Court Opinion

ID: 3032495
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:47:55.079771+00
Date Added: 2024-06-11T11:48:18.912315
License: Public Domain

United States Bankruptcy Appellate Panel
                             FOR THE EIGHTH CIRCUIT

                                    No. 03-6011 MN

In re:                                     *
                                           *
Cyril J. Bauer and                         *
Rae Orene Bauer,                           *
                                           *
         Debtors.                          *
                                           *
Cyril J. Bauer and Rae Orene Bauer,        *         Appeal from the United States
                                           *         Bankruptcy Court for the
         Debtors-Appellants,               *         District of Minnesota
                                           *
               v.                          *
                                           *
Michael J. Iannacone,                      *
                                           *
         Trustee-Appellee.                 *

                               Submitted: August 19, 2003
                                Filed: September 16, 2003

Before WILLIAM A. HILL, SCHERMER and FEDERMAN, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
      Debtors Cyril J. Bauer and Rae Irene Bauer (“Debtors”) appeal from the
bankruptcy court1 order granting the objection to the Debtor’s amendment of
exemptions filed by Trustee Michael Iannacone (“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.

                                        ISSUE

       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

      On February 20, 2002, the Debtors filed a joint petition for relief under
Chapter 7 of the Bankruptcy Code. At the time of their bankruptcy filing, neither of
the Debtors was employed. Mr. Bauer had retired from the telephone company where
he had worked for years, starting in technical support, then working as a supervisor,
and eventually earning the position of quality manager. Mrs. Bauer had worked as
a technician for the telephone company and later for Tech Systems where she earned
$23 an hour prior to being laid off.

       In their schedules and statements filed with the bankruptcy court, the Debtors
listed the value of their residence at $80,000 and listed the amount of secured debt
encumbering the residence at $81,000. Pursuant to Section 522(b)(1) of the

      1
        The Honorable Dennis D. O’Brien, Chief United States Bankruptcy Judge
for the District of Minnesota.
                                           2
Bankruptcy Code, the Debtors elected the federal exemptions available under
Section 522(d) of the Bankruptcy Code and did not assert a homestead exemption in
their residence.

      Rae Orene Bauer had purchased the three-story residence in 1990 for $70,000.
The Debtors had intended to update the house and had begun several improvement
projects. At the time of their bankruptcy filing, however, they had not completed
many if any of the projects and the house was in a state of disrepair and in need of
substantial repairs and improvements.2 The property was assessed for tax purposes
at a value of $203,000 for tax year 2002. The Debtors had increased the
homeowner’s insurance coverage on their residence to $276,000 in January, 2002.

      In April, 2002, the Debtors received an offer to purchase their residence “as is”
for $150,000. The Debtors rejected the offer as too low. They believed they should
have been able to sell the house at a price that would result in net proceeds between
$80,000 and $100,000 in its condition at the time. They believed they could sell the
house for $350,000 if they completed certain improvements to the residence.

      On May 16, 2002, the Debtors’ residence was destroyed in a fire. The Debtors
have asserted a claim under their homeowner’s insurance policy for $400,953.96.
This amount includes a claim of $141,287.84 for the replacement value of the home’s
contents, resulting in a claim of $259,666.12 for the value of the structure.

       On August 7, 2002, the Debtors amended their schedules to increase the value
of their residence from $80,000 to $203,000. They also amended their schedule of
exemptions to elect the state exemptions rather than the federal exemptions and to

      2
         According to testimony, the house was stacked with junk and was in a state
of complete disarray, bats resided on the third floor, a toilet and bathtub occupied
the stairway landing, the walls had holes, wires were exposed, plumbing was not
complete, and mouse and bat feces were present.
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assert a homestead exemption in the amount of $200,000. The Trustee objected to
the asserted homestead exemption. The bankruptcy court found the Debtors had
sought the amended homestead exemption in bad faith. Accordingly, the bankruptcy
court denied the homestead exemption, resulting in this appeal.

                            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). The bankruptcy court has discretion to deny an amendment of exemptions
if the amendment is proposed in bad faith. Id. Bad faith is a finding of fact which is
subject to review for clear error. Id. 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. Id. at 889.

                                   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)3 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).4 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. Bad faith on

      3
       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.
      4
       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.
                                          4
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; rather, bad faith by the
Debtors is.

       The Trustee, as the objector, has 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). The preponderance of the evidence standard
results in a roughly equal allocation of the risk of error between litigants. Id., 498
U.S. at 286, 111 S.Ct. at 659. It is the presumed standard of proof in civil actions
unless a particularly important individual interest or right is at stake. Id. A debtor
has no fundamental right to discharge in bankruptcy which would require a higher
standard of proof. Id. Bad faith in the exemption context does not warrant a higher
burden of proof than fraud in the discharge context.

       Bad faith is determined by an examination of the totality of the circumstances.
Kaelin, 308 F.3d at 889. Here, the bankruptcy court considered the evidence and
determined that the Debtors had acted in bad faith in listing the value of their home
at $80,000 in February of 2002. In January of 2002, the Debtors had increased their
homeowner’s insurance coverage on the residential structure to $276,000. Their
residence was assessed at $203,000 for real property taxes for tax year 2002. Less
than two months after filing their bankruptcy petition the Debtors summarily rejected
an offer to purchase their house “as is” for $150,000 because they believed the value
of their home in its current condition was between $180,000 and $200,000 and that
the value could increase to between $300,000 and $400,000 if they completed repairs
to the home. All of these factors are inconsistent with a good faith belief that the
home had a value of $80,000, regardless of the amount of clutter and disarray in the
house. 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. The bankruptcy court’s
conclusion is not clearly erroneous and should be affirmed.

                                           5
       A discharge in bankruptcy and the associated fresh start are not fundamental
rights. Grogan v. Garner, 498 U.S. at 286, 111 S.Ct. at 659. To the contrary, they are
privileges. The opportunity for a completely unencumbered new beginning is limited
to the honest but unfortunate debtor. Id, 498 U.S. at 286-87, 111 S.Ct. at 659, citing
Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695,699 (1934). The cost to the
debtor for an unencumbered fresh start is minimal: the debtor must honestly and
accurately disclose his or her financial affairs and must cooperate with the trustee.5
The debtor’s duty of disclosure requires updating schedules as soon as reasonably
practical after he or she becomes aware of any inaccuracies or omissions.

       Here, the Debtors were not truthful in their disclosures with respect to their
home. They substantially undervalued their home in schedules signed under penalty
of perjury to reflect no equity. The irony here is that if the Debtors had accurately
disclosed the true value of their home from the outset, they may have been entitled
to exempt their equity in it. For the price of accurate disclosure, they might have
obtained an unencumbered fresh start and retained the equity in their home. Instead
they failed to honestly and accurately disclose the value of their home or to amend
their schedules when they received an offer to purchase their home for an amount
which exceeded the scheduled value of their home by $70,000. They only amended
their schedules to increase the value of the home after the Trustee had learned of its
true value following the fire. They accompanied their belated updated disclosure
with a bad faith attempt to assert a homestead exemption.

      Bad faith cost the Debtors the equity in their home. Had they paid the price of
honesty in their disclosures to the court, the Trustee, and their creditors, they may
have earned a fresh start while retaining the equity in their home.

      5
          See 11 U.S.C. § 521 setting forth the debtor’s duties.
                                            6
                                  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’ their asserted homestead exemption. Accordingly,
we AFFIRM.

      A true copy.

             Attest:

                     CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
                     EIGHTH CIRCUIT

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