Kuhnel v. Russell (In Re Kuhnel)

346 B.R. 528, 2006 Bankr. LEXIS 2007, 2006 WL 2130529

• Court: Bankruptcy Appellate Panel of the Tenth Circuit
• Decided: August 1, 2006
• Docket: BAP No. WY-06-022, Bankruptcy No. 05-21304
• Status: Published

Opinions

OPINION

NUGENT, Bankruptcy Judge.

Nicholas Lee Kuhnel and Elizabeth Ann Kuhnel (“Debtors”) appeal an order of the United States Bankruptcy Court for the District of Wyoming sustaining the trustee’s objection to their claimed exemption of a 2002 Chevrolet Trailblazer. For the following reasons, we REVERSE the bankruptcy court’s order and remand with instructions.

I. Appellate Jurisdiction

This Court has jurisdiction over this appeal. The Appellants timely filed their notice of appeal from the bankruptcy court’s final order.¹ The parties have consented to this Court’s jurisdiction because they have not elected to have the appeal heard by the United States District Court for the District of Wyoming.²

II. Background

On May 14, 2005, Debtors purchased a 2002 Chevrolet Trailblazer (“the vehicle”) from Pedersen Toyota Scion Volvo. The purchase was financed by Toyota Motor Credit Corp. (“Toyota”). Debtors granted Toyota a purchase money security interest (“PMSI”) on the vehicle. Debtors filed for protection under Chapter 7 of the Bankruptcy Code on June 23, 2005. On the same day, Toyota filed a lien against the vehicle.

On their Schedule C, Debtors claimed the vehicle exempt under Wyo. Stat. Ann. § l-20-106(a)(iv) in the sum of $4,800.³ The vehicle had a current market value of $19,500 and Toyota’s claim was $21,480.

The first meeting of creditors was held on July 21, 2005. The deadline to object under Federal Rule of Bankruptcy Procedure (“Rule”) 4003(b) was August 20, 2005. No timely objection to the vehicle exemption was claimed by the trustee or any other party in interest.

The trustee objected to Debtors’ vehicle exemption on January 27, 2006, after retaining counsel who informally obtained a release by Toyota of its liens. Debtors responded to the trustee’s objection, arguing that it was not timely filed according to Rule 4003(b). The bankruptcy court sustained the trustee’s objection, finding (1) Debtors did not have any equity in the vehicle, (2) the granting of the lien by the Debtors was voluntary, and (3) a timely objection to the claimed exemption was not a prerequisite to the application of 11 U.S.C. § 522(g),⁴ citing In re Duncan.⁵ Debtors timely appeal from this order.

III.Discussion

A. Standard of Review

We review the bankruptcy court’s order de novo because there are no factual disputes and the issues on appeal pertain to the proper application of bankruptcy statutes and interpretation of case law.⁶

B. Analysis

The issue on appeal is whether § 522(g) operates in this case to “save” the trustee from failing to timely object to the Debtors’ exemptions under Rule 4003(b). The bankruptcy court concluded that it did, citing Duncan. We disagree.

1. The Interplay of § 522(g) and Rule 4003(b).

In the very brief order rendering its decision, the bankruptcy court held that:

The granting of the lien by the debtors was a voluntary transfer. Therefore, the debtors are not entitled to claim an exemption in the 2002 Chevrolet Trailblazer as there was not equity. Further, this court holds that a timely objection to the claimed exemption is not a prerequisite to the application of § 522(g). In re Duncan, 329 F.3d 1195 (10th Cir. 2003).⁷

Section 522(g)(1) provides, in pertinent part:

Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if—

(1) (A) such transfer was not a voluntary transfer of such property by the debtor; and

(B) the debtor did not conceal such property .... ⁸

The plain language of § 522(g)(1) provides that a debtor cannot assert any exemption in property that a trustee recovers after the debtor’s voluntary transfer of the property. Section 522(g)(1) deals with property that a trustee recovers in various ways, including pursuing the classes of avoidance actions enumerated in § 550(a). Among these is the avoidance of liens by assuming hypothetical or actual lien creditor status under § 544, and the preservation of those avoided transfers for the benefit of the estate under § 551.

Here, the trustee argues that she recovered the vehicle in which the Debtors voluntarily transferred a security interest, and that as a result, the Debtors are barred from exempting the vehicle by the operation of § 522(g). At first blush, it may have appeared to the bankruptcy court that the trustee used her hypothetical lien creditor powers in § 544(a) to avoid Toyota’s unperfected lien. And if the trustee had successfully avoided the lien, she could have preserved it for the benefit of the creditors under § 551. On closer examination of the facts in this case, however, the trustee did not “avoid” the lien and, accordingly, cannot “preserve” it.

Instead, the trustee’s counsel convinced Toyota to release the lien after making demand. No “action or proceeding” was commenced. By pursuing this course, the trustee failed to preserve the lien for the estate. Had the trustee filed an action or proceeding, she could have obtained a court order avoiding and preserving the lien for the benefit of the estate under §§ 544 and 551. Alternatively, she could have arranged for Toyota to assign the lien to the estate. But when Toyota released the lien, there was nothing left to “preserve.” If the Debtors’ exemption is valid, all the trustee has left in the estate with respect to the vehicle is that portion which is nonexempt under Wyoming law, free and clear of Toyota’s lien.

Whether the Debtors’ claimed exemption is valid depends first on the effect of Rule 4003(b) which provides, in relevant part:

A party in interest may file an objection to the list of property claimed as exempt only within 30 days after the meeting of creditors held under § 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules if filed, whichever is later. The court may, for cause, extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension.

The Supreme Court held in Taylor v. Freeland & Kronz that a trustee who fails to make an objection to an exemption within this 30-day time limit cannot contest the validity of a claimed exemption, even where the debtor has no colorable basis for claiming it.⁹ It has strictly interpreted this 30-day period in conjunction with § 522(1) to bar any objections not made within that period of time, stating “[djead-lines may lead to unwelcome results, but they prompt parties to act and they produce finality.”¹⁰

Here, no timely request to extend the time for filing objections was made by the trustee or any party in interest. The trustee’s objection, filed many months after the § 341 meeting, was untimely under Rule 4003(b). Taylor renders her late effort futile and renders discussion of the trustee’s state law objection pointless.

In an effort to salvage her argument, the trustee relies on the Tenth Circuit’s decision in In re Duncan.11 But, as we discuss below, the injection of Duncan into the analysis of this case is only a red herring.

2. In re Duncan.

Duncan can easily be distinguished from the case at bar. Duncan was a bankrupt lawyer who filed a case under Chapter 7 of the Bankruptcy Code after the entry of a malpractice judgment against him and after he transferred his fee interest in property he used for a home and office to himself and his nondebtor wife, creating a tenancy by the entirety under Wyoming law. The debtor then claimed a homestead exemption in the entireties’ interest in the property under § 522(b)(2)(B) because he and his wife held title as tenants by the entirety; he also claimed a $10,000 homestead exemption under Wyoming law. No objection was filed within the Rule 4003(b) objection period and the debtor was discharged.

Thereafter, Duncan’s trustee filed an adversary proceeding seeking to avoid the transfer as fraudulent and to recover the property for the benefit of the estate. The bankruptcy court granted summary judgment in favor of the trustee. The trustee then filed a notice of intent to sell the property and sought the court’s approval of the sale. The debtor objected and moved for turnover of the exemption proceeds at the time of the sale. The debtor argued that the trustee’s failure to object within the 30-day period entitled him to the exemption proceeds after the sale of the property. The bankruptcy court concluded that as a matter of Wyoming property law, when the debtor transferred his full fee title to himself and his wife as tenants by the entirety, he actually did not transfer his half portion of the entireties’ estate. Considering that the debtor had always retained at least half of the property interest, the bankruptcy court ruled that the debtor was not barred by § 522(g)(1) from claiming an exemption.¹² Following the same reasoning, this Court affirmed.¹³ The Court of Appeals for the Tenth Circuit disagreed with the analysis of Wyoming entireties law below and reversed, concluding that under Wyoming law, while each tenant by the entirety may have separate rights in the property, each tenant does not have separate interests; rather, both parties have a unity of interest.¹⁴

The Court of Appeals then held that the trustee recovered not only Duncan’s nondebtor spouse’s interest in the home, but also Duncan’s interest because those interests are unified. The Court concluded that “[Duncan] is not entitled to claim a homestead exemption in property voluntarily transferred and recovered by the Trustee in an adversary proceeding, notwithstanding the Trustee’s failure to object within the 30-day period of [Rule] 4003(b).”¹⁵ The Court laid particular emphasis on the fraudulent nature of Duncan’s conduct in making a voluntary prepetition transfer of at least half his homestead to his wife.

In addressing the question of whether a Rule 4003(b) objection deadline trumps the § 522(g) prohibition, the Duncan court distinguished the Supreme Court’s decision in Taylor, pointing out that Taylor did not involve an adversary proceeding to avoid a fraudulent transfer or any aspect of § 522(g).¹⁶ The Court of Appeals concluded that allowing the debtor to slip the bonds of § 522(g) to exempt property that he fraudulently conveyed and that the trustee recovered simply because the trustee did not timely object would render the § 546(a)(1)(A) statute of limitation for the exercise of a trustee’s avoiding powers meaningless.¹⁷

We may distinguish Duncan in several critical ways. First, the Debtors here were in possession of the vehicle at all times. They made no effort to conceal or transfer it, other than by granting the PMSI that, through no fault of the Debtors, Toyota failed to successfully perfect. The trustee took no timely action to object to the Debtors’ claimed exemption. Additionally, the trustee did not avoid or preserve Toyota’s lien. Furthermore, although the Debtors’ grant of the security interest was voluntary, there is nothing in the record to suggest that the Debtors’ conduct was tainted by fraud or bad faith. The trustee was on notice of the Debtors’ exemption from the beginning and was informed at the first creditors’ meeting that the validity of Toyota’s lien was questionable.

These are very different circumstances from those presented in Duncan. Using Duncan’s rationale here, to disregard the trustee’s failure to timely object is inappropriate. We think Duncan means that when a trustee recovers fraudulently conveyed property that would otherwise be exempt by using the avoiding powers enumerated in § 522(g), a debtor cannot then benefit from his own misdeeds by claiming an exemption in it. It has no application here.

IV. Conclusion

The trustee’s claim that she recovered property for the estate that the Debtors voluntarily transferred is simply untenable. As we noted above, the trustee did not “avoid” the Toyota lien and, consequently, she failed to “preserve” it for the benefit of the estate. Instead, Toyota released the lien, rendering the vehicle unencumbered. When the trustee failed to timely object to the Debtors’ exemption of the vehicle, she lost her right to contest the exemption’s validity. The Supreme Court’s decision in Taylor v. Freeland & Kronz dictates this result.¹⁸ Because the trustee did not “recover” any property that was fraudulently conveyed, In re Duncan has no precedential or persuasive effect in this case.

For these reasons, we REVERSE the bankruptcy court’s order and REMAND the case, directing the bankruptcy court to overrule the trustee’s objection to the Debtors’ exemption of $4,800 of the value of their vehicle.

1 . 28 U.S.C. § 158(a)(1); Fed. R. Bankr.P. 8002(a). A bankruptcy court's grant or denial of a claimed exemption is a final appealable order from a bankruptcy proceeding. In re Brayshaw, 912 F.2d 1255, 1256 (10th Cir.1990).

2 . 28 U.S.C. § 158(b)-(c); Fed. R. Bankr.P. 8001(e).

3 . Wyo. Stat. Ann. § 1-20-106(a)(iv) (2006) provides an exemption for "a motor vehicle [when owned by any person] not exceeding in value two thousand four hundred dollars ($2,400.00).” Husband and wife may each claim the statutory exemption. See Coones v. Fed. Deposit Ins. Corp., 796 P.2d 803 (Wyo.1990) (interpreting the phrase "any person” in Wyo. Stat. Ann. § 1-20-106(b) (2006)).

4 . Unless otherwise noted, all statutory references are to Title 11 of the United States Code.

5 . 329 F.3d 1195 (10th Cir.2003).

6 . See In re Albrecht, 233 F.3d 1258, 1260 (10th Cir.2000); Manchester v. Annis (In re Annis), 232 F.3d 749, 751 (10th Cir.2000).

7 . Order Sustaining Trustee’s Objection to Debtors’ Claimed Exemption ("Order”), in Appellants’ Appendix at 020. 8. § 522(g)(1).

9 . 503 U.S. 638, 643-44, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).

10 . Id. at 644, 112 S.Ct. 1644.

¹¹

12 . id. at 1198.

13 . Id.

14 . Id. at 1200-1201.

15 . Id. at 1204.

16 . Id. at 1202.

17 . Id. at 1203.

18 . 503 U.S. 638, 643-44, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).

8 . Id. at 373-74.