Sheehan v. Scotchel
Filing
10
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT: It is ORDERED that the Court AFFIRMS the ruling of the Bankruptcy Court. The Clerk is directed to remove this case from the active docket. Signed by District Judge Irene M. Keeley on 9/3/15. (cnd)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
MARTIN P. SHEEHAN, Trustee of
the Bankruptcy Estate of
John Charles Scotchel, Jr., and
Helen Holland Scotchel,
Appellant,
//
CIVIL ACTION NO. 1:14CV196
(Judge Keeley)
JOHN CHARLES SCOTCHEL, JR.,
and HELEN HOLLAND SCOTCHEL,
Appellees.
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
This matter arises from Chapter 7 bankruptcy proceedings
commenced in January 2012 by the debtors, John Charles Scotchel,
Jr. (“Scotchel”) and Helen Holland Scotchel (collectively, the
“Scotchels”).
Martin P. Sheehan, the trustee of the Scotchels’
bankruptcy
estate
Bankruptcy
Court
(the
for
“Trustee”),
the
Northern
appeals
an
Order
District
of
West
of
the
Virginia
overruling his objections to one of the Scotchels’ Schedule C
exemptions.
amendment
Specifically, the Trustee objects to the Scotchels’
to a
particular
exemption
under
Fed.
R.
Bankr.
P.
1009(a), which provides a “general right to amend” that may be
exercised “as a matter of course at any time before the case is
closed.”
For the reasons that follow, the Court AFFIRMS the Order
of the Bankruptcy Court.
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
I. BACKGROUND
Scotchel, an attorney in Morgantown, West Virginia, helped
litigate a personal injury action that in March of 2012 ultimately
resulted in a lucrative settlement agreement (the “Falls Case”).
As part of that settlement, Scotchel earned a contingency fee award
of $690,000.
Two months before the Falls case settled, however,
the Scotchels filed a bankruptcy petition in which they included
the Falls Case as a Schedule B asset. They valued it on their
Schedule C exemptions at only one dollar because, at that time,
they were unaware of its value.
In an Order dated October 16, 2012, the Bankruptcy Court
prohibited the Scotchels from “exempt[ing] 100% of the [fair market
value]” of the contingency fee award from the Falls Case. Although
the Scotchels protested that the fee award did not belong to the
bankruptcy estate, that contention was rejected at every turn. See
Scotchel v. Sheehan, 585 F. App’x 187 (4th Cir. 2014) (per curiam);
Scotchel v. Sheehan, No. 1:13CV161, 2014 WL 823379 (N.D.W. Va. Mar.
3, 2014); and In re Scotchel, 491 B.R. 739 (Bankr. N.D.W. Va.
2013).
On April 26, 2013, the same day that the Bankruptcy Court
entered its Order concerning the contingency fee, the Trustee sent
the Scotchels a check to for one dollar, representing the claimed
2
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
exemption for the contingency fee in the Falls Case.
Then, on July
2, 2013, the Trustee sought authorization from the Bankruptcy Court
to make an interim distribution of $341,081.63 to creditors.
Because the Scotchels had appealed the Bankruptcy Court’s decision
regarding
the
contingency
fee,
they
objected
to
the
interim
distribution on the basis that the Bankruptcy Court should stay it
pending the outcome of their appeal.
The Bankruptcy Court scheduled a hearing on the objection for
August 1, 2013.
Two days before the hearing, the Trustee stopped
payment on the one dollar check, which the Scotchels had not
cashed, and submitted the amount to the Registry of the Bankruptcy
Court. Following the hearing, the Bankruptcy Court authorized the
Trustee’s distribution, but stayed it pending this Court’s ruling
on the Scotchels’ appeal.
This Court affirmed the Bankruptcy Court’s decision concerning
the Falls Case contingency fee in March 2014.
the
stay,
thus
allowing
the
Trustee
to
It also dissolved
make
the
interim
distribution.
The following month, the Scotchels filed a notice of amendment
to their Schedule C exemptions pursuant to Rule 1009(a). Utilizing
their unused portion of West Virginia’s “wildcard” exemption, W.
3
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Va. Code § 38-10-4(e), they claimed $18,780 under the exemption for
the Falls Case contingency fee.
The Trustee objected to the proposed Rule 1009(a) amendment.
Following oral argument, the Bankruptcy Court entered a Memorandum
Opinion and Order overruling the Trustee’s objections.
In its
Order, the Bankruptcy Court concluded that “res judicata does not
bar Mr. Scotchel from amending his claimed exemption.”
1-19 at 5).
(Dkt. No.
Moreover, pursuant to Law v. Siegel, __ U.S. __, 134
S. Ct. 1188 (2014), the court found that it cannot exercise its
general, equitable powers to disallow Mr. Scotchel’s amended claim
of exemption.
Id. at 7.
The Trustee appeals from that decision,
which the Court now takes up de novo.1
See In re Bunker, 312 F.3d
145, 150 (4th Cir. 2002).
II. DISCUSSION
Under
Rule
1009(a),
“[a]
debtor
may
amend
her
list [of
exemptions] as a matter of course at any time before a case is
1
The Trustee’s arguments on appeal are anything but refined. In
a shotgun-shell approach, the Trustee raises (either expressly or by
implication) the doctrines of laches, estoppel, collateral estoppel,
judicial estoppel, promissory estoppel, equitable estoppel, and res
judicata.
Nowhere does he enumerate, let alone try to satisfy, the
elements of any of these doctrines (under either state or federal law);
nor does he assert the “bad faith” argument raised below. As far as this
Court can glean, he asks that the Scotchels’ Rule 1009(a) amendment be
disallowed (1) because an interim distribution had already been
authorized, and (2) because equity so demands. These are the arguments
the Court addresses below.
4
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
closed.” Botkin v. DuPont Cmty. Credit Union, 650 F.3d 396, 398-99
(4th Cir. 2011) (emphasis added).
“[A] court ordinarily does not
have discretion to deny leave to amend or to require a showing of
good cause.”
Tignor v. Parkinson, 729 F.2d 977, 978 (4th Cir.
1984); see also In re LoCurto, 239 B.R. 314, 316 (Bankr. E.D.N.C.
1999) (“As a general rule, amendments are liberally allowed, and
Rule 1009 contains no limitation of the debtor’s right to amend.”).
Notably, res judicata is not a cognizable exception to the
general rule permitting liberal amendment under Rule 1009(a).
Not
only has the Trustee here failed to cite any authority suggesting
otherwise, but at least one court has stated that res judicata
“will not preclude a debtor from filing amended exemptions under
Rule 1009(a), unless a final order denying an exemption claim for
the same asset has previously been entered.”
B.R. 454, 464 (Bankr. E.D. Pa. 2007).
never
denied
the
Scotchels’
In re Romano, 378
Here, the Bankruptcy Court
exemption
for
the
Falls
Case
contingency fee; in point of fact, it specifically “permit[ted] the
Debtors to amend their claimed exemptions.”
n.3) (citing Fed. R. Bankr. P. 1009(a)).
(Dkt. No. 1-25 at 3
Thus, res judicata is
irrelevant to the Court’s analysis.
The thrust of the Trustee’s appeal lies in his assertion that
principles of equity should preclude the Scotchels from amending
5
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
their exemption.
Historically, courts have recognized bad faith
and prejudice as exceptions to the general rule permitting liberal
amendment of exemptions under Rule 1009(a).
428
B.R.
644,
649
(Bankr.
M.D.N.C.
See, e.g., In re Man,
2010)
(“[T]here
are
two
recognized exceptions to the general rule: prejudice and bad
faith.”) (citations omitted).
Last year, however, pursuant to the
decision in Law v. Siegel, “the legal landscape [] changed” with
respect to judicially-created equitable exceptions to the liberal
amendment of exemptions.
In re Gress, 517 B.R. 543, 547 (Bankr.
M.D. Pa. 2014).
The debtor in Siegel claimed a $75,000 exemption for his home,
to which he assigned a value of $363,348.
134 S. Ct. at 1193. He
also represented that the home was subject to two mortgage liens,
one for $147,156.52 and another for $156,929.04. Id.
total amount
of
these
liens
exceeded the
Because the
home’s
value
after
deducting the $75,000 exemption, the trustee did not pursue a
foreclosure sale.
Id.
As later disclosed, however, no second
mortgage lien existed; the debtor had fraudulently represented its
existence
in
an
effort
to
prevent
a
foreclosure
sale.
Id.
Accordingly, the trustee initiated an adversary proceeding in the
bankruptcy court, which cost $500,000 to litigate.
6
Id.
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Because the debtor had perpetrated a fraud, the bankruptcy
court permitted the trustee to “surcharge” the $75,000 exemption to
defray his litigation expenses. Id. Both the Bankruptcy Appellate
Panel and a three-judge panel of the Ninth Circuit affirmed that
decision.
Id.
at
1193-94.
Specifically,
the
Ninth Circuit
determined that the surcharge was proper as it was “calculated to
compensate the estate for the actual monetary costs imposed by the
debtor’s misconduct, and was warranted to protect the integrity of
the bankruptcy process.”
In re Law, 435 F. App’x 697, 698 (9th
Cir. 2011) (per curiam) (unpublished table decision).
The Supreme
Court granted the debtor’s petition for a writ of certiorari in
order to address whether a bankruptcy court “may order that a
debtor’s exempt assets be used to pay administrative expenses
incurred as a result of the debtor’s misconduct.”
Siegel, 134 S.
Ct. at 1192.
A unanimous Supreme Court held that “[t]he Bankruptcy Court .
. . violated § 522’s express terms when it ordered that the $75,000
protected by [the debtor’s] homestead exemption be made available
to pay [the trustee’s] attorney’s fees, and administrative expense.
In doing so, the court exceeded the limits of its authority under
§ 105(a) and its inherent powers.”
Court,
Justice
Scalia
explained
7
Id. at 1195.
that
the
Writing for the
Bankruptcy
Code
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
specifically allows a homestead exemption and also provides that
the amount of that exemption cannot be used to pay administrative
expenses of the trustee.
emphasized
that
bankruptcy
courts
Id. at 1195.
“‘whatever
must
and
Of relevance here, he also
equitable
can
only
confines of’ the Bankruptcy Code.”
powers
be
remain
the
within
exercised
in
the
Id. at 1194 (quoting Norwest
Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)).
Notably, the trustee in Siegel had urged the existence of a
“general, equitable power in bankruptcy courts to deny exemptions
based on a debtor’s bad-faith conduct.”
Id. at 1196.
In rejecting
that contention, the Court held that “the Bankruptcy Code admits no
such power,” and “federal law provides no authority for bankruptcy
courts to deny an exemption on a ground not specified in the Code.”
Id. at 1196-97 (italics omitted).
It further explained:
We acknowledge that our ruling forces [the trustee] to
shoulder a heavy financial burden resulting from [the
debtor’s] egregious misconduct, and that it may produce
inequitable results for trustees and creditors in other
cases. We have recognized, however, that in crafting the
provisions of § 522, “Congress balanced the difficult
choices that exemption limits impose on debtors with the
economic harm that exemptions visit on creditors.” Schwab
v. Reilly, 560 U.S. 770, 791 (2010). The same can be
said of the limits imposed on recovery of administrative
expenses by trustees. For the reasons we have explained,
it is not for courts to alter the balance struck by the
statute.
Siegel, 134 S. Ct. at 1197-98.
8
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
The
question
presented
here
is
whether
the lack
of
any
equitable basis under the Bankruptcy Code to deny an exemption
likewise eliminates judicially-created equitable grounds to deny an
amendment to an exemption under Rule 1009(a).
The post-Siegel
consensus calls for application of the Supreme Court’s decision in
this context, see, e.g., In re Lua, 529 B.R. 766, 773-74 (Bankr.
C.D. Cal. 2015) (collecting cases), and this Court agrees that
Siegel’s rationale is applicable.
Nothing in the text of Rule
1009(a) provides an exception –- equitable or otherwise -- to a
debtor’s unambiguous ability to amend exemptions “as a matter of
course at any time before the case is closed.”
Thus, Siegel
constrains the Court from applying the equitable exception urged by
the Trustee.
Moreover, a recent Fourth Circuit decision comports with the
view that the strict interpretation of the Bankruptcy Code demanded
by Siegel applies with equal force to the Bankruptcy Rules.
In In
re Jenkins, 784 F.3d 230 (4th Cir. 2015), the court determined the
date on which a creditors’ meeting had concluded based on the
actions of the trustee.
It quoted Rule 2003(e), which provides:
“The meeting may be adjourned from time to time by announcement at
the meeting of the adjourned date and time. The presiding official
9
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
shall promptly file a statement specifying the date and time to
which the meeting is adjourned.”
Id. at 235.
Based on the text of the rule, our circuit court found that
“[t]he
presiding
official
in
this
case
neither
announced
an
adjourned date and time, nor filed a statement specifying as much.
And the [t]rustee never sought to rectify this omission and never
attempted to reconvene the creditors’ meeting after July 19.
meeting therefore concluded on that date.”
The
Id. at 235-36. The
trustee nevertheless urged the court to “accept that the meeting
was successfully continued on [July 19] rather than concluded.”
Id. at 236.
The court rejected that argument, finding no
support
in “[either] the text of Rule 2003 [or] the relevant case law.”
Id.
Siegel, its progeny, and Jenkins all confirm that this Court
is
bound
to
determining
apply
the
unambiguous
whether
any
equitable
text
of
exception
Rule
may
1009(a)
be
in
applied.
Because that text provides no such exception, the Bankruptcy Court
correctly rejected the Trustee’s equity-based argument.
III. CONCLUSION
For the reasons discussed, the Court finds no cognizable basis
on which to disallow the Scotchels’ amended exemption under Rule
1009(a).
It therefore AFFIRMS the ruling of the Bankruptcy Court.
10
SHEEHAN v. SCOTCHEL, ET AL.
1:14CV196
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
It is so ORDERED.
The
Court
directs
the
Clerk
to transmit
copies
of
this
Memorandum Opinion and Order to counsel of record and to remove
this case from the active docket.
DATED: September 3, 2015.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE
11
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?