In re Young

• Decision Date: 28 August 2003
• Docket Number: No. 01-40540-S.,01-40540-S.
• Citation: 297 B.R. 492
• Parties: In re Scott Arthur YOUNG, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

Page 492

297 B.R. 492

In re Scott Arthur YOUNG, Debtor.

No. 01-40540-S.

United States Bankruptcy Court, E.D. Texas, Sherman Division.

August 28, 2003.

Debbie L. Grass, Wendell H. Livingston, Becket & Lee LLP, Malvern, PA, for Creditor.

Bruce Edward Turner, Carrollton, TX, for Debtor.

OPINION

DONALD R. SHARP, Chief Judge.

NOW before the Court is the Debtor's Amended Motion To Determine Property as Exempt filed by Scott Arthur Young ("Debtor"). The Court considered the pleadings filed and the evidence adduced at trial. This opinion constitutes the Court's findings of fact and conclusions of law required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.

FACTUAL AND PROCEDURAL BACKGROUND

The Debtor filed his voluntary petition for relief under Chapter 7 together with his Schedules and Statement of Financial Affairs as required under 11 U.S.C. § 521. Included among his Schedules and Statement of Financial Affairs was Schedule C-his schedule of property claimed as exempt. The Debtor elected the State of Texas exemptions applicable pursuant to 11 U.S.C. § 522(b)(2)(A). The Debtor listed no interest in real property. The aggregate current market value of the exempt personal property listed by Debtor on his original Schedule "C" was $21,461.63. The Debtor's father died on or about March 2, 2001 but clearly within 180 days of the petition date. Whereupon, on April 18, 2001, the Debtor amended his Schedule "B" and Schedule "C" to reflect the Debtor's interest in a discretionary trust acquired under his father's Last Will and Testament and the codicils thereto. In addition to adding the interest in the trust, the Debtor used his amendment to Schedule "C" to change the legal basis of his claim of exemption from State to Federal statutes listing 11 U.S.C. §§ 522(d)(2), (3) or (10) for all but the interest in the trust. The Debtor specified that 11 U.S.C. § 541(c)(2) [SIC] provided the legal basis for such exemption. The fair market value of the interest in the discretionary trust was listed as "unknown". The discretionary trust is allegedly funded by a stream of revenue from the Debtor's late father's shares in Partners Energy Corporation, a business in which the Debtor's father was allegedly sole shareholder. The Debtor is one of four beneficiaries of such trust.

An order was entered by this Court granting the Debtor a discharge on June 12, 2001 and the case was closed. On motion of the Chapter 7 Trustee, the case was reopened and the Chapter 7 Trustee withdrew her report of no assets. The Debtor filed his Motion To Determine Property as Exempt which was later amended ("Motion"). The Chapter 7 Trustee filed a Response objecting to the Motion and the matter came on for trial. Prior to trial, the Debtor filed a third amendment to his schedules, Amended Schedule "C", to reflect the value of the Debtor's interest in the discretionary trust as $40,000. In addition, Amended Schedule "C" changes the legal basis for the Debtor's claim of exemption in the discretionary trust from 11 U.S.C. § 541(c)(2) to three case cites: "Hughes v. Jackson, 125 Tex. 130, 81 S.W.2d 656 (1935); Kalpack [SIC] v. Torres, 829 S.W.2d 913 (Tex.App.-Corpus Christi 1992, writ den.); [and] San Angelo Savings v. Shurley, 179[171] B.R. 769 (5th Cir.-Western Dist.1994)".¹ At the conclusion of the trial, the Court took the matter under advisement following an opportunity for the parties to file briefs. None were forthcoming.²

DISCUSSION

Amended exemption claims are generally allowed, absent bad faith, concealment of property, or prejudice to creditors. In re Fournier, 169 B.R. 282 (Bankr.D.Conn.1994). In this case, the amendment was prompted by an event beyond the Debtor's control, his father's death. He amended his schedules within a reasonable period of time thereafter. "[W]hile the Trustee has the burden of proving that exemptions are not properly claimed, the initial burden is with the Debtor to establish that the exemption, as claimed, is of the type covered by the statute." In re Gregoire, 210 B.R. 432, 436 (Bkrtcy.D.R.I.1997) in dicta. The Motion before the Court requests this Court determine the Debtor's interest in the discretionary trust exempt on two bases: (1) by operation of Fed.R.Bankr.P. 4003 as a result of the Chapter 7 Trustee's failure to object to the exemption listed on Schedule "C" of the Amended Schedules filed on April 18, 2001 and (2) because the subject discretionary trust is in the nature of a spendthrift trust the assets of which are shielded from creditors under State Law.

Respecting the procedural argument, the Chapter 7 Trustee admitted that she had not objected timely to the Amended Schedules filed April 18, 2001, but argued the obligation did not arise until the Debtor actually claimed the property as exempt by citing to a proper legal basis for the claim of exemption. The Chapter 7 Trustee opined that there was no basis to object because the Debtor listed the interest in the discretionary trust in an "unknown", unspecified value and cited to 11 U.S.C. § 541(c)(2)³ rather than a State of Federal statute on exempt property. Her rationale is that "... § 541(c)(2) has nothing to do with exemptions. It's a property of the estate provision and that's why I elected not to object to it. It's not a proper exemption .... he hasn't actually claimed it as exempt. What he claimed was that it wasn't property of the estate." The Court need not reach the issue of whether listing the wrong statute as a basis for an exemption on Schedule "C" is a fatal to the claim. The Debtor was correct that Fed.R.Bank.P. 4003 applies. However, it offers little comfort to him because the Debtor's counsel waived such defense. Upon filing the Amendment to the Schedules on April 19,2002, the Debtor's counsel reopened the issue, at least as to the trust property, and triggered the tolling of a new 30 day period within which the Chapter 7 Trustee was permitted to object. In re Bell, 225 F.3d 203 (2d Cir.2000) cf. Matter of Kazi, 985 F.2d 318, 323 (7th Cir.1993) [limits application to items actually amended] citing to In re Payton, 73 B.R. 31 (Bankr.W.D.Tex.1987) (holding that filing of "any" amendment does not reopen the time period for asserting an objection; trustee could object only to actual amendments to the list); In re Payton, 73 B.R. 31 (holding that filing of "any" amendment does not reopen the time period for asserting an objection; trustee could object only to actual amendments to the list). Based upon the foregoing, the Chapter 7 Trustee's objection to the Debtor's claim of exemption is timely; the Debtor's procedural argument fails.

The substantive aspect of the Debtor's argument is more convoluted than his procedural argument. A debtor filing a voluntary petition in bankruptcy in the State of Texas may elect property claimed as exempt from either the Federal exemptions under 11 U.S.C. §§ 522(b)(1) and (d) or the Texas Property Code exemptions made applicable pursuant to 11 U.S.C. § 522(b)(2)(A). In this case the Debtor initially elected the State of Texas exemptions (Feb. 16, 2001), amended to elect under the Federal statutes providing for exemptions (April 18, 2001), but then amended Schedule "C" again to claim the exemptions under the Texas Property Code (April 19, 2002). Under the Texas Property Code, "[p]ersonal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if: (1) the property is provided for a family and has an aggregate fair market value of not more than $60,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property;....". V.T.C.A. Texas Property Code, Section 42.001.⁴ The Debtor's Schedules and Statement of Financial Affairs indicate that the Debtor was a married man on the date of the filing of the voluntary petition. Therefore, the provision for a ceiling of $60,000 aggregate value under sub-section one applies to his claimed exemptions.⁵

The Court has determined that the relief requested in the Debtor's Motion must be denied. There is no legal basis under which the Debtor may exempt this property. After the Debtor amended his Schedules, the property claimed as exempt consists of property defined in § 42.002 of the Texas Property Code with a value of $21,461.63, the addition of the claimed value for the interest in the trust increases the claimed exemption to an aggregate of $61,461.63.⁶ The interest in the trust clearly is not of the type identified in § 42.002. Even were the Debtor to revert back to the Federal exemptions abandoned by his April 19, 2002 amendment to schedules, the $40,000 portion of the property claimed as exempt would exceed any amount which the Debtor might claim as exempt under 11 U.S.C. § 522(d) [e.g. § 522(d)(5) together with the unapplied portion to which he might be entitled under § 522(d)(1)].

The Debtor's only hope of retaining the benefits of the trust, having exhausted the statutory protections, would be to exempt them under other applicable non-bankruptcy law, state law or to have the Court determine that the property is not property of the estate as contemplated under 11 U.S.C. § 541. Perhaps this is the purpose of the reference to § 541(c)(2) in the amended April 18, 2001 Schedule "C".

The three cases listed by the Debtor on Amended Schedule "C" filed April 19, 2002, as the legal basis for his claim of exemption provide him no relief. Hughes v. Jackson, 125 Tex. 130, 81 S.W.2d 656 (1935) merely speaks to the issue of a trustee's right to use his sound judgment and discretion as to how he will distribute the expenditure of the fund among or between the beneficiaries. Alternatively, the Hughes case could be offered here as support for the proposition that as to a discretionary trust, no interest vests in the cestui que trust. Ibid at 136, 81 S.W.2d 656. The Hughes Court clarified, though: "no interest goes to the third person until the trustees have exercised...