In re: Carlos Gutierrez Hernandez

Opinion

FOR THE DISTRICT OF PUERTO RICO IN RE: : CASE NO. 10-01762 (ESL) : CARLOS GUTIERREZ HERNANDEZ : Debtor : CHAPTER 7 ____________________________________: This case is before the court upon the Debtor’s Motion to Inform Amendment of Schedules B & C to change the value of a certain case held before the Puerto Rico Court of First Instance from “unknown” to the amount of $181,000 [Schedule B] and amend the claimed exemptions based on that new added value [Schedule C] (“Motion to Amend”, Docket Nos. 29 & 30). The Chapter 7 Trustee (the “Trustee”) filed an Objection to Amend Schedule C claiming that the Debtor: (i) filed his Motion with the intention of hindering and obstruction the administration of the Trustee; (ii) failed to read his schedules before filing his bankruptcy petition, which indicates a complete disregard for the honesty duty imposed by the Bankruptcy Code; (iii) the Debtor’s attempt to amend at this stage of the proceedings would be prejudicial to creditors and to the estate and it would frustrate the distribution scheme contemplated by the Bankruptcy Code; and (iv) the Debtor’s right to claim an exemption arises and is fixed on the date the petition is filed, and thus post-petition changes in the Debtor’s factual circumstances or in the applicable law do not alter the status of an exemption properly claimed (the “Objection”, Docket No. 31). For the reasons stated below, the Debtor’s Motion to Amend is granted and the Trustee’s Objection is hereby denied. Procedural Background The Debtor filed his Chapter 7 bankruptcy petition on March 5, 2010 and corresponding schedules (Docket No. 1). In Schedule B (Personal Property), the Debtor reported that he is a plaintiff in a “cause of action against the PR Telephone Co. [in Case No.] DPE2007-1405 (703) [before the] Bayamón Superior Court, for discrimination and salaries” and estimated its value as “unknown” (the “PRTC Case”, Docket No. 1, p. 13, ¶ 21). He did not claim any exemption on that PRTC case (Docket No. 1, pp. 16-17). On March 26, 2010, the Trustee filed an Application for Leave to Employ the law office of Luis E. Martin Lugo, Esq. to represent the bankruptcy estate in the contested matters in the PRTC case (Docket No. 10). On May 14, 2010, the court issued an Order approving Luis E. Martin Lugo, Esq. as special counsel for the estate (Docket No. 14). On February 23, 2012, the Debtor filed its Motion to Amend (Docket No. 30), to which he tendered the proposed Amended Schedules B & C (Docket No. 29). The purpose to amend Schedule B is to change the value of the Debtor’s interest in the PRTC case from “unknown” to $181,000 (Docket Nos. 30, ¶ 1, and 29, p. 2, ¶ 21). The purpose of amending Schedule C is to “reflect [the] exemptions of the [PRTC case]” in the amount of $63,000 under 11 U.S.C. §§ 522(d)(5), 522(d)(11)(E) and 522(d)(11)(D) (Docket Nos. 30, ¶ 2 and 29, p. 5). On March 3, 2012, the Trustee filed his Objection on the following grounds: (i) the Debtor filed his Motion to hinder and obstruct the administration of the Trustee; (ii) he failed to read his schedules before filing his bankruptcy petition, which indicates a complete disregard for the honesty duty imposed by the Bankruptcy Code; (iii) his attempt to amend at this stage of the proceedings would be prejudicial to creditors and to the estate and it would frustrate the distribution scheme contemplated by the Bankruptcy Code; and (iv) that the right to claim an exemption arises and is fixed on the date the petition is filed, and thus post-petition changes in the Debtor’s factual circumstances or the in the applicable law do not alter the status of an exemption properly claimed (the “Objection”, Docket No. 31). On March 16, 2012, the Debtor filed an Objection to “Trustee’s Objection to Amend Schedule C” (the “Reply to Objection”, Docket No. 32) averring that: (i) his request to amend Schedules B & C are timely under Fed. R. Bankr. P. 1009(a); (ii) he disclosed the PRTC case from the very beginning but that he had no knowledge of its value when he filed for bankruptcy nor did he have access to that information at that moment; (iii) the Trustee was well aware of the PRTC case; (iv) he has not breached his honesty duty in these proceedings nor acted in bad faith; (v) delay alone cannot be construed as bad faith”; and (vi) the Trustee has not offered any evidence that the Debtor is hindering, concealing or causing economic loss to creditors. Applicable law & Analysis (A) Exemptions in general When a debtor files a bankruptcy petition, all of his/her/its assets become property of the 2 1 bankruptcy estate [11 U.S.C. § 541] subject to the debtor’s right to reclaim certain property as exempt funder 11 U.S.C. § 522. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). A property becomes exempt by operation of law when no objections are filed. See 11 U.S.C. § 522(1). But the fact that debtors claim an exemption does not necessarily mean that they are entitled to it, since there must be compliance with statutory requirements and then an order of the bankruptcy court to effect. See 9A Am. Jur. 2d Bankruptcy § 1392; In re Rolland, 317 B.R. 402, 412 (Bankr. C.D.Cal. 2004); In re Colvin, 288 B.R. 477, 483 (Bankr. E.D.Mi. 2003); Carlucci & Legum v. [Murray (In re Murray), 249 B.R. 223, 230 (E.D.N.Y. 2000). Exemptions should be liberally jconstrued in furtherance of the debtor’s right to a “fresh start”. See In re Newton, 2002 Bankr. ILEXIS 2089 at *7, 2002 WL 34694092 at *3 (B.A.P. 1* Cir. 2002); Christo v. Yellin (In re Christo), 228 B.R. 48, 50 (B.A.P. 1° Cir. 1999), \(B) ~~ How to claim exemptions under I] U.S.C. § 522 In order to be effective, a debtor must specifically describe the property claimed as exempt inform the value. See Nancy C. Dreher and Joan N. Feeny, Bankruptcy Law Manual, Volume 11 § 5:43 (2011-12), p. 941. Thus, a debtor is required to list the property claimed as exempt on the schedule of assets that must be filed with the bankruptcy petition. See 11 U.S.C. § 522(1); Fed. Rs. P. 1007(b), 1007(1)(b) & 4003. A party in interest or the trustee may file an objection to the of property claimed as exempt within 30 days after the meeting of creditors held under 11 U.S.C. 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules filed, whichever is later. Fed. R. Bank. P. 4003(b)(1). If an interested party fails to object to a Iclaimed exemption within the time allowed, the subject property will be excluded from the Ibankruptcy estate even if the exemption’s value exceeds the statutory limits. 11 U.S.C. § 522(1); /Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644 (1992). In the instant case, there is no dispute the Trustee’s Objection is timely. Notwithstanding, in Schwab v. Reilly, 130 S.Ct. 2652, 2668 (2010), the Supreme Court held the time limits for objecting to an exemption do not apply if the claimed exemption is valid on face. Schwab’s analysis rests on the determination that Section 522(a)(3)(B) defines the “‘property’ a debtor may ‘clai[m] as exempt’ as the debtor’s ‘interest’ —up to a specified dollar

1 amount— in the assets described in the category, not as the assets themselves.” Id. at 2661-62 \(citations omitted). Under the Schwab doctrine, treating the entries as exemptions of an in-kind interest would violate the Bankruptcy Code’s limits and fail to account for the distinction between llexemptions that include a monetary cap and those that allow debtors to exempt property regardless value. Id. at 2663, n.10. Thus, Schwab mandates that exemptions be claimed “in a manner that makes the scope of the exemption clear”. Id. at 2668. In Massey v. Pappalardo (In re Massey), 465 720 (B.A.P. 1° Cir. 2012), the debtor did not assign a monetary value to the claimed exemption his car and residence in their Schedule C, but rather claimed “100% of FMV [Fair Market /Value]”. Id. at 721. The Trustee timely challenged those claimed exemptions alleging that they were improper. Id. at 722. The Massey court adopted the analysis in In re Salazar, 449 B.R. 890 (Bankr. IN.D.Tx. 2011), where the court posed two possible solutions to dealing with this type of claimed jlexemptions. First, the court could hold an evidentiary hearing on the value of the debtor’s lexemptions. At such a hearing, the debtor has the initial burden of showing a plausible basis for the that ‘100% of FMV of an asset falls within the statutory limit on the amount that may be lexempted under Section 522. In accordance with Schwab, if the objection is overruled, the asset Iclaimed will no longer be part of the estate, but if the objection is sustained, the debtor must forfeit value in excess of the statutory allowance. The second approach is for the court to “simply ldeclare that an objection to an exemption claim of ‘100% of FMV? is a facially valid objection because the debtor has failed to claim a set amount as contemplated by the exemption statute jlallowing the exemption.” Salazar, 449 B.R. at 897. In this situation, the court will sustain the lobjection “unless the debtor amends his exemptions to claim a dollar amount for his exempt linterest in the property.” Id. at 897 (emphasis added). The Salazar court adopted this approach [Id. lat 902], and the Massey court held that said approach “best recognizes the reasoning in Schwab”. IMassey, 465 B.R. at 728. Under either scenario, Fed. R. Bankr. P. 4003(c) mandates that “the lobjecting party has the burden of proving that the exemptions are not properly claimed.” In the instant case, the Debtor disclosed the PRTC case with his bankruptcy petition, albeit an “unknown” reported value. See Docket No. 1, p. 13 [Schedule B]. The Trustee was also laware of its existence, course of action and status since at least March 26, 2010, when he filed the

1 Application for Leave to Employ the law office of Martin Lugo, Esq. to represent the bankruptcy (Docket No. 10). Thus, the Debtor’s Motion to Amend (Docket No. 23) is targeted precisely “claim a dollar amount for his exempt interest in the property”, namely the PRTC case, following Salazar reasoning, 449 B.R. at 902, as cited in In re Massey, 465 B.R. at 728. The court now llproceeds to analyze the merits of the amendment. Amendments to claimed exemptions under Fed. R. Bankr. P. 1009 Pursuant to Fed. R. Bankr. P. 1009(a), a debtor may amend a claim of exemptions at any time the case is closed as a matter of right. “The Rule adopts a permissive approach that freely amendments to lists or schedules without court permission at any time during the case.” Hannigan v. White (In re Hannigan), 2004 U.S. Dist. LEXIS 28802 at **12-13 (D.Ma. 2004) aff'd 409 F.3d 480 (1* Cir. 2005), quoting In re Robbins, 187 B.R. 400, 403 (Bankr. D.Ma. 1995)'. But Ithe right to amend is not absolute. The court may disallow such amendments in exceptional icircumstances. For instance, caselaw has recognized two clear exceptions to this permissive approach: (7) prejudice to creditors or the trustee and (ii) bad faith. In re Snyder, 279 B.R. 1, 6 (B.A.P. 1* Cir. 2002). Also see Nancy C. Dreher and Joan N. Feeny, Bankruptcy Law Manual, Volume 1 § 5:43 (2011-12), p. 941. In determining whether the amendment would prejudice creditors, the appropriate inquiry is whether a creditor will recover less or be adversely affected by the amendment; instead, a court determine whether the creditor(s) would be adversely affected by having detrimentally relied jon the debtor’s initial position. Allan N. Resnick and Henry J. Sommes, 9 Collier on Bankruptcy, 1009.02[1] (16" ed. 2012); In re Talmo, 185 B.R. 637, 645 (Bankr. $.D.Fla. 1995) (“[P]rejudice may established by showing harm to the litigating posture of parties in interest. If the parties would have different actions or asserted different positions had the exemption been claimed earlier, and the linterests of those parties are detrimentally affected by the timing of the amendment, then the prejudice sufficient to deny amendment.”). Delay to amend by itself and/or disappointment of creditors’ llexpectations do not constitute prejudice. In re Melber, 315 B.R. 181, 190 (Bankr. D.Ma. 2004), citing ' Subsequently abrogated on other grounds.

1 In re Arnold, 252 B.R. 778 (B.A.P. 9" Cir. 2000). Similarly, bad faith in amending a claimed exemption is generally identified as some sort of jattempt to conceal an asset. Inre Cudeyro, 213 B.R. 910, 918 (Bankr. E.D.Pa. 1997). Bad faith can also found when debtors intentionally undervalue their home in the schedules to reflect no equity. Inre Hannigan, 409 F.3d at 483-484. Such bad faith is determined by an examination of the totality of the Icircumstances. See Berliner v. Pappalardo (In re Puffer), 674 F.3d 78, 82 (1* Cir. 2012), citing Marrama \v. Citizens Bank of Mass. (In re Marrama), 430 F.3d 474, 482 (1* Cir. 2005), affd at 549 U.S. 365 (2007); In re Lombardo, 370 B.R. 506, 512 (Bankr. E.D.N.Y. 2007) as adopted in In re Fernandez Rosado, 2010 Bankr. LEXIS 4440 at *33, 2010 WL 5019023 at *11 (Bankr. D.P.R. 2010); Accord Pope iv. Clark Un re Clark), 274 B.R. 127, 137 (Bankr. W.D.Pa. 2002) (“Bad faith ... is determined by lexamining the totality of the circumstances.”); Gold v. Guttman (In re Guttman), 237 B.R. 643, 651 \(Bankr. E.D.Mi. 1999); In re Hardy, 234 B.R. 94, 95 (Bankr. W.D.Mo. 1999); Clemmer, 184 B.R. 935, 942 (Bankr, E.D.Tn. 1995). The “totality of the circumstances test cannot be reduced to a imechanical checklist”: it “derives from equity”. In re Puffer, 647 F.3d at 82. “This matters because lequitable concepts are peculiarly insusceptible to per se rules.” Id. at 82. “A mere allegation by an objector of bad faith [or prejudice] is insufficient.” Wood v. Premier \Capital, Inc. (In re Wood), 291 B.R. 219, 228 (B.A.P. 1" Cir. 2003), quoting In re St. Angelo, 189 B.R. 24, 26 (Bankr. D.R.I. 1995). In both instances, an objection to the proposed amendment must be fact- lintensive and through specific evidence. See In re Colvin, 288 B.R. 477, 481-482 (Bankr. E.D. Mich. (“Mere allegations of bad faith will not suffice; the objecting party must demonstrate the bad faith jof the debtor by specific evidence.”); In re St. Angelo, 189 B.R. 24, 26 (Bankr. D.R.I. 1995) (“Intent conceal is a factual determination to be made by a bankruptcy court...”). The court finds that the Trustee’s tersely encryptic Objection (Docket No. 31) fails to refer Ito a single fact in support of its legal conclusions, and consequently the Trustee has failed to meet his burden under Fed. R. Bankr. P. 4003(b). Pursuant to the cited caselaw, the Trustee has failed to any prejudice whatsoever or bad faith by the Debtor. Likewise, no intention of hindering or lobstructing the administration of the Trustee can be inferred from the record and much less from the lTrustee’s Objection. Furthermore, the record of this case shows that Debtor did not attempt to

1 conceal the PRTC case. To sustain his position, the Trustee cites in passim In re Rice, 452 B.R. 623 (Bankr. E.D.Mi. 2011), for the proposition that the Debtor did not read his initial schedules when he the bankruptcy petition, which constitutes reckless disregard for the truth that bars him from amending his schedules. A careful reading of that case demonstrates that the facts are inapposite to instant one and is ergo inapplicable. In In re Rice, the debtor acknowledged that he did not read jall the schedules but rather “scanned them”. 452 B.R. at 626. In the case at bar, the Debtor duly \disclosed the existence of the PRTC with its assigned case number at the Bayamon Superior Court. Therefore, the Trustee’s Objection is denied. The Trustee has not contested the validity of Debtor’s amended claimed exemptions, and thus an evidentiary hearing on the value of the Debtor’s claimed exemptions is unwarranted. Conclusion In view of the foregoing, the Debtor’s Motion to Amend (Docket No. 30) is hereby granted the Trustee’s Objection (Docket No. 31) is hereby overruled. Consequently, the Debtor is jlallowed to amend his Schedule B and C (Docket No. 29). In San Juan, Puerto Rico, this 14" day of June, 2012. Saree AE Lameutte 41 United States Bankruptcy Judge