JEFF BOHM, Chief Bankruptcy Judge.
This case is about a Chapter 7 Trustee who is doing her job well and a Debtors' attorney who is not. Additionally, this is a case about debtors who thumb their nose at the bankruptcy system. At issue is how this Court should rule on the Trustee's Objection to Exemptions and Motion to Compel Turnover and Filing of Statement of Financial Affairs (the Objection/Motion).
The Court makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated into by Federal Rules of Bankruptcy Procedure 7052 and 9014.
The relevant facts — as established by the pleadings, the admitted exhibits, the Trustee's testimony, and the stipulations of the Debtors' counsel — are as follows:
1. David Lee Reeves, Jr. (Mr. Reeves) and Hope Ann Reeves (Ms. Reeves) (collectively,
2. On this same day, the Debtors also filed their Schedules A, B, C, D, E, F, G, H, I, and J (the Original Schedules), a Summary of the Schedules, and their Statement of Financial Affairs (the Original SOFA). [Id. at pp. 8-29 & 32-37; Trustee's Ex. B, pp. 1-6].
3. The Debtors filed their proposed Chapter 13 plan on June 18, 2010
4. On July 22, 2010, the Debtors filed their proposed Order for Withholding of Wages of Chapter 13 Debtor [Doc. No. 26]. On July 23, 2010, this Court signed the Debtors' proposed Order for Withholding of Wages of the Chapter 13 Debtor, directing the United States Department of Homeland Security — the employer of one of the Debtors (i.e., Ms. Reeves) — to remit a specific portion of her wages directly to the Chapter 13 Trustee until it receives an order from this Court directing the employer to cease making these payments (the Wage Withholding Order). [Doc. No. 27].
5. On August 23, 2010, the Debtors filed an Emergency Motion to Temporarily Suspend the Wage Withholding Order [Doc. No. 36]; and, on August 26, 2010, this Court granted this emergency motion, and signed an order suspending the withholding of Ms. Reeves' wages until October 31, 2010 [Doc. No. 39].
6. On September 3, 2010, the Chapter 13 Trustee filed a Motion to Dismiss or Convert, requesting that this Court dismiss or convert the Debtors' Chapter 13 case because the Debtors: (a) failed to make payments pursuant to § 1326(a)(1); (b) caused unreasonable delay that was prejudicial to their creditors; (c) failed to amend Schedule I to reflect Ms. Reeves' new income and employer; and (d) failed to provide a copy of their 2009 tax return. [Doc. No. 42].
7. On October 18, 2010, this Court signed an Order Withdrawing Motion to Dismiss, which (a) authorized the Chapter 13 Trustee to withdraw his motion to dismiss, conditioned on Ms. Reeves agreeing to entry of another wage order; and (b) ordered Ms. Reeves to provide the information required by the Chapter 13 Trustee for entry of a wage order within 7 days of the entry of the Order. [Doc. No. 52].
8. On January 13, 2011, the Debtors filed a Motion to Sign Amended Wage Order; attached thereto was their proposed Amended Wage Withholding Order. [Doc. No. 66]. On January 20, 2011, this Court granted the Debtors' Motion to Sign Amended Wage Order and signed an Amended Order for Withholding of Wages of Chapter 13 Debtor (the Amended Wage Withholding Order). [Doc. No. 67]. The Amended Wage Withholding Order expressly set forth that: (a) the Wage Withholding Order, which was entered on the docket on July 23, 2010 [Finding of Fact No. 4], was vacated; and (b) Ms. Reeves' current employer — US Customs & Border
9. On July 13, 2012, the Debtors filed an Amended Order to Employer to Pay Chapter 13 Trustee [Doc. No. 87]; and, on the same day, this Court signed the order (the Second Amended Wage Withholding Order), directing Ms. Reeves' employer (i.e., U.S. Customs & Border Protection) to remit a portion of her wages directly to the Chapter 13 Trustee until further order from the Court [Doc. No. 88].
10. The Debtors filed a Notice of Voluntary Conversion from Chapter 13 to Chapter 7 on February 11, 2013 (the Conversion Date). [Doc. No. 92].
11. On the Conversion Date, the Debtors filed their Amended Schedules B, C, F, I and J (the 2/11 Amended Schedules)
12. On February 13, 2013, Allison Byman (the Trustee) was duly appointed as the Chapter 7 Trustee, and she continues to serve as the Trustee up to this date.
13. On March 1, 2013, the Chapter 13 Trustee, who administered the Debtors' case prior to conversion, filed the Chapter 13 Standing Trustee's Final Report and Account (the Final Report).
14. The Final Report reflects that: (1) while the Debtors were in their Chapter 13, they paid a total of $82,999.15 to the Chapter 13 Trustee; and (2) upon conversion, the Chapter 13 Trustee sent $4,625.49 to the Debtors (the Chapter 13 Refund), representing funds that the Debtors had paid to the Chapter 13 Trustee pursuant to the Confirmed Plan but which the Chapter 13 Trustee had not distributed to creditors by the Conversion Date. [Trustee's Ex. D, p. 3; Doc. No. 97, p. 2].
16. On March 22, 2013, the Debtors filed Amended Schedules B, C, I, J, and G (the 3/22 Amended Schedules).
17. On April 4, 2013, one of the Debtors (i.e., Mr. Reeves) appeared at the continued meeting of creditors, but the other Debtor (i.e., Ms. Reeves) failed to appear. [Doc. No. 123, p. 3, ¶ 10]; see [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1]. Mr. Reeves was sworn and provided additional testimony. [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1 ¶ 1]; see [Findings of Fact Nos. 29-34] (discussing Mr. Reeves' testimony at the April 4, 2013 meeting of creditors). "The Trustee continued the meeting of creditors for a second time to May 2, 2013, to allow for production of business records, the 2012 tax return
18. On April 12, 2013, the Debtors, through their attorney, filed a skeletal Motion to Dismiss this Chapter 7 case (the First Motion to Dismiss) because "the Chapter 7 Trustee and the Office Of the United States Trustee For The Southern District of Texas have aggressively pursued (via requests for documents and the 341 meeting interrogations), that Debtors cannot cope with the additional strain of
19. On April 17, 2013, this Court signed an order denying the First Motion to Dismiss due to the failure of the Debtors' counsel to: (a) give notice to their creditors, the Chapter 7 Trustee, and parties requesting notice pursuant to Bankruptcy Local Rule 9013-1; and (b) file a proper Certificate of Service. [Doc. No. 111].
20. On April 25, 2013, the Debtors, through their attorney, filed a second Motion to Dismiss this Chapter 7 case (the Second Motion to Dismiss), identical to the First Motion to Dismiss, but this time, the Second Motion to Dismiss complied with Bankruptcy Local Rule 9013-1. [Doc. No. 115]. Several creditors and the Trustee filed responses opposing the Second Motion to Dismiss. [See Doc. Nos. 116, 119, 121 & 122].
21. On May 2, 2013, a continued meeting of creditors was held, at which the Debtors failed to appear. Counsel for the Debtors "indicated that he was sick and unable to attend, and that his clients had no intention of attending the continued meeting."
22. On May 6, 2013, the Trustee filed a Motion Pursuant to § 348(f)(2) to Establish Property of the Estate as of the Date of Conversion to Chapter 7 (the § 348(f)(2) Motion). [Doc. No. 123]. In the § 348(f)(2) Motion, the Trustee asserted that the Debtors' bad faith conduct was such that the Conversion Date — not the Petition Date — should be the relevant date for determining what property constitutes property of the estate.
23. On May 16, 2013, a continued meeting of creditors was held, at which both of the Debtors failed to appear; thus, the Trustee, once again, continued the meeting of creditors to June 11, 2013. [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1]. The Debtors also failed to appear at the June 11, 2013 continued meeting of creditors; thus, the Trustee, once again, continued the meeting of creditors to July 2, 2013. [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1].
24. On June 27, 2013, this Court held a hearing on the Second Motion to Dismiss. The Debtors once again failed to appear. [Doc. No. 144]. On June 28, 2013, the Court issued an order denying the Second Motion to Dismiss and ordering the Debtors to appear, give testimony, and produce certain documents at the continued meeting of creditors. [Doc. No. 147, pp. 1-2]. The order also expressly set forth that if the Debtors did not appear at any subsequently scheduled meeting of creditors, then the Court would issue a bench warrant for their arrest. [Id. at p. 2].
25. On July 2, 2013, a continued meeting of creditors was held, at which neither the Debtors nor their counsel appeared. See [Docket sheet entry for 07/10/2013 regarding the Meeting of Creditors]. The Trustee continued the meeting of creditors to July 11, 2013. [Id.]. At the July 11, 2013 continued meeting of creditors, the Debtors appeared, but even though they did appear, the meeting was continued to August 1, 2013 because the Debtors still needed to provide additional documentation to the Trustee. See [Docket sheet entry for 07/23/2013 regarding the Meeting of Creditors].
26. On June 27, 2013, July 11, 2013, and August 6, 2013, this Court held hearings on the § 348(f)(2) Motion, during which testimony was adduced and exhibits were introduced (the Hearing on the § 348(f)(2) Motion). Ms. Reeves testified on June 27, 2013, and Mr. Reeves testified on July 11, 2013. After considering the testimony adduced and the exhibits that were introduced, this Court orally granted the § 348(f)(2) Motion.
27. On August 9, 2013, this Court issued an order granting the § 348(f)(2) Motion
28. On September 12, 2013, a continued meeting of creditors was held. The Debtors appeared, and the Trustee was finally able to conclude the meeting of creditors, the first one of which was held approximately six months earlier [see Finding of Fact No. 15].
29. Prior to the April 4, 2013 continued meeting of creditors, one of the Debtors (i.e., Mr. Reeves) provided the Trustee with bank statements for the 90 days prior to the Conversion Date. [Doc. No. 123, p. 4, ¶ 17]. The statements for Mr. Reeves' personal account, which he used for his business, indicate that he received a wire transfer in the amount of $46,930.50 on February 8, 2013. [Id.]. On the same day, Mr. Reeves requested a cashier's check in the amount of $30,010.00. [Id.].
30. At the April 4, 2013 continued meeting of creditors [Finding of Fact No. 17], Mr. Reeves was sworn and provided testimony regarding his business, Tubular Machine Products (TMP). [Doc. No. 123, p. 3, ¶¶ 10 & 13; Adv. Doc. No. 1, p. 3, ¶ 11 & Adv. Doc. No. 10, p. 1, ¶ 2]. Specifically, Mr. Reeves testified that he used the cashier's check in the amount of $30,010.00 to pay Jim Roy, a creditor of TMP. [Id. at p. 4, ¶ 17].
31. Mr. Reeves also testified that he: (a) started his business after filing the Chapter 13 case, but before confirmation of the proposed Chapter 13 Plan
32. Mr. Reeves also testified that he did not maintain books or records for his business and that he stopped operating his business in either January or February of
33. Mr. Reeves also testified that his benefits from the Veteran's Administration (VA Benefits) increased in September of 2011, and at the time of the increase, or soon thereafter, he received a retroactive lump sum payment — approximately $10,000 to $12,000 — to bring his benefits current (the Retroactive Payment). [Doc. No. 123, p. 4, ¶ 18]. Despite the increase in Mr. Reeves' VA Benefits and the Retroactive Payment, the Debtors did not disclose this information or modify the Confirmed Plan to make greater distributions to their creditors. [Id., pp. 4-5, ¶ 18]. Mr. Reeves further testified at the Hearing on the § 348(f)(2) Motion that he did not notify the Chapter 13 Trustee of the Retroactive Payment because the Debtors believed it was exempt from bankruptcy. [Tape Recording, July 11, 2013 Hearing at 2:13:02-2:13:09 p.m.]. Rather, the Debtors used the Retroactive Payment to purchase a 2010 Dodge 2500 Truck (the 2010 Dodge Truck). [Doc. No. 123, pp. 4-5, ¶ 18].
34. At the meeting of creditors and at the Hearing on the § 348(f)(2) Motion, Mr. Reeves testified that he discarded the computer he used for his business operations in or around September 2012, during the pendency of the Debtors' Chapter 13 case. [Adv. Doc. No. 1, p. 3, ¶ 13].
35. At the Hearing on the § 348(f)(2) Motion, Mr. Reeves testified that he had acquired several vehicles during his Chapter 13 case, but he could not describe the disposition of each vehicle. [Adv. Doc. No. 1, p. 4, ¶ 14].
36. Also, at the Hearing on the § 348(f)(2) Motion, Mr. Reeves identified an unpaid receivable due to him in the amount of at least $20,000.00; this receivable
37. At the Hearing on the § 348(f)(2) Motion on June 27, 2013, the other debtor — Ms. Reeves — repeatedly claimed to have no knowledge or familiarity with Mr. Reeves' business. [Adv. Doc. No. 1, p. 4, ¶ 16]. Specifically, she testified that although she was aware of TMP, she did not know anything about the business because she was "not allowed to be involved in anything that [Mr. Reeves] does because of her job." [Tape Recording, June 27, 2013 Hearing at 1:12:35-1:13:25 p.m.]. Ms. Reeves could not explain where the $800,000 that flowed through his business went nor could she explain the existence or absence of his business records. [Adv. Doc. No. 1, p. 4, ¶ 16]. Ms. Reeves did not notify the Chapter 13 Trustee or this Court of Mr. Reeves' new business or of the increased income during the operation of Mr. Reeves' business. [Id.; Tape Recording, June 27, 2013 Hearing at 1:17:14-1:17:23 p.m.].
38. On September 24, 2013 — approximately six weeks after this Court granted the § 348(f)(2) Motion — the Trustee's counsel e-mailed the Debtors' counsel the following request:
[Trustee's Ex. A, p. 1].
39. On the same day, approximately three hours after the Trustee's counsel sent the foregoing e-mail, counsel for the Debtors replied as follows:
[Id.].
40. On the same day, approximately two hours after the Debtors' counsel's response, counsel for the Trustee replied:
[Id.].
41. Counsel for the Debtors neither responded to this e-mail nor filed any amended Schedules or SOFA on behalf of his clients. [See Doc. No. 175, p. 4, ¶ 9; Tape Recording, November 19, 2013 Hearing at 2:00:11-2:00:17 p.m.]. Thus, for purposes of fulfilling her duties as a Chapter 7 Trustee in the wake of the August 9, 2013 Order, the "live" Schedules and "live" SOFA that the Trustee scrutinized were the Original Schedule A, the 3/22 Amended Schedule B, the 3/22 Amended Schedule C, the Original Schedules D and E, the 2/11 Amended Schedule F, the 3/22 Amended Schedule G, the Original Schedule H, the 3/22 Amended Schedules I and J, and the Original SOFA (collectively, the "Live" Pleadings). [See Findings of Fact Nos. 2, 11 & 16].
42. The 3/22 Amended Schedules do not list all of the Debtors' interests in property as of the Conversion Date. [Tape Recording, November 19, 2013 Hearing at 2:23:00-2:23:09 p.m.; Doc. No. 175, p. 2, ¶ 7; see also Doc. Nos. 100 & 101]. In addition to outright omissions, there are inaccurate "low-ball" values placed on certain assets. [Tape Recording, November 19, 2013 Hearing at 2:23:10-2:23:15 p.m.; Doc. No. 175, p. 2, ¶ 7].
43. First, the 3/22 Amended Schedules B and C identified $20.00 relating to "Woodforest National Bank." [Trustee's Ex. B, pp. 15 & 20; Doc No. 100, p. 1; Doc. No. 101, p. 1; Doc. No. 175, p. 3, ¶ 7(a)]. However, as of the Conversion Date, the Debtors had two accounts at Woodforest National Bank (the Woodforest Bank Accounts).
44. The difference between the amount that the Debtors scheduled with respect to the Woodforest Bank Accounts on the 3/22 Amended Schedules and the actual amount that the Debtors had in the Woodforest Bank Accounts as of the Conversion Date is $2,652.08 (i.e., $2,672.08 - $20.00 = $2,652.08). [See Finding of Fact No. 43].
45. Second, the 3/22 Amended Schedules B and C identified $15,000.00 relating to the Debtors' 2012 tax refund (the 2012 Tax Refund). [Trustee's Ex. B, pp. 18 & 21; Doc. No. 100, p. 4; Doc. No. 101, p. 2; Doc. No. 175, p. 3, ¶ 7(d)]. However, the actual amount of the 2012 Tax Refund was $15,613.00.
46. The difference between the amount that the Debtors scheduled with respect to the 2012 Tax Refund on the 3/22 Amended Schedules and the actual amount that they received is $613.00 (i.e., $15,613.00 - $15,000.00 = $613.00). [See Finding of Fact No. 45].
47. Third, the 3/22 Amended Schedules B and C identified the 2010 Dodge Truck, and the Debtors valued this vehicle at $15,000.00.
48. Fourth, the 3/22 Amended Schedule B failed to disclose the refund that the Debtors received from the Chapter 13 Trustee in the amount of $4,625.49 (the Chapter 13 Refund). [See Trustee's Ex. B, pp. 15-19; Doc. No. 100; Doc. No. 175, p. 3, ¶ 7(c); see also Finding of Fact No. 14].
49. Finally, the 3/22 Amended Schedules B and C identified $8.00 relating to "Houston Police Federal Credit Union" (the HPFCU Account). [Trustee's Ex. B., pp. 15 & 20; Doc. No. 100, p. 1; Doc. No. 101, p. 1; Doc. No. 175, p. 3, ¶ 7(b)]. However, as of the Conversion Date, the HPFCU Account ending in member number 7300 — which is in the name of one of the Debtors (i.e., Ms. Reeves) — had a balance of $17.07. [See Doc. No. 175, p. 3, ¶ 7(b); Trustee's Ex. E, p. 15].
50. The difference between the amount that the Debtors scheduled with respect to the HPFCU Account on the 3/22 Amended Schedules and the actual amount that the Debtors had in the HPFCU Account as of the Conversion Date is $9.07 (i.e., $17.07-$8.00). [Tape Recording, November 19, 2013 Hearing at 2:09:52-2:10:16 p.m.]. The Trustee testified that she does not believe this amount to be a material omission; however, she objected to this specific inaccuracy because she did not want to waive her objection to any balance relating to this particular account.
Having reviewed the "Live" Pleadings, [see Finding of Fact No. 41], and recognizing that the Debtors were not going to voluntarily make any further amendments, the Trustee filed the Objection/Motion on October 11, 2013. [Doc. No. 175]. In the Objection/Motion, the Trustee: (1) objects to several exemptions claimed by the Debtors; (2) seeks an order requiring the Debtors to turn over certain funds; and (3) seeks an order compelling the Debtors to file an amended SOFA.
Specifically, the Trustee seeks the following relief set forth immediately below. [See Doc. No. 175, pp. 4-5, ¶¶ 11-15]. First, the Trustee requests turn over of $2,652.08 (i.e., the aggregate balance of the Woodforest Bank Accounts as of the Conversion Date minus the $20.00 exemption claimed on the 3/22 Amended Schedules) [see Finding of Fact No. 44]; and the Trustee objects to any attempt by the Debtors to exempt any amount over $20.00 with respect to the Woodforest Bank Accounts because the Debtors failed to disclose the full amount in the Woodforest Bank Accounts on the 3/22 Amended Schedules. [Doc. No. 175, p. 4, ¶ 11; see also Finding of Fact No. 43].
Second, the Trustee requests turn over of $613.00 (i.e., the actual amount of the 2012 Tax Refund that the Debtors received — $15,613.00 — minus the $15,000.00 exemption claimed on the 3/22 Amended Schedules) [see Finding of Fact No. 46]; and the Trustee objects to any attempt by the Debtors to exempt any amount of the 2012 Tax Refund over $15,000.00 because the Debtors failed to disclose the full amount of the 2012 Tax Refund on the 3/22 Amended Schedules. [Doc. No. 175, p. 5, ¶ 14; see also Finding of Fact No. 45].
Third, the Trustee requests that this Court disallow the "tools of the trade" exemption claimed by the Debtors with respect to the 2010 Dodge Truck on the 3/22 Amended Schedules (i.e., $4,350.00) based upon the fact that Mr. Reeves had ceased doing business in January or February of 2013 and therefore could not (as a matter of law) have been using the 2010 Dodge Truck as a tool of any trade at the time the 3/22 Amended Schedules were filed. [Doc. No. 175, p. 5, ¶ 15; see Finding of Fact No. 47].
Fourth, the Trustee requests turn over of $4,625.49 (i.e., the amount of the Chapter 13 Refund); and the Trustee objects to any attempt by the Debtors to exempt any amount of the Chapter 13 Refund because the Debtors failed to disclose this refund on the 3/22 Amended Schedules.
Fifth, the Trustee requests turn over of $9.07 (i.e., the balance of the HPFCU Account as of the Conversion Date minus the $8.00 exemption claimed on the 3/22 Amended Schedules) [see Finding of Fact No. 50]; and the Trustee objects to any attempt by the Debtors to exempt any amount over $8.00 with respect to the HPFCU Account because the Debtors failed to disclose the full amount in the HPFCU Account on the 3/22 Amended
Finally, in the Objection/Motion, the Trustee is requesting additional relief (i.e., that the Debtors be required to file an amended SOFA) because she asserts that there are a variety of responses in the Original SOFA that must be amended by the Debtors. [Doc. No. 175, p. 5, ¶ 16]. For example, the Debtors transferred property to third parties within relevant look-back time periods prior to the Conversion Date, and the Trustee requests to have the Debtors' representations, under penalty of perjury, related to these transfers. [Id.]. Additionally, the Debtors' responses (including the truthfulness and sufficiency of the responses) will be relevant in the Trustee's pending discharge action against the Debtors.
On October 20, 2013, the Debtors filed a Response to the Objection/Motion (the Response). [Doc. No. 178]. The Response contains several unwarranted satirical statements, criticizing the Trustee and her counsel. [See Doc. No. 178]. By way of example, in paragraph 6 of the Response, the Debtors, through their attorney, state:
[Id. at pp. 2-3, ¶ 6]. This language reflects that the Debtors and their counsel believe that the Trustee unnecessarily prepared and prosecuted the Objection/Motion. Indeed, the Debtors state the following in paragraph 2 of the Response:
[Id. at pp. 1-2, ¶ 2]. From the tone and the words that the Debtors and their counsel chose to use in the Response, it is clear that the Debtors and their counsel do not take the Objection/Motion seriously. Indeed, the glib tone of the Response underscores that the Debtors are continuing to exhibit the same disrespectful approach to the bankruptcy process that they have shown during their Chapter 13 case [see Findings of Fact Nos. 17, 18, 19, 21, 23, 24, 25, 27, 28 & 29-37]; and unfortunately, their counsel has joined them in this attitude.
On November 19, 2013, this Court held a hearing on the Objection/Motion (the Hearing). The Debtors, the Debtors' counsel, the Trustee, the Trustee's counsel, and counsel for Thomas Ed Cole (Cole) — a creditor and party-in-interest who supports the Objection/Motion — appeared at the Hearing. Counsel for the Debtors, after making his appearance, stipulated to all of the factual averments made in the Objection/Motion and informed the Court that he wanted "to go straight to argument." [Tape Recording, November 19, 2013 Hearing at 11:15:25-11:15:32 a.m. & 1:39:23-1:39:36 p.m.]. The Trustee's counsel, on the other hand, adduced testimony from the Trustee in support of the Objection/Motion. This Court finds that her testimony was very credible; accordingly, the Court gives her testimony substantial weight. Counsel for the Debtors attempted to call a rebuttal witness, but this Court sustained the objection of the Trustee's counsel because the Debtors' counsel did not file a witness list pursuant to Bankruptcy Local Rule 9013-2. [Id. at 2:21:00-2:22:37 p.m.]. The Court also admitted exhibits A, B, C, D and E of the Trustee without any objections from counsel for the Debtors. [Id. at 1:37:39-1:37:38 p.m.].
In closing arguments, counsel for the Trustee asserted that because there was no property at all listed in the Final Report [see Finding of Fact No. 13], the Debtors are required by Bankruptcy Rule 1019(5)(C)(i) to amend their Schedules to disclose property "acquired after the [Petition Date] but before [the Conversion Date]." [Tape Recording, November 19, 2013 hearing at 2:52:31-2:53:03; see also Doc. No. 175, p. 4, ¶ 8; Trustee's Ex. D; Doc. No. 97]. The Trustee then emphasized that the Debtors had never amended their Schedules in compliance with Rule 1019(5)(C)(i). [Tape Recording, November 19, 2013 hearing at 2:52:31-2:53:03]. Moreover, she argued that the amended Schedules that the Debtors have filed (i.e., the 3/22 Amended Schedules B and C) were strewn with inaccuracies and omissions. [Finding of Fact No. 42].
For his part, counsel for the Debtors asserted that Bankruptcy Rule 1019(5)(C)(i) does not apply in the case at bar. [Tape Recording, November 19, 2013 Hearing at 2:43:15-2:44:48 p.m.]. Moreover, he asserted that the 2/11 Amended Schedules and the 3/22 Amended Schedules were accurate and that the Trustee should not have filed the Objection/Motion. Counsel for the Debtors did, however, stipulate that to the extent that the value of the Debtors' interest in certain property is
After hearing closing arguments from the Trustee's counsel, Cole's counsel, and counsel for the Debtors, the Court took the matter under advisement.
Approximately eight hours after the Hearing, the Debtors filed (1) a Brief with Respect to 11 U.S.C. § 707(b)(4)(B) (the Brief) [Doc. No. 186]; and (2) Amended Schedules B and C (the 11/19 Amended Schedules) [Doc. No. 187].
In the Brief, counsel for the Debtors corrected his argument at the Hearing regarding Bankruptcy Rule 1019(5)(C)(i)
In the Brief, the Debtors also request that no penalties be assessed against their attorney pursuant to § 707(b)(4)(B)(i)
Finally, the Debtors argue in the Brief that pursuant to § 704(a)(7), the Trustee was required to inform the Debtors' counsel of the discrepancies in the 3/22 Amended Schedules because they requested "information concerning the estate and the estate's administration" in their counsel's response to the Trustee's e-mail on September 24, 2013. [Id. at pp. 4-5, ¶ 8; see also § 704(a)(7)]. Specifically, the Debtors assert that they requested "information concerning the estate and the estate's administration" when their counsel responded to the Trustee's counsel's e-mail with the following language: "Because, Bankr[.] Rules required conversion schedules (regardless of the issue of bad faith), I believe that what we've submitted should suffice.
The Debtors filed the 11/19 Amended Schedules, absent leave of the Court to do so. By filing the 11/19 Amended Schedule B, the Debtors attempt to:
And, by filing the 11/19 Amended Schedule C, the Debtors attempt to:
By filing the 11/19 Amended Schedules, the Debtors seek to correct the inaccuracies identified in the Objection/Motion over which the parties litigated at the Hearing — all in an effort to avoid the consequences of their skullduggery brought to this Court's attention by the Trustee and to now exempt both the $332.00 related to the Woodforest Bank Accounts and the
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This particular dispute is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because it affects the administration of this Chapter 7 estate. Further, it is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(B) and (E) because it is a contested matter to determine the allowance or disallowance of exemptions from property of the estate and the remedy sought is an order to turn over property of the estate.
Venue is proper pursuant to 28 U.S.C. § 1408(1).
Having concluded that this Court has jurisdiction over this contested matter, the Court nevertheless notes that Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) sets forth certain limitations on the constitutional authority of bankruptcy courts to enter final orders. This Court must therefore determine whether it has constitutional authority to sign final orders in the dispute at bar — one order relating to the Trustee's objections to the Debtors' claimed exemptions on the 3/22 Amended Schedules, one order relating to the Trustee's request for turn over of nonexempt property, and one order relating to the Trustee's request to compel the Debtors to file an amended SOFA. The Court concludes that it does for the following reasons.
The facts in the case at bar are easily distinguishable from those in Stern. In Stern, the debtor filed a counterclaim against a creditor who had filed a proof of claim. The debtor's counterclaim was based solely on state law; there was no Code provision providing a basis for the counterclaim. Moreover, the resolution of the counterclaim was not necessary to adjudicating the validity of the claim of the creditor. Under these circumstances, the
In the case at bar, on the other hand, there is no state law involved. The Objection/Motion is based upon express provisions of the Code and an express Bankruptcy Rule — 11 U.S.C. §§ 348(f)(2), 521(a)(3), 521(a)(4), 541, 542 and Bankruptcy Rule 1019(5)(C). Thus, this dispute is easily distinguishable from the suit in Stern, and the Court concludes that Stern v. Marshall is inapplicable in this dispute. The Court therefore has the constitutional authority to enter final orders in this dispute.
In the alternative, even if Stern somehow applies, this Court concludes that the one exception articulated in Stern by the Supreme Court applies — specifically, that this Court may enter a final order over essential bankruptcy matters under the "public rights" exception. Under Thomas v. Union Carbide Agric. Prods. Co., a right closely integrated into a public regulatory scheme may be resolved by a non-Article III tribunal. 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including "the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a `fresh start' by releasing him, her, or it from further liability for old debts." Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006); see N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion) (noting in dicta that the restructuring of debtor-creditor relations "may well be a `public right'"). But see Stern, 131 S.Ct. at 2614, n. 7 ("We noted [in Granfinanciera] that we did not mean to `suggest that the restructuring of debtor-creditor relations is in fact a public right.'").
Disputes that are integrally bound up in the claims adjudication process — and thus involve the exercise of the Bankruptcy Court's in rem jurisdiction over the estate — are part of the "public rights" exception. See Stern, 131 S.Ct. at 2618 (noting that when determining whether Congress may bypass Article III, "the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims adjudication process"). Disputes over rights created by the Bankruptcy Code itself as part of the public bankruptcy scheme also fall within the "public rights" exception. See Thomas, 473 U.S. at 593, 105 S.Ct. 3325 (allowing non-Article III adjudication of rights created by a public regulatory scheme). The bankruptcy court may enter final judgments in these matters.
In the case at bar, the key issues before this Court arise from a dispute over whether: (1) certain property is exempt; (2) certain property is property of the Debtors' estate, which the Debtors must turn over to the Trustee; (3) the Debtors are required to file amended Schedules listing property as of the Conversion Date; and (4) the Debtors are required to file an amended SOFA. The right to exempt property from the bankruptcy estate is governed by § 522; the determination of property of the estate (which must be turned over to the Trustee) is governed by §§ 541 and 542; the requirement to file amended Schedules as of the Conversion
For all of these reasons, this Court has the constitutional authority to enter final orders on the Objection/Motion.
The Debtors made several meritless assertions in the Response, at the Hearing, and in the Brief. The Court will address these issues first, and will thereafter address why the Trustee is entitled to the relief she requests in the Objection/Motion. The specific assertions made by the Debtors, with which this Court disagrees, are as follows:
The "Live" Pleadings consist of the Original Schedule A, the 3/22 Amended Schedule B, the 3/22 Amended Schedule C, the Original Schedules D and E, the 2/11 Amended Schedule F, the 3/22 Amended
The Debtors wholly failed to comply with Bankruptcy Rule 1019(5)(C)(i). This Rule provides that:
FED. R. BANKR.P. 1019(5)(C)(i) (emphasis added). Based on the plain language of Bankruptcy Rule 1019(5)(C)(i), this Court concludes that the Debtors were required to file a schedule of property, not listed in the Final Report, acquired after the Petition Date but before the Conversion Date because: (i) the Debtors converted their case from Chapter 13 to Chapter 7 after the Chapter 13 plan was confirmed [see Findings of Fact Nos. 3 & 10]; and (ii) the exception set forth in Bankruptcy Rule 1019(5)(C)(i) does not apply in the case at bar. Specifically, the Court finds that the exception does not apply because: (i) the Debtors' case was converted from Chapter 13 to Chapter 7 [Finding of Fact No. 10]; and (ii) this Court found that
In closing arguments at the Hearing, counsel for the Debtors asserted that the Debtors were not required to file amended Schedules pursuant to Bankruptcy Rule 1019(5)(C)(i).
Attorneys practicing in this Bankruptcy Court should be familiar with and adhere to the Bankruptcy Local Rules of the Southern District of Texas. See In re Zuniga, 332 B.R. 760, 774 (Bankr.S.D.Tex. 2005). Bankruptcy Local Rule 1019-1 requires debtors to either file "supplemental schedules itemizing changes from the original schedules in property of the estate and in creditor lists" or file a statement that there are no changes
In the case at bar, the Debtors failed to file either amended Schedules or a statement that there were no changes by February 25, 2013 (i.e., 14 days after the Conversion Date).
Bankruptcy Rule 4002(a)(4) requires the Debtors to "
Here, the Debtors failed to cooperate with the Trustee because the 3/22 Amended Schedules are inaccurate and incomplete [Finding of Fact No. 42], which hindered the Trustee in carrying out her duties — namely, the investigation of the Debtors' financial affairs, preparation of an inventory, and the administration of the estate. As of the filing of the Objection/Motion (i.e., October 11, 2013) and the date of the Hearing (i.e., November 19, 2013), the "Live" Pleadings were the Original Schedule A, the 3/22 Amended Schedule B, the 3/22 Amended Schedule C, the Original Schedules D and E, the 2/11 Amended Schedule F, the 3/22 Amended Schedule G, the Original Schedule H, the 3/22 Amended Schedules I and J, and the Original SOFA. [Finding of Fact No. 41]. The Debtors not only failed to comply with the Trustee's request on September 24, 2013 to amend the "Live" Pleadings in light of the August 9, 2013 Order, [see Findings of Fact Nos. 38, 39, 40 & 41], but their counsel failed to respond to the Trustee's counsel's e-mail requesting confirmation of her interpretation of the Debtors' representations [Findings of Fact Nos. 40 & 41]. Indeed, the Debtors waited approximately two months — after the Trustee filed the Objection/Motion and this Court held the Hearing — to file the 11/19 Amended Schedules, which are still not entirely acceptable.
In sum, because the Debtors failed, and continue to fail, to cooperate with the Trustee by providing her with accurate and complete Bankruptcy Rule 1019(5)(C)(i) Amended Schedules — reflecting their interests in property and appropriate exemptions as of the Conversion Date — the Court finds that the Debtors
It is well-established that the Debtors' affirmative duty under § 521 to fully and accurately disclose all assets and interests in property
In the case at bar, this Court issued the August 9, 2013 Order, granting the § 348(f) Motion, because it concluded that the Debtors had converted their case from Chapter 13 to Chapter 7 in bad faith. [Finding of Fact No. 27]. Section 348(f)(2) provides: "[i]f the debtor converts a case under chapter 13 of this title to a case under another chapter under this title
Here, the Debtors converted their case from Chapter 13 to Chapter 7 in bad faith. [Finding of Fact No. 27]. There are several instances of the Debtors' bad faith conduct. First, Mr. Reeves' VA Benefits increased in September of 2011, and around that time, he also received the Retroactive Payment, approximately $10,000 to $12,000 to bring his benefits current. [Finding of Fact No. 33]. Despite the increase in Mr. Reeves' VA Benefits and the Retroactive Payment, the Debtors did not disclose this information or modify the Confirmed Plan to make greater distributions to creditors. [Id.]. Second, Mr. Reeves secretly and improperly used the Retroactive Payment to purchase the 2010 Dodge Truck [Id.], which the Debtors attempted to fully exempt on the 3/22 Amended Schedules. [Finding of Fact. No. 47]. Third, Mr. Reeves testified, at the Hearing on the § 348(f)(2) Motion, that he had acquired several vehicles during the Debtors' Chapter 13 case, but he could not articulate the disposition of these vehicles. [Finding of Fact No. 35].
Fourth, Mr. Reeves started a business, TMP, after the Petition Date but before confirmation of the Chapter 13 Plan; yet, he neither notified the Chapter 13 Trustee about TMP nor did he have authority from this Court or the Chapter 13 Trustee to operate TMP. [Finding of Fact No. 31]. In addition to concealing the existence of his new business from the Chapter 13 Trustee and this Court, Mr. Reeves — and Ms. Reeves — never sought to modify the Chapter 13 Plan to increase the recovery to the Debtors' creditors, despite Mr. Reeves earning a monthly income from TMP. [Id.]. Fifth, Mr. Reeves testified at the April 4, 2013 continued meeting of creditors that his wife and he converted their case from Chapter 13 to Chapter 7 to avoid judgments that had been filed related to his business debts and that he expected a discharge for the additional $506,395.32 in debts incurred during the Debtors' Chapter 13 case. [Id.]. Sixth, the bank statements from Mr. Reeves' personal
Seventh, Mr. Reeves did not maintain books or records for TMP and he ceased doing business in either January or February of 2013. [Finding of Fact No. 32]. Indeed, in response to the Trustee's request for invoices, Mr. Reeves was only able to turn over drafts, correspondence, and handwritten notes regarding TMP's sales [Id.], thereby preventing the Trustee from ascertaining the TMP's true financial condition. At the meeting of creditors on April 4, 2013 and at the hearing on the § 348(f)(2) Motion, Mr. Reeves testified that he discarded the computer he used for TMP's operations in or around September 2012, during the pendency of the Debtors' Chapter 13 case. [Finding of Fact No. 34].
Eighth, Mr. Reeves testified that over $800,000 flowed through TMP's account in the year 2012, but he could not explain how he spent these funds, other than on expenses related to entertainment or the purchases of vehicles to transport products; however, Mr. Reeves could not provide any evidence of any payment made for products purchased for customers or on behalf of customers. [Finding of Fact. No. 35].
Ninth, at the same hearing, Mr. Reeves identified an unpaid receivable due to him in the amount of at least $20,000.00, which constitutes property of the estate; and if collectible, it would be distributed to the Debtors' creditors. [Finding of Fact No. 36]. He further testified that he paid the account debtor in cash to deliver the products to his customer, the customer never received the product, and he never received the return of the funds. [Id.]. Mr. Reeves testified that he was not familiar with the account debtor at the time of the transaction, even though the transaction took place at his home and involved the exchange of cash obtained from the Debtors' Woodforest Bank Account for the purchase of the product. [Id.]. He indicated that he would turn over to the Trustee information regarding the account debtor, but he has never done so. [Id.].
Finally, the other Debtor (i.e., Ms. Reeves) claimed to have no knowledge or familiarity with Mr. Reeves' business. [Finding of Fact No. 37]. The Court finds this assertion of her lack of knowledge of TMP to be dubious because she is married to Mr. Reeves, and she presumably enjoyed at least some of the his income from TMP. She failed to notify the Chapter 13 Trustee or this Court of the existence of TMP or of Mr. Reeves' increased income from TMP, and she could not explain the whereabouts of the alleged $800,000 that flowed through TMP's account or the existence or absence of TMP's business records. [Id.].
Therefore, because of the foregoing bad conduct that was revealed at the hearing on the § 348(f)(2) Motion, this Court concluded that the Debtors' estate would be determined as of the Conversion Date and would include the Debtors' post-petition after-acquired property. [Finding of Fact No. 27]. As of August 9, 2013, the Debtors were on notice that property of their bankruptcy estate would be determined as of the Conversion Date and that they had a duty to amend their Schedules to completely and accurately reflect all of their property as of the Conversion Date. See [Finding of Fact No. 27; FED. R. BANKR.P. 1019(5)(C)(i); BLR 1019-1]. This, the Debtors failed to do, and they
For all the reasons above, the Court concludes that the Debtors have failed to accurately, completely, and timely amend their Schedules pursuant to Bankruptcy Rule 1019(5)(C)(i), Bankruptcy Local Rule 1019-1, Bankruptcy Rule 4002(a)(4), and § 521(a)(3). Moreover, the Debtors have not provided any good reason for why the 3/22 Amended Schedules are inaccurate and why they failed to timely provide the Trustee with amended Schedules accurately reflecting their property interests as of the Conversion Date.
At the Hearing, counsel for the Debtors repeatedly emphasized that the Trustee should have first made a demand for turn over of property of the estate before filing the Motion/Objection. Counsel for the Debtors supports this assertion by stating that it is local practice for trustees to call the debtor's attorney, point out discrepancies in the Schedules, and request that the debtor "either find another exemption or write [the trustee] a check." [Tape Recording, November 19, 2013 Hearing at 2:45:33-2:46:07 p.m.].
The Court rejects this argument. The duty to turn over the property of the estate is not contingent upon any demand by the Trustee; rather the obligation is "self-operative and mandatory." See Calvin v. Wells Fargo Bank, N.A. (In re Calvin), 329 B.R. 589, 600 (Bankr. S.D.Tex.2005). "In fact, [t]here is no requirement in the Code that the trustee make a demand, obtain a court order, or take any further action in order to obtain a turnover [delivery] of the estate's property." Id. (citations omitted). And, because there is no language in the Code that states that the Trustee has to make a demand to turn over property of the estate, this Court will not impose such a requirement on the Trustee. See Carcieri v. Salazar, 555 U.S. 379, 380, 129 S.Ct. 1058, 172 L.Ed.2d 791 (2009) ("When a statute's text is plain and unambiguous, the statute must be applied according to its terms.") (citation omitted); Lamie v. U.S. Tr., 540 U.S. 526, 536, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) ("We should prefer the plain meaning since that approach respects the words of Congress"); Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) ("We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there."). Moreover, even the Bankruptcy Local Rules do not impose such a requirement
Indeed, there are good policy reasons why the Code imposes no such requirement on Chapter 7 trustees. First, if Chapter 7 trustees had to first make demands, it would consume a substantial amount of their time. Second, it would allow anyone holding estate property to legally use this property until the demand was made, which would result in a wasting of assets of the estate. For all of these reasons, the Court concludes that the Debtors' argument that the Trustee should have first made a demand upon them to turn over property of the estate before filing the Objection/Motion is without merit.
In the Brief, the Debtors attempt to shift the blame for their failure to comply with Bankruptcy Rule 1019(5)(C), Bankruptcy Local Rule 1019-1, and § 521(a)(3) by asserting that the Trustee failed to comply with § 704(a)(7), which requires the Trustee to "furnish such information concerning the estate and the estate's administration as is requested by a party in interest." In the Brief, the Debtors assert that the Trustee was required to inform the Debtors' counsel of the discrepancies in the 3/22 Amended Schedules because they had requested "information concerning the estate and the estate's administration." [Doc. No. 186, p. 4, ¶ 8]. In support of their argument, the Debtors assert that they requested "information concerning the estate and the estate's administration" when their counsel responded to the Trustee's counsel's e-mail with the following language: "Because, Bankr[.] Rules required conversion schedules (regardless of the issue of bad faith), I believe that what we've submitted should suffice.
The Court disagrees. This phrase (i.e., "Let me know otherwise") does not constitute a request for "information concerning the estate and the estate's administration" pursuant to § 704(a)(7). The Debtors signed and filed the 2/11 Amended Schedules and the 3/22 Amended Schedules under oath; and the "burden is on the [D]ebtors to complete their schedules accurately." In re Park, 246 B.R. 837, 842 (Bankr.E.D.Tex.2000). The Debtors, not the Trustee, are in the best position to know what discrepancies exist in their own Schedules. Rather than a request for "information concerning the estate and the estate's administration," the Court construes the Debtors' counsel's response as an affirmative representation to the Trustee that the Debtors and he believe that the Schedules that were already filed were sufficient. The Trustee did not have the obligation to the Debtors to specifically disclose to them the discrepancies in the
Section 521(a)(3) requires that the Debtors "cooperate with the trustee as necessary to enable the trustee to perform the trustee's duties under this title." 11 U.S.C. § 521(a)(3); see, e.g., United States Trustee v. Cortez (In re Cortez), 457 F.3d 448, 457 (5th Cir.2006) ("Section 521(3) requires the debtor to cooperate with the trustee, and § 1302(b) imposes duties on the trustee, including the duty to investigate the debtor's financial affairs under § 704(4)."). "Not only does a debtor have a duty to cooperate with the Trustee, see 11 U.S.C. § 521(a)(3); counsel for the debtor, as an agent of the debtor, shares this duty to cooperate with the Trustee." In re Cochener, 360 B.R. 542, 580 (Bankr. S.D.Tex.2007), aff'd in part, rev'd in part, 382 B.R. 311 (S.D.Tex.2007), rev'd, 297 Fed.Appx. 382 (5th Cir.2008). The Debtors and their counsel have failed to cooperate with the Trustee throughout the pendency of this case in numerous respects.
First, only one of the Debtors appeared at the meeting of creditors on April 4, 2013 [Finding of Fact No. 17], and neither of the Debtors appeared at four subsequent meetings of creditors, which were scheduled on May 2, 2013, May 16, 2013, June 11, 2013, and July 2, 2013 [Findings of Fact Nos. 21, 23 & 25]. Pursuant to § 343 and Bankruptcy Local Rule 2003-1(a), the Debtors were required to appear at the scheduled meetings of creditors. See 11 U.S.C. § 343 ("The debtor
Second, the Debtors, through their attorney, filed the First Motion to Dismiss, but this Court denied this motion for failure to: (1) give notice to the creditors, the Trustee and parties requesting notice per Bankruptcy Local Rule 9013-1; and (2) file a proper Certificate of Service. [Findings of Fact Nos. 18 & 19]. Although the Debtors subsequently filed the Second Motion to Dismiss, which complied with Bankruptcy Local Rule 9013-1 [Finding of Fact No. 20], they nevertheless failed to attend the meeting of creditors on May 2, 2013, and the continued meetings of creditors on May 16, 2013, June 11, 2013, and July 2, 2013 — apparently because they believed that their attendance was unnecessary solely because the Second Motion to Dismiss was pending before this Court. See [Findings of Fact Nos. 21, 23, 26]. Indeed, on July 11, 2013, the Debtors finally appeared at the continued meeting of creditors [Finding of Fact No. 25], but only after this Court issued an order on June 28, 2013 [see Finding of Fact No. 24]. This order denied the Second Motion to Dismiss because the Debtors had failed to appear at the hearing on the Second Motion to Dismiss; and this order required the Debtors to appear, give testimony, and produce documents at the continued meeting of creditors on July 11, 2013; and this order expressly set forth that if the Debtors did not appear at the meeting of creditors on July 11, 2013, or any subsequently scheduled meeting of creditors, then the Court would issue a bench warrant for their arrest. [Finding of Fact No. 24]. Thus, the Debtors' conduct required this Court to actually issue an order requiring attendance under the threat of being taken into custody. If this conduct does not reflect failure to cooperate with the Trustee, then nothing does.
Third, on September 24, 2013, before filing the Objection/Motion, counsel for the Trustee e-mailed the Debtors' counsel, requesting that the Debtors, within 10 days, file newly amended Schedules and SOFA in light of the August 9, 2013 Order. [Finding of Fact No. 38]. This, the Debtors failed to do. [See Finding of Fact No 41]. It was only
Finally, at the Hearing, counsel for the Debtors agreed that to the extent that the value of the Debtors' interest in certain property is more than what they claimed as exempt in the 3/22 Amended Schedules, they should not receive an exemption above the amount they claimed to be exempt in the 3/22 Amended Schedules. [Finding of Fact No. 49]. Despite their counsel's statement at the Hearing, the Debtors, by filing the 11/19 Amended Schedule C, now attempt to increase the amount of their exemption with respect to the Woodforest Bank Accounts from $20.00 — as reflected on the 3/22 Amended Schedule C — to $332.00. [Compare Doc. No. 100, p. 1, with Doc. No. 187, p. 1]. It is unclear to this Court why the Debtors are attempting to claim an exemption of $332.00 with respect to the Woodforest Bank Accounts on the 11/19 Amended Schedules. The Debtors' counsel did not mention this specific amount (i.e., $332.00) at the Hearing. What is clear is that the $332.00 claimed exemption runs contrary to the Debtors' counsel's stipulation that the Debtors should not receive an exemption above the amount they claimed to be exempt in the 3/22 Amended Schedules. Reneging on a stipulation in open court further underscores the lack of cooperation that the Debtors have provided to the Trustee in this case.
In sum, the Court finds that the Debtors' argument — that the Trustee failed to comply with § 704(a)(7) — is meritless. The Court also finds that the Debtors and their counsel have failed to cooperate with the Trustee in violation of § 521(a)(3); and, their failure to cooperate has substantially interfered with the Trustee's duty under § 704(4) to investigate the Debtors' financial affairs.
Amendments to exemptions are generally and liberally allowed under Bankruptcy Rule 1009. FED. R. BANKR.P. 1009(a) ("A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed."). The Debtors' right to amend is not, however, absolute. An exception to this general rule is that "if there is a showing of the debtor's bad faith or of prejudice to the creditors," an amendment may be denied. Unruh v. Tow (In re Unruh), 265 Fed.Appx. 148, 150 (5th Cir.2008) (quoting Stinson v. Williamson (In re Williamson), 804 F.2d 1355, 1358 (5th Cir.1986)). The Court also has discretion to deny leave to amend if the debtor has concealed assets. In re Park, 246 B.R. 837, 841, n. 8 (Bankr. E.D.Tex.2000). "Any one of the foregoing factors standing alone would be sufficient grounds to strike an amended claim of exemption." Id. (citing In re Talmo, 185 B.R. 637, 644 (Bankr.S.D.Fla.1995)).
If debtors have acted in bad faith in amending their Schedules, the court may strike the amended Schedules. See In re Unruh, 265 Fed.Appx. 148, 150 (5th
Here, the Debtors undervalued and concealed assets on the 3/22 Amended Schedules by: (i) failing to disclose that they had two accounts at Woodforest Bank Accounts as of the Conversion Date [Finding of Fact No. 43]; (ii) undervaluing their interest in the Woodforest Bank Accounts by $2,652.08 [Finding of Fact No. 44]; (iii) undervaluing the 2012 Tax Refund by $613.00 [Findings of Fact Nos. 45 & 46]; (iv) concealing the Chapter 13 Refund in the amount of $4,625.49 [Finding of Fact No. 48]; and (v) undervaluing their interest in the HPFCU Account by $9.07 [Findings of Fact Nos. 49 & 50]. Further, the Debtors attempted to mislead their creditors by utilizing the "tools of the trade" exemption under § 522(d)(6) to claim a $4,350.00 exemption with respect to the 2010 Dodge Truck, despite Mr. Reeves' testimony that he had ceased to do business in January or February of 2013. [Finding of Fact No. 47 and footnote number 27]. See, e.g., In re Mmahat, 110 B.R. 236, 243 (Bankr.E.D.La.1990) ("[T]he Debtor's characterization of an item as a tool of his trade is not enough to render it exempt; instead, the exemption claim must be made in good faith and supported by credible testimony.") (citing In re Racca, 40 B.R. 622, 627 (Bankr. W.D.La.1984)). Therefore, this Court concludes that the Debtors acted in bad faith when they filed the 3/22 Amended Schedules. By so doing, the Debtors unnecessarily created additional expenses for the Trustee because she had to have her counsel draft and prosecute the Objection/Motion. Further, the Debtors acted in bad faith because once the Trustee prosecuted the Objection/Motion, and forced this Court to consume time hearing the dispute, the Debtors then filed the 11/19 Amended Schedules, attempting to avoid the consequences of their prior omissions and inaccuracies — which the Trustee had already pointed out in the Objection/Motion — and to exempt more than $20.00 in cash related to the Woodforest Bank Accounts as well as the 2005 Dodge Ram.
In the alternative, the Court may also strike the 11/19 Amended Schedules if the creditors have been prejudiced as a result of the Debtors' failure to disclose. See, e.g., In re Unruh, 265 Fed.Appx. 148, 150 (5th Cir.2008). The Debtors' failure to timely file complete and accurate Bankruptcy Rule 1019(5)(C)(i) Amended Schedules unnecessarily created additional expenses because the Trustee, through her counsel, had to prepare and prosecute the Objection/Motion. Additionally, the Trustee had to incur further expense to prepare for the Hearing only to learn at the Hearing that the Debtors' counsel was willing to stipulate to all the factual averments in the Objection/Motion. [Tape Recording, November 19, 2013 Hearing at 11:15:25-11:15:32 a.m. & 1:39:23-1:39:36 p.m.]. These additional administrative expenses will prejudice creditors because they will reduce any ultimate distribution to them, as their claims are junior to the increasing administrative claims of the Trustee's counsel for having to prosecute the Objection/Motion. See In re Wilson, 446 B.R. 555, 562 (Bankr.M.D.Fla.2011) (holding that the debtor's delayed amendment created additional expenses in prosecuting the motion to turnover and motion to compel, which will prejudice creditors
The Fifth Circuit has held that amending schedules does not excuse false oaths. Sholdra v. Chilmark Fin. LLP (In re Sholdra), 249 F.3d 380, 382 (5th Cir. 2001) (citing Mazer v. United States, 298 F.2d 579, 582 (7th Cir.1962)). Indeed, a debtor's assertion that he has amended his SOFA will fail as a defense if the amendment came only after a third party has brought to the Court's attention the initial inaccuracies in those schedules and SOFA. Gebhardt v. Gartner (In re Gartner), 326 B.R. 357, 373 (Bankr.S.D.Tex.2005) (citing In re Sholdra, 249 F.3d at 382) (affirming the denial of discharge based on the debtor's false oath and rejecting the defense that the debtor filed amendments to his original Schedules and SOFA one week after his deposition revealed false statements in his original filings); see also In re Guenther, 333 B.R. 759, 767-68 (Bankr. N.D.Tex.2005) ("It may be close to impossible to produce Schedules and SOFAs that contain no mistaken information, and bankruptcy papers with mistakes are not, alone, enough to bar a debtor's discharge. But, the appropriate response is to offer amended information in a prompt fashion, and not to wait to amend the errors
Here, that is exactly what happened. Only when the Trustee filed the Objection/Motion
Notably, even after the Trustee filed the Objection/Motion on October 11, 2013, the Debtors' counsel made no attempt to contact the Trustee or her counsel to discuss and resolve the discrepancies. Rather, the
Additionally, by filing the 11/19 Amended Schedules, the Debtors now attempt to exempt $332.00 of the $2,672.08 in the Woodforest Bank Accounts as of the Conversion Date [see Doc. No. 187, p. 6], despite the stipulation of the counsel at the Hearing that the Debtors could not exempt more than $20.00 — i.e., the amount they claimed to be exempt in the 3/22 Amended Schedules [Tape Recording, November 19, 2013 Hearing at 2:31:00-2:32:18 p.m.]. It is disingenuous, if not outright deceitful, that the Debtors and their counsel are now trying to claim $332.00 as exempt, rather than the amount of $20.00, with respect to the Woodforest Bank Accounts.
In sum, because the Debtors did not amend the 3/22 Amended Schedules B and C before the Trustee brought to this Court's attention the inaccuracies and omissions contained therein, this Court finds that the 11/19 Amended Schedules should be stricken and disallowed. Accordingly, the "Live" Pleadings — including the 3/22 Amended Schedules B and C — remain the Debtors' current Schedules and SOFA for purposes of issuing rulings with respect to the Debtors. See [Finding of Fact No. 41].
Bankruptcy Rule 4003(b)(1) provides, in relevant part, that "a party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under § 341(a) is concluded...." In the case at bar, the Trustee filed the Objection, objecting to certain exemptions claimed by the Debtors, on October 11, 2013. [Doc. No. 175]. The § 341 meeting of creditors was concluded on September 12, 2013. [Finding of Fact No. 28]. Because the Objection was filed within thirty days after the conclusion of the § 341 meeting of creditors, the Court finds that the Objection was timely filed.
Under Bankruptcy Rule 4003(c), the Trustee, as the objecting party, has the burden of proving that the Debtors' exemptions are not properly claimed. However, "while the Trustee has the burden of proving that exemptions are not properly claimed, the initial burden is with the Debtor[s] to establish that the exemption, as claimed, is of the type covered by the statute." In re Park, 246 B.R. 837, 840 (Bankr.E.D.Tex.2000) (quoting In re Gregoire, 210 B.R. 432 (Bankr.D.R.I. 1997)). "If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the
In the case at bar, for the reasons set forth below, the Court finds that the Trustee has met her burden of proving that the Debtors' exemptions are not properly claimed; and the Court further finds that the Debtors have failed to establish that their claimed exemptions are covered by any appropriate law. Thus, the Debtors will be required: (1) to forfeit the funds totaling $2,652.08 in their Woodforest Bank Accounts; (2) to pay the Trustee the sum of $613.00 (representing that portion of the 2012 Tax Return that they failed to disclose on the 3/22 Amended Schedules); (3) to pay the Trustee the sum of $4,350.00 (representing the amount they claimed as exempt on 3/22 Amended Schedules under the "tools of the trade" exemption for the 2010 Dodge Truck
In addition to outright omissions, there are inaccurate "low-ball" values placed on certain assets. [Finding of Fact No. 42]. The Court finds that the omissions and the inaccurate "low-ball" values in the 3/22 Amended Schedules relating to the Woodforest Bank Accounts are both blatant and substantial.
The Court finds that the Debtors filed the 3/22 Amended Schedules under oath that deliberately and significantly understated the value of their asset at Woodforest National Bank. The Debtors provided no reason for why there is such a large discrepancy with respect to the Woodforest Bank Accounts. Indeed, in closing arguments at the Hearing, counsel for the Debtors admitted that there is a "large discrepancy" with respect to the Woodforest Bank Accounts. [Tape Recording, November 19, 2013 Hearing, at 2:45:28-2:45:32].
Accordingly, the Court sustains the Trustee's objection with respect to the Woodforest Bank Accounts and finds that the Debtors shall: (1) turn over to the Trustee $2,652.08, representing the amount in the Debtors' two Woodforest Bank Accounts as of the Conversion Date which exceeds the amount they claimed as exempt (i.e., $2,672.08 - $20.00); and (2) not be allowed to exempt any amount related to the Woodforest Bank Accounts in excess of $20.00.
On the 3/22 Amended Schedules, the Debtors identified $15,000.00 with respect to the 2012 Tax Refund; however, the actual amount of the 2012 Tax Refund was $15,613.00. [Finding of Fact No. 45]. This Court finds the $613.00 difference between what the Debtors scheduled and the actual amount that they received to be substantial. [See Finding of Fact No. 46]. The Debtors vigorously contend that the $613.00 difference is immaterial and insignificant by reiterating that $613.00 is only a four percent difference.
This Court disagrees. To adopt the Debtors' and their counsel's view that 4% is immaterial would be to allow all debtors to skim a little bit from each property that they own and hope that the trustee and their creditors do not notice and object. Counsel for the Debtors is essentially arguing that the greater a debtor's assets and debts, the less accurate the debtor has to be.
The Court finds that the Debtors filed the 3/22 Amended Schedules under oath that deliberately and significantly understated
Id. at p. 3. The Debtors have provided no reason for why they failed to provide the Trustee with written notice, or why they did not accurately amend their Schedules to disclose that the 2012 Tax Refund was $15,613.00, and not the $15,000.00 that they represented on the 3/22 Amended Schedules.
Accordingly, this Court sustains the Trustee's objection with respect to the 2012 Tax Refund and finds that the Debtors shall: (1) turn over to the Trustee $613.00, which represents the difference between the actual amount the Debtors received and the amount they disclosed on the 3/22 Amended Schedules (i.e., $15,613.00-$15,000.00); and (2) not be allowed to exempt any amount related to the 2012 Tax Refund in excess of $15,000.00.
On the 3/22 Amended Schedules, the Debtors attempt to fully exempt the 2010 Dodge Truck by utilizing the "tools of the trade" exemption and claiming a $4,350.00 exemption under § 522(d)(6) despite the testimony of Mr. Reeves at the meeting of creditors on April 4, 2013 that he had ceased doing business in January or February 2013 and was not using the truck as a trade tool. [Finding of Fact No. 47]. Because it is undisputed that Mr. Reeves was not using the 2010 Dodge Truck as a tool of his trade on the Conversion Date, this Court finds that the Debtors, under oath, deliberately listed the "tools of the trade" exemption with respect to the 2010 Dodge Truck despite knowing that they were not entitled to such an exemption.
Accordingly, the Court sustains the Trustee's objection with respect to the 2010 Dodge Truck, and disallows the "tools of the trade" exemption that the Debtors claimed with respect to the 2010 Dodge Truck on the 3/22 Amended Schedules. See, e.g., In re Mmahat, 110 B.R. 236, 243 (Bankr.E.D.La.1990) ("[T]he Debtor's characterization of an item as a tool of his trade is not enough to render it exempt; instead, the exemption claim must be made in good faith and supported by credible testimony.") (citing In re Racca, 40 B.R. 622, 627 (Bankr.W.D.La.1984)). Therefore, the Debtors need to turn over $4,350.00 to the Trustee, representing the improperly claimed exemption under § 522(d)(6) on the 3/22 Amended Schedules [Finding of Fact No. 47].
With respect to the Chapter 13 Refund, which the Debtors failed to list on the 3/22 Amended Schedules, the Court finds that the Debtors' omission is material. [Finding of Fact No. 48]. The Chapter 13 Trustee filed the Final Report on March 1, 2013, representing that he had returned the Chapter 13 Refund to the Debtors. [Findings of Fact Nos. 13 & 14]. If the Chapter 13 Trustee had not listed the Chapter 13 Refund in the Final Report, the Trustee would not have known that the Debtors received $4,625.49.
In the Response, the Debtors assert that they were not required to list or exempt the Chapter 13 Refund on their Schedules because:
[Doc. No. 178, p. 1, ¶ 2] (emphasis added). The Debtors set forth two reasons for their assertion that they were not required to list or exempt the Chapter 13 Refund on their Schedules. The Court disagrees with both reasons.
On the 3/22 Amended Schedules, the Debtors failed to disclose the Chapter 13 Refund. [Finding of Fact No. 48]. In closing arguments at the Hearing, counsel for the Debtors argued that although the
The Court disagrees with this argument. Because the Chapter 13 Refund constitutes property of the estate, the Debtors were required to immediately turn over the Chapter 13 Refund to the Trustee when they received it directly from the Chapter 13 Trustee. See § 542(a).
If the Debtors deposited the check from the Chapter 13 Trustee into their account,
Second, the Court rejects the Debtors' assertion — that they were not required to list or exempt the Chapter 13 Refund on their Schedules — because § 521(a)(4) requires the Debtors to "
Accordingly, the Court sustains the Objection with respect to the Chapter 13 Refund and finds that the Debtors shall: (1) turn over to the Trustee $4,625.49 — the entire amount of the Chapter 13 Refund [Finding of Fact No. 48] — because (a) they failed to disclose and turn over the Chapter 13 Refund; and (b) they have failed to produce documentation supporting their allegation that a portion of this amount was earned after the Conversion Date [Doc. No. 175, p. 3, ¶ 7(c) & p. 5, § 13]; and (2) not be allowed to exempt any amount related to the Chapter 13 Refund.
On the 3/22 Amended Schedules, the Debtors identified $8.00 related to the HPFCU Account; however, as of the Conversion Date, Ms. Reeves — one of the Debtors — actually had a balance of $17.07
The Debtors do not believe that this discrepancy is substantial. In the Response, the Debtors state: "[i]ndeed the Trustee apparently challenges an account alleged to contain $8.00 when it ostensibly contained a whopping $17.07-a full $9.07 difference!" [Doc. No. 178, p. 1, ¶ 5]. The Debtors simultaneously dismiss the gravity of the discrepancy relating to the HPFCU Account on the 3/22 Amended Schedules and criticize the Trustee and her counsel for doing their job:
[Doc. No. 178, p. 2-3, ¶ 6] (emphasis added).
The Debtors have provided no reason for why there was a discrepancy with respect to the HPFCU Account. In a vacuum, if the only discrepancy in this case was the HPFCU Account, the Trustee would assuredly not have made this $9.07 discrepancy an issue. However, the Debtors have demonstrated a repeated pattern of lying on their Schedules and by the time the Trustee filed the Objection/Motion [see Doc. No. 175], this Court had already found the Debtors to have converted their case from Chapter 13 to Chapter 7 in
Accordingly, the Court sustains the Trustee's objection with respect to the HPFCU Account and finds that the Debtors shall: (1) turn over to the Trustee $9.07, which represents the amount in the HPFCU Account as of the Conversion Date exceeding the amount they claimed as exempt (i.e., $17.07 - $8.00 = $9.00); and (2) not be allowed to exempt any amount related to the HPFCU Account in excess of $8.00.
In conclusion, this Court finds that that the 11/19 Amended Schedules should be
With respect to the Objection/Motion, the Court finds that the relief requested should be granted in its entirety. Specifically, the Court sustains the Objection and grants the Motion with respect to the Woodforest Bank Account, the 2012 Tax Refund, the 2010 Dodge Truck, the Chapter 13 Refund, and the HPFCU Account. Accordingly, the Debtors shall turn over to the Trustee the total amount of $12,249.64 — which is the sum of (1) $2,652.08 related to the Woodforest Bank Accounts; (2) $613.00 related to the 2012 Tax Refund; (3) $4,350.00 related to the 2010 Dodge Truck (representing the amount that the Debtors improperly claimed as exempt on 3/22 Amended Schedules under the "tools of the trade" exemption for the 2010 Dodge Truck); (4) $4,625.49 related to the Chapter 13 Refund; and (5) $9.07 related to the HPFCU Account. Finally, the Debtors will not be allowed to exempt: (1) any amount in excess of $20.00 related to the Woodforest Bank Accounts; (2) any amount in excess of $15,000.00 related to the 2012 Tax Refund; (3) any amount related to the Chapter 13 Refund; and (4) any amount in excess of $8.00 related to the HPFCU Account.
Language in the Debtors' Brief underscores that their counsel, himself, knows that his conduct is unacceptable. See [Doc. No. 186, pp. 2-4] (providing reasons why the Debtors' counsel should not be sanctioned for discrepancies on the 3/22 Amended Schedules relating to the Woodforest Bank Accounts, the 2012 Tax Refund, and the Chapter 13 Refund).
Sir Walter Scott, the Scottish author and novelist, aptly made the following observation: "Oh what a tangled web we do weave, when we practise to deceive!"
The Debtors' counsel was flippant to the Trustee and her counsel — both in his e-mails to the Trustee's counsel and his pleadings. See [Finding of Fact Nos. 38,
Counsel for the Debtors needs to change his ways, and he needs to do so immediately. He can make a good start by sitting his clients down and explaining to them why this Court has sustained the Objection and granted the Motion. He must then do what he apparently has never previously done: strongly urge the Debtors to respect the bankruptcy system to which they have turned for a discharge and comply with this Court's orders.
Orders consistent with this Memorandum Opinion will be issued simultaneously on the docket with the entry of this Opinion.
Section 522(d)(2) expressly states that among the list of interests that may be exempted under § 522(b)(2), are a "debtor's interest, not to exceed $3,540 in value, in one motor vehicle." 11 U.S.C. § 522(d)(2).
Section 522(d)(5) expressly states that among the list of interests that may be exempted under § 522(b)(2), are a "debtor's aggregate interest in any property, not to exceed in value $1,150 plus up to $10,825 of any unused amount of the exemption provided under paragraph (1) of this subsection." 11 U.S.C. § 522(d)(5).
