In re Orlando, 05-49612-JBR.

• Citation: 359 B.R. 395
• Decision Date: 02 February 2007
• Docket Number: No. 05-49612-JBR.,05-49612-JBR.
• Parties: In re Peter J. ORLANDO, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

359 B.R. 395

In re Peter J. ORLANDO, Debtor.

No. 05-49612-JBR.

United States Bankruptcy Court, D. Massachusetts.

February 2, 2007.

COPYRIGHT MATERIAL OMITTED

Wayne R. Davies, Milford, MA, for Debtor.

MEMORANDUM OF DECISION ON DEBTOR'S MOTION TO AMEND BANKRUPTCY PETITION (SCHEDULE C) [# 23] AND CHAPTER 7 TRUSTEE'S MOTION TO COMPROMISE CLAIM WITH JANET D. ORLANDO [# 26]

JOEL B. ROSENTHAL, Bankruptcy' Judge.

This matter came before the Court for hearing on the Debtor's Motion to Amend Schedule C[# 23], to which the Chapter 7 Trustee objected [# 24], and the Chapter 7 Trustee's Motion to Compromise Claim with Janet D. Orlando [# 26] to which the Debtor objected [# 29]. After the hearing the parties submitted supplemental briefs and a copy of the recording of the Debtor's testimony at his first meeting of creditors, held pursuant to 11 U.S.C. § 341 (the " § 341 Meeting"). In addition the Debtor and his attorney submitted affidavits in support of the Debtor's position.

FACTS

The facts are uncontested. On October 14, 2005 the Debtor filed a voluntary petition pursuant to Chapter 7 of the Bankruptcy Code, as well as all schedules and the statement of financial affairs. He did not list any interest in any real estate on schedule A nor any interest in "alimony, maintenance, support or property settlement to which he is or might be entitled" on schedule B. The column labeled "None" has an "X" next to Item 16 of Schedule B which requests such information. At the § 341 Meeting, the Debtor, who was sworn, confirmed that the schedules and statements were correct. When asked if he had ever owned any real estate, the Debtor testified that he had but that his ex-wife received the house in the divorce action. The Chapter 7 Trustee then asked the following:

Are you entitled to anything as a result of that divorce, a future payment when they — she sells the house, or anything of that nature?

The Debtor responded:

I do have $80,000 that is supposed to go to the kids' education.

The Chapter 7 Trustee asked for and received a copy of the Separation Agreement.¹ Exhibit C to the Separation Agreement provides, in pertinent part:

The Wife hereby agrees to pay the Husband $85,000.00 in exchange for his release of any right, title and interest he may have in the [former marital home]. The payment shall be made as follows: . . . The Wife shall pay the Husband $80,000.00 when the youngest child is emancipated. The Wife shall have the right to make payments to the Husband on the outstanding balance of $80,000.00 at any time prior to the emancipation of the child, but shall not be obligated to pay the $80,000.00 until [the youngest child] is emancipated.

In the event that the Husband dies prior to the emancipation of [the youngest child], he hereby agrees to forgive the Wife's obligation to pay the $80,000.00 to his estate.

On February 1, 2006 the Debtor received his discharge. Shortly thereafter the Chapter 7 Trustee sought and obtain permission to retain his law firm as counsel to the Trustee. During the 8 months that followed, there was no activity reflected on the docket and thus the Court issued a Notice of Inactivity on November 3, 2006. Immediately thereafter the Chapter 7 Trustee filed a response in which he identified the payment the Debtor was to receive upon the youngest child's emancipation² as a "potential asset" and further stated that he had been in contact with the former wife's counsel regarding this matter.

On December 7, 2006 the Debtor filed the First Amended Schedules B and C.³ On Schedule B, item 16, the Debtor listed for the first time his interest in the future payment under the Separation Agreement as follows:

Possible interest in Divorce Separation Agreement with Janet D. Orlando excludable pursuant to Code section 541(A)(1) [sic] and (5) as not an interest of the Debtor at the time of filing. Included in bankruptcy petition for purposes of claiming exemption.

The Debtor valued this interest under the Separation Agreement at $0.00 but on Amended Schedule C asserted an exemption of $9,625.00 in the asset pursuant to 11 U.S.C. § 522(d)(5). The Trustee objected arguing that the Debtor was acting in bad faith and the allowance of the amendments would prejudice the creditors as the Trustee had reached an agreement with the ex-wife to settle the payment obligation. The Trustee then filed a motion to approve the settlement with the Debtor's ex-wife whereby the ex-wife would immediately pay $20,000 in complete satisfaction of her obligation to pay $80,000.00 upon emancipation of the youngest child. The Debtor objected to the settlement on the grounds that the obligation to pay was not an asset of the estate.

The Court held a non-evidentiary hearing, and although neither party requested an evidentiary hearing, the parties agreed to submit a copy of the recording of the § 341 Meeting when it became clear during oral argument that they disagreed as to what the Debtor was asked and what his answer was. The Debtor's counsel also requested and was granted the opportunity to "respond" to the testimony.

The Debtor filed an affidavit following the non-evidentiary hearing. In his affidavit the Debtor testified as follows:

5. I have reviewed my response with my attorney, and my statement to the Trustee was truthful. At the time of the Section 341 Creditors Meeting, I was not certain that my wife would have sufficient funds at the time of emancipation of my youngest child. I therefore doubted that I would ever receive the moneys from my wife. But even if I did receive such funds, I knew that the Separation Agreement required me to pay for my children's education.

6. I have reviewed the separation agreement again today, and I continue to believe that the best interests and welfare of my children are of paramount consideration, as stated in paragraph 3 of Exhibit A [of the Separation Agreement], and that I will continue to be entitled to share in all major decisions regarding their education, as stated in Paragraph 1 of exhibit A. I also continue to believe that Paragraph 5 of Exhibit B [of the Separation Agreement] will require that any funds received from my wife pursuant to Paragraph 1 of Exhibit C [of the Separation agreement] must be considered' available for my children's education, including college.

DISCUSSION

1. Amendment of the Schedules

With some limited exceptions not relevant to this case, the filing of a bankruptcy petition creates an estate that includes "all legal or equitable interests of the debtor in property as of the commencement of the case . . . ." 11 U.S.C. § 541(a)(1). "Whether property is `property of the estate' requires a federal analysis under Section 541 but as the Supreme Court has articulated, `[p]roperty interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.' Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)." In re Wiesner, 267 B.R. 32, 37 n. 7 (Bankr. D.Mass.2001). Under Massachusetts law the right to "[c]hoses in action, rights and other interests, the benefits of which may be receivable now and in the future are classifiable as intangible personal property." Hanify v. Hanify, 403 Mass. 184, 187, 526 N.E.2d 1056, 1059 (1988) (citations and internal quotation marks omitted).

There is no doubt that the Debtor's right to receive $80,000.00, albeit in the future, is an asset. The payment is not alimony; it is clearly a property settlement. It is by its very terms the final payment to the Debtor for release of whatever interest he may have had in the marital home. Moreover the Debtor's assertion that the $80,000 is not an asset because it was somehow earmarked for his children's education is not supported by the express language of Exhibit C to the Separation Agreement. The $80,000 payment was the remainder of the sum the Debtor was to receive in exchange for waiving any rights to the marital home. The fact that the right of the debtor to receive funds might be "forgiven" or extinguished on his death does not diminish that fact that the Debtor had an "interest" at the commencement of the case.

Having determined that the right to receive the $80,000 future payment is an asset of the estate, the Court turns to the question of whether the Debtor is entitled to now schedule and exempt the asset, or at, least $9,625 attributable to this asset. Fed. R. Bank. P. 1009(a) permits a debtor to amend his schedules "as a matter of...