions have been allowed. If there were a delay in adjudicating the debtor’s exemptions, dismissal without prejudice could bar the suit altogether if the statute of limitations were to lapse. Therefore, dismissal without prejudice could turn into dismissal with prejudice.
To avoid the possibility that the statute might run in the meantime, Judge St. Eve could have allowed the chapter 13 trustee to intervene as a plaintiff.