C. KATHRYN PRESTON, United States Bankruptcy Judge.
This cause came on for hearing on October 22, 2015, upon Trustee's Objection to
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
The Debtor previously owned residential real property located at 5317 Agate Place, Lewis Center, Ohio 43035 (the "Real Property"). During the pendency of the Chapter 7 bankruptcy case, the Trustee formally abandoned the Real Property. Thereafter, the bankruptcy case was closed. The Real Property was sold at foreclosure sale, which resulted in a surplus of sale proceeds in the amount of $80,593.21 (the "Surplus Proceeds"). The Chapter 7 bankruptcy case was reopened at the Trustee's request, in order to allow the Trustee to administer the Surplus Proceeds. The Debtor subsequently filed an amended Schedule C to claim a homestead exemption in the Real Property pursuant to Ohio Revised Code § 2329.66(A)(1). The Trustee asserts that the Surplus Proceeds are property of the bankruptcy estate and objects to the Debtor's claim of exemption in the Real Property.
Upon arguments presented and evidence adduced at the hearing, the Court finds and concludes as follows:
The Debtor filed a Voluntary Petition for relief under Chapter 13 of the Bankruptcy Code on November 03, 2014, and later converted the case to one under Chapter 7 of the Bankruptcy Code on January 7, 2015. On the date of the filing of the Petition, the Debtor owned the Real Property and disclosed it on Schedule A—Real Property ("Schedule A") (Doc. # 1). The Debtor, however, did not claim an exemption in the Real Property on Schedule C—Property Claimed as Exempt ("Schedule C") (Doc. # 1). As of the date of the Petition, the Debtor indicated on Schedule A that the value of the Real Property was $360,500.00
On January 22, 2015, Home Ally Financial II, LLC ("Home Ally") filed Amended Motion for Relief from Stay and for In Rem Relief pursuant to 11 U.S.C. § 362(d)(4) (the "Motion for Relief from Stay") (Doc. # 32) seeking relief from the automatic stay to pursue its rights against the Real Property, including foreclosure remedies. On the same day that the Motion for Relief from Stay was filed, Home Ally also filed Home Ally Financial II, LLC's Request for Abandonment of Property (the "Request for Abandonment") (Doc. # 33) requesting that the Trustee abandon the Real Property on the basis that the Real Property was over-encumbered by liens and there was no equity in it for the benefit of the bankruptcy estate. There were no objections filed in response to the Motion for Relief from Stay, and this Court entered an Order Granting Motion for Relief from the Automatic Stay (the "Relief from Stay Order") (Doc. # 34) on February 18, 2015. The Relief from Stay Order granted relief from the automatic stay so that Home Ally could pursue its in rem remedies under non-bankruptcy law regarding the Real Property. On February 25, 2015, Trustee's Abandonment of Property (the "Abandonment") (Doc. # 42) was filed (by Home Ally on behalf of the Trustee) whereby the Trustee abandoned the Real Property. Thereafter, the Court entered the Discharge of Debtor (Doc. # 56) on April 15, 2015, and the bankruptcy case was closed on May 7, 2015.
Upon termination of the automatic stay, Home Ally pursued its foreclosure remedies in Delaware County Common Pleas Court (the "State Court"), and the Real Property was sold pursuant to a sheriff's sale (the "Sheriff's Sale") conducted on April 15, 2015. Prior to the Sheriff's Sale, the first mortgage holder failed to file an answer in response to the foreclosure complaint filed against it in the State Court. As a result, the first mortgage holder's lien was extinguished and no longer entitled to be paid from the Sheriff's Sale proceeds. This resulted in the Surplus Proceeds. On May 11, 2015, the State Court entered a Journal Entry Confirming Sale, Ordering Deed and Distributing Sale Proceeds (the "Confirming Order") which confirmed the sale of the Real Property to Raymond Financial Services, Inc. for the amount of $320,000. The Confirming Order also provided for distribution of the sale proceeds. The Confirming Order revealed that after payment of lienholders entitled to be paid, and fees and costs of the foreclosure proceeding, there would remain on hand with the Sheriff, the sum of $80,593.21. On the same day, the State Court also entered a Judgment Entry (the "Show Cause Order") providing, among other things, that any party may show cause by June 5, 2015, why the balance of the Surplus Proceeds should not be returned to the Debtor.
On May 18, 2015, the Debtor filed a Motion to Reconsider Journal Entry Confirming Sale, Ordering Deed and Distributing Sale Proceeds (the "Motion to Reconsider")
While the Trustee and the Debtor were litigating issues in the State Court, the Trustee filed a Motion for an Order Reopening the Estate and Directing Appointment of Trustee (the "Motion to Reopen") (Doc. # 61) before this Court requesting that the bankruptcy case be reopened to administer property of the estate for the benefit of creditors. Over the objection by the Debtor, the Court granted the Trustee's Motion to Reopen and entered the Order to Reopen Case with Appointment of Trustee and Dispensing with Notice to Reopen and Deferring Filing Fee Pending Recovery of Assets (the "Order Reopening Case") (Doc. # 67) on June 4, 2015. Thereafter, on June 9, 2015, the Debtor filed an amended Schedule C claiming a homestead exemption in the Real Property (and thus, the proceeds of sale thereof) in the amount of $132,900.00 pursuant to Ohio Revised Code § 2329.66(A)(1). The Trustee filed an objection.
The filing of a petition for relief under the Bankruptcy Code creates a bankruptcy estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate pursuant to 11 U.S.C. § 522(b). Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 548 (6th Cir.1998). Pursuant to § 522(b)(2), a debtor may claim federal exemptions set forth in § 522(d) so long as the applicable state has not "opted-out" and enacted its own exemptions. Ohio has elected to opt-out of the federal exemptions and create its own set of exemptions. See Ohio Rev. Code Ann. § 2329.662.
"[T]he objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. 4003(c).
In re Kimble, 344 B.R. 546, 551 (Bankr. S.D.Ohio 2006) (internal quotation marks and citations omitted).
In this case, the Debtor claimed a homestead exemption in the Real Property pursuant to Ohio Revised Code § 2329.66(A)(1)(b). Ohio's homestead exemption provides in pertinent part as follows:
Ohio Rev.Code Ann. § 2329.66(A)(1)(b). Before the Court can determine if the Debtor's claim of exemption in the Real Property is proper, it must first determine whether it is property of the bankruptcy estate.
The filing of a petition for relief under the Bankruptcy Code creates a bankruptcy estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1).
Batten v. Cardwell (In re Batten), 351 B.R. 256, 260 (Bankr.S.D.Ga.2006). On the date of the filing of the Petition in this case, the Debtor listed the Real Property on Schedule A and indicated the value of it was $360,500.00. The Debtor also indicated the Real Property was subject to liens in the amount of $617,627.61. After the date this case converted from one under Chapter 13 to one under Chapter 7, the Debtor filed an amended Schedule A solely to change his representation that the Real Property was only owned by him and not jointly with his wife; all other information remained the same. The Real Property was property of the bankruptcy estate because the Debtor owned it at the time the Petition was filed and continued to own it after the case converted, and the parties do not dispute this fact.
11 U.S.C. § 554 governs abandonment of property of the estate. Section 554(a) provides that "[a]fter notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(a). "The effect of abandonment by a trustee, whether accomplished by affirmative act under 11 U.S.C. § 554(a) or (b) or by failure of administration under subparagraph (c), is to divest the trustee of control over the property because once abandoned, property is no longer a part of the bankruptcy estate." In re Sills, 126 B.R. 974, 976 (Bankr.S.D.Ohio 1991). "When property is abandoned, it ceases to be property of the estate and reverts to the debtor." Sills, 126 B.R. at 976 (citing Brown v. O'Keefe, 300 U.S. 598, 602, 57 S.Ct. 543, 81 L.Ed. 827 (1937)).
In re Polumbo, 271 F.Supp. 640, 642-643 (W.D.Va.1967) (citations omitted). "The general rule in this area is well settled—once a trustee abandons property, the abandonment is irrevocable." Huntington Nat'l Bank v. Hunter (In re Hunter), 76 B.R. 117, 118 (Bankr.S.D.Ohio 1987) (citations omitted). "The rationale for the general rule is that once an asset has been abandoned, it is no longer part of the estate and is effectively beyond the reach and control of the trustee. Courts have also noted the policy of preserving finality." DeVore v. Marshack (In re DeVore), 223 B.R. 193, 198 (9th Cir. BAP 1998) (citations omitted).
Hunter, 76 B.R. at 118 (citations omitted).
On February 25, 2015, the Trustee in this case abandoned the Real Property pursuant to 11 U.S.C. § 554(a) as evidenced by the Abandonment that was filed. The Debtor disclosed the Real Property on Schedule A and provided the full street address, the current value of the Debtor's interest in the Real Property, and the amount of secured claims related to the Real Property. Upon conversion of the case, the Debtor filed an amended Schedule A that still listed the Real Property as an asset owned by him that included all the same information as the initial Schedule A.
Once the Real Property was abandoned and removed entirely from the jurisdiction of the bankruptcy court, the same revested back to the Debtor as if it had never been held by the Trustee. See Hunter, 76 B.R. at 118. In addition, any lienor, including but not limited to Home Ally, was permitted to proceed with its remedies related to the Real Property, such as foreclosure, as it normally would under applicable state law. See In re Polumbo, 271 F.Supp. 640, 643 (W.D.Va.1967). Upon termination of the automatic stay and abandonment of the Real Property in this case, Home Ally pursued its foreclosure remedies in the State Court. The Real Property was sold pursuant to the Sheriff's Sale for the sale price of $320,000, which resulted in the Surplus Proceeds. The Surplus Proceeds, however, are not property of the bankruptcy estate because the Real Property had been abandoned previously by the Trustee. Any interest of the Trustee or the bankruptcy estate in the Real Property irrevocably terminated once the asset was abandoned on February 25, 2015. The Sheriff's Sale did not occur until April 15, 2015 which was almost a month after the Real Property was no longer part of the bankruptcy
The Trustee argues that the Debtor had a continuing duty to list the Surplus Proceeds in his bankruptcy case once he became aware of their existence. "The Bankruptcy Code and Rules require that the schedules contain information that is accurate as of the date the petition is filed. A debtor who learns that the information supplied in his or her schedules was inaccurate as of the petition date has a duty to correct that information. . . ." Vasquez v. Adair (In re Adair), 253 B.R. 85, 91 n. 16 (9th Cir. BAP 2000) (emphasis added) (citation omitted). "[N]othing in the Bankruptcy Code or Rules imposes upon a debtor the ongoing duty of supplementation advocated by the Trustee." Vasquez, 253 B.R. at 90 (rejecting the trustee's contention that debtors have a duty to provide ongoing information "analogous to the duty imposed on a party to supplement responses to discovery requests when the party learns that his or her prior response is in some material respect incomplete or incorrect, even though the response was complete and accurate when made").
Vasquez, 253 B.R. at 90 (footnotes omitted). In this case, the Debtor scheduled his ownership interest in the Real Property indicating the fair market value and the aggregate amount of secured claims related to it. The Trustee has not asserted that this information was incorrect or otherwise misleading. Furthermore, nothing in the record indicates that the Debtor otherwise learned that any of the information he supplied in his schedules was inaccurate as of the petition date.
The Trustee further contends that the Surplus Proceeds are personalty and should be listed on Schedule B—Personal Property ("Schedule B") and because the Debtor failed to file an amended Schedule B disclosing same, the Trustee did not knowingly abandon them. The Trustee relies upon Slone v. Anderson (In re Anderson), 511 B.R. 481 (Bankr.S.D.Ohio 2013) to support his position.
In the Anderson case, the debtors' real property was sold at a sheriff's sale prior to the date the debtors filed bankruptcy under Chapter 7 of the Bankruptcy Code. In addition, the state court entered an order prior to the debtors' bankruptcy case being filed that indicated among other things that a remaining balance or surplus proceeds existed in the amount of $74,343.23 that was being held by the state court until further order. The debtors, in Anderson, did not list any real property or proceeds from the sale of real property in their bankruptcy schedules. The debtors did identify the foreclosure action involving their real property in their Statement of Financial Affairs, however, the debtors did not indicate there was any equity in the real property of any proceeds owed to the debtors from the sheriff's sale. The trustee even examined the debtors at the meeting of creditors about the foreclosure proceeding, and they indicated they were not owed any proceeds.
Slone v. Anderson (In re Anderson), 511 B.R. 481, 494 (Bankr.S.D.Ohio 2013).
The facts present in Anderson differ so greatly from the facts of this case, it is inapplicable to the issues before this Court. The Surplus Proceeds in this case did not exist before the Debtors filed their bankruptcy petition. To be sure, the Surplus Proceeds did not exist until after the Trustee abandoned the asset (i.e., the Real Property) from which they were derived. Accordingly, this Court finds the Anderson case distinguishable from this case and unpersuasive.
And finally, the Trustee's additional argument regarding the res judicata effect of the State Court order is misplaced. A claim is barred by res judicata, also known as claim preclusion, if: (1) there has been a final decision on the merits by a court of competent jurisdiction; (2) the subsequent action is between the same parties or their privies; (3) the issue in the subsequent action was or should have been litigated in the prior action; and (4) there is identity between the causes of action. Bittinger v. Tecumseh Prods. Co., 123 F.3d 877, 880 (6th Cir.1997) (citations omitted). As stated in the Order on Reconsideration and Intervention, the State Court determined that (1) the Debtors waived their homestead exemption in the foreclosure proceeding based on untimeliness, and (2) the Trustee was allowed to intervene in the foreclosure proceeding and receive the Surplus Proceeds to distribute to the Debtor's creditors. The State Court awarded the Surplus Proceeds to the Trustee, however, it did not make a specific finding that the Surplus Proceeds were property of the bankruptcy estate, nor did it provide the basis for awarding the Surplus Proceeds to the Trustee. Therefore, it is unclear what the State Court's reasoning was for its determination that the Trustee was entitled to the Surplus Proceeds. This Court has exclusive jurisdiction to determine what is property of the bankruptcy estate. See 28 U.S.C. § 1334. Since the bankruptcy court has exclusive jurisdiction over property of the estate
Furthermore, the third and fourth elements of res judicata cannot be satisfied either. The issue of whether the Debtor could claim a homestead exemption in his bankruptcy case was not litigated in the State Court foreclosure proceeding. The Order on Reconsideration and Intervention specifically stated that "because defendant George Haber failed to timely assert in this case his right to claim a so-called homestead exemption under [Ohio Revised Code §] 2329.66(A)(1)(b), Haber's May 18, 2015 motion asking me to reconsider the May 11, 2015 entry is denied." The State Court specifically limited its determination to the foreclosure proceeding, so the issue of whether the Debtor could claim a homestead exemption in his bankruptcy case was not litigated before the State Court. Nor could it be, inasmuch as that question falls within the exclusive purview of this Court. And finally, the legal proceeding before the State Court was a foreclosure proceeding and the legal proceeding before this Court is a bankruptcy case. As a result, there is no identity between the causes of action.
Based on the foregoing, the Court finds that the Trustee irrevocably abandoned the Real Property, the Surplus Proceeds are not and never have been property of the Debtor's bankruptcy estate, and the Court does not have jurisdiction over the Surplus Proceeds. Accordingly, it is
IT IS SO ORDERED.
Ohio Rev.Code Ann. § 2329.66(B). The adjusted dollar amounts do not appear in the text of the statute; however, that information may be accessed by visiting the Ohio Judicial Conference website. Ohio Judicial Conference, http://www.ohiojudges.org/(search and follow "Exemptions" hyperlink).
