DECISION AND ORDER ON TRUSTEE'S OBJECTION TO DEBTOR'S EXEMPTION

Alan S. Trust, United States Bankruptcy Judge.

Pending before the Court is a motion filed by the chapter 7 trustee (the "Trustee") objecting to Debtor, Joseph Louis Castellano's claim of an exemption in an Individual Retirement Account (the "Exemption Objection"). The objection is premised on Debtor having acted in fraud of his creditors and in bad faith by converting $13,000 of non-exempt cash into an exempt IRA on the eve of filing this bankruptcy case. For the reasons to follow, while Debtor is not to be applauded for his conduct, the Exemption Objection will be denied.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), (B), and (O), and the Standing Order of Reference in effect in the Eastern District of New York dated August 28, 1986, as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

Background

Debtor filed this chapter 7 case on April 20, 2015. Less than two weeks before seeking bankruptcy protection, as of April 7, Debtor and his spouse co-owned a joint Chase bank account with a balance of $43,908.20. However, before filing his petition, Debtor depleted this account by making several transfers:1 on April 8, he used $13,000 to augment an IRA in his name and transferred $21,954.59 into an account held solely in his wife's name; then on April 16, Debtor paid $4,585 to his counsel as a retainer for filing the case. The Trustee, however, only challenges the IRA transfer.

Debtor listed the IRA on his Schedule B in the amount of $30,000, and asserted an exemption for the full amount of the IRA on his Schedule C, pursuant to New York Debtor and Creditor Law ("DCL") § 282(2)(e). [dkt item 1] Debtor did not disclose the $13,000 he transferred to his IRA in his Statement of Financial Affairs, nor did he disclose this transfer at his § 341 meeting held on May 27. In fact, Debtor answered "no" to the Trustee's question of whether he had transferred any assets greater than $500 in the last six years.

On July 21, the Trustee filed a motion for an extension of his time to object to Debtor's discharge. [dkt item 19]

On August 11, the Court held a hearing on the Trustee's motion, following which the Court approved a stipulation between the Trustee and Debtor extending the Trustee's time to object to Debtor's discharge through October 31, 2015. [dkt item 22]

The Trustee discovered the eve-of-filing transactions, and questioned Debtor about them at an adjourned § 341 meeting held on September 8. Debtor explained that the amount withdrawn from his jointly held account and transferred to his wife represented her 1/2 interest in the account, and stated that he supplemented his IRA after conferring with his attorney; he then refused to answer any questions concerning the timing or the motivation concerning the IRA transfer on the basis of attorney client privilege.

The Trustee did not object to Debtor's discharge before the deadline, nor did he seek an additional extension.

The Exemption Objection

As his legal basis to deny Debtor's exemption claim, the Trustee asserts that Debtor's pre-petition conduct was in bad faith and constitutes fraud on his creditors undertaken while he was insolvent. He asserts that had Debtor not supplemented his IRA, his creditors would share in the $13,000. The Trustee attaches Debtor's schedule F which is 176 pages long and lists unsecured claims in the total approximate amount of $2,200,000. The Trustee does not, however, assert that the IRA is not actually exempt under New York law, nor does he cite to a specific Code provision as a basis to deny Debtor's exemption claim. [dkt item 23]

Debtor responds with three basic arguments, only one of which merits discussion: first, that moving money from a joint checking account to an IRA is not a transfer under the Bankruptcy Code (see footnote 1 above); second, that even if the $13,000 was recovered, it would only generate a de minimis distribution (see footnote 2 below)2; and third, Debtor's pre-bankruptcy planning, even if orchestrated by or with the aid of his counsel, may not be used to deny Debtor's exemption claim under the Supreme Court's decision in Law v. Siegel, ___ U.S. ___, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). [dkt item 27]

In reply, the Trustee asserts that Law v. Siegel is not applicable because there the trustee sought to surcharge a valid exemption, but here the Trustee seeks to disallow an exemption based on the debtor's bad faith, relying on In re Woolner, No. 13-57269-WSD, 2014 WL 7184042 (Bankr. E.D.Mich. Dec. 15, 2014).

Analysis

Section 522 of the Bankruptcy Code authorizes debtors to exempt certain property of the estate under federal law pursuant to § 522(d) or under applicable state law, unless applicable state law only authorizes the debtor to claim exemptions under state law. 11 U.S.C. §§ 522(b)(1), (2); 541. In 2011, New York became an opt-in state, which means that Debtor may elect to claim either the federal or the New York exemptions. In re Rasmussen, 2011 U.S. Dist. LEXIS 104212, at *3 (E.D.N.Y. Sept. 14, 2011). Here, Debtor asserted an exemption for his IRA under New York law pursuant to DCL § 282(2)(e)3.

As the objecting party, the Trustee carries the burden of demonstrating that Debtor's exemption was improperly claimed. FED. R. BANKR. P. 4003(b)(3). The Trustee correctly notes that Bankruptcy Rule 4003(b)(2) authorizes him to object to any exemption on the basis that it was fraudulently asserted, and that he may do so up to one year after the case was closed. See FED. R. BANKR. P. 4003(b)(2). However, first, the Trustee is not asserting that the exemption claim itself was fictitious or fraudulently claimed, nor does he reference a specific Code section that prohibits the IRA transfer; he asserts that stuffing the IRA was done in fraud of creditors. Second, the Trustee does not cite a case other than Woolner as standing for the proposition that a debtor's obtaining an exemption by conduct that is generally fraudulent to his creditors is a basis to deny the exemption under Rule 4003(b)(2). Further, Woolner did not involve exemption planning but rather the purposeful undervaluing of an asset:

Woolner, 2014 WL 7184042, at *2. In so holding, however, Judge Shapero recognized that a number of other courts would not hold as he did.4

More recent decisions, including from the Sixth Circuit Court of Appeals, have noted that Law v. Siegel prohibits the bankruptcy court from disallowing exemptions or amendments to exemptions due to bad faith or fraud. Ellman v. Baker (In re Baker), 791 F.3d 677, 682 (6th Cir.2015) ("it is clear that Siegel prohibits the bankruptcy court from disallowing the debtors' claimed exemptions because of their alleged bad faith and fraudulent conduct")5. Ellman appears to overrule Woolner by implication. See Cooper v. Chilson (In re Chilson), No. 1:15-CV-00020-MR, 2016 WL 1079149, at *7 (W.D.N.C. Mar. 18, 2016) (the "Woolner analysis clearly remains a minority view."); Taylor v. Caillaud, No. 3:15-CV-00206-GCM, 2015 WL 7738391, at *4-5, 2015 U.S. Dist. LEXIS 160984, at *11-12 (W.D.N.C. Dec. 1, 2015).

Law v. Siegel requires this Court deny the Exemption Objection

As mentioned above, Debtor invokes Law v. Siegel as a basis for denying the Exemption Objection; the Trustee asserts that the decision is distinguishable. While Law v. Siegel arises from different conduct, it is dispositive for this case.

Law v. Seigel is, at its core, a case of statutory construction; despite that debtor's fraudulent conduct in attempting to insulate his California state law homestead exemption,6 the chapter 7 trustee could not collect his attorneys' fees incurred in unearthing the debtor's fraud as a sanction surcharged against the debtor's exemption, as doing so contravened a specific provision of the Bankruptcy Code7. While this specific holding was limited to the construction to be given to § 522(k), the Supreme Court gave direct guidance on the inability of bankruptcy courts to use their § 105 powers to remedy debtor fraud:

Id. at 1196.

The High Court further noted that § 522 establishes a number of limitations on a debtor's ability to exempt property based upon a debtor's pre-petition conduct. For example, a debtor's homestead exemption may be reduced under § 522(o) to the extent the debtor converted nonexempt assets into exempt equity with the "intent to hinder, delay, or defraud a creditor". Id. (citing to 11 U.S.C. § 522(o)). Moreover, a debtor's homestead exemption may be capped under § 522(q) in the event the debtor had been previously convicted of a felony for abusing the provisions of the Bankruptcy Code, or for a violation of federal or state securities laws. Id. (citing to 11 U.S.C. § 522(q)). While Section 522 also contains a limitation on how much of an exemption a debtor may claim in certain property based on improving his or her position in that exempt asset during the 1215-day period preceding filing for bankruptcy8, the statute does not contain any similar limitation on a debtor's ability to exempt assets held in an individual retirement account.

Indeed, the Supreme Court went on to address disallowing an exemption based on the debtor's fraudulent concealment of the asset alleged to be exempt, and rejected the notion of a "general, equitable power in bankruptcy courts to deny exemptions based on a debtor's bad-faith conduct." The Supreme Court stated:

Id. at 1196-97.

Finally, the High Court was of course mindful that debtors may need to be punished for their wrongful actions, but emphasized that a debtor's misconduct or fraud should be dealt with through various other specific Code provisions that directly address those circumstances.9

Recently, the bankruptcy court for the Central District of Illinois in In re Coyle considered a strikingly similar scenario to the one present here. 2016 WL 828459 (Bankr.C.D.Ill. Mar. 2, 2016). There, certain creditors objected to the debtor's state law exemption claim in an IRA based upon her alleged fraud, bad faith and conversion; the creditors asserted, among other things, that the debtor had impermissibly contributed non-exempt funds into to her IRA in contemplation of her bankruptcy filing. Unlike this Debtor, the debtor in Coyle had previously had her discharge denied, but not for misconduct concerning her IRA contributions. The bankruptcy court determined that Law v. Siegel prohibited disallowing the debtor's exemption absent specific statutory authority to do so. Then, after reviewing the applicable state law exemption statute, the court concluded that the movants had failed to articulate a state law basis to deny the exemption.

Here, Debtor asserted an exemption under DCL § 282(2)(e) for his IRA. The Trustee has failed to reference a specific Code section that could serve as a basis to disallow Debtor's exemption. The Trustee has not demonstrated or even alleged that the IRA is not exempt under New York law, either by its existence or in its amount. Thus, there is no viable basis for the IRA to be disallowed under the Code or applicable non-bankruptcy exemption law. Whether Debtor's conduct may have been a basis to deny his discharge is not before this Court, as no Section 727 action was brought. Whether Debtor made impermissible transfers to his spouse or his attorney is also not before this Court.

Thus, the Trustee's objection to the IRA exemption, the only matter sub judice, should be overruled.

Conclusion

For the foregoing reasons, it is hereby

ORDERED, that the Exemption Objection is denied.