Neblett v. Gress (In re Gress)

Citations: 517 B.R. 543; 2014 Bankr. LEXIS 4007Docket: No. 1:13-bk-06202 MDF

Court: United States Bankruptcy Court, M.D. Pennsylvania; September 19, 2014; Us Bankruptcy; United States Bankruptcy Court

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Objections to exemptions have been filed by John P. Neblett, the Chapter 7 Trustee, against amended schedules by Debtors Michael J. Gress and Brandy L. Gress. The Court will compel the Debtors to comply with a prior order from March 19, 2014, requiring them to turn over specific property to the Trustee. The Debtors filed a Chapter 7 petition on December 4, 2013, and subsequently provided their schedules and statements. During a creditors’ meeting on January 24, 2014, the Trustee noted that certain household goods listed in Schedule B were not claimed as exempt in Schedule C. The meeting was adjourned to allow the Debtors to amend their claims. 

The Debtors submitted two amendments to Schedules B and C, claiming certain household goods and an anticipated tax refund. However, some household goods valued at $4,000 remained non-exempt. The Trustee filed objections on February 20, 2014, demanding the turnover of specific items, including unclaimed household goods, 50 Longaberger baskets, flea market inventory valued at $2,000, and an iPad and iPhone not disclosed in schedules. The Trustee also contested the exemption of the baskets and flea market inventory, arguing they were undervalued and did not qualify under the relevant statutory provisions. 

After the Debtors did not respond to the Trustee's objections, the Court upheld the Trustee's objections in the March 19, 2014 Turnover Order, directing the Debtors to transfer the contested items. The Debtors later filed a third amendment to Schedule C, an objection to the Trustee's claims, and a motion to reconsider the Turnover Order, citing a technical error due to their counsel's relocation. However, when a hearing was scheduled for April 29, 2014, neither the Debtors nor their counsel appeared, resulting in the Court denying the reconsideration motion for lack of a meritorious defense to the Trustee's objections.

Debtors submitted a fourth amended Schedule B and C (Docket 33) and a fifth amended Schedule B and C (Docket 34) on April 29, 2014, collectively termed "April 29 Exemptions." The fourth amended Schedule B included an iPhone, iPad, and a fax/copier/printer, with identical listings in the fifth amended Schedule B. In the fourth amended Schedule C, Debtors claimed exemptions for household goods previously not exempted, a tax refund, and the electronic devices under 11 U.S.C. § 522(d)(3) and § 522(d)(5) and (6). The fifth amended Schedule C revised some claims, asserting certain items, like Longaberger baskets and inventory, under § 522(d)(5) instead of § 522(d)(3). 

Debtors did not appeal the Turnover Order by the May 13, 2014 deadline but filed a motion for reconsideration on May 5, 2014, citing counsel's illness during the initial hearing. The Court denied this motion on May 6, 2014, for lack of grounds. On May 19, 2014, the Trustee objected to the third amended Schedule C (Docket #43) and the April 29 Exemptions (Docket 42), specifically targeting the items included in the Turnover Order. Debtors responded, asserting no intent to conceal assets and claiming sufficient exemptions to cover all their assets. They argued that the Turnover Order did not preclude them from asserting a new basis for exemptions and that no merits decision on their claims had been reached. 

Additionally, Debtors contended that omissions in their schedules were due to a technical issue and miscalendaring by counsel. On June 30, 2014, the Trustee requested a hearing on the objections to the amended Schedule Cs, which was held on July 22, 2014, without testimony, and the matter was taken under advisement.

Confusion in this case stemmed from inadequate preparation of the original schedules, unclear and untimely amendments, and failure to adhere to bankruptcy rules. The Debtors claimed good faith despite significant lapses, including nondisclosure of assets, late exemption claims post-default judgment, lack of a meritorious defense in reconsideration motions, and failure to appeal an asset turnover order. Although the assets at issue are of limited value and would yield modest returns for creditors, the Trustee has a fiduciary duty to manage these assets unless their administration costs exceed potential creditor returns. The Bankruptcy Code, particularly 11 U.S.C. § 704(a)(1) and § 554(a), guides the Trustee’s responsibilities, including asset collection and abandonment of burdensome property.

The Court cannot simply weigh equities without considering relevant statutes and case law, particularly the Supreme Court’s ruling in Law v. Siegel, which restricts bankruptcy courts from using equitable powers to override explicit provisions of the Bankruptcy Code regarding exemptions. Federal Rule of Bankruptcy Procedure 1009(a) allows for amendment of schedules before case closure without court discretion to deny such amendments unless bad faith or creditor prejudice is evident. However, following Law v. Siegel, the courts are now restricted from disallowing amended exemptions based on equitable grounds, as evidenced by subsequent cases like In re Franklin and In re Scotchel, which affirm the lack of court discretion in such matters.

The court ruling in In re Pipkins establishes that a court cannot disallow an exemption or prevent its amendment on equitable grounds if the exemption meets statutory criteria. This is reinforced by In re Gutierrez, which indicates that past precedent allowing disallowance based on bad faith and prejudice is no longer valid. Consequently, objections to Debtors’ amended exemptions based on allegations of bad faith are overruled.

The principle of claim preclusion, or res judicata, applies to claims that could have been raised in previous actions involving the same parties if those actions resulted in a final judgment on the merits. Relevant case law emphasizes that once an exemption claim dispute is resolved with a final non-appealable order, relitigation is barred. Bankruptcy courts should disallow amended exemption claims that attempt to revisit previously determined issues. 

The Turnover Order issued on March 19, 2014, became final as Debtors did not appeal the denials of their motions for reconsideration filed on March 20 and May 6, 2014. As a result, Debtors are prohibited from filing further amendments to exempt items subject to the Turnover Order, as they failed to appeal the final order.

A further order will be issued requiring the Debtors to turn over property as specified in the Turnover Order. The Trustee's objections to the Debtors’ exemption claims, based on good faith or equitable grounds, will be overruled. According to Local Bankruptcy Rule 1009-l(c), amendments to schedules must clearly indicate additions or deletions, prefaced by 'ADD' or 'DELETE.' The Debtors have submitted four amendments to Schedule B and six to Schedule C without proper notation of changes, often including items previously claimed as exempt and not contested by the Trustee.

Debtors' counsel attempted to request telephonic appearance at a hearing on short notice due to illness, but was informed that arrangements could not be made. No appeal was filed within fourteen days following the denial of the Second Reconsideration Motion on May 20, 2014. On May 19, 2014, the Trustee moved for turnover of jewelry listed on Schedule B but not exempted on Schedule C; the Debtors objected and later amended Schedule C to claim the jewelry as exempt. The Court denied the turnover motion on June 24, 2014, due to lack of prosecution.

The deadline for objecting to the Trustee’s First Objection was March 16, 2014, and the Court acknowledges that Debtors’ counsel received notification of this deadline. Jurisdiction is established under 28 U.S.C. 157 and 1334, with this matter classified as core under 28 U.S.C. 157(b)(2)(A) and (B). This Opinion includes findings of fact and conclusions of law according to Federal Rule of Bankruptcy Procedure 7052, applicable to contested matters by Rule 9014. The Supreme Court recognized various measures available to bankruptcy courts for addressing debtor misconduct, including the denial of discharge under 727 and other sanctions.