IN RE BEAUDOIN, 07-21257 (ASD).

• Decision Date: 30 March 2010
• Docket Number: No. 07-21257 (ASD).,07-21257 (ASD).
• Citation: 427 B.R. 30
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Scott A. BEAUDOIN and Jennifer J. Beaudoin, Debtors.

427 B.R. 30

In re Scott A. BEAUDOIN and Jennifer J. Beaudoin, Debtors.

No. 07-21257 (ASD).

United States Bankruptcy Court, D. Connecticut.

March 30, 2010.

COPYRIGHT MATERIAL OMITTED

Kent S. Baker, Esq., Law Offices of Kent Steven Baker, Norwich, CO, for Debtors.

Rowena A. Moffett, Esq., Brenner, Saltzman & Wallman LLP, New Haven, CO, for Creditor IndyMac Bank, F.S.B.

MEMORANDUM OF DECISION ON CREDITOR INDYMAC BANK, F.S.B.'s (1) OBJECTION TO PROPERTY CLAIMED AS EXEMPT, AND (2) MOTION FOR DETERMINATION OF SECURED STATUS

ALBERT S. DABROWSKI, Bankruptcy Judge.

I. INTRODUCTION

The instant matter raises the questions of whether a cause of action, not expressly exempt under Section 522 of the Bankruptcy Code¹, is property that may be exempt by a debtor pursuant to the "wild-card" exemption of Section 522(d)(5), and whether the lien of creditor IndyMac Bank, F.S.B. extends to and is secured in part by the Debtors' interest in the cause of action.

The first question has not been addressed by the Second Circuit. However, as discussed in detail in Section IV, A, 4, infra, this Court aligns itself with the majority of courts which have addressed this issue by construing Section 522(d)(5) liberally to include no limitation on the type of property which may be exempt thereunder. Accordingly, the Court determines that the objection of IndyMac Bank, F.S.B. to the Debtor's claim of exemption, (Doc. I.D. No. 18), shall be OVERRULED.

With regard to the second question, this Court determines that IndyMac Bank, F.S.B. has a valid lien in the amount of $148,681.10, but that such lien is unsecured by the proceeds from the Debtors' cause of action because the lien was never perfected with respect to personal property other than fixtures, and therefore, that its ... Motion for Determination of Secured Status, (Doc. I.D. No. 17), shall be DENIED.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant matter by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this proceeding on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(2)(B), (K).

III. PROCEDURAL AND FACTUAL BACKGROUND

A. The Mortgage and Security Interest

On December 20, 2004, Scott and Jennifer Beaudoin (hereafter and heretofore, the "Debtors") executed a promissory note to IndyMac Bank, F.S.B. (hereafter, "IndyMac") in the amount of $272,600.00, (Doc. I.D. No. 17, Exh. A). As collateral for the loan, the Debtors granted IndyMac a security interest in real property located at 15 Sable Drive, Ledyard, Connecticut (hereafter, the "Real Property"), as well as in certain personal property related to the Real Property². IndyMac subsequently perfected its security interest with respect to the Real Property and its fixtures. Doc. I.D. No. 17, at ¶ 4.

B. The Debtors' State Court Cause of Action

In June 2006, the Debtors commenced a civil lawsuit³ (hereafter, the "Action") against Smart Start Building Systems (hereafter, "Smart Start") alleging the defendant's failure to build a modular home on the Real Property. The Action was ultimately settled by a compromise of the claim, entitling the Debtors to receive $31,000.00 as compensation (hereafter, the "Proceeds of the Action" or "Proceeds"). See, Order Granting Motion to Compromise, Doc. I.D. No. 51, dated November 21, 2008.

C. The Bankruptcy Petition and Objection to Exemption

The Debtors filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code on September 12, 2007, and received their discharge on December 11, 2007. On Schedule C, (Doc. I.D. No. 1), the Debtors listed the Action as property exempt from the estate pursuant to Title 11, United States Code, Section 522(d)(5) in the amount of $17,250.00. IndyMac filed the present objection (hereafter, the "Objection") to the Debtors' claim of exemption on November 8, 2007, (Doc. I.D. No. 18), alleging that the Debtors are not entitled to the exemption on the grounds that (1) "the Action is subject to a valid lien by IndyMac" by virtue of IndyMac's security interest; (2) the Action is not "property subject to exemption under 11 U.S.C. § 522(d)(5)" because the cause of action is not specifically enumerated as exempt property under Section 522(d)(11); and (3) even if the Debtors are entitled to exempt the Action, IndyMac is entitled to any equity amount above the allowed exemption. IndyMac filed a separate motion to determine its status as a secured creditor (hereafter, the "Motion"), (Doc. I.D. No. 17).

A hearing was held on September 10, 2009, wherein the parties requested that the Objection be resolved upon the briefs. The Debtors thereafter submitted their Debtors' Brief in Opposition to Creditor IndyMac Bank, F.S.B.'s Objection to Property Claimed as Exempt, (Doc. I.D. No. 61), on September 22, 2009, and Indy-Mac submitted its ... Reply in Support of Its Objection to Property Claimed as Exempt, (Doc. I.D. No. 62), on October 1, 2009. The parties continued the resolution of IndyMac's Motion pending a resolution of the Objection.

On November 19, 2009, a hearing was held wherein the Court advised the parties that the Objection and the Motion were sufficiently related that a resolution of both matters simultaneously was feasible. The Chapter 7 Trustee, on December 16, 2009, filed his Response ... to Creditor IndyMac Bank, F.S.B.'s Motion for Determination of Secured Status, (Doc. I.D. No. 63), and on December 22, 2009, IndyMac filed its ... Reply in Support of Its Motion for Determination of Secured Status, (Doc. I.D. No. 64). In the interest of judicial economy, the Court now decides both the Objection and the Motion herein.

IV. DISCUSSION

A. IndyMac's Objection to the Debtors' Claim of Exemption

1. Exemption Under Section 522(d)(5)

The Debtors' cause of action against Smart Start, which arose and was commenced by the Debtors pre-petition, unequivocally constitutes property of the estate. "The filing of a Chapter 7 petition creates a bankruptcy estate encompassing `all legal or equitable interests of the debtor in property as of the commencement of the case,' 11 U.S.C. § 541(a)(1), including any causes of action possessed by the debtor." In re de Hertogh, 412 B.R. 24, 29 (Bankr.D.Conn.2009) (citing Seward v. Devine, 888 F.2d 957, 963 (2d Cir.1989)).

Although a debtor's bankruptcy estate is essentially liquidated under Chapter 7 of the Bankruptcy Code to pay creditors, Congress provided for various exemptions of property which the debtor is permitted to retain in order to effect the underlying purpose of the Bankruptcy Code in affording debtors a fresh start. As this Court recently noted,

The effect of an exemption is twofold. First, the exempted property is removed from the estate and is not distributable to unsecured creditors in bankruptcy. See 11 U.S.C. § 522(b). Second, to the extent set forth in Section 522(c), the exempt property is placed beyond the reach of the debtor's prepetition creditors outside of bankruptcy.

In re Banner, 394 B.R. 292, 299 (Bankr. D.Conn.2008). The Debtors herein seek to exempt, inter alia, the Proceeds of the Action pursuant to Bankruptcy Code Section 522, which provides in pertinent part that:

522 (b)

(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in ... paragraph (2) ... of this subsection.

(2) Property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize.

* * *

(d) The following property may be exempted under subsection (b)(2) of this section:

(1) The debtor's aggregate interest, not to exceed $20,200 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.

* * *

(5) The debtor's aggregate interest in any property, not to exceed in value $1,075 plus up to $10,125 of any unused amount of the exemption provided under paragraph (1) of this subsection.

* * *

11 U.S.C. § 522(b),(d) (2007) (emphasis added).

On the Debtor's Schedule C ("Property Claimed as Exempt"), the Debtors do not claim any "homestead" exemption under Section 522(d)(1). Therefore, the Debtors may claim under Section 522(d)(5) an exemption in property for the full unused $10,125.00 of the Section 522(d)(1) exemption, plus $1,075.00, for a total of $11,200.00.⁴ At issue is whether the Action, not expressly exempt under other subsections of Section 522, may nonetheless be exempt as "any property" under the so-called "wild-card" exemption provision of Section 522(d)(5).

2. Burden of Proof

Under the Federal Rules of Bankruptcy Procedure, "the objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. 4003(c). As the objecting party, IndyMac bears the burden of proof in establishing that the Debtors' claimed exemption of the Proceeds of the Action is improper.

Connecticut construes exemptions broadly, and this Court has recognized that

exemption laws must be liberally construed in favor of a debtor and/or the debtor's family, so that their purposes may be properly effectuated. For this reason, no mere technicality should defeat the right of exemption, and whenever the claim to an exemption can be brought within the purpose and intent of the statute by a fair and reasonable interpretation, the exemption should be allowed. Thus, statutory language should not be restricted in its meaning and effect so as to minimize its operation on the beneficent objects of the statutes. Furthermore, when there is a

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