In re Harrington

• Decision Date: 29 December 2003
• Docket Number: No. 03-10490.,03-10490.
• Citation: 306 B.R. 172
• Parties: In re Benjamin Ronald HARRINGTON and Linda Kay Harrington, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

306 B.R. 172

In re Benjamin Ronald HARRINGTON and Linda Kay Harrington, Debtors.

No. 03-10490.

United States Bankruptcy Court, E.D. Texas, Beaumont Division.

December 29, 2003.

COPYRIGHT MATERIAL OMITTED

Stephen J. Zayler, Stephen J. Zayler, P.C., Lufkin, TX, for Stephen J. Zayler, Chapter 7 Trustee.

Tagnia Fontana, Maida Law Firm, P.C., Beaumont, TX, for Debtors.

MEMORANDUM OF DECISION

BILL PARKER, Chief Judge.

This matter is before the Court upon the "Trustee's Amended Motion for Authority to Pay to Debtor (sic) Portion of Funds Claimed as Exempt From Settlement of District Court Cause of Action" (the "Trustee's Motion") filed by the Chapter 7 Trustee, Stephen J. Zayler ("Trustee"). Based upon the evidence and legal argument presented at the hearing on this matter, the Court concludes that the Trustee's Motion should be granted only as to authorize and direct the immediate payment by the Trustee of the additional sum of $43,376.90 to the Debtors, Benjamin and Linda Harrington, based upon their valid exemption claims, but that all other relief requested by the Trustee's Motion should be denied.¹

Factual and Procedural Background

On April 8, 2003, Benjamin and Linda Kay Harrington (the "Debtors") filed a Chapter 7 petition, and Stephen J. Zayler was subsequently appointed to serve as the Chapter 7 trustee in their case. At the time the Debtors filed their voluntary petition, they were the plaintiffs in a state court lawsuit pending in the 128th Judicial District of Orange County, Texas, styled Benjamin Harrington, et al v. Hartford Lloyds Insurance Co. This was a cause of action for injuries sustained by the Debtors as a result of an automobile accident. The Debtors properly listed this lawsuit as an asset on Schedule B, and they exempted a portion of the expected recovery on their Schedule C under the federal exemption scheme. Specifically, the Debtors claimed $34,850.00 as exempt under 11 U.S.C. § 522(d)(11)(D), and they also claimed $17,169.00 as exempt pursuant to their § 522(d)(5) wild card exemption.

On June 18, 2003, a Motion to Approve Compromise and Settlement of District Court Cause of Action was filed wherein the Trustee, Special Counsel Richard Schechter,² and the Debtors agreed to settle this controversy for the total sum of $235,000.00. The terms of the settlement did not allocate the gross receipts of $235,000.00 by and among bodily injury, pain and suffering, actual pecuniary loss or any other category of damages contemplated by the federal exemption statute, but instead simply offered the $235,000.00 settlement amount in a lump sum from the named defendants.³

After receipt of the $235,000.00 settlement funds, the Trustee filed his Motion whereby he sought permission to pay to the Debtors the $17,169.00 claimed by the Debtors as exempt under 11 U.S.C. § 522(d)(5), from which he proposed to deduct a proportionate share of the 40% attorney's fee owed to attorney Richard Schechter (or $6,867.60), as well as a pro rated share of the actual expenses owed to Richard Schechter (or $1,659.30). Thus, the Trustee sought to tender to the Debtors the total sum of $8,642.10 in full satisfaction of the Debtors' § 522(d)(5) exemption of the proceeds from their state court lawsuit.⁴ The Trustee denied that the Debtors were entitled to any portion of their exemption claim under 11 U.S.C. § 522(d)(11)(D).

The Debtors objected to the treatment proposed by the Trustee's Motion, asserting that they had properly claimed amounts arising from the state court lawsuit as exempt under both 11 U.S.C. § 522(d)(5) and (d)(11)(D), and that they should therefore receive $52,019.00 as the aggregate amounts claimed as exempt under both subsections. The Debtors further argued that the attorney's fees owed to the special counsel should not be prorated between the estate and the Debtors' exemption amounts. A hearing was held on this matter on October 21, 2003, with both parties appearing and presenting argument. Upon the conclusion of the hearing, the Court provided the parties with additional time in which to submit supplemental briefing. Upon receipt of such briefing, the Court took this matter under advisement. This memorandum disposes of all issues pending before the Court.

Discussion

The commencement of a bankruptcy case creates an estate encompassing all legal and equitable interests in property of the debtor as of the petition date, including any property that might potentially be exempt. 11 U.S.C. § 541(a). This includes any pending personal injury lawsuit in which the debtor is involved. See Wischan v. Adler (In re Wischan), 77 F.3d 875, 877 (5th Cir.1996). The trustee as the representative of the bankruptcy estate under 11 U.S.C. § 323(a), succeeds to all causes of action held by the debtor at the time the bankruptcy petition is filed. See Jones v. Harrell, 858 F.2d 667 (11th Cir.1988); Miller v. Shallowford Community Hosp., Inc., 767 F.2d 1556 (11th Cir.1985). The debtor may then exempt certain property from that bankruptcy estate by claiming either the federal exemptions provided by 11 U.S.C. § 522(d), or any other exemptions provided by applicable federal, state, or local law. 11 U.S.C. § 522(b).⁵

As previously stated, the Debtors in this case selected the federal exemption scheme. On their Schedule C, the Debtors claimed $17,169.00 of the settlement proceeds as exempt under 11 U.S.C. § 522(d)(5)⁶ and they each claimed $17,425.00 of such proceeds as exempt under § 522(d)(11)(D).⁷ As noted earlier, the Trustee has never challenged the legitimacy of Debtors' exemption claim under 11 U.S.C. § 522(d)(5), only whether such exempt property can be impressed with a proportional share of the attorneys' fees owed.⁸

However, the Trustee's Motion, by seeking authority to pay to the Debtors only the amount claimed as exempt under § 522(d)(5), directly disputes the Debtors' entitlement to the exemption of any portion of the $235,000.00 settlement proceeds under § 522(d)(11)(D). Accordingly, an issue immediately arises regarding the timeliness of the Trustee's action.

The Debtors argue that Fed. R. Bankr.P. 4003(b)⁹ and the United States Supreme Court's decision in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), preclude the Court from considering at this point in the case the legitimacy of their § 522(d)(11)(D) exemption claim. As recognized in Taylor, § 522(l) of the Bankruptcy Code requires a debtor to file a list of the property that the debtor claims as statutorily exempt from distribution to creditors, and "[u]nless a party in interest objects, the property claimed as exempt on such list is exempt." See 11 U.S.C. § 522(l), cited in Taylor, 503 U.S. at 642, 112 S.Ct. at 1647. Fed. R. Bankr.P. 4003(b) then sets forth the deadline for filing such an objection, giving a party in interest thirty (30) days after the conclusion of the § 341(a) meeting of creditors either to file an objection to the claimed exemptions or to request an extension of time to file such an objection. Id. at 639, 112 S.Ct. at 1646.

In Taylor, a chapter 7 debtor had listed as exempt the money that she expected to win in a discrimination lawsuit against her employer. The debtor described this property as "Proceeds from lawsuit — [Davis] v. TWA" and "Claim for lost wages" and listed its value as "unknown" on her Schedule C (Property Claimed As Exempt). Despite representations from the debtor's attorneys that the debtor might recover between $90,000 and $110,000, the chapter 7 trustee elected to forego any objection to the debtor's claimed exemption within thirty days of the § 341 meeting of creditors because he thought the cause of action likely had a negligible value. However, that assessment proved to be erroneous. The debtor subsequently settled her lawsuit for $110,000, $71,000 of which went directly to her attorneys as payment of attorneys' fees. After learning of the settlement, the trustee filed a complaint against the debtor's attorneys in the bankruptcy court, seeking turnover of the $71,000 based upon his assertion that such sums constituted property of the debtor's bankruptcy estate. The attorneys argued for retention of the fee payment because the debtor had exempted the entire proceeds of the lawsuit from the bankruptcy estate without objection. The United States Supreme Court eventually held that even though the debtor did not have a good-faith or reasonably disputable basis for claiming the entire amount of the proceeds as exempt under either federal or state law, the exemption claim was nonetheless valid because no party in interest had objected to the claimed exemption within the 30-day objection period established by Rule 4003(b). Taylor, 503 U.S. at 643-44, 112 S.Ct at 1648-49.

In the present case, the Debtors listed their personal injury cause of action on Schedule B as "Personal Injury Case Cause No. A-10073-C; Benjamin and Linda Harrington v. The Hartford Insurance Company," and valued the asset at $175,000.00. The Debtors then claimed a portion of the expected recovery from their lawsuit as exempt on Schedule C, claiming the aggregate amount of $34,850.00 pursuant to 11 U.S.C. § 522(d)(11)(D),¹⁰ as well as $17,169.00 pursuant to § 522(d)(5). The § 341(a) meeting of creditors was held and concluded on June 2, 2003, and, pursuant to Rule 4003(b), the Trustee had until July 2, 2003, either to file an objection to the claimed exemptions or to request an extension of time. He did neither. The Debtors therefore claim that the express provisions of Rule 4003(b) and the rationale of Taylor insulate their respective § 522(d)(11)(D) exemption claims from any challenge by the Trustee.

The Trustee argues that Taylor is clearly distinguishable from the current situation, and that the objection deadline set forth in Rule 4003(b) is inapplicable when the basis for objecting to a claimed exemption is not known until after the expiration of the Rule 4003(b) deadline. According to the Trustee,...