In re Cory S. Obrien And Mary A. Obrien

• Decision Date: 04 January 2011
• Docket Number: No. GG 09–00426.,GG 09–00426.
• Citation: 443 B.R. 117
• Parties: In re Cory S. OBRIEN and Mary A. OBrien, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

443 B.R. 117

In re Cory S. OBRIEN and Mary A. OBrien, Debtors.

No. GG 09–00426.

United States Bankruptcy Court, W.D. Michigan.

Jan. 4, 2011.

Jeff A. Moyer, Esq., Grandville, MI, Chapter 7 Trustee.Dawn I. Krupp, Esq., Grand Rapids, MI, for Cory S. OBrien and Mary A. OBrien.

OPINION REGARDING TRUSTEE'S OBJECTION TO DEBTORS' AMENDED EXEMPTIONS AND TRUSTEE'S MOTION FOR TURNOVER

JAMES D. GREGG, Chief Judge.

I. ISSUES.

Cory S. OBrien (“Mr. OBrien”) and Mary A. OBrien (“Mrs. OBrien”) (collectively the “Debtors”) ¹ filed an amended Schedule C claiming their federal and state tax refunds as exempt. The Debtors were represented by Dawn I. Krupp (“Debtors' Attorney”) throughout this case. Jeff A. Moyer (“Trustee”) timely filed an objection to the Debtors' amended exemptions and requested a turnover of the refunds.

The Trustee has raised many objections to the amended exemptions. First, he argues that the amendment is “too late.” Some support for this argument is found in a trilogy of recent decisions rendered by the two other bankruptcy judges in this district. Those decisions seem to state that once a debtor spends a tax refund or “dissipates” property of the estate, the debtor cannot amend to claim that property as exempt because it is “already gone.” Second, as another type of “too late” objection, the Trustee asserts that the Debtors may only “add” property of the estate and claim exemptions for a period of fifteen days after filing their voluntary petition. Third, the Trustee argues that the Debtors' bad faith, concealment of the refunds, or reckless indifference mandates denial of the amended exemptions. Fourth, the Trustee asserts that because he has begun to administer the assets, prejudice to creditors will occur if the amended exemptions are permitted. Finally, the Trustee seeks to hold the Debtors' Attorney accountable for the delay in filing the amended exemptions. The Trustee characterizes this final issue as “what is the proper, fair and equitable result that does not unnecessarily punish these Debtors for their reliance on improper advice of counsel.”

II. JURISDICTION.

This court has jurisdiction over this chapter 7 bankruptcy case. 28 U.S.C. § 1334. This contested matter is a core proceeding. 28 U.S.C. § 157(b)(2)(B) and (E) (allowance or disallowance of exemptions and turnover of property of the estate). All proceedings and contested matters have been referred in this district to the bankruptcy court for determination. L.R. 83.2 (W.D. Mich.). This opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.

III. FACTS.

A. Procedural Background and Debtors' Schedules.

The Debtors filed their joint voluntary chapter 7 petition on January 19, 2009. At the time of the commencement of the case, Schedules and a Statement of Affairs were also filed. The Debtors owned no real property and had very limited personal property, mostly comprised of household goods, clothes, and a “free and clear” 2000 Chrysler minivan with 198,000 miles. (The Debtors' 2003 Dodge Durango truck was repossessed in September 2008.) In response to Schedule B—Personal Property, paragraph 18, “other liquidated debts owed to debtor including tax refunds,” the Debtors answered “none.” On Schedule D—Creditors Holding Secured Claims, the Debtors responded they had no secured creditors. On Schedule F—Creditors Holding Unsecured Nonpriority Claims, thirty-five creditors were listed. Of these creditors, twenty-seven (approximately 77%) resulted from unpaid medical or dental bills. Unsecured debts totaled $41,330. (In an amended Schedule F, the Debtors subsequently listed forty-three unsecured creditors, thirty of which were medical or dental claims, with total unsecured debt of $41,612.)

Regarding Schedule C—Property Claimed as Exempt, the Debtors elected the exemptions permitted under 11 U.S.C. § 522(b)(2),² the so-called federal exemptions. (Michigan is a non-opt-out state.) The Debtors claimed only $35 under § 522(d)(5), the “catchall” exemption. Therefore, any person, including the Trustee, could easily ascertain that the Debtors jointly had more than $20,000 in their unused § 522(d)(5) catchall exemption.

On January 22, 2009, a Notice of Chapter 7 Bankruptcy Case was docketed and served upon parties in interest. The § 341 meeting was scheduled for February 24, 2009 and the court believes it occurred on that date.³ On April 7, 2009, The Debtors filed amended schedules. In their (First) Amended Schedule B—Personal Property, the Debtors listed, in paragraph 18, a “2008 Federal Tax Return” in the amount of $5,000 and “2008 State Tax Returns” in the amount of $150. On their (First) Amended Schedule C, the aggregate amount of federal tax returns ($2,115 and $2,885) of “$5,000” was listed exempt. The state tax return, in the amount of $150, was also listed as exempt. Total catchall exemptions under § 522(d)(5) totaled $5,185 and the Debtors still had more than $15,000 remaining in unused § 522(d)(5) catchall exemptions.

Two days later, on April 9, 2009, the Trustee filed his Motion to Compel Turnover. (Dkt. 25.) The Trustee asserted the Debtors failed to disclose and exempt 2008 federal and state tax refunds in the amount of $4,114.00.

On April 27, 2009, within the 30 day deadline to object to Debtors' amended exemptions, the Trustee objected to the Debtors' “belated exemption” of the tax refunds. The Trustee also asserted the Debtors were in “bad faith” and the circumstances “may very well reflect an intentional attempt by the Debtors to conceal this asset.” Notwithstanding these assertions, the Trustee acknowledges that the Debtors disclosed in writing they had received their federal refund of $4,007 and would be receiving a state refund of $107 on the “Trustee's pre-meeting questionnaire.” The Trustee also candidly recognizes that the Debtors orally disclosed the tax refunds to him at the § 341 meeting. Notwithstanding disclosure by the Debtors at the § 341 Meeting, the Trustee objects because the official amendments to Schedules B and C did not occur until “42 days after the § 341 meeting.” In further support of his objection to the Debtors' amended exemptions, the Trustee asserts “reckless indifference” and also states that he had begun to administer the assets by sending correspondence and communicating with the Internal Revenue Service.

On June 2, 2009, the Debtors filed their (Second) Amended Schedules B and C. In these schedules, they modified information about their tax refunds; the federal refund was reduced from an aggregate amount of $5,000 to $4,100; and the state refund was increased from $107 to $197. Again, anyone could easily see the Debtors still had in excess of $17,000 in their remaining and unused federal catchall exemptions.

Legal memoranda regarding the two contested matters (turnover and objection to exemptions) were filed by the opposing parties. On August 12, 2009, the court held a hearing, heard testimony, considered the exhibits admitted, and reviewed the pertinent schedules. Because of the lateness of the day and because the court believed that the contested matters could be expeditiously determined, the court did not permit the trustee (or the Debtors' Attorney) to make a final argument. The court rendered an extemporaneous oral bench opinion during which it made specific findings of fact and conclusions of law. See transcript of August 12, 2009 hearing, hereinafter, “Tr.”, at 71 (“I find at this time that closing argument will not materially advance the litigation and I'm going to give an extemporaneous oral bench opinion.”).

On August 19, 2009, the court prepared, signed and docketed its Order Overruling Trustee's Objection to Debtors' Exemptions and Denying Trustee's Motion to Compel Turnover. (Dkt. 49.) On August 29, 2009, the Trustee filed his Motion to Alter or Amend Judgment Under [Bankruptcy Rule] 9023 based, in part, upon the court's failure to permit closing arguments. The Trustee asserted that if the court “had the benefit of the closing arguments” that the outcome “may have been materially and substantially different.” (Dkt. 51.)

This judge normally and routinely permits final arguments to be made as determined by the difficulty of the contested matter or adversary proceeding. After an adjournment requested by the parties, the court heard the motion to alter the judgment on December 16, 2009. (The Trustee appeared in support of his motion; the Debtors' Attorney did not appear.) On January 4, 2010, the court prepared, signed and docketed its Order Rescinding Court's Prior Order Overruling Trustee's Objection to Debtor's Exemptions and Scheduling Supplemental Argument Regarding the Trustee's Objection to Exemptions. (Dkt. 66.)

On January 27, 2010, the court heard final argument by the Trustee and the Debtors' Attorney. The court took the matter under advisement.⁴

B. Debtors' Economic and Family Circumstances.

During the hearing, Mrs. OBrien and Mr. OBrien each testified credibly. The court finds both of them to be totally honest and truthful. However, the presentation of their testimony was somewhat confusing because of their attorney's scattered questions and the disorganized mode of presentation of the Debtors' case. One problem faced by the court is to determine what happened prepetition and what happened postpetition. In some instances, the time of occurrences is clear; in other instances, the court has drawn inferences to determine the timing of the Debtors' actions and activities.

Before the filing of the bankruptcy case, the Debtors were separated for a period of time. Mr. OBrien lived and worked in Colorado; Mrs. OBrien remained in Michigan with the Debtors' four minor children. Because of the separation, Mrs. OBrien and Mr. OBrien filed separate returns for the 2007 tax year. (Tr. at 44.) During 2007, Mrs. OBrien had income of $21,583 (Tr. at 30), and Mr. OBrien's income was $35,102 (Tr. at 35). Sometime during 2008, the Debtors again began...