Court Opinion

ID: 4273081
Source: CourtListenerOpinion
Date Created: 2018-05-07 17:00:29.07183+00
Date Added: 2024-06-11T14:33:24.960100
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE ADAM LEE,                            No. 15-17451
                                Debtor,
                                              D.C. No.
                                           1:15-cv-00278-
ADAM LEE,                                    SOM-RLP
                  Plaintiff-Appellant,

                  v.                         OPINION

DANE S. FIELD, Chapter 7 Trustee,
               Defendant-Appellee.

     Appeal from the United States District Court
              for the District of Hawaii
     Susan O. Mollway, District Judge, Presiding

       Argued and Submitted February 15, 2018
                 Honolulu, Hawaii

                       Filed May 7, 2018

 Before: Diarmuid F. O’Scannlain, Richard R. Clifton,
         and Sandra S. Ikuta, Circuit Judges.

               Opinion by Judge Ikuta
2                              IN RE LEE

                            SUMMARY*

                             Bankruptcy

    The panel affirmed the district court’s affirmance of the
bankruptcy court’s turnover order compelling a debtor to
relinquish possession of two properties.

    Before filing his petition in bankruptcy, the debtor
transferred his interests in the two properties into a tenancy-
by-the-entirety estate.       He subsequently claimed an
exemption for those interests under 11 U.S.C. § 522(b)(3).
The bankruptcy trustee successfully brought an adversary
proceeding to set aside the debtor’s transfers of the property
interests.

    The debtor argued that the trustee had failed to make a
timely objection to his claimed exemptions, and therefore the
exemptions were valid notwithstanding the avoidance of the
transfer. The panel held that the trustee’s adversary
complaint contesting the basis for the exemptions qualified as
an objection to those exemptions under Federal Rule of
Bankruptcy Procedure 4003. The bankruptcy court therefore
properly granted the turnover order, thus denying the claimed
exemptions.

    *
      This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                          IN RE LEE                          3

                         COUNSEL

Ted N. Pettit (argued), Case Lombardi & Pettit, Honolulu,
Hawaii, for Plaintiff-Appellant.

Enver W. Painter Jr. (argued), Honolulu, Hawaii; Simon
Klevansky and Nicole D. Stucki, Klevansky Piper LLP,
Honolulu, Hawaii; for Defendant-Appellee.

                         OPINION

IKUTA, Circuit Judge:

    Before filing a petition in bankruptcy, Adam Lee
transferred his interests in two properties into a tenancy-by-
the-entirety estate, and subsequently claimed an exemption
for those interests under 11 U.S.C. § 522(b)(3). The trustee
successfully brought an adversary proceeding to set aside
Lee’s transfers of those interests. When the trustee sought a
turnover order to compel Lee to relinquish possession of the
properties, Lee resisted. He argued that the trustee had failed
to make a timely objection to the exemptions under Rule
4003 of the Federal Rules of Bankruptcy Procedure, and
therefore Lee’s exemptions were valid notwithstanding the
court’s avoidance of the transfer. The bankruptcy court
disagreed. It granted the turnover order, thus denying the
claimed exemptions. We hold that the trustee’s adversary
complaint contesting the basis for Lee’s exemptions qualified
as an objection to those exemptions under Rule 4003. We
therefore affirm.
4                          IN RE LEE

                                I

    We begin by setting out the applicable bankruptcy law.
The Bankruptcy Code allows debtors to exempt certain
property from the bankruptcy estate, in order to avoid
distribution to the estate’s creditors. See Taylor v. Freeland
& Kronz, 503 U.S. 638, 642 (1992). A debtor may claim an
exemption for “any interest in property in which the debtor
had, immediately before the commencement of the case, an
interest as a tenant by the entirety or joint tenant to the extent
that such interest . . . is exempt from process under applicable
nonbankruptcy law.” 11 U.S.C. § 522(b)(3)(B). As relevant
here, Hawaii law allows for the creation of tenancy-by-the-
entirety interests. Haw. Rev. Stat. § 509-2. “A tenancy by
the entirety is a unique form of ownership in which both
spouses are jointly seized of property such that neither spouse
can convey an interest alone . . . .” Traders Travel Int’l, Inc.
v. Howser, 753 P.2d 244, 246 (Haw. 1988). Hawaii law
exempts such interests from creditors of an individual spouse.
 Sawada v. Endo, 561 P.2d 1291, 1296–97 (Haw. 1977); see
also In re Cataldo, 224 B.R. 426, 429 (B.A.P. 9th Cir. 1998).

    The Bankruptcy Code requires the debtor to file a list of
claimed exemptions, and provides that “[u]nless a party in
interest objects, the property claimed as exempt on such list
is exempt.” 11 U.S.C. § 522(l). The Supreme Court has
made clear that if the time period set out in the applicable
bankruptcy rules expires without a qualifying objection, the
exemption becomes final regardless “whether or not [the
debtor] had a colorable statutory basis for claiming it.”
Taylor, 503 U.S. at 644; see also Law v. Siegel, 134 S. Ct.
1188, 1196 (2014) (“[A] trustee’s failure to make a timely
objection prevents him from challenging an exemption.”). As
a general rule, “exempt property immediately revests in the
                                IN RE LEE                                5

debtor” upon expiration of the objection period.                      In re
Mwangi, 764 F.3d 1168, 1175 (9th Cir. 2014).

    Rule 4003 of the Federal Rules of Bankruptcy Procedure
requires that a party in interest, including a trustee, “file an
objection” to a claimed exemption “within 30 days after the
meeting of creditors held under [11 U.S.C.] § 341(a) is
concluded.” Fed. R. Bankr. P. 4003(b)(1).1 “However, Rule

   1
       Bankruptcy Rule 4003 states, in pertinent part:

          (b) Objecting to a Claim of Exemptions.

          (1) Except as provided in paragraphs (2) and (3), a
          party in interest may file an objection to the list of
          property claimed as exempt within 30 days after the
          meeting of creditors held under § 341(a) is concluded
          or within 30 days after any amendment to the list or
          supplemental schedules is filed, whichever is later. The
          court may, for cause, extend the time for filing
          objections if, before the time to object expires, a party
          in interest files a request for an extension.

          (2) The trustee may file an objection to a claim of
          exemption at any time prior to one year after the closing
          of the case if the debtor fraudulently asserted the claim
          of exemption. The trustee shall deliver or mail the
          objection to the debtor and the debtor’s attorney, and to
          any person filing the list of exempt property and that
          person’s attorney.

          ...

          (4) A copy of any objection shall be delivered or mailed
          to the trustee, the debtor and the debtor’s attorney, and
          the person filing the list and that person’s attorney.
6                              IN RE LEE

4003(b), unlike some other bankruptcy rules, proscribes no
particular form for objections to exemption claims.” In re
Spenler, 212 B.R. 625, 629 (B.A.P. 9th Cir. 1997). In
addition, Rule 4003 imposes some procedural requirements.
For instance, “[a] copy of any objection” must “be delivered
or mailed to the trustee, the debtor and the debtor’s attorney,
and the person filing the list [of exemptions] and that
person’s attorney.” Fed. R. Bankr. P. 4003(b)(4). Moreover,
Rule 4003(c) provides that in any hearing under the rule, “the
objecting party has the burden of proving that the exemptions
are not properly claimed.” Fed. R. Bankr. P. 4003(c). “After
hearing on notice, the court shall determine the issues
presented by the objections.” Id.

                                    II

    We now turn to the facts of this case. Lee, a real estate
developer operating on Oahu, experienced various financial
difficulties beginning in 2008. In September 2010, Lee met
with a bankruptcy attorney, Chuck Choi, and discussed filing
for a possible bankruptcy. A few days later, Lee conveyed
his 90 percent interest in 4014 Palua Place #1 (Palua 1) and
his 75 percent interest in 4014 Palua Place #2 (Palua 2) to
himself and his spouse, Yuka Yahagi Lee, as tenants by the
entirety.2

         (c) Burden of Proof. In any 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. . . .
    2
      Lee and his spouse own the remaining 10 percent of Palua 1 as
tenants by the entirety as a result of a prior transfer from Lee’s father,
                               IN RE LEE                                 7

    Lee filed a Chapter 7 bankruptcy petition on August 12,
2013. Shortly thereafter, Lee filed his schedules, listing debts
of approximately $4 million ($2.9 million to unsecured
creditors and $1.1 million to secured creditors). In his
Schedule A, listing his real property interests, Lee included
his tenancy-by-the-entirety interests in Palua 1 and Palua 2.
In his Schedule C, Lee elected to claim state-law exemptions
under 11 U.S.C. § 522(b)(3) and claimed exemptions under
Hawaii state law for his tenancy-by-the-entirety interests in
both Palua 1 ($669,000) and Palua 2 ($262,848).

    Pursuant to 11 U.S.C. § 341, the trustee held a meeting of
creditors that concluded on December 19, 2013. During the
meeting, the trustee confirmed that Lee’s spouse did not pay
anything for the interest that she received in the transfer to the
tenancy-by-the-entirety estate, and the trustee then suggested
to Lee’s counsel that the trustee was “probably looking at a
fraudulent transfer case on that.” At the conclusion of the
meeting, Lee testified that he transferred his interests in Palua
1 and Palua 2 to the tenancy-by-the-entirety estate for
“exemption planning,” after meeting with his attorney to
discuss a possible bankruptcy.

    On January 14, 2014, the trustee filed an adversary
proceeding in bankruptcy court against Lee and his spouse.
The complaint asked the court to set aside Lee’s transfers of
his interests in Palua 1 and Palua 2 to his tenancy-by-the-
entirety estate as a fraudulent transfer, but did not cite
11 U.S.C. § 522(b)(3) or ask the court to deny Lee’s claimed
state-law exemptions in his Schedule C.

which is not at issue in this proceeding. A third-party creditor owns the
remaining 25 percent of Palua 2, which is also not at issue in this appeal.
8                                IN RE LEE

    After a three-day trial in February 2015, the bankruptcy
court found that the trustee had “proved, by clear and
convincing evidence, that Mr. Lee transferred his interest in
the Palua Place properties to himself and his wife with actual
intent to hinder, delay, or defraud his existing and future
creditors.” The bankruptcy court cited Lee’s own testimony
that he had made the transfers in order to protect his interest
in the properties, as well as the “powerful circumstantial
evidence” of Lee’s financial difficulties at the time of the
transfers. Accordingly, the bankruptcy court avoided the
transfers under 11 U.S.C. § 544(b) and Hawaii law.3 On
March 10, 2015, the bankruptcy court issued a final judgment
avoiding the transfers, but did not expressly state that it was
denying the exemptions.

    Lee appealed this ruling to district court and moved for a
stay pending appeal. The district court denied the stay on
May 6, 2015, and affirmed the bankruptcy court’s judgment
on September 21, 2015. We dismissed Lee’s appeal of the
district court’s order for failure to prosecute.

    While Lee’s appeal of the bankruptcy court’s judgment in
the fraudulent transfer proceeding was pending in district
court, the trustee filed a motion in bankruptcy court on May
18, 2015, seeking the turnover of various records and assets
of Lee, including Palua 1 and Palua 2, so that the trustee
could convert those assets into money for the estate. The

    3
       11 U.S.C. § 544(b)(1) allows a trustee to “avoid any transfer . . . that
is voidable under applicable law by a creditor holding an unsecured claim
that is allowable.” Hawaii law provides that a transfer made “[w]ith actual
intent to hinder, delay, or defraud any creditor of the debtor” is fraudulent,
Haw. Rev. Stat. § 651C-4(a)(1), and therefore avoidable. A creditor may
obtain “[a]voidance of the transfer or obligation to the extent necessary to
satisfy the creditor’s claim.” Haw. Rev. Stat. § 651C-7(a)(1).
                               IN RE LEE                                  9

trustee argued that an order requiring Lee to turn over the
Palua properties was necessary because Lee had been
interfering with efforts to liquidate the properties for the
estate.

    In his opposition to the trustee’s motion for a turnover of
property, Lee argued that he was not required to turn over
Palua 1 and Palua 2 because he had claimed exemptions in
both properties and the trustee had failed to file a timely
objection within 30 days of the conclusion of the creditor’s
meeting, as required by Rule 4003(b)(1). Lee further
contended that absent the property interests listed on his
Schedule C (as well as other costs contested by the trustee),
there was insufficient value remaining in the Palua 1 and 2
properties to merit a sale and that the bankruptcy estate
should instead abandon its interest in the properties.

    The bankruptcy court granted the trustee’s turnover
motion, concluding that the complaint filed in the adversary
proceeding satisfied the requirements of Rule 4003. The
district court affirmed the grant of the turnover order, and Lee
timely appealed.4

                                    III

    We have jurisdiction under 28 U.S.C. § 158(d)(1) because
the bankruptcy court’s turnover order constituted a formal

    4
       While Lee’s appeal of the turnover order was pending in district
court, the bankruptcy court granted the trustee’s motion to authorize a sale
of Palua 1. Lee filed a separate appeal. In a concurrently filed
memorandum disposition, we affirm the district court’s dismissal of Lee’s
appeal of the sale order as moot. See Lee v. Field, No. 16-15108 (9th Cir.
May 7, 2018).
10                        IN RE LEE

denial of Lee’s claimed exemptions. See In Re Gilman, –
F.3d –, 2018 WL 1769088, at *3–4 (9th Cir. Apr. 13, 2018).
We look through the district court’s decision and “review the
bankruptcy court decision directly.” Gladstone v. U.S.
Bancorp, 811 F.3d 1133, 1138 (9th Cir. 2016) (quoting In re
DAK Indus., Inc., 66 F.3d 1091, 1094 (9th Cir. 1995)). We
review the bankruptcy court’s factual findings for clear error,
and its conclusions of law de novo. Id.

    Lee concedes that the trustee filed his adversary
complaint in the fraudulent transfer proceeding within
30 days after the conclusion of the creditors’ meeting, but
argues that the complaint did not constitute an objection to
his claimed exemptions for purposes of Rule 4003, because
it did not expressly state that the trustee objected to the
exemptions. Therefore, we must determine whether the
trustee’s fraudulent transfer complaint met the requirements
of Rule 4003.

    Rule 4003(b) sets forth the procedure for objecting to a
claim of exemptions. As noted above, “Rule 4003(b), unlike
some other bankruptcy rules, proscribes no particular form
for objections to exemption claims.” In re Spenler, 212 B.R.
at 629. Its purpose, however, is to “provide the debtor with
timely notice that the trustee or other interested party objects
to a debtor’s claimed exemption.” Id. at 630 (citing In re
Young, 806 F.2d 1303, 1305 (5th Cir. 1987), overruled on
other grounds by In re Orso, 283 F.3d 686, 694 (5th Cir.
2002) (en banc)).

    The adversary complaint here gave Lee more than
adequate notice that the trustee objected to Lee’s claimed
exemptions. In this context, an adversary action and an
objection under Rule 4003 are inextricably intertwined. Lee
                          IN RE LEE                          11

could claim a state-law exemption in his interests in Palua 1
and Palua 2 only because he had previously conveyed them
to himself and his spouse as tenants by the entirety. Because
property held in a tenancy by the entirety was exempt from
Lee’s creditors under Hawaii law, see Sawada, 561 P.2d at
1297, the trustee had no legal basis for objecting to the
claimed exemptions unless he could avoid the transfer of that
property interest. In order to set aside Lee’s transfers and
recover some portion of the challenged interests in Palua 1
and Palua 2 for the benefit of the bankruptcy estate, the
trustee had to bring an adversary proceeding. See Havoco of
Am., Ltd. v. Hill, 197 F.3d 1135, 1140 (11th Cir. 1999).
Accordingly, by bringing the adversary action, the trustee
attacked the basis for Lee’s exemptions in order to recover
the property for the estate; the proceeding would have been
pointless if Lee could retain his exemptions and therefore
retain his fraudulently transferred property interests. See In
re Mwangi, 764 F.3d at 1175. Because it was apparent that
the adversary action’s sole purpose was to prevent Lee from
retaining the exemptions, Lee had adequate notice that the
trustee objected to them. Accordingly, while including an
express objection to the claimed exemptions in his complaint
or other filing would have been a better practice, the trustee’s
action in filing the adversary complaint sufficiently
constituted an objection to the exemption that satisfies Rule
4003.

    Further, the adversary complaint and proceeding met Rule
4003’s procedural requirements. It is undisputed that the
complaint was timely filed. See Fed. R. Bankr. P. 4003(b)(1).
The time period for Rule 4003 objections began to run when
the trustee concluded the meeting of creditors on December
19, 2013, and it expired on January 18, 2014. Prior to that
date, the trustee filed an adversary complaint on January 14,
12                             IN RE LEE

2014, initiating the fraudulent transfer proceeding. Nor does
Lee dispute that the complaint and summons were served on
him and his attorney, as required by Rule 4003(b)(4). See
Fed. R. Bankr. P. 4003(b)(4). Further, as required by Rule
4003(c), the fraudulent transfer proceeding provided a
hearing after notice. See Fed. R. Bankr. P. 4003(c). Finally,
the trustee was required to prove the fraudulent transfer by
clear and convincing evidence. See Kekona v. Abastillas,
150 P.3d 823, 825, 830 (Haw. 2006).5 Therefore, the
proceeding complied with the requirement of Rule 4003(c)
that the trustee bear the burden of proof in avoiding the
transfers (i.e. that the “the exemptions are not properly
claimed”). Fed. R. Bankr. P. 4003(c).

    In determining that the fraudulent transfer complaint and
proceeding satisfied Rule 4003, we join the well-reasoned
conclusion of the Sixth Circuit. See In re Grosslight,
757 F.2d 773, 777 (6th Cir. 1985). In Grosslight, a creditor
filed an adversary proceeding within the time period for Rule
4003 objections, asking that the automatic stay be lifted as to
property the debtor claimed was exempt because of tenancy-
by-the-entirety ownership. Id. The Sixth Circuit held that it
could “treat this adversary proceeding as an objection to the
claim of exemptions,” noting that “its filing did meet
procedural concerns.” Id. We also agree with the many other

     5
       11 U.S.C. § 544 provides that “the trustee may avoid any transfer of
an interest of the debtor in property or any obligation incurred by the
debtor that is voidable under applicable law by a creditor holding an
unsecured claim that is allowable under section 502 of this title or that is
not allowable only under section 502(e) of this title.” 11 U.S.C.
§ 544(b)(1) (emphasis added). Under the applicable law, Hawaii Revised
Statutes chapter 651C, a plaintiff must prove a fraudulent transfer by clear
and convincing evidence. See Kekona, 150 P.3d at 830. The bankruptcy
court found that the trustee met this burden.
                         IN RE LEE                         13

bankruptcy courts and bankruptcy appellate panels that have
recognized that “actions taken by a creditor or trustee” may
constitute “objections under 4003(b), even though no
pleading styled ‘objection to exemption’ was filed.” In re
Spenler, 212 B.R. at 630 (collecting cases); see also In re
Wharton, 563 B.R. 289, 296 (B.A.P. 9th Cir. 2017) (holding
that a trustee or other interested party has satisfied Rule
4003(b) by “set[ting] forth the basis for his objection” in a
brief supporting a turnover motion); In re Breen, 123 B.R.
357, 360 (B.A.P. 9th Cir. 1991) (holding that a motion
seeking relief from the automatic stay qualified as an
objection under Rule 4003(b) where it “in essence objected
to the debtors’ claim that [a vehicle could] be exempted as a
tool of the trade”).

    Lee’s arguments to the contrary are generally based on his
contention that courts must read Rule 4003 as requiring an
express statement of objection. But as we have explained,
neither the Bankruptcy Code nor Rule 4003 require Lee’s
formalistic approach, and within the confines of the Code and
the Rules, a bankruptcy court “retains its broad equitable
power.” In re Sasson, 424 F.3d 864, 869 (9th Cir. 2005)
(quoting Johnson v. Home State Bank, 501 U.S. 78, 88 (1991)
(per curiam)).

    Lee invokes our rule that “[e]xemption statutes in
bankruptcy law should be construed liberally in favor of the
debtor,” meaning that “[w]here the text of a statutory
exemption is ambiguous as to whether it applies, the debtor
is entitled to the exemption.” In re Tober, 688 F.3d 1160,
1163 (9th Cir. 2012) (citation omitted); see also In re Arrol,
170 F.3d 934, 937 (9th Cir. 1999) (interpreting ambiguous
California homestead exemption to apply to residence outside
of California). Lee points to no instance, however, where we
14                         IN RE LEE

have applied this rule of statutory construction to interpret the
procedural rules governing objections to exemptions. We
have previously declined to construe “the trustee’s ability to
inhibit exemptions” under 11 U.S.C. § 522 strictly, see In re
Glass, 60 F.3d 565, 569 (9th Cir. 1995), and likewise decline
to adopt a hypertechnical interpretation of Rule 4003 where
its purpose to “provide the debtor with timely notice” has
been clearly satisfied, In re Spenler, 212 B.R. at 630. As the
bankruptcy court reasonably concluded, the factual
allegations and the legal theories argued in the trustee’s
adversary action were no different than they would have been
if the words “objection to exemption” had been included.
Lee points to no additional fact or argument that he would
have raised had the trustee expressly stated he was objecting
to the exemptions under Rule 4003(b).

     Lee also argues that the approach taken by Grosslight and
analogous bankruptcy cases was superseded by Taylor,
503 U.S. at 641, 644, and Law, 134 S. Ct. at 1196. We
disagree. In Taylor, the debtor claimed as exempt the
potential proceeds of a pending lawsuit and the trustee
“decided not to object to the claimed exemption,” taking no
action at all within the 30-day period. 503 U.S. at 641.
When the proceeds of the lawsuit later exceeded the trustee’s
initial assessment, the trustee filed a complaint seeking
turnover of the proceeds. Id. Taylor held that the trustee
could not “contest the exemption [outside Rule 4003’s 30-day
period] whether or not [the debtor] had a colorable statutory
basis for claiming it.” Id. at 643–44.

   The Supreme Court applied the same principle in Law,
where the trustee failed to take any action timely opposing the
debtor’s homestead exemption claim. 134 S. Ct. at 1196.
The trustee later avoided the debtor’s fraudulently claimed
                          IN RE LEE                         15

lien in the property, and the bankruptcy court surcharged the
debtor’s homestead exemption to satisfy the trustee’s
attorneys’ fees incurred in the fraudulent transfer litigation.
Id. at 1193. The Supreme Court reversed, holding that
because the debtor’s exemption, though baseless, had become
final absent an objection, the bankruptcy court had no power
to surcharge the exemption. Id. at 1196–97. The trustees in
both Taylor and Law took no action that could qualify as a
Rule 4003(b) objection, and therefore neither case offers
guidance on whether other filed proceedings may qualify as
a timely objection. They therefore do not overrule Grosslight
or undermine its persuasive value.

    Next, Lee urges us to consider In re Canino, but it is not
on point. 185 B.R. 584 (B.A.P. 9th Cir. 1995). The trustee
there did not file any written objection to exemptions claimed
for a home and a vehicle that exceeded the statutory amounts.
Id. at 587. Instead, the trustee took “some actions
inconsistent with Debtor’s listed exemptions” by selling the
vehicle and taking steps to sell the home. Id. at 591. The
court concluded that these actions were insufficient to
constitute an objection, noting that “they were simply [the]
Trustee’s duties” if the exemptions were invalid, and that they
had been “confusing” to the debtor. Id. at 592. Moreover,
the court reasoned that “to condone de facto objections under
[Rule] 4003, would mean that trustees and creditors
everywhere will be improperly seizing assets,” citing due
process concerns. Id.

   Here, the trustee did not simply disregard Lee’s claimed
exemptions and seek to take possession of Palua 1 and Palua
2. Instead, the trustee brought an adversary proceeding,
expressly seeking to invalidate the basis for the exemptions
and formally recover the interests for the bankruptcy estate.
16                              IN RE LEE

Unlike the due process concerns raised by the “de facto”
objection in In re Canino, 185 B.R. at 592, Lee received a full
trial on the validity of the transfers in which the trustee
proved fraudulent intent by clear and convincing evidence.

    Finally, Rule 4003 does not require a ruling on an
objection at a specific time. Here, the trustee timely objected
pursuant to Rule 4003(b) and the bankruptcy court
adjudicated “the issues presented by the objections” in a
manner that satisfied Rule 4003(c). Fed. R. Bankr. P.
4003(c). When Lee raised the exemptions in a later
proceeding to oppose the turnover motion, the bankruptcy
court’s explicit denial of the exemptions was consistent with
Rule 4003. By issuing the turnover order, the bankruptcy
court effectively ruled on the exemptions, because it
expressed the court’s understanding that the disputed interests
in Palua 1 and Palua 2 were the property of the bankruptcy
estate.6

     6
       We reject Lee’s other arguments. Lee’s remaining 10 percent
interest in Palua 1 is irrelevant, because the trustee does not dispute Lee’s
exemption of that interest. Lee’s contention that the exemptions were
proper when he filed his Schedule C is meritless, in light of the
bankruptcy court’s determination that the transfers were fraudulent at the
time that they were made. See Sawada, 561 P.2d at 1297. Finally,
contrary to Lee’s assertions, the bankruptcy court could disallow Lee’s
exemptions based on its avoidance of the fraudulent transfers, regardless
whether the trustee requested that relief in the adversary proceeding. See
Fed. R. Civ. P. 54(c) (providing that, except for default judgments, final
judgments “should grant the relief to which each party is entitled, even if
the party has not demanded that relief in its pleadings”); Fed. R. Bankr. P.
7054(a) (applying Rule 54(c) to adversary proceedings in bankruptcy).
                               IN RE LEE                               17

   We therefore conclude that Rule 4003 was satisfied and
the bankruptcy court correctly determined that Lee’s
exemptions were invalid.7

    AFFIRMED.

    7
      We do not reach the trustee’s alternative argument that he could file
an objection under Rule 4003(b)(2), which allows a trustee to object to
fraudulently asserted exemptions within a year of the closing of the
bankruptcy case, because the record does not reflect that the trustee filed
any such objection.