In re Hoover

574 B.R. 413

IN RE: John E. HOOVER, Debtor

Case No. 14–40478–CJP

United States Bankruptcy Court, D. Massachusetts, Central Division.

Signed July 17, 2017

David G. Baker, Boston, MA, for Debtor.

Richard T. King, Lisa D. Tingue, Office of the U.S. Trustee, Worcester, MA, for Assistant U.S. Trustee.

MEMORANDUM OF DECISION

Chistopher J. Panos, United States Bankruptcy Judge

The matters before the Court are (i) the Motion to Compromise Claim (Doc. No. 312) (the "Settlement Motion") filed by the Chapter 7 Trustee in the above-captioned case, Jonathan R. Goldsmith (the "Trustee"), by which he seeks to settle a prepetition personal injury claim of the debtor, John E. Hoover (the "Debtor"), resulting from a motor vehicle accident (the "Claim") for the benefit of the estate and (ii) the Motion to Amend Certain Schedules (Doc. No. 317) (the "Amendment Motion," collectively with the Settlement Motion, the "Motions") filed by the Debtor some twenty-two months post-petition and after the Trustee had sought approval to settle the Claim, by which he seeks to amend Schedule A/B to increase the $0.00 value he originally attributed to the Claim to $100,000.00 and amend Schedule C to change his exemption in the Claim from $0.00 under a state law exemption to a total of $34,190.00 under federal exemptions. The Debtor objected to the reasonableness of the proposed settlement, questioning the adequacy of the settlement amount (Doc. No. 313) (the "Settlement Objection"), and the Trustee objected to the Amendment Motion (Doc. No. 331) (the "Amendment Objection"), asserting that the Debtor's conduct regarding the Claim and its exemption was fraudulent given his initial undervaluation of the Claim.¹

As the Trustee has stated that he will not proceed with the Settlement Motion if his Amendment Objection is overruled, resolution of the Motions requires the Court to determine the Amendment Motion first.² With respect to that motion, the Court must examine whether the door seemingly shut on its authority to deny the amendment of an exemption claim based on a debtor's bad faith after Law v. Siegel , ––– U.S. ––––, 134 S.Ct. 1188, 1196, 188 L.Ed.2d 146 (2014), is reopened by the application of Rule 4003(b)(2) of the Federal Rules of Bankruptcy Procedure (the "Rules"). For the reasons discussed below, upon consideration of the Motions, the oppositions thereto, the supplemental briefing submitted by the parties at the direction of the Court, the argument of counsel at the hearing on the Motions, and the record of this entire case, the Court concludes that Rule 4003(b)(2) does not provide an independent basis for objecting to the amendment of an exemption under the circumstances of this case. Constrained by Siegel , the Court overrules the Trustee's Amendment Objection, grants the Amendment Motion, and denies the Settlement Motion without prejudice.

I. JURISDICTION

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A) and (B) and Local Rule 201 of the United States District Court for the District of Massachusetts.

II. BACKGROUND AND POSITIONS OF THE PARTIES

The Debtor commenced a Chapter 11 proceeding on March 15, 2014 (the "Petition Date") and filed his Schedules of Assets and Liabilities, Statement of Financial Affairs and other required documents on March 31, 2014. On Schedule B as originally filed, the Debtor disclosed his interest in the Claim, which he described as a "[p]ersonal injury claim" and valued at $0.00. On Schedule C, the Debtor asserted an exemption in the Claim pursuant to Mass. Gen. L. c. 235, § 34, Seventeenth, in the amount of $0.00. On July 31, 2014, the Court granted a conversion motion filed by the United States Trustee, and the Trustee was subsequently appointed.

Prior to filing his Petition, the Debtor had retained Attorney Robert F. Casey, Jr. ("Attorney Casey") to pursue the Claim, which arose from a motor vehicle accident involving the Debtor and a third party on or about February 12, 2012. On December 5, 2014, the Trustee filed an application to employ Attorney Casey as special counsel, which the Court (Hoffman, CJ) approved on January 15, 2015, over the Debtor's objection. On February 5, 2015, Attorney Casey filed a complaint in Worcester Superior Court on behalf of the Trustee commencing a motor vehicle tort civil action regarding the Claim (the "State Court Action").

The Trustee filed the Settlement Motion seeking approval of a compromise of the Claim, pursuant to which the estate would receive a proposed payment of $15,500.00 (the "Settlement Amount") from the insurer of the defendant in the State Court Action in exchange for a general release by the estate. The Trustee has represented that the Debtor's health insurer will reduce its lien against the Settlement Amount to $4,400.00 and that Attorney Casey voluntarily reduced his legal fees to $4,014.67, which along with his expenses of $1,518.66, would also be paid from the Settlement Amount.

The Debtor objected to the Settlement Motion, arguing primarily that the severity of his injuries and the available insurance policy limit suggested to him that the Settlement Amount is below the low end of reasonableness, precluding its approval. The Debtor also contends that he was never contacted regarding the case and his injuries.

The Trustee argued that the terms of the settlement are fair and reasonable, taking into consideration the amount of a likely verdict, the severity of Debtor's claimed injury where he refused medical evacuation at the scene, a Personal Injury Protection offset of $2,000.00 that would need to be paid, and the insurer's rejection of mediation. The Trustee also noted that the Debtor's lack of cooperation was also taken into account as Attorney Casey had sought, but failed, to obtain a medical release from the Debtor after he had filed the State Court Action. See Amendment Obj. , Ex. D, Attorney Casey Correspondence to Debtor dated April 28, 2015.

After the Trustee filed his Settlement Motion and almost two years after the Petition Date, the Debtor moved to amend his schedules to increase the value of the Claim from $0.00 to $100,000.00, the policy limit of the State Court Defendant's insurance, to switch from state to federal exemptions, and to assert an increased exemption amount totaling $34,190.00, comprised of a claimed $22,975.00 exemption under § 522(d)(11)(D) and an additional $11,215.00 exemption under § 522(d)(5).³

The Debtor explained his revised assessment of the Claim's value, stating that he originally "listed an estimated value of $0.00 because his prior attorney, Robert Casey, had expressed pessimism about any recovery on the claim." Amendment Mot. ¶ 3. The Debtor further stated that "[g]iven that Mr. Casey's original assessment of the claim appears to have been incorrect, [he] now desires to amend Schedule B to reflect the value of the claim as being equal to what he believes is the tortfeasor's policy limit, and to amend Schedule C to claim the maximum exemption amount available." Id. ¶ 6.

Pursuant to his Amendment Objection, the Trustee denied the Debtor's allegations as to the purported communications the Debtor had with Attorney Casey regarding the value of the Claim prior to the Petition Date, attaching certain written communications delivered to the Debtor by Attorney Casey, wherein special counsel conveyed to the Debtor offers of $9,000.00 and $12,000.00, respectively, received in response from the insurer to the Debtor's initial demand for $100,000.00, the Defendant's policy limit. See Amendment Obj. , Ex. A, Attorney Casey Correspondence to Insurer dated September 11, 2013 ; Ex. B, Attorney Casey E-mail Correspondence to Debtor dated January 17, 2014 ; Ex. C, Correspondence from Tracy Bernard, Attorney Casey's Paralegal, to Debtor dated March 20, 2014. Despite these communications, the Debtor filed his schedules indicating the value of the Claim was $0.00. The Trustee argues that the Debtor's representation with respect to Attorney Casey's purported pessimism regarding the Claim in the Amendment Motion "is false, misleading, and constitutes an attempt by the Debtor to perpetrate fraud on the Court." Amendment Obj. 3. The Debtor asserted at the hearing on the Motions that there was a "misunderstanding" with respect to the correspondence and that the Settlement Amount was "not significantly better" than prepetition settlement offers.

The Debtor contends that Siegel is on point and holds that federal exemptions may be amended despite any contention of fraud or bad faith in connection with the amendment. In reply, the Trustee asserts that Siegel is not applicable because, in that case, the trustee sought to surcharge a valid exemption, but here the Trustee seeks to challenge the propriety of the Debtor claiming an exemption based on bad faith, relying on In re Woolner , No. 13-57269, 2014 WL 7184042 (Bankr. E.D. Mich. Dec. 15, 2014) and Rule 4003(b)(2). With respect to application of Rule 4003(b)(2), the Debtor disputes the rule is applicable in this proceeding because the Debtor's case is not closed.

III. DISCUSSION

Rule 1009 provides that 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), and the First Circuit has applied this right to the claims of exemption.⁴ See, e.g., Hannigan v. White (In re Hannigan) , 409 F.3d 480, 481 (1st Cir. 2005). Despite the broad language of Rule 1009, prior to Siegel , the First Circuit had recognized certain exceptions for bad faith amendments, see, e.g., Malley v. Agin , 693 F.3d 28, 30 (1st Cir. 2012) (affirming surcharge against exempt property as "appropriate and necessary" under § 105(a) to offset fraudulent concealment of non-exempt property); In re Hannigan , 409 F.3d at 481 (Chapter 7 debtor was not allowed to amend homestead exemption because debtor acted in bad faith by intentionally excluding a parcel of land to undervalue debtor's property). These exceptions...