Douglas Ellmann v. Michael James Baker , 791 F.3d 677 ( 2015 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0135p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
In re: MICHAEL JAMES BAKER and SUZIE CARMEN ┐
BAKER, │
Debtors. │
│ No. 14-2149
__________________________________________
│
DOUGLAS S. ELLMANN, Trustee, >
│
Appellant, │
│
v. │
│
│
MICHAEL JAMES BAKER and SUZIE CARMEN BAKER, │
Appellees. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:14-cv-11924—Stephen J. Murphy III, District Judge.
Argued: May 5, 2015
Decided and Filed: July 2, 2015
Before: COLE, Chief Judge; MERRITT and BATCHELDER, Circuit Judges.
_________________
COUNSEL
ARGUED: Thomas R. Morris, SILVERMAN & MORRIS, P.L.L.C., Farmington Hills,
Michigan, for Appellant. Beatriz H. Coleman, TILA ATTORNEY GROUP, PLLC, Saline,
Michigan, for Appellees. ON BRIEF: Thomas R. Morris, SILVERMAN & MORRIS,
P.L.L.C., Farmington Hills, Michigan, for Appellant. Beatriz H. Coleman, TILA ATTORNEY
GROUP, PLLC, Saline, Michigan, for Appellees.
1
No. 14-2149 Ellmann v. Baker, et al. Page 2
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OPINION
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COLE, Chief Judge. Michael James Baker and Suzie Carmen Baker, the debtors in this
bankruptcy appeal, failed to disclose in their bankruptcy schedules their interest in a cause of
action until years after the close of the bankruptcy case. After learning about the cause of action,
Douglas S. Ellmann, the bankruptcy trustee, requested that the case be reopened so that he could
pursue the cause of action on behalf of the debtors’ bankruptcy estate; after the case was
reopened, the debtors amended their bankruptcy schedules to claim exemptions in the cause of
action. Over the trustee’s objection based on bad faith and fraudulent conduct, the bankruptcy
court allowed the amendments and the district court affirmed.
We must decide whether the Supreme Court’s decision in Law v. Siegel, 134 S. Ct. 1188
(2014), limits the bankruptcy court’s power to disallow claimed exemptions and whether the
trustee’s objection to the timeliness of the amendments was waived. Because we believe the
answers to both questions are yes, we affirm the order of the district court.
I. BACKGROUND
The debtors previously owned a house in Dexter, Michigan; in 2007, it was foreclosed
and sold at a sheriff’s sale. On February 12, 2008, the debtors filed for chapter 13 bankruptcy.
On February 27, 2008, they filed their bankruptcy schedules, which must list all of their assets,
liabilities, income, and other financial information. The debtors did not disclose any interest in
the house or any cause of action related to it. On May 14, 2008, the case was converted to a
chapter 7 liquidation proceeding, and Douglas S. Ellmann was appointed as the trustee. On
August 26, 2008, the debtors received a discharge of their debts from the bankruptcy court.
The redemption period for the foreclosed house expired after the bankruptcy petition date
without the house being redeemed. After the foreclosure sale, Residential Funding Company,
LLC (“RFC”), the holder of the sheriff’s deed to the house, commenced an eviction action to
remove the debtors, but the debtors and RFC eventually entered into a consent judgment. The
No. 14-2149 Ellmann v. Baker, et al. Page 3
debtors, however, claim that their counsel agreed to the judgment without their consent and over
their objections. The bankruptcy case was closed on February 13, 2009.
On March 20, 2009, the debtors filed suit in Michigan state court against RFC and its
counsel, alleging that the foreclosure was defective and seeking to set it aside. The action lasted
over four years, but the debtors never sought to reopen their bankruptcy case to amend their
schedules and disclose the cause of action. After learning about the cause of action, the trustee
moved to reopen the bankruptcy case, claiming that the cause of action was property of the
bankruptcy estate. The bankruptcy court reopened the case on November 14, 2013, and Ellmann
was reappointed as chapter 7 trustee. The trustee then began negotiations with RFC and its
counsel to settle the action.
On December 13, 2013, the debtors filed an amended schedule in the bankruptcy case
that disclosed the cause of action, stating that it had a value of $3 million. Concurrently, each of
the debtors claimed a “wildcard” exemption of $5,300.00 in the cause of action under 11 U.S.C.
§ 522(d)(5). On December 27, 2013, the trustee filed his objection to the amended exemptions,
arguing that: (1) the debtors’ failure to disclose the cause of action earlier interfered with the
trustee’s administration of the bankruptcy estate; (2) the debtors attempted to conceal the cause
of action; (3) the exemption claims were made in bad faith; and (4) even if the debtors were not
aware of the cause of action when the bankruptcy case was closed, they still should have
amended their schedules sooner. The bankruptcy court later approved the trustee’s settlement of
the cause of action.
The bankruptcy court denied the trustee’s objection to the debtors’ amended exemptions,
reasoning that the Supreme Court’s decision in Law v. Siegel precluded a bankruptcy court from
using its equitable powers to deny an exemption as a sanction for debtor misconduct;
alternatively, the bankruptcy court ruled that the objection was not made within thirty days of the
amendments and was therefore waived. The district court affirmed the bankruptcy court’s order,
and the trustee appeals.
No. 14-2149 Ellmann v. Baker, et al. Page 4
II. ANALYSIS
A. Standard of Review
This court reviews the bankruptcy court’s and district court’s conclusions of law de novo
and the bankruptcy court’s factual findings for clear error. See In re Batie, 995 F.2d 85, 88 (6th
Cir. 1993).
B. Applicable Provisions of the Bankruptcy Code and Rules
Chapter 7 of the Bankruptcy Code allows debtors to discharge their debts by liquidating
certain assets to pay creditors. See generally 11 U.S.C. §§ 704(a)(1), 726, 727. The filing of a
bankruptcy petition creates a bankruptcy “estate” generally comprising all of the debtor’s
property, a list of which the debtor must file with the bankruptcy court along with or shortly after
filing the bankruptcy petition. 11 U.S.C. §§ 521(a)(1)(B)(i), 541(a)(1). Such property includes
causes of action that the debtor did bring or could have brought before the petition’s filing. Tyler
v. DH Capital Mgmt., Inc., 736 F.3d 455, 461–63 (6th Cir. 2013). The estate is placed under the
control of a trustee, who is responsible for managing liquidation of the estate’s assets and
distribution of the proceeds to creditors. 11 U.S.C. § 704(a)(1).
The Bankruptcy Code authorizes debtors to “exempt” certain kinds of property from the
estate, thereby enabling them to retain those assets post-bankruptcy, unless specifically
prohibited by state law. 11 U.S.C. § 522(b), (d). Among these exemptions, the “homestead”
exemption allows a debtor to exempt up to $22,975.00 of equity in a residence. 11 U.S.C.
§ 522(d)(1). In addition, the “wildcard” exemption allows a debtor to exempt up to $1,225.00 in
aggregate value of “any property,” as well as up to $11,500 of any unused portion of the
homestead exemption. 11 U.S.C. § 522(d)(5). Except in particular situations specified in the
Code, exempt property “is not liable” for the payment of “any [pre-petition] debt” or “any
administrative expense.” 11 U.S.C. § 522(c), (k).
A debtor claims an exemption by listing it on Schedule C of the Official Bankruptcy
Forms. Fed. R. Bankr. P. 1007(b)(1), 4003(a). An interested party or the trustee may then
object, generally “within 30 days after the meeting of creditors held under §341(a) is concluded
or within 30 days after any amendment to the list or supplemental schedules is filed, whichever
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is later.” Fed. R. Bankr. P. 4003(b). A schedule may be amended by the debtor “as a matter of
course at any time before the case is closed.” Fed. R. Bankr. P. 1009(a). After an estate is fully
administered and the bankruptcy court has discharged the trustee, the bankruptcy court must
close the case, but the case may be reopened “to administer assets, to accord relief to the debtor,
or for other cause.” 11 U.S.C. § 350.
C. Law v. Siegel
After the debtors’ bankruptcy case was reopened, the trustee objected to their claimed
exemptions, asserting that they acted fraudulently and in bad faith by failing to list their cause of
action as estate property while the bankruptcy case was previously open. The trustee cited our
decision in Lucius v. McLemore, 741 F.2d 125 (6th Cir. 1984) (per curiam), for the proposition
that a bankruptcy court may disallow a claimed exemption if a debtor attempted to conceal the
underlying property or acted in bad faith. While the objection was pending, the Supreme Court
of the United States decided Law v. Siegel, which stated in dictum that the Bankruptcy Code
does not grant courts authority to disallow an exemption (or disallow amendment of schedules to
claim an exemption) based on a debtor’s fraudulent concealment of assets alleged to be exempt
or other bad-faith conduct. 134 S. Ct. at 1196. At the hearing on the objection, the trustee
appeared to withdraw his reliance on Lucius because of Siegel.
On appeal, the trustee argues that the bankruptcy court incorrectly extended Siegel “so as
to abrogate all existing limitations on the right of a debtor to make an amended claim of
exemption in a re-opened case.” Trustee’s Br. 10. The bankruptcy court erred, he argues, by
rejecting “the distinction between a case which has not yet been closed, and a case which has
been previously closed,” and Siegel is distinguishable because the case was never closed, unlike
the case before us here. Id. at 10–11. In other words, according to the trustee, Lucius remains
“applicable to a previously closed case despite Law v. Siegel.” Id. at 11.
This court has previously held that “[c]ourts may [] refuse to allow an amendment where
the debtor has acted in bad faith or where property has been concealed.” Lucius, 741 F.2d at
127. Some courts have held that this rule equally applies to reopened cases. In re Goswami, 304
B.R. 386, 393 (B.A.P. 9th Cir. 2003).
No. 14-2149 Ellmann v. Baker, et al. Page 6
In Siegel, the Supreme Court held that a bankruptcy court erred in “surcharging” a
debtor’s exemption, i.e., permitting the bankruptcy trustee to recover from the debtor’s claimed
homestead exemption the fees and expenses expended to uncover the debtor’s fraudulent conduct
during the bankruptcy proceedings. Siegel, 134 S. Ct. at 1195. The bankruptcy court appears to
have reasoned that it had the equitable and inherent power to do so to protect the integrity of the
bankruptcy system. See id. at 1193–94. The Ninth Circuit Bankruptcy Appellate Panel and the
Ninth Circuit affirmed. The Supreme Court reversed, however, reasoning that “[i]t is hornbook
law” that bankruptcy courts cannot “override explicit mandates of other sections of the
Bankruptcy Code.” Id. at 1194 (quoting 2 Collier on Bankruptcy ¶ 105.01[2], p. 105–06 (16th
ed. 2013)). Because 11 U.S.C. § 522(b)(3)(A) allows a debtor to exempt equity from his
residence and § 522(k) prohibits use of the exemption to pay “any administrative expense,”
which the Supreme Court said the attorney’s fees “indubitably” were, it held that the bankruptcy
court exceeded its inherent powers and violated the Code by ordering the surcharge. Id. at 1195.
The Supreme Court further determined that bankruptcy courts do not have “discretion to
grant or withhold exemptions based on whatever considerations they deem appropriate” because
the Bankruptcy Code “sets forth a number of carefully calibrated exceptions and limitations,
some of which relate to the debtor’s misconduct.” Id. at 1196. Thus, “[t]he Code’s
meticulous—not to say mind-numbingly detailed—enumeration of exemptions and exceptions to
those exemptions confirms that courts are not authorized to create additional exceptions.” Id.
Accordingly, the Supreme Court concluded that the Code does not confer “a general, equitable
power in bankruptcy courts to deny exemptions based on a debtor’s bad faith conduct” or “the
debtor’s fraudulent concealment of [an] asset alleged to be exempt.” Id.
Applying these principles here, it is clear that Siegel prohibits the bankruptcy court from
disallowing the debtors’ claimed exemptions because of their alleged bad faith and fraudulent
conduct. While Lucius previously held that bankruptcy courts may use their equitable powers to
sanction a debtor’s misconduct by disallowing exemptions in property concealed from the
trustee, the Supreme Court’s superseding decision unambiguously abrogates their ability to do
so. Some courts have characterized these principles in Siegel as mere dictum, see, e.g., In re
Woolner, No. 13-57269, 2014 WL 7184042, at *3–4 (Bankr. E.D. Mich. Dec. 15, 2014), but this
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court has explained that “[l]ower courts are obligated to follow Supreme Court dicta, particularly
where there is not substantial reason for disregarding it, such as age or subsequent statements
undermining its rationale.” Am. Civil Liberties Union of Ky. v. McCreary Cnty., Ky., 607 F.3d
439, 447–48 (6th Cir. 2010) (citations and internal quotation marks omitted). No such reason in
favor of disregarding Siegel exists here, and many lower courts—including nearly all that have
identified the language above as dictum—have adhered to Siegel’s pronouncements. See, e.g., In
re Elliott, 523 B.R. 188, 189 (B.A.P. 9th Cir. 2014) (“We conclude that Law v. Siegel [] has
abrogated Ninth Circuit law such that unless statutory power exists to do so, a bankruptcy court
may not deny a debtor’s exemption claim or bar a debtor’s exemption claim amendment on the
basis of bad faith or of prejudice to creditors.”); In re Gress, 517 B.R. 543, 547–48 (Bankr. M.D.
Pa. 2014) (“Following [Siegel], several courts have held that they no longer have the discretion
to deny a debtor the opportunity to amend his exemptions based upon equitable considerations
such as bad faith or prejudice to creditors.”). Indeed, another panel of this court, while declining
to rely on Siegel to reverse a bankruptcy court’s disallowance of an amendment, explained that
Siegel “strongly suggests that the bankruptcy court exceeded its authority when it disallowed
[an] amendment” based on prejudice to creditors—a ground absent from the Bankruptcy Code.
In re Westry, 591 F. App’x 429, 432 (6th Cir. 2014). Thus, to the extent Lucius conflicts with
Siegel, the Supreme Court has effectively overruled it.
While the trustee attempts to argue that Siegel applies only to bankruptcy cases that have
never been closed, we think that Siegel also applies in cases that have been reopened, like this
one. The trustee correctly notes that Siegel “did not involve an amended claim of exemption
made after the case had been closed,” Trustee’s Br. 10, but he does not explain why this
distinction is critical. Siegel itself does not draw such a line. Importantly, Siegel’s reasoning is
compelling whether or not a case has been reopened. We therefore reject the trustee’s artificial
delineation and hold that, under Siegel, bankruptcy courts do not have authority to use their
equitable powers to disallow exemptions or amendments to exemptions due to bad faith or
misconduct.
No. 14-2149 Ellmann v. Baker, et al. Page 8
D. Rule 1009(a)
The district court wrote, “Anticipating th[e] consequence of Siegel, the Trustee
made, for the first time at the hearing on his objections, [i.e., more than thirty days after the
objections were filed,] the argument that the Bakers’ amendments were untimely under
Bankruptcy Rule 1009.” Rule 1009(a) provides that “[a] voluntary petition, list, schedule, or
statement may be amended by the debtor as a matter of course at any time before the case is
closed.” Fed. R. Bankr. P. 1009(a) (emphasis added). An objection to an amendment must be
made within thirty days of the amendment’s filing. Fed. R. Bankr. P. 4003(b)(1). This time
limit is both mandatory and jurisdictional. Taylor v. Freeland & Kronz, 503 U.S. 638, 643
(1992) (holding that the time limit is mandatory); In re Laurain, 113 F.3d 595, 597 (6th Cir.
1997) (holding that “Rule 4003(b) is jurisdictional”). Because the bankruptcy case was
previously closed, the trustee argued at the hearing, which occurred more than thirty days after
the amendments were filed, that the debtors could not make amendments under Rule 1009(a) “as
a matter of course” and that any amendment made after the reopening of a case instead is subject
to disallowance at the discretion of the bankruptcy court.
The trustee concedes that he “did not argue this specific interpretation of Rule 1009 in his
[written] Objection,” but maintains that the argument became relevant only after Siegel.
Trustee’s Br. 15. “As a result of the Supreme Court’s opinion, the prior closure of the Debtors’
bankruptcy case became, for the first time, relevant” and therefore “[t]he Trustee cannot be
deemed to have waived an argument that only came into being months after the objection was
filed.” Id. at 17. The district court concluded that the objection was untimely and thus waived.
We agree with the district court’s conclusion that the trustee waived his Rule 1009(a)
argument by failing to timely raise it in his objection. Importantly, the trustee conceded at the
hearing that he never argued in his objection that Rule 1009 barred the debtors from amending
their exemptions. (Hearing Tr., R. 1, PageID 236 at 7:1–2 (“We did not raise that specific
argument.”).) In addition, the trustee answered “Yes” in response to the bankruptcy court’s
question, “Well, you had that argument available to you before [Law v. Siegel] was decided,
didn’t you?” (Id. at PageID 235–36 at 6:24–7:1.) The basis for a Rule 1009 objection to an
exemption claimed after the close of the case is that the objection is untimely because it can no
No. 14-2149 Ellmann v. Baker, et al. Page 9
longer be claimed as a matter of course. But as the district court cogently explained, such an
objection is analytically distinct from the bad-faith objection that previously could have been
brought under Lucius. Not only that, but the untimeliness objection was available concurrently
with the bad-faith objection that was available prior to Siegel. Thus, the trustee’s contention that
his Rule 1009 objection became available and relevant only after Siegel is unpersuasive.
III. CONCLUSION
Because Law v. Siegel prohibits the bankruptcy court from disallowing amendments due
to a debtor’s bad faith or fraud and the trustee waived his timeliness objection to the
amendments, we affirm the district court’s decision affirming the bankruptcy court’s order.