An opinion from the Eighth Circuit shows the injustice that seemingly results from slavish adherence to the statute demanded by Law v. Segal, 571 U.S. 415 (2014), where the Supreme Court held that the court may not employ equitable considerations to override a debtor’s statutory homestead exemption.
Twice concealing assets, the debtor was caught red-handed both times. The second time, the chapter 7 trustee uncovered an account with $30,000 cash.
After amending his schedules to list the account, the chapter 7 debtor claimed an exemption in the cash. The trustee objected, contending that bad faith barred the debtor from claiming the exemption. The bankruptcy court overruled the objection and was upheld by the Bankruptcy Appellate Panel.
On November 26, the Eighth Circuit upheld the lower courts in an opinion by Circuit Judge Michael J. Melloy.
The trustee relied upon an Eighth Circuit opinion seemingly on point. Kaelin v. Bassett, 308 F.3d 885 (8th Cir. 2002). In Kaelin, the appeals court held that the bankruptcy court has discretion “to deny the amendment of exemptions if the amendment is proposed in bad faith or would prejudice creditors.” Id. at 888.
In short, Judge Melloy held that Law v. Segal abrogated Kaelin and “precludes the denial of an amendment to a schedule of claimed exemptions based on a debtor’s bad faith.”
The trustee tried to distinguish Law v. Segal, because the Supreme Court was dealing with an attempt at surcharging an exempt asset, not the amendment of exemptions. Judge Melloy ruled that the distinction was not “meaningful,” given the “expansive statement” by the high court in Law v. Segal.
Like the Supreme Court, Judge Melloy noted that the bankruptcy court has “other tools” to deal with a debtor’s bad faith.
Observation
The bankruptcy court in fact used “other tools” to deal with the debtor’s deception. Not mentioned in the circuit court opinion was the fact that the debtor had waived his discharge after the trustee filed a complaint to deny discharge under Section 727(a)(2)(2), (3) and (4) for concealing property, falsifying records and making a false oath.
However, the $30,000 will remain insulated from creditors’ claims despite the denial of discharge.
A trustee could argue that the debtor impliedly waived his exemption in the $30,000 by failing to claim the exemption until the second time he amended his schedules.
Will a court ever have the chutzpah to reason that a fraudulent failure to list an asset amounted to waiving the exemption, thus evading Law v. Segal? The attempt may not succeed, because Bankruptcy Rule 1009(a) gives a debtor the right to amend schedules “as a matter of course at any time before the case is closed.”
A final thought: When adopting the statute, it is difficult to believe that Congress would have approved of results like those in Law v. Segal and the case in the Eighth Circuit.
The Supreme Court should consider exercising restraint whenever the justices are given a case that could erode the bankruptcy court’s equitable powers. After all, Congress cannot draft a law to head off every bad result that might occur from literal, unthinking application of the statute.
And remember, at the time the Bankruptcy Code was enacted, the Supreme Court was saying that the bankruptcy court was essentially a court of equity. Only later did the Supreme Court begin eroding bankruptcy court’s equitable powers. When enacting the Code, Congress believed that bankruptcy courts had equitable power to avoid inequitable results from application of the “plain language” doctrine, a concept that also arrived later.
An opinion from the Eighth Circuit shows the injustice that seemingly results from slavish adherence to the statute demanded by Law v. Segal, 571 U.S. 415 (2014), where the Supreme Court held that the court may not employ equitable considerations to override a debtor’s statutory homestead exemption.
Twice concealing assets, the debtor was caught red-handed both times. The second time, the chapter 7 trustee uncovered an account with $30,000 cash.
After amending his schedules to list the account, the chapter 7 debtor claimed an exemption in the cash. The trustee objected, contending that bad faith barred the debtor from claiming the exemption. The bankruptcy court overruled the objection and was upheld by the Bankruptcy Appellate Panel.
On November 26, the Eighth Circuit upheld the lower courts in an opinion by Circuit Judge Michael J. Melloy.
The trustee relied upon an Eighth Circuit opinion seemingly on point. Kaelin v. Bassett, 308 F.3d 885 (8th Cir. 2002). In Kaelin, the appeals court held that the bankruptcy court has discretion “to deny the amendment of exemptions if the amendment is proposed in bad faith or would prejudice creditors.” Id. at 888.
In short, Judge Melloy held that Law v. Segal abrogated Kaelin and “precludes the denial of an amendment to a schedule of claimed exemptions based on a debtor’s bad faith.”