Larry K. Alexander v. MaryJo Jensen-Carter ( 1999 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
____________________
No. 99-6051MN
____________________
In re: *
*
Larry Kenneth Alexander, *
*
Debtor. *
_____________________________ *
* Appeal from the United States
Larry Kenneth Alexander, * Bankruptcy Court for the
* District of Minnesota
Debtor - Appellant, *
*
v. *
*
Mary Jo A. Jensen-Carter, *
*
Trustee - Appellee. *
____________________
Submitted: August 27, 1999
Filed: October 21, 1999
____________________
Before WILLIAM A. HILL, SCHERMER, and SCOTT, Bankruptcy Judges.
____________________
WILLIAM A. HILL, Bankruptcy Judge.
Debtor Larry Kenneth Alexander appeals from the bankruptcy court’s1 June 30, 1999,
order sustaining the chapter 7 trustee’s objection to Alexander’s claimed homestead
1
The Honorable Dennis D. O’Brien, Chief Judge, United States Bankruptcy Court for the
District of Minnesota.
exemption.2 We have jurisdiction over this appeal from the final order of the bankruptcy
court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
BACKGROUND
On June 18, 1998, debtor Larry Kenneth Alexander filed a chapter 13 bankruptcy
petition which listed his address as 175 N. Lexington Parkway, St. Paul, Minnesota. The
debtor then filed Schedule C on July 6, 1998, claiming a homestead exemption for property
located at 875 Laurel Avenue, St. Paul, Minnesota. The chapter 13 trustee filed a timely
objection to the debtor’s homestead exemption, asserting that as the debtor was living at the
Lexington Parkway residence at the time of petition filing, he could not claim the Laurel
Avenue residence for a homestead exemption. On November 30, 1998, an evidentiary
hearing was held wherein the debtor admitted that at the time he filed his chapter 13 petition,
he was living at the Lexington Parkway residence but that his family was living at the Laurel
Avenue residence. By an order dated December 3, 1998, the bankruptcy court sustained the
chapter 13 trustee’s objection and involuntarily converted the case to chapter 7. At the time
of conversion, the debtor was living at the Laurel Avenue residence. The debtor appealed
the bankruptcy court’s order of December 3, 1998, to the district court, asserting, inter alia,
that the bankruptcy court erred in (1) denying confirmation of the debtor’s chapter 13 plan;
(2) sustaining the chapter 13 trustee’s objection to the debtor’s homestead exemption; and
(3) converting the case to chapter 7. By an order dated August 4, 1999, the district court
affirmed the bankruptcy court’s order of December 3, 1998, in all respects.
On December 21, 1998, the debtor filed a Schedule C in the converted chapter 7 case,
claiming a homestead exemption for his Laurel Avenue residence. The section 341 creditors’
meeting in the converted chapter 7 case was held on January 25, 1999. On February 22,
1999, the chapter 7 trustee filed an objection to the debtor’s homestead exemption on the
same basis that was asserted by the chapter 13 trustee; namely, that the debtor’s Laurel
Avenue residence did not qualify for a homestead exemption in the converted chapter 7 case
because the debtor was living elsewhere at the time he filed his chapter 13 petition. On
March 17, 1999, the bankruptcy court conducted a hearing to determine whether the debtor
could exempt his Laurel Avenue residence as a homestead in the converted chapter 7 case
2
See In re Alexander, 236 B.R. 679 (Bankr. D.Minn. 1999).
2
and thereafter issued the order now on appeal, which sustained the trustee’s objection to the
debtor’s homestead exemption for the Laurel Avenue residence. The debtor now argues,
inter alia, that his entitlement to a homestead exemption for the Laurel Avenue residence in
the converted chapter 7 case is governed by Armstrong v. Lindberg (In re Lindberg), 735
F.2d 1087 (8th Cir. 1984). In addition, the debtor raises various procedural issues for our
consideration. We shall first dispose of these issues before moving on to the substantive
basis for the appeal.
STANDARD OF REVIEW
On appeal, we review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. Fed. R. Bankr. P. 8013; In re Usery, 123 F.3d 1089, 1093 (8th
Cir. 1997); O’Neal v. Southwest Mo. Bank (In re Broadview Lumber Co.), 118 F.3d 1246,
1250 (8th Cir. 1997).
DISCUSSION
I. Debtor’s “Motion to Strike”
By a letter dated August 16, 1999, the chapter 7 trustee (the appellee in this case)
submitted to this Court a copy of the U. S. District Court’s opinion and order of August 4,
1999. The debtor responded by filing a “motion to strike,” seeking to bar this Court from
taking into consideration the district court’s opinion and order of August 4, 1999. The debtor
asserts that the district court’s opinion should be excluded from our consideration because
it is prejudicial and because it was not a part of the record developed before the bankruptcy
court when it issued its order of June 30, 1999–the order from which the present appeal was
taken.
“Ordinarily an appellate court should base its decision on the facts as they existed at
the time the trial court made its decision.” Frankfurth v. Cummins (In re Cummins), 20 B.R.
652, 653 (B.A.P. 9th Cir. 1982). In extraordinary circumstances, however, an appellate court
may “take judicial notice of developments in a case on appeal which have occurred in the
district court after the appeal was filed.” Cummins, 20 B.R. at 653 (quoting Samuel v.
University of Pittsburgh, 506 F.2d 355, 360 n.12 (3rd Cir. 1973)). “[T]he on-going nature
of bankruptcy proceedings, on occasion, creates situations where the reviewing court may
take notice of fundamental events occurring after the entry of the judgment from which the
3
appeal was taken.” Cummins, 20 B.R. at 653. Moreover, appellate courts regularly take
similar judicial notice of post-appeal developments which trigger the mootness doctrine. Id.
at 653 (citing Landy v. Federal Deposit Ins. Corp., 486 F.2d 139, 151 (3rd Cir. 1973)).
In Cummins, a real estate broker brought an adversary proceeding against the debtors
to recover his real estate commission. Cummins, 20 B.R. at 652-53. The bankruptcy court
entered judgment in favor of the debtors based on a conclusion that the real estate broker was
a professional person who failed to receive court approval of his employment as required by
§ 327(b) of the Bankruptcy Code. Id. The real estate broker appealed that judgment to the
Ninth Circuit Bankruptcy Appellate Panel. Id. Subsequently, while the appeal was pending,
the debtors’ voluntarily dismissed their bankruptcy petition. Id. The dismissal was brought
to the appellate panel’s attention during a telephonic hearing and again during oral argument.
Id. at 654. The debtors argued that the appellate panel could not consider the dismissal of
the debtors’ bankruptcy petition because the dismissal had occurred after the bankruptcy
court’s decision in the adversary proceeding. Id. Nevertheless, the appellate panel took
notice of the voluntary dismissal, and that fact formed the basis for the panel’s decision to
reverse and remand the case. Id. at 653-54.
In the present case, the debtor’s argument closely resembles the argument made by
the debtors in Cummins, and a similar result is appropriate. The debtor has not demonstrated
how his present appeal to this Court would be prejudiced by our taking notice of the district
court’s opinion and order of August 4, 1999. Accordingly, we take judicial notice of the
aforementioned decision, and the debtor’s “motion to strike” is denied. Moreover, although
our inquiry regarding the homestead exemption issue may be similar to that of the district
court, our procedural context is different. The district court was concerned with the chapter
13 trustee’s objection to the debtor’s homestead exemption. Thus, the district court was not
squarely faced with the issue of whether a debtor may claim a homestead exemption in a
converted chapter 7 case based on residency at the time of conversion. Because the district
court did not address this issue, its opinion need not be given preclusive effect and should
not impede this Court’s determination of the issue now presented. The present appeal arises
in the context of the converted chapter 7 case wherein the debtor has attempted to exempt
the homestead where he resided at the time of conversion. Therefore, this Court is in a
proper procedural context to address the debtor’s argument that homestead exemption
4
eligibility is determined according to the date of conversion. First, however, we will dispose
of the debtor’s argument that the chapter 7 trustee’s objection was untimely filed.
II. Timeliness of the Chapter 7 Trustee’s Objection
On December 21, 1998, the debtor filed an amended Schedule C, claiming his Laurel
Avenue homestead as exempt in the converted chapter 7 case. On January 25, 1999, the
creditors’ meeting for the converted chapter 7 case was held. On February 22, 1999, the
trustee in the converted chapter 7 case filed an objection to the debtor’s homestead
exemption. The debtor asserts that the chapter 7 trustee’s objection was untimely under Rule
4003(b) because it was not filed within 30 days after the debtor filed his amended schedule.
The debtor argues that objections to exemptions must be filed within 30 days after an
amendment to Schedule C or within 30 days after the original creditors’ meeting in the
chapter 13 case, citing In re Ferretti, 230 B.R. 883 (Bankr. S.D.Fla. 1999) in support of his
position. Apparently interpreting Rule 4003(b) according to its plain meaning, the
bankruptcy court concluded that the trustee’s objection to the debtor’s homestead exemption
was timely filed because it occurred within 30 days after the creditors’ meeting in the
converted chapter 7 case. See In re Alexander, 236 B.R. 679, 681 (Bankr. D.Minn. 1999).
The trustee or any creditor may file objections to a debtor’s claimed exemptions
within 30 days after the conclusion of the section 341 creditors’ meeting, or within 30 days
after the filing of any amended schedules. Fed. R. Bankr. P. 4003(b). A trustee who fails
to timely file an objection to an exemption pursuant to Rule 4003(b) is precluded from
objecting at a later time, and the disputed asset is exempt. Taylor v. Freeland & Kronz, 503
U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992). “Because an order of conversion
constitutes an order for relief under the chapter to which the case is converted, Rule 2003(a)
mandates the United States trustee to call a meeting of creditors.” Ferretti, 230 B.R. at 887.
In the context of conversion from chapter 11 to chapter 7, the chapter 7 trustee may file
objections to exemptions within 30 days after the creditors’ meeting in the converted chapter
7 case. See LaRossa v. Leydet (In re Leydet), 150 B.R. 641 (Bankr. E.D.Va. 1993); In the
Matter of Bergen, 163 B.R. 377 (Bankr. M.D.Fla. 1994); In re Kleinman, 172 B.R. 764
(Bankr. S.D.N.Y. 1994). But see In re Brown, 178 B.R. 722 (Bankr. E.D.Tenn. 1995); In
re Halbert, 146 B.R. 185 (Bankr. W.D.Tex. 1992). Similarly, in the context of conversion
from chapter 13 to chapter 7, the chapter 7 trustee may timely file an objection to the
5
debtor’s claimed exemptions within 30 days after the creditors’ meeting in the converted
chapter 7 case. Weissman v. Carr (In re Weissman), 173 B.R. 235, 237 (M.D.Fla. 1994);
In re Jenkins, 162 B.R. 579, 580-81 (Bankr. M.D.Fla. 1993). But see In re Beshirs, 236 B.R.
42 (Bankr. D.Kan. 1999); Ferretti, 230 B.R. at 891 (holding that the chapter 7 trustee in a
case converted from chapter 13 cannot file objections to exemptions unless the case was
converted in bad faith or amended schedules were filed following conversion).
Leydet, Bergen, Kleinman, Weissman, and Jenkins stand for the proposition that the
trustee in a converted chapter 7 case may timely file objections to exemptions within 30 days
after the creditors’ meeting in the converted case. Halbert reached a different conclusion
based largely on the idea that once property is successfully exempted by the debtor in
possession in the chapter 11 case, it is no longer part of the bankruptcy estate, and an
objection in the converted chapter 7 case would not be sufficient to bring the previously
exempted property back into the estate. Halbert, 146 B.R. at 188-89. Brown adopted this
reasoning from Halbert. Brown, 178 B.R. at 726-27. However, the concern raised in Brown
and Halbert is not present in this case because the debtor did not successfully exempt his
Laurel Avenue property within the context of his chapter 13 case. Therefore, Brown and
Halbert are less applicable to the present case.
Furthermore, part of the basis for the Ferretti court’s decision was that a different
holding would “have the effect of setting aside and emasculating” a previous order by the
bankruptcy court in that case. Ferretti, 230 B.R. at 890. The present case raises a similar
concern. In the chapter 13 context of this case, the bankruptcy court ruled that the debtor
could not exempt the Laurel Avenue property under Minnesota law. The applicable legal
standard remains the same in the context of the converted chapter 7 case. Therefore, it
would be illogical to hold that a debtor in a converted case may reverse a previous ruling of
the bankruptcy court simply by filing an amended schedule. To quote the court in Ferretti,
“[s]uch a result nullifies the principle of law of the case” and “ignores the statutory mandate
that property of a converted case is to be determined as of the date of the original petition.”
Ferretti, 230 B.R. at 890.
Finally, we are unpersuaded by the reasoning of the court in Beshirs. As the court
observed in Leydet, nothing in the Bankruptcy Code or Bankruptcy Rules restricts the term
6
“meeting of creditors” in Rule 4003(b) to refer only to the original meeting of creditors that
occurred before conversion. Leydet, 150 B.R. at 643. The argument that the trustee in a
converted chapter 7 case is precluded from filing objections to exemptions because Rule
1019(2) fails to provide a new filing period after conversion is unpersuasive. Id. Stating a
new filing period in Rule 1019(2) would be unnecessary and repetitious because the plain
meaning of Rule 4003(b) already provides for a new filing period after the meeting of
creditors pursuant to Rule 2003(a) in the converted case. Id. Moreover, discovering
improper exemptions is one of the primary purposes for conducting a meeting of creditors.
Thus, precluding the trustee from filing objections to exemptions in a converted chapter 7
case runs contrary to the role of the chapter 7 trustee in bankruptcy and needlessly
compromises the rationale for conducting section 341 meetings in converted cases. Id. at
644. Accordingly, we affirm the bankruptcy court’s conclusion that the trustee’s objection
to the debtor’s homestead exemption in the converted chapter 7 case was timely filed
pursuant to Rule 4003(b).
III. Debtor’s Homestead Exemption
At the time the original chapter 13 petition was filed, the debtor was living at his
Lexington Parkway property. At the time of conversion, the debtor was living at his Laurel
Avenue property. The debtor asserts that he can claim a homestead exemption for his Laurel
Avenue property, citing Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087 (8th Cir.
1984) in support of his proposition that facts existing at the time of conversion control
homestead exemption eligibility.
In Lindberg, the court ruled that when a case is converted from chapter 13 to chapter
7, the date of conversion controls what exemptions may be claimed in the converted chapter
7 case. Lindberg, 735 F.2d at 1090-91. When Lindberg was decided, the majority of courts
agreed that property of the converted chapter 7 bankruptcy estate was determined at the time
of conversion, and the Lindberg decision relied heavily on this principle. Lindberg, 735 F.2d
at 1090 (citations omitted). As the Lindberg court stated, “[o]nly if the same date controls
what is property of the estate and what exemptions may be claimed can the debtor make full
use of exemption laws.” Id.
7
However, later decisions by the Eighth Circuit cast doubt on the Lindberg decision’s
continued viability in light of the 1994 amendments to the Bankruptcy Code. See Armstrong
v. Harris (In re Harris), 886 F.2d 1011, 1013 (8th Cir. 1989); Armstrong v. Peterson (In re
Peterson), 897 F.2d 935, 937-38 (8th Cir. 1990). Without expressly overruling Lindberg, the
Harris court stated that the interplay of section 522(b)(2)(A) and section 348(a) “indicates
that the date of petition controls exemption eligibility.” Harris, 886 F.2d at 1013.
Furthermore, the Peterson court ruled unequivocally that exemption eligibility is determined
according to the facts and exemption laws applicable at the time a bankruptcy petition is
filed. Peterson, 897 F.2d at 937-38. However, neither the Harris court nor the Peterson
court specifically addressed the situation where a bankruptcy case was converted from one
chapter to another.
In 1994, the Bankruptcy Code was amended to include the following provision:
. . . [W]hen a case under chapter 13 of this title is converted to a case under
another chapter of this title–
(A) property of the estate in the converted case shall consist of
property of the estate, as of the date of filing of the petition, that
remains in the possession of or is under the control of the
debtor on the date of conversion; . . .
11 U.S.C. § 348(f)(1)(A) (italics added). Moreover, conversion of a case from one chapter
to another “does not affect a change in the date of the filing of the petition.” 11 U.S.C. §
348(a). The Bankruptcy Code clearly indicates that in a case converted from chapter 13,
property of the estate in the converted case is determined according to the filing date of the
original chapter 13 petition. Therefore, exemption eligibility should also be determined as
of the original chapter 13 filing date. This principle is consistent with the Harris decision,
the Peterson decision, and the Lindberg court’s reasoning that property of the estate and
exemption eligibility should be determined as of the same date. Indeed, other courts have
concluded that Lindberg has been superseded by the 1994 Bankruptcy Code amendments and
that exemption eligibility is determined as of the date the original chapter 13 petition was
filed. See Lowe v. Sandoval (In re Sandoval), 103 F.3d 20 (5th Cir. 1997); In re Weed, 221
B.R. 256 (Bankr. D.Nev. 1998); In re Ferretti, 230 B.R. 883 (Bankr. S.D.Fla. 1999); In re
8
Beshirs, 236 B.R. 42 (Bankr. D.Kan. 1999). Therefore, we affirm the bankruptcy court’s
conclusion that Lindberg is no longer good law.
CONCLUSION
Based on the foregoing, the debtor’s “motion to strike” is denied, and the bankruptcy
court’s order of June 30, 1999, is affirmed.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
EIGHTH CIRCUIT.
9