PAUL M. BLACK, Bankruptcy Judge.
The matter before the Court is the objection of the Chapter 7 Trustee, Scot S. Farthing (the "Trustee"), to an exemption claimed by the Debtors, David Malcolm Jackson and Alicia Gail Jackson (the "Debtors"). The Trustee's objection challenges the Debtors' attempt to reduce the amount of exemptions claimed on a prior recorded homestead deed and use the resulting excess exemption amount in an attempt to exempt funds held in a Wells Fargo account in the amount of $7,484.33. These funds represent the proceeds of the sale of a distribution agreement with Flowers Baking Company of West Virginia, LLC, an asset the male debtor possessed when he initially filed this case. For the reasons set forth below, the Court will sustain the Trustee's objection and disallow the challenged exemption.
The material facts of this case are not in dispute. The Debtors originally filed a Chapter 7 bankruptcy petition in this Court on January 26, 2015. Subsequent to a motion to dismiss for abuse filed by the United States Trustee, the case was converted to one under Chapter 13 of the Bankruptcy Code on May 12, 2015. On motion of the Chapter 13 Trustee, who learned that the distribution agreement was sold by the male debtor without court approval, the Chapter 13 case was subsequently converted back to Chapter 7 on April 19, 2018.
At the outset of their initial Chapter 7 filing, on February 20, 2015, the Debtors timely filed a homestead deed in the Washington County, Virginia Circuit Court. Stipulation of Facts, ECF No. 96, at ¶ 2. This allowed the Debtors to claim the Virginia homestead exemption. Specifically, the Debtors claimed the following property exempt pursuant to the homestead exemption: (i) funds on deposit in a share account at United Southeast FCU, $1,090.00; (ii) CDs and DVDs, $200.00; (iii) jewelry — 2 chains, watch, ring, $300.00; (vi) cash surrender value of Lincoln Life Insurance policy, $1,537.00; and (v) jewelry — earrings, necklaces, watch, $2,000.00. The total exemptions claimed were $5,127.00.
On May 7, 2018, prior to the initial meeting of creditors in the current Chapter 7 case, the Debtors filed amendments to their Schedule B (property) and Schedule C (exemptions). That same day, they also filed an Amended Homestead Deed in state court, which decreased amounts on items previously exempted and removed some items they claimed as exempt on the original homestead deed. Additionally, the Debtors claimed as exempt $7,484.33 in funds held in their joint Wells Fargo bank account from the sale of the contract with Flowers Bakery, which again was owned at the time of filing their original Chapter 7 bankruptcy petition on January 26, 2015.
The Trustee argues that since the contract with Flowers Bakery was in existence at the time of the original Chapter 7 petition, the proceeds resulting from the sale of that asset are not exempt and cannot be now for the first time added to their homestead deed. As the Debtors did not timely claim the contract with Flowers Bakery as exempt under Virginia law, the Trustee maintains that the proceeds belong to the estate. Additionally, the Trustee argues that the Debtors only had $2,611.32 in homestead exemptions available to claim on the Wells Fargo account — thus leaving $4,873.01 ($7,484.33 - $2,611.32 = $4,873.01) available for administration in this case.
The Debtors argue that the amended homestead deed should be allowed and the funds in their joint bank account should be held as exempt upon the reconversion to Chapter 7. The Debtors assert that they have the right to file an amended homestead deed to show that assets initially claimed as exempt at the onset of the case have changed, been sold, or even destroyed. Upon the reconversion to Chapter 7, the Debtors assert that a new bankruptcy estate is created, which gives them the opportunity to make a claim of exemption from the assets that exist as of the time of the conversion. The Debtors argue that their original homestead deed filed in the original Chapter 7 is a nullity because of the effect of 11 U.S.C. § 348(f).
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on December 6, 1994, and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. The Court further concludes that this matter is a "core" bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A).
Pursuant to 11 U.S.C. § 541(a), a bankruptcy estate is created upon the commencement of a bankruptcy case "to be administered by the bankruptcy trustee." In re Bunker, 312 F.3d 145, 150 (4th Cir. 2002). Section 541(a)(1) states that, "[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case" become property of the estate. Therefore, the legal and equitable interests that the Debtors had in the contract became property of their bankruptcy estate on the Petition Date. Under the Bankruptcy Code, a debtor is allowed to protect certain property from the bankruptcy estate by claiming it as exempt under 11 U.S.C. § 522 in order "[t]o prevent the debtor from becoming destitute." Sheehan v. Ash, 889 F.3d 171, 173 (4th Cir. 2018). Pursuant to Virginia law, a "householder" is allowed to claim a wild card exemption of up to $5,000 on the assets of their choosing, also known as the homestead exemption. See Va. Code § 34-4. The debtor claims the exemption by timely recording a homestead deed in the proper jurisdiction within the state. In re Conner, 408 B.R. 88, 90 (Bankr. W.D. Va. 2009). "At least in the bankruptcy context, both husband and wife may each qualify as a `householder' and may therefore each claim a $5,000.00 exemption." In re Sherman, 191 B.R. 654, 656-57 (Bankr. E.D. Va. 1995) (citing Cheeseman v. Nachman (In re Cheeseman), 656 F.2d 60 (4th Cir. 1981)).
In this case, the Debtors do not contend that they obtained the distribution contract after the conversion of the case, or even while the case was pending in Chapter 13. The Debtors do not dispute that the contract was an asset of the estate as of the initial filing of the case as the Debtors listed the relationship with Flowers Bakery on their initial Statement of Financial Affairs filed with the petition. ECF No. 1. However, they did not seek to claim an exemption in the contract at any point prior to May 7, 2018, over three years after the case was initially filed. In their view, the funds in their joint bank account should be exempt because upon the reconversion to Chapter 7, they have a right to file an amended homestead deed to reflect the changes to their estate to ensure a "fresh start." In support of this argument, the Debtors point to the assertion that pursuant to Section 348(f)(1)(A) any property accumulated during their Chapter 13 case is a post-petition asset under Section 1306 and therefore not part of their estate once it is converted to Chapter 7. In re Brown, 375 B.R. 362, 381 (Bankr. W.D. Mich. 2007). The Debtors argue that the proceeds received from the sale of the contract with Flowers Bakery are not part of the Chapter 7 estate because this case was previously one under Chapter 13, and the provisions of 11 U.S.C. §348(f) apply, which provide that the Chapter 7 estate does not include assets that have been obtained since the time of the filing of the original case.
However, the Debtors had a property interest in the distribution contract on the Petition Date which should have been exempted prior to the sale. The distribution contract was liquidated sometime in January 2017, during the pendency of their Chapter 13 case, without prior approval of the court for the sale of this asset.
Had the Debtors wanted to claim a portion of the distribution contract or proceeds realized from its sale as exempt, they should have included it in the original homestead deed. The Debtors failed to do so. The "failure to comply with the Virginia homestead exemption statute precludes [a debtor] from claiming that exemption for bankruptcy purposes." Zimmerman v. Morgan, 689 F.2d 471, 472 (4th Cir. 1982).
"It is well established, however, that if an initial exemption claim is timely made, even in a nominal amount, it may thereafter be amended upward, to the extent the homestead exemption amount has not been exhausted, to increase the value claimed exempt." In re Watkins, 267 B.R. 703, 708 (Bankr. E.D. Va. 2001).
For the reasons set forth above, the Trustee's Objection will be sustained. A separate Order will be entered contemporaneously herewith.
11 U.S.C. § 348(f).
