Substance over Form: Ninth Circuit Clarifies When an Objection to Exemptions Is Really an Objection

A struggling real estate developer decided to do some asset-planning and transferred his partial interest in two properties to his wife as tenancy-by-the-entirety.[1] Three years later, he filed for chapter 7 bankruptcy and claimed the two properties as exempt under 11 U.S.C. § 522(b)(3) and Hawaii state law.[2] At the 11 U.S.C. § 341 meeting of the creditors on Dec.19, 2013, the trustee suggested the possibility of bringing a fraudulent-transfer case seeking to undo the transfers to the debtor’s wife.[3] On Jan. 14, 2014, 26 days after the conclusion of the meeting of creditors, the trustee filed an adversary proceeding to set aside the debtor’s transfer of the properties to his wife.[4] There was no mention of an objection to exemptions, no citation to 11 U.S.C. § 522(b)(3), and no request for relief from the bankruptcy court to deny the claimed tenancy-by-the-entirety exemption.[5]

After a three-day trial, on March 10, 2015, the bankruptcy court avoided the transfers, with the order containing no language denying the exemption.[6] On May 18, 2015, the trustee filed a motion seeking turnover of the two properties, and the debtor defended the motion by arguing that the properties remained protected by the claimed exemption, since no timely objection had been filed under Rule 4003(b)(1).[7] The bankruptcy court disagreed with the debtor and found that the fraudulent transfer adversary proceeding satisfied Rule 4003 and the debtor appealed.[8]

So can you object to an exemption, without saying, at any point, that  you are objecting to an exemption? You sure can, so long as the procedure of Rule 4003 is followed in substance. The court noted, “Rule 4003(b), unlike some other bankruptcy rules, proscribes no particular form for objections to exemption claims.”[9] Rule 4003(b), in general, requires the following: (1) an objection filed within 30 days after the meeting of creditors is concluded; and (2) delivering or mailing the objection to the debtor and debtor’s attorney. Though not labeled an “objection,” the Ninth Circuit found that the trustee’s adversary proceeding to avoid the transfers that gave rise to the tenancy-by-the-entirety exemption qualified under Rule 4003. The court noted that no particular form of objection is required, only that the debtor is provided “timely notice that the trustee or other interested party objects to a debtor’s claimed exemption.”[10] The parties conceded the the adversary proceeding was filed within 30 days of the conclusion of the meeting of the creditors.[11] The court further reasoned that the adversary gave the requisite notice because the exemption claimed could only survive if the transfer to the debtor’s wife survived.[12] A contrary result would result in a conflict of laws: If the transfers were successfully avoided (and therefore void on inception), then to allow the tenancy-by-the-entirety exemption on property owned by one spouse is in direct conflict with the requirements for tenancy-by-the-entirety under state law.

The court found the remainder of Rule 4003 satisfied as well. The complaint was served as required by Rule 4003(b)(4).[13] The adversary proceeding and trial provided a “hearing on notice” required by Rule 4003(c).[14] In framing the analysis by reviewing whether the action taken, though by another name, satisfies Rule 4003, the court also reaffirmed that where no timely action is taken at all, the exemption must stand.[15]

The ruling suggests that practitioners must broaden their sights when faced with action within 30 days of the conclusion of the meeting of creditors to assess what impact, if any, the action would have on exemptions, even if not explicitly subject to a form objection. While the court noted that the best practice would have been to include a reference to objection to exemptions in the complaint at least as part of the relief requested, its exclusion was not fatal to the objection itself.