Court Opinion

ID: 9693077
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:21:43.921289+00
Date Added: 2024-06-11T18:19:40.004534
License: Public Domain

KLEIN, Bankruptcy Judge,
concurring.
I agree with the majority that the trustee proved the debtor was not entitled to the California exemption in question and write separately to note that we may be holding the trustee to a higher burden than necessary.
*741There is reason to doubt the validity of the allocation, in Federal Rule of Bankruptcy Procedure 4003(c), of the burden of proof to the party objecting to a claim of exemption, especially an exemption claimed under state law.
At least with respect to state-law exemptions, the better view, after the Supreme Court’s decision in Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000), may be that, if challenged, the debtor has the burden to establish entitlement to a claim of exemption under state law by the same standard that applies in the courts of that state. If so, then the objecting party does not properly bear the burden of proof.
This post-Raleigh view necessarily calls into question the validity of Rule 4003(c), which expressly allocates the burden of proof on claims of exemption: “the objecting party has the burden of proving that the exemptions are not properly claimed.”11
The basic problem is that Rule 4003(c) suffers from being a procedural rule that attempts to accomplish a substantive task, it being settled by Raleigh that a burden of proof in bankruptcy is substantive and generally is regarded as an essential element of a claim itself. Raleigh, 530 U.S. at 20-21, 120 S.Ct. 1951.
This problem has multiple dimensions that may lead to differing results as between exemptions based on nonbankruptcy law and exemptions based on the Bankruptcy Code. It is even possible that the allocation of burden in Rule 4003(c) is valid with respect to federal bankruptcy exemptions but not, as in this appeal, with respect to state exemptions.
The state-law exemptions that apply by way of § 522(b) are probably subject to the burdens of proof that are prescribed under state law.12 Since Raleigh teaches that the burden of proof is substantive, it follows that state law provides the rule of decision regarding the burden on each state exemption. States (either through legislation or decisional law) ordinarily require the proponent of an exemption to bear the burden of proof, the precise quantum of proof varying state-by-state and, sometimes, exemption-by-exemption. E.g., In re Barnes 275 B.R. 889, 898-99 n. 2 (Bankr.E.D.Cal.2002) (California law).
The analysis of federal bankruptcy exemptions is different. Congress did not specify a burden of proof for the exemptions that it created in Bankruptcy Code § 522(d). Nor, in contrast to § 502, did Congress say in legislative history that the burden of proof was being left to the rules of procedure.13 Nevertheless, if one ac*742cepts that there was a clean slate, a rule could plausibly operate to fill a substantive gap in a manner that would make Rule 4003(c) an effective allocation of burden of proof for purposes of the § 522(d) exemptions.
The difficulty with the view that Rule 4003(c) may play a valid gap-filling role for federal bankruptcy exemptions is that the slate was not clean in 1983. The rule indirectly, and without either necessity or explanation, inverted the burden of proof from settled practice under the Bankruptcy Act of 1898, as reflected by Bankruptcy Rule 403(c) and the case law on which it was based.14
Former Bankruptcy Rule 403(c) functioned in a regime in which the trustee was required to make a report to the court specifying the claimed exemptions that were not allowable.15 The “bankrupt” (now, “debtor”) or any creditor could object to the report. Bankr.Rule 403(c). The trustee’s report was “deemed approved” if there were no timely objections. Bankr.Rule 403(e). If there was an objection to the trustee’s report, the burden of *743proof was on the objector. Bankr.Rule 403(c).
The Bankruptcy Code made significant structural changes in the exemption process. The biggest difference was elimination of the requirement of the trustee’s report, which had the consequence of causing the debtor and the 'trustee to exchange roles. The identity of the objector in an exemption context shifted from debtor to trustee.
Under the former regime, the debtor’s claim of exemptions had to pass through the filter of the trustee’s report. Claimed exemptions were treated as presumptively valid only to the extent the trustee agreed and did not propose to reject the exemption in the required report; if the trustee did not agree with the debtor, then it was incumbent on the debtor to object to the report and prove entitlement to the exemption.
Under the current regime, the debtor’s claim of exemptions is treated as presumptively valid; if the trustee does not agree, it is incumbent on the trustee to object. 11 U.S.C. § 522(1); Taylor v. Freeland & Kronz, 503 U.S. 638, 642-43, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).
None of the changes wrought by the Bankruptcy Code, however, necessitated any adjustment in the settled burden of proof. Nor was there any mention in the legislative history of § 522 regarding the burden of proof in a fashion that would suggest that any change was contemplated.
Moreover, the general transition rule is that settled judge-made rules established under the Bankruptcy Act were not silently abrogated unless inconsistent with the new Bankruptcy Code. See, e.g., Kelly v. Robinson, 479 U.S. 36, 47, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). This rule of construction was not undermined by Raleigh, which rejected an appeal to pre-Code practice because the Court concluded that the pre-Code cases were contradictory, inconsistent, and anything but settled. Raleigh, 530 U.S. at 22-23, 120 S.Ct. 1951.
The settled judge-made rule under the Bankruptcy Act was that the debtor had the burden of proof on exemption issues. The Advisory Committee Note to the 1973 adoption of Bankruptcy Rule 403(c) explained that the rule was essentially restating judge-made law regarding the burden of proof on exemptions: “the case law has generally placed the burden of proof on the bankrupt whenever there is an issue raised as to his right to an exemption claimed.”16
The settled pre-Code law placing the burden of proof on the debtor (and other objectors) was an allocation that comported with general nonbankruptcy law by requiring the objecting debtor to prove enti*744tlement. Under nonbankruptcy law, the person claiming property as exempt from judgment enforcement generally has the burden to demonstrate that the exemption is warranted.
The Advisory Committee Note to the adoption of Rule 4003(c) in 1983 explained that the rule was derived from § 522(1) and from former Bankruptcy Rule 403.17 Although the new Rule 4003(c) replicated the portion of Rule 403(c) that allocated the burden of proof to objectors, the Advisory Committee Note did not point out that this would operate to invert the burden of proof established under prior law and would do so in a fashion that would no longer be in harmony with nonbankruptcy law. The representation in that note that the “Code changes the thrust of that rule [403(c) ] by making it the burden of the debtor to list and the burden of parties in interest to object” appears to be a reference to the procedural burden of going forward, rather than a reference to the substantive burden of proof.
There are, thus, two ultimate questions regarding Rule 4003(c): first, whether any rule of procedure can permissibly require that exemptions based on nonbankruptcy law be subject to a burden of proof different than nonbankruptcy law; and, second, whether this particular rule validly altered the burden of proof that had been settled in eight decades of practice under the Bankruptcy Act.
The answer to the first question was suggested by the Supreme Court in Raleigh when it rejected the proposition that the allocation of burdens of proof in tax matters should be different in bankruptcy. One could credibly argue that there is no reason to think that the same analysis would lead to a different conclusion with respect to exemptions under nonbankrupt-cy law, particularly since that was the state of the pre-Code law.
The answer to the second question is suggested by the Supreme Court’s approach, in cases such as Kelly, perpetuating settled pre-Code judge-made doctrine that is not inconsistent with the Bankruptcy Code and was not otherwise rejected by Congress.
Nor are these questions more theoretical than real. A majority of states have exercised their statutory power under § 522(b)(1) to “opt out” of the “federal exemptions” in § 522(d). 14 Collier on Bankruptcy (AlaN N. Resnick & Henry J. Sommer, eds.), Exemptions ¶ Intro.[3] (15th ed. rev.2004). And, in every state, a debtor may elect to take exemptions based on state law in lieu of the exemptions created by § 522(d). Thus, the state-law burden of proof is potentially significant.
As noted, the automatic allowance of exemptions to which there is no objection that appears in Bankruptcy Code § 522(1) does not change this analysis.18 That sub*745section, which was plainly modeled on Bankruptcy Rule 403(e), does not specify a burden of proof. Insofar as it implicates burdens, § 522(1) deals with the procedural burden of going forward, rather than the burden of proof. It arguably also operates to create an evidentiary presumption that a mere claim of exemption is valid, which presumption is rebutted by making an objection. If rebutted, then the usually-applicable burden of proof applies.
The present appeal does not require us to resolve the extent of the validity of Rule 4003(c) because we are unanimous that, under all plausible views regarding the burden of proof, the evidence of record does not support the claimed exemption. We agree that, assuming that the trustee had the burden of proof, the trustee carried that burden. It follows that the evidence also would not be sufficient to support an exemption if the debtor were to have had the burden of proof. The assertion in the majority opinion that the burden of proof is on the trustee should be regarded as nonbinding dictum because it is not necessary to the decision.
In another case, however, the allocation of the burden of proof could be crucial. I CONCUR.

. The rule provides:
(c) Burden of Proof. In an hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.
Fed. R. Bankr.P. 4003(c).

. Putting a finer point on the pencil, this analysis also applies to exemptions created by federal nonbankruptcy law. Thus, a debtor claiming $600 per month exempt as a Medal of Honor pension will, if questioned, be obliged to produce a copy of the certificate showing they are on the Army, Navy, Air Force, and Coast Guard Medal of Honor Roll. 38 U.S.C. §§ 1560-62 (2000).

.The House and Senate committee reports on the enactment of the Bankruptcy Code each state:
The burden of proof on the issue of allowance [of claims] is left to the Rules of Bankruptcy Procedure. Under the current Chapter XIII Rules, a creditor is required to prove that his claim is free from usury, Rule 13-301. It is expected that the Rules will make similar provision for both liquidation and individual repayment plan cases.
S. Rep. No. 95-989, at 62 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5848; *742H.R.Rep. No. 95-595, at 352 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6308. No rules regarding burden of proof for allowance of claims were subsequently adopted. Raleigh, 530 U.S. at 22, n. 2, 120 S.Ct. 1951.

. Congress authorized the former Bankruptcy Rules that were promulgated between 1973 and 1976 to fill substantive gaps because the version of 28 U.S.C. § 2075 in effect from 1964 to 1979 directed that all laws in conflict with bankruptcy rules be of no further force or effect after such rules have taken effect, so long as they did not abridge, enlarge, or modify a substantive right. 28 U.S.C. § 2075 (repealed 1979). As noted later in this concurrence, Rule 403(c) merely restated settled decisional law.

. Bankruptcy Rule 403 provided, in relevant parts:
(a) Claim of Exemptions. — A bankrupt shall claim his exemptions in the schedule of his property required to be filed by Rule 108.
(b) Trustee's Report. — -The trustee shall examine the bankrupt's claim for exemptions, set apart such as are lawfully claimed, and allowable, and report to the court the items set apart, the amount or estimated value of each, and the exemptions claimed that are not allowable. The report shall be filed with the court no later than 15 days after the trustee qualifies. If the trustee reports that any exemption claimed is not allowable, he shall forthwith mail or deliver copies of the report to the bankrupt and his attorney.
(c) Objections to Report.- — Any creditor or the bankrupt may file objections to the report within 15 days after its filing, unless further time is granted by the court within such 15-day period. Copies of the objections so filed shall be delivered or mailed to the trustee and, if the objections are by a creditor, to the bankrupt and his attorney. After hearing upon notice the court shall determine the issues presented by the objections. The burden of proof shall be on the objector.
(d) Procedure If No Trustee Qualified. — If no trustee has qualified, the bankruptcy judge shall file the report prescribed by subdivision (b) of this rule within 15 days after the first date set for the first meeting of creditors. If the bankrupt files objections to the report, the court shall appoint a trustee or receiver, who shall represent the estate in the hearing on the objections.
(e) Approval of Report If No Objections.— If no objections are filed within the time provided by this rule, the report shall be deemed approved by the court. On request, the court may, at any time and without reopening the case, enter an order approving the report.
(f) Claim of Exemption by Person Other Than Bankrupt. — If the bankrupt fails to claim the exemptions to which he is entitled, or if he dies before his exemptions have been set apart to him, his spouse, dependent children, or any other persons who are entitled to claim the exemptions allowable to the bankrupt may, within such time as the court may order, file a claim for his exemptions or object to the report.
Bankr.Rule 403 (repealed 1983).

. The Advisory Committee explained, in relevant part:
Subdivision (c) of the rule is an elaboration of the last clause of General Order 17(2).... The allocation of the burden of proof made by the last sentence of subdivision (c) rests on the assumption that the trustee has performed the duties imposed on him by subdivision (b) [trustee's report of exemptions] with due regard to the rights of the bankrupt as well as the creditors whom he represents. Although the assumption might be questioned by the bankrupt, the case law has generally placed the burden of proof on the bankrupt whenever there is an issue raised as to his right to an exemption claimed. In re Dederick, 91 F.2d 646, 650 (10th Cir.1937); In re Campbell, 124 F. 417, 421-22 (W.D.Va.1903); In re Stinemetz, 38 Am.B.R.(N.S.) 544, 547 (Ref., D.Kans.1938); 1 Collier ¶ 6.23 (1960)....
Bankr.Rule 403(c), Advisory Comm. Note (repealed 1983).
General Order 17(2) provided for objections to the trustee’s report of exemptions but was silent about the burden of proof. Gen. Order in Bankr.17(2), 305 U.S. 688 (1939).

. Note that § 522(1) was, itself, derived in substantial part from Rule 403. The explanation was:
This rule is derived from § 522(1) of the Code and, in part, former Bankruptcy Rule 403. The Code changes the thrust of that rule by making it the burden of the debtor to list his exemptions and the burden of parties in interest to raise objections in the absence of which “the property claimed as exempt on such list is exempt;” § 522(1).
Fed. R. Bankr.P. 4003(c), Advisory Comm. Note (1983).

. The statute provides:
(1) The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. If the debtor does not file such a list, a dependent of the debtor may file such a list, or may claim property as exempt from property of the estate on behalf of the debtor. Unless a party in interest objects, the property claims as exempt on such list is exempt.
11 U.S.C. § 522(1).