In re Floyd

• Decision Date: 16 November 2009
• Docket Number: No. 09-51554-JDW.,09-51554-JDW.
• Citation: 423 B.R. 579
• Parties: In re Johnny Wilson FLOYD, III, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Georgia

423 B.R. 579

In re Johnny Wilson FLOYD, III, Debtor.

No. 09-51554-JDW.

United States Bankruptcy Court, M.D. Georgia, Macon Division.

November 16, 2009.

Ward Stone, Jr., Macon, GA, for Debtor.

William Flatau, Macon, GA, for Trustee.

MEMORANDUM OPINION

JAMES D. WALKER, JR., Bankruptcy Judge.

This matter comes before the Court on the Trustee's Objection to Debtor's Claimed Exemptions. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(A). After considering the pleadings, the evidence, and the applicable authorities, the Court enters the following findings of fact and conclusions of law in conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

The facts in this case are undisputed. In January 2005, Debtor Johnny Floyd purchased a large parcel of land, titled solely in his name and subject to a deed to secure debt. In January 2008, Debtor surveyed out 12 acres from the property for a residence and borrowed money to build a house. The residence was titled in the names of both Debtor and his wife as joint owners with a right of survivorship. Debtor subsequently transferred his half interest in the house to his wife by a gift deed in February 2008.

On May 18, 2009, Debtor filed a Chapter 7 petition. He filed schedules on June 2, 2009. Even though Debtor had no interest in the residence on the petition date, Schedule A listed real property, including joint ownership in the residence, worth approximately $275,000 and subject to a mortgage of $203,000. On Schedule C, Debtor claimed an exemption of $10,000 in the residence. He did not disclose the February 2008 transfer on his statement of financial affairs.

At the § 341(a) meeting of creditors, held on June 24, 2009, the Chapter 7 Trustee questioned Debtor about the February 2008 transfer of his half interest in the residence to his wife. The Trustee further indicated his intention to avoid the transfer through litigation. The following month, on July 27, 2009, Debtor's wife reconveyed a half interest in the residence to Debtor. Thereafter, on August 3, 2009, Debtor filed amended schedules to disclose all the transfers related to the residence.

The Trustee filed an objection to Debtor's exemptions on August 6, 2009, claiming Debtor was not entitled to an exemption in the residence pursuant to 11 U.S.C. § 522(g). The Court held a hearing on the objection on October 5, 2009. At the conclusion of the hearing, the Court invited the parties to brief the issue. After considering the evidence and arguments of the parties, the Court will sustain the Trustee's objection.

Conclusions of Law

At issue in this case is whether Debtor may claim an exemption in his residence. Exemptions are governed by 11 U.S.C. § 522, which authorizes individual debtors to "exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection." 11 U.S.C. § 522(b)(1). As the Supreme Court explained in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), "[n]o property can be exempted (and thereby immunized) ... unless it first falls within the bankruptcy estate." Id. at 308, 111 S.Ct. at 1835 (emphasis in original).

Property of the estate is broadly defined in § 541(a)(1) to include all interests of the debtor on the filing date. "That means the property of the debtor's estate is property the debtor had when the bankruptcy case commences, not property that he acquires thereafter." Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234, 1237 (11th Cir.2006); see also Bell v. Bell (In re Bell), 225 F.3d 203, 215 (2d Cir.2000) (After the petition date, "the property of the estate is distinct from the property of the debtor."). The Bankruptcy Code provides several means by which the estate may acquire property after the case is filed. See 11 U.S.C. § 541(a)(3)-(7), § 1207(a), § 1306(a). Some of those provisions specifically apply to property the debtor acquires post-petition, including § 541(a)(5), § 1207(a), and § 1306(a), none of which are applicable in this case.¹ Of the other provisions, only § 541(a)(3), which designates as estate property any property the trustee recovers through his avoidance powers,² and § 541(a)(7), which designates as estate property any property the estate acquires after the petition date,³ are at issue in this case.

Although a debtor may only exempt property of the estate, not all estate property is subject to exemption. Pursuant to § 522(g)(1), the debtor may exempt property recovered by the trustee under the trustee's avoidance power "to the extent that the debtor could have exempted such property ... if such property had not been transferred, if—(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and (B) the debtor did not conceal such property[.]" 11 U.S.C. § 522(g)(1). In other words, if the trustee avoids a voluntary transfer by the debtor, the debtor is not entitled to any exemption in the recovered property. See Glass v. Hitt (In re Glass), 60 F.3d 565, 569 (9th Cir.1995).

With the legal framework in place, the Court now considers whether Debtor in this case may exempt his interest in the residence. Debtor admits he had no ownership interest in the property on the petition date. Therefore, the residence is not property of the estate pursuant to § 541(a)(1). The question, then, is whether it entered the estate by some other means. At the hearing, counsel for Debtor argued that the residence became property of the estate via § 541(a)(7), as property acquired by the estate. He cited several century-old cases to support his argument. However, those cases predate the current Bankruptcy Code, and none of them address property of the estate as defined in § 541. For example, in Bashinski v. Talbott, 119 F. 337 (5th Cir.1902), the debtor assigned his interest in a judgment to a third party. Shortly thereafter, he was the subject of an involuntary bankruptcy. The exemption law at that time allowed the debtor to claim an exemption of up to $1,600 without reference to any specific property. The debtor claimed such an exemption, and the trustee set aside property and cash worth a total of $1,600. The cash set aside by the trustee was money collected on the judgment. The money had been collected post-petition by the debtor's attorney. The assignee of the judgment had made no collection efforts and had made no claim on the money actually collected. Furthermore, the court noted that the assignment had not been properly delivered. Id. at 337-38. The court found the debtor was entitled to an exemption in the money because no avoidance suit had been filed against the transferee and the transfer was not made to defraud creditors. Id. at 339.

This decision is consistent with the law in effect at the time. Property of the estate was defined to include

(1) documents relating to [the debtor's] property; (2) interests in patents, patent rights, copyrights, and trade-marks; (3) powers which he might have exercised for his own benefit ...; (4) property transferred by him in fraud of his creditors; (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him ...; and (6) rights of action arising upon contracts or from the unlawful taking or detention of, or injury to, his property.

Bankruptcy Act, ch. 541, 55 Stat. 544, 565-66, § 70a (1898) (emphasis added). The statute also authorized the trustee to avoid "any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided" and to recover the property or its value. Id. 55 Stat. at 566, § 70e. Thus, the court's focus on actual fraud and avoidance tracked the language the statute—even though the court never actually cited that language. However, the court went even further, finding the purpose of the transfer was "that [the assignee] should collect the judgment as trustee or agent for [the debtor], and pay the proceeds to [the debtor's] creditors." 119 F. at 339. In other words, the court concluded that the debtor was the true owner of the judgment on the petition date, as such the property became property of the estate subject to exemption when the petition was filed. Regardless of the court's reason for reaching its conclusion, Talbott and the other cases cited by Debtor are unhelpful and unpersuasive because they were decided under substantially different statutes than the Court must consider today.⁴

In his brief, counsel for Debtor added a second argument. He claimed the reconveyance was not a mere transfer to Debtor, rather it was intended as a transfer to Debtor in trust for the bankruptcy estate. Debtor offers no evidence to support his contention other than his bare assertion as to intent, he offers no evidence of an agreement or instrument setting forth the terms of the trust, and he cites no law imposing a trust. Furthermore, the Trustee cannot receive property and have it become property of the estate except as specifically authorized by the Bankruptcy Code through his avoidance power.⁵

Turning to the Trustee's arguments, he primarily contends that he need not initiate an adversary proceeding to "recover" property under his avoidance power. Debtor counters that the Trustee must, at a minimum, file an adversary proceeding. Two circuit courts of appeals that have considered the issue agree with the Trustee.

In Russell v. Kuhnel (In re Kuhnel), 495 F.3d 1177 (10th Cir.2007), the debtors borrowed money to purchase a truck, but the lender failed to timely perfect its purchase money security interest. The debtors subsequently filed a Chapter 7 petition, and the trustee "caused [the lender] to consensually release its lien." Id. at 1179. The trustee did so without initiating litigation. Id. At issue in the case was whether the debtors were entitled to claim an exemption in the now-unencumbered truck or whether the exemption was...