In re Wick

• Decision Date: 02 January 2001
• Docket Number: No. 00-1790 DDA. Bankruptcy No. 97-45270. Adversary No. 99-4284.,00-1790 DDA. Bankruptcy No. 97-45270. Adversary No. 99-4284.
• Citation: 256 BR 618
• Parties: In re Susan E. WICK, Debtor. John R. Stoebner, Trustee, Plaintiff-Respondent, v. Susan E. Wick; Teaching Temps, Inc.; and Nichols Kaster & Anderson, Defendants-Appellants.
• Court: U.S. District Court — District of Minnesota

256 B.R. 618 (2001)

In re Susan E. WICK, DebtorJohn R. Stoebner, Trustee, Plaintiff-Respondent, v.Susan E. Wick; Teaching Temps, Inc.; and Nichols Kaster & Anderson, Defendants-Appellants.

No. 00-1790 DDA. Bankruptcy No. 97-45270. Adversary No. 99-4284.

United States District Court, D. Minnesota, Fourth Division.

January 2, 2001.

Donald H. Nichols, Nicholas G.B. May, Nichols Kaster & Anderson, Minneapolis, MN, for defendants-appellants.

John R. Stoebner, David A. Harbeck, Lapp, Laurie, Libra, Thomson & Stoebner, Chartered, Minneapolis, MN, for plaintiff-respondent.

Julia Ann Christians, Lapp, Laurie, Libra, Abramson & Thomson, Minneapolis, MN, pro se.

Ronald John Walsh, Walsh Law Office, Brooklyn Park, MN, pro se.

ORDER

ALSOP, Senior District Judge.

This is a direct appeal from a final judgment in a bankruptcy adversary proceeding.The bankruptcy court ordered judgment in favor of the Trustee, and the Appellants elected to bring the appeal in district court pursuant to 28 U.S.C. § 158(c)(1).The case raises essentially two issues.First, if an asset the debtor claims as exempt increases in value after the filing of the bankruptcy petition, does an increase in the value of the asset above the amount the debtor claimed as exempt belong to the debtor or to the bankruptcy estate?Second, does the failure of a trustee to object to a debtor's claimed exemption within the time allowed by Fed. R.Bankr.P. 4003(b) preclude the trustee from later contesting the value of the asset the debtor claimed as exempt?The district court on appeal reviews the bankruptcy court's legal conclusions de novo.Taylor v. United States(In re Taylor),212 F.3d 395, 396(8th Cir.2000).For the reasons stated in this opinion, the Court holds that post-petition appreciation of an asset claimed as entirely exempt belongs to the debtor and that, in any case, a trustee may not challenge the value of a debtor's exemption once the deadline for making an objection to the exemption has passed.The Court accordingly reverses the judgment of the bankruptcy court and orders entry of judgment in favor of the Appellants.

I.

AppellantSusan Wick in March 1997 entered into a contractual agreement with her then employer, Teaching Temps, Inc.("TTI").¹The agreement included a provision giving Wick a conditional right to receive stock in TTI.More particularly, TTI agreed to provide Wick with a contingent stock option that allowed Wick to receive shares of TTI's stock representing a certain percentage of ownership if Wick remained in TTI's employment for one year following the date of the agreement.Exactly four months later, in July 1997, Wick filed a voluntary Chapter 7 bankruptcy petition.Wick in the petition included her contingent stock option on the Schedule B list of personal property.Wick also included her contingent stock option on the Schedule C list of property claimed as exempt from the bankruptcy estate, citing 11 U.S.C. § 522(d)(5) as authority for the exemption.On both schedules Wick stated that the value of her contingent stock option was "unknown."The parties agree that Wick had no more than $3,925 of value remaining available under the cited exemption provision to apply to the contingent stock option.The trustee of Wick's bankruptcy estate, RespondentJohn Stoebner("the Trustee"), had an opportunity at the creditors meeting to examine Wick about her claimed exemptions, and Wick at the Trustee's request provided the Trustee with a copy of her agreement with TTI.The Trustee did not object to any of Wick's exemptions, and Wick received her discharge from bankruptcy in November 1997.

Wick eventually completed the year of employment at TTI necessary to vest her rights under the employment agreement and in April 1998 began negotiations to exercise her stock option.Wick for various reasons did not receive her stock certificates until September 1998, and TTI terminated her employment shortly thereafter.Wick then commenced an action against TTI in state court in which she requested, inter alia,a court-ordered buyout of her stock shares.That case proceeded to trial, and in March 1999 the state court granted a buyout and ordered TTI to pay Wick $97,200 for her stock.TTI filed an appeal but later settled with Wick for an amount that apparently included the full price for the stock as determined by the state court.

The Trustee after learning of the state court's order demanded that Wick turn over to the bankruptcy estate all cash she received for the stock in excess of $3,925.When Wick refused to do so, the Trustee obtained permission to reopen Wick's bankruptcy case, which had been closed some months earlier,² and commenced this adversary proceeding to recover some or all of the proceeds of the stock buyout for the bankruptcy estate.The bankruptcy court following another trial held that the estate received a one-third interest in Wick's contingent stock option when Wick filed her bankruptcy petition,³ and the parties do not dispute that at the time of filing the estate's one-third interest was worth less than $3,925.⁴The bankruptcy court, however, also held that Wick did not exempt all of the estate's one-third interest in the contingent stock option and that the Trustee's failure to object did not preclude the Trustee from seeking to recover the estate's share of the proceeds of the buyout remaining after the exercise of Wick's exemption rights.The bankruptcy court accordingly entered judgment in favor of the trustee in the amount of $28,475, which represents one-third of the $97,200 total cash paid for Wick's stock less $3,925 for Wick's claimed exemption.

II.

Wick's primary argument is that her exemption as stated in the petition was sufficient to remove her contingent stock option, and by implication the resulting stock and the proceeds of the stock buyout, from the bankruptcy estate.Wick's position is predicated on the assumption that if a debtor claims the entire value of an asset as exempt that asset then "falls out" of the estate and title to the asset revests in the debtor.The validity of this assumption as a general matter was acknowledged in Abramowitz v. Palmer,999 F.2d 1274, 1276(8th Cir.1993), but, as the bankruptcy court noted, Abramowitz is not the last word on the matter because Abramowitz did not involve an asset that increased in value during the administration of the bankruptcy estate.

The bankruptcy court held that if an asset claimed as exempt appreciates in value the estate has an interest in the asset to the extent that the asset's value and any post-petition appreciation exceed the value of the debtor's exemption.There is substantial authority for this position.It is well-settled that post-petition appreciation of a non-exempt asset belongs to the estate if such appreciation is not the result of the debtor's post-petition services.Potter v. Drewes(In re Potter),228 B.R. 422, 424(8th Cir. BAP1999).Although the Eighth Circuit has not addressed the issue, several courts in other jurisdictions have limited the debtor's exemption to the value the debtor claimed or was entitled to claim as exempt.SeeHyman v. Plotkin(In re Hyman),967 F.2d 1316, 1321(9th Cir.1992)(holding that the value of debtor's homestead exemption was limited under California law and that the estate was entitled to all post-petition appreciation beyond value of exemption);In re Heflin,215 B.R. 530, 534(Bankr. W.D.Mich.1997)(holding that the estate was entitled to post-petition appreciation in real property even though at time of filing the exemption and encumbrances on the property together exceeded the market value of the property);In re Sherbahn,170 B.R. 137, 139(Bankr.N.D.Ind.1994)(rejecting argument that debtor was entitled to proportional share of post-petition appreciation of partially exempted asset).The Bankruptcy Code provides that the value of an asset generally is determined at the time the petition is filed, 11 U.S.C. § 522(a)(2), but courts disallowing the debtor any post-petition appreciation do not interpret this section as freezing the values of estate assets on the filing date.Hyman,967 F.2d at 1320 n. 9.The practical effect of this approach is to preclude the debtor from realizing any gain at the expense of the creditors from the exercise of exemptions.

Since the bankruptcy court issued its opinion, however, one of the cases it cited with respect to this issue, Polis v. Getaways, Inc.,242 B.R. 653(N.D.Ill.1998), was reversed on appeal.In re Polis,217 F.3d 899(7th Cir.2000).The Seventh Circuit in Polis criticized the lower court's approach and held that the debtor's estate had no interest in an asset which at the time of filing had a value less than the value of the debtor's exemption even if that asset subsequently increased in value.Id. at 902.The appellate court in Polis held that § 522(a)(2) fixed the value of exempted property on the date of filing, 217 F.3d at 902, and reasoned that the benefit of establishing definitively the value of property, and thus the rights of persons with an interest in that property, on that date outweighed the risk that the debtor might receive a windfall if the property fluctuated in value.Id. at 903.

The concern that the parties have a set point in time at which their rights to property are established is reasonable, although a case conceivably could be made for setting that point at the close of the bankruptcy case rather than on the date of filing.As Polis indicates, however, the Bankruptcy Code provides that asset values are determined on the date of filing.⁵There is no reason to suppose that this rule does not apply if it somehow works to the benefit of the debtor, especially since the debtor is not allowed to rewrite her exemptions if an exempted asset fluctuates downward in value rather than upward.Applying that rule to this case, the value of the estate's interest in the contingent stock option for purposes of Wick's...