In re Markey

• Decision Date: 29 October 2007
• Docket Number: Bankruptcy No. 02-93495.,Adversary No. 05-3269.
• Citation: 378 B.R. 594
• Parties: In re Tamara M. MARKEY, Debtor. Randall L. Seaver, Trustee, Plaintiff, v. Tamara M. Markey, now known as Tamara Markey Hancel, Defendant.
• Court: U.S. Bankruptcy Court — District of Minnesota

Page 594

378 B.R. 594

In re Tamara M. MARKEY, Debtor.

Randall L. Seaver, Trustee, Plaintiff, v. Tamara M. Markey, now known as Tamara Markey Hancel, Defendant.

Bankruptcy No. 02-93495.

Adversary No. 05-3269.

United States Bankruptcy Court, D. Minnesota.

October 29, 2007.

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Michael S. Dove, Gislason & Hunter LLP, New Ulm, MN, Randall L. Seaver, Roger Seaver, Fuller Seaver & Ramette, Burnsville, MN, for Plaintiff.

Michael J. Iannacone, lannacone Law Office, Lake Elmo, MN, for Defendant.

MEMORANDUM DECISION AFTER TRIAL [ADV 05-3269] AND ORDER ON TRUSTEE'S OBJECTION TO DEBTOR'S AMENDED CLAIM OF EXEMPTIONS [BKY 02-93495]

GREGORY F. KISHEL, Bankruptcy Judge.

This Chapter 7 ease and adversary proceeding came on before the Court on a joint calendar setting, for trial in ADV 05-3269 and for an evidentiary hearing on an objection to the Debtor's amended claim of exemptions in BKY 02-93495. The Plaintiff and objector ("the Trustee") appeared personally and by his attorney, Michael S. Dove. The Defendant ("the Debtor")¹ appeared personally and by her attorney, Michael J. lannacone. The following memorializes the decision on both proceedings, which is based on the evidentiary record and the briefs and oral argument submitted by counsel.

INTRODUCTION²

The Debtor filed a voluntary petition for relief under Chapter 7 on November 6, 2002. She was represented by David F. Frundt, Esq., for the filing and the resultant bankruptcy case.

When the Debtor filed for bankruptcy she held ownership interests in two parcels of real estate in Martin County, Minnesota. One was the house in the town of Ceylon that she occupied as her home; the other was a rental property. She also owned various items of personal property. In her original Schedule C, filed with her petition, she claimed exemptions for her interests in both parcels of real estate and in various described personalty. She elected the exemptions available under federal law, 11 U.S.C. § 522(d).³ She assigned specific values to the claimed exemptions, as the schedule's form required. Among other things, she noted a "Value of Claimed Exemption" of "0.00" for the house she occupied. This figure was the same as the value she had assigned to the property as a whole, in her Schedule A. She did not schedule any interest in a right to receive income tax refunds, as an asset or as exempt property.

The Trustee was duly appointed to administer the estate in the Debtor's bankruptcy case. He convened the meeting of creditors under 11 U.S.C. § 341 on December 19, 2002.

The colloquy at the meeting of creditors went into the issues of the Debtor's equity in the real estate and her right to receive income tax refunds. It emerged that the Debtor had not yet filed returns for tax years 2001 and 2002, but had had amounts for taxes withheld from her wages in both years. The Debtor stated that she believed she was entitled to tax refunds for both years. The Trustee then asked her to file her returns promptly, and to refrain from cashing any checks for refunds that she received. He specifically instructed her to send the checks to Frundt, "while we figure[d] out who's entitled to it." The Debtor agreed to do this.

The Debtor received a discharge under Chapter 7 in BKY 02-93495 on February 19, 2003.

After some exchange of correspondence with Frundt on the issue of the value of the Debtor's home, the Trustee objected to the Debtor's claim of exemption in that asset.⁴ He did so to obtain an adjudication under In re Soost, 262 B.R. 68 (8th Cir. BAP 2001), that the value to be allowed as exempt was limited to the specific number in the recitations in the Debtor's original Schedule C. The Debtor did not respond to the objection. An order sustaining the Trustee's objection was entered. In pertinent part, it determined that "[t]he Debtor's claimed exemption of a homestead ... in the amount of `0.00' entitles her to nothing."

As it then came to be known to the Trustee, in several stages of revelation:

1. On November 22, 2002, shortly after her bankruptcy filing, the Debtor had been granted a judgment from the Martin County, Minnesota District Court, determining that a mortgage of record against the Debtor's home was not valid or enforceable. (The reason was that the mortgage had been previously granted during the Debtor's marriage to one Edward R. Chojnacki, but the Debtor had not signed the mortgage instrument.) That judgment was later affirmed by the Minnesota Court of Appeals.⁵ This had left the home free and clear of encumbrances. The Debtor had not listed or claimed as exempt any interest in this lawsuit, in her original bankruptcy schedules. The Trustee first became aware of the foreclosure action before the meeting of creditors, when Frundt disclosed it to him in a letter dated November 14, 2002. In a later letter dated December 11, 2002, Frundt disclosed for the first time that "the validity of [the] Mortgage held by Wells Fargo Bank" was also at issue in the foreclosure action. He stated that "regardless of the outcome, this matter will need to be appealed." At the meeting of creditors, the Trustee first learned about the entry of the state court's judgment.

2. In May, 2004, the Debtor obtained a loan in the principal amount of $100,000.00 and granted a mortgage against her home to secure it. This occurred after the entry of the order sustaining the Trustee's objection to the Debtor's claim of homestead exemption. In the meantime, the Trustee had taken no action to administer the non-exempt value in the home. The net proceeds of the loan, in the amount of $91,635.53, were disbursed to the Debtor directly or to third parties on the Debtor's account.

3. The Debtor filed her income tax returns for 2001 and 2002 by January 31, 2003. She did not advise the Trustee that she had completed and filed the returns. After that, she received corresponding tax refunds, in early 2003. She did not report her receipt of the refunds to the Trustee. She did not turn the checks or any direct-deposited refunds over to the Trustee. She cashed the checks or retained all direct-deposited funds, and spent the full amount of the proceeds.

4. When she filed for bankruptcy, the Debtor had owned a large snowblower attachment, capable of use when installed on a tractor. She had not noted her ownership of this asset anywhere in her bankruptcy schedules. After the meeting of creditors in her case, she sold it for $1,800.00. She then spent the proceeds. She did not report the sale or her receipt of the proceeds to the Trustee; nor did she turn the proceeds over to the Trustee.

5. When she filed for bankruptcy, the Debtor had owned a moped or motorcycle of the Indian brand, an Amana-brand freezer, a satellite dish and receiver, and a horse trailer. She also had had an open savings account at State Bank of Ceylon. She had not disclosed her ownership of any of these assets in her bankruptcy schedules.

After taking an examination of the Debtor under Fed. R. Bankr.P.2004, the Trustee commenced ADV 05-3269. Via his complaint, he sought a revocation of the grant of discharge to the Debtor. The stated grounds were that the Debtor had acquired property of the bankruptcy estate (in the form of the proceeds of the mortgage-secured loan, the tax refunds, and the snowblower sale, plus certain tangible personal property), and after failing to report these acquisitions to the Trustee she had failed to surrender the proceeds to him, all knowingly and fraudulently. He also sought relief styled under the turnover provisions of 11 U.S.C. § 542, to recover the subject assets or their value from the Debtor.

For the defense of this adversary proceeding, the Debtor engaged new counsel, Michael J. Iannacone, Esq. He filed an answer. Through it, the Debtor generally denied that she had acted with fraudulent intent. As an affirmative defense, she asserted that she had "reasonably relied on the advice of her bankruptcy counsel," "at all times in her dealings with the bankruptcy trustee."

After a scheduling conference and the issuance of a scheduling order, the Trustee filed a motion for summary judgment. The Trustee and the Debtor's counsel stipulated to a month's continuance of the hearing on it. Five days prior to the date of the continued hearing, Iannacone filed amended schedules in BKY 02-93495. Under them, the Debtor now claimed "100% of value exempt" as to her home, reciting $92,000.00 as the value of the property as a whole and as the value of her claimed exemption. She now cited Minnesota law, Minn.Stat. § 550.01-.02, as the legal basis for her claim of exemption. One day before the hearing, Iannacone filed a response to the Trustee's motion.⁶

The Trustee objected to the amended claim of exemptions. At a preliminary hearing, the Court and counsel agreed that an evidentiary hearing on that proceeding would be consolidated with the trial in ADV 05-3269.

In the ruling on the motion for summary judgment, the Court made a number of findings as to uncontested facts, and legal conclusions as to those facts. First, it was held that the Debtor's dissipation of some of the cash proceeds from the tax refunds and the mortgage loan disbursement, and the full proceeds of the sale of the snowblower attachment, were failures to surrender property of the estate that were actionable under 11 U.S.C. § 727(d)(2). However, the record presented triable fact issues as to the Debtor's knowledge and/or intent when she received and dissipated these funds. Thus, the Trustee was not entitled to judgment as a matter of law and his motion was denied. These were the only fact issues reserved for trial in ADV 05-3269.⁷ Certain legal issues under the Trustee's remaining turnover requests were reserved for determination after the ruling on the viability of the Debtor's amended claim of exemptions.⁸ The Court specifically reserved the issue of whether the Debtor's discharge...