In re Lents
| Decision Date | 11 October 2022 |
| Docket Number | C/A 21-01868-EG |
| Parties | IN RE: Christopher Allen Lents and Kimberly Dawn Lents, Debtor(s). |
| Court | U.S. Bankruptcy Court — District of South Carolina |
ORDER ON DEBTORS' MOTION TO COMPEL ABANDONMENT AND TRUSTEE'S MOTION
FOR TURNOVER THIS MATTER came before the Court for hearing on September 21, 2022 (the "Hearing"), to consider (1) Christopher Allen Lents and Kimberly Dawn Lents' (the "Debtors") Motion to Compel Abandonment[1] and Chapter 7 Trustee Michelle L. Vieira's (the "Trustee") Objection thereto,[2] and (2) the Trustee's Motion for Turnover Against Debtor 2, Kimberly Dawn Lents, For Non-Exempt Property of Estate ("Motion for Turnover")[3] and the Debtors' Response thereto.[4] The hearing was attended in person by Debtor Kimberly Dawn Lents, who is now known as Kimberly Dawn Spoljaric ("Ms. Spoljaric") and the Trustee, as well as their respective counsel. Debtor Christopher Allen Lents ("Mr. Lents") appeared by telephone. Ms Spoljaric and the Trustee testified, and the parties stipulated to the introduction of various documents into the record.[5] Based on the pleadings, the arguments of counsel at the Hearing, and the evidence presented, the Court makes the following findings of fact and conclusions of law.
1. On July 16, 2021 (the "Petition Date"), the Debtors filed a voluntary petition for Chapter 7 relief accompanied by their schedules and statements of financial affairs.[6] At the time of filing, the Debtors were living in and maintaining separate residences and filing separate tax returns.
2. The Debtors listed two real properties on their Schedule A/B. The first is a single-family home owned by both Debtors located at 458 Flat Rock Lane, Summerville, SC 29486 (the "House") where Mr. Lents resided at the time of filing. The House was listed as having a value of $350,000.00. At the Hearing, Ms. Spoljaric testified that the Debtors determined the value of the House by considering the estimated property value on Zillow.com, what comparable properties in the neighborhood were selling for at the time and the opinion of a real estate agent the Debtors contacted. The second is a condominium located at 5523 N. Ocean Blvd #1209, Myrtle Beach, SC 29577 (the "Condominium") owned solely by Ms. Spoljaric, where she has been residing since before the Petition Date. The Condominium was listed on the schedules as being worth $130,000.00.
3. At the time of filing, both properties were encumbered by mortgages. On Schedule D, the Debtors listed mortgages on the House totaling $332,114.55 and a mortgage on the Condominium of $109,998.34. The Debtors later determined that the mortgage balance on the Condominium was $120,540.31, as the Debtors had not accounted for amounts owed due to a forbearance.[7] According to the Debtors' estimates and figures they provided, as of the Petition Date, there was $17,885.45 in equity in the House and $9,459.69 in equity in the Condominium.
4. Ms. Spoljaric testified that even while they were married, she kept her finances separate from Mr. Lents, and the couple filed separate tax returns. Mr. Lents made all mortgage payments on the House, where he resided, and otherwise paid for expenses related to its maintenance both before and after the Petition Date; however, according to her testimony, he did not make any payments or maintenance that came due for the Condominium.
5. In Schedule C, Mr. Lents claimed a homestead exemption on the House in the amount of $63,237.50, and Ms. Spoljaric claimed a homestead exemption on the Condominium in the amount of $56,912.50; both exemptions were pursuant to S.C. Code Ann. § 15-41-30(A).[8]
6. The Debtors' Statement of Financial Affairs for Individuals Filing for Bankruptcy (Official Form 107) ("SOFA") indicates they had previously operated RTLS Battery Management, LLC, a consulting firm, until May of 2021, and were operating a dog treat business by the name of Two Sisters Pet Barkery, LLC ("Two Sisters"). Ms. Spoljaric testified that she operated these businesses. She further testified that she sometimes paid for business debts out of her personal bank account, and she regularly made personal expenditures out of the Two Sisters bank account.
7. According to testimony presented at the Hearing, some information in the Debtors' schedules was inconsistent with the information in financial documents reviewed by the Trustee. For example, Schedule A/B reflects that the Debtors had no cash in their possession on the Petition Date and expressly stated neither of them carry cash. In reviewing bank statements, however, the Trustee noticed, and Ms. Spoljaric acknowledged during her testimony, that several withdrawals of cash were made from the bank accounts in the two weeks before the Petition Date totaling approximately $2,000.00. Ms. Spoljaric testified that she used the cash to pay creditors. However, in response to Part 3, Question 6 of the SOFA, which asks, "during the 90 days before you filed for bankruptcy, did you pay any creditor a total of $600.00 or more?," the Debtors only indicated a payment to OneMain Financial of $894.45.
8. On the SOFA, the Debtors indicated Ms. Spoljaric received income from employment and operating a business of $197,550.69 in 2019, $11,305.89 in 2020, and $13,028.53 from January 1, 2021 until the Petition Date. According to the Trustee's testimony, the amount of income that Ms. Spoljaric represented she received from Two Sisters on her 2020 income tax return - which Ms. Spoljaric affirmed during her testimony - is inconsistent with bank records.
9. On August 19, 2021, the Trustee examined the Debtors at the 11 U.S.C. § 341 meeting of creditors. The Trustee did not abandon any assets of the Debtors' estate at the conclusion of the meeting; rather, on the same day, she made an Entry of Further Action Required on the case docket, indicating she would hold the case open for 30 days "to obtain valuation of real estate."[9]
10. On August 26, 2021, a week after the meeting of creditors was held, the Trustee filed a Notice of Assets and Request for Notice to Creditors. On the same day, the Court issued and served a Notice to File Proof of Claim Due to Recovery of Assets, setting November 26, 2021 as the deadline to file non-governmental claims and January 22, 2022 as the deadline for governmental claims.[10] 11. Over the following week, the Trustee and Debtors' counsel corresponded via e-mail about a potential buyer for the Condominium, the value of the Condominium, the balance owed on the mortgage on the Condominium, additional exemptions available to Ms. Spoljaric, and on August 30, 2021, the Trustee e-mailed Debtors' counsel stating that that if Ms. Spoljaric amended her exemptions to claim additional homestead and wildcard amounts "that should resolve the issue" (the "August 30 Email"). The Trustee testified that this Email was meant to convey that if Ms. Spoljaric claimed additional exemptions on the Condominium, the Trustee would not pursue a sale of the property because there would be negligible equity to distribute to creditors. When questioned at the Hearing, Ms. Spoljaric also agreed that the email only concerned the issue of selling the Condominium, not the House.
12. On September 1, 2021, the Debtors filed an Amended Schedule C.[11] As with the original Schedule C, Mr. Lents claimed a homestead exemption of $63,237.50 for the House. With respect to the Condominium, Ms. Spoljaric increased her claimed homestead exemption to $63,237.50 and claimed a wildcard exemption of $4,394.20. At the hearing, Ms. Spoljaric testified she understood she would not have been able to claim an exemption in the House in addition to the exemptions she claimed for the Condominium.
13. On October 19, 2021, the Court entered an order granting a discharge under 11 U.S.C. § 727 to the Debtors (the "Discharge Order")[12] and served it on all parties in interest, including both Debtors at their respective addresses.
14. The Discharge Order states: "A discharge under 11 USC § 727 is granted to: Christopher Allen Lents, Kimberly Dawn Lents" and "SEE THE BACK OF THIS ORDER FOR IMPORTANT INFORMATION." The first sentence on the back of the order states: "This order does not close or dismiss the case…." The back of the order further states: "Because the law is complicated, you should consult an attorney to determine the exact effect of the discharge in this case." Despite the language in the Discharge Order, Ms. Spoljaric testified that she believed that receiving the discharge meant her bankruptcy case was "over with", but she did not realize that the case still needed to be closed.
15. The Debtors divorced in the spring of 2022 and decided to sell the House and split the proceeds. On March 1, 2022, the Debtors signed a listing agreement with a real estate broker to sell the House. On April 14, 2022, without notifying the Trustee or obtaining Court approval, the Debtors sold the House to a third party for $430,000.00. The Closing Disclosure introduced into evidence reflects that Mr. Lents received $42,430.08 and Ms. Spoljaric received $40,676.66 (the "Disputed Proceeds") in net proceeds from the sale of the House.[13] After the closing, Ms. Spoljaric received a refund of mortgage payments of $825.84 but did not disclose it to the Trustee.[14]
16. While the Debtors did not tell their bankruptcy counsel about the sale of the House, Ms. Spoljaric testified that the Debtors told the real estate broker and the closing attorney about filing for bankruptcy relief, and relied on those professionals to determine the impact of the bankruptcy on the sale. She further testified she did not rely on any conduct of the Trustee in determining it would be...
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