In re McCowan

IN RE: RODNEY ALLEN McCOWAN DEBTOR

CASE NO. 09-10347-8-SWH

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NORTH CAROLINA RALEIGH DIVISION

August 22, 2018

CHAPTER 7

ORDER OVERRULING TRUSTEE'S OBJECTION TO AMENDED SCHEDULE C-1 EXEMPTION

The matter before the court is the Trustee's Objection to Amended Schedule C-1 Exemption ("Exemption Objection") filed on February 14, 2018, Dkt. 167. A response in opposition was filed by Rodney Allen McCowan ("Mr. McCowan" or "debtor") on February 28, 2018, Dkt. 171. A hearing was held in Raleigh, North Carolina on May 2, 2018, following which the court took the matter under advisement. After consideration of the case record, pleadings, and arguments of counsel, the court will overrule the Trustee's Objection.

Background

Mr. McCowan filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code¹ on November 30, 2009. His Schedule A, filed on December 21, 2009, listed an ownership interest in real property located at 1211 Champions Point Drive, Durham, North Carolina (the "Property") valued at $90,000.00, subject to a deed of trust in favor of Bank of America, N.A. ("Bank of America") in the amount of $268,121.00 (Schedule D), Dkt. 20. Schedule A also indicated that the Property was occupied by Mr. McCowan's former spouse.

The case was converted from chapter 11 to chapter 7 on August 4, 2010, Dkt. 98, and Gregory B. Crampton was appointed Chapter 7 trustee (the "Trustee"), Dkt. 107. On August 10, 2010, BAC Home Loan Servicing, LP f/k/a Countrywide Home filed Proof of Claim No. 13 in the amount of $288,121.37, in which it stated that the claim was secured, and to which it attached a recorded Deed of Trust and Promissory Note.²

Based upon the value of the Property as testified to by the debtor at his § 341 Meeting and the lien identified by Bank of America, the Trustee determined there was no realizable value for the estate and filed a Notice of Trustee's Intent to Abandon Property on January 28, 2011, Dkt. 123. The Notice of Abandonment provides as follows:

Real property located at 1211 Champions Point Drive, Durham, NC 27712 (Scheduled value $90,000, Debtor testified at 341 value $240,000 - $250,000; lienholders Bank of America, $268,121 and Durham County $4,483; no realizable value).

Dkt. 123 at 1, ¶ 3. No objections were filed, and the Property was deemed abandoned. The Discharge of Debtor was entered on November 4, 2010 at Dkt. 111. A Final Decree was entered on February 16, 2011 at Dkt. 128, and the case was closed.

On July 19, 2016, Bank of America initiated an action in Durham County Superior Court seeking a judicial foreclosure of the Property based on an equitable lien and money damages against the debtor, Dkt. 165 at 2-3. Bank of America also filed a lis pendens on the Property on August 3, 2016. On August 22, 2016, Bank of America amended its state court complaint to remove its request for a personal judgment against Mr. McCowan in light of his discharge but proceeded to pursue foreclosure. As part of his defense of the foreclosure action, and subsequent to the closing of his bankruptcy case, Mr. McCowan determined that Bank of America had filed a Certificate of Satisfaction and Affidavit of Lost Note in 2003, cancelling the deed of trust on the Property prior to the filing of the bankruptcy petition.

On June 22, 2017, Mr. McCowan filed a Motion to Reopen so that the Trustee could administer the Property as an asset of the estate, Dkt. 129. An order reopening the case was entered on September 13, 2017, and the chapter 7 Trustee was reappointed, Dkt. 143. The Trustee moved to revoke the abandonment of the Property on September 29, 2017, Dkt. 146. Finding that the Trustee justifiably relied on the representations of the debtor and Bank of America concerning the alleged existence of the lien on the Property, the court entered an order revoking the abandonment on February 9, 2018, Dkt. 165. On March 7, 2018, the Trustee filed an Objection to Bank of America's secured claim on the Property, and the court entered an order allowing the objection on June 26, 2018, Dkt. 193.

On January 16, 2018, Mr. McCowan filed an Amended Schedule C-1 claiming a homestead exemption, in the amount of $18,500.00,³ in the Property pursuant to (North Carolina General Statutes § 1C-1601(a)(1)) Dkt. 164. The Trustee filed an objection to the Amended C-1 Schedule on February 14, 2018 (the "Objection"), and the debtor filed his response on February 28, 2018 (the "Response").

In his Objection, the Trustee contends that the debtor failed to amend his Schedule C-1 in accordance with Rule 1009(a) of the Federal Rules of Bankruptcy Procedure, Dkt. 167. Specifically, the Trustee asserts that any amendments to the petition must be made prior to the closing of the case, and that the debtor effectively lost the right to amend his exemptions upon entry of the Final Decree on February 16, 2011. At the hearing, the Trustee amended his argument to reflect that, although Rule 1009(a) does not prohibit a debtor from amending his schedules in a reopened case, the debtor, once a case is closed, must prove that his failure to amend the schedules prior to the closing of the case was the result of "excusable neglect."

The Trustee also contends that, as of the date the case was reopened, the debtor's child had reached the age of majority, therefore eliminating the debtor's right to claim a homestead exemption. At the hearing, the Trustee proffered that, under North Carolina law, the homestead exemption is conditioned on the debtor or a dependent of the debtor's continued use of the exempted property as a residence. Accordingly, the Trustee contends that the applicability of a homestead exemption should be evaluated on the date the debtor sought to claim the exemption (i.e. January 16, 2018), rather than the date the petition for bankruptcy was originally filed (i.e. November 30, 2009). The Trustee does not dispute the fact that on the date the petition was filed, the debtor's child was living on the Property and was not of majority age.

In his response, the debtor contends that Rule 1009(a) allows the amendment of his Schedule C-1, so long as the amendment is made neither in bad faith, nor is prejudicial to creditors. In the alternative, the debtor asserts that if Rule 1009(a) does prohibit the amendment of his Schedule C-1 due to the closing of his prior case, then he still may can amend his exemptions based on a showing of "excusable neglect," pursuant to Rule 9006(b). Finally, the debtor maintains that the right to claim an exemption is determined by the circumstances present as of the date the petition for bankruptcy is filed.

Discussion

A. Debtor's Right to Amend Schedules in Reopened Proceedings

While Rule 4003 of the Federal Rules of Bankruptcy Procedure provides the guidelines for scheduling and objecting to property that an individual debtor intends to claim as exempt, Rule 1009(a) governs the debtor's right to amend a schedule of claimed exemptions. In re Libbus, No. 15-05128-5-DMW, 2018 WL 1470513, at *3 (Bankr. E.D.N.C. March 23, 2018); In re Poulette, 493 B.R. 729, 733 (Bankr. D. Md. 2013). In relevant part, Rule 1009(a) 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." FED. R. BANKR. P. 1009(a) (emphasis added).

Courts are split on how to apply Rule 1009(a) to cases that were closed and have been subsequently reopened. In re Dollman, 583 B.R. 268, 271 (Bankr. D.N.M. 2017). The Dollman court succinctly summarized the approaches that various courts have taken to address this issue:

Three approaches have emerged to the application of Rule 1009(a) in a reopened case. First, the broad approach treats a reopened case the same as a case that was never closed and allows the debtor to amend schedules as a matter of course in the reopened case. See e.g., In re Goswami, 304 B.R. 386, 392-93 (9th Cir. BAP 2003). Second, the narrow approach does not permit any amendments to schedules in a reopened case. See, e.g., In re Bartlett, 326 B.R. 436, 439 (Bankr. N.D. Ind. 2005). Third, the middle approach applies Rule 9006(b)(1), which allows the debtor to amend schedules upon proving the failure to do so before case closure was the resultof excusable neglect. See, e.g., In re Moretti, 260 B.R. 602, 607-608 (1st Cir. BAP 2001).

Dollman, 583 B.R. at 271-72. This court, and others in the Fourth Circuit, have adopted the "middle approach," requiring a showing of "excusable neglect" before a debtor may amend his schedules in a reopened case. See, e.g., In re Libbus, 2018 WL 1470513 at *8-9; In re Poulette, 493 B.R. 729, 730 (Bankr. D. Md. 2013); In re Dunn, No. 05-09708-8-JRL, 2010 WL 2721201, at *2 (Bankr. E.D.N.C. July 7, 2010); In re Wilmoth, 412 B.R. 791, 796-797 (Bankr. E.D. Va. 2009).

The debtor contends that Rule 1009(a) affords debtors an unfettered right to amend their schedules, so long as the amendments are neither made in bad faith, nor prejudicial to creditors. The court acknowledges there is a wide breadth of case law that supports the debtor's position.⁴ Nevertheless, the court chooses to follow "[t]he established precedent of this district and others within the jurisdiction of the United States Court of Appeals for the Fourth Circuit," which requires a showing of "excusable neglect," in accordance with Rule 9006(b), to amend a schedule in a reopened case. In re Libbus, 2018 WL 1470513 at *8. Such a conclusion balances the debtor's right to claim and enjoy exemptions to which they are entitled against the necessity for finality in the administration of bankruptcy cases and the possibility of prejudice to creditors.

In determining excusable neglect, courts in the Fourth Circuit employ the two-prong test set forth by the Supreme Court of the United States in Pioneer Investment Services v. BrunswickAssociates, 507 U.S. 380 (1993). See, e.g., Libbus, 2018 WL 1470513, at *4 (citing Thompson v. E.I....