United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 09-6003

 

In re: *

*

James Robert Barrows and *

Terri Lee Barrows, *

*

Debtors. *

*

James Robert Barrows and * Appeal from the United States

Terri Lee Barrows, * Bankruptcy Court for the 

* District of Minnesota 

Debtors-Appellants, *

*

v. *

*

Julia Christians, *

*

Trustee-Appellee. *

 

Submitted: June 30, 2009

Filed: July 10, 1009

 

Before SCHERMER, FEDERMAN, and SALADINO, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
1

The Honorable Robert J. Kressel, United States Bankruptcy Judge for the

District of Minnesota.

2

Debtors James Robert Barrows and Terri Lee Barrows (“Debtors”) appeal from

the bankruptcy court1

 order granting the objection to the Debtors’ amendment of

exemptions filed by Trustee Julia Christians (“Trustee”). We have jurisdiction over

this appeal from the final order and judgment of the bankruptcy court. See 28 U.S.C.

§ 158(b). For the reasons set forth below, we affirm.

ISSUES

The issues on appeal are whether the bankruptcy court erred in finding bad faith

on the part of the Debtors and whether it abused its discretion in disallowing the

Debtors’ attempt to amend their exemptions because of such bad faith. We conclude

that the bankruptcy court did not err in finding bad faith nor abuse its discretion in

disallowing the Debtors’ amended exemptions. 

BACKGROUND

The Debtors are married. Terri Lee Barrows was out of work in early 2008 and

the family’s consumer debts became unmanageable. On March 3, 2008, the Debtors

met with Attorney Alan Albrecht (“Attorney”) to discuss bankruptcy. The Attorney

gave them a worksheet to fill out and return to him. The worksheet included questions

about the Debtors’ assets, income, expenses and creditors. The worksheet did not

purport to be an official document, nor did the Debtors believe it to be one. The

worksheet stated as follows: “Official Bankruptcy Forms will be completed using the

information that you give in these worksheets and you will be required to sign a

declaration stating under penalty of perjury that the information is true and correct.”
3

The Debtors took the worksheet home and spent a lot of time filling it out. 

Question 16 of the worksheet asked the Debtors to list the approximate average daily

balance in their bank accounts. Terri Lee Barrow looked up the balance in the

couple’s checking account online and listed $300 as the approximate average daily

balance of the checking account and $25 as the approximate daily balance of the

savings account. The Debtors returned the completed worksheet to the Attorney’s

office on June 15, 2008. 

After completing the worksheet and returning it to the Attorney’s office but

before they reviewed and signed their bankruptcy petition and schedules, the Debtors

borrowed $17,000 from James Robert Barrows’ 401K account. The Debtors

deposited the proceeds from the 401K loan into their checking account on June 30,

2008.

The Debtors returned to the Attorney’s office on July 7, 2008, where they

carefully reviewed their petition and schedules page by page, comparing the schedules

to the information they had provided on the worksheet. The Debtors knew at the time

that they had deposited the $17,000 proceeds from the 401K loan into their checking

account. Nonetheless, the Debtors approved and signed under oath the bankruptcy

petition, schedules, and statements on July 7, 2008. The schedules listed the current

value of the Debtors’ interest in the checking and savings accounts as $325. The

Debtors claimed an exemption for their savings and checking accounts with a current

value of $325. The Debtors listed James Robert Barrow’s 401K account with a

current value of $65,000. On their statement of financial affairs when asked to list all

property other than property transferred in the ordinary course of business or financial

affairs of the debtor transferred either absolutely or as security within two years

immediately preceding the commencement of this case, the Debtors listed “None.”

Finally, the Debtors indicated no anticipated change in income or expenses in their

statements.
4

The Attorney filed the Debtors’ bankruptcy petition and schedules on July 15,

2008 (“Petition Date”). On the Petition Date the Debtors’ checking account had a

balance of $13,918.89. The Debtors had been actively drawing on the account prior

to and after their bankruptcy filing, paying their mortgage and other bills.

The Trustee conducted the Debtors’ Section 341 meeting of creditors on August

18, 2008. At the meeting the Debtors testified under oath that their petition and

schedules were true, correct and complete. The Debtors provided the Trustee with

copies of their bank statements but did not disclose the 401K loan or the fact that the

balance in the checking account exceeded the amount listed in their schedules by more

than $13,000. After the Section 341 meeting of creditors, the Trustee reviewed the

bank statements and sent a written demand to the Debtors for turnover of the funds in

the bank account in excess of the $325 which the Debtors had exempted. On August

26, 2008, the Debtors filed Amended Schedules B and C listing the value of the bank

accounts at $13,970.19 and asserting an exemption of the entire balance in the

accounts.

The Trustee objected to the Debtors’ amended exemption of the bank accounts.

The bankruptcy court conducted a hearing on the objection. The Debtors testified that

Terri Lee Barrows spent a significant amount of time researching and collecting

information and filling out the worksheet provided by the Attorney. The Debtors

carefully reviewed the petition, schedules, and statements prepared by the Attorney

and signed them under oath, attesting to their accuracy. In examining the petition,

schedules and statements, the Debtors checked to make sure the documents matched

the information contained in the worksheet the Debtors had provided to the Attorney

and did not contain any typographical errors. The Debtors knew the worksheet was

prepared before the 401K loan and that the petition, schedules, and statements did not

accurately reflect the balances of the bank accounts and the 401K account as of the

day they signed the documents under oath. The Debtors explained that they thought

the bankruptcy documents only needed to reflect the balances disclosed in the
5

worksheet and that they did not need to be updated. The Debtors had been advised

by the Attorney that they would have to provide copies of bank statements to the

Trustee. They knew such statements would show the actual account balances on the

Petition Date. The Debtors thought this was sufficient. The Debtors also stated that

they did not consider the 401K loan to be a transfer of assets – instead it was merely

the transformation of an asset from one form – funds in a 401K account – to another

form – funds in a bank account. The bankruptcy court determined that the Debtors

had acted in bad faith in failing to accurately disclose the amount of funds in the bank

accounts and then asserting an exemption therein only after the Trustee demanded

turnover of the funds in excess of the originally disclosed amount. The court

sustained the Trustee’s objection to the amended exemption and limited the Debtors’

exemption of the bank account to $325. The Debtors appeal that order.

STANDARD OF REVIEW

We review the bankruptcy court’s findings of fact for clear error and its

conclusions of law de novo. Kaelin v. Bassett (In re Kaelin), 308 F.3d 885, 888 (8th

Cir. 2002); Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 356 (B.A.P. 8th Cir.

2003). The bankruptcy court has discretion to deny an amendment of exemptions if

the amendment is proposed in bad faith. Kaelin, 308 F.3d at 888; Bauer, 298 B.R. at

356. Bad faith is a finding of fact which is subject to review for clear error. Kaelin,

308 F.3d at 888; Bauer, 298 B.R. at 356. A finding is clearly erroneous when

although evidence exists to support it the reviewing court is left with the definite and

firm conviction that a mistake has been committed. Kaelin, 308 F.3d at 889; Bauer,

298 B.R. at 356. 
2

 A state may opt out of the federal exemptions, leaving only state

exemptions available for debtors. Minnesota has not opted out and therefore

debtors in Minnesota may choose between the federal and state exemptions.

3 See also Fed. R. Bankr. P. 1009 permitting a debtor to amend schedules as

a matter of course at any time before the case is closed.

6

DISCUSSION

Pursuant to Section 522(b) of the Bankruptcy Code, a debtor may exempt

property either under the federal exemptions set forth in Section 522(d)2

 or under state

or other applicable exemption laws. 11 U.S.C. § 522(b). Exemption claims are

generally subject to liberal amendment. Kaelin, 308 F.3d at 889; Armstrong v. Harris

(In re Harris), 886 F.2d 1011, 1015 (8th Cir. 1989); Bauer, 289 B.R. at 356.3

 The right

to freely amend exemptions is not absolute, however, and “can be tempered by the

actions of the debtor or the consequences to the creditors.” Kaelin, 308 F.3d at 889;

Bauer, 289 B.R. at 356. Bad faith on the part of the debtor or prejudice to creditors

can eliminate a debtor’s right to amend exemptions. Here, prejudice to creditors is not

at issue; instead, bad faith by the Debtors is.

The Trustee, as the objector, bears the burden of establishing bad faith by a

preponderance of the evidence. Fed.R.Bankr.P. 4003(c); see also Grogan v. Garner,

498 U.S. 279, 111 S.Ct. 654 (1991); Bauer, 289 B.R. at 356. Bad faith is determined

by an examination of the totality of the circumstances. Kaelin, 308 F.3d at 889;

Bauer, 289 B.R. at 356. Concealment of an asset generally supports a finding of bad

faith. Kaelin, 308 F.3d at 890. The efficiency of the bankruptcy process depends on

the accuracy and reliability of the petition, schedules, and statements without the

necessity of digging around or conducting independent examinations to get the true

facts. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992). Full and accurate disclosure

is required of debtors. 
7

Here, the bankruptcy court considered the evidence and determined that the

Debtors had acted in bad faith in listing the amount in their bank accounts at $325

when they knew they had borrowed $17,000 from a 401K account and had deposited

the loan proceeds into their bank account shortly before filing bankruptcy. The

Debtors had been actively spending the money and were well aware of its inclusion

in the bank account, yet they understated the account balance by more than $13,000.

The Debtors continued to spend the loan proceeds post-petition, yet again attested

under oath to the accuracy of the bankruptcy schedules when the Trustee asked about

them at the Section 341 meeting of creditors. The Debtors failed to mention the

discrepancy between the listed bank account balance and the actual bank account

balance or the 401K loan, instead explaining that they knew they were providing bank

statements to the Trustee and that the Trustee would learn the true balance upon

review of the statements. The bankruptcy judge did not believe the Debtors’

explanation or that their actions were taken in good faith. As the trier of fact, the

bankruptcy judge was in the ideal position to evaluate the veracity of the Debtors as

they testified at trial. Bauer, 298 B.R. at 357. As long as the trial court’s conclusion

is plausible in light of the record viewed as a whole, we shall not reverse it even if the

record also supports the alternative conclusion. Anderson v. City of Bessemer City,

N.C., 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511 (1985). The trial court’s choice

between two permissible views of the evidence cannot be clearly erroneous. Id. The

bankruptcy court considered the totality of circumstances, determined that the Debtors

acted in bad faith, and exercised its discretion to sustain the objection to the amended

exemption in light of the Debtors’ bad faith. The bankruptcy court’s conclusion is not

clearly erroneous. Furthermore, the court did not abuse its discretion in sustaining the

objection to the amended exemption based on its determination of bad faith.

Alternatively the bankruptcy court determined that the Debtors acted with

reckless indifference to the truth when they provided inaccurate schedules and

statements and failed to correct the material falsehoods therein. Again, the bankruptcy
8

court’s conclusion is based on its evaluation of the Debtors’ veracity and is supported

by the record as a whole and therefore should be affirmed.

The Debtors argue that they could have exempted the funds if they had

remained in the 401K account so there is no harm in allowing the Debtors to exempt

the funds after transferring them to the bank account. This fact does not change the

result. Bauer, 298 B.R. at 357 (“The irony here is that if the Debtors had accurately

disclosed the [funds in the bank accounts and the 401K loan] from the outset, they

may have been entitled to exempt [the funds].”) While there may be no harm to

creditors, the Debtors acted in bad faith and that bad faith alone is sufficient to

disallow the amended exemption.

CONCLUSION

The bankruptcy court correctly considered the totality of circumstances and did

not err in finding bad faith on the part of the Debtors. The court did not abuse its

discretion in denying the Debtors’ asserted exemption in the entire bank account

balance. Accordingly, we AFFIRM.