Lee v. Field (In re Lee)

• Decision Date: 07 May 2018
• Docket Number: No. 15-17451,15-17451
• Citation: 889 F.3d 639
• Parties: IN RE Adam LEE, Debtor, Adam Lee, Plaintiff-Appellant, v. Dane S. Field, Chapter 7 Trustee, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

889 F.3d 639

IN RE Adam LEE, Debtor,Adam Lee, Plaintiff-Appellant,

v.Dane S. Field, Chapter 7 Trustee, Defendant-Appellee.

No. 15-17451

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 15, 2018 Honolulu, Hawaii

Filed May 7, 2018

Ted N. Pettit (argued), Case Lombardi & Pettit, Honolulu, Hawaii, for Plaintiff-Appellant.

Enver W. Painter Jr. (argued), Honolulu, Hawaii; Simon Klevansky and Nicole D. Stucki, Klevansky Piper LLP, Honolulu, Hawaii; for Defendant-Appellee.

Before: Diarmuid F. O’Scannlain, Richard R. Clifton, and Sandra S. Ikuta, Circuit Judges.

OPINION

IKUTA, Circuit Judge:

Before filing a petition in bankruptcy, Adam Lee transferred his interests in two properties into a tenancy-by-the-entirety estate, and subsequently claimed an exemption for those interests under 11 U.S.C. § 522(b)(3). The trustee successfully brought an adversary proceeding to set aside Lee’s transfers of those interests. When the trustee sought a turnover order to compel Lee to relinquish possession of the properties, Lee resisted. He argued that the trustee had failed to make a timely objection to the exemptions under Rule 4003 of the Federal Rules of Bankruptcy Procedure, and therefore Lee’s exemptions were valid notwithstanding the court’s avoidance of the transfer. The bankruptcy court disagreed. It granted the turnover order, thus denying the claimed exemptions. We hold that the trustee’s adversary complaint contesting the basis for Lee’s exemptions qualified as an objection to those exemptions under Rule 4003. We therefore affirm.

I

We begin by setting out the applicable bankruptcy law. The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate, in order to avoid distribution to the estate’s creditors. See Taylor v. Freeland & Kronz , 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). A debtor may claim an exemption for "any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest ... is exempt from process under applicable nonbankruptcy law." 11 U.S.C. § 522(b)(3)(B). As relevant here, Hawaii law allows for the creation of tenancy-by-the-entirety interests. Haw. Rev. Stat. § 509-2. "A tenancy by the entirety is a unique form of ownership in which both spouses are jointly seized of property such that neither spouse can convey an interest alone...." Traders Travel Int'l, Inc. v. Howser , 69 Haw. 609, 753 P.2d 244, 246 (1988). Hawaii law exempts such interests from creditors of an individual spouse. Sawada v. Endo , 57 Haw. 608, 561 P.2d 1291, 1296–97 (1977) ; see also In re Cataldo , 224 B.R. 426, 429 (9th Cir. B.A.P. 1998).

The Bankruptcy Code requires the debtor to file a list of claimed exemptions, and provides that "[u]nless a party in interest objects, the property claimed as exempt on such list is exempt." 11 U.S.C. § 522(l). The Supreme Court has made clear that if the time period set out in the applicable bankruptcy rules expires without a qualifying objection, the exemption becomes final regardless "whether or not [the debtor] had a colorable statutory basis for claiming it." Taylor , 503 U.S. at 644, 112 S.Ct. 1644 ; see also Law v. Siegel , 571 U.S. 415, 134 S.Ct. 1188, 1196, 188 L.Ed.2d 146 (2014) ("[A] trustee’s failure to make a timely objection prevents him from challenging an exemption."). As a general rule, "exempt property immediately revests in the debtor" upon expiration of the objection period. In re Mwangi , 764 F.3d 1168, 1175 (9th Cir. 2014).

Rule 4003 of the Federal Rules of Bankruptcy Procedure requires that a party in interest, including a trustee, "file an objection" to a claimed exemption "within 30 days after the meeting of creditors held under [ 11 U.S.C.] § 341(a) is concluded." Fed. R. Bankr. P. 4003(b)(1).¹ "However, Rule 4003(b), unlike some other bankruptcy rules, proscribes no particular form for objections to exemption claims." In re Spenler , 212 B.R. 625, 629 (9th Cir. B.A.P. 1997). In addition, Rule 4003 imposes some procedural requirements. For instance, "[a] copy of any objection" must "be delivered or mailed to the trustee, the debtor and the debtor’s attorney, and the person filing the list [of exemptions] and that person’s attorney." Fed. R. Bankr. P. 4003(b)(4). Moreover, Rule 4003(c) provides that in any hearing under the rule, "the objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c). "After hearing on notice, the court shall determine the issues presented by the objections." Id.

II

We now turn to the facts of this case. Lee, a real estate developer operating on Oahu, experienced various financial difficulties beginning in 2008. In September 2010, Lee met with a bankruptcy attorney, Chuck Choi, and discussed filing for a possible bankruptcy. A few days later, Lee conveyed his 90 percent interest in 4014 Palua Place #1 (Palua 1) and his 75 percent interest in 4014 Palua Place #2 (Palua 2) to himself and his spouse, Yuka Yahagi Lee, as tenants by the entirety.²

Lee filed a Chapter 7 bankruptcy petition on August 12, 2013. Shortly thereafter, Lee filed his schedules, listing debts of approximately $4 million ($2.9 million to unsecured creditors and $1.1 million to secured creditors). In his Schedule A, listing his real property interests, Lee included his tenancy-by-the-entirety interests in Palua 1 and Palua 2. In his Schedule C, Lee elected to claim state-law exemptions under 11 U.S.C. § 522(b)(3) and claimed exemptions under Hawaii state law for his tenancy-by-the-entirety interests in both Palua 1 ($669,000) and Palua 2 ($262,848).

Pursuant to 11 U.S.C. § 341, the trustee held a meeting of creditors that concluded on December 19, 2013. During the meeting, the trustee confirmed that Lee’s spouse did not pay anything for the interest that she received in the transfer to the tenancy-by-the-entirety estate, and the trustee then suggested to Lee’s counsel that the trustee was "probably looking at a fraudulent transfer case on that." At the conclusion of the meeting, Lee testified that he transferred his interests in Palua 1 and Palua 2 to the tenancy-by-the-entirety estate for "exemption planning," after meeting with his attorney to discuss a possible bankruptcy.

On January 14, 2014, the trustee filed an adversary proceeding in bankruptcy court against Lee and his spouse. The complaint asked the court to set aside Lee’s transfers of his interests in Palua 1 and Palua 2 to his tenancy-by-the-entirety estate as a fraudulent transfer, but did not cite 11 U.S.C. § 522(b)(3) or ask the court to deny Lee’s claimed state-law exemptions in his Schedule C.

After a three-day trial in February 2015, the bankruptcy court found that the trustee had "proved, by clear and convincing evidence, that Mr. Lee transferred his interest in the Palua Place properties to himself and his wife with actual intent to hinder, delay, or defraud his existing and future creditors." The bankruptcy court cited Lee’s own testimony that he had made the transfers in order to protect his interest in the properties, as well as the "powerful circumstantial evidence" of Lee’s financial difficulties at the time of the transfers. Accordingly, the bankruptcy court avoided the transfers under 11 U.S.C. § 544(b) and Hawaii law.³ On March 10, 2015, the bankruptcy court issued a final judgment avoiding the transfers, but did not expressly state that it was denying the exemptions.

Lee appealed this ruling to district court and moved for a stay pending appeal. The district court denied the stay on May 6, 2015, and affirmed the bankruptcy court’s judgment on September 21, 2015. We dismissed Lee’s appeal of the district court’s order for failure to prosecute.

While Lee’s appeal of the bankruptcy court’s judgment in the fraudulent transfer proceeding was pending in district court, the trustee filed a motion in bankruptcy court on May 18, 2015, seeking the turnover of various records and assets of Lee, including Palua 1 and Palua 2, so that the trustee could convert those assets into money for the estate. The trustee argued that an order requiring Lee to turn over the Palua properties was necessary because Lee had been interfering with efforts to liquidate the properties for the estate.

In his opposition to the trustee’s motion for a turnover of property, Lee argued that he was not required to turn over Palua 1 and Palua 2 because he had claimed exemptions in both properties and the trustee had failed to file a timely objection within 30 days of the conclusion of the creditor’s meeting, as required by Rule 4003(b)(1). Lee further contended that absent the property interests listed on his Schedule C (as well as other costs contested by the trustee), there was insufficient value remaining in the Palua 1 and 2 properties to merit a sale and that the bankruptcy estate should instead abandon its interest in the properties.

The bankruptcy court granted the trustee’s turnover motion, concluding that the complaint filed in the adversary proceeding satisfied the requirements of Rule 4003. The district court affirmed the grant of the turnover order, and Lee timely appealed.⁴

III

We have jurisdiction under 28 U.S.C. § 158(d)(1) because the bankruptcy court’s turnover order constituted a formal denial of Lee’s claimed exemptions. See In Re Gilman , 887 F.3d 956, 961–962 (9th Cir. 2018). We look through the district court’s decision and "review the bankruptcy court decision directly." Gladstone v. U.S. Bancorp , 811 F.3d 1133, 1138 (9th Cir. 2016) (quoting In re DAK Indus., Inc. , 66 F.3d 1091, 1094 (9th Cir. 1995) ). We review the bankruptcy court’s factual findings for clear error, and its conclusions of law de novo. Id.

Lee concedes that the trustee filed his adversary complaint in the fraudulent transfer proceeding within 30 days after the conclusion of the creditors' meeting, but argues that the...