Chief Judge Roger L. Efremsky • Clerk of Court Edward Emmons
Original Filed MAY 18, 1999
GARY A. BOYD and KAREN M. BOYD, Debtor.
EDWARD F. TOWERS, TRUSTEE, Plaintiff.
A.P. No. 98-3113-DM
GARY A. BOYD and KAREN M. BOYD,
On February 19, 1999, Gary and Karen Boyd ("Debtors") filed a motion to dismiss the complaint of the Chapter 7 trustee, Edward Towers ("Trustee"), for recovery of post-petition transfers, for revocation of discharge and for declaratory relief regarding Debtors' claim of exemption ("Complaint"). A hearing on the motion to dismiss was held on March 26, 1999; Iain A. Macdonald, Esq. appeared on behalf of Debtors and Dennis D. Davis, Esq. appeared on behalf of Trustee. At the hearing, the court requested additional briefing from the parties. Trustee filed his supplemental brief on April 5, 1999 and Debtors filed their supplemental brief on April 8, 1999. For the reasons stated below, the court will grant the motion to dismiss with leave to amend the complaint.
On or about August 1, 1995, Debtors filed their joint Chapter 7 voluntary petition. Approximately four months earlier (in April 1995), Debtor Gary Boyd was injured by a fork lift operated by an employee of Home Depot USA, Inc. ("Home Depot"). When Debtors filed their Chapter 7 petition, they held a cause of action against Home Depot for physical, emotional and financial injuries, but had not yet filed a lawsuit against Home Depot. Debtors failed to disclose the existence of their claims against Home Depot as an asset in their sworn schedules.
The Chapter 7 case was closed as a no-asset case on February 7, 1996; one week later, on February 14, 1996, Debtors filed a state court lawsuit against Home Depot. Thereafter, on or about August 20, 1997, Debtors and Home Depot reached an agreement whereby Home Depot paid $700,000 in settlement of the personal injury, property damage and loss of consortium claims. After payment to their state court litigation counsel, Debtors retained approximately $410,000.
Eventually, the United States Trustee discovered the existence of Debtors' claims against Home Depot and moved to reopen the Debtors' case. The case was reopened on February 10, 1998, and on March 3, 1998, Debtors filed an amendment to their schedules disclosing the existence of the claim and the settlement of it, and exempting the personal injury portion of the claim. In their Amended Schedule C, Debtors stated:
Debtors amend their schedule of exemptions to claim, as fully exempt pursuant to California Code of Civil Procedure § 704.140, the personal injury claim set forth on Amended Schedule B.
In their Amended Schedule B, Debtors disclosed only:
An unliquidated claim for damages against Home Depot, U.S.A., Inc., a Delaware corporation and Mark Zimmerman, resulting from accident occurring on or about April 18, 1995. Claim unliquidated on date of bankruptcy. Although settled on or about August 22, 1997, for the sum of $700,000.
Debtors exempted only their personal injury portion of their claims against Home Depot; Debtors did not claim as exempt any claim for property damage, for loss of wages or for loss of consortium.
Three days after Debtors filed their amended schedules and exemptions, Trustee served an objection to the claim of exemption on Debtors' counsel. The Trustee prepared the objection for filing with the court; even though the objection was prepared and served well within the deadline for objections to exemptions, the court did not receive its copy until well after the deadline. Consequently, the objection was not timely filed with the court.
Subsequently, on April 21, 1998, Trustee filed the Complaint, seeking denial of the exemption, recovery of the $700,000 in settlement proceeds pursuant to 11 U.S.C. §§ 549 and 550, and revocation of Debtors' discharge.
A. Trustee's Objection to Debtors' Exemption of Their Personal Injury Claim is Time-barred, Although Trustee is Entitled to Valuation of Settlement to Determine Amount of Non-exempt Property Damage and Other Claims.
1. Trustee's Objection to Exemptions Is Time-Barred
Trustee's third claim for relief in the Complaint seeks declaratory relief regarding the amended exemptions filed by Debtors. Federal Rule of Bankruptcy Procedure 4003(b) requires a trustee to file objections to exemptions within thirty days of the filing of an amendment to a debtor's list of exemptions. The United States Supreme Court has strictly construed this filing requirement, essentially treating Rule 4003(b) as a jurisdictional statute of limitations. See Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (failure of trustee to file an objection within time period of Rule 4003(b) resulted in allowance of claimed exemption, even where objection was otherwise meritorious and valid). Timely filing requires actual receipt of the pleadings by the clerk of court. See Cooper v. City of Ashland, 871 F.2d 104, 105 (9th Cir. 1989) (when papers are mailed to clerk's office, filing is complete when papers are received by clerk); see also Fed. R. Bankr. P. 5005(a) (documents required to be "filed" shall be filed with the clerk in the district where the main bankruptcy case is pending). To the extent Rule 4003(b) establishes a statute of limitations for objections, the requirement of a "filing" must be strictly enforced. See Lee v. Dallas County Bd. Of Educ., 578 F.2d 1177, 1178 n.1 (5th Cir. 1978) (compliance with a filing requirement is not satisfied by mailing the necessary papers within the allotted time; the papers must be filed by the clerk within the filing period specified in the applicable rule or order); see also Eubank v. Strickland (In re Strickland), 50 B.R. 16, 17 (Bankr. M.D. Alab. 1985) (plain language of Fed. R. Bankr. P. 4007© states that nondischargeability complaints must be "filed" within certain time period; depositing pleading in mail was not sufficient "filing"). Because Trustee did not timely file his objection to the amended exemption, Debtors may retain their exemption in the personal injury portion of their claims against Home Depot, as set forth in their amended schedules.
Trustee argues that because Debtors received "actual notice" of the objections to exemptions when they were timely served with the written objections, Trustee has timely objected to the amended exemption. Trustee cites several cases (most of which were decided prior to Taylor) in support of his "actual notice" argument. In each of these cases, however, the document providing the actual notice (i.e., a motion for relief stay containing an objection to exemption, an objection that did not comply with local rules, etc.) was timely filed. The document setting forth the objection in this case was not timely filed.(2)
2. Debtors Did Not Need Leave of Court to File Amended Exemptions
Trustee contends that this Court should disregard the amended Schedule C that declares the personal injury claim as exempt because Debtors did not obtain leave of court to file their amendments. Trustee cites Fed. R. Bankr. P. 1009(a), which 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." Under Trustee's interpretation of this rule, Debtors lost their automatic right to amend once the case was closed, even if the case had been re-opened; Trustee asserts that Debtors were therefore required to obtain leave of court before filing any amendments. The court interprets this provision of Rule 1009 differently: as long as a case is open, a debtor may amend its schedules and statements of affairs, until closing. In any event, Rule 1009 does not affirmatively require a debtor to file a motion to amend its schedules and statement of affairs. Here, the case was open (re-opened) when Debtors filed their amendments. The court believes that a motion for leave to file amended schedules was not necessary.
3. Section 105 Does Not Extend Trustee's Deadline to Object to Exemptions
Trustee argues that this court should utilize its powers under 11 U.S.C. § 105 to disallow Debtors' exemptions. The Bankruptcy Code and Rules, however, contain provisions specifically governing allowance of and objections to exemptions. See 11 U.S.C. § 522; Fed. R. Bankr. P. 4003. This court cannot permit Trustee to attack Debtor's exemptions through section 105 instead of the more specific provisions and rules governing exemptions. Seaport Automotive Warehouse, Inc. v. Rohnert Park Auto Parts, Inc. (In re Rohnert Park Auto Parts, Inc.), 113 B.R. 610 (9th Cir. BAP 1990) (the court's power under section 105 is limited; "while endowing the court with general equitable powers, section 105 does not authorize relief inconsistent with more specific law.").
4. Trustee is Entitled to Valuation of Settlement
Nevertheless, even though Trustee did not timely file his objection to the exemption, Trustee is entitled to a valuation of Debtors' settlement with Home Depot to determine how much of the settlement payment is attributable to property damage or other claims which are not the "personal injury" claims. Debtor exempted only the "personal injury" claims; to the extent the settlement includes amounts for other claims, those amounts have not been declared exempt and continue to be property of the estate. While "the uncontested, unambiguous listed exemption stands," the Trustee is entitled file a motion for valuation of the settlement proceeds and exemption, which is not time-barred. Alderman v. Martinson (In re Alderman), 195 B.R. 106, 111 (9th Cir. BAP 1996).
Trustee argues that the "personal injury" claim exemption is ambiguous and subject to a motion for valuation as well. The court disagrees. The date for determining the value of the personal injury exemption is the bankruptcy petition date. Rigby v. Hall (In re Hall), 1 F.3d 853, 855 (9th Cir. 1993). As of the petition date, Debtors' claims against Home Depot were not the subject of any pending action and were unliquidated. Pursuant to Cal. Code Civ. P. § 704.140(a), the entire personal injury cause of action was exempt as of the petition. Debtors' personal injury claim is unambiguous, and is not subject to the limitations of Cal. Code Civ P. § 704.140(b), inasmuch as the settlement did not exist as of the petition date.(3)
B. Trustee's Claim for Revocation of Discharge is Time-barred.
Trustee asserts that grounds exist to revoke Debtors' discharge pursuant to 11 U.S.C. § 727(d)(1) and (d)(2).(4) An action under subsection (d)(1) must be filed within one year of the granting of the discharge. An action under subsection (d)(2) must be filed within one year of the granting of the discharge or before the case was closed, whichever occurs later. See 11 U.S.C. § 727(e)(1) and (2).(5) The discharge in this case was granted on January 27, 1996, and the case was closed on February 7, 1996. The Complaint was filed on April 21, 1998, more than two years later. It is therefore time-barred.
Trustee contends that Debtors' dishonest conduct in failing to disclose its claim against Home Depot equitably tolled the limitations set forth in section 727(e)(1) and (2); alternatively, Trustee argues that the case was not "closed" for the purposes of section 727(e)(2), because it was not finally administered. As acknowledged by the Trustee in his supplemental brief, the courts holding that a case is not "closed" for section 727(e) purposes if assets have been omitted from the original schedules are resorting to "intellectual gymnastics" and are in effect applying the doctrine of "equitable tolling." Most courts, however, have held that "equitable tolling" does not apply to section 727(d) actions. Davis v. Johnson (In re Johnson), 187 B.R. 984, 988 (Bankr. S.D. Cal. 1995) (setting forth list of cases refusing to apply equitable tolling to section 727(d) actions). The court finds the majority cases to be persuasive, and will not apply the doctrine of "equitable tolling" in this case. Trustee's claim for revocation of discharge will therefore be dismissed.
C. The Court Will Allow the Trustee to Amend His Complaint to Seek Turnover of Any Settlement Proceeds Attributable to Non-Personal Injury Claims
As set forth in § II, A, supra, the court will recognize Debtors' claim of exemption in the personal injury cause of action. To the extent the settlement proceeds are directly attributable to the personal injury claims, they are no longer property of the estate and are not subject to any avoidance action. However, with respect to that portion of the settlement funds attributable to property damage or other non-personal injury claims, Trustee is entitled to amend his complaint to seek turnover of such funds. He cannot, however, maintain an avoidance claim under section 549 and section 550, because there was no "transfer." The Debtors simply retained property that would have been property of the estate; they did not transfer the property to themselves.(6) Under Trustee's interpretation of sections 549 and 550, Debtors were both the transferees and the transferors. If so, no transfer occurred and Trustee cannot state a claim for relief under section 549 or 550. He can, however, use this adversary proceeding to seek a turnover from the Debtors of any nonexempt portion of the Home Depot settlement proceeds.
Counsel for Debtors should prepare an order consistent with this Memorandum Decision. Counsel should submit the order within ten days of the date of service of this Memorandum Decision and should comply with B.L.R. 9021-1 and 9022-1. The order should provide for dismissal of this adversary proceeding, subject to leave to amend the complaint to recover nonexempt proceeds within twenty days of the order. The order should also set a status conference on this adversary proceeding for July 30, 1999 at 1:30 P.M.
Dated: May __, 1999 ______________________________ Dennis Montali United States Bankruptcy Judge
1. Many of the facts set forth in this section are recited in the Complaint, the allegations of which the court considers true for the purposes of this motion to dismiss. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Arbabian v. BP America, 898 F.Supp. 703, 707 (N.D. Cal. 1995) ("For purposes of a motion to dismiss under Rule 12(b)(6), a complaint is construed in a light most favorable to the plaintiff and all properly pleaded factual allegations are taken as true.").
2. The objections to Debtors' exemptions appear to be substantively valid, particularly the allegation that Debtors are precluded from claiming the cause of action exempt because of their fraud in secreting it from the trustee; if the objections had been timely filed, they might well have been sustained.
3. Section 704.140(a) of the California Code of Civil Procedure exempts a cause of action for personal injury. Section 704.140(b) exempts a settlement or award for a personal injury. On their petition date, Debtors held a cause of action, not an award or settlement. Thus, the entire cause of action is exempt under section 704.140(a). See In re Rita Marie Carr, Case No. 92-12222, Memorandum of Decision issued by Jaroslovsky, J. (August 16, 1994) (available on court's website at www.canb.uscourts.gov).
4. Section 727(d) of the Bankruptcy Code provides:
(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if - (1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge; (2) the debtor acquired property that is property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee; or
(3) the debtor committed an act specified in subsection (a)(6) of this section.
5. Section 727(e) of the Bankruptcy Code provides:
(e) The trustee, a creditor, or the United States trustee may request a revocation of a discharge - (1) under subsection (d)(1) of this section within one year after such discharge is granted; or (2) under subsection (d)(2) or (d)(3) of this section before the later of - (A) one year after the granting of such discharge; and (B) the date the case is closed.
6. But see, In re Signorelli, 113 B.R. 781, 782 (Bankr. S.D. Fla. 1990) (motion for turnover of property of the estate sustained where debtors' post-petition purchase of real property "... is, in essence, a post-petition transfer of property of the estate pursuant to the provisions of 11 U.S.C. section 549....")