In re Waller

424 B.R. 306

In re DeCarlos M. WALLER and Lailta A. Waller, Debtors.

No. 08-59709.

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

February 23, 2010.

COPYRIGHT MATERIAL OMITTED

Laurence B. Landon, Columbus, OH, for Debtor.

Susan L. Rhiel, Columbus, OH, for Trustee.

MEMORANDUM OPINION AND ORDER DENYING TRUSTEE'S OBJECTION AND AMENDED OBJECTION TO DEBTORS' CLAIM OF EXEMPT PROPERTY

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

This case requires the Court to determine whether it is appropriate to deny an exemption in tax refunds claimed by DeCarlos M. Waller and Lailta A. Waller ("Debtors") because of a dispute between the Debtors' counsel and Susan L. Rhiel, Chapter 7 trustee ("Trustee"), over who should calculate the amount of the exemption. At stake is $8,969. For the reasons set forth below, the Court OVERRULES the Trustee's objection to the Debtors' exemptions.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2)(B).

II. Factual and Procedural Background

The Debtors filed a voluntary Chapter 7 petition on October 9, 2008. On their initial Schedule B (Personal Property) and Schedule C (Property Claimed as Exempt), the Debtors neither listed nor claimed an interest or exemption in any tax refund. On November 14, 2008, four days before the scheduled meeting of creditors,¹ the Debtors filed amended Schedules B and C ("First Amendment") (Doc. 13). Amended Schedule B listed "Possible 2008 Tax Refunds" in the amount of $4,100. Amended Schedule C declared exemptions in "Possible 2008 Tax Refunds" in the following amounts: $1,750 claimed under Ohio's "wildcard" exemption as set forth in Ohio Revised Code § 2329.66(A)(18); $650 claimed under § 2329.66(A)(3) for tax refunds generally; and an "unknown" amount claimed for an earned income tax credit under § 2329.66(A)(9)(g).² There were no objections to the First Amendment.

On November 24, 2008, the Trustee filed a motion to require the Debtors to file income tax returns and to turn over to her any resulting tax refunds. An order granting the motion was entered December 22, 2008 ("Tax Order") (Doc. 21). Also on November 24, the Trustee filed a motion to extend the time to object to the Debtors' discharge to May 31, 2009 (Doc. 16). The basis of her motion was to ensure compliance with the Tax Order. The motion to extend time to object to the Debtors' discharge was granted by order entered December 29, 2008 (Doc. 25).

The Debtors prepared and filed separate tax returns in early February 2009 and provided copies of the returns to the Trustee. Refund checks totaling $10,200 were sent directly to the Trustee by the taxing authorities pursuant to the Tax Order. She is currently holding the funds pending the outcome of this dispute.

On May 12, 2009, the Debtors again filed amendments to Schedules B and C ("Second Amendment") (Doc. 28) to add one bank account and delete another and to claim an exemption of $50 in the added bank account. The Second Amendment did not change the information previously disclosed concerning the tax refunds. Nonetheless, on May 20, 2009, the Trustee filed an objection ("Original Objection") (Doc. 29) to the Debtors' exemption for the earned income tax credit claimed under § 2329.66(A)(9)(g), on the ground that she was unable to calculate an "unknown" exemption. Two days later, she filed an amended objection ("Amended Objection") (Doc. 30) to encompass the exemptions claimed under § 2329.66(A)(3) and (A)(18) as well, and asked that all of the tax-related exemptions be denied in their entirety. In the Amended Objection, the Trustee asserted that "[o]n May 13, 2009, for the first time, the Debtors filed Amended Schedules adding the tax refunds as an asset on Schedule B and claiming exemptions on Schedule C (including an exemption in an `unknown' amount despite the fact that the returns had been filed months before and the amount was readily ascertainable.)." Amended Objection at 1 (emphasis added).

The Debtors filed a response ("Response") (Doc. 31) disputing the Trustee's assertion regarding the timing of the claimed exemptions and noting that the anticipated tax refunds were disclosed in the First Amendment, which was filed on November 14, 2008, four days before the § 341 meeting. The amount of the anticipated tax refund was listed as "unknown" in the First Amendment because, in November 2008, their tax returns for 2008 were neither prepared nor due, and the amount of any refund was, in fact, unknown. The Response further stated that the tax returns forwarded to the Trustee, in compliance with the Tax Order, identified both the amount of the refund and the earned income tax credit. In addition, the Debtors argued that nothing in their conduct exhibited bad faith or an intent to defraud the Trustee or creditors. Finally, the Debtors pointed out that schedules may be freely amended while a case is pending so long as a debtor is not acting in bad faith or concealing assets.

Following a hearing on the Amended Objection and the Response ("Hearing"), the Debtors again filed amendments to Schedules B and C ("Third Amendment") (Doc. 39). In the Third Amendment, the Debtors listed on Schedule B (line 18) "2008 Tax Refunds" in the amount of $10,642.³ Schedule C was amended to delete the claimed exemption of $650 under § 2329.66(A)(3), and to change the exemption for the earned income tax credit under § 2329.66(A)(9)(g) from "Unknown" to "$7219.00." The exemption claimed under § 2329.66(A)(18) remained unchanged at $1,750. The Third Amendment prompted another objection by the Trustee ("Renewed Objection") (Doc. 40). In the Renewed Objection, the Trustee made the following argument:

The Trustee objects given the timing of the amendment as addressed at the hearing on this matter. This case is in a closing posture. The information contained in this now third amendment was known to the Debtors in February 2009. Following the hearing on August 4th, the Court indicated [that it] would be taking this matter under advisement. Now, eight days later, the Debtors amend their exemption for the third time, resulting in further cost to the Debtors, the Trustee, and the Court. The Trustee requests, given the facts of this case, that the Debtors' exemptions in the tax refunds be denied in their entirety.

Renewed Objection at 1.

The Debtors filed a response to the Renewed Objection ("Renewed Response") (Doc. 41) in which they state that they amended the schedules "to make it easier for the Trustee, Court or any other interested party, to calculate the amount of non-exempt equity in assets and to claim their exemptions allowed by law." Again, the Debtors asserted that Fed. R. Bankr.P. 1009(a) permits a debtor to amend his/her schedules at any time before a case is closed.

III. Legal Analysis

The filing of a petition under the Bankruptcy Code creates an estate comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) ("An estate in bankruptcy consists of all the interests in property, legal and equitable, possessed by the debtor at the time of filing, as well as those interests recovered or recoverable through transfer and lien avoidance provisions."). Although the scope of § 541(a)(1) is expansive, see United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), "[f]ederal bankruptcy law allows a debtor to exempt some of his property— mainly basic necessities—from the bankruptcy estate. The exemptions can afford the debtor some economic and social stability, which is important to the fresh start guaranteed by bankruptcy." Sheehan v. Morehead (In re Morehead), 283 F.3d 199, 202-03 (4th Cir.2002) (citing Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 59 L.Ed. 713 (1915)). See 11 U.S.C. § 522(b); Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005) ("To help the debtor obtain a fresh start, the Bankruptcy Code permits him to withdraw from the estate certain interests in property, such as his car or home, up to certain values." (citations omitted)); Owen, 500 U.S. at 308, 111 S.Ct. 1833 ("An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor. Section 522 determines what property a debtor may exempt."); Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 548 (6th Cir.1998) ("The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate."); Storer v. French (In re Storer), 58 F.3d 1125, 1127 (6th Cir.1995) (same). Exemptions "give the debtors a so-called `grub-stake' to begin their fresh start and . . . act as a safety net, so that the debtor and his family are not completely impoverished due to creditor collection action or bankruptcy such that they become wards of the state." In re Robinson, 292 B.R. 599, 606 (Bankr.S.D.Ohio 2003) (internal quotation marks omitted).

Section 522(b)(1) of the Code offers a debtor the choice between exempting the property specified in § 522(d) or utilizing the exemptions provided by federal nonbankruptcy law or state law "unless the State law that is applicable to the debtor . . . specifically does not so authorize[.]" 11 U.S.C. § 522(b)(1). Because Ohio has chosen to "opt out" of the federal exemption scheme, the Debtors are limited to the exemptions provided under Ohio law.⁴ See Storer, 58 F.3d at 1127 ("Ohio has replaced the federal exemptions with its own state exemptions, which are those generally available to debtors under Ohio's general debtor-creditor law.").

Upon the filing of a bankruptcy petition, or within 15 days thereafter, a debtor must file schedules of assets and liabilities. See 11 U.S.C. § 521(a)(1)(B)(i); Fed. R. Bankr.P. 1007(b)(1)(A...