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Damon Massey and v. Denise M. Pappalardo

February 27, 2012

DAMON MASSEY AND MARIE MASSEY, DEBTORS. DAMON MASSEY AND MARIE MASSEY, APPELLANTS,
v.
DENISE M. PAPPALARDO, CHAPTER 13 TRUSTEE, APPELLEE.



Appeal from the United States Bankruptcy Court for the District of Massachusetts (Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge) Bankruptcy Case No. 11-41059-MSH

FOR PUBLICATION

Before Lamoutte, Kornreich, and Tester, United States Bankruptcy Appellate Panel Judges.

Tester, U.S. Bankruptcy Appellate Panel Judge.

The debtors, Damon Massey and Marie Massey ("the Masseys" or "the Debtors"), appeal from the bankruptcy court order ("the Order") sustaining the objection of the chapter 13 trustee, Denise Pappalardo ("the Trustee"), to their claimed exemptions of "100% of FMV" in their residence and car. For the reasons set forth below, we AFFIRM the Order.

BACKGROUND

The Masseys are chapter 13 debtors, who filed a joint petition for relief, schedules, a statement of financial affairs, and a plan of reorganization in March 2011. On Schedule A, they indicated that they each owned a one-third interest, with a right of survivorship, in a single family home in Billerica, Massachusetts ("the residence"),*fn1 which they valued at $92,000.00. They reported on Schedule B that they jointly owned, inter alia, a 1995 Saturn ("the car"), which they valued at $1,455.00. On Schedule C, they indicated that they were electing their federal exemptions under § 522(d).*fn2 At the heart of this appeal is their further disclosure on Schedule C that the amount of their claimed exemptions in both the residence and the car was "100% of FMV," pursuant to § 522(d). The Masseys' Schedule D reflected that the residence was subject to a mortgage in the amount of $127,555.43, and that $35,555.43 of the claim was unsecured. The Masseys did not list any liens on the car on Schedule D.

In May 2011, the Trustee objected both to confirmation of the Debtors' chapter 13 plan and their exemptions ("the Objection"). Relying on Schwab v. Reilly, 130 S. Ct. 2652 (2010), the Trustee challenged the claimed exemption in the residence primarily on the grounds that it exceeded statutory limits. She also argued that the exemptions constituted an improper attempt to capture post-petition appreciation in the residence and the car, and suggested that the Masseys were acting in bad faith. Accordingly, the Trustee argued that because the Masseys' exemptions were improper, their plan might fail the liquidation test of § 1325(a)(4), and, therefore, confirmation should be denied.

In their response to the Objection ("the Response"), the Masseys countered with the argument that resounds throughout this appeal: "The idea that one has no statutory right to claim an in-kind exemption to property whose value is plainly within the statutory exemption limits is anathema to a consumer debtor." They rejected the Trustee's arguments that their challenged exemptions exceeded statutory limits, and that they were acting in bad faith. They further contended that the phrase, "100% of FMV," was merely a "phrase of art" authorized by the Supreme Court in Schwab to claim in-kind exemptions. Specifically, they pointed to the following language from Schwab:

Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as "full fair market value (FMV)" or "100% of FMV." Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits. If the trustee fails to object, or if the trustee objects and the objection is overruled, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption. See Fed. R. Bankr. P. 1009(a). Either result will facilitate the expeditious and final disposition of assets, and thus enable the debtor (and the debtor's creditors) to achieve a fresh start free of the finality and clouded-title concerns [the debtor] describes.

At the hearing on the Objection, the Trustee argued that neither Schwab nor the Code permit in-kind exemptions. She again argued that the Debtors were attempting to shield potential appreciation in the real estate, which was actually property of the estate pursuant to Barbosa v. Solomon, 235 F.3d 31 (1st Cir. 2000).

The Masseys countered:

The key point here is that the phrase "100[%] of FMV" doesn't mean what it seems to mean. If the Supreme Court had said, "Use the word 'Rumpelstiltskin' when you want to claim an in-kind exemption,'" that's what we would have done, and it would have meant no more nor less than the phrase that we did pick, which is the one that's mentioned in Justice Thomas's opinion.

When the bankruptcy court asked counsel for the Masseys, "How is anybody supposed to know what 'FMV' means," counsel replied: "Well, the Supreme Court told us . . . [in Schwab]."

The bankruptcy court entered an order overruling the Objection based on the misapprehension that it was untimely. In the order granting the Trustee's motion to reconsider, the court wrote:

Upon reconsideration, I will vacate my July 25th order and enter the following order on the [T]rustee's objection. The [T]rustee's objection to the [D]ebtors' claim of exemption of "100% of FMV" in [the residence and the car] is sustained. "Most of the § 522(d) exemption categories define the property a debtor may claim as exempt as the debtor's interest-up to a specified dollar amount-in the assets described in the category, not as the assets themselves. §§ 522(d)(5)-(6); see also §§ 522(d)(1)-(4), (8) . . . . " Schwab v. Reilly, 130 S. Ct. 2652, 2661-62 (2010) (Internal quotation marks omitted). Accordingly, the debtors' exemptions are deemed limited to the maximum statutory exemption amount available to them as of the date of the filing of their [c]hapter 13 petition (i.e., $40,400[.00] for the [residence] and $3,225[.00] for the [car]). To the extent either item appreciates in value after the [c]hapter 13 filing date, the [D]ebtors would be entitled to exempt such appreciation up to the maximum exemption amount. Any appreciation in excess of the exemption amounts, however, would be property of the estate potentially available for creditors. Barbosa v. Solomon, 243 B.R. 562, 568 (D. Mass. 2000), aff'd [ ] 235 F.3d 31 (1st Cir. 2000). Subject to the foregoing, the [T]rustee's objection to plan confirmation is overruled. The [T]rustee may incorporate the relevant terms of this order in her proposed order confirming the plan.

The Masseys appealed that portion of the court's ruling sustaining the Trustee's objection to their "claim of exemption of '100% of FMV' in their home and automobile."

JURISDICTION

A bankruptcy appellate panel is "duty-bound" to determine its jurisdiction before proceeding to the merits even if the litigants do not raise the issue. See Boylan v. George E. Bumpus, Jr. Constr. Co. ( In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 725 (B.A.P. 1st Cir. 1998). A panel may hear appeals from "final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]." Fleet DataProcessing Corp v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (B.A.P. 1st Cir. 1998). The Panel has previously ruled that "[a]n order sustaining an objection to exemption is a reviewable final order." Fracasso v. Reder (In re Fracasso), 222 B.R. 400 (B.A.P. 1st Cir. 1998) (citation omitted), aff'd, 187 F.3d 621 (1st Cir. 1999); see also Howe v. Richardson (In re Howe), 232 B.R. 534 (B.A.P. 1st Cir. 1999), aff'd, 193 F.3d 60 (1st Cir. 1999). Accordingly, the Panel has jurisdiction to hear this appeal.

STANDARD OF REVIEW

A bankruptcy court's findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir. 2010). The Panel reviews orders regarding a debtor's claimed exemptions de novo, especially where, as here, there are no disputed issues of fact. In re Howe, 232 B.R. at 535; In re Fracasso, 222 B.R. at 400.

POSITION OF THE PARTIES

The following excerpt from the Masseys' Amended Brief best ...


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