In re Cruz

• Decision Date: 18 May 2018
• Docket Number: CASE NO. 14–07140
• Citation: 585 B.R. 255
• Parties: IN RE: Minerva PADILLA CRUZ, Debtor(s)
• Court: U.S. Bankruptcy Court — District of Puerto Rico

585 B.R. 255

IN RE: Minerva PADILLA CRUZ, Debtor(s)

CASE NO. 14–07140

United States Bankruptcy Court, D. Puerto Rico.

Signed May 18, 2018

Manuel F. Casellas, Juan Manuel Suarez Cobo, Legal Partners PSC, San Juan, PR, for Debtors.

Mayra M. Arguelles Alvarez, San Juan, PR, for Trustee.

OPINION & ORDER

Brian K. Tester, U.S. Bankruptcy Judge

This matter comes before the court upon Minerva Padilla Cruz's (hereinafter "Debtor") Motion To Alter or Amend Order Granting Trustee's Objection to Debtor's Claim Of Exemptions [Dkt. No. 91]; the Chapter 13 Trustee Jose R. Carrion's (hereinafter the "Trustee") Trustee's Opposition to Motion to Alter or Amend Order Granting Trustee's Objection to Debtor's Claim of Exemptions [Dkt. No. 101]; Debtor's Reply To Trustee's Opposition to Motion to Alter or Amend Order, Etc. [Dkt. No. 109]; and the Trustee's Sur reply to Reply to Opposition to Motion to Alter or Amend Order [Dkt. No. 111].

Debtor seeks reconsideration of this court's Order dated August 18, 2017 [Dkt. No. 89], sustaining Trustee's objection to Debtor's exemption over a lump sum payment received post-petition, post-confirmation for the Debtor's accumulated but unused sick leave. Section 522(d)(5)¹ states that debtors may exempt "$1,250 plus up to $11,850 of any unused amount of the [homestead] exemption" "in any property". 11 U.S.C. § 522(d)(5). The Trustee argued that exemptions can only be taken over property described in section 541, while Debtor argued that section 522 is also applicable to property of the estate acquired under section 1306. Upon consideration of the parties' arguments and the record, for the reasons set forth below, the court concludes that the Trustee failed to sustain his burden in objecting to the exemption and therefore, GRANTS Debtor's Motion to Alter or Amend Order Granting Trustee's Objection to Debtor's Claim of Exemptions [Dkt. No. 91].

I. Procedural and Factual Background

On August 29, 2014, Debtor, a government employee, filed for chapter 13 bankruptcy protection. Along with the necessary documents and schedules Debtor, on her Schedule B, listed $766.00 held in a bank account as personal property. On her Schedule C, Debtor exempted the bank account balance of $766.00 under section 522(d)(5). Debtor did not claim a homestead exemption. Furthermore, Debtor did not list the accumulated but unused sick leave hours held with her employer, the Puerto Rico Department of Education (hereinafter the "Dep't of Educ."), as an asset. On December 9, 2015, Debtor's chapter 13 Plan was confirmed. [Dkt. No. 50]. As of the date of this Opinion & Order, the case has not been closed, dismissed, or converted. The plan stated that the property of the estate would vest in the Debtor upon discharge or conversion.

On October 6, 2016, the Puerto Rico Government Employees Association ("AEELA") filed a motion informing that under P.R. Laws Ann. tit. 3, § 862, et seq., it had a statutory lien over Debtor's 83 days and 52 minutes of accumulated sick leave license with the Dep't of Educ. for an estimated value of $13,144.20. AEELA, furthermore requested, and the court authorized, the Dep't of Educ. to transfer $1,507.53 in full payment of AEELA's claim. [Dkt's. No. 57 & 62].

On October 13, 2016, in response to AEELA's motion, the Trustee filed a motion requesting the court to "...order Debtor to, within 14 days, amend Schedules I and J to reflect her new economic situation and inform whether she has received the $11,636.67...and, if so, to inform why it was not submitted to the Trustee to increase the base of the plan". [Dkt. No. 58]. On October 15, 2016, the Debtor amended item 35 of Schedule B ("Other personal property of any kind not listed") for the amount of $11,636.67, and in her amended Schedule C claimed the amount as exempt under section 522(d)(5). [Dkt. No. 60]. In a series of motions that followed, the Trustee requested that the remainder of the funds be sent to him for distribution under the plan, and objected to Debtor's exemption claim. The Trustee contends that section 522 is not applicable to property acquired pursuant to section 1306. The Debtor replied to these objections. [Dkts. No. 58, 61, 66, 70, 76, 86]. On August 18, 2017, the court entered an Order (the "Exemption Order") granting Trustee's objection and ordering the Debtor to submit the funds to the Trustee for distribution to the general unsecured creditors. [Dkt. No. 89].

In response, Debtor filed the Motion to Alter or Amend Order Granting Trustee's Objection to Debtor's Claim of Exemptions , now under consideration, contending the court erred by granting Trustee's objection. The reconsideration is premised on the argument that Trustee did not meet the burden of persuasion required by Federal Rules of Bankruptcy Procedure 4003(c) since exemptions under section 522(d)(5) can be taken over any property of the estate.

In deciding Debtor's motion, the court must address the following issues: (1) whether the Debtor's motion to alter or amend meets the legal requirements for reconsideration under Fed. R. Civ. P. 59(e) ; (2) whether unused sick leave accumulated prepetition and unused sick leave accumulated post-petition are property of the bankruptcy estate; (3) whether a chapter 13 debtor may amend its schedules to claim an exemption over property not initially included in Schedule B, and (4) whether Trustee's objection met Bankruptcy Rule 4003(c)'s burden of persuasion requirement.²

II. Discussion

A. Standard of Review

Federal Rules of Civil Procedure Rule 59(e)

Because Debtor's motion to alter or amend the judgment was timely filed as per Fed. R. Bankr. P. 9023, the court will base its review under Fed. R. Civ. P. 59(e).³ See In re Iannochino, 242 F.3d 36, 42 (1st Cir. 2001). Rule 59(e) authorizes a court to alter or amend a final judgment or order on a movant's timely motion. See Rule 59(e). "According to the accompanying Advisory Committee Report, [ Rule 59(e) ] was adopted to [make] clear that the district court possesses the power to rectify its own mistakes in the period immediately following the entry of judgment." White v. N.H. Dep't of Emp't Sec., 455 U.S. 445, 450, 102 S.Ct. 1162, 71 L.Ed.2d 325 (1982). "An order sustaining an objection to a debtor's claimed exemption is a final order." In re Wood, 291 B.R. 219, 223-24 (1st Cir.BAP 2003). "...[O]rders granting or denying exemptions are appealable as final orders under 28 U.S.C. § 158(a)." Howe v. Richardson, 232 B.R. 534, 535 (1st Cir.BAP 1999), aff'd, 193 F.3d 60 (1st Cir. 1999). The First Circuit Court of Appeals has identified four general grounds for granting a Rule 59(e) motion: manifest errors of law or fact, newly discovered or previously unavailable evidence, manifest injustice, and an intervening change in controlling law." Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 7 (1st Cir. 2005). As will be explained below, the Debtor has met the necessary standard to succeed in a Rule 59(e), as a result of this court's manifest error of law in the application of sections 522, 541 and Fed. R. Bankr. P. 4003 to the facts of this case.

B. Any interest in property held by a debtor as of commencement of a bankruptcy proceeding becomes property of the estate under 11 U.S.C. § 541(a) and subject to exemption under 11 U.S.C. § 522.

Definition of Property of the Estate under 11 U.S.C. § 541

Section 541(a)(1) states that filing a bankruptcy petition automatically creates an estate comprised of "...all legal or equitable interests of the debtor in property as of the commencement of the case...wherever located and by whomever held...." 11 U.S.C. § 541(a). It is from this initial pool of assets that the fundamental purpose of the Code is promoted: giving honest debtors sufficient breathing room in order to make a fresh start and distributing assets equally among creditors. See 5 COLLIER ON BANKRUPTCY ¶ 541.01 (Richard Levin & Henry J. Sommer eds., 16th ed.). To achieve this purpose, the term ‘property’ has been construed in the broadest and most inclusive terms possible to include nearly anything that might have value. Courts have consistently found that "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." In re Wood, 291 B.R. 219, 224 (1st Cir.BAP 2003) (citing In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1992) (internal quotations omitted) ).

The determination whether a particular asset is property of the bankruptcy estate is a federal question, but courts must look to state law to determine debtors' property interests. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). See also Stern v. Marshall, 564 U.S. 462, 495, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ("Property interests are created and defined by state law"). As a threshold matter, the court must first address whether and to what extent the Debtor in this case had a legal or equitable interest in her accumulated sick leave as of the commencement of the bankruptcy case before any inquiry into the exemptions can commence.

Debtors 'Accumulated Vacation Time or Sick Pay is Property of the Estate

Under P.R. Laws Ann. tit. 3, § 703 et seq., when a government employee is finally removed from service, he/she is legally entitled to a lump sum payment for the unused balance of their sick leave, up to a maximum of 90 hours, if he/she provided at least ten (10) years of service.⁴ In Álvarez Crespo v. Pierluisi, 150 D.P.R. 252 (2000), the Puerto Rico Supreme Court discussed the nature of Puerto Rico's government employees' accrued but unused sick leave under P.R. Laws Ann. tit. 3, § 703 et seq., and concluded that it was "something more than a common or ordinary marginal benefit of an employee" and that it was "transferable property right".⁵ Moreover, in Zayas Rodríguez y otros v. PRTC, 195 D.P.R. 720, 736 (2016), the Puerto Rico Supreme Court held that accumulated but unused sick leave is a "contingent benefit whose purpose is to guarantee an income...