In re Hoffpauir
| Decision Date | 12 January 2001 |
| Docket Number | No. 99-01993.,99-01993. |
| Citation | 258 BR 447 |
| Parties | In re John Edward HOFFPAUIR, and Dian Louise Hoffpauir, Debtors. |
| Court | U.S. Bankruptcy Court — District of Idaho |
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Randal J. French, Bauer & French, Boise, Idaho, for Debtors.
Jed W. Manwaring, Evans, Keane, LLP, Boise, Idaho, for Lois K. Murphy, Chapter 7 Trustee.
Gary L. McClendon, Boise, Idaho, Office of the United States Trustee.
This decision addresses some of the issues which have arisen between chapter 7 debtors and their trustee over the ability to exempt the proceeds of a fire insurance policy which provided for replacement value coverage of certain personal property. This decision follows an earlier ruling of the Court. See, "Memorandum of Decision and Order" filed June 21, 2000 (Doc. No. 37). As the relevant facts are set forth at length in that decision, and are incorporated here by this reference, they will be only briefly restated in order to provide convenient context for purposes of the present rulings.
On August 5, 1999 John and Dian Hoffpauir ("Debtors") filed a chapter 7 petition, and their schedules and statement of financial affairs. On schedules A and D, Debtors listed a residence in Boise, Idaho with a market value of $175,000 and securing a claim in the amount of $151,800. On schedule B, they listed household goods and furnishings with a total value of $2,905. This category and amount included a computer valued at $500.
On schedule C, Debtors claimed a homestead exemption and personal property exemptions including the household goods for $2,905.00 under Idaho Code § 11-605(1)(a), and an $800 exemption to protect the excess value of a vehicle pursuant to § 11-605(10). No exemption was claimed for any tools of the trade under § 11-605(3). No timely objection was raised to these claimed exemptions.
On November 18, 1999 a fire caused significant damage to the residence and destroyed virtually all the personal property contents. Debtors made a claim under their homeowners' insurance policy with Farmer's Insurance Group. This policy provided for "replacement cost" contents coverage.
On December 10, 1999 Debtors amended their schedules B and C. Amended schedule B increased the declared value of the household goods and furnishings from $2,905 to $108,000. Debtors also included a new entry on this schedule for "office equipment" (a computer and printer) with a value of $4,000. Amended schedule C claimed, in addition to the homestead, a $10,000 exemption in household goods and furnishings, and a $3,000 exemption for a computer, printer and scanner. On January 7, 2000 the Trustee filed a timely objection to these exemptions.
On January 12, Debtors again amended their schedules. Schedule B now listed $125 in dishes, cups, glasses, pots, pans and cooking utensils, and $103,000 in insurance proceeds for household goods and furnishings. This amended schedule B also listed $10,000 in insurance proceeds for a computer, printer, scanner and software. On their second amended schedule C, Debtors now claimed a $10,000 exemption in personal property1 pursuant to "IC 11-605", with an additional $800 wild card exemption for additional household goods pursuant to § 11-605(10), and a $3,000 exemption in computer equipment as a tool of the trade. On January 25, the Trustee again timely objected to the exemptions.
This objection came on for hearing on April 18, 2000. At that hearing, the parties stipulated to delay submission of the Trustee's objection to Debtors' amended homestead exemption in the real property until all outstanding issues were clarified with the insurer under that aspect of the policy. The Court was asked to resolve only the objection to the amended exemptions claimed on Debtors' personal property and the insurance proceeds.
After consideration of all arguments and briefing, the Court on June 21 issued a preliminary decision which required the parties, including the U.S. Trustee ("UST") who had appeared in support of the Trustee, to return for further evidentiary hearing. This was based on the significant discrepancy between Debtors' itemization and valuation of property on their schedules and their later representations to their insurance carrier. The Court concluded that a threshold issue was presented as to whether the amendments were made in good faith and should be allowed under Fed.R.Bankr.P. 1009 and applicable precedent.2
At hearing on September 21, the parties presented further evidence regarding these matters. Upon that supplementation of the record, the Court took under advisement the issue of whether the proposed amendments were offered in good faith, and again took under advisement the issues regarding the propriety of all claimed personal property exemptions under state law.3
This decision constitutes the Court's findings and conclusions on the matter. Fed.R.Bankr.P. 9014, 7052.
The Court must first decide whether Debtors should be allowed to amend their exemption claims. Assuming amendment is proper, and the Court thus reaches the question of allowance of the exemptions claimed, the litigants urge the following positions.
Debtors argue that, following the post-petition fire loss of their home and its contents, they are entitled to claim exempt $13,800 of the insurance proceeds as above set forth. They rely in large part upon the established principle of liberality in construction of exemption statutes, and upon what they perceive to be the intent of the Idaho Legislature reflected in Idaho Code § 11-606.
The Trustee, admitting that no objection was raised to the original exemption claimed of $2,905 in household goods, concedes an exemption under § 11-606 of an identical amount of insurance proceeds covering those assets. But she asserts that Debtors aren't entitled to increase the exemption beyond this fair market value of the personal property as of the date of filing, even though Debtors carried replacement cost insurance coverage. Her view is based on a narrower reading of § 11-606 coupled with a belief that Debtors should be held to their earlier valuation of their personal property assets, a valuation Mr. Hoffpauir reaffirmed at hearing as still accurate up to the day of the fire. She also believes that § 541 captures for the benefit of creditors any intangible rights that ripen post-petition, and contends that exemption through amendment is improper in regard to such property.
The UST holds a similar view. But it also specifically argues that, under prevailing case law, "post-petition appreciation" in asset value belongs to the estate. The UST contends that the insurance proceeds fall within this category, and they cannot be claimed as exempt. In the UST's view, Debtors are entitled to no part of the insurance proceeds whatsoever.4
Arnold reaffirmed the proposition, discussed in the Court's June 21 decision, that exemption amendments are to be liberally allowed absent a showing of bad faith or prejudice. 252 B.R. at 784.5 Accord, Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th Cir.1998). Bad faith must be evaluated on the entirety of the evidence, and generally involves consideration of whether debtors have attempted to conceal assets. Id. at 785-86. The mere fact that allowance of the amendment would remove assets from administration is, standing alone, insufficient to establish prejudice. Id. at 787-88.
The amendments clearly raised the specter of possible bad faith. The submission by Debtors to their insurance carrier, Exhibit 1, set forth a "date of purchase" and an "original cost" of hundreds of assets on an item by item basis. In all cases, this asserted "original cost" was far in excess of the values Debtors set out on their signed and sworn bankruptcy schedules for the same assets, even for assets the exhibit shows as acquired within a year or two of filing.
However, the testimony of Mr. Hoffpauir during the September 21 hearing established that these entries on Exhibit 1 were not truly disclosures of acquisition costs for the assets, nor even Debtors' estimates of their value as of the date of fire. Rather, the "original cost" category contained estimates of probable or anticipated replacement costs given Debtors' post-fire investigation.
The "replacement cost" category on Exhibit 1 was a similar misnomer. This column was used by Debtors only to indicate the actual amount spent when the item was replaced, not its projected replacement cost.
Mr. Hoffpauir testified that the in-place fair market values of the assets at the time of the fire were identical to the values that were set forth on the original bankruptcy schedules. His testimony was credible as to Debtors' good faith belief in those values. So, too, was his explanation for the apparent discrepancies regarding values on Exhibit 1 arising from the misuse of the terminology.
Less persuasive was Debtors' explanation for wholly omitting from the schedules assets they were able to itemize on Exhibit 1. Debtors contend that the admitted errors on the schedules arose partially through "oversight," partially through sloppy description, partially through slipshod completion of the schedules, and partially through a misunderstanding of what needed to be disclosed.6 The Court finds that a cavalier approach was taken to the serious duties of complete and accurate disclosure and scheduling of property.
While not favorably disposed to such arguments, the Court nevertheless concludes that the amendment should not be barred on the grounds of bad faith. The concern that Exhibit 1 reflected knowledge of Debtors that their scheduling of assets was grossly misleading, and may have reflected an intent to conceal assets, has been assuaged by the explanation for Debtors' inartful use of the terms "original cost" and...
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