Allen v. Gonzales (In re Allen)

IN RE KELLI DENISE ALLEN and PAUL EUGENE ALLEN, Debtors.

KELLI DENISE ALLEN and PAUL EUGENE ALLEN, Appellants, v. YVETTE GONZALES, Chapter 7 Trustee, Appellee.

BAP No. NM-20-038

Bankr. No. 19-11843-t7

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

June 7, 2021

NOT FOR PUBLICATION^*

Chapter 7

OPINION

Appeal from the United States Bankruptcy Court for the District of New Mexico

Before ROMERO, Chief Judge, SOMERS, and PARKER, Bankruptcy Judges.

PARKER, Bankruptcy Judge.

Debtors in this chapter 7 bankruptcy case appeal the denial of their exemption claim in a cargo trailer used in their concrete refinishing business. The United States Bankruptcy Court for the District of New Mexico (Bankruptcy Court) held Debtors' concrete refinishing business did not constitute a trade under the New Mexico tools of the trade exemption statute and disallowed the exemption. We conclude the objecting party's burden of proof was not satisfied, and the Bankruptcy Court abused its discretion in denying the cargo trailer exemption, and reverse.

I. Background

Kelli and Paul Allen (Debtors) filed a chapter 7 bankruptcy petition in the District of New Mexico on August 8, 2019. Debtors disclosed their ownership of J&K Ventures, LLC, d/b/a Advanced Concrete Transformations (J&K, LLC) in their bankruptcy schedules.¹ Through J&K, LLC, Debtors performed concrete refinishing services, in addition to their regular employment at FedEx and Kelli Allen's employment with Home Chef. Debtors valued their interests in J&K, LLC at $6,448.17, primarily based on the value of tools and equipment the LLC owns. Debtors also listed ownership of a 1998 Pace American twenty-eight-foot cargo trailer valued at $1,000 (Trailer) used to transport and store materials used in concrete refinishing jobs.²

Originally, in Schedule C, Debtors exempted $1,450.17 of their interest in J&K, LLC pursuant to New Mexico Statutes §§ 42-10-1, -2³ and $4,025 of their interest pursuant to New Mexico Statutes § 48-2-15.⁴ Shortly thereafter, Debtors amended their schedules on April 16, 2020, and then again on April 24, 2020, revising Schedules A, B, and C. In amended Schedule C, Debtors removed the exemption claim for J&K, LLC and claimed a $750 exemption in the Trailer solely pursuant to New Mexico Statutes §§ 42-10-1, -2.⁵ In addition to amending the Schedules to claim the Trailer exempt rather than the LLC, Debtors claimed an exemption in $2,630.08 in "unpaid wages garnished pre-petition by Capital One Bank."⁶

Yvette Gonzales, the chapter 7 trustee in Debtors' case, filed an objection to Debtors' exemption claims on November 1, 2019 (Objection to Exemptions).⁷ The Trustee objected to Debtors' amended exemption claims, arguing Debtors were not entitled to a $750 exemption in the Trailer because they had already exempted the maximum under New Mexico's $500 personal property wild card exemption, and the Trailer did "not fall within any of the other permissible categories for an exemption"under New Mexico Statutes §§ 42-10-1, -2.⁸ The Trustee also objected to Debtors' claimed exemption in the wages Capital One Bank garnished.⁹ Debtors responded, arguing the Trustee incorrectly characterized the exemption claim in the Trailer as a "wild card" exemption.¹⁰ Instead, Debtors claimed the Trailer exempt pursuant to New Mexico's tools of the trade exemption because they used it to operate J&K, LLC's concrete refinishing business. Debtors claimed they personally own the Trailer but used it to store and transport materials, supplies, tools, and equipment J&K, LLC uses. The Trustee did not respond to Debtors' clarification.

The Bankruptcy Court heard the Objection to Exemptions on June 26, 2020. In the Trustee's opening statement, counsel explained that while the Trustee believed Debtors used the Trailer in J&K, LLC's business, this use did not qualify the Trailer as a tool of the trade. The Trustee's tool of the trade argument was not elaborate, but she did not question the concrete resurfacing enterprise as a trade and repeatedly referred to theconcrete resurfacing work as a business.¹¹ The Trustee did not call any witnesses at the hearing, instead presenting her case through cross-examination of Debtors.

Kelli Allen testified she and her husband owned the Trailer personally but used it to operate J&K, LLC,¹² and only used the Trailer for J&K, LLC jobs.¹³ On cross-examination, the Trustee introduced Debtors' amended schedules and had Mrs. Allen admit Debtors failed to list the Trailer as "machinery, fixtures, equipment, [or] supplies" used in a business or trade.¹⁴ On redirect, Mrs. Allen explained the failure to list the Trailer on line 40 was an oversight.¹⁵ The Trustee also inquired about Trailer's ownership by directing Mrs. Allen to line 42 of Schedule A/B: Property.¹⁶ Line 42 states J&K, LLC stores its tools, equipment, and materials in the Trailer and references line 4, indicating Debtors jointly own the Trailer.¹⁷ The Trustee never questioned Ms. Allen about thescope of their concrete resurfacing business including the number of jobs, number of hours devoted, gross and net income, assets, business reports, or similar questions.

Paul Allen also testified at the hearing. Mr. Allen's testimony focused on his wages from his employment at FedEx and the claimed exemption in the wages Capital One Bank garnished.¹⁸ The Trustee did not cross-examine Mr. Allen.

At closing argument, the Trustee asserted the Trailer did not qualify as a tool of the trade under New Mexico Statutes §§ 42-10-1, -2. The Trustee admitted the Trailer "was used for the [D]ebtors' business" and "those facts [were] not in contest."¹⁹ The Trustee argued the Bankruptcy Court should deny the exemption for two primary reasons: (1) because the Trailer is a "general piece of equipment that's not specialized for any trade but can be used for ordinary purposes"²⁰ and (2) the Trailer did not belong to Debtors but to J&K, LLC, suggesting Debtors transferred it as "a capital contribution to the business."²¹ Accordingly, the Trustee argued the Trailer belonged to J&K, LLC and Debtors could not claim an exemption in it. Again, the Trustee did not challenge the "trade" portion of the "tools of the trade" exemption.

After Debtors' closing argument, the Bankruptcy Court identified three issues regarding the tools of the trade exemption: (1) whether the Trailer may be considered a tool of a trade; (2) whether Debtors' failure to list any tools of the trade in Schedule A/B prevented them from claiming the exemption; and (3) whether the Trailer is owned byDebtors or J&K, LLC.²² Further explaining the last issue, the Bankruptcy Court stated, "if it's going to be exempt under the tool of the trade, it's got to be the trade of the debtor, and so [the Trustee] wants me to make a distinction because the debtor incorporated and so it was actually under a trade of an LLC not of the debtors."²³

The Bankruptcy Court later issued a written opinion denying Debtors' $750 claim of exemption in the Trailer.²⁴ In analyzing the tools of the trade exemption, the Bankruptcy Court held the Trailer "could qualify as a tool of the concrete refinishing trade" under the "use test" as it was used exclusively in the business and necessary to the business.²⁵ The Bankruptcy Court also held Debtors owned the Trailer and not J&K, LLC.²⁶ The Bankruptcy Court found no support for the Trustee's argument the Trailer belonged to J&K, LLC. The Opinion states, "the only evidence in the record is that the [Debtors] bought the [T]railer personally and never transferred it to J&K."²⁷ The Court did not address Debtors' failure to list the Trailer as a tool of the trade in their petition.

The Bankruptcy Court then sua sponte raised a new issue—whether the concrete refinishing business is a "trade" for purposes of the New Mexico tools of the trade exemption statute.²⁸ The Bankruptcy Court concluded New Mexico courts would likely "insist that a secondary trade contribute in a meaningful way to the debtor's support."²⁹The Bankruptcy Court found Debtors scheduled "a monthly loss of about $200 from J&K" in Schedule I but showed "slim earnings" from J&K, LLC in their Statement of Financial Affairs.³⁰ These findings suggested J&K, LLC's income "either contributes about 4.5%" to Debtors' income "or reduces their income by about 4.5%."³¹ Either way, the Bankruptcy Court found "concrete refinishing cannot fairly be considered a 'trade' of" Debtors, who primarily relied on Mr. Allen's employment at FedEx for their support.³² Accordingly, the Bankruptcy Court denied the tools of the trade exemption claimed in the Trailer. Debtors filed a timely notice of appeal of the Opinion and order denying the claim of exemption.

II. Jurisdiction & Standard of Review

"With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from 'final judgments, orders, and decrees' of bankruptcy courts within the Tenth Circuit."³³ Neither party elected to have the United States District Court for the District of New Mexico hear this appeal; thus, they have consented to our review. "A decision is considered final if it 'ends the litigation on the merits and leaves nothing for the court todo but execute the judgment.'"³⁴ An order denying a debtor's exemption claim is a final order for purposes of appellate review.³⁵

The denial of the Trailer exemption claim is premised on the Bankruptcy Court's interpretation of New Mexico's exemption statutes. Whether a bankruptcy court correctly interprets and applies a state statute is a question of law reviewed de novo.³⁶ "De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision."³⁷ However, a bankruptcy court's findings of fact related to a debtor's claim of exemption are reviewed for clear error.³⁸ "A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, we are left with the definite and firm...