In re Ball, Bankruptcy No. 95 B 22563.
| Decision Date | 17 May 1996 |
| Docket Number | Bankruptcy No. 95 B 22563. |
| Parties | In re Paula BALL, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Drew M. Dillworth, Thomas Raleigh, Raleigh, Helms & Finke, Chicago, IL, for Trustee.
Daniel A. Edelman, Beth I. Solomon, Edelman & Combs, Chicago, IL, Robert J. Adams & Associates, Chicago, IL, for Debtor.
Daniel J. Zollner, Jennifer L. Sucher, Lord, Bissell & Brook, Chicago, IL, for Nationscredit.
The Trustee has filed an objection to the Debtor's amended schedule claiming as exempt property a class action filed in the district court (after commencement of this case) for Truth in Lending Act ("TILA") violations. The Trustee also moved for authority to settle that litigation for $7,500. The Debtor, of course, objects to the Trustee settling an action that she claims is exempt from estate property. The Trustee, on the other hand, contends that because the TILA claim was not included on the original schedules, the Debtor had no standing to file the action. In general, this Court agrees with the Debtor, but cannot enter a final order disposing of these matters until the value of her TILA claim is determined.
The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 23, 1995. Thomas E. Raleigh was appointed Trustee in this case. On December 12, 1995, the Debtor filed a class action in the district court alleging, inter alia, violation of the TILA. That suit arises out of a pre-petition loan made to the Debtor. The Debtor's original bankruptcy schedules did not list the TILA claim as an asset. The meeting of creditors required by § 3411 was held on January 16, 1996. At the meeting the Trustee reviewed the schedules with the Debtor, but the Debtor still did not mention the pending district court litigation. On January 17, 1996, the Debtor's attorney filed an amended schedule B, including the district court cause of action and claiming it as exempt.
The Trustee then entered into negotiations with the defendant in the district court litigation, Nationscredit Financial Services Corp. ("Nationscredit"), and they agreed to settle the "claim" for $7,500. Nationscredit and the Trustee state that the settlement represents a "release of all claims and demands at law, in equity or by statute that Paula Ball has or ever had under loan No. C42419233, loan No. C42417393, any insurance policies purchased by Paula Ball at the time of the loan transactions and any other loan or insurance transactions involving Paula Ball prior to the bankruptcy filing" and does not include any amount for other class members' claims. Reply Memorandum at p. 9. However, a letter from Nationscredit to the Trustee provides that the settlement is contingent upon obtaining a dismissal of the district court law suit. In addition, the Debtor has presented evidence that the settlement amount is at least five times the value of her individual claim.
This opinion will address two matters currently before the Court: the Trustee's motion to approve the settlement and objections to the Debtor's claim of exemption.2 Those two motions raise three key issues: 1) Whether the Debtor may amend her schedules to include the TILA claim; 2) the value of the Debtor's interest in the TILA claim; and 3) if the settlement amount exceeds that value, whether that excess (above the exempted portion) is property of the estate. The Court holds, for the reasons set forth below, that the Debtor properly amended her schedules, and that only the value of the Debtor's interest in the claim, exclusive of any premium attributable to the class allegations, may be property of the estate (to the extent it is not exempted by the Debtor). That determination of that value, however, may require a hearing, if the Trustee and Nationscredit request one.
The Trustee objects to the Debtor's exemption on two grounds. First the Trustee notes that the "Wild Card" exemption allowed under Illinois law (735 ILCS 5/12-1001(b)) is limited to $2,000 and it is unclear what personal property the Debtor claims as exempt under the Wild Card Exemption. The Debtor filed a second amended Schedule C on March 12, 1996, (after all the briefs had been filed) clarifying what property she is claiming as exempt. That amended schedule would appear to repair the alleged defect in the first amendment.
The Trustee also argues, however, that the Debtor did not have standing to file the district court suit and that this affects the Debtor's ability to claim the lawsuit as exempt.3 Nationscredit also filed an objection to the exemption. Nationscredit contends that because the Debtor did not list the TILA claim in her original schedules filed with the petition and did not mention it at the § 341 meeting, that the Debtor was attempting to conceal the existence of the asset and the exemption should be denied for bad faith.
A. The Debtor May Exempt The TILA Claim.
There is no dispute that under § 541 even a contingent claim of a debtor is included in property of the estate. In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993). However, property may be removed from the estate under the exemptions allowed by federal or state law.4 "Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in the applicable exemption provision." § 522(b). The Debtor did not initially schedule the TILA claim as an asset or claim it as exempt. Federal Rule of Bankruptcy Procedure 1009(a) allows a debtor to amend a schedule "as a matter of course at any time before the case is closed." Such an amendment may only be denied "upon a clear and convincing showing of bad faith by the debtor or prejudice to the creditors." Yonikus, at 872.
Nationscredit contends that the Debtor acted in bad faith by not initially scheduling the asset and not mentioning it at the § 341 meeting. The Debtor attached affidavits of her attorneys and herself to her reply memorandum explaining why this occurred. Apparently the Debtor arrived at the § 341 meeting approximately 30 minutes late. By this time her attorney had already left and the Debtor completed her testimony at the meeting unrepresented by counsel. The Debtor was not aware that she was required to disclose the TILA claim at that time. See Declarations of Mark Wheeler, Esq., and Debtor. The amended schedule listing the district court litigation and claiming it as exempt was not filed until the day after the § 341 meeting simply due to the oversight of the Debtor's bankruptcy attorney. See Declaration of Robert J. Adams, Esq. Neither the Trustee nor Nationscredit produced any evidence to dispute the Debtor's explanation. Accordingly, this Court finds that any inference that may have arisen from the Debtor's initial failure to disclose the TILA claim has been adequately explained and does not establish bad faith, let alone the clear and convincing evidence required to deny the Debtor's otherwise permissive right to amend. Nor has there been any showing of prejudice to creditors. The amended schedule relates back to the filing of the Debtor's bankruptcy petition. In re Ace Finance Co., 64 B.R. 688 (E.D.Ohio 1986).
The Trustee and Nationscredit maintain that because the Debtor did not exempt the TILA claim and cannot now amend her schedules to claim it as exempt, that the Debtor did not have standing to bring the lawsuit.5 Since this Court has concluded that the Debtor may amend her schedules and that the amended schedules relate back to the filing of the petition, this argument must be rejected.6
B. Proceeds of Settlement in Excess of the Value of the Debtor's Interest Belong to the Class, Not the Estate. Therefore, Depending on the Amount of that Value, the Debtor's Interest May be Entirely Exempt.
The next problem with the Debtor's claim that the cause of action is exempt relates to the value of that claim. The Illinois wild card exemption only permits a debtor to exempt "other property" up to a value of $2,000. The Trustee argues that the proposed settlement amount, $7,500, establishes that the value of the claim is in excess of the wild card exemption. Notwithstanding the Trustee's and Nationscredit's arguments to the contrary, the evidence presently before the court suggests that the proposed settlement figure includes a premium for settlement of the entire class action lawsuit. Even if the TILA action were property of the estate, any settlement proceeds over and above the value of the Debtor's individual claim would not be property of the estate, but property of the class. Young v. Higbee, 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945); Certain-Teed Products Corp. v. Topping, 171 F.2d 241 (2d. Cir.1948).7 The settlement is conditioned upon obtaining a dismissal of the entire district court suit. The evidence offered by the Debtor shows that the proposed settlement is approximately five times the damages the Debtor would be able to recover in an individual lawsuit. Even though dismissal will not operate as res judicata on other class members' claims, Nationscredit may be willing to pay this premium to obtain a dismissal in the hopes that no other plaintiff will step into the shoes of the Debtor and attempt to get a class certified to bring the TILA claims against it.
The Trustee and Nationscredit have not yet produced any other evidence of the value of the TILA suit.8 The Debtor, on the other hand, has included affidavits from experts on consumer TILA litigation indicating that the most the Debtor would be entitled to recover on an individual claim is approximately $1,400. See Declarations of Andy Norman and O. Randolph Bragg attached to the Debtor's Response to Objection to Debtor's Exemptions at Exhibit A. This amount is within the $2,000 wild card exemption. Since the lawsuit is a class action,...
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