Debtor Successfully Claims an Exemption 19 Years after Discharge

April 10, 2018

When the court’s sense of equity collides with a statute, the Supreme Court held in Law v. Siegel, 134 S. Ct. 1188, 188 L. Ed. 2d 146, 82 U.S.L.W. 4140 (2014), that the statute prevails when it comes to exemptions.

Relying on Law, Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., held that a debtor was entitled to a homestead exemption, although she made the claim 19 years after receiving a chapter 7 discharge.

The debtor-to-be owned her home in fee simple. In 1992, she recorded a deed where she retained a life interest but transferred the remainder interest to her children jointly. In 1998, at age 77, she filed a petition and got a discharge the same year. She did not schedule her life estate among her assets. Unaware of the home, the trustee reported a “no asset” case.

In 2016 the woman and her children sold the property to a third party in a sale that generated $50,000 in net proceeds, Judge Bucki said in his March 22 opinion. The buyer objected to the quality of title, forcing the sellers to put the proceeds in escrow.

To clear up title, the debtor retained new counsel, who reopened her 1998 bankruptcy in 2017 and amended her schedules to show the life estate and to claim the New York homestead exemption, which was $10,000 in 1998. The trustee and the debtor, then age 96, agreed that the actuarial value of the life estate was about $32,000 in 1998.

The trustee objected to the exemption, contending that the debtor acted in bad faith and that creditors were prejudiced by the 19-year delay in generating estate assets. Although it apparently did not factor much in Judge Bucki’s decision, the debtor’s counsel argued that the debtor made an innocent mistake because she did not understand the concept of a life estate.

Rather than focusing on the debtor’s culpability, Judge Bucki said the decision turned on Law. He focused on the high court’s statement that Section 522 “does not give courts discretion to grant or otherwise withhold exemptions based on whatever consideration they deem appropriate . . . . [T]he court may not refuse to honor the exemption absent a valid statutory basis for doing so.”

Although Law dealt with surcharging an exemption and the case at hand sought to deny an exemption, the “distinction is without consequence,” Judge Bucki said. Either “characterization seeks the same outcome of depriving the debtor of a statutory right . . . even now, many years after the order for relief.”

Judge Bucki also cited dicta in Law for the proposition that the allegedly fraudulent concealment of an asset is no bar to allowing an exemption.

Judge Bucki declined to follow cases where courts required debtors to show excusable neglect when seeking to amend exemptions in reopened cases. Citing the Ninth Circuit Bankruptcy Appellate panel, he said that Bankruptcy Rule 9006(b) does not apply because the Code does not require the amendment of schedules within a specified time.

Allowing the debtor a $10,000 homestead exemption, Judge Bucki did not lay down a hard and fast rule. He said that his opinion “does not address the possibility that in some unusual circumstances, a debtor may be estopped from claiming an exemption.”

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