Opinion
CASE NO.: 03-40283 (NLW).
October 16, 2008
Mac Truong and Maryse MacTruong, New York, NY, Debtors Pro Se.
Steven P. Kartzman, Esq., Adam Brief, Esq. Mellinger, Sanders Kartzman, Morris Plains, NJ, Attorneys for Trustee.
OPINION
This matter is before the court on the Chapter 7 Trustee's objection to the amended exemptions claimed by the debtors. For the reasons stated below, the Trustee's objections are sustained and the exemptions claimed by the debtors are disallowed. Further, because the court finds that the amendments to the schedules are baseless, the filing injunction imposed by court order dated February 14, 2008 is enlarged to require the debtors to first request permission from the court prior to filing the proposed amendments to the petition and schedules.
Pursuant to 28 U.S.C. §§ 1334 and 157(a) and the Standing Order of Reference issued by the United Sates District Court for the District of New Jersey on July 23, 1984, the court has jurisdiction to hear and determine this matter The objection to exemptions constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(B). The following constitutes the findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052.
FACTUAL BACKGROUND
Mac Truong and Maryse MacTruong ("Truongs") filed for relief under Chapter 7 of the Bankruptcy Code on September 23, 2003 ("Petition Date"). Steven P. Kartzman ("Trustee") was appointed as the trustee to administer their case. In the Schedule C filed with their petition, the Truongs claimed as exempt: (i) two Individual Retirement Accounts ("IRAs"), (ii) the surrender value of two life insurance policies issued by Guardian Life Insurance ("Guardian Policies"), (iii) various items of personal property, and (iv) two automobiles. No real property was identified and no homestead exemption was claimed.
The Trustee objected to the exemption of the IRAs based on a lack of documentation regarding the accounts. The Trustee also objected to exemption of the Guardian Policies on the grounds that the $70,000 value claimed as exempt exceeded the amount permitted by statute. The Trustee's objection was resolved by a consent order dated December 9, 2003 ("Exemption Consent Order"), under which the Trustee and the Truongs agreed that (i) if the Truongs could not establish that their IRAs were qualified accounts, their exemption would be limited to $8,725 per debtor under Code § 522(d)(5) to the extent that provision was not exhausted by other exemption claims and (ii) the exemption for the Guardian Policies would be limited to $9,300 per each debtor under Code § 522(d)(8).
On the Petition Date, the Truongs did not list real property or claim an exemption for such property because they previously conveyed their residence (the "Property") to Maryse MacTruong's sister by deed recorded on January 10, 2000. This conveyance occurred just four days after a creditor, Broadwhite Associates ("Broadwhite"), received a judgment against the Truongs in the amount of $356,509.33. After discovering the transfer, in April, 2003, Broadwhite commenced suit in the Superior Court of the State of New Jersey, Bergen County Chancery Division ("State Court Action") to set aside the conveyance of the Property as a fraudulent transfer.
After they filed their Chapter 7 case, the Truongs removed the State Court Action to the bankruptcy court. The Trustee subsequently was substituted as plaintiff in place of Broadwhite. The Truongs proved to be extremely litigious defendants thereby prolonging resolution of the fraudulent transfer adversary proceeding for years. Ultimately, on October 11, 2008, the court granted summary judgment in favor of the Trustee, avoiding the transfer of the Property. As part of its ruling, this court held that under Code § 522(g) the Truongs were not eligible to claim an exemption in the Property. Consistent with their litigation strategy, the Truongs appealed the summary judgment order. However, in July 2007, the Hon. Garret E. Brown affirmed the grant of summary judgment in favor of the Trustee. The Truongs subsequently appealed Judge Brown's decision. That appeal was still pending when the Trustee's objection was filed.
The history of the adversary proceeding will not be repeated here. This court's opinion dated February 14, 2008 and filed in Case No. 03-40283 contains a lengthy review of the adversary proceeding and related litigation by the Truongs.
The Trustee marketed the Property and in early 2008 obtained a purchaser. By order dated February 1, 2008, the court authorized the sale of the Property for the sum of $571,000 (contract price of $607,000 less a $36,000 credit in lieu of repairs). Two months later, the Truongs filed amended Schedules A, C and E. In the amended Schedule A, the Debtors now listed the Property as an asset. In the amended Schedule C, the Truongs now claimed an exemption of $250,000 in the Property based on Code § 522(b)(2). They also increased the exemption claimed for the Guardian Policies from $9,300 per each debtor to a total of $31,000.
The Trustee's objection to the amended exemption for the Property rests on his assertion that (i) the amended exemption claim is not made timely, (ii) the amount of the exemption claimed is not allowable under state or federal law and (iii) the Truongs cannot exempt any interest in the Property because under Code § 522(g) transfer of the Property was voluntary and fraudulent. The Trustee's objection to the amended exemption for the Guardian Policies rests on the fact that the debtors agreed to the Exemption Consent Order that limited their exemption to $9,300 per each debtor.
DISCUSSION
There are two procedural aspects to the matter before the court. First, under Bankruptcy Code § 522(b)(1), if a debtor files a list of property claimed as exempt, the property is exempt unless an objection is filed and sustained. Under Fed.R.Bankr.P. 4003(c), the objecting party has the burden of proving that the exemptions are not properly claimed. Moreover, it is well recognized that "[i]f the objecting party can produce evidence to rebut the exemption, the burden of production then shifts to the debtor to come forward with unequivocal evidence to demonstrate that the exemption is proper." Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 n. 3 (9th Cir. 1999).
Second, a debtor has the ability to amend a petition, list, schedule or statement "as a matter of course at any time before the case is closed." Fed.R.Bankr.P. 1009(a). Notably, a number of courts have imposed a judicial gloss on this general right to amend, holding that amendments should only be allowed if there is no bad faith, concealment of property, or prejudice to creditors. See, Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (8th Cir. 2002); Matter of Yonikus, 996 F.2d 866, 872 (7th Cir. 1993); Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir. 1984).
The Trustee argues that the amendment of Schedule C to claim an exemption in the Property is untimely because it is made near the end of the case and after four years of intense litigation between the Trustee and the Truongs to recover the very Property which they now seek to exempt. The court infers that the Trustee means that the belated amendment evidences bad faith. The Trustee relies on In re Reiland, 382 B.R. 779, 784 (Bankr. D. Minn.) for its observation that bad faith can include a "positive concerted intent to delay, frustrate or prevent the bankruptcy estate from realizing on the value of the subject assets."
A quick scan of this court's February 14, 2008 opinion reveals that the Truongs have employed every conceivable litigation strategy to delay and frustrate the Trustee's effort to recover the Property for the benefit of the bankruptcy estate. They prolonged discovery, filed numerous groundless motions for reconsideration and equally unfounded appeals. As a further diversionary tactic they filed motions for removal of the Trustee on several occasions. While the adversary was pending, the Truongs caused the Property to be further conveyed to two different limited liability companies, thereby causing the Trustee to also seek relief against these entities. While the Trustee was marketing the Property, they refused to cooperate with his realtor and the court was forced to direct the U.S. Marshal to remove the Truongs from the Property. Even after the sale of the Property was accomplished, the Truongs filed complaints with to other state and federal courts in an attempt to undo the sale. Finally, only after the sale of the Property was closed did they file the amended exemptions. Thus, it is readily evident that the Truongs' conduct has been directed at forestalling the recovery and liquidation of the Property. As such, their actions can easily be viewed as done in bad faith, warranting denial of their amended exemption claim for the Property.
However, the Trustee does not address whether the Reiland approach is applicable in this circuit. The Third Circuit Court of Appeals has not ruled on whether the general right to amend under Bankruptcy Rule 1009 should be denied upon a showing of bad faith, concealment of property or prejudice to creditors. However, the Third Circuit has considered Bankruptcy Rule 110, the predecessor rule to Bankruptcy Rule 1009. It has held that the language of Bankruptcy Rule 110 must be strictly construed and that a court does not have discretion to deny amendments. In re Gershenbaum, 598 F.2d 779, 781 (3d Cir. 1979). This ruling was largely grounded in the fact that Bankruptcy Rule 110 was specifically enacted to change General Order 11, which had permitted courts to exercise "substantial discretion to deny an amendment for which good cause had not been shown." Id.
In effect, Bankruptcy Rule 110 became Bankruptcy Rule 1009. It was adopted as Bankruptcy Rule 1009 without substantive change when the Federal Rules of Bankruptcy Procedure became effective August 1, 1983. Lucius v. McLemore, 741 F.2d at 126-27.
Nonetheless, it is not clear that the Third Circuit would not permit the limited exception to Rule 1009 that other courts have recognized. In Gershenbaum, the debtor sought only to amend his schedules by adding an omitted creditor. Further, as noted by the court in In re Cudeyro, 213 B.R. 910, 917 (Bankr. E.D. Pa. 1997), ". . . whether a debtor in bankruptcy may amend his or her schedules so as to include an additional creditor-involved an analysis of procedural rules and policy considerations different from those governing the issue of amendment of exemption claims." Moreover, the Supreme Court has recently ruled that a "bad faith" exception exists to a debtor's right to convert "at anytime" under Bankruptcy Code § 706(a). Marrama v. Citizens Bank of Massachussetts, et al., 549 U.S. 365, ___, 127 S. Ct. 1105, 1109 (2007). In part, the Court grounded its ruling on "the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate `to prevent an abuse of process' described in § 105(a) of the Code." Id. At 1112. Accordingly, it might well be that if presented with the facts sub judice, the Third Circuit would find that the judge-made exceptions to Rule 1009 are consistent with the Bankruptcy Code and appropriate.
Fortunately, this court does not need to speculate as to whether the Third Circuit would distinguish the present matter from its holding in Gershenbaum, as there are other reasons to disallow the amendments.
Under Code § 522(g), a debtor may exempt property recovered by the trustee under §§ 510(c)(2), 542, 543, 550, 551 or 553 as long as the transfer was involuntary and the property was not concealed by the debtor. Here, the Trustee recovered the Property under a complaint grounded in Code §§ 544, 550 and N.J.S.A. 25:2-25 and 27 (made applicable by Code § 544). As recounted above, the Truongs voluntarily transferred their Property almost simultaneously with the rendering of a large judgment against them and then did not claim any real property on Schedule A of their bankruptcy petition or disclose the transfer in their statement of financial affairs. Concededly, the Truongs removed the State Court Action to bankruptcy court and perhaps can thereby be said to have disclosed the transfer of the Property. However, consideration of the Truongs transfers of the Property even while the adversary proceeding was pending and their effort to derail the adversary proceeding run completely counter to any notion that the Truongs were making a good faith disclosure of the Property. A more realistic view is that the bankruptcy filing and the removal of the State Court Action to the bankruptcy court were litigation tactics intended to obstruct Broadwhite's efforts to reach the Property. Further, the manner in which the Truongs defended the adversary proceeding bears out this view. In short, to permit the Truongs to exempt any interest in the Property offends both the clear language of Code § 522(g) and the bankruptcy policy of providing the honest but unfortunate debtor with exempt property in order to enable the debtor to make a fresh start.
The Truongs' exemption claim for the Property also fails because no federal or state law supports allowance of a homestead exemption in the amount of $250,000. At the Petition date, the homestead exemption allowable under Code § 522(d)(1) amounted to $17,425 for each debtor. With regard to a homestead exemption, New Jersey law is even less generous, providing no exemption for a debtor's residence.
The Truongs base their $250,000 exemption on Code § 522(b). However, their reliance on § 522(b) is misguided. Because the Truongs rely on § 522(p) as well as § 522(b)(2), the court presumes they are relying on the Bankruptcy Code as amended by the Bankruptcy Abuse Prevention and Consumer Protection act of 2005 ("BAPCPA") § 522(b)(2) and its pre-BAPCPA counterpart § 522(b)(1) simply provide the state governments with the authority to "opt-out" of the federal exemptions. That is, both before and after BAPCPA, a state could choose to prohibit its citizens from selecting the exemptions provided in § 522(d). As is readily apparent, § 522(b)(2) does not set out any exemptions, much less a $250,000 homestead exemption.
Current § 522(b)(2) was formerly § 522(b)(1). Section 224 of BAPCPA amended and redesignated subsection (b)(1) as (b)(2). BAPCPA § 1501 made subsection (b)(2) effective in cases filed on or after October 17, 2005.
The Truongs appear to derive their $250,000 homestead exemption from § 522(p)(1), which limits a homestead exemption to $125,000 if (i) under § 522(b)(3)(a) the debtor elects the state exemption and (ii) acquired the property in the 1215 day period preceding the petition date. Two fundamental flaws exist with regard to the Truongs' reliance on § 522(p)(1). First neither § 522(b)(3)(A) nor § 522(p) were made applicable to cases pending when BAPCPA was enacted or became effective. Under § 1505 of BAPCPA § 522(b)(3)(A) was made applicable to cases filed on or after October 17, 2005, and § 522(p) was made applicable to cases filed on or after April 20, 2005. Second, § 522(p)(1) does not create an exemption, but rather places a cap on a state law exemption if the property was acquired within the 1215 day period preceding the petition date. In re Kane, 336 B.R. 477, 480-481 (Bankr. D. Nev. 2006).
Similarly unfounded is the Truongs' argument that the Trustee's objection is meritless because an appeal of the orders avoiding the transfers of the Property has been pending in the Third Circuit Court of Appeals. Importantly, the Truongs did not obtain a stay pending appeal. It is well recognized among federal courts that "the existence of a pending appeal does not render a judgment unenforceable nor suspend its preclusive effects absent a party obtaining a stay from either the rendering or enforcing court." Guiness PLC v. Ward, 955 F.2d 875, 898 (4th Cir. 1992); In re Cohoes Indus. Terminal, Inc., 83 B.R. 256, 258 (Bankr. S.D.N.Y. 1988). See also, Restatement (Second) of Judgments, § 13, comment f (1982).
Lastly, the Truongs cannot escape the binding effects of the Exemption Consent Order with regard to the Guardian Policies. The Exemption Consent Order resulted from the Trustees objection to the exemptions initially claimed by the Truongs when they filed their Chapter 7 petition. The Trustee's objection was properly noticed and a hearing was scheduled. Rather than litigate their exemption with regard to the Guardian Policies, the Truongs agreed to limit their exemption claims to $9,300 each.
Application of the doctrine of res judicata requires denial of the Truongs' amendment of Schedule C to claim a different and higher exemption amount. The doctrine applies if there has been a final judgment on the merits in a prior suit involving the same parties or their privies and the same causes of action are being asserted. United States v. Athlone Industries, Inc. 746 F.2d 977, 983 (3d. Cir. 1984). Plainly, the Exemption Consent Order resolved the controversy between the Truongs and the Trustee regarding their claimed exemption in the Guardian Policies. They cannot now unilaterally modify its terms because they wish to claim a higher exemption amount. Judge Walsh's decision in In re American Metrocomm Corp., 303 B.R. 32 (Bankr. D. Del. 2003) is instructive on this point. In American Metrocomm, a former employee filed a proof of claim for $100,000 for employment compensation. The debtor objected on the ground that a prepetition settlement agreement had been executed between the parties and that the former employee was paid the agreed amount. Id. at 34. The issue before the bankruptcy court was whether the settlement agreement had a binding effect on the later filed proof of claim. Id. Applying the elements of res judicata, the bankruptcy court found that the proof of claim was barred by the settlement agreement. Id. In particular, it relied on case authority finding that a settlement agreement constitutes a final judgment on the merits. Id. Applying this reasoning to the Exemption Consent Order, this court reaches a similar result.
Because the Truongs' amendments to their exemptions lack foundation, it appears to the court that the Truongs continue to engage in vexatious litigation intended to disrupt the Trustee's efforts to administer this case. It must be noted that for many years Mac Truong was a practicing attorney. It is reasonable to expect that either (i) he knows the applicable law or (ii) he is capable of ascertaining what law applies. Because of the Truongs' continued practice of filing meritless pleadings, the court is further extending the filing injunction to require the Truongs to seek leave of this court prior to filing any further amendments to their petition or schedules.
CONCLUSION
The Trustee's objection to the amended exemption claims filed by the Truongs is sustained. The Truongs' exemption claims lack any basis in the law and evidence bad faith. Further, because of the long and vexatious litigation history in this case generally, and the complete lack of any legal foundation for the amendments to Schedule C specifically, the court is extending the filing injunction to require the Truongs to obtain leave of court before filing any other amendments to their petition or schedules.
In Re: Debtor(s) (name(s) used by the debtor(s) in the last 8 years, including married, maiden, trade, and address): Mac Truong Maryse Mac Truong 325 Broadway 325 Broadway c/o IMDIT Pro Se Services c/o IMDIT Pro Se Services Suite 200 Suite 200 New York, NY 10007 New York, NY 10007 Social Security No.: xxx-xx-1959 xxx-xx-2551 Employer's Tax I.D. No.:NOTICE OF JUDGMENT OR ORDER Pursuant to Fed.R.Bankr.P. 9022
Please be advised that on October 16, 2008, the court entered the following judgment or order on the court's docket in the above-captioned case:Document Number: 474-441
Opinion Filed (related document:[441] Cross Motion (related document:[433] Motion re: for an Order to Reduce Claim and to Discharge Lien of Judgment filed by Trustee Steven P. Kartzman) filed by Debtor Mac Truong). The following parties were served: Debtor, Debtor's Attorney, Trustee, US Trustee. Signed on 10/16/2008. (dlr)
Parties may review the order by accessing it through PACER or the court's electronic case filing system (CM/ECF). Public terminals for viewing are also available at the courthouse in each vicinage.