Siding with the Sixth Circuit, the Ninth Circuit held that a fraudulent transfer complaint filed within 30 days of a Section 341 meeting satisfies the requirement for filing a timely objection to a claimed exemption.
Facing financial troubles, a man transferred his interests in two real properties to himself and his wife as tenants by the entireties. The properties were worth almost $1 million.
Three years later he filed a chapter 7 petition, took Hawaii’s exemptions, scheduled the properties, and claimed they were exempt because they were held by the entireties.
At the Section 341 meeting, the debtor candidly admitted that he transferred the properties to himself and his wife as “exemption planning.”
Less than 30 days after the creditors’ meeting, the trustee sued the debtor, contending that the transfer was made with actual intent to hinder, delay or defraud creditors. After trial, the bankruptcy court entered judgment for the trustee. The debtor appealed to district court and lost.
While the appeal was pending, the trustee filed a turnover proceeding in bankruptcy court, asking the court to compel the debtor to turn over the two properties in preparation for sale. The debtor objected, arguing that the trustee had not filed an objection to the exemption within 30 days of the creditors’ meeting as required by Section 522(l) and Bankruptcy Rule 4003(b)(1).
The bankruptcy court overruled the objection, directed turnover, and held that the fraudulent transfer complaint was the equivalent of an exemption objection. The district court agreed, and so did Circuit Judge Sandra S. Ikuta in her May 7 opinion for the Ninth Circuit.
The debtor argued in the circuit court that his exemption became final 30 days after the creditors’ meeting because the adversary complaint did not expressly state that it was also an objection to the exemption claim.
Judge Ikuta rejected the debtor’s argument, focusing on two facts: (1) The trustee had filed the fraudulent transfer complaint within 30 days of the creditors’ meeting, and (2), as Judge Ikuta said twice, Rule 4003(b)(1) “proscribes no particular form for objections to exemption claims.”
Judge Ikuta said that the complaint gave the debtor “more than adequate notice that the trustee objected to [the debtor’s] claimed exemption.” The complaint and the objection to exemption were “inextricably intertwined,” she said.
“By issuing the turnover order, the bankruptcy court effectively ruled on the exemptions, because it expressed the court’s understanding that the disputed interests . . . were property of the bankruptcy estate.”
Judge Ikuta explained that the trustee had no basis for objecting to the exemption claim absent success in the adversary proceeding, which attacked the basis for the exemption. The adversary proceeding, she said, would have been “pointless” if the debtor were entitled to retain his exemption together with his “fraudulently transferred property.”
Procedurally, the complaint met the requirements of Rule 4003(b)(1) because the trustee had the burden of proof, the complaint was timely, the papers were served on the debtor and his counsel, and there was a hearing on notice.
Judge Ikuta did concede it would have been “better practice” to include an exemption objection in the adversary complaint.
Judge Ikuta said that her decision was in accord with a 1985 opinion by the Sixth Circuit and rulings by “many other” bankruptcy courts and appellate panels.
We submit that courts should be cautious in applying Judge Ikuta’s holding in other contexts, because finding an equivalence is a slippery slope when a party was not given explicit notice of the relief being sought.
The opinion has troubling similarities with Title Max v. Wilber (In re Wilber), 876 F.3d 1302 (11th Cir. Dec. 11, 2017), rehearing en banc denied Feb. 14, 2018, where the Eleventh Circuit held that a confirmed chapter 13 plan did not bind a lender because the lender had previously filed a motion to declare that a car was no longer estate property. To read ABI’s discussion of Wilber, click here.
Let us hope that courts do not go farther afield with judicial decrees that abrogate explicit statutory or rule-based requirements.