Westry

Filing 9

OPINION and ORDER Denying 1 Bankruptcy Appeal Signed by District Judge Arthur J. Tarnow. (MLan)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re
LATONYA WESTRY,
Debtor.
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LATONYA WESTRY,
Civil Case No. 13-13092
Appellant,
SENIOR UNITED STATES DISTRICT JUDGE
ARTHUR J. TARNOW

v.
KIM JIN LIM, CHAPTER 7 TRUSTEE,

MAGISTRATE JUDGE PAUL J. KOMIVES
Appellee.
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ORDER AND OPINION AFFIRMING THE BANKRUPTCY COURT’S JUNE 7, 2013
ORDER [45]
Before the Court is Debtor-Appellant Latonya Westry’s (herein Debtor) appeal
of the Bankruptcy Court’s Order [45] sustaining Appellee-Trustee Lim’s (herein
Trustee)1 Objection [38] to Debtor’s Amendment [34] of exemptions. For the reasons
that follow, the Bankruptcy Court’s Order [45] is AFFIRMED.
STATEMENT OF FACTS
The relevant facts of this case are fairly simple. Debtor filed for Chapter 7
liquidation personal bankruptcy protection on November 18, 2011. At the time of
filing, Debtor had a pending workers’ compensation claim. When Debtor filed for

1

Although Trustee George P. Dakmak preceded Trustee Lim in administering the bankruptcy estate
in this case, this Order will simply refer to a singular Trustee.

bankruptcy, she listed the workers’ compensation claim with a scheduled value of
“unknown” on her Schedule B listing of personal property. On her Schedule C list of
exempted property, Debtor claimed the workers’ compensation claim was exempted
under 11 U.S.C. § 522(d)(5). Exemptions under § 522(d)(5) are statutorily capped at
$10,055.00.
On December 21, 2011, the parties held the Meeting of Creditors required by
11 U.S.C. § 341. At the meeting, the Trustee obtained contact information for
Debtor’s workers’ compensation attorney. After communication between Trustee, the
Debtor, Debtor’s bankruptcy attorney, and Debtor’s workers’ compensation attorney,
all parties were advised that Trustee would be administering Debtor’s workers’
compensation claim. Eventually, on March 19, 2013, both Trustee and Debtor’s
employer consented to a $25,000.00 settlement of Debtor’s workers’ compensation
claim. After fees, costs, and Debtor’s exemption, this settlement would result in a net
receipt of $10,530.29 for the bankruptcy estate.
Pursuant to Trustee’s role as administrator of the workers’ compensation claim,
Trustee received the non-exempt portion of the settlement. On March 27, 2013,
Debtor filed amended schedules, claiming that all of her workers’ compensation
settlement was exempt under 11 U.S.C. § 522(d)(10)(C). Trustee timely objected to
the amendments on April 25, 2013 and Debtor responded to Trustee’s Objection [38]
on May 1, 2013. At a hearing on June 3, 2013, Bankruptcy Judge Rhodes sustained
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Trustee’s objection, finding by a preponderance of the evidence that the creditors
would be prejudiced by the amendments. On June 7, 2013, the parties filed a Order
[45] stipulated as to form only memorializing the bankruptcy court’s June 3, 2013
ruling. Debtor now appeals that Order [45].
STANDARD OF REVIEW
This Court reviews a bankruptcy court’s conclusions of law de novo. In re
Batie, 995 F.2d 85, 88 (6th Cir. 1993). De novo review means that this Court reviews
the law independently of the bankruptcy court and no deference is given to the
conclusions of the bankruptcy court. Myers v. IRS (in re Meyers), 216 B.R. 402, 403
(B.A.P. 6th Cir. 1998). On appeal to a district court, a bankruptcy court's findings of
fact are reversible only if they are clearly erroneous. FED. R. BANKR. P. 8013; In re
Batie, 995 F.2d at 88. A factual finding is clearly erroneous when the reviewing court
is left with a definite and firm conviction that a mistake has been made. In re AmTrust
Financial Corp., 694 F.3d 741, 749 (6th Cir. 2012). “[I]f a question is a mixed
question of law and fact, then [the district court] must break it down into its
constituent parts and apply the appropriate standard of review for each part.” In re
Batie, 995 F.2d at 88.

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ANALYSIS
The Parties’ Arguments
Debtor argues that she has an absolute right to amend her Schedules pursuant
to Federal Rule of Bankruptcy Procedure 1009(a) while her case is still open. Debtor
asserts that the only exceptions to the absolute right to amend schedules during an
open case is bad faith or concealment of property, which the bankruptcy judge did not
find here. Debtor relies heavily on Lucius v. McLemore, 741 F.2d 125 (6th Cir. 1984)
to support her proposition that a debtor’s right to amend is absolute excepting bad
faith or concealment of property. In addition to arguing that an objection cannot be
sustained on the basis of prejudice, Debtor also asserts that the Bankruptcy Court
made no finding of prejudice.
Trustee argues that Debtor mischaracterizes Lucius because a debtor’s right to
file amendments is always subject to a trustee’s equal right to file objections to those
amendments pursuant to Federal Rule of Bankruptcy Procedure 4003. Indeed, Trustee
argues, Lucius itself states that a debtor’s right to amend schedules is subject to
objection by any party in interest. Id. at 127. Trustee next cites many cases from
several jurisdictions, including the Bankruptcy Court for the Eastern District of
Michigan, wherein prejudice was sufficient to sustain a trustee’s objections to a
debtor’s amendments. See, e.g., In re Lundy, 216 B.R. 609 (Bankr. E.D. Mich. 1998);
Gold v. Guttman (In re Guttman), 237 B.R. 643 (Bankr. E.D. Mich. 1999); Shapiro
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v. First Franklin Fin. Group (In re Rechis), 339 B.R. 643 (Bankr. E.D. Mich. 2006);
In re Daniels, 270 B.R. 417 (Bankr. E.D. Mich. 2001). Trustee further argues that the
Bankruptcy Court properly found that the creditors would be prejudiced by Debtor’s
amendments because Trustee would have taken different actions and positions had the
amendments been made earlier.
Debtor’s Reply Appellate Brief mostly consists in disputing facts that are far
afield of the issue upon which her appeal turns. However, Debtor also argues that the
legal standard for determining whether prejudice is sufficient to sustain an objection
is different than the standard Trustee cites. The two different standards the parties
propose will be examined in the Court’s analysis below.
De Novo Review of Prejudice as a Proper Basis for Sustaining the Objection
Trustee’s arguments are well-received. Whether the bankruptcy court may rely
on prejudice to sustain an objection is a question of law that this Court reviews de
novo. Federal Rule of Bankruptcy Procedure 4003 demonstrates that Trustee was
entitled to object to Debtor’s amendment and case law demonstrates that the
Bankruptcy Court properly sustained the objection on the basis of prejudice. The
Sixth Circuit has not yet explicitly ruled on whether prejudice to creditors is sufficient
to sustain an objection. In re O’Brien, 443 B.R. 117, 142 (Bankr. W.D. Mich. 2011).
Because there is no binding case law on this issue, the Court looks to other circuits
for guidance. See, e.g., In re Mulvania, 214 B.R. 1, 9 (B.A.P. 9th Cir. 1997)
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(cautioning against creating inter-circuit conflicts, especially when a lower federal
court is addressing an issue already decided by another circuit court); In re Berg, 188
B.R. 615, 620 (B.A.P. 9th Cir. 1995), aff'd, 121 F.3d 535 (9th Cir. 1997) (noting that
consistent application of federal law is an important goal, and a lower federal court
should only deviate under compelling circumstances from the interpretation placed on
a federal statute by the only circuit to have spoken). Other circuits have held that
prejudice to creditors is a sufficient reason to sustain a trustee’s objection to an
amendment. See, e.g., In re Kaelin, 308 F.3d 885, 889 (8th Cir. 2002) (“[t]he
bankruptcy court has the discretion to deny the amendment of exemptions if the
amendment is proposed in bad faith or would prejudice creditors”); In re Doan, 672
F.2d 831, 833 (11th Cir. 1982) (“a court may deny leave to amend if there is a
showing of the debtor's bad faith or of prejudice to the creditors”); see also AM. JUR.
BANKRUPTCY § 1432 (“a court might deny leave to amend on a showing of a debtor's
bad faith or prejudice to creditors”) (citing Matter of Williamson, 804 F.2d 1355 (5th
Cir. 1986)). Accordingly, upon de novo review, the Court concludes that a finding of
prejudice supported by a preponderance of the evidence is a sufficient basis upon
which to sustain the Objection [38].

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Clear Error Review of the Finding of Prejudice Below
A finding of prejudice is a finding of fact that the district court reviews for clear
error. Trustee proposes the following standard upon which the Bankruptcy Court was
to determine whether prejudice to the creditors existed:
In determining whether to deny an amendment to schedules on the
basis of prejudice, the focus is on the effect of allowing the
amendment upon creditors and other parties in interest. Mere
delay in filing an amendment, or the fact that an amendment if
allowed will result in the exemption being granted, are not
sufficient to show prejudice..... [P]rejudice may be established by
showing harm to the litigating posture of parties in interest. If the
parties would have taken different actions or asserted different
positions had the exemption been claimed earlier, and the interests
of those parties are detrimentally affected by the timing of the
amendment, then the prejudice is sufficient to deny amendment.
Moreover, an amendment is prejudicial if it impairs a trustee in
the diligent administration of the estate.
In re Daniels, 270 B.R. at 426 (quoting In re Talmo, 185 B.R. 637, 645 (Bankr. S.D.
Fla. 1995)). Upon review of the particular facts of this specific case, it was not clear
error for the Bankruptcy Court to find prejudice by a preponderance of the evidence
here. Trustee negotiated the settlement of Debtor’s pending workers’ compensation
claim on behalf of the creditors. Trustee negotiated the settlement under the
presumption that any amount over the statutory cap in 11 U.S.C. § 522(d)(5) would
go into the bankruptcy estate for the benefit of the creditors. If Debtor’s workers’
compensation claim had been claimed as completely exempt under 11 U.S.C. §
522(d)(10)(C) at the time of the filing of the bankruptcy petition, Trustee would not
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have administered the claim on behalf of the bankruptcy estate. Hence, the Trustee
certainly would have “taken different actions” and may have “asserted different
positions had the exemption been claimed earlier.” Daniels, 270 B.R. at 426. The
Daniels standard for a finding of prejudice was met in this case.
As stated above, Debtor argues that the standard for finding prejudice is stricter
than the standard in Daniels. In support of this contention, Debtor cites a case from
the Bankruptcy Court for the Western District of Michigan, In re O’Brien, 443 B.R.
117. O’Brien states “In assessing whether sufficient prejudicial conduct or inaction
has occurred, the bankruptcy court should ‘balance the prejudice to the debtor of
disallowing the exemption against the prejudice to third parties in allowing the
exemption.’” Id. at 143 (quoting In re Arnold, 252 B.R. 778, 785 (B.A.P. 9th Cir.
2000)).
The Court need not decide which standard governs prejudice determinations in
general because in the case at bar, the facts also satisfy the stricter standard Debtor
proposes. At the June 3, 2013 objection hearing, Trustee argued that permitting the
amendment would be prejudicial to the creditors because the Trustee had administered
the workers’ compensation claim. [2] at 75. The Bankruptcy Court went on to find:
the debtor’s obligation is to list the property and claim it as exempt
however he or she sees fit. . . the record establishes that it was clear
enough to the debtor that the trustee intended to administer and
distribute to creditors whatever value there was in this Workers'
Compensation claim over and above the initial exemption claimed by
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the debtor in her original Schedule C. Knowing that, nevertheless,
the debtor failed and neglected to claim additional apparently
available exemptions in it until after she became aware of the precise
amount of the exemption – of the Workers' Compensation claim. . .
This was improper on her part. She should have claimed whatever
exemption she wanted to claim in her discretion from the beginning.
Nothing prevented her from doing that.
[2] at 76, 81—2. The record indicates that the Bankruptcy Court found that Debtor’s
amendment would have prejudiced2 the creditors because Debtor made the amendment
based on the amount of the workers’ compensation claim. Stated another way, once
it became clear that creditors would receive assets from the workers’ compensation
claim, Debtor amended her schedules on that basis rather than on a legally substantive
basis. Any prejudice to Debtor was of her own creation by delaying the amendments;
therefore, the prejudice to the creditors outweighs the prejudice to Debtor under the
O’Brien-Arnold standard. The Court cannot say that the record indicates that the
Bankruptcy Court made a clear error when it made a finding of prejudice here.
Debtor disputes other facts such as the timing of notice of the 341 meeting or
certain correspondence or the exact meaning of certain correspondence. These
disputed facts are irrelevant to the legal issue upon which Debtor premises her appeal.
Most importantly, Debtor knew about the existence and nature of her workers’
compensation claim since the time of the initial bankruptcy filing. [2] at 76.

2

Although the Bankruptcy Court does not explicitly use the word prejudice, earlier in the hearing
Trustee conceded to the Bankruptcy Court that other than prejudice due to the timing of the
amendment the exemptions would be appropriate. [2] at 75.
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CONCLUSION
Accordingly, for the foregoing reasons,
IT IS ORDERED that the Bankruptcy Court’s June 7, 2013 Order [45]
sustaining Appellee-Trustee Lim’s (herein Trustee) Objection [38] is AFFIRMED.
SO ORDERED.

Dated: March 19, 2014

s/Arthur J. Tarnow
Arthur J. Tarnow
Senior United States District Judge

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