Court Opinion

ID: 4310149
Source: CourtListenerOpinion
Date Created: 2018-09-06 16:00:22.529308+00
Date Added: 2024-06-11T14:43:36.947934
License: Public Domain

United States Bankruptcy Appellate Panel
                           For the Eighth Circuit
                       ___________________________

                               No. 18-6007
                       ___________________________

 In re: Johnny M. Belew, also known as John Belew, formerly doing business as
                      Belew and Bell, Attorneys at Law

                              lllllllllllllllllllllDebtor

                            ------------------------------

                                  Bianca Rucker

                       lllllllllllllllllllllTrustee - Appellant

                                          v.

                                Johnny M. Belew

                       lllllllllllllllllllllDebtor - Appellee
                                    ____________

                 Appeal from United States Bankruptcy Court
               for the Western District of Arkansas - Fayetteville
                                ____________

                          Submitted: August 2, 2018
                           Filed: September 6, 2018
                                ____________

Before SALADINO, Chief Judge, NAIL and SHODEEN, Bankruptcy Judges.
                             ____________
NAIL, Bankruptcy Judge.

      Chapter 7 Trustee Bianca Rucker ("Trustee") appeals the March 5, 2018 order
of the bankruptcy court1 overruling her objection to Debtor Johnny M. Belew's
("Debtor") second amended claim of exemptions. We have jurisdiction over this
appeal pursuant to 28 U.S.C. § 158(b). We affirm.

                                  BACKGROUND

      Debtor filed a petition for relief under chapter 7 of the bankruptcy code.
Trustee assumed her duties shortly thereafter.

      At the meeting of creditors, Debtor disclosed a debit account he had not
disclosed on the schedules he filed with his petition. One week later, Debtor
amended his schedules to disclose the debit account and claim it exempt.

       Trustee's subsequent investigation led her to believe Debtor had additional
assets he had not disclosed. This proved to be true, and Debtor eventually amended
his schedules a second time to disclose and claim exempt a "Possible Equitable
Interest" in his spouse's checking account, which Debtor valued at "Unknown," two
"unpublished and unedited fiction manuscripts," which Debtor valued at $100.00, and
a "Possible interest in cash held in a safe at Debtor's residence," which Debtor valued
at "Unknown."2

      1
        The Honorable Ben T. Barry, Chief Judge, United States Bankruptcy Court
for the Eastern and Western Districts of Arkansas.
      2
       In his original schedules and in both this amendment and his earlier
amendment, Debtor availed himself of the federal exemptions listed in 11 U.S.C.
§ 522(b)(2).

                                         -2-
       Trustee objected to Debtor's second amended claim of exemptions. In her
objection, Trustee alleged, inter alia, the second amended claim of exemptions was
filed in bad faith and was prejudicial to Debtor's creditors and should therefore be
disallowed. The matter was heard, and the bankruptcy court overruled Trustee's
objection. In reaching its decision, the bankruptcy court relied on Law v. Siegel,
571 U.S. 415 (2014), for the proposition that federal law provides no authority for
bankruptcy courts to deny an exemption on a ground that is not specified in the
bankruptcy code. Trustee timely appealed.

        Trustee identifies three issues in her opening brief. Two of these issues relate
to the bankruptcy court's reliance on Law, which we discuss below. Trustee raises the
third issue–whether the bankruptcy court erred in failing to correctly apply 11 U.S.C.
§ 522(g) (which allows a debtor to exempt property a trustee recovers on behalf of
the estate, if the debtor did not voluntarily transfer or conceal the property)–for the
first time on appeal. Because Trustee did not raise this issue before the bankruptcy
court, we have not considered it on appeal. Edwards v. Edmondson (In re Edwards),
446 B.R. 276, 280 (B.A.P. 8th Cir. 2011) (discussion and citations therein), aff'd, 477
F. App'x 405 (8th Cir. 2012).

                             STANDARD OF REVIEW

      We review de novo the bankruptcy court's interpretation and application of the
Supreme Court's decision in Law. See Pierce v. Collection Assocs., Inc. (In re
Pierce), 779 F.3d 814, 817 (8th Cir. 2015) (conclusions of law are reviewed de novo).

                                    DISCUSSION

     On behalf of a unanimous court, Justice Scalia framed the issue presented in
Law as "whether a bankruptcy court . . . may order that a debtor's exempt assets be

                                          -3-
used to pay administrative expenses incurred as a result of the debtor's misconduct[,]"
Law, 571 U.S. at 417, and held a bankruptcy court may not.

             A bankruptcy court has statutory authority to issue any
             order, process, or judgment that is necessary or appropriate
             to carry out the provisions of the Bankruptcy Code. And
             it may also possess inherent power . . . to sanction abusive
             litigation practices. But in exercising those statutory and
             inherent powers, a bankruptcy court may not contravene
             specific statutory provisions.

             It is hornbook law that [11 U.S.C.] § 105(a) does not allow
             the bankruptcy court to override explicit mandates of other
             sections of the Bankruptcy Code. Section 105(a) confers
             authority to carry out the provisions of the Code, but it is
             quite impossible to do that by taking action that the Code
             prohibits. That is simply an application of the axiom that
             a statute's general permission to take actions of a certain
             type must yield to a specific prohibition found elsewhere.
             Courts' inherent sanctioning powers are likewise
             subordinate to valid statutory directives and prohibitions.
             We have long held that whatever equitable powers remain
             in the bankruptcy courts must and can only be exercised
             within the confines of the Bankruptcy Code.

             Thus, the Bankruptcy Court's surcharge was unauthorized
             if it contravened a specific provision of the Code. We
             conclude that it did. Section 522 (by reference to
             California law) entitled [the debtor] to exempt $75,000 of
             equity in his home from the bankruptcy estate. And it
             made that $75,000 not liable for payment of any
             administrative expense. . . .

             The Bankruptcy Court thus violated § 522's express terms
             when it ordered that the $75,000 protected by [the debtor]'s
             homestead exemption be made available to pay [the

                                          -4-
             trustee]'s attorney's fees, an administrative expense. In
             doing so, the court exceeded the limits of its authority
             under § 105(a) and its inherent powers.

Law, 571 U.S. at 420-23 (citations and quotation marks omitted).

      The issue framed by Justice Scalia in Law is not the issue presented to the
bankruptcy court in this case, i.e., whether a bankruptcy court may deny an exemption
on a ground that is not specified in the bankruptcy code. Had Justice Scalia said
nothing more, Law would have had no bearing on the bankruptcy court's decision.

      It has long been the law in the Eighth Circuit that a bankruptcy court may
consider a debtor's bad faith and any prejudice to the debtor's creditors in determining
whether to allow the debtor to amend his claim of exemptions.

             The general rule allows liberal amendment of exemption
             claims.   However, the policy of freely allowing
             amendment, while the case is still open, is not an absolute
             and can be tempered by the actions of the debtor or the
             consequences to the creditors.

             The two recognized exceptions to this rule are bad faith on
             the part of the debtor and prejudice to the creditors.

Kaelin v. Bassett (In re Kaelin), 308 F.3d 885, 889 (8th Cir. 2002) (citations omitted).
That is precisely what Trustee asked the bankruptcy court to do in this case.

      Justice Scalia, however, had more to say in Law.

             [Trustee] points out that a handful of courts have claimed
             authority to disallow an exemption (or to bar a debtor from
             amending his schedules to claim an exemption, which is

                                          -5-
             much the same thing) based on the debtor's fraudulent
             concealment of the asset alleged to be exempt. He suggests
             that those decisions reflect a general, equitable power in
             bankruptcy courts to deny exemptions based on a debtor's
             bad-faith conduct. For the reasons we have given, the
             Bankruptcy Code admits no such power. It is of course
             true that when a debtor claims a state-created exemption,
             the exemption's scope is determined by state law, which
             may provide that certain types of debtor misconduct
             warrant denial of the exemption. . . . But federal law
             provides no authority for bankruptcy courts to deny an
             exemption on a ground not specified in the Code.

Law, 571 U.S. at 425 (citations and italics omitted). Inasmuch as a debtor's right to
amend his claim of exemptions was not the issue in Law, Justice Scalia's additional
commentary would seem to be dicta.3 See Gray v. Warfield (In re Gray), 523 B.R.
170, 174 (B.A.P. 9th Cir. 2014).

       Like the bankruptcy court, we are thus placed in the unenviable position of
having to determine whether the bankruptcy court was bound by the Supreme Court's
dicta in Law or by the Eighth Circuit Court of Appeals' holding in Kaelin. At first
blush, this might appear to be an easy decision. However, not all dicta are created
equal.

      3
        Not every court agrees. See, e.g., U.S. v. Ledee, 772 F.3d 21, 29 n.10 (1st Cir.
2014) (noting Law "held" bankruptcy courts do not have a general, equitable power
to deny exemptions based on a debtor's bad faith); Clabaugh v. Grant (In re Grant),
658 F. App'x 411, 414 (10th Cir. 2016) (stating Law "held" the bankruptcy code does
not give bankruptcy courts the power to deny exemptions based on a debtor's bad
faith); and McFarland v. Wallace (In re McFarland), 790 F.3d 1182, 1185 (11th Cir.
2015) (citing Law for the proposition that bankruptcy courts may not refuse to honor
an exemption absent a valid statutory basis for doing so, without discussing whether
Justice Scalia's comments were dicta).

                                          -6-
             This court and others have held that federal courts are
             bound by the Supreme Court's considered dicta almost as
             firmly as by the Court's outright holdings, particularly
             when ... [the dicta] is of recent vintage and not enfeebled
             by any [later] statement.

             Although panels have held that federal courts are bound by
             Supreme Court dicta, this goes too far. Appellate courts
             should afford deference and respect to Supreme Court
             dicta, particularly where, as here, it is consistent with
             longstanding Supreme Court precedent.

In re Pre-Filled Propane Tank Antitrust Litigation, 860 F.3d 1059, 1064 (8th Cir.
2017) (quotation marks omitted).

       Bearing these principles in mind, we conclude Kaelin has been abrogated by
Law. Justice Scalia could not have been more clear: A bankruptcy court has no
authority under federal law to deny an exemption on a ground not specified in the
bankruptcy code. Whether Justice Scalia's words are dicta or not, and if they are
dicta, whether we are "bound" by them or are only required to afford them deference
and respect, we cannot ignore the Supreme Court's unambiguous statement of the law.

       The Sixth and Ninth Circuit Courts of Appeals have reached much the same
conclusion. See Ellmann v. Baker (In re Baker), 791 F.3d 677, 683 (6th Cir. 2015);
Lua v. Miller (In re Lua), 692 F. App'x 851, 852 (9th Cir. 2017). Prior to Law, the
law in both circuits was similar to that in the Eighth Circuit. In the Sixth Circuit,
bankruptcy courts could refuse to allow an amendment if the debtor had acted in bad
faith or had concealed property. Lucius v. McLemore (In re Lucius), 741 F.2d 125,
127 (6th Cir. 1984). In the Ninth Circuit, bankruptcy courts could deny a debtor
leave to amend on a showing of bad faith or prejudice to creditors. Martinson v.
Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998). That changed soon after
Law was decided.

                                         -7-
            [I]t is clear that [Law] prohibits the bankruptcy court from
            disallowing the debtors' claimed exemptions because of
            their alleged bad faith and fraudulent conduct. While
            Lucius previously held that bankruptcy courts may use
            their equitable powers to sanction a debtor's misconduct by
            disallowing exemptions in property concealed from the
            trustee, the Supreme Court's superseding decision
            unambiguously abrogates their ability to do so. Some
            courts have characterized these principles in [Law] as mere
            dictum, but this court has explained that lower courts are
            obligated to follow Supreme Court dicta, particularly
            where there is not substantial reason for disregarding it,
            such as age or subsequent statements undermining its
            rationale. No such reason in favor of disregarding [Law]
            exists here, and many lower courts—including nearly all
            that have identified the language above as dictum—have
            adhered to [Law]'s pronouncements. Indeed, another panel
            of this court, while declining to rely on [Law] to reverse a
            bankruptcy court's disallowance of an amendment,
            explained that [Law] strongly suggests that the bankruptcy
            court exceeded its authority when it disallowed an
            amendment based on prejudice to creditors—a ground
            absent from the Bankruptcy Code. Thus, to the extent
            Lucius conflicts with [Law], the Supreme Court has
            effectively overruled it.

Baker, 791 F.3d at 682-83 (citations, quotation marks, and brackets omitted). See
Lua, 692 F. App'x at 852 (recognizing Michael had been abrogated by Law).

       Trustee has pointed us to only one case, In re Woolner, Bankr. No. 13-57269,
2014 WL 7184042 (Bankr. E.D. Mich. Dec. 15, 2014), in which the court declined
to follow Law and sustained a trustee's objection to a debtor's amended claim of
exemptions based on the debtor's bad faith. That case has since been abrogated by
Baker, 791 F.3d at 682, and we have not discovered any others.

                                        -8-
       On the other hand, any number of cases have interpreted and applied Law to
overrule a trustee's objection to a debtor's amended claim of exemptions when the
trustee's objection was based on the debtor's bad faith or other non-statutory grounds.
See, e.g., In re Hoover, 574 B.R. 413, 418 n.5 (Bankr. D. Mass. 2017) (collecting
cases).

                                   CONCLUSION

      Having reviewed the matter de novo, we agree with the bankruptcy court: A
bankruptcy court has no authority under federal law to deny a debtor's claim of
exemptions on a ground that is not specified in the bankruptcy code. Consequently,
we affirm the bankruptcy court's order overruling Trustee's objection to Debtor's
second amended claim of exemptions.

                                         -9-