Opinion
NOT FOR PUBLICATION
Argued and Submitted at Seattle, Washington, March 24, 2006
Appeal from the United States Bankruptcy Court for the Western District of Washington. Bk. No. 05-11933. Honorable Thomas T. Glover, Bankruptcy Judge, presiding.
Before: SMITH, RUSSELL[ and KIRSCHER, Bankruptcy Judges.
Hon. Barry Russell, Chief Bankruptcy Judge for the Central District of California, sitting by designation.
Hon. Ralph B. Kirscher, Chief Bankruptcy Judge for the District of Montana, sitting by designation.
MEMORANDUM
Billie Renee Clark, Mindy Anne Wortner, Estelle Leanne Hillard, and Anthony and Jessica Carter (collectively, " Debtors") separately and independently appeal final orders entered June 23, 2005, which sustained the objections to exemption filed by the chapter 7 trustee, Peter H. Arkison. Debtors' motions for reconsideration were denied on July 22, 2005 and timely notices of appeal were filed. We REVERSE and REMAND.
The order against Estelle Leanne Hillard was entered on June 24, 2005 - a day after the other orders were entered.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
An order was entered by the Clerk of the BAP on October 5, 2005 providing for a joint hearing in these matters.
I. FACTS
On February 17, 2005, Debtors, all represented by the same attorney, filed separate individual chapter 7 petitions. Their § 341 creditors' meetings were held on April 11, 2005, at which time each stated that their respective schedules of assets and liabilities were correct. However, upon further and more direct questioning by the trustee regarding possible tax refunds, each responded that they either had received refunds after signing the bankruptcy schedules or were expecting to receive tax refunds. Following the meeting, they amended schedules B and C to list the refunds as assets and to claim them as exempt.
Debtors each amended their schedules to reflect the tax refunds as follows:
Billie Renee Clark
$3, 060
Mindy Anne Wortner
$4, 524
Estelle Leanne Hillard
$6, 137
Anthony and Jessica
Carter
$2, 368
The trustee timely objected to the exemptions, asserting that Debtors should not be allowed to claim an exemption on property which they attempted to conceal from the trustee. According to the trustee, Debtors acted to conceal the tax refunds by 1) failing to disclose them in their bankruptcy schedules in the first instance, 2) falsely representing to the trustee that the schedules were accurate, and 3) only revealing their existence when specifically asked about them by the trustee.
In conjunction with the objections to exemption, the trustee also filed motions to deny the tax refunds as exempt property. The basis for the motions was identical to the objections, and because the bankruptcy court treated the matter as one, we shall do the same.
Debtors opposed the objections, alleging that the tax refunds were inadvertently omitted as a result of their attorney's failure to emphasize the necessity of scheduling tax refunds not yet received. They denied any intent to conceal the refunds, and in this regard, requested an evidentiary hearing in order to prove the veracity of their statements to the court.
Debtors each filed declarations that support the facts alleged herein.
The trustee viewed the attempt to shift the blame onto Debtors' attorney with skepticism, pointing out that Debtors' tax returns, all signed prior to the bankruptcy filings, clearly reflected entitlement to refunds. The trustee maintained that because Debtors knowingly omitted the tax refunds from the schedules, the objections to exemption should be sustained.
A hearing on the matter was held on May 25, 2005. Although the bankruptcy court initially granted Debtors' oral request for an evidentiary hearing, it ultimately concluded that a further hearing was not required and sustained the exemption objections, stating
The Court: I think it's, as far as I'm concerned, today, on these cases. I'm not going to hear any oral testimony on these things.
Mr. Cleland, these are sizable amounts of money for consumers to -- and to say that they somehow forgot it or didn't know is preposterous to me. And it seems to me, in each instance, that any exemption claim should be denied and the property should be turned over to the trustee.
Mr. James Cleland, Jr. represented Debtors at the hearing and serves as their counsel in this appeal as well.
Transcript of Proceedings, May 25, 2005, p. 7.
Debtors appeal.
II. ISSUE
Whether the bankruptcy court erred in disallowing the exemptions of debtors who failed to list tax refunds on their original bankruptcy schedules and who later amended the schedules to claim the refunds exempt only after the trustee's inquiry.
III. JURISDICTION
Federal subject matter jurisdiction is founded under 28 U.S.C. § § 1334 and 157(b)(1) and (2)(B). We have appellate jurisdiction over final orders pursuant to 28 U.S.C. § § 158(b)(1) and (c)(1).
IV. STANDARD OF REVIEW
We review legal issues de novo and the bankruptcy court's factual findings under a clearly erroneous standard. In re Arnold, 252 B.R. 778, 784 (9th Cir. BAP 2000). The bankruptcy court has no discretion to disallow amended exemptions unless the amendment was done in bad faith or caused prejudice to third parties, i.e., creditors. Id.; Matter of Doan, 672 F.2d 831, 833 (11th Cir. 1982). Issues with regard to the right of a debtor to claim an exemption is a question of law we review de novo, however, questions as to the debtor's intent are factual and subject to the clearly erroneous standard. In re Arnold, 252 B.R. at 784; In re Cataldo, 224 B.R. 426, 428-29 (9th Cir. BAP 1988).
V. DISCUSSION
Rule 1009(a) provides that " a voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed." A debtor may amend his schedules at any time before the case closes, absent a showing of bad faith or prejudice to creditors. In re Wolfberg, 255 B.R. 879, 883 (9th Cir. BAP 2000); In re Andermahr, 30 B.R. 532, 533 (9th Cir. BAP 1983)(" an exemption should be allowed no matter when it is claimed absent a showing of bad faith by the debtor or prejudice to creditors"). In this case, the record does not support a finding of either bad faith or prejudice to third parties.
At oral argument, the trustee urged the panel to expand the circumstance under which a debtor can be denied an exemption to include, in addition to bad faith and prejudice to creditors, negligence, or at the very least, gross negligence in failing to disclose all assets. We believe the common law rule as it currently stands is sufficient, and therefore, decline the invitation to modify or expand it.
A. Bad Faith
Bad faith is typically found in circumstances where a debtor intends to hide assets. In re Arnold, 252 B.R. at 785. Stated otherwise, the conduct in question must involve an active concealment of assets, i.e., something more than mere negligence. In re Andermahr, 30 B.R. at 533.
In Arnold, the chapter 7 trustee successfully negotiated the settlement of the debtor's personal injury claim. The debtor, who had previously mentioned the lawsuit in his statement of affairs but had not listed the claim on his schedules of assets or exemptions, amended the schedules to claim the settlement proceeds exempt. The trustee objected on the grounds of bad faith and prejudice to creditors. The bankruptcy court rejected the debtor's assertion that he failed to list the claim because he did not understand that the claim constituted an asset of the estate. It concluded that by burying information about the lawsuit in the statement of financial affairs and omitting them from the schedules, the debtor acted in bad faith. On appeal, the panel reversed, holding that
[G]iving due regard to the bankruptcy court's assessment of [the debtor's] credibility, and accepting that he knew that the State Court Action was an asset, the record still [could not] support a finding that [the debtor] intended to hide this asset.
In re Arnold, 252 B.R. at 786 (emphasis added).
While the trustee in this case concedes that bad faith was not explicitly raised by him or the court, he maintains that his principal argument regarding intentional concealment, and the court's response to it, sufficiently addressed the issue, as evidenced by the following colloquy:
Mr. Arkison [the trustee]: That's a significant amount of money, Your Honor, that I'm looking at in terms of -- for a lot of these people, that's probably almost a month's salary that's coming back as a tax return. And I don't know if the attorney isn't asking the questions, Debtors are zoning out and not thinking about it, they don't know that it's a -- I mean, Your Honor, the problem is, when do we get to put our hand up and say, We want this money?
The Court: I think it's, as far as I'm concerned, today, on these cases. I'm not going to hear any oral testimony on these things.
Mr. Cleland, these are sizeable amounts of money for consumers -- and to say that they somehow forgot it or didn't know is preposterous to me. And it seems to me, in each instance, that any exemption claim should be denied and the property should be turned over to the trustee.
Transcript of Proceedings, May 25, 2005, p. 7.
An objective examination of the record tends to support Debtors' contentions that their failure to disclose the refunds was inadvertent and not an attempt to conceal the assets. In their declarations, Debtors each stated
When reviewing the bankruptcy paperwork I signed on February 9, 2005, and the property that was " Other contingent and unliquidated claims of every nature . . .", [sic] I did not understand that this meant money I hadn't gotten yet, and Mr. Cleland did not explain this to me.
Mr. Cleland DID explain to me that I had far less property than the maximum allowed by law, and that I should feel free to list all of my property.
Had I known what the questions meant, I would have certainly listed the tax refund, as I knew from what my attorney told me that I would keep it.
Further, upon the trustee's inquiry regarding the tax refunds, Debtors answered honestly and followed up with an appropriate amendment to their schedules. A mere delay alone is not sufficient to support a finding of bad faith. In re Arnold, 252 B.R. at 786.
Finally, confusion among debtors over the reporting of tax refunds is apparently not a new circumstance for the court. Apparently, the court had, in the previous year, chastised certain attorneys and their clients for neglecting to schedule tax refunds in their initial schedules, but had not denied their exemptions. Although Mr. Cleland was not privy to " the speech, " the court's earlier leniency in other unrelated cases may have been a factor in the court's decision to deny Debtors' request for an evidentiary hearing.
Reference to the court's earlier " speech" appears in the following colloquy between the trustee and the court:
During the course of the hearing, the following exchange took place between the court and Mr. Cleland:
B. Prejudice to Creditors
Neither the trustee's exemption objections nor the court's ruling appear to have been based on prejudice to creditors. Accordingly, we need not address the issue.
VI. CONCLUSION
Based on the foregoing, we conclude that the factual record does not sufficiently support the disallowance of Debtors' exemptions as to the tax refunds on the basis of intentional concealment, i.e., bad faith. Accordingly, we REVERSE the decision of the bankruptcy court and REMAND with instructions that it 1) conduct an evidentiary hearing on the issue of bad faith and 2) issue findings of fact and conclusions of law following the hearing.
Mr. Arkison: All of them are basically the same issue of the tax refunds not being listed. And there's a point in time . . . when we have to raise the issue and draw a line. I believe a year ago you The Court: I gave them a speech. Mr. Arkison: - you gave your speech. The Court: I remember the speech. Mr. Arkison: I mean, I'm back again a year later. Transcript of Proceedings, May 25, 2005, p. 3-4.
Mr. Cleland: Normally, I wouldn't ask for oral testimony . . . The Court: Okay. Mr. Cleland: That's awfully short notice for my clients to get off work, sir. The Court: Well, I know. But these are serious things. You now, I let everybody out last year. Mr. Cleland: Sir, I wasn't privy to it. I didn't know you chastised The Court: It doesn't make any difference. I was being gracious last year. This one -- the first case out Transcript of Proceedings, May 25, 2005, p. 5-6.