Lee v. Field
ORDER AFFIRMING BANKRUPTCY COURT ORDER re 1 - Signed by JUDGE SUSAN OKI MOLLWAY on 11/17/2015. "This court affirms the bankruptcy court ruling challenged by Lee on this appeal. This order disposes of all issues in this appeal, including those raised by the Amended Statement of Issues on Appeal. See ECF No. 6-2. The court therefore denies as moot the Trustee's motion to strike the Amended Statement of Issues on Appeal and Amended Designation of Record o n Appeal. See ECF No. 13-1. The Clerk of Court is directed to enter judgment against Lee and to terminate this appeal." (emt, )CERTIFICATE OF SERVICEParticipants registered to receive el ectronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
DANE S. FIELD, Trustee,
CIVIL NO. 15-00278 SOM/RLP
ORDER AFFIRMING BANKRUPTCY
Bankr. Case No. 13-01356 (RJF)
ORDER AFFIRMING BANKRUPTCY COURT ORDER
This appeal turns on whether a bankruptcy debtor’s
interest in fraudulently transferred property is exempt from
being included in the debtor’s bankruptcy estate as subject to
claims by creditors.
Debtor/Appellant Adam Lee appeals the
portion of Bankruptcy Judge Robert J. Faris’s order of June 29,
2015, that ordered Lee to turn over possession of two properties
on Palua Place to the bankruptcy trustee.
This court affirms.
This is not the first bankruptcy appeal this court has
adjudicated involving Lee.
On September 21, 2015, this court
affirmed a bankruptcy court order in an adversary proceeding
filed by the bankruptcy trustee on January 14, 2014, No. 1490003, that determined that Lee had fraudulently transferred two
properties located on Palua Place, in Honolulu, to himself and
his wife as tenants by the entirety.
In re Adam Lee (Field v.
Lee), 2015 WL 5598319, *7 (Sept. 21, 2015).
The court explained,
Lee filed a Chapter 7 bankruptcy petition.
See ECF No. 7-3, PageID # 175. His
bankruptcy Schedule A included three real
estate parcels. Two properties were on Palua
Place and were listed as held in tenancies by
the entirety. The schedule stated that, with
respect to one of the Palua Place properties,
Lee had a 75% interest, and Alexandria
Shiroma had a 25% interest. The schedule
stated that the other Palua Place property
had approximately $838,000 in equity. See
ECF No. 14-1, PageID # 740.
Id., 2015 WL 5598319, *1.
While the appeal of the adversary proceeding order
concerning the fraudulent transfer of the Palua Place properties
was pending before this court, the bankruptcy judge ordered Lee
to turn possession of the Palua Place properties over to Dane S.
Field, Lee’s Chapter 7 bankruptcy trustee.
(Order of June 29, 2015).
See ECF No. 9-1
Lee appeals only the portion of that
order concerning turning over possession of the Palua Place
properties to the trustee.
STANDARD OF REVIEW.
This court reviews a bankruptcy court’s findings of
fact for clear error and its conclusions of law de novo.
re Kimura (United States v. Battley), 969 F.2d 806, 810 (9th Cir.
1992) (“The court reviews the bankruptcy court’s findings of fact
under the clearly erroneous standard and its conclusions of law
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.
questions of law and fact are reviewed de novo.”
In re JTS
Corp., 617 F.3d 1102, 1109 (9th Cir. 2010) (quotation marks and
The Court Has Already Determined that Lee
Fraudulently Transferred the Palua Place
On September 9, 2013, Lee filed Schedules in his
Chapter 7 bankruptcy proceeding.
Schedule C claimed a $669,000
exemption for “Palua Place #1” and a $262,848 exemption for
“Palua Place #2.”
See ECF No. 20, PageID # 861.
stated that these properties were exempt based on “Sawada v.
Endo, 561 P.2d 1291; Ha. Rev. Stat. 509-2.”
In Sawada v.
Endo, 57 Haw. 608, 617, 561 P.2d 1291, 1297 (1977), the Hawaii
Supreme Court held that property held in tenancy by the entirety,
as allowed by section 509-2 of Hawaii Revised Statutes, “is not
subject to the claims of the creditors of one of the spouses
during their joint lives.”
In so ruling, the Hawaii Supreme
Court noted that “the creation of a tenancy by the entirety may
not be used as a device to defraud existing creditors.”
616, 561 P.2d at 1297.
With respect to same Palua Place properties for which
Lee claimed exemptions on his Schedule C, on February 27, 2015,
Bankruptcy Judge Robert J. Faris issued Findings of Fact and
Conclusions of law that determined that Lee had fraudulently
transferred the properties to himself and his wife.
20, PageID #s 913-30.
See ECF No.
On March 10, 2015, a Final Judgment was
entered avoiding and setting aside as fraudulent 1) Lee’s
transfer of his 90% interest in Palua Place #1 to himself and his
wife, and 2) Lee’s transfer of his 75% interest in Palua Place #2
to himself and his wife.
See ECF No. 9-10, PageID #s 309-10.
This court affirmed that decision in an order of September 21,
See ECF No. 20, PageID #s 934-52.
Because only a 90% interest in the Palua Place #1
property was avoided and set aside, the court is unpersuaded by
Lee’s argument that the Bankruptcy Court improperly adjudicated
Lee’s exemption with respect to the other 10% in that property.
See ECF No. 8, PageID # 104.
There is no contention that the
trustee objected to that 10% claimed exemption.
See ECF No. 19,
PageID # 840 (“Trustee did not seek to avoid the Debtor’s
transfer of the 10% interest in Palua 1 to the Debtor’s tenancyby-the-entireties estate; and the Trustee has not argued that the
avoidance action operates as an objection to the Debtor’s
exemption as to his 10% interest in Palua 1.”).
The Bankruptcy Judge Correctly Determined
that the Bankruptcy Trustee Had Objected to
Lee’s Claimed Exemptions With Respect to the
Palua Place Properties.
According to the Docket Sheet in Lee’s Chapter 7
bankruptcy case, the bankruptcy trustee held a meeting of
creditors pursuant to 11 U.S.C. § 341 on September 19, October
23, and December 19, 2013.
See ECF No. 9-23, PageID #s 672-73
Apparently, an earlier meeting of creditors was held on
September 7, 2013.
At that meeting, the trustee warned Lee’s
counsel that the trustee would likely challenge the transfers to
tenancies by the entireties.
See ECF No. 20, PageID # 911
(responding to statement that Lee’s wife had not paid anything
for her interest in the property, Trustee said, “Chuck, I’m
probably looking at a fraudulent transfer case on that.”).
The docket sheet indicates that the bankruptcy trustee
filed an adversary proceeding on January 14, 2014, to determine
whether the Palua Place properties had been fraudulently
transferred from Lee to Lee and his wife as tenants by the
Id., PageID # 678.
On March 15, 2015, final judgment
was entered in the adversary proceeding, avoiding and setting
aside the fraudulent transfer of Lee’s 90% interest in Palua
Place #1 and 75% interest in Palua Place #2.
PageID # 309-12.
See ECF No. 9-10,
Lee appealed, and this court affirmed in an
order of September 21, 2015.
See In re Adam Lee (Field v. Lee),
2015 WL 5598319, *7 (Sept. 21, 2015); ECF No. 20, PageID #s 93453.
Under 11 U.S.C. § 522(l),
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 claimed as
exempt on such list is exempt.
11 U.S.C.A. § 522(l).
Pursuant to Rule 4003(b)(1) of the Federal
Rules of Bankruptcy Procedure, objections to claims of exemption
may be filed within 30 days after the meeting of creditors,
unless that time is extended by the court.
extends that time to “one year after the closing of the case if
the debtor fraudulently asserted the claim of exemption.”
In Taylor v. Freeland & Kronz, 503 U.S. 638, 643
(1992), the United States Supreme Court examined Rule 4003(b),
ruling that, unless an objection is made to a claimed exemption
within 30 days of the creditors’ meeting (or within the time set
by the court in the event that time is extended), the property
claimed as exempt is exempt.
Recently, the Supreme Court, citing
Taylor, has reiterated “that a trustee’s failure to make a timely
objection prevents him from challenging an exemption.”
Siegel, 134 S. Ct. 1188, 1196 (2014).
On appeal, Lee argues that, because the trustee did not
file a document in the Chapter 7 bankruptcy proceeding that
expressly “objected” to the claimed exemptions with respect to
the Palua Place properties, Bankruptcy Judge Faris erred in not
recognizing the exemptions.
This court is not persuaded.
Section 522(l) does not mandate the form an objection
must take, stating only that, “[u]nless a party in interest
objects, the property claimed as exempt on such list is exempt.”
See In re Spenler, 212 B.R. 625, 629 (B.A.P. 9th Cir. 1997)
(“Rule 4003(b), unlike some other bankruptcy rules, proscribes no
particular form for objections to exemption claims.”); In re
Betz, 273 B.R. 313, 320 (Bankr. D. Mass. 2002) (noting that
§ 522(l) and Rule 4003(b) are silent on what constitutes a
In the present case, the trustee filed an adversary
proceeding on January 14, 2014, less than 30 days after the
creditors’ meeting held on December 19, 2013.
proceeding challenged the transfer of the Palua Place properties
from Lee to Lee and his wife as tenants by the entirety.
Schedule C asserted an exemption based solely on the claimed
tenancies by the entirety, and because the adversary proceeding
challenged the validity of the transfers to tenancies by the
entirety as fraudulent, the issue before this court concerns
whether the filing of the adversary proceeding qualifies as an
“objection” to the claimed exemption for purposes of § 522(l).
In other words, this court must determine whether the trustee’s
filing of the adversary proceeding within 30 days of the
conclusion of the creditors’ meeting qualifies as a timely
“objection” such that Lee does not automatically have the claimed
exemptions under Taylor and Law.
In In re Spenler, 212 B.R. at 630, the Ninth Circuit
Bankruptcy Appellate Panel noted that “Rule 4003(b) was meant to
provide the debtor with timely notice that the trustee or other
interested party objects to a debtor’s claimed exemption.”
leading bankruptcy treatise has therefore stated:
The propriety of the exemption claim may be
raised in another proceeding. To be an
adequate substitute for a separate objection
to exemptions, however, any such proceeding
must clearly put the debtor and the debtor’s
counsel on notice of the objection to the
exemptions claimed and be filed withing the
deadline set forth in Rule 4003(b).
Alan N. Resnik and Henry J. Sommer, Collier on Bankruptcy,
¶ 4003.03 (16th ed. 2015).
“An overwhelming majority of courts have held that, at
least in the instance where some form of written objection was
manifested within the 30 day deadline, Rule 4003(b) is satisfied
even though no formal objection was filed.”
In re Betz, 273 B.R.
Other jurisdictions have specifically recognized that an
adversary proceeding may constitute an objection for purposes of
Rule 4003 and § 522(l).
In Matter of Grosslight, 757 F.2d 773,
777 (6th Cir. 1985), for example, the Sixth Circuit recognized
the filing of an adversary proceeding as a sufficient objection
for purposes of Rule 4003(b).
In that case, a creditor filed an
adversary proceeding 24 days after the filing of the schedule of
The Sixth Circuit stated that the filing of
the adversary proceeding met the procedural concerns and
therefore treated that filing as an objection.
This court views the trustee’s filing of the adversary
proceeding challenging the basis for the claimed exemptions at
issue in this case as satisfying § 522(l) and Rule 4003(b), even
if the adversary proceeding did not specifically refer to any
According to Lee’s Schedule C, the sole
basis of the claimed exemptions was the holding of the properties
in tenancies by the entirety.
The adversary proceeding
challenged the propriety of the transfers of the properties into
tenancies by the entirety, meaning that the adversary proceeding
clearly challenged the basis for the claimed exemptions.
court is therefore unpersuaded by Lee’s argument that, because
the bankruptcy court determined that Lee had fraudulently
transferred the properties into tenancies by the entirety but did
not specifically say that the exemptions were overruled as a
result, Lee should be allowed to maintain the exemptions for the
fraudulently transferred property.
Nor is the court persuaded by
Lee’s argument that treating the fraudulent transfer judgment as
negating certain exemptions for the Palua properties amounts to
affording relief beyond that embodied in that judgment.
court is not amending the judgment in the fraudulent transfer
To the contrary, this court is giving
effect to that judgment.
To hold otherwise would allow Lee to
benefit from his fraudulent transfers even though the trustee
timely complied with the requirements of § 522(l) and Rule
Lee certainly had written notice that the trustee was
challenging as fraudulent Lee’s transfers of properties into
tenancies by the entireties.
There is no injustice in
disallowing an exemption based on fraudulent conduct.
The court is also unpersuaded by Lee’s reliance on
Section 522(b)(3)(b) recognizes that a debtor
may exempt tenancy by the entirety property that the debtor had
immediately before commencement of bankruptcy proceedings.
cites § 522(b)(3)(b) for the first time in his Reply brief.
Under Local Rule 7.4, “Any argument raised for the first time in
the reply shall be disregarded.”
Even if considered, however,
§ 522(b)(3)(b) does not say that a debtor’s holding of property
in tenancy by the entirety cannot be challenged.
The court is also unpersuaded by Lee’s reliance on In
re Canino, 185 B.R. 584 (B.A.P. 9th Cir. 1995).
In Canino, the
debtors filed a Schedule C, listing a car and a residence as
In each case, the claimed exemption exceeded the
Neither the Chapter 7 trustee nor any
other party in interest filed a formal objection to the claimed
Id. at 587.
June 23, 1992.
The creditors’ meeting concluded on
The 30-day period to file objections to
exemptions therefore ended on July 23, 1992.
trustee did not file objections, on June 1, 1992, he asked to
employ a real estate broker to sell the residence.
was denied without prejudice.
On June 3, 1992, the trustee
gave the debtors notice that he intended to sell the car, selling
it on June 20, 1992, three days before the creditors’ meeting
The trustee paid the debtors the statutory
exemption amount for the vehicle, which the debtors accepted.
On October 9, 1992, the trustee renewed the motion to employ
a real estate broker.
That motion was granted four days later.
Given these circumstances, the bankruptcy court held that
the trustee’s actions constituted an “informal objection” for
purposes of Rule 4003(b).
On appeal, the Bankruptcy Appellate Panel for the Ninth
Circuit held that the trustee’s actions failed to rise “to the
level of an objection.”
Id. at 591.
In so ruling, the
Bankruptcy Appellate Panel reasoned that the trustee was only
performing his duties, that courts may not use equitable
considerations to allow untimely objections, and that Rule 4003
does not provide for “informal objections.”
Canino recognized that there is no prescribed form of objection
to an exemption for purposes of Rule 4003.
Id. at 592.
trustee’s actions “did not constitute an explicit objection to
Debtor’s claimed exemptions.
In any case, as to the residence,
the pertinent actions were taken after the time to object had
Canino is distinguishable on its facts.
trustee explicitly challenged the claimed Palua Place exemptions
in writing during the 30-day time period for objections.
the challenge took the form of an adversary proceeding, as
opposed to a document referring to an “objection to claimed
exemption,” Lee and his counsel received notice of the fact and
essence of the challenge.
Under these circumstances, Lee is
unpersuasive in arguing that he should be allowed the exemption
given the trustee’s failure to call the challenge an “objection.”
Lee Received the Due Process Required by Rule
Lee argues that he did not receive the due process
required by Rule 4003.
See ECF No. 8, PageID # 103.
argues that Rule 4003(b)(1) requires any objection to be filed
within 30 days of the creditors’ meeting.
But there can be no
dispute that the Adversarial Proceeding Complaint challenging the
essence of Lee’s claimed exemptions with respect to the Palua
Place properties was filed on January 14, 2014, less than 30 days
after the December 19, 2013, creditors’ meeting.
Proceeding No. 14-90003, ECF No. 2.
As noted above, this court
views the adversary proceeding complaint as satisfying the
Lee is not contending that he and his attorney had to
be served with any objection within 30 days of the creditors’
Lee only argues that Rule 4003(b)(4) requires
objections to be delivered or mailed to both a debtor and his
At the hearing on the motion, the trustee’s attorney
represented that Lee’s attorney accepted service of the adversary
proceeding on Lee’s behalf, thus satisfying Rule 4003(b)(4)’s
It appears that Lee’s Rule 4003(b)(4)
argument is based on the factual contention that no document
referring to an “objection” or an “exemption” was filed and
served, not on any contention that the trustee failed to serve
the adversary proceeding complaint.
Finally, Lee argues that Rule 4003(c) required a
“hearing on notice” at which the objecting party bears the burden
of proving the exemptions were not properly claimed.
requirement is easily satisfied by the trial in the adversary
proceeding in which the trustee satisfied his burden of proving
that Lee had fraudulently transferred the property at issue in
the claimed exemptions.
As noted in the Bankruptcy Judge’s
Findings of Fact and Conclusions of Law, a three-day trial was
held from February 2 through 4, 2015, regarding the trustee’s
claim that the transfer of the Palua Place properties had been
See ECF No. 20, PageID # 913.
Because Lee Had No Valid Exemption, the Palua
Place Properties Were Not “Under Water.”
Nor is Lee persuasive in arguing that the Palua Place
properties were not subject to turnover because the exemptions
rendered the properties “under water” such that they were
“inconsequential” and should therefore have been abandoned.
ECF No. 8, PageID #s 104-06.
These arguments are based on a
This court’s determination that Lee fraudulently
transferred the properties into tenancies by the entirety
requires the conclusion that Lee’s claimed exemptions based on
the same tenancies by the entirety are invalid.
claimed exemptions, the properties could not have been “under
water” and “inconsequential” such that they should have been
This court affirms the bankruptcy court ruling
challenged by Lee on this appeal.
This order disposes of all
issues in this appeal, including those raised by the Amended
Statement of Issues on Appeal.
See ECF No. 6-2.
therefore denies as moot the Trustee’s motion to strike the
Amended Statement of Issues on Appeal and Amended Designation of
Record on Appeal.
See ECF No. 13-1.
The Clerk of Court is directed to enter judgment
against Lee and to terminate this appeal.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, November 17, 2015.
/s/ Susan Oki Mollway
Susan Oki Mollway
Senior United States District Judge
In re Adam Lee, Civ. No. 15 00278 SOM/RLP; ORDER AFFIRMING BANKRUPTCY COURT
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