Matter of Heflin

• Decision Date: 28 October 1997
• Docket Number: Bankruptcy No. GT96-88579.
• Citation: 215 BR 530
• Parties: In the Matter of Steven Duane HEFLIN, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

215 B.R. 530 (1997)

In the Matter of Steven Duane HEFLIN, Debtor.

Bankruptcy No. GT96-88579.

United States Bankruptcy Court, W.D. Michigan.

October 28, 1997.

Paul F. Davidoff, Kalamazoo, MI, for Steve Duane Heflin.

James W. Boyd, Traverse City, MI, Chapter 7 Trustee.

OPINION DENYING DEBTOR'S MOTION TO COMPEL TRUSTEE TO ABANDON REAL PROPERTY

JAMES D. GREGG, Bankruptcy Judge.

INTRODUCTION

In this chapter 7 case, Steven Duane Heflin (the "Debtor") has filed a motion to compel James W. Boyd (the "Trustee") to abandon a 40-acre parcel of real property ("the Property") in which the Debtor has claimed exemptions. The issue before the court is whether the Trustee is legally required to abandon the Property where the total amount of liens against the Property and exemptions claimed by the Debtor exceed the scheduled value of the Property as of the filing date and where the Trustee has failed to make a timely objection to the Debtor's claimed exemptions. Stated differently, is the Trustee required to object to the Debtor's scheduled value of the Property? This court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334 and § 157(b)(1). This matter is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(A), (B) and (O).

BACKGROUND

The Debtor filed a voluntary petition pursuant to chapter 7 of the Bankruptcy Code on December 6, 1996. In Schedule A-Real Property, the Debtor stated the Property had a market value of $16,000. That schedule also stated the Property was subject to a secured claim of $431.25. The Debtor claimed the maximum residence exemption of $15,000 available under 11 U.S.C. § 522(d)(1).¹ The Debtor also claimed a catchall exemption in the Property of $579 pursuant to 11 U.S.C. § 522(d)(5).²

The Section 341 meeting was held and closed on January 14, 1997. The Trustee has not objected to the Debtor's exemptions. The Debtor asserts that shortly after the § 341 meeting, a developer announced plans to purchase and develop land near the Debtor's residence which has increased the value of the Property from $16,000 to $40,000.

On May 29, 1997, Debtor filed a motion to seeking to compel the Trustee to abandon the property. The Debtor contends the Trustee must abandon the Property in its entirety because the claimed exemptions exceed the scheduled value as of the filing date, and that the Debtor is entitled to any postpetition appreciation of the Property. The Trustee responds that he is not obligated to object to the Debtor's claimed exemptions because they were within the statutory maximums allowed by law. He also argues that the Debtor's exemption is limited to the specific dollar amount listed in Schedule C-Property Claimed Exempt and that the Property remains in the bankruptcy estate and is subject to administration, i.e., possible sale and distribution of nonexempt proceeds to creditors. Under these circumstances, the Trustee states he should not be compelled to abandon the Property.

DISCUSSION

Debtor's motion to abandon is brought pursuant to Section 544(b) of the Bankruptcy Code which states:

On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

11 U.S.C. § 544(b). There is no evidence whatsoever to suggest that the Property is "burdensome to the estate." Therefore, the issue before the court is whether the Property is "of inconsequential value and benefit to the estate."

The United States Court of Appeals for the Sixth Circuit has set forth guidelines to be considered by bankruptcy courts when facing a motion to abandon. "An order compelling abandonment is the exception, not the rule." See Morgan v. K.C. Machine & Tool Co. (In re K.C. Machine), 816 F.2d 238, 246 (6th Cir.1987). Generally, "abandonment should not be ordered where the benefit of administering the asset exceeds the cost of doing so." Id. Moreover, "absent an attempt by the trustee to churn property worthless to the estate just to increase fees, abandonment should very rarely be ordered." Id. In sum, the Sixth Circuit has concluded that "compelled abandonment is not available where administration promises a benefit to the estate." Id. at 247. See also In re Pepper Ridge Blueberry Farms, 33 B.R. 696, 698 (Bankr.W.D.Mich.1983)("Congress only intended the abandonment proceeding to be used where there is no question of facts or law involved and for a trustee or debtor in possession to hold assets for no benefit to the estate would unconscionable.").

In this case, the Debtor argues that there was no net equity remaining in the Property because his claimed exemptions combined with the existing lien amount exceed the scheduled value of the Property as of the date of the filing. Therefore, the Debtor avers the Property is of inconsequential value and no benefit to the estate and must be abandoned, notwithstanding any postpetition appreciation in value. The Debtor also contends that the Trustee is bound by the claimed exemptions because he did not file a timely objection under Section 522(l).³ Bankruptcy Rule 4003(b) requires that an objection be filed within 30 days after the conclusion of the § 341 meeting unless, during the 30 day period, the court extends the time for objections.⁴ Because the Trustee failed to object to the exemptions within the requisite time, the Debtor contends that the Property is fully exempt, is of no benefit to the estate, and must be abandoned.

The Debtor relies on the Supreme Court's opinion in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). In Taylor, the Court held that a chapter 7 trustee could not contest the validity of a claimed exemption after the expiration of the Rule 4003(b) 30-day objection period, even though the debtor had no colorable basis for claiming the exemption. Taylor, 503 U.S. at 643-45, 112 S.Ct. at 1647-49. In Taylor, that debtor claimed an exemption for proceeds from a discrimination suit which she had pending against her employer. In her schedules, the debtor described the value of the exempt property as "unknown." During the first meeting of creditors, the debtor orally estimated that her claim was worth $90,000. In response to further inquiries from the trustee, the debtor optimistically raised her estimation to $110,000. Nevertheless, the trustee decided not to object to the claimed exemption because he doubted that the lawsuit had any value. Eventually, the debtor settled with her employer for $110,000 which resulted in a net recovery to the debtor of $71,000.

The trustee in Taylor then demanded that the debtor turnover the settlement proceeds as property of the estate. The debtor refused and asserted that the recovery was fully exempt. The bankruptcy court disagreed because, in its view, there was no statutory basis for the claimed exemption; the proceeds remained property of the estate, despite the trustee's failure to object to the claimed exemptions. In the eventual reversal, the Supreme Court concluded that the debtor was entitled to retain all proceeds because the trustee failed to file a timely objection to the claimed exemption as required under § 522(l) and Rule 4003(b). The Court held that the trustee's failure to file a timely objection prevented him from belatedly challenging the validity of the exemption notwithstanding the lack of any legitimate statutory basis for the exemption. 503 U.S. at 642, 112 S.Ct. at 1647-48.

There are several subtle, but very important, facts which distinguish the Taylor case from the case currently pending before this court. First, there were several "red flags" present in Taylor which should have caused the trustee to object to the claimed exemption, or at least request an extension of time for making objections so as to provide additional opportunity to investigate. For instance, the debtor in Taylor sought to exempt "Proceeds from lawsuit-Davis v. TWA" and "Claim for lost wages" without specifying any statutory basis for the exemption. In contrast, the exemptions filed by this Debtor refer to a "Home located in Luther, Michigan 49656" and the Debtor cited the specific statutory provision for the residence and catchall exemptions as "11 USC 522(d)(1)" and "11 U.S.C. 522(d)(5)." See Debtor's Schedule C-Property Claimed Exempt (italics in original). Thus, the Trustee had no reason to object to the homestead and related catchall exemptions claimed by the Debtor because he cited to the correct statutory provision which allows such exemptions.

Second, with respect to the amount claimed as exempt, the debtor in Taylor stated "unknown" in her schedules. Thereafter, the debtor estimated that the value of her lawsuit was $90,000 and $110,000. In Taylor the trustee had sufficient reason to believe that the debtor was seeking to exempt the entire amount of the proceeds from her lawsuit. Conversely, in this case the Debtor did not indicate in his schedules that he intended to claim the entire value of the Property as exempt, regardless of its eventual sale price or market value. Instead, the Debtor's schedules set forth specific dollar amounts, i.e., $15,000 and $579 which are consonant with the maximum statutory exemptions. Again, the Trustee had no reason to object to the amount of the exemptions because they were within the limits established by the Code.

Thus, unlike the facts in Taylor. this case does not involve a situation where the Trustee has failed to object to an improper exemption and then is bound by the consequences of his decision. Rather, the Trustee in this case did not object because there was both a valid statutory basis for the exemptions and the amount was within the statutory limits. Indeed, if the Trustee had filed an objection, it most likely would have been denied because the specific exemptions claimed in the Debtor's schedules are legally valid.

If no valid objection can be...