Mullen v. Peters

Filing 9

ORDER reversing the bankruptcy courts February 5, 2024 Order (Doc. 4 -18) in its entirety. This action is remanded to the bankruptcy court for further proceedings consistent with this decision. IT IS FURTHER ORDERED directing the Clerk of the Court to enter judgment in favor of Trustee Brian J. Mullen and to close this case. Signed by Judge Michael T Liburdi on 11/22/2024. (REK)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Brian J. Mullen,

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Appellant,

No. CV-24-00305-PHX-MTL
ORDER

v.
George William Peters, Jr.,

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Appellee.

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Before the Court is Appellant Brian J. Mullen’s (“the Trustee”) appeal of the

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bankruptcy court’s February 5, 2024 Order overruling the Trustee’s objections. (Doc. 1 at

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5.) The appeal is fully briefed, and the parties do not dispute the facts underlying this case.

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(Docs. 3, 6, 7.) For the following reasons, the order is reversed.

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I.

BACKGROUND

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On February 7, 2023, George William Peters, Jr. (“Debtor”), filed for Chapter 7

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bankruptcy, claiming exemptions under Arizona law. (Doc. 4-1 at 17-18.) The Trustee

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objected, arguing Debtor was not domiciled in Arizona for the full 730 days prior to

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bankruptcy as required by 11 U.S.C. § 522(b)(1)(A). (Doc. 4-2 at 2-3.) On August 31,

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2023, the bankruptcy court held a hearing on the trustee’s objection and issued final orders,

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finding Debtor ineligible for Arizona exemptions. (Doc. 4-8 at 2.)

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The next day, on September 1, 2023, Debtor filed his amended Schedule C to claim

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exemptions under Ohio law. (Doc. 4-6 at 7-8.) The Trustee objected, arguing res judicata

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barred Debtor from claiming the same assets under a different legal theory. (Doc. 4-11 at

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2-6.) The Trustee also argued Debtor was only eligible for one exemption under Ohio law.
(Id.) After a hearing on December 5, 2023, the bankruptcy court issued a final order that
sustained the Trustee’s second objection: Debtor was ineligible under Ohio law to claim
all exemptions other than his life insurance. (Doc. 4-12 at 3.) Further, the bankruptcy court
found res judicata did not bar Debtor from claiming the same assets under Ohio law. (Id.)

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Then, on December 13, 2023, Debtor once again amended his Schedule C, this time
to claim exemptions under federal law. (Doc. 4-13 at 2-3.) In response, the Trustee objected
on various grounds, contending that res judicata barred Debtor from claiming the same
assets under federal exemption law and that Debtor was ineligible for exemptions under
both state and federal law. (Doc. 4-14 at 2-3, 4-7.) After full briefing and another hearing
on February 5, 2024, the bankruptcy court overruled the Trustee’s objections—finding that
res judicata did not apply and that Debtor qualified for both state and federal exemptions.
(Doc. 4-18 at 2.) The Trustee timely appealed. (Doc. 1.)

II.

LEGAL STANDARD
The Court has jurisdiction over this case pursuant to 28 U.S.C. § 158(a), which

states “[t]he district courts of the United States shall have jurisdiction to hear appeals from
final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and
proceedings referred to the bankruptcy judges under section 157 of this title.” 28 U.S.C.
§ 158(a)(1).
A district court reviews the bankruptcy court’s conclusions of law de novo and its
findings of fact for clear error. See In re JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010).
The Court must accept the bankruptcy court’s findings of fact unless the Court “is left with
the definite and firm conviction that a mistake has been committed by the bankruptcy
judge.” In re Greene, 583 F.3d 614, 618 (9th Cir. 2009). The Court reviews the evidence
in the light most favorable to the prevailing party. Lozier v. Auto Owners Ins. Co.,
951 F.2d 251, 253 (9th Cir. 1991); In re Jake’s Granite Supplies, L.L.C, 442 B.R. 694, 699
(D. Ariz. 2010).

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III.

DISCUSSION
The Trustee raises two issues on appeal: (1) whether the bankruptcy court erred in

permitting Debtor’s third attempt to exempt the same assets after Debtor’s first two
attempts were denied by final orders and (2) whether the bankruptcy court erred in
permitting Debtor to claim federal exemptions when Debtor already had an allowed state
exemption. (Doc. 3 at 4.) The Court addresses these issues in turn.
A.

Law of the Case Doctrine

Debtor argues that the law of the case doctrine precludes this Court from
reconsidering an issue that has already been decided by the bankruptcy court. (Doc. 6 at 6.)
Under the law of the case doctrine, “a court is generally precluded from
reconsidering an issue that has already been decided by the same court, or a higher court

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in the identical case.” United States v. Alexander, 106 F.3d 874, 876 (9th Cir. 1997). On

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appeal, “law of the case is a jurisprudential doctrine under which an appellate court does

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not reconsider matters resolved on a prior appeal.” Snow-Erlin v. United States, 470 F.3d
804, 807 (9th Cir. 2006).
This Court has jurisdiction for this case because it is as an appeal from the
bankruptcy court. See 28 U.S.C. § 158(a). The record shows that this is the first appeal of
the lower court’s decision. (See Doc. 4.) Therefore, the law of the case doctrine does not
apply here.
B.

Res Judicata

The Trustee argues that res judicata bars Debtor from claiming the same assets
exempt under a different legal theory after litigating and losing his first claim. (Id. at 6-9.)
The Court finds the bankruptcy court erred when it found Debtor eligible to re-assert the
same assets under a different exemption law.
Courts review a bankruptcy court’s “determination of whether issue or claim
preclusion applies de novo as mixed questions of law and fact in which legal questions
predominate.” In re Cogliano, 355 B.R. 792, 800 (B.A.P. 9th Cir. 2006) (cleaned up); see
also In re Paine, 283 B.R. 33, 39 (B.A.P. 9th Cir. 2002) (“Claim and issue preclusion apply
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in bankruptcy.”).

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“Res judicata, also known as claim preclusion, bars litigation in a subsequent action

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of any claims that were raised or could have been raised in the prior action.” GP Vincent

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II v. Estate of Beard, 68 F.4th 508, 514 (9th Cir. 2023) (quoting Owens v. Kaiser Found.
Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 2001)). Res judicata applies if the earlier
litigation involved the same claim as the later lawsuit, reached a final judgment on the
merits, and involved the same parties. Id. (citation omitted). In the unique context of

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bankruptcy, “the principle of res judicata should be invoked only after careful inquiry

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because it blocks unexplored paths that may lead to truth.” In re Enewally, 368 F.3d 1165,

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1172-73 (9th Cir. 2004) (quoting Latman v. Burdette, 366 F.3d 774, 784 (9th Cir. 2004)).
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Identity of Claims

The first element of res judicata requires courts to examine the identity of the claims.
When evaluating this element, courts use a four-factor analysis:

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(1) whether the rights or interests established by the prior
judgment would be destroyed or impaired by prosecution of
the second action, (2) whether substantially the same evidence
is presented in the two actions, (3) whether the two suits
involve infringement of the same right, and (4) whether the two
suits arise out of the same transactional nucleus of facts.
GP Vincent II, 68 F.4th at 515 (citing Mpoyo v. Litton Electro-Optical Sys., 430 F.3d 985,
987 (9th Cir. 2005)). The fourth factor is generally deemed the most important, with the

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Ninth Circuit often holding the “common nucleus criterion to be outcome determinative

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under the first res judicata element.” Mpoyo, 430 F.3d at 988.

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The Trustee argues res judicata bars Debtor from “fil[ing] three different exemption

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claims in the same assets.” (Doc. 3 at 6.) In support, the Trustee cites In re Bryan, 466 B.R.

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460, 465 (B.A.P. 8th Cir. 2012), In re Magallanes, 96 B.R. 253, 256 (B.A.P. 9th Cir. 1988),
and In re Cogliano, 355 B.R. at 803, to argue Debtor cannot exempt the same assets under
different exemption laws. (Id. at 7.) The bankruptcy court previously stated these cases
were unpersuasive because they involved instances:
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[W]here the debtor tried to recast the exemptions under the
same exemption scheme . . . . None of them involved a situation
where one state or the federal law was chosen as the exemption
rules against, and then the party attempted to assert the same
assets as exempt only under a different scheme.

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(Doc. 4-19 at 14-15.) In light of this, the bankruptcy court ruled that res judicata did not

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bar Debtor from amending his exemptions under Ohio law. (Id. at 18.) Similarly, the

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bankruptcy court later found res judicata did not bar Debtor from amending his exemptions

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under federal law because it “[was] an entirely new issue.” (Doc. 4-20 at 10.)

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Here, Debtor’s claimed exemptions under Arizona, Ohio, and federal law arise out

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of the same nucleus of operative facts. Each time Debtor amended his exemptions, he

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copied the same facts and merely substituted which exemption law applied. For example,

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Debtor listed the same assets (e.g., home, car, household goods, bank accounts, etc.) at the

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same value in each Schedule C, with the exception of his car value which likely reflects its

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depreciation over time. (Docs. 4-1 at 17-18, 4-6 at 7-8, 4-13 at 2-3.) As a result, the

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bankruptcy court had to conduct a similar analysis of Debtor’s assets, financial history,

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liabilities, residency, etc.—regardless of which legal scheme Debtor chose to assert. None

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of Debtor’s amendments changed his liabilities or the underlying facts of his financial

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status. Therefore, the Court finds that the common nucleus criterion is satisfied because

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each amended exemption related to the same set of facts.

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Other factors also support a finding that the “identity of claims” element is satisfied.

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For instance, Debtor would need to present “substantially the same evidence” for his

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homestead exemptions. Mpoyo, 430 F.3d at 987. Because Arizona, Ohio, and federal

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exemptions laws require the homestead to be used as a dwelling or residence, Debtor would

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need to present the same evidence to show whether the homestead is used in the appropriate

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manner. See A.R.S. § 33-1101(A) (explaining that homestead exemption should not exceed

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$250,000 in value in real property where the person resides); Ohio Rev. Code Ann.

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§ 2329.66(A)(1) (stating that person domiciled in Ohio may claim up to $125,000 in real

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property the person uses as a residence); 11 U.S.C. § 522(d)(1) (permitting debtor to

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exempt up to $27,900 in real property the debtor uses as a residence).1

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For the above reasons, the first element of res judicata is satisfied.

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2.

Final Judgment on the Merits

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The second element of res judicata hinges on whether the earlier lawsuit “reached a

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final judgment on the merits.” Myopo, 430 F.3d at 987 (citation omitted). In the Ninth

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Circuit, “an order denying an exemption constitutes a final appealable order.” In re Gilman,

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887 F.3d 956, 961 (9th Cir. 2018); Warfield v. Nance, 658 B.R. 152, 165 (D. Ariz. 2024).

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The Trustee argues that the bankruptcy court’s ruling on Debtor’s exemptions
constitute final orders. (Doc. 3 at 4, 8.) Debtor argues that he has a right to amend his
Schedule C any time prior to the closing of his case. (Doc. 6 at 5.)

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Debtor is allowed to amend the Schedule C form before the closing of the case. See

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Fed. R. Bankr. P. 1009 (“A voluntary petition, list, schedule or statement may be amended

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by the debtor as a matter of course at any time before the case is closed.”). Debtor, however,

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should have filed the amendment before the bankruptcy court issued its orders sustaining
the Trustee’s objections because these orders constitute a final judgment on the merits. See
In re Gilman, 887 F.3d at 961-62; In re Albert, 998 F.3d 1088, 1090 (9th Cir. 2021)

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(clarifying “that a bankruptcy court’s prior rejection of claimed exemptions preclusive

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weight”); see also In re St. Hill, No. 04-30919F, 2005 WL 6522764, at *10 (Bankr. E.D.

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Pa. Sept. 2, 2005) (noting that when a trustee objects to an exemption, the debtor must
make any necessary amendments prior to any ruling, not afterward). As a result, the second
element of claim preclusion is satisfied.

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3.

Identity of the Parties

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The final element of res judicata is whether the earlier lawsuit “involved identical

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parties.” Mpoyo¸430 F.3d at 987 (citation omitted). Although Debtor does not contest

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whether this element is satisfied, the Court finds the parties here and the parties to the
bankruptcy proceedings are the same. (See Docs. 4-19 at 2, 4-20 at 2.)

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The Ohio Revised Code requires a person claiming a homestead exemption to be
domiciled in that state. Ohio Rev. Code § 2329.66(A).
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4.

Conclusion

The bankruptcy court erred when it overruled the Trustee’s objection that res
judicata barred Debtor’s amended exemptions. Although Debtor argues he has the right to
amend his schedules at any time prior to the closing of his case, this right is not absolute.
(Doc. 6 at 5.) Because the bankruptcy court issued two final orders regarding Debtor’s first
and second amended exemptions, Rule 1009(a) does not entitle Debtor to amend his
exemptions again under a new legal theory. Fed. R. Bank. P. 1009(a); In re Wolfberg, 255
B.R. 879, 883 (B.A.P. 9th Cir. 2000), aff’d, 37 F.App’x 891 (9th Cir. 2002).
Therefore, for the reasons discussed above, all the elements of res judicata are

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satisfied. To hold otherwise would permit a debtor to “delay matters by claiming the same

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property as exempt time and time again,” which would contravene the burdens res judicata

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is designed to void. In re Albert, 998 F.3d at 1092; see e.g., In re St. Hill, 2005 WL
6522764, *9 (Bankr. E.D. Pa. 2005) (“[W]here a debtor has claimed certain property as
exempt, the bankruptcy trustee has objected to that exemption claim, and there has been a
final, non-appealed ruling sustaining the trustee’s objection, all of the elements of claim
preclusion have been established.”)
C.

Federal Exemptions Are Not Permitted

The Court now turns to whether Debtor can claim exemptions under both Ohio and
federal law. Debtor argues the last sentence in 11 U.S.C. § 522(b)(3) of the Bankruptcy
Code—known as the hanging paragraph—permits him to claim exemptions under both
state and federal law. (Doc. 6 at 7-8.) The bankruptcy court agreed, relying on In re
Withington, 594 B.R. 696, 707 (Bank. D. Colo. 2018). (Doc. 4-20 at 14.) The Trustee
argues the bankruptcy court erred because the plain language of the hanging paragraph
does not support a finding that debtor is entitled to exemptions under both laws. (Doc. 3 at
12.) Debtor argues that exemption laws should be construed liberally in favor of debtors,
meaning that the statute should be interpreted to allow Debtor to claim both Ohio and
federal exemptions here. (Doc. 6 at 7-8.)
When a debtor has lived in different states prior to filing the bankruptcy petition,
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Section 522(b)(3)(A) of the Bankruptcy Code provides:

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(3) Property listed in this paragraph is—
(A) subject to subsections (o) and (p), any property that is
exempt under Federal law, other than subsection (d) of this
section, or State or local law that is applicable on the date of
the filing of the petition to the place in which the debtor’s
domicile has been located for the 730 days immediately
preceding the date of the filing of the petition or if the debtor’s
domicile has not been located in a single State for such a 730day period, the place in which the debtor’s domicile was
located for 180 days immediately preceding the 730-day period
or for a longer portion of such 180-day period than in any other
place;

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11 U.S.C. § 522(b)(3)(A) (emphasis added). Section 522(b)(2) permits states to opt out of

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federal exemptions and limit their residents to state-created exemptions. As a result, the

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domiciliary requirements in 11 U.S.C. § 522(b)(3)(A) may render the debtor ineligible for

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any exemption if the applicable state exemption law restricts the use of state exemptions

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to in-state residents. In re Rodenbough, 579 B.R. 545, 551 (Bankr. D. Idaho 2018). To

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remedy this effect, Congress enacted the hanging paragraph, which permits a debtor to

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claim federal exemptions under 11 U.S.C. § 522(d). It states:

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If the effect of the domiciliary requirement under subparagraph
(A) is to render the debtor ineligible for any exemption, the
debtor may elect to exempt property that is specified under
subsection (d).
11 U.S.C. § 522(b)(3) (emphasis added).
Here, Debtor was not domiciled in Arizona for more than 730 days prior to the
bankruptcy; therefore, the bankruptcy court properly found Debtor ineligible for
exemptions under Arizona law. (Doc. 4-19 at 4.) In the 180 days preceding the 730-day
period before filing the bankruptcy petition, Debtor lived in Ohio. (Id. at 8.) The
bankruptcy court found Debtor had to claim exemptions under Ohio law. (Id.) However,
many of the Ohio exemption laws require the person claiming them to be domiciled in
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Ohio. Ohio Rev. C. 2329.66(A). (Doc. 4-19 at 16-17.) Because Debtor was living in
Arizona at the time he filed the bankruptcy petition, the bankruptcy court found that under
Ohio law, Debtor was ineligible to claim any exemptions other than his life insurance
claim. (Id. at 17.) The parties now dispute whether Debtor qualifies for federal exemptions
under the hanging paragraph when Debtor was previously allowed a claim under Ohio law
for his life insurance. (Docs. 3 at 9-12, 6 at 7-8.) The Court finds that the bankruptcy court
erred when it found Debtor eligible for both state and federal exemptions.
Section 522(b)(3) allows a debtor to claim federal exemptions under § 522(d) when

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the debtor is “ineligible for any exemption.” 11 U.S.C. § 522(b)(3) (emphasis added).

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Although the Bankruptcy Code does not define “any,” courts generally give words their

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ordinary plain meaning by “consulting common dictionary definitions” when a statute does

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not define a term. Animal Legal Def. Fund v. United States Dep’t of Agric., 933 F.3d 1088,

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1093 (9th Cir. 2019); see also Antonin Scalia & Bryan A. Garner, Reading Law: The

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Interpretation of Legal Texts, 69 (2012) (“The ordinary-meaning rule is the most

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fundamental semantic rule of interpretation.”). Any means “one, some, or all

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indiscriminately

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of

whatever

quantity.”

Any,

Merriam-Webster

Dictionary,

https://www.merriam-webster.com/dictionary/any (last visited Nov. 7, 2024).
Under the plain language of the hanging paragraph, the federal exemptions are only

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available to debtors who are “ineligible for any exemption.” 11 U.S.C. § 522(b)(3)

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(emphasis added). See, e.g., In re Rodenbough, 579 B.R. at 551 (“[I]f a debtor has access

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to ‘any’ exception, then the resort to the federal exemptions is not employed.”); In re

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Karavias, 438 B.R. 86, 88 (Bankr. W.D. Pa.2010) (“[B]ecause such debtor is then left

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without any exemption at all, such debtor is thus entitled to take the federal exemptions

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under § 522(d).”); In re Kauer, 2020 WL 4195758, *3 (Bankr. D. Ariz. 2020) (“Even those

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courts that interpret the word ‘any’ in § 522(b)(3)(A) literally recognize that the debtor

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must be eligible for and receive the exemption.” (emphasis removed)). Therefore, because

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Debtor qualifies for the life insurance exemption under Ohio law, he is ineligible to claim
federal exemptions under the hanging paragraph. See 4 Collier on Bankr. P. 522.06 (16th
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2024) (“Thus, the phrase ‘ineligible for any exemption’ in the sentence is best construed
as applying when the debtor is ineligible for any single exemption under the state
exemption scheme, rather than ineligible for all exemptions.” emphasis added)).2
IV.

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Accordingly,

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IT IS ORDERED reversing the bankruptcy court’s February 5, 2024 Order
(Doc. 4-18) in its entirety. This action is remanded to the bankruptcy court for further
proceedings consistent with this decision.

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CONCLUSION

IT IS FURTHER ORDERED directing the Clerk of the Court to enter judgment
in favor of Trustee Brian J. Mullen and to close this case.

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Dated this 22nd day of November, 2024.

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The Court recognizes the meaning of “any” in the hanging paragraph is widely disputed
among bankruptcy courts. For example, some courts find the debtor eligible to claim
federal exemptions only if the debtor is entirely ineligible for all state exemptions due to
522(b)(3)(A)’s domiciliary requirements. E.g., In re Goldstein, No. 20-20406, 2021 WL
5443542, at *9 (Bankr. D. Me. Nov. 19, 2021). Meanwhile, other courts hold that a debtor
is ineligible to invoke the hanging paragraph if he qualifies for even one state exemption.
E.g., In re Wilson, No. 14-20557, 2015 WL 1850919, at *4 (Bankr. D. Idaho Jan. 13, 2015).
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