In re Dawson
| Decision Date | 07 December 2018 |
| Docket Number | Case No. DG 16-04923 |
| Citation | 593 B.R. 749 |
| Parties | IN RE: Michael Harold DAWSON and Patricia Ann Dawson, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
Cheryl L. Chadwick, Duff Chadwick & Associates PC, Ionia, MI, Martin L. Rogalski, Martin L. Rogalski PC, Jenison, MI, for Debtor.
After debtor Patricia Dawson (the "Debtor") amended Schedule C to claim as exempt a cause of action against her former bankruptcy counsel (the "Cause of Action"), chapter 7 trustee Jeff A. Moyer (the "Trustee") filed Trustee's Objection to Amended Claim of Exemption (ECF No. 43, the "Objection"), seeking an order denying any exemption in the Cause of Action as contrary to 11 U.S.C. § 522(g).1 The Debtor opposes the Objection.
The court held a hearing on November 16, 2018, in Grand Rapids, Michigan, to consider the Debtor's exemption and whether the Trustee has met his burden under Rule 4003(c) of persuading the court that the Debtor has not properly claimed it. The Debtor and the Trustee both appeared at the hearing through counsel. The Debtor's former counsel also appeared through counsel, but only to monitor the hearing for any impact on the Trustee's adversary proceeding against her and her firm.
The court has considered the arguments presented at the hearing and in the Trustee's Brief in Support of Objection to Amended Claims of Exemptions filed after the hearing (ECF No. 54, the "Post-Hearing Brief"), and will overrule the Objection.
By way of background, before the Debtor amended her exemption claims, the Trustee had filed a complaint against the Debtor's former counsel alleging legal malpractice due to counsel's alleged failure to file the Debtor's petition in time to preserve a possible preference recovery (and exemption rights) under §§ 522(g) and 547. Through that adversary proceeding, the Trustee contends that if counsel had filed the Debtors' bankruptcy petition in time, the Debtor could have exempted approximately $6,047.00 from a likely preference recovery against her judgment creditor, GFI, LLC, who garnished a deposit account at Portland Federal Credit Union. The Trustee alleges that because former counsel failed to file the bankruptcy petition within ninety days of the service of the creditor's garnishment writ, she negligently foreclosed the Debtor from exempting the $6,047.00 that the Trustee, or the Debtor, might have avoided under § 547 and recovered under § 550. See 11 U.S.C. §§ 522(g-h), 547, and 550.
The parties to this exemption controversy agree that the Cause of Action qualifies as a prepetition asset to which the Trustee succeeded under § 541(a)(1) upon the commencement of the Debtor's case. Bauer v. Commerce Union Bank , 859 F.2d 438, 441 (6th Cir. 1988) (), cert. denied , 489 U.S. 1079, 109 S.Ct. 1531, 103 L.Ed.2d 836 (1989).2 They also agree that if the court overrules the Objection, the Cause of Action would, as a practical matter, belong to the Debtors rather than their bankruptcy estate, because its full value cannot be used to pay claims. See 11 U.S.C. § 522(c) and (k). Property without benefit to the estate should be abandoned back to the debtor, as the Trustee conceded during the hearing. 11 U.S.C. §§ 105(a) and 554(b).
Conceding that the court "may not refuse to honor the exemption absent a valid statutory basis for doing so,"3 the Trustee argues § 522(g) provides the statutory basis that precludes the Debtor from claiming the Cause of Action as exempt. He argues that the Debtor's former counsel concealed the Cause of Action by not cooperating in the Trustee's pre-suit investigation, and that the Debtor, as principal, is accountable for the acts of her former agents (the defendants in the adversary proceeding).
As the Supreme Court frequently says, the interpretation of any statute starts with the statutory text. Pennsylvania Dept. of Public Welfare v. Davenport , 495 U.S. 552, 558-59, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). Where the text is clear, the inquiry begins and ends there. Given the central role that § 522(g) plays in this dispute, the court begins with the text of the statute:
11 U.S.C. § 522(g) (emphasis added). In his Objection, during the hearing, and again in the Post-Hearing Brief, the Trustee contended that the Debtor's former counsel concealed the Cause of Action allegedly transferred by the Debtor, but when pressed he was unable to identify what transfer the Debtor effected—the obvious focus of the statutory text.
Last year, this court construed the text of § 522(g) and described its purpose as follows:
In effect, § 522(g)"provides a further opportunity for a debtor to claim an exemption in property that was not in the debtor's portfolio when the bankruptcy proceeding began" if the transfer was involuntary and the property was not concealed by the debtor. Stornawaye Financial Corp. v. Hill (In re Hill) , 562 F.3d 29, 34 (1st Cir. 2009). If, however, the transfer was voluntary and the property is recovered by the trustee under the provisions enumerated in the statute, § 522(g)"prevents a debtor from claiming exemptions" in the recovered property. In re Kuhnel , 495 F.3d 1177, 1178–81 (2007) ().
In re Mickens , 575 B.R. 797, 803 (Bankr. W.D. Mich. 2017) ().
As Judge Boyd explained in Mickens , § 522(g) is "a rehabilitative statute, rather than a punitive one, ... intended to further facilitate a debtor's overall ‘fresh start’ by permitting her to exempt property that was transferred away and recovered by the trustee in certain circumstances." Id. , 575 B.R. at 808 (citations omitted).
In contrast to this view of § 522(g), which regards the subsection as expanding the universe of property subject to exemption, the Trustee regards § 522(g) as limiting exemptions generally, even exemptions claimed in property included within the estate on the petition date under § 541(a)(1), as he argues in the Post-Hearing Brief. The court rejects the Trustee's narrow view of § 522(g) for several reasons.
Most generally, as a remedial or "rehabilitative statute," § 522 should be "construed liberally." In re Smith , 640 F.2d 888, 891 (7th Cir. 1981) ; cf. In re Wengerd , 453 B.R. 243, 247 (6th Cir. B.A.P. 2011) (). Even without this maxim of statutory construction, the text of the statute does not support the Trustee's reading.
The opening line—"[n]otwithstanding sections 550 and 551 of this title"—is the reader's first signal that § 522(g) is designed to expand, not limit, a debtor's exemption rights. It reveals that the point of the provision is to relax the restrictions in the two cited statutes that would otherwise preclude a debtor from claiming property as exempt.4 More specifically, by suspending §§ 550 and 551, § 522(g) ensures that debtors may exempt property that is not initially available for exemption, either as a legal or practical matter, because title or control of the asset is initially outside the bankruptcy estate. In this way, the text of § 522(g) expands, rather than limits, exemption rights which, in general, are determined as of the petition date when the rights of the parties to a bankruptcy proceeding are usually fixed. In re O'Brien , 443 B.R. 117, 130-31 (Bankr. W.D. Mich. 2011).
Of course, the expanded exemption right is not unlimited: if the debtor took steps to put the property beyond the reach of the trustee by voluntarily transferring and concealing it, the debtor cannot benefit when the trustee later unwinds the transfer, using the avoidance and recovery powers under chapter 5. This should come as no surprise.
The Trustee, however, seizes on the limiting language of § 522(g), arguing that the restrictions apply not just to property over which a trustee gains control using the chapter 5 powers, but to all property automatically included within the estate under § 541(a)(1). His argument invites the court to write out of the statute the references to § 550 and 551, and stands the text of § 522(g) on its head. He does this principally by identifying the transfer at issue as the transfer or conveyance that is said to occur by operation of law under § 541(a)(1). See Post-Hearing Brief at pp. 2-5. In addition to being at odds with Mickens and unsupported by any citation to case law, interpreting § 522(g) as a limitation on exempting any property included in the estate under § 541(a)(1) () would render the exemptions under § 522(b) inapplicable in every bankruptcy proceeding. In addition to ignoring the opening proviso in § 522(g), the Trustee's argument proves too much.
By identifying the transfer to which § 522(g) refers as the voluntary transfer of property into the estate automatically effected upon the filing of a petition, the Trustee ensures that no debtor in a voluntary case could ever satisfy § 522(g)(1), which authorizes exemptions only if...
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