In re Harding

1

In Re WHITNEY J. HARDING, Debtor.

No. 22-70235

United States Bankruptcy Court, C.D. Illinois

August 25, 2023

Chapter 7

OPINION

Mary P. Gorman, United States Bankruptcy Judge

Before the Court after trial is the Chapter 7 Trustee's Objection to Debtor's Claim of Exemptions (#27) asking that the Debtor's exemptions in "Household Goods," "Electronics," and a handgun be limited to the amounts claimed on the Debtor's Schedule C. For the reasons set forth herein, the Trustee's objection will be allowed, in part. The exemptions will be limited to the amounts now claimed, but the Debtor will not be prohibited from further amending her claim of exemptions.

I. Factual and Procedural Background

Whitney J. Harding ("Debtor") filed her voluntary Chapter 7 petition on April 20, 2022. Relevant to the issues here, she scheduled ownership of personal property that she described as "Household Goods" valued at $450 "Electronics" valued at $400, and a "Handgun" valued at $500. She claimed each asset or category of assets as exempt in the same amounts as their scheduled values. She also scheduled ownership of a "Term Insurance" policy with a surrender value of $0. She did not separately schedule ownership of any furniture, collectibles of value, jewelry, or other insurance policies.

On April 25, 2022, the Debtor suffered a fire at her apartment resulting in a total loss of most of her personal property. At some point thereafter, Jeffrey D. Richardson, the Chapter 7 Trustee, learned about the fire and that the Debtor had submitted a claim for the loss of her personal property to State Farm Insurance Company based on a renter's insurance policy. The Trustee filed a motion seeking turnover of documentation regarding the insurance claim and any proceeds paid based on the claim. The Debtor subsequently filed an amended Schedule A/B: Property listing for the first time "Renter's insurance policy - State Farm - no cash value at time of filing, subsequent claim for post-petition fire requests $28,000, Debtor suggests that any claim flows from exempt personal property and/or post-petition loss of rented apartment." The Trustee and the Debtor entered into an agreed order on the Trustee's motion for turnover agreeing that any remaining and future proceeds from the insurance claim would be held by the Debtor's attorney in his trust account pending further order of court and that the Debtor would turn over to the Trustee all records relating to the insurance claim.

On June 27, 2022, the Trustee filed his Objection to Debtor's Claim of Exemptions. Noting the history set forth above and that he had yet to receive complete documentation of what had been paid by the insurance company and how those proceeds had been spent, the Trustee asked that (1) the Debtor's exemption for household goods be limited to the $450 amount claimed, (2) the Debtor's exemption for all electronics be limited to the $400 amount claimed, and (3) the Debtor's exemption for her handgun be limited to the $500 amount claimed. Resolution of the matter was continued several times while the Trustee sought additional documents from the Debtor and her insurance company. An evidentiary hearing was finally held July 6, 2023.

The Debtor, called as an adverse witness by the Trustee, was the only witness to testify. She described the reasoning behind the way she scheduled her property and exemptions in this case and the circumstances of the post-petition fire that resulted in the loss of her personal property, as well as the insurance claim that she filed.

The fire loss occurred just a few days after the Debtor filed her bankruptcy case. The Debtor testified that everything she lost in the fire had been owned by her at the time of her bankruptcy filing; she had acquired no additional property between her case filing and the fire. By early July 2022, the Debtor had received payments from the insurance company totaling $26,015.71, which she testified were attributable only to property loss and were not intended to reimburse her for living expenses or displacement costs.

The Debtor identified an itemization of personal property generated by her insurance company based on a list provided by her of the items lost in the fire and what she estimated it would cost to replace them. She said the insurance company adjusted her cost figures based on the age of the items in creating its itemization. The itemization generated by the insurance company included a breakdown of the Debtor's property according to age and set forth two proposed payout values for each item-actual cash value and replacement cost value. According to the Debtor, the insurance company paid her the actual cash value of her lost property subject to reimbursement for additional amounts up to the replacement cost value for any items that she actually replaced within a certain time and for which she provided proof of purchase to the insurance company. Although the bulk of payments received under her insurance policy were based on actual cash value, the Debtor said that she did submit receipts for some replaced items for which she was ultimately paid the full replacement cost value. She believed that the last payment she received from the insurance company of $1478.54, dated July 2, 2022, was attributable to such replacement costs.

The Trustee reviewed with the Debtor a copy of the insurance itemization that he had marked up to highlight all items of personal property other than food or clothing.^[1] The Debtor reviewed the itemization page by page and agreed that the marked items did not include food or clothing. Neither she nor her attorney disputed the Trustee's representation that the actual cash value of the marked items as set forth in the insurance estimate totaled $14,560.68.^[2]

The marked items of property on the itemization consisted of general household goods and consumer items, furniture, and electronics. In addition, the Debtor acknowledged that the total included amounts for wall art, books, and other items meeting the description of examples of "collectibles of value" on the Schedule A/B form instructions; she also agreed that she had not listed any such items on her schedules. The Debtor acknowledged that the total included values for jewelry items that she admittedly did not separately list or include as "jewelry" on her schedules. She conceded that the list of items and the values provided in support of her insurance claim were much more extensive and significantly greater than what was provided on her bankruptcy schedules.

The Trustee specifically asked the Debtor why she did not schedule the books, artwork, and collectibles that she owned when she filed bankruptcy and for which she claimed insurance reimbursement after the fire. She responded that those items were not of garage sale value. Likewise, when the Trustee pointed out that she had received insurance proceeds for a pair of diamond earrings but had scheduled no jewelry, the Debtor said that the earrings did not have garage sale value. The Trustee, suggesting some confusion, asked her whether she meant that the earrings and other items were not the type of property that would be sold at a garage sale and therefore could not be valued for a garage sale or whether she meant that such items would have no value if placed in a garage sale. The Debtor responded that she did not have an answer to the Trustee's question. She also admitted that she did not schedule any furniture despite claiming a couch, chair, and several other items of furniture on the insurance itemization. Her only explanation for the lack of disclosure of furniture on her schedules was that the items were old.

Under questioning by her own attorney and in an apparent effort to reconcile the significant discrepancies between her bankruptcy schedules and her insurance claim, the Debtor said that she lumped most of her personal property other than her handgun and electronics into the single category of "Household Goods" under the subparagraph for "Household goods and furnishings" on Schedule A/B. She testified that she had both held and shopped at several garage sales over the years and was familiar with garage sale prices. The Debtor maintained that, lumped together under the term "Household Goods," she had disclosed all her personal property-including furniture and collectibles-and that the $450 stated was a fair estimate of the garage sale value of all such property.

The Trustee closed by arguing that the Debtor had not disclosed any furniture, collectibles, books, works of art, or jewelry and therefore had not claimed any such property as exempt. He asserted that, because the property was neither disclosed nor claimed as exempt, the insurance proceeds paid with respect to the loss of such items remained property of the estate. Further, he said that, because the Debtor failed to properly itemize her household goods on her schedules, she should be limited to the $450 claimed and is not entitled to the higher amount of insurance proceeds paid for such items. He asked that her exemption be limited to $450 and that she not be allowed to amend her exemptions.

The Debtor's attorney asserted that the use of the term "Household Goods" without any further itemization was broad enough to cover all the Debtor's personal property lost in the fire with the possible exception of her diamond earrings. He said that her exemption should not only be allowed but also be determined to cover all the Debtor's household goods, furniture, books, collectibles and art, together with the insurance proceeds she received for the loss of such items. He conceded that the Debtor might ultimately be required to turn over to the Trustee the insurance proceeds related to the unscheduled and non-exempt...