United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 05-1606

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In re: James W. Ladd, doing *

business as Ladd Trucking; *

Sherri L. Ladd, doing business *

as Ladd Trucking, *

*

Debtors. *

_______________________ * Appeal from the United States

* Bankruptcy Appellate Panel

James W. Ladd; Sherri L. Ladd, * for the Eighth Circuit.

*

Appellants, *

*

v. *

*

Charles W. Ries, *

*

Appellee. *

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Submitted: December 14, 2005

Filed: May 5, 2006

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Before WOLLMAN, BEAM, and RILEY, Circuit Judges.

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BEAM, Circuit Judge.

James and Sherri Ladd appeal from the Bankruptcy Appellate Panel (BAP)

decision denying their motion to amend their asset schedules to claim their farm as

exempt property under Minnesota law. Because we find that the doctrine of res
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If the Trustee does not timely object to a claim of exemption, the property will

be deemed exempt, even if there is no basis for the exemption. Taylor v. Freeland &

Kronz, 503 U.S. 638, 643-45 (1992). Therefore trustees commonly object, initially,

to claimed exemptions. 

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judicata does not preclude such action, we reverse and remand to the bankruptcy

court for further proceedings. 

I. BACKGROUND

When the Ladds first filed for bankruptcy in September 2002, they claimed

their farm as an exempt homestead pursuant to the exemptions under federal

bankruptcy law. 11 U.S.C. § 522(d)(1). The Ladds estimated their equity interest in

the homestead to be $18,150. The Trustee filed a protective1

 objection to the

homestead claim, and because the Ladds did not oppose the objection, a default order

was entered denying the federal exemption. Fifteen months later, the Ladds filed

amended schedules of assets and attempted to claim their farm as exempt property

under Minnesota law. The Trustee again objected, this time asserting that res judicata

precluded any amended claim of exemption for the homestead. The bankruptcy court

agreed with the Trustee, as did the BAP. The BAP reasoned that a bankruptcy motion

is the equivalent of a civil lawsuit and that to allow amendment after entry of

judgment on such a motion would be "akin to allowing a party to add a new claim to

a complaint after trial and entry of a judgment." In re Ladd, 319 B.R. 599, 603

(B.A.P. 8th Cir. 2005).

On appeal the Ladds claim that because Bankruptcy Rule 1009 allows them to

amend schedules "at any time," they should not be precluded by res judicata

principles from amending their schedules to claim the exemption under Minnesota

state law. The Trustee argues that Rule 1009 does not contemplate amendment after

a final order has been entered on a claimed exemption.
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II. DISCUSSION

We review the bankruptcy court's and appellate panel's conclusions of law de

novo and factual findings for clear error. In re Kaelin, 308 F.3d 885, 888 (8th Cir.

2002). A bankruptcy court's decision regarding whether a debtor may file amended

property schedules is reviewed for an abuse of discretion. Id.

We find that the BAP erred in holding this action was barred by the doctrine

of res judicata. "Final judgment on the merits of an action precludes the same parties

from relitigating issues that were or could have been raised in that action." Lundquist

v. Rice Mem'l Hosp., 238 F.3d 975, 977 (8th Cir. 2001) (per curiam). Res judicata

will apply where a final judgment was entered by a court of competent jurisdiction,

if the same parties (or their privies) and the same cause of action were involved.

Banks v. Int'l Union Electron, 390 F.3d 1049, 1052 (8th Cir. 2004). An action is the

"same," for purposes of res judicata if it turns on the "same nucleus of operative facts

as the prior claim." Daley v. Marriott Int'l, Inc., 415 F.3d 889, 896 (8th Cir. 2005)

(quotations omitted). We have noted that res judicata should not be applied where

one or both parties have "little motivation" or "little incentive" to fully litigate an

issue. Lovell v. Mixon, 719 F.2d 1373, 1377 (8th Cir. 1983).

Assuming that the judgment entered on the federal exemption was a "final"

judgment, the problem with applying res judicata is that the same cause of action is

not involved. The Trustee argues that since the Ladds are claiming a homestead

exemption in both actions, the two causes of action necessarily arise out of the same

nucleus of operative facts. We disagree, as there are significant differences between

the federal exemption statute and the Minnesota exemption.

Debtors in Minnesota may elect between the federal exemptions found in 11

U.S.C. § 522(d), or elect the exemptions provided by state law, plus any federal

exemptions, other than those given by section 522(d). Christians v. Dulas, 95 F.3d
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703, 704 n.1 (8th Cir. 1996). Debtors may not choose to exempt some assets under

the federal scheme and others under the state scheme, however. 11 U.S.C. § 522(b).

The primary difference between the federal and the Minnesota state homestead

exemption is that the federal homestead exemption is limited by monetary

value–when the Ladds filed in 2002, it allowed debtors to protect up to $34,850 for

their homestead. 11 U.S.C. § 522(d)(1). On the other hand, Minnesota's exemption

scheme essentially limits the homestead by acreage–160 acres–rather than amount.

Minn. Stat. Ann. § 510.02; see In re Johnson, 880 F.2d 78, 82 (8th Cir. 1989) ("The

[homestead] exemption is limited by acreage rather than by monetary value. Minn.

Stat. § 510.02."). 

The Ladds argue that they initially tried asserting the federal exemptions

because they were more favorable for property other than the homestead. Under the

federal "wildcard" exemption scheme, a debtor may protect other miscellaneous

property in addition to the homestead. 11 U.S.C. § 522(d)(5). Pursuant to the

wildcard federal exemptions, the Ladds also attempted to exempt approximately

$1,600 worth of personal property in the form of cash in a checking account, artwork,

clothing, and office materials such as a fax machine and filing cabinet. Once the

Trustee objected to the homestead exemption, questioning the value of the Ladds'

homestead interest, it became too costly to proceed with the federal exemptions

because the Ladds would have had to obtain expert testimony and expend attorney

fees for litigation regarding the value of their homestead. Since the value of the

miscellaneous personal property was so low, it was not worth the expense of litigation

over the valuation of their homestead. So rather than litigate the federal homestead

issue, and assuming that they could amend their schedules at any time before the

close of the bankruptcy case pursuant to Rule 1009, the Ladds chose not to fight the

objection and allowed a default judgment on the federal exemption to be entered

against them.
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Although they could not exempt the miscellaneous personal property, under

Minnesota law, their homestead would be protected up to $500,000 since it was a

homestead used for agricultural purposes. Minn. Stat. Ann. § 510.02. Thus, there

would be no serious question that the Ladds' equity in their homestead would qualify

for the state exemption. There also is no dispute that the Ladds' homestead is within

the 160 acre-limit imposed by Minnesota law. Id.

Under these circumstances, we find that the cause of action is not the same for

res judicata purposes. The key operative facts of the federal exemption litigation

would have been whether the Ladds' interest in the homestead was greater than the

maximum allowed by federal bankruptcy law–$34,850. The key facts in a proceeding

under the Minnesota exemption would be whether their homestead interest exceeded

160 acres or the $500,000 limit. The substance of what the debtors would have to

prove in each action is substantially different. Under federal law, a debtor's focus

would be on value, and under Minnesota law, it would be on acreage.

Since the Ladds had so little equity in their home, it made sense for them to

initially proceed under the federal scheme and try to exempt other personal property

pursuant to the wildcard statute. But there was "little motivation" and "little

incentive" for the Ladds to engage in costly litigation defending the federal

homestead exemption in order to exempt $1,600 worth of personal property. Lovell,

719 F.2d at 1377.

The Trustee argues that the Ladds should have asserted their intent to use the

state homestead exemption before default judgment on the federal exemption was

entered. But in the District of Minnesota at least, debtors could not have raised the

Minnesota exemption as an "alternate" theory at the same time the federal exemption

was asserted. See In re Cochrane, 178 B.R. 1011, 1017-18 (Bankr. D. Minn. 1995)

(holding that "there is no basis under the Federal Rules of Bankruptcy Procedure for

proposing an 'alternative' claim of exemptions at the same time as one asserts a 'main'
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claim"). The bankruptcy forms also do not allow pleading in the alternative, as a

Minnesota debtor must check either the federal or the state exemptions "box" on the

Schedule C property exemption form. The Trustee conceded at oral argument that a

debtor may not plead exemptions "alternatively." Requiring an already cash-strapped

debtor to litigate an exemption simply for the purpose of raising the alternative theory

makes little sense, especially when the debtor can accomplish the same result by

amending pursuant to Rule 1009.

We have previously held that in bankruptcy cases, "the principle of res judicata

should be invoked only after careful inquiry because it blocks 'unexplored paths that

may lead to truth.'" Lovell, 719 F.2d at 1379 (quoting Brown v. Felsen, 442 U.S. 127,

132 (1979)). We see no reason to stray from that admonishment in this case.

If the Ladds are not barred by res judicata from asserting their state law

homestead exemption, the question remains as to whether the bankruptcy court

should have allowed amendment pursuant to Bankruptcy Rule 1009. Rule 1009(a)

provides that a debtor may amend, at any time, as a matter of course before the case

is closed. In Kaelin we noted that the general rule allows liberal amendment, but the

ability to amend is not absolute, depending on the actions of the debtor and the

consequences to the creditor. 308 F.3d at 889. Thus, the two recognized exceptions

to the rule allowing liberal amendment under Rule 1009 are bad faith on the part of

the debtor and prejudice to the creditor. Id. 

The record is not clear as to why the debtors waited fifteen months between the

time the federal exemptions were denied and they filed for state exemptions.

However, neither the Trustee nor any other creditors have claimed bad faith or

misconduct by the debtors. And, we find that the creditors would not be prejudiced

by amendment. As the Ladds point out, the creditors essentially concede that the

requisites of the Minnesota homestead exemption, i.e., ownership, occupancy and a

parcel less than 160 acres, are not truly at issue for this property. See id. at 890
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(holding that creditors can show prejudice if they would have asserted different

positions had the exemption been claimed earlier). 

Maximization of exemptions, especially the homestead exemption, is a

fundamental policy of the Bankruptcy Code, In re Johnson, 880 F.2d at 83, which is

likely why Rule 1009 allows liberal amendment. Because there have been no

allegations of bad faith by the debtors or prejudice to the creditors, we hold that the

bankruptcy court abused its discretion in not allowing the Ladds to amend their

schedules to claim the Minnesota homestead exemption.

III. CONCLUSION

We reverse and remand to the bankruptcy court for proceedings consistent with

this opinion.

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