In re Smith, Case No. 14-12505

In re JOE M. SMITH and ANGELA J. SMITH, Debtors.

Case No. 14-12505

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF TENNESSEE EASTERN DIVISION

January 7, 2019

The following is SO ORDERED:

Chapter 7

MEMORANDUM OPINION RE: CHAPTER 7 TRUSTEE'S OBJECTION TO DEBTORS' CLAIMED EXEMPTIONS

This case presents an interesting question: may a debtor claim portions of a post-petition personal injury settlement as exempt under more than one Tennessee exemption statute. The debtors in this case claimed $7,500.00 of the settlement as exempt under Tennessee Code Annotated § 26-2-111(2)(B) and $10,000.00 of the settlement as exempt under Tennessee Code Annotated § 26-2-103(a). The Chapter 7 Trustee objected and asserted that the debtors cannot claim two exemptions in one personal injury settlement. The Court conducted a hearing in this matter on December 6, 2018.

This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84-30 in the United States District Court for the Western District of Tennessee, Western and Eastern Divisions, and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). This Court has subject matter jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1) and 1334. This Court also has constitutional authority to hear and finally resolve this matter. In re Kooi, 547 B.R. 244, 246 (Bankr. W.D. Mich. 2016). Thus, the Court may enter a final order in this matter. This memorandum opinion shall serve as the Court's findings of facts and conclusions of law. Fed. R. Bankr. P. 7052.

I. FACTS

Joe and Angela Smith ("Debtors") filed a chapter 7 petition for bankruptcy relief on September 24, 2014. The bankruptcy case progressed normally and the Debtors received a discharge on December 25, 2014. On June 8, 2017, the Debtors filed a motion to reopen their case in order to disclose a pre-petition personal injury cause of action based on injuries Joe Smith suffered after using the diabetes drug Actos ("Actos Action"). The Debtors did not inform their bankruptcy attorney of the existence of this cause of action until October 27, 2016. The Debtors stated that the possible value of the pre-petition claim was between $30,000.00 and $50,000.00. The Court granted the Debtors' motion to reopen their case on July 21, 2017.

On January 10, 2018, the Debtors filed a motion to approve settlement of the Actos Action. According to the motion, Joe Smith had been awarded a gross settlement of $54,266.19 and his son, who was a minor at the time of Mr. Smith's injury, had been awarded $20,000.00. That portion of the settlement awarded to the Debtors' son did not come into the bankruptcy estate. Of the $54,266.19 awarded to Joe Smith, $12,634.20 had been designated as attorney's fees. After deduction of expenses, fees and liens, the net settlement due Joe Smith was $ 28,420.34. The Debtors filed an amended Schedule C on January 10, 2018, in which they claimed the entire settlement as exempt pursuant to Tennessee Code Annotated ("Tenn. Code Ann.") § 26-2-111(2)(B).

The Court initially set the motion to approve the settlement for a hearing on February 15, 2018; however, because the Chapter 7 Trustee ("Trustee") was not reappointed until February 26, 2018, the Court continued the matter to April 12, 2018.

After the Trustee was reappointed, he entered into a consent order with the Debtors which allowed the Trustee 30 days from entry of the order to object to the Debtors' motion to approve the Actos Action settlement and to evaluate Debtors' claimed exemption therein. The parties also agreed that the Debtors would have the right to amend their exemptions. The Court entered this order on February 26, 2018.

On March 5, 2018, the Trustee filed an objection to the Debtors' claimed exemption in the settlement proceeds. The Trustee asserted that the Debtors' exemption was limited to $7,500.00 under Tennessee law. The Trustee also filed an objection to the Debtors' motion to approve the settlement. He asserted that the Actos Action was property of the estate and that the law firm had not been employed by the estate to pursue the claim.

On March 16, 2018, the Trustee filed an application to employ the attorneys representing Joe Smith in the Actos Action on behalf of the estate. The Court granted the requested relief on March 21, 2018.

On June 6, 2018, the Trustee filed a motion to approve the settlement of the Actos Action pursuant to the same terms and amounts as set forth in the Debtors' prior motion. After deduction of expenses, fees, liens and attorney's fees, $28,420.34 from the settlement proceeds was due the estate. The Court granted the Trustee's motion on July 9, 2018.

On July 18, 2018, the Debtors amended Schedule C for a second time. They claimed $19,420.34 of the Actos settlement as exempt under Tenn. Code Ann. § 26-2-111(2)(B) and another $9,000.00 as exempt under Tenn. Code Ann. § 26-2-103. That same day, the Trustee filed an objection to the Debtors' amended exemption. The Trustee again asserted that the Debtors' exemption in the Actos Action settlement proceeds was limited to $7,500.00 pursuant to Tenn. Code Ann. § 26-2-111(2)(B).

On October 8, 2018, the Debtors amended Schedule C for a third time. In so doing, they clarified which debtor was claiming which exemption and amended theamounts of the exemptions. The amended schedule indicates that Joe Smith was claiming $7,500.00 of the settlement as exempt under Tenn. Code Ann. § 26-2-111(2)(B) and $10,000.00 of the settlement as exempt under Tenn. Code Ann. § 26-2-103. Angela Smith was not claiming an exemption in any of the settlement proceeds.

The Debtors filed an objection and response to the Trustee's July 18, 2018 objection to the claimed exemptions. The Debtors filed a legal brief in support thereof on October 9, 2018. The Debtors argued that Joe Smith's exemption in the Actos Action settlement proceeds was not limited to the $7,500.00 personal injury exemption set forth in Tenn. Code Ann. § 26-2-111(2)(B). They asserted that Tennessee state law also allowed Joe Smith to claim a portion of the proceeds as exempt under the $10,000.00 personal property exemption set forth in Tenn. Code Ann. § 26-2-103.

The Trustee filed an objection to the Debtors' amended exemption on October 9, 2018, in which he again asserted that the Joe Smith was limited to the $7,500.00 personal injury exemption found in Tenn. Code Ann. § 26-2-111(2)(B). The Trustee filed a memorandum in support thereof on October 26, 2018, in which he asserted that "[a] personal injury claim is not in the same classification as a personal property exemption." (Memo. in support of Trustee's Obj. at 6, ECF No. 66.) The Trustee continued, stating,

Whereas personal property is property other than real property consisting of things temporary or moveable...[p]ersonal property has also been defined as a class of property that can be moved from one location to another. Personal injury is defined as an injury to one's body, mind or emotions. Personal Injury is not personal property.

(Id. (internal citations omitted).)

At the hearing on December 6, 2018, the Trustee argued that if the Tennessee legislature had intended for debtors to be able to use the exemption statutes in this way, it could have explicitly so provided. The Trustee also took issue with the fact that the Actos Action was unliquidated at the time the Debtors filed their bankruptcy petition. The Trustee argued that an unliquidated claim is different from cash. The Trustee agreed that had the Actos Action been settled prior to the filing of the bankruptcy petition, the proceeds would be exempt as personal property under Tenn. Code Ann. § 26-2-103; however, because the action had not been settled pre-petition, the settlement proceedscould not be so claimed. Thus, the Trustee argued that the Debtors were limited to claiming $7,500.00 of the proceeds as exempt under the personal injury exemption found in Tenn. Code Ann. § 26-2-111(2)(B). Finally, the Trustee stated that he was waiving his right to address the possible res judicata effect of the Debtors' failure to disclose the Actos Action in their chapter 7 petition. Accordingly, the Court will not address this issue.

The Trustee filed a motion for relief from the order approving the Actos Action settlement pursuant to Federal Rule of Civil Procedure 60 on December 20, 2018. According to his motion, the Trustee had recently learned that the entire settlement of $74,266.19 had been awarded to Joe Smith. Although the settlement documents indicated that $20,000.00 of this had been awarded to the Debtors' minor son, this was incorrect. Joe Smith's settlement of $54,266.19 had been increased by $20,000.00 because he had a minor child at the time of the injury. The Court has set this motion for a hearing on January 17, 2019; however, even if the Court sets the order approving the settlement aside, the Debtors' claimed exemptions in the settlement will not change. As such, the Trustee's motion for relief does not impede the Court's decision as to the exemptions.

II. Conclusions of Law

By virtue of § 541 of the Bankruptcy Code, the filing of a bankruptcy petition creates a bankruptcy estate. Section 541(a) of the Code defines "property of the estate" as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "This definition is unquestionably broad, its main purpose being to bring anything of value that the debtors have into the [bankruptcy] estate." Lyon v. Eiseman (In re Forbes), 372 B.R. 321 (B.A.P. 6th Cir. 2007) (internal quotation marks and citation omitted). "Property of the estate includes pre-petition causes of action for personal injuries even if a judgment or settlement is not reached until after the commencement of the bankruptcy case." In re Calderon, 363 B.R. 537, 541 (Bankr. M.D. Tenn. 2003) (citations omitted); In re Cupp, 383 B.R. 84, 88 (Bankr. E.D. Tenn. 2008). Once such an action is settled...