Summary
finding the right to exempt property from the bankruptcy estate, the determination of the property of the estate, and the requirement to file amended Schedules and Statement of Financial Affairs were "central to the public bankruptcy scheme, as they relate to both the exercise of exclusive jurisdiction over the property of debtor's estate...and the equitable distribution of that property among the Debtors' creditors."
Summary of this case from Nat'l Med. Imaging, LLC v. DVI Receivables XIV, LLCOpinion
No. 10–34961–H4–7.
2014-01-29
In re David Lee REEVES, Jr., Hope Ann Reeves, Debtors.
Andrew Jeb Bolton, Attorney at Law, Huntsville, TX, Ruby Kathleen Bolton, The Bolton Law Firm, Tomball, TX, for Debtor and Joint Debtor. Jennifer Casey, Gauntt, Earl & Binney, LLP, The Woodlands, TX, for Hope Ann Reeves (Joint Debtor).
Andrew Jeb Bolton, Attorney at Law, Huntsville, TX, Ruby Kathleen Bolton, The Bolton Law Firm, Tomball, TX, for Debtor and Joint Debtor. Jennifer Casey, Gauntt, Earl & Binney, LLP, The Woodlands, TX, for Hope Ann Reeves (Joint Debtor).
Nancy Lynne Holley, U.S. Trustee, Houston, TX, for U.S. Trustee.
Heather R. Potts, The Kim Law Firm, Houston, TX, for Allison D. Byman, Trustee.
MEMORANDUM OPINION REGARDING TRUSTEE'S OBJECTION TO EXEMPTIONS AND MOTION TO COMPEL TURNOVER AND FILING OF STATEMENT OF FINANCIAL AFFAIRS [Doc. No. 175]
JEFF BOHM, Chief Bankruptcy Judge.
I. Introduction
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).
For the reasons set forth herein, the Court sustains the Objection and grants the Motion.
When referenced separately, the Objection to Exemptions will hereinafter be referred to as “the Objection,” and the Motion to Compel Turnover and Filing of Statement of Financial Affairs will hereinafter be referred to as “the 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.
To the extent that any Finding of Fact is construed to be a Conclusions of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.
Any reference to “the Code” refers to the United States Bankruptcy Code, and reference to any section (i.e., § ) refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted. Further, any reference to “the Bankruptcy Rules” refers to the Federal Rules of Bankruptcy Procedure. Any reference to “Bankruptcy Local Rule” or “BLR” refers to the Bankruptcy Local Rules of the United States Bankruptcy Court for the Southern District of Texas.
II. Findings of Fact
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:
A. Procedural Background of the Debtors' Chapter 13 Case and Their Conversion to a Chapter 7 Case
1. David Lee Reeves, Jr. (Mr. Reeves) and Hope Ann Reeves (Ms. Reeves) (collectively,the Debtors) filed their voluntary Chapter 13 petition on June 14, 2010 (the Petition Date). [Doc. No. 1, pp. 1–7].
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
[Doc. No. 13]; they subsequently amended their proposed Chapter 13 plan five times—on July 19, 2010 [Doc. No. 22], August 2, 2010 [Doc. No. 31], August 23, 2010 [Doc. No. 37], September 24, 2010 [Doc. No. 45], and October 13, 2010 [Doc. No. 50]. On October 18, 2010, this Court confirmed the amended Chapter 13 plan that the Debtors filed on October 13, 2010 [Doc. No. 50] (the Confirmed Plan). [Doc. No. 51].
The Court points out that the Debtors filed this proposed Chapter 13 plan as an “Amended Chapter 13 Plan” [ see Doc. No. 13, p. 1]; however, this particular proposed Chapter 13 plan—filed on June 18, 2010—is the first Chapter 13 plan that the Debtors filed and thus, it was not an amended plan.
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 Protection—was ordered to remit a specific portion of her wages directly to the Chapter 13 Trustee pursuant to the Amended Wage Withholding Order. [ Id.].
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)
[Doc. Nos. 93, 93–1, 93–2 & 94; Trustee's Ex. B, pp. 7–14], and their Statement of Intent [Doc. No. 93–3]. The 2/11 Amended Schedule F set forth additional creditors and debts incurred during the Chapter 13 case; the additional scheduled debts set forth in this Schedule totaled $506,395.32 and were unsecured. See [Doc. No. 93–1].
The Court notes that the Debtors failed to comply with Bankruptcy Local Rule 1009–1(b), which requires amendments to schedules to be “marked to identify added, deleted or changed information.” While the Debtors “circled” newly added information on the 2/11 Amended Schedules, they did not mark the information that they deleted from the Original Schedules. [ Compare Doc. No. 1 with Doc. No. 93]. For example, on the Original Schedule B, the Debtors identified Capital One Bank, but they deleted “Capital One Bank” on the 2/11 Amended Schedule B without identifying this deletion. [ Compare Doc. No. 1 with Doc. No. 93].
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).
[Trustee's Ex. D; Doc. No. 97]. There was no property listed in the Final Report. [Doc. No. 175, p. 4, ¶ 8; Tape Recording, November 19, 2013 Hearing at 1:45:40–1:45:45 p.m.; see Trustee's Ex. D; see Doc. No. 97].
When a Chapter 13 case “has been fully administered, the chapter 13 trustee is required to prepare and file a final report and accounting, like that required of a liquidation prior to the closing of a chapter 7 case” under § 704(a)(9) in order for the case to be closed. 8 Collier on Bankruptcy, ¶ 1302.03[1][g] at 1302–15 (16th ed. 2013) (emphasis added) (internal citations omitted); see also 6 Collier on Bankruptcy, ¶ 704.12 at 704–29 (16th ed. 2013) (stating that § 704(a)(9)—which “requires the trustee to make a final report and to file a final account of the administration of the estate with the court and with the United States trustee”—also applies to trustees in chapter 13 cases ) (emphasis added). “The trustee must file an itemized statement of property received and disposed of. The purpose of all expenditures must likewise be stated.... The trustee's account should detail the relevant dollar amounts, and the report should be a running summary of the details of administration.” Id.
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].
15. The initial post-conversion meeting of creditors was held on March 21, 2013 at which the Debtors did appear, but the Trustee continued the meeting of creditors to April 4, 2013. [Doc. No. 123
, p. 3, ¶¶ 9–10]; see [Adv. Doc. No. 1
Doc. No. 123 is the Trustee's 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) [ See Finding of Fact No. 22]. The Debtors did not file a response to the § 348(f)(2) Motion in the first instance. [ Id.]. Therefore, this Court accepts the Trustee's allegations in the § 348(f)(2) Motion as true. Moreover, the Debtors' testimony at the hearing on the § 348(f)(2) Motion confirmed the allegations set forth in the § 348(f)(2) Motion. See [Findings of Fact Nos. 26 & 27].
, p. 2, ¶ 8 & Adv. Doc. No. 10
Adv. Doc. No. 1 is the Trustee's Complaint to Bar Discharge of the Debtors (the Complaint), which she filed on August 19, 2013. [ See Adv. Doc. No. 1].
Adv. Doc. No. 10 is the Debtors' Answer to Complaint of Chapter 7 Trustee (the Answer), which they filed on September 23, 2013. [ See Adv. Doc. No. 10].
After the March 21, 2013 meeting of creditors, the “ Debtor's attorney [was] to amend within ten (10) days, Schedules ‘B’, ‘C’ & ‘J’; [and] provide [a] copy of [the Debtors'] 2012 Tax Return to Trustee.” See [Docket sheet entry for 03/22/2013 regarding the Meeting of Creditors] (emphasis in original).
Whenever Adv. Doc. No. 1 and Adv. Doc. No. 10 are cited simultaneously in this Memorandum Opinion, this means that the Debtors, in the Answer, admitted the Trustee's allegations in the Complaint.
16. On March 22, 2013, the Debtors filed Amended Schedules B, C, I, J, and G (the 3/22 Amended Schedules).
[Doc. Nos. 100, 101, 102, 103 & 104; Trustee's Ex. B, pp. 15–21].
The Court notes that the Debtors, once again, failed to comply with Bankruptcy Local Rule 1009–1(b) when they filed the 3/22 Amended Schedule B. [ See footnote number 4]. Specifically, the Debtors identified a “2008 GMC Sierra” on the 2/11 Amended Schedule B, but they deleted this on the 3/22 Amended Schedule B without identifying this deletion. [ Compare Doc. No. 93, p. 4 with Doc. No. 100].
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
and information regarding payment of an insurance claim for damaged goods.” [Doc. No. 123, p. 3, ¶ 10]; see [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1].
The Court notes that the Debtors' attorney was supposed to provide a copy of the Debtors' 2012 tax return to the Trustee within 10 days after the meeting of creditors on March 21, 2013. [Finding of Fact No. 15]. Yet, the Debtors' attorney had still not provided such information to the Trustee at the continued meeting of creditors on April 4, 2013, forcing the Trustee to, once again, continue the meeting of creditors to May 2, 2013.
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 enduring further interrogations.”
The Court notes that this sentence is grammatically incorrect, but this is a verbatim quote from the First Motion to Dismiss.
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.”
[Doc. No. 123, p. 3, ¶ 10]; see [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1]. Therefore, the Trustee, once again, was forced to continue the meeting of creditors to May 16, 2013. [Doc. No. 123, p. 3, ¶ 10]; see [Adv. Doc. No. 1, p. 2, ¶ 9 & Adv. Doc. No. 10, p. 1, ¶ 1].
The Court notes that pursuant to Bankruptcy Local Rule 2003–1(a) and a form entitled “Chapter 7 Debtors Duties and Responsibilities”—which is available on the website for the Bankruptcy Court of the Southern District of Texas—the Debtors were required to attend all meetings of creditors “ unless excused by the Court from attendance.” BLR 2003–1(a) (emphasis added); Chapter 7 Debtors Duties and Responsibilities Form, p. 2, ¶ 16, available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc. Moreover, another form available on the same website, entitled “Procedures for Obtaining Relief from Requirement to Attend § 341 Meeting of Creditors,” sets forth the procedures for which the Debtors can seek to be excused from attending the mandatory meetings of creditors. See Procedures for Obtaining Relief from Requirement to Attend § 341 Meeting of Creditors Form, available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc. In Section V(C)(2), the Court subsequently discusses the Debtors' and their counsel's repeated failure to attend meetings of creditors and their failure to seek to be excused from attending these meetings. But, with respect to this particular meeting of creditors, held on May 2, 2013, the Court finds that although 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,” the Debtors and their counsel should have sought to be excused from attending this meeting by following the specific procedures in the above-referenced Procedures Form.
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.
[ Id.]. The Debtorsdid not file a response to the § 348(f)(2) Motion.
Normally, what constitutes property of the estate is determined on the date the petition was filed. See§ 541(a)(1) (“Such estate is comprised of ... all legal or equitable interests of the debtor in property as of the commencement of the case.”) (emphasis added).; see, e.g., W. v. Hsu (In re Advanced Modular Power Sys., Inc.), 413 B.R. 643, 670 (Bankr.S.D.Tex.2009), aff'd sub nom. Hsu v. W., Civil Action No. H–09–3131, 2009 WL 7760300 (S.D.Tex. Dec. 30, 2009) (“[T]he property of the estate includes the intangible and tangible property held by the Debtor as of the Petition Date....”). However, if a debtor converts a case from Chapter 13 to Chapter 7 in bad faith, then pursuant to § 348(f)(2), the property of the estate is determined as of the date of conversion. See§ 348(f)(2); see, e.g., In re Fonke, 321 B.R. 199, 208 (Bankr.S.D.Tex.2005) (“Based on the plain language of § 348(f)(2), a debtor who converts in bad faith is punished by enlarging the property of the estate to include the debtor's postpetition after acquired property.”).
The Court notes that the Debtors failed to file a response to the § 348(f)(2) Motion, even though the § 348(f)(2) Motion included immediately below the title, in pertinent part, the following language that is required by Bankruptcy Local Rule 9013–l(b): “ IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE MOVING PARTY CANNOT AGREE. YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY.” [Doc. No. 123, p. 1] (emphasis added); see BLR 9013–1(b).
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.
This Court's Findings of Facts and Conclusions of Law made in open court at the conclusion of the Hearing on the § 348(f)(2) Motion on August 6, 2013 are incorporated as if fully set forth herein. See, e.g., Hoffman v. Greene (In re Burke), 374 B.R. 781, 783 (Bankr.D.Colo.2007), aff'd, Bankr.No. 98–2466–MER, Civil Action No. 07–cv–01947–AP, 2008 WL 4452133 (D.Colo. Sept. 29, 2008) (“To the degree and extent this Court's previous findings of fact, conclusions of law, decisions and opinions, as designated, are relevant to this ruling, the Court adopts and incorporates them herein....”).
27. On August 9, 2013, this Court issued an order granting the § 348(f)(2) Motion(the August 9, 2013 Order). [Doc. No. 155]. The August 9, 2013 Order expressly set forth that the Debtors' case was converted from Chapter 13 to Chapter 7 in bad faith
and that property of the Debtors' estate would be determined as of the Conversion Date (i.e., February 11, 2013) and not as of the Petition Date (i.e., June 14, 2010). [ Id.].
See [Findings of Fact Nos. 29–37 in Section II(B) ] (discussing specific examples of the Debtors' bad faith conduct).
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].
B. A Description of the Debtors' Bad Faith Conduct That Resulted in the Granting of the § 348(f)(2) Motion
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
; (b) failed to notify the Chapter 13 Trustee about his new business; (c) did not have authority from this Court or the Chapter 13 Trustee to operate his business; (d) received monthly income from this business but never sought to modify the Confirmed Plan to increase the recovery to the Debtors' creditors; (e) converted his case from Chapter 13 to Chapter 7 to avoid judgments that had been filed related to his business debts; and (f) expected a discharge for the additional $506,395.32 in debts that he (through his proprietorship) incurred during the Chapter 13 case [ see Finding of Fact No. 11]. [ Id. at pp. 3–4, ¶ 13; Adv. Doc. No. 1, p. 3, ¶ 11 & Adv. Doc. No. 10, p. 1, ¶ 2].
However, at the Hearing on the § 348(f)(2) Motion, Mr. Reeves testified that he opened TMP around September or October of 2011, which is approximately one year after the proposed Chapter 13 Plan was confirmed. [Tape Recording, July 11, 2013 Hearing at 1:52:17–1:52:27 p.m.]. Moreover, Ms. Reeves testified that Mr. Reeves was working for an employer as of the Petition Date, but approximately a year and four months later (i.e., around September or October 2011), he quit his job and started his own business (i.e., TMP). [Tape Recording, June 27, 2013 Hearing at 1:15:36–1:16:46 p.m.]. Yet, Mr. Reeves testified at the Hearing on the § 348(f)(2) Motion that he was unemployed and seeking employment as of the Petition Date. [Tape Recording, July 11, 2013 Hearing at 1:50:06–1:50:11 p.m.]. While the testimony of Mr. Reeves and Ms. Reeves is contradictory, there is no question that at some point after the Petition Date, Mr. Reeves surreptitiously started his own business.
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 2013. [ Id. at p. 4, ¶ 16; Adv. Doc. No. 1, p. 3, ¶ 12 & Adv. Doc. No. 10, p. 1, ¶ 3]. Upon the Trustee's request for the turnover of invoices, Mr. Reeves only turned over drafts, correspondence, and handwritten notes regarding sales. [Adv. Doc. No. 1, p. 3, ¶ 12; Adv. Doc. No. 10, p. 1, ¶ 3].
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].
Mr. Reeves also testified that over $800,000 flowed through his business account in the year 2012, but he could not explain how such funds were spent, other than on expenses related to entertainment or the purchases of vehicles to transport products. [ Id.].
In the Answer, the Debtors deny the Trustee's allegation and contend that Mr. Reeves “could articulate the disposition of [these] vehicles.” [Adv. Doc. 10, p. 1, ¶ 4]. However, the Court notes that the Debtors' contention is wholly inaccurate because Mr. Reeves was not, in fact, able to articulate the disposition of these vehicles at the Hearing on the § 348(f)(2) Motion. The Debtors' denial in the Answer is in direct conflict with Mr. Reeves' prior testimony under oath.
He could not provide evidence of any payment made for products purchased for customers or on behalf of customers. [Adv. Doc. No. 1, p. 4, ¶ 14].
In the Answer, the Debtors deny this specific allegation by stating the following: “Debtors deny that they did not explain where $800,000 that flowed through Debtor's business went.” [Adv. Doc. No. 10, p. 1, ¶ 4]. The Court notes that the Debtors' assertion is inaccurate because Mr. Reeves was not able to explain the whereabouts of the $800,000 that flowed through TMP. See [Tape Recording, July 11, 2013 Hearing at 2:28:21–2:31:29]. Once again, the Debtors' denial in the Answer is in direct conflict with Mr. Reeves' prior testimony under oath. See [footnote number 17].
In the Answer, the Debtors assert that Mr. Reeves “was able to provide testimony concerning payment of products purchased for customers or on behalf of customers.” [Doc. No. 10, p. 1, ¶ 4]. The Court notes that this assertion is also inaccurate because Mr. Reeves did not provide such testimony. See [Tape Recording, July 11, 2013 Hearing at 2:28:21–2:31:29]. Once again, the Debtors' denial in the Answer is in direct conflict with Mr. Reeves' prior testimony under oath. [ See 12 n. 19, 13 n. 20].
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 receivableconstitutes property of the estate and, if collectible, the funds would be distributed to the Debtors' creditors. [Adv. Doc. No. 1, p. 4, ¶ 15]. Mr. Reeves testified that he paid the account debtor in cash to deliver products to his customer; the customer never received the product; and he (i.e., Mr. Reeves) never received the return of the funds. [ Id.]. Mr. Reeves indicated that he would turn over to the Trustee information regarding the account debtor, but he has never provided any such information. [ Id.]. Mr. Reeves further testified that he was not familiar with the account debtor at the time of the transaction, which took place at his home and involved the exchange of cash obtained from the Debtors' Woodforest Bank Account for the purchase and delivery of the products. [ Id.].
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.].
C. The Trustee's Requests for: (1) Amended Schedules that Reflect Property of the Estate as of the Conversion Date; and (2) an Amended SOFA
The applicable Federal Bankruptcy Rule only requires amended Schedules upon a bad faith conversion. See Bankruptcy Rule 1019(5)(C)(i). But, in the case at bar, the Trustee requested the Debtors to also file an amended SOFA due to the bad faith business dealings that the Debtors undertook while they were in Chapter 13. See [Findings of Fact Nos. 29–37].
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:
In light of [the August 9, 2013 Order], which stated that the Debtors' estate would be determined as of [the Conversion Date], the Trustee requests that the Debtors file newly amended schedules and [SOFA] ... within the next 10 days. If the Debtors believe their current form of schedules/sofa to be complete and accurate even in light of the Court's order, please make that express representation to me in response to this email.
[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:
I'm new to this.... Are we required to make such amendments? I couldn't find where that's required (or even suggested). Let me explain: If you are talking about Schedules A & B, I'm not sure that we can do better than what was sought and supplied to date. As for the SOFA: that does not purport to reflect assets held at the time of conversion anyway, although it does already show preconversion transactions (which may or may not constitute property of the converted estate). Because, Bankr[.] Rules required conversion schedules (regardless of the issue of bad faith), I believe that what we've submitted should suffice.
Let me know otherwise.
[ Id ].
The Court finds that the Debtors' counsel was representing to the Trustee's counsel in his response to her e-mail the following: (a) because the Debtors—in their view—had filed accurate and complete Schedules (i.e., the 2/11 Amended Schedules and the 3/22 Amended Schedules [Findings of Fact Nos. 11 & 16] ), they did not need to comply with the Trustee's counsel's request that the Debtors file newly amended Schedules and SOFA within 10 days; (b) what the Debtors had filed as of the date of the e-mail string between the Debtors' counsel and the Trustee's counsel on September 24, 2013 [ see Findings of Fact Nos. 38 & 39]—specifically, the 2/11 Amended Schedules and the 3/22 Amended Schedules [ see Findings of Fact Nos. 11 & 16]—was sufficient; and (c) the August 9, 2013 Order—which expressly set forth that the Debtors converted their case 7 from Chapter 13 to Chapter 7 in bad faith [Finding of Fact No. 27]—did not impose duties upon the Debtors to further amend their Schedules and SOFA.
40. On the same day, approximately two hours after the Debtors' counsel's response, counsel for the Trustee replied:
I take your response to mean that the Debtors are making the following representations:
1) They have accurately and comprehensively identified, on Schedule A and B, all property in which they had an interest (of whatever nature) as of [the Conversion Date];
2) They have comprehensively identified all exemptions they intend to claim in their property (such property being that in which they had an interest, of whatever nature, as of February 11, 2013 [i.e., the Conversion Date];
3) In light of the revised effective date as it relates to the determination of the Debtors' estate, there are no new items to disclose on the Statement of Financial Affairs (such as new items to include income 2011, 2012, and 2013 (ytd); pending litigation; repossessions since February 2012, gifts since February 2012, Losses since 2012, bankruptcy/debt counseling payments, transfers to creditors within 90 days prior to [the Conversion Date], all other transfers since Feb. 2011, and all other relevant information sought by the SOFA taking into consideration [the August 9, 2013 Order] ).
If this is not what your clients are intending to represent, please provide clarification.
[ 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].
D. Inaccuracies in the 3/22 Amended Schedules
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).
[ See Doc. No. 175, p. 3, ¶ 7(a); Trustee's Ex. E, pp. 1–10]. As of the Conversion Date, the account ending with 8997, which is in the name of only one of the Debtors (i.e., Ms. Reeves), had a balance of $2,034.29 [Trustee's Ex. E, pp. 1 & 4], and the account ending with 0769, which is in the name of the other Debtor (i.e., Mr. Reeves), had a balance of $637.79. [ Id. at pp. 7 & 9]. Thus, as of the Conversion Date, the aggregate amount in the Woodforest Bank Accounts was $2,672.08 (i.e., $2,034.29 + $637.79 = $2,672.08).
Indeed, the Original Schedule B and the 2/11 Amended Schedule B also failed to identify the two accounts at the Woodforest National Bank, and only identified $20.00 relating to “Woodforest National Bank.” [Doc. No. 1, p. 9; Trustee's Ex. B, p. 7; Doc. No. 93, p. 1].
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.
[Trustee's Ex. C, p. 6; Doc. No. 175, p. 3, ¶ 7(d) ].
The Court notes that the Debtors failed to disclose the 2012 Tax Refund on the 3/22 Amended Schedules B and C [ see Trustee's Ex. C, pp. 7–14; Doc. Nos. 93 & 94], despite knowing the existence and amount of the 2012 Tax Refund as early as February 21, 2013. The Court finds that the Debtors knew that they were entitled to receive $15,613.00—and not $15,000.00—as early as February 21, 2013 because Martin Consulting LP, the company who prepared the Debtors' tax returns, gave the Debtors instructions for filing the 2012 Federal Form 1040, which was dated February 21, 2013. See [Trustee's Ex. C, p. 1] (“You will receive a refund of $15,613.00.”) (emphasis added).
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.
[Doc. No. 175, p. 3, ¶ 7(e); Trustee's Ex. A, pp. 18 & 21; Doc. No. 100, p. 4; Doc. No. 101, p. 2]. In order to fully exempt the 2010 Dodge Truck, the Debtors utilized the “tools of the trade” exemption and claimed a $4,350.00 exemption under § 522(d)(6)
The Court notes that the Debtors failed to identify the 2010 Dodge Truck on the 2/11 Amended Schedules B and C [ see Trustee's Ex. B, pp. 7–14; Doc. Nos. 93 & 94], even though they had purchased this vehicle after receiving the Retroactive Payment in September of 2011 [Finding of Fact No. 33].
on the 3/22 Amended Schedules.
.Section 522(d)(6) 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 $2,300 in value ... in tools, of the trade of the debtor or the trade of a dependent of the debtor.” 11 U.S.C. § 522(d)(6).
[Doc. No. 101, p. 2]. They did so despite Mr. Reeves testifying at the April 4, 2013 continued meeting of creditors that he had ceased to do business in January or February of 2013 [Finding of Fact No. 32]. [Doc. No. 175, p. 3, ¶ 7(e) ]. Stated differently, the Debtors were claiming a “tools of the trade” exemption under § 522(d)(6) even though Mr. Reeves ceased to do business in January or February of 2013—several weeks before filing the 3/22 Amended Schedules.
In addition to claiming a $4,350.00 exemption under § 522(d)(6) for the 2010 Dodge Truck on the 3/22 Amended Schedules, the Debtors also claimed a $3,450.00 exemption pursuant to § 522(d)(2), and a $7,200.00 exemption pursuant to § 522(d)(5) [Doc. No. 101, p. 2], for a total claimed exemption of $15,000.00 (i.e., $4,350.00 + $3,450.00 + $7,200.00 = $15,000.00) with respect to the 2010 Dodge Truck—the full amount of the Debtors' interest in the 2010 Dodge Truck as disclosed on the 3/22 Amended Schedule B [Doc. No. 100, p. 4].
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).
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.
[ Id. at 2:09:52–2:10:16 p.m.].
The Court understands why the Trustee objected, particularly given the Debtors' bad faith conduct during their Chapter 13 proceeding and their other significant inaccuracies on the 3/22 Amended Schedules B and C. See [Findings of Fact Nos. 42–50]. The Trustee had every right to be skeptical about just exactly what the Debtors' relationship was with HPFCU. After all, they had only listed one of two accounts at Woodforest National Bank. [Finding of Fact No. 43].
III. Relief Requested
A. The Objection/Motion, the Debtors' Response, and the Arguments Made in Support Thereof
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.
[ Id. at pp. 4–5, ¶¶ 10–16; see Doc. No. 155].
[ See 14 n. 22].
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.
[Doc. No. 175, p. 5, ¶ 13; see Finding of Fact No. 48].
The Trustee was initially willing to request a reduced amount upon the Debtors' production of proper documentation that a specific portion of the Chapter 13 Refund was earned after the Conversion Date—as the Debtors contend—but the Debtors have provided no documentation to support their position. [Doc. No. 175, p. 3, ¶ 7(c) & p. 5, ¶ 13].
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 Schedules. [Doc. No. 175, p. 4–5, ¶ 12; see also Findings of Fact No. 49].
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.
The Trustee initiated adversary proceeding number 13–03204 on August 19, 2013, seeking to bar the Debtors' discharge pursuant to §§ 727(a)(3), (a)(4)(D), (a)(5). [Adv. Doc. No. 1]. Section 727(a)(3) provides that the Court shall grant the Debtors a discharge, unless the Debtors “concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the [Debtors'] financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.” Section 727(a)(4)(D) provides that the Court shall grant the Debtors a discharge, unless the Debtors “knowingly and fraudulently, in or in connection with the case ... withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the [Debtors'] property or financial affairs.” Section 727(a)(5) provides that the Court shall grant the Debtors a discharge, unless the Debtors “failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the [Debtors'] liabilities.” The Debtors' complete and accurate answers to many of the items in the amended SOFA are certainly relevant to this adversary proceeding and could well affect the Trustee's prosecution of this suit.
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:
Debtors laughingly admit paragraph # 12 [of the Objection/Motion] which should tell this Court everything it needs to know about the prosecution of this case, and about the conduct of the Trustee's counsel. Rhetorically, does the Trustee's counsel really intend to show that the Debtors intentionally hid $9.07 from the Trustee? Seriously? Has this case degraded to such a wolf-pack mentality that this Court will simply preside of the tearing apart of the carcasses of these folks? It appears that the Debtor's punishment for their alleged fraud is that they will pay everyone back ... and that they will also pay the “wolf-pack's” lawyers for the privilege of not being able to escape their bankruptcy filing.
[ 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:
In subparagraph d [of the Objection/Motion,] the Trustee further states that the Debtors listed as tax refund of $15000.00 when it was actually $15,613.00—that's another huge four percent (4%) difference! The remedy, however, is not to run up fees in violation of the Rules of Professional Responsibility and Rule 9013, but instead to demand turnover of the un-exempted excess. No demand has ever been made from the Trustee for this un-exempted tax refund amount. Consequently, no attorney's fees should be awarded to the Trustee's counsel for failing to demand directly for what they are now seeking by court order.
[ 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.
The Court disagrees with the Debtors' assertion that the Trustee should have first made a demand before filing the Objection/Motion. The Court subsequently discusses this issue in Section V(B).
B. The Hearing on the Objection/Motion
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 more than what they claimed as exempt in the 3/22 Amended Schedules, the Debtors should not receive an exemption above the amount they claimed to be exempt on the 3/22 Amended Schedules.
Despite this stipulation, the Debtors are nevertheless now trying to exempt $332.00 related to the Woodforest Bank Accounts instead of the $20.00 they claimed to be exempt on the 3/22 Amended Schedules. See Section III(C)(2).
After hearing closing arguments from the Trustee's counsel, Cole's counsel, and counsel for the Debtors, the Court took the matter under advisement.
C. The Debtors' Brief with Respect to 11 U.S.C. § 707(b)(4)(B) and Newly Amended Schedules B and C
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].
1. The Brief
In the Brief, counsel for the Debtors corrected his argument at the Hearing regarding Bankruptcy Rule 1019(5)(C)(i)
, and informed the Court that the “Debtors and their counsel now agree that Rule 1019 normally does not require conversion schedules listing post-petition property except ifSection 348(f)(2) applies” [Doc. No. 186, p. 1, ¶ 2]—and that here, this section does apply. “Notwithstanding this fact,” the Debtors reiterate that they filed the 2/11 Amended Schedules and the 3/22 Amended Schedules, and that the amendments contained therein are accurate. [ Id. at ¶ 3].
See [Section III(B) & 34 n. 49].
In the Brief, the Debtors also request that no penalties be assessed against their attorney pursuant to § 707(b)(4)(B)(i)
regarding the discrepancies on the 3/22 Amended Schedules relating to the Woodforest Bank accounts, the 2012 Tax Refund, and the Chapter 13 Refund.
.Section 707(b)(4)(B)(i) provides that “if the court finds that the attorney for the [D]ebtor[s] violated [Bankruptcy Rule] 9011, the court, on its own initiative or on the motion of a party in interest, in accordance with such procedures, may order the assessment of an appropriate civil penalty against the attorney for the [D]ebtor[s].”
[Doc. No. 186, pp. 2–4]. This request is made despite the fact that the Trustee has not requested this Court to assess such penalties.
The Court notes that, in the Brief, the Debtors addressed neither of the discrepancies on the 3/22 Amended Schedules related to the HPFCU Account and the 2010 Dodge Truck. See [Doc. No. 186].
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. Let me know otherwise.” [Trustee's Ex. A, p. 1; see Finding of Fact No. 39] (emphasis added).
2. The 11/19 Amended Schedules
The only Schedules that the Debtors amended on 11/19 were Schedules B and C. See [Doc. No. 187]. In Section V(D), the Court subsequently discusses why the 11/19 Amended Schedules should be stricken and disallowed.
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:
(i) increase the value of the Debtors' interest in the Woodforest Bank Accounts from $20.00—as reflected on the 3/22 Amended Schedule B—to $2,672.08 [ Compare Doc. No. 100, p. 1, with Doc. No. 187, p. 1];
(ii) increase the value of the Debtors' interest in the HPFCU Account from $8.00—as reflected on the 3/22 Amended Schedule B—to $17.07 [ Compare Doc. No. 100, p. 1 with Doc. No. 187, p. 1];
(iii) add the following property, “Chapter 14 Refund (pre-conversion payments) ($4625.29–$2200 = $2,425.29),”
valued at $2,425.49 [Doc. No. 187, p. 3];
The Court presumes that the Debtors meant to identify the Chapter 13 Refund, rather than the “Chapter 14 Refund.”
(iv) replace the 2010 Dodge Truck—which was listed on the 3/22 Amended Schedule B with a value of $15,000.00
—with a $9,000.00 interest in the following property:
See [Finding of Fact No. 47].
“(2010 Dodge Truck was traded post-conversion to another truck, 2005 Dodge Ram 1500)[.] Post-petition creditor is “Credit Acceptance” and current is approximately $13,000.00[.]”
(the 2005 Dodge Ram) [ Compare Doc. No. 100 with Doc. No. 187, p. 187]; and
This disclosure is verbatim from the 11/19 Amended Schedule B. It is clear that a word is missing. The Court believes that the missing word is “balance,” and that the intended disclosure should read as follows: “(2010 Dodge Truck was traded post-conversion to another truck, 2005 Dodge Ram 1500)[.] Post-petition creditor is “Credit Acceptance” and current balance is approximately $13,000.00[.]”
(v) increase the value of the Debtors' interest in the 2012 Tax Refund from $15,000.00—as reflected on the 3/22 Amended Schedule B—to $15,613.00 [ Compare Doc. No. 100, p. 4 with Doc. No. 187, p. 4].
And, by filing the 11/19 Amended Schedule C, the Debtors attempt to:
(i) 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. 101, p. 1 with Doc. No. 187, p. 6];
(ii) remove their claimed exemptions on the 3/22 Amended Schedules relating to the 2010 Dodge Truck (i.e., a total of $15,000.00)—$3,450.00 pursuant to § 522(d)(2), $4,350.00 pursuant to § 522(d)(6), and $7,200.00 pursuant to § 522(d)(5) [ see Doc. No. 101, p. 2]; and
(iii) claim an exemption in the 2005 Dodge Ram that they acquired by trading in the 2010 Dodge Truck [ see Doc. No. 187, p. 7].
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 2005 Dodge Truck. For the reasons subsequently discussed herein, this approach will not succeed.
IV. Jurisdiction, Venue, and Constitutional Authority to Enter Final Orders
A. Jurisdiction
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.
Finally, this dispute is core under the general “catch-all” language of 28 U.S.C. § 157(b)(2). See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930 (5th Cir.1999) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”).
An adversary proceeding is typically necessary for turnover of money or property. However, Bankruptcy Rule 7001(1) expressly states that a proceeding to compel the Debtors to deliver property to the Trustee is not an adversary proceeding. Fed. R. Bankr.P. 7001(1) (“The following are adversary proceedings:(1) a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee....”) (emphasis added). Here, the Trustee is requesting that the Debtors be ordered to turn over nonexempt property totaling $12,249.64—specifically, the sum of (a) $2,652.08 related to the Woodforest Bank Accounts; (b) $613.00 related to the 2012 Tax Refund; (c) $4,350.00 related to the Debtors' claimed exemption under § 522(d)(6) for the 2010 Dodge Truck; (d) $4,625.49 related to the Chapter 13 Refund; and (e) $9.07 related to the HPFCU Account. [ See Doc. No. 175, pp. 4–5, ¶¶ 10–15]. Thus, the Trustee is not required to file an adversary proceeding; the Objection/Motion passes procedural muster.
B. Venue
Venue is proper pursuant to 28 U.S.C. § 1408(1).
C. Constitutional Authority to Enter Final Orders
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.
1. The First Reason: The facts in Stern are distinguishable from the facts in the case at bar
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 Supreme Court held that the bankruptcy court lacked constitutional authority to enter a final judgment on the debtor's counterclaim.
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.
2. The Second Reason: Even if Stern applies, the “Public Rights” Exception articulated in Stern applies in the case at bar
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 Date is governed by § 348(f)(2) and Bankruptcy Rule 1019(5)(C)(i); and the requirement to file an amended SOFA is governed by this Court's equitable powers set forth in § 105(a).
These issues are central to the public bankruptcy scheme, as they relate to both the exercise of exclusive jurisdiction over the property of the Debtors' estate (because before property can become exempt, it is property of the estate), and the equitable distribution of that property among the Debtors' creditors.
.Section 105(a) sets forth that: “The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” In the case at bar, the only SOFA filed by the Debtors is the Original SOFA [Finding of Fact No. 2]. Yet, one of the Debtors (i.e., Mr. Reeves) started his own business after the Petition Date, and Mr. Reeves shut down this business before the Conversion Date. [Finding of Fact No. 31]. Given that this Court has already found that the Debtors' conversion from Chapter 13 to Chapter 7 was in bad faith [Findings of Fact Nos. 26 & 27], and that the Trustee has initiated an objection to discharge against the Debtors based upon § 727(a), [ see 22 n. 32], this Court concludes that it should exercise its powers under § 105(a) to require the Debtors to file an amended SOFA.
For all of these reasons, this Court has the constitutional authority to enter final orders on the Objection/Motion.
V. Conclusions of Law
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:
(a) In September of 2013, when the Trustee's counsel inquired as to whether the Debtors were going to file amended Schedules, [ see Findings of Fact Nos. 38 & 40], they were not required to amend their Schedules and that the Schedules they had filed—the 2/11 Amended Schedules and the 3/22 Amended Schedules—were sufficient [ see Finding of Fact No. 39];
(b) The Trustee was required to first make a demand for turnover of property of the estate before filing the Objection/Motion;
(c) The Trustee was required to specifically spell out to the Debtors the inaccuracies in the 3/22 Amended Schedules before filing the Objection/Motion; and
(d) By filing the 11/19 Amended Schedules, these most recently filed Schedules, rather than the 3/22 Amended Schedules B and C, govern the Debtors' exemption rights.
The Debtors have not expressly stated that the 11/19 Amended Schedules should govern their exemption rights. However, by filing them, that is the position that they are now necessarily taking.
A. Contrary to the Debtors' Assertion at the Hearing, the Debtors were Required to Timely File Complete and Accurate Bankruptcy 1019(5)(C)(i) Amended Schedules, and They Failed to Do So
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 Schedule G, the Original Schedule H, the 3/22 Amended Schedules I and J, and the Original SOFA [Finding of Fact No. 41]; and, the Trustee filed the Objection/Motion based upon the “Live” Pleadings. See [Doc. No. 175]. The 3/22 Amended Schedules do not list all of the Debtors' interests in property as of the Conversion Date. [Finding of Fact No. 42]. Indeed, in addition to outright omissions of assets, there are inaccurate “low-ball” values placed on certain assets. [ Id.]. For the reasons set forth below, the Court concludes that the Debtors failed to file amended Schedules as required by Bankruptcy Rule 1019(5)(C)(i). Indeed, by failing to do so, the Debtors also failed to comply with Bankruptcy Local Rule 1019–1
Bankruptcy Local Rule 1019–1 expressly required the Debtors, within 14 days after entry of an order converting their case from Chapter 13 to Chapter 7, to file: “(1) supplemental schedules itemizing changes from the original schedules in property of the estate and in creditor lists, or (2) a statement that there are no changes.” BLR 1019–1.
, and § 521(a)(3).
Bankruptcy Rule 4002(a)(4) expressly states that the Debtors shall “cooperate with the [T]rustee in the preparation of an inventory, the examination of proofs of claim, and the administration of the estate.” Fed. R. Bankr.P. 4002(a)(4).
Thus, the very glib and indignant tone of the Debtors, expressed through their counsel in the written Response and in oral argument at the Hearing, is not only unprofessional; it is entirely unjustified.
.Section 521(a)(4) requires the Debtors to “cooperate with the [T]rustee as necessary to enable the [T]rustee to perform the [T]rustee's duties under this title.” 11 U.SC. § 521(a)(4).
1. The Debtors Failed to Comply with Bankruptcy Rule 1019(5)(C)(i)
The Debtors wholly failed to comply with Bankruptcy Rule 1019(5)(C)(i). This Rule provides that:
Unless the court orders otherwise, if a ... chapter 13 case is converted to chapter 7 after confirmation of a plan, the debtor shall file: (i) a schedule of property not listed in the final report and account acquired after the filing of the petition but before conversion, except if the case is converted from chapter 13 to chapter 7 and § 348(f)(2) does not apply.
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 § 348(f)(2) does, in fact, apply because the Debtors converted their case in bad faith
See also [Findings of Fact Nos. 29–37].
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).
In the Brief, however, counsel for the Debtors corrected the argument he made at the Hearing regarding Bankruptcy Rule 1019(5)(C)(i), and the “Debtors and their counsel now agree that Rule 1019 normally does not require conversion schedules which list post-petition property except if Section 348(f)(2) applies.” [Doc. No. 186, p. 1, ¶ 2]. Therefore, it appears that the Debtors' current position is that they were required to file amended Schedules pursuant to Bankruptcy Rule 1019(5)(C)(i). While it is now heartening that the Debtors acknowledge that under Rule 1019(5)(C)(i), they are in fact required to file amended Schedules reflecting their financial condition on the Conversion Date, the Debtors failed to file complete and accurate amended Schedules required by this Rule until after the Trustee filed the Objection/Motion and this Court held the Hearing. See [Doc. No. 187]. Thus, despite the admission of the Debtor's counsel after the Hearing that they were required to amended Schedules pursuant to file Bankruptcy Rule 1019(5)(C)(i) (hereinafter referred to as: Bankruptcy Rule 1019(5)(C)(i) Schedules), the Debtors timely failed to do so.
The Court notes that the arguments of the Debtors' counsel at the Hearing regarding Bankruptcy Rule 1019(5)(C)(i) were confusing. Specifically, counsel for the Debtors interpreted this Rule to mean that the Debtors were not required to file Bankruptcy Rule 1019(5)(C)(i) Amended Schedules because of his interpretation of § 348(f)(2). See [Tape Recording, November 19, 2013 Hearing at 2:43:15–2:44:48 p.m.]. Subsequently, counsel for the Debtors realized that his interpretation of Rule 1019(5)(C)(i) and § 348(f)(2) at the Hearing was simply wrong. Thus, after the Hearing, the Debtors' counsel filed a Brief, admitting his error and affirmatively stating that Rule 1019(5)(C)(i) does indeed apply. See [Section III(C)(1).].
The 11/19 Amended Schedules, which were filed only after the Trustee filed the Objection/Motion and only after the Hearing, appear to be almost complete and accurate, but there is still one very glaring problem. See [Doc. No. 187]. The Debtors' counsel stipulated at the Hearing that the Debtors could not exempt more than what they claimed as exempt in the 3/22 Amended Schedules [Tape Recording, November 19, 2013 Hearing at 2:31:00–2:32:18 p.m.]. Despite this stipulation, in the 11/19 Amended Schedule C, the Debtors are now trying to exempt $332.00 with respect to the Woodforest Bank Accounts, even though they only claimed a $20.00 exemption in the 3/22 Amended Schedules [Finding of Fact No. 43].
2. The Debtors Failed to Comply with Bankruptcy Local Rule 1019–1
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 within 14 days after entry of an order converting a case from one chapter to another. BLR 1019–1 (emphasis added).
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).
Indeed, the Debtors waited approximately one month after the February 25, 2013 deadline to file the 3/22 Amended Schedules. [Finding of Fact No. 16]. Moreover, the 3/22 Amended Schedules did not list all of the Debtors' interests in property as of the Conversion Date. [Finding of Fact No. 42]. Therefore, the Court finds that the Debtors failed to comply with Bankruptcy Local Rule 1019–1 because they failed to meet the February 25, 2013 deadline to timely file either complete and accurate amended Schedules, with itemized changes, or a statement that there were no changes from the Original Schedules.
Although the Debtors, on the Conversion Date, filed the 2/11 Amended Schedules [Finding of Fact No. 11], the Court concludes that the 2/11 Amended Schedules did not satisfy the Debtors' duties under Bankruptcy Local Rule 1019–1 because they were inaccurate. [ See Doc. Nos. 93, 93–1, 93–2 & 94; Trustee's Ex. B, pp. 7–14].
3. The Debtors Failed to Comply with Bankruptcy Rule 4002(a)(4) and § 521(a)(3)
This section is limited to the Debtors' failure to comply with § 521(a)(3) by amending their Schedules. In Section V(C)(2), the Court further discusses how the Debtors and their counsel, in other respects, failed to comply with § 521(a)(3), a provision which is not limited to their obligation to amend their Schedules.
Bankruptcy Rule 4002(a)(4) requires the Debtors to “cooperate with the [T]rustee in the preparation of an inventory, the examination of proofs of claim, and the administration of the estate.” Fed. R. Bankr.P. 4002(a)(4) (emphasis added). 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)(emphasis added); see, e.g., United States Trustee v. Cortez (In re Cortez), 457 F.3d 448, 457 (5th Cir.2006) (“Section 521[a](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).”).
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.
[ Compare Finding of Fact No. 16 with Doc. No. 187].
As already set forth in footnote number 50, the 11/19 Amended Schedules are unacceptable because the Debtors are now trying to exempt $332.00 with respect to the Woodforest Bank Accounts, even though they only claimed a $20.00 exemption in the 3/22 Amended Schedules [Finding of Fact No. 43], and the Debtors' counsel stipulated at the Hearing that the Debtors could not exempt more than what they claimed as exempt in the 3/22 Amended Schedules. [Tape Recording, November 19, 2013 Hearing at 2:31:00–2:32:18 p.m.]. Moreover, the 11/19 Amended Schedules are unacceptable because the Debtors finally disclosed to the Trustee and this Court that they disposed of the 2010 Dodge Truck and purchased the 2005 Dodge Ram, and now the Debtors are attempting to exempt this 2005 truck. See [Doc. No. 187, p. 4].
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 have failed to comply with Bankruptcy Rule 4002(a)(4) and § 521(a)(3).
4. The Debtors Failed to Fully and Accurately Disclose All of Their Assets and Interests in Property
It is well-established that the Debtors' affirmative duty under § 521 to fully and accurately disclose all assets and interests in property continues throughout the case and requires the Debtors to amend their Schedules “when ever it becomes necessary in order to ensure the accuracy and reliability of the information disclosed therein.” In re Okan's Foods, Inc., 217 B.R. 739, 752 (Bankr.E.D.Pa.1998). The Court finds that the Debtors have failed to fulfill the most fundamental duties imposed upon debtors—full disclosure and truthfulness. They have not been forthright with the Trustee, their creditors, or this Court.
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 in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.” 11 U.S.C. § 348(f)(2) (emphasis added). “Based upon the plain language of § 348(f)(2), a debtor who converts in bad faith is punished by enlarging the property of the estate to include the debtor's postpetition after acquired property.” In re Fonke, 321 B.R. 199, 208 (Bankr.S.D.Tex.2005).
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' personalaccount reflect that he received a wire transfer in the amount of $46,930.50 on February 8, 2013, at which time Mr. Reeves requested and obtained a cashier's check in the amount of $30,010.00. [Finding of Fact No. 29]. He then used the cashier's check in the amount of $30,010.00 to pay Jim Roy, a creditor of his business, TMP. [Finding of Fact No. 30].
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 steadfastly maintained that the “Live” Pleadings were sufficient until after the Trustee filed the Objection/Motion and this Court held the Hearing on November 19, 2013. [ See Findings of Fact Nos. 38, 39, 40 & 41; Doc. No. 187]. Only then did they file the 11/19 Amended Schedules. Case law is clear that debtors cannot cleanse themselves of dishonesty in their Schedules by coming clean with amended disclosures after a third party has first exposed their untruthfulness. See Gebhardt v. Gartner (In re Gartner), 326 B.R. 357, 373 (Bankr.S.D.Tex.2005).
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.
The Debtors did not testify at the Hearing. Counsel for the Debtors attempted to call a rebuttal witness, but this Court sustained the Trustee's counsel's objection because counsel for the Debtors had failed to file a witness or exhibit list, as required by Bankruptcy Local Rule 9013–2. See BLR 9013–2(c), (k) (“Counsel for each party shall also exchange and file exhibit and witness lists with the Clerk of the Court by noon on the Day of Exchange [i.e., 48 hours before the scheduled hearing].”) (emphasis added).
B. Contrary to the Debtors' Assertion, the Trustee was not Required to First Make a Demand for Turnover of Property of the Estate Before Filing the Objection/Motion
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 requirementon the Trustee.
For these reasons, the Debtors' position is unsupportable as a matter of law.
See BLR 1009–1(c) (“If it appears to the court or trustee that the supporting documents need to be amended, the court or trustee may notify the debtor, specifying the items, documents, and time for amendment.”) (emphasis added).
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.
C. Contrary to the Debtors' Assertion, the Trustee did not Fail to Comply with § 704(a)(7); Rather, the Debtors and their Counsel Failed to Comply with § 521(a)(3)
In Section V(A)(3), the Court previously discussed how the Debtors failed to comply with § 521(a)(3) by amending their Schedules. This section now discusses how the Debtors and their counsel, in other respects, failed to comply with § 521(a)(3), a provision which is not limited to their obligation to amend their Schedules.
1. Discussion about § 704(a)(7)
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. Let me know otherwise.” [Trustee's Ex. A, p. 1; see Finding of Fact No. 39] (emphasis added).
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 3/22 Amended Schedules before filing the Objection/Motion. Therefore, the Court finds the Debtors' argument—that the Trustee failed to comply with § 704(a)(7)—is meritless. Rather, the Court finds that it is the Debtors and their counsel who have failed to comply with their obligations under the Code—i.e., § 521(a)(3)—by repeatedly failing to cooperate with the Trustee throughout the pendency of this case.
2. Discussion about the failure of the Debtors and their counsel to comply with § 521(a)(3)
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, see11 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. See11 U.S.C. § 343 (“The debtor shall appear and submit to examination under oath at the meeting of creditors under section 341(a) of this title.”) (emphasis added); BLR 2003–1(a) (“Debtors must attend Creditors' Meetings unless excused by the Court from attendance, Bankruptcy Code 343”) (emphasis added). Moreover, the Form entitled “Chapter 7 Debtors Duties and Responsibilities” (the Duties and Responsibilities Form), which is available on the website for the Bankruptcy Court of the Southern District of Texas, also requires the Debtors to attend all meetings of creditors.
The Form entitled “Procedures for Obtaining Relief from Requirement to Attend § 341 Meeting of Creditors” (the Procedures Form), which is also available on the website for the Bankruptcy Court of the Southern District of Texas, expressly sets forth the procedures for which the Debtors can seek to be excused from attending the mandatory meetings of creditors.
See the Duties and Responsibilities Form, p. 2, ¶ 16 (“[The Debtors] are required to appear and attend a Meeting of Creditors.... The meeting can only be rescheduled as a result of an emergency or an unavoidable or unforeseen conflict.”), available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc.
For example, if the Debtors were unable to attend any scheduled meeting of creditors, the Debtors were required to contact the trustee “ prior to the scheduled meeting.”
See the Procedures Form, available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc. BLR 1001–1 sets forth that the Forms referenced in the Bankruptcy Local Rules are contained on the court's website.
And, if the Debtors were unable to attend the meeting of creditors, but the Trustee did not agree that their attendance should be excused, or if any creditor objected at a meeting of creditors, the Debtors were required to file a motion to excuse their appearance at the meeting of creditors.
Id. at p. 1, ¶ 3.
This, the Debtors never did. Moreover, the Debtors' counsel, as an agent of the Debtors, also failed to cooperate with the Trustee when he failed to appear at the continued meeting of creditors on July 2, 2013. [Finding of Fact No. 25]. Although the Debtors failed to appear at this meeting, counsel for the Debtors had a duty himself to appear at this meeting. See, e.g., In re Cochener, 360 B.R. at 580 (“[E]ven if a debtor does not appear at a meeting of creditors, there is an obligation for the debtor's attorney to attend the meeting of creditors on behalf of the debtor.”). “[W]hen the attorney and the debtor[s] both failed to appear, any trustee could reasonably conclude that it was under the advice and direction of the attorney that the debtor did not appear.” Id.
Id. at p. 2, ¶ 6.
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 after this Court held the Hearing on the Objection/Motion that the Debtors filed the 11/19 Amended Schedules.
[Findings of Fact No. 23, 24, 25, 26 & 51]. Rather, counsel for the Debtors initially argued that Bankruptcy Rule 1019(5)(C)(i) did not apply and that the Debtors did more than they were required to do because they filed the 2/11 Amended Schedules and the 3/22 Amended Schedules [Finding of Fact No. 41]; and, on September 24, 2013, the Debtors' counsel also asserted to the Trustee's counsel that “I believe that what we've submitted [i.e., the 3/22 Amended Schedules] should suffice” [Finding of Fact No. 24]. By filing the 11/19 Amended Schedules, the Debtors now impliedly concede that the 2/11 Amended Schedules and the 3/22 Amended Schedules do not suffice and that they therefore should have complied with the Trustee's request of September 24,2013.
See Section V(D) of this Memorandum Opinion for why the Court strikes the 11/19 Amended Schedules.
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.
D. The 11/19 Amended Schedules Should Be Stricken and Disallowed
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)).
1. The Debtors Acted in Bad Faith
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 Cir.2008). Unruh concluded that a “finding of bad faith requires some form of deception, such as an effort to mislead creditors or to conceal assets, as opposed to a mere mistaken failure to list an asset or to claim an exemption.” Id. (citing McFatter v. Cage, 204 B.R. 503, 508 (S.D.Tex.1996)).
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.
2. The Creditors Were Prejudiced By the Debtors' Failure to Disclose
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 by reducing any ultimate distribution to them).
3. The 11/19 Amended Schedules Do Not Excuse the False Oaths in the 3/22 Amended Schedules
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 only after the insistence of one of their creditors.”) (emphasis added).
Here, that is exactly what happened. Only when the Trustee filed the Objection/Motion and this Court held the Hearing on the Objection/Motion did the Debtors amend their Schedules to correct the inaccuracies and omissions in the 3/22 Amended Schedules. [ See Finding of Fact No. 41; Doc. No. 187]. The Debtors' inaccuracies and omissions in the 3/22 Amended Schedules are not minor [ see Findings of Fact Nos. 42–50], the non-disclosure of which can be excused. See Gebhardt v. Gartner (In re Gartner), 326 B.R. 357, 372 (Bankr.S.D.Tex.2005) (“A debtor who makes more than one false statement under oath with an opportunity to clear up the inconsistencies has demonstrated his recklessness, which is sufficient for the bankruptcy court to infer the debtor's requisite [fraudulent] intent.”) (emphasis added). The Debtors made multiple false statements under oath in the 3/22 Amended Schedules, and they had ample opportunity to clear up the inconsistencies when the Trustee's counsel e-mailed on Debtors' counsel on September 24, 2013.
[ See Finding of Fact No. 38]. The Debtors, however, did nothing for almost two months [ see Finding of Fact No. 38, 39, 40 & 41]—until they filed the 11/19 Amended Schedules approximately eight hours after this Court held the Hearing on the Objection/Motion [Doc. No. 187]. Indeed, if the Trustee had not filed and prosecuted the Objection/Motion, then the Debtors would not have filed the 11/19 Amended Schedules.
In the Trustee's counsel's e-mail to the Debtor's counsel on September 24, 2013, she stated: “In light of [the August 9, 2013 Order], which stated that the Debtors' estate would be determined as of [the Conversion Date], the Trustee requests that the Debtors file newly amended schedules and [SOFA] ... within the next 10 days. If the Debtors believe their current form of schedules/sofa to be complete and accurate even in light of the Court's order, please make that express representation to me in response to this email.” [Finding of Fact No. 38].
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 Debtors filed the Response and forced the Trustee and her counsel to prepare for and prosecute the Objection/Motion at the Hearing. But then, at the beginning of the Hearing, the Debtors' counsel stipulated to all of the factual averments made 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.]. The Court is at a loss to understand why the Debtors' counsel—since he stipulated, on behalf of the Debtors, to all of the factual averments made in the Objection/Motion [ Id ]—did not simply pick up the phone and confer with the Trustee or her counsel before the Hearing, which took place more than two months after the Objection/Motion was filed, in order to spare the Trustee's counsel from having to spend additional time preparing for the Hearing.
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.
It is unclear to this Court why the Debtors are claiming the specific amount of $332.00. What is clear to this Court is that based on the stipulation of their own counsel and relevant case law, the Debtors may not claim more than $20.00 as exempt.
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].
E. The Objection/Motion
1. Standard for Objections to Exemptions
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 exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption.” Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) (citing Fed. R. Bankr.P. 1009(a)); see also In re Hall, 169 B.R. 732, 734 (Bankr.N.D.Okla.1994) (“Property can be exempt in bankruptcy only if it is claimed as exempt, by listing it as claimed exempt pursuant to 11 U.S.C. § 522(1), F.R.B.P. 4003(a), Official Form 6.”); In re Pomar, 234 B.R. 135, 136 (Bankr.M.D.Fla.1993) (“It is elementary that assets not scheduled and not claimed as exempt cannot be allowed as exempt.”).
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
); (4) to pay the Trustee the sum of $4,625.49 (representing the Chapter 13 Refund that they failed to disclose); and (5) to pay the Trustee the sum of $9.07 (representing that portion of the HPFCU Account that they failed to disclose on the 3/22 Amended Schedules). With respect to the Trustee's Motion for Turn Over, the Court concludes that the Debtors must turn over the above-referenced funds, totaling $12,249.64 (i.e., $2,652.08 + $6.13 + $4,350.00 + $4,625.49 + $9.07). The Court discusses each of these amounts immediately below.
Not only was Mr. Reeves not using the 2010 Dodge Truck as a tool of his trade [Finding of Fact No. 35] because he was no longer doing business as of the time they filed the 3/22 Amended Schedules; the Debtors also surreptitiously used the Retroactive Payment, which constituted property of the estate, to purchase the 2010 Dodge Truck [Finding of Fact No. 33].
2. Property in Dispute
a. The Woodforest Bank Accounts
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.
First, the Debtors failed to disclose that they had two accounts at Woodforest National Bank. [Finding of Fact No. 43]. Second, the Debtors' bank account statements reflect that they significantly undervalued the amount they had in Woodforest National Bank. [Findings of Fact Nos. 43]. On the 3/22 Amended Schedules, the Debtors identified $20.00 related to Woodforest National Bank, but they actually had a total of $2,672.08 in their two accounts. [ Id.]. Therefore, the difference between what the Debtors scheduled with respect to the Woodforest Bank Accounts on the 3/22 Amended Schedules and the actual amount that was in the Woodforest Bank Accounts as of the Conversion Date is $2,652.08 (i.e., $2,672.08 - $20.00 = $2,652.08). [Finding of Fact No. 44].
The Debtors' counsel also stipulated at the Hearing that the discrepancy relating to the Woodforest Bank Accounts was substantial. See [Tape Recording, November 19, 2013 Hearing at 2:44:51–2:44:58] (“I agree, $20 does not look anything like $2,600. I agree. Those two numbers cannot be harmonized.”) (emphasis added).
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.
b. The 2012 Tax Refund
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.
By way of example, in the Response, the Debtors state: “[i]n subparagraph d the Trustee further states that the Debtors listed as tax refund of $15,000.00 when it was actually $15,613.00 that's another huge four percent (4%) difference!” [Doc. No. 178, p. 1, ¶ 2]. In closing arguments at the Hearing, counsel for the Debtors argued that “a 4% mistake ... is not an attempt to avoid creditors; not an attempt to avoid losing money. It's simply a 4% mistake. These are not large numbers.” [Tape Recording, November 19, 2013 Hearing, at 2:45:14–2:45:27].
It is approximately 4% (i.e., $613/$15,000 = 4%).
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.
This position runs contrary to the bankruptcy system. See, e.g., In re SRR Energy Management Resources, Inc. (In re Roqumore), 393 B.R. 474, 484 (Bankr.S.D.Tex.2008) (“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘ honest but unfortunate debtor.’ ”) (quoting Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)).
Indeed, at the Hearing, the Debtors' counsel stated: “I probably would not have amended a schedule that had a $12 [sic] difference.... $15,613, yes, I would have made that amendment.” [Tape Recording, November 19, 2013 Hearing at 2:49:21–2:49:34]. Despite their counsel's concession that he, himself, would have amended Schedules to reflect a $613.00 increase in the expected tax return, the Debtors failed to amend their Schedules to reflect this increase.
The Court finds that the Debtors filed the 3/22 Amended Schedules under oath that deliberately and significantly understatedthe value of the 2012 Tax Refund. The Duties and Responsibilities Form requires the Debtors to “provide written notice to the Trustee of any tax refund in excess of $2,500.00 you anticipate receiving or actually receive.” See the Duties and Responsibilities Form, p. 2, ¶ 10, available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc. Moreover, the Duties and Responsibilities Form directs the Debtors as follows:
You have a legal obligation to promptly provide the Trustee with the information requested herein as soon as you learn of it.... If you receive money or property under any of the categories listed above, you must keep all such monies or property in your possession until the Trustee directs you to take a specific course of action.
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.
c. The 2010 Dodge Truck
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].
The Debtors used the Retroactive Payment, which they failed to disclose to the Chapter 13 Trustee or this Court, to purchase the 2010 Dodge Truck [Finding of Fact No. 33], and they subsequently sold the 2010 Dodge Truck to purchase the 2005 Dodge Ram [Doc. No. 187]. The Trustee has not complained about the Debtors failing to disclose the VA monies which the Debtors ultimately used to purchase the 2005 Dodge Ram. She is only objecting to the “tools of the trade” exemption in the amount of $4,350.00 under § 522(d)(6). [Doc. No. 175, p. 5, ¶ 15]. Accordingly, the Court will require only that the Debtors to turn over $4,350.00.
d. The Chapter 13 Refund
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.
[ See Finding of Fact No. 14]. In the Objection/Motion, the Trustee requested turn over of this $4,625.49, and objected to any attempts by the Debtors to exempt any amount of the Chapter 13 Refund because the Debtors failed to disclose the Chapter 13 Refund on the 3/22 Amended Schedules. [Finding of Fact No. 48]. The Trustee was willing to accept a reduced portion of the Chapter 13 Refund upon the Debtors' production of proper documentation that a specific portion of the Chapter 13 Refund was earned after the Conversion Date
While Bankruptcy Rule 1019(5)(C)(i) only requires the Debtors to disclose property not listed in the Final Report, Bankruptcy Local Rule 1019–1 requires them to amend their Schedules itemizing any changes. [ CompareFed. R. Bankr.P. 1019(5)(C)(i)with BLR 1019–1]. Hence, the Debtors were required to amend their Schedule B to disclose the Chapter 13 Refund.
—as the Debtors contend—but the Debtors have provided no documentation to support their claim. [Doc. No. 175, p. 3, ¶ 7(c) & p. 5, ¶ 13].
While the Debtors were still in their Chapter 13 case, a so-called “Wage Order” was in effect. See [Findings of Fact Nos. 4, 8 & 9]. When a Wage Order is in effect, a debtor's employer remits a portion of the debtor's wages directly to the Chapter 13 trustee pursuant to the confirmed plan. Once a Chapter 13 case is converted to a Chapter 7 case, the Chapter 13 plan is no longer in effect. However, until the employer receives an order from this Court directing the employer to cease making direct payments to the Chapter 13 trustee, the employer continues to remit such payments. Thus, in the case at bar, when the Chapter 7 Trustee stated that she was willing to request a reduced amount [Doc. No. 175, p. 3, ¶ 7(c) & p. 5, ¶ 13], she was telegraphing to the Debtors that if, in fact, the employer had remitted post-conversion payments to the Chapter 13 Trustee, she would probably not seek to recover these funds.
In the Response, the Debtors assert that they were not required to list or exempt the Chapter 13 Refund on their Schedules because:
based upon information and belief, no refund was due to the Debtors as of [the Conversion Date] ... and this is why the Debtors did not mention such item. After conversion, the Chapter 13 Trustee did withdraw an additional sum from the Debtor's account and that amount was subsequently refunded to Debtors. Further, there is no obligation to either list or exempt such amount.
[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.
i. The Debtors Were Required to Turn Over the Chapter 13 Refund to the Trustee Pursuant to Bankruptcy Rule 4002(a)(4) and § 521(a)(3), But They Failed to Do So
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 Chapter 13 Refund was owed to the Debtors prior to the Conversion Date and therefore belonged to the Debtors' estate,
the Debtors received the Chapter 13 Refund after the Conversion Date directly from the Chapter 13 Trustee. The Court notes that the Debtors' counsel's statement at the Hearing—that the Chapter 13 Refund constitutes property of the Debtors' estate—is accurate.
When the undersigned judge asked the Debtors' counsel if, in his judgment, the Debtors needed to disclose the Chapter 13 Refund, the Debtors' counsel stated: “Well, that's a very good point. When is the estate measured? If the estate is measured according to your order, Judge, as of February, the 11th, the refund wasn't made until after that date. Now, if it was money owed to the Debtors prior to February, the 11th, I would agree with the Court that that money does belong to the Chapter 7 estate.” [Tape Recording, November 19, 2013 Hearing at 2:42:24–2:42:42 p.m.] (emphasis added).
However, contrary to their counsel's stipulation, it is the Debtors' position that because the Chapter 13 Trustee had a legal obligation to turn over property of the estate to the Trustee under Bankruptcy Rule 1019(4), and because the Chapter 13 Trustee did not turn over the Chapter 13 Refund to the Trustee, but rather sent it directly to the Debtors, the Chapter 13 Refund is presumed not to be property of the estate. [ Id. at 2:12:23–2:12:50 p.m. & 2:42:48–2:43:14 p.m.].
See § 1306(a)(2) (“Property of the estate includes ... all earnings from services performed by the [D]ebtor[s] after the [Petition Date] but before the case is closed, dismissed or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.”); see also In re Seafort, 437 B.R. 204, 209 (6th Cir. BAP 2010), aff'd on other grounds, 669 F.3d 662 (6th Cir.2012) (“Notably, [§ 1306], which addresses property and earnings that come into existence after the debtor files a petition for relief does not exclude 401(k) contributions from property of the estate.”) (citing § 1306).
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).
There is no presumption that property that the Chapter 13 Trustee sends directly to the Debtors is not property of the estate.
.Section 542(a) provides that “an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease ... or that the debtor may exempt ..., shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” 11 U.S.C. § 542(a) (emphasis added).
As previously mentioned in Sections V(A)(3) and V(C)(2), Bankruptcy Rule 4002(a)(4) and § 521(a)(3) require the Debtors to cooperate with the Trustee so that she can carry out her duties under the Code. See In re Royce Homes, LP, No. 09–32467–H4–7, 2009 WL 3052439 (Bankr.S.D.Tex. Sept. 22, 2009) (discussing a debtor's unquestionable duty to cooperate with the trustee). One of the Trustee's duties is to identify and take possession of the assets of the Debtors' estate, § 704(a)(1), (2), (4), and then determine, once the Debtors claim their exemptions, whether to object to these exemptions, Fed. R. Bankr.P. 4003(b). See, e.g., In re Melenyzer, 140 B.R. 143, 155 (Bankr.W.D.Tex.1992) (“[T]he trustee must also collect the assets of the estate; investigate the financial affairs of the debtor, and appropriately object ... to exemptions.”).
The Debtors' counsel cited no case law stating there is a presumption that it is not property of the estate.
If the Debtors deposited the check from the Chapter 13 Trustee into their account, they needed to make this disclosure; or, if they had not yet done so, they still needed to disclose that they were in possession of this check. See BLR 1019–1; the Duties and Responsibilities Form, p. 2, ¶ 10. Finally, and perhaps more important, pursuant to § 542(a)
, the Debtors were required to turn over the Chapter 13 Refund to the Trustee, so she could administer this particular asset of the Chapter 7 estate. In sum, the Debtors' obligations here were to disclose receipt of monies and to turn them over to the Trustee as required by § 542(a). They failed to do so.
See 62 n. 73 (defining § 542(a)).
ii. The Debtors Were Required to Turn Over the Chapter 13 Refund to the Trustee Pursuant § 521(a)(4), But They Failed to Do So
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 “surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate.” 11 U.S.C. § 521(a)(4) (emphasis added). The Debtors were required to surrender to the Trustee the Chapter 13 Refund upon receipt of these funds. If the Debtors really believed that these funds were not property of the estate, then they should have kept these funds in their possession, notified the Trustee of their receipt, and provided an opportunity to the Trustee to determine whether these funds were property of the estate and whether the Debtors needed to turn over these funds to her.
See the Duties and Responsibilities Form, p. 2, ¶ 10 (“You have a legal obligation to promptly provide the Trustee with the information requested herein as soon as you learn of it.... If you receive money or property under any of the categories listed above, you must keep all such monies or property in your possession until the Trustee directs you to take a specific course of action.”) (emphasis added), available at http:// www. txs. uscourts. gov/ bankruptcy/ rulesformsproc; see also In re Pegues, 266 B.R. 328, 330 (Bankr.D.Md.2001) (stating that some courts have held that “post-petition wages held by the chapter 13 trustee at the time that the case is converted to chapter 7 should be disbursed to creditors under a confirmed plan.”). The Debtors failed to comply with their legal obligation. Rather, they spent the Chapter 13 Refund, [Finding of Fact No. 48], and told no one until confronted by the Trustee.
Any capable consumer bankruptcy attorney would have counseled his clients to take this approach. The record is devoid of any evidence that the Debtors' counsel did so here.
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.
e. Houston Police Federal Credit Union Account
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 in the HPFCU Account. [Finding of Fact No. 49]. Therefore, the difference between what the Debtors schedule with respect to the HPFCU Account on the 3/22 Amended Schedules and the actual amount that was in the HPFCU Account as of the Conversion Date is $9.07 (i.e., $17.07 - $8.00 = $9.07). [Finding of Fact No. 50].
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:
Debtors laughingly admit paragraph # 12
which should tell this Court everything it needs to know about the prosecution of this case, and about the conduct of the Trustee's counsel. Rhetorically, does the Trustee's counsel really intend to show that the Debtors intentionally hid $9.07 from the Trustee? Seriously? Has this case degraded to such a wolf-pack mentality that this Court will simply preside of the tearing apart of the carcasses of these folks? It appears that the Debtor's punishment for their alleged fraud is that they will pay everyone back (which appears to be the case now as they have agreed to non-dischargeability on several debts), and that they will also pay the “wolf-pack's” lawyers for the privilege of not being able to escape their bankruptcy filing.
[Doc. No. 178, p. 2–3, ¶ 6] (emphasis added).
Paragraph 12 of the Objection/Motion contains the Trustee's request for a turn over of $9.07 and the Trustee's objection to any attempts by the Debtors to exempt any amount over $8.00 with respect to the HPFCU account (i.e., the amount that the Debtors identified on the 3/22 Amended Schedules B and C). [Doc. No. 175, p. 4–5, ¶ 12; see also Findings of Fact Nos. 49 & 50].
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 bad faith [Finding of Fact No. 27]. The Trustee was justifiably worried about how the Debtors were using the HPFCU account and how much monies were actually on deposit at this institution. See [Finding of Fact No. 49]. Thus, the Trustee had no choice but to do her job and object to the Debtors' claimed exemption for the HPFCU Account.
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.
VI. Conclusion
A. Summary of the Court's Conclusions Regarding the 11/19 Amended Schedules and the Objection/Motion
In conclusion, this Court finds that that the 11/19 Amended Schedules should be stricken and disallowed because there is ample evidence of the Debtors' bad faith and that the Debtors concealed assets. Therefore, the 3/22 Amended Schedules B and C, and not the 11/19 Amended Schedules B and C, are the Debtors' “live” Schedules for the purpose of this Court's ruling on the Objection/Motion and for the remainder of this Chapter 7 case.
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.
B. The Court, At This Time, Declines to Address Sanctions Against the Debtors' Counsel
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).
The Brief addresses why the Trustee should not be able to recover sanctions against him; yet, the Trustee has not filed a separate motion for sanctions.
The Court reiterates that, in the Brief, the Debtors addressed neither of the discrepancies on the 3/22 Amended Schedules relating to the HPFCU Account or the 2010 Dodge Truck. See [Doc. No. 186]. Their silence on the claimed exemption of the 2010 Dodge Truck is particularly deafening.
See [Doc. No. 175]. Because the Trustee has not sought such relief—at least so far—this Court will not grant such relief at this time.
Pursuant to Bankruptcy Rule 9011, a motion for sanctions must “be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision(b).” Fed. R. Bankr.P. 9011(c)(1)(A).
C. Comments on the Conduct of the Debtors' Counsel
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!”
That is what the Debtors have done in both their Chapter 13 case and in this converted Chapter 7 case. Moreover, the conduct of the Debtor's counsel has been as shoddy as his clients' conduct has been deceptive.
Sir Walter Scott, Marmion, Canto vi. Stanza 17. The Court notes that the word “practise” is not misspelled in this quotation.
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, 39, 40 & 41; Doc. No. 178; Doc. No. 186]. He failed to appear at the July 2, 2013 meeting of creditors. [Finding of Fact No. 25]. Additionally, he failed to comply with a fundamental rule when he filed the First Motion to Dismiss—namely, he gave no notice to the creditors and the Trustee about his clients' wish to have their case dismissed. [Findings of Fact Nos. 18 & 19; Fed. Bankr.R.P. 9013–1]. Further, he failed to respond to the last e-mail of the Trustee's counsel, which caused the Trustee to file the Objection/Motion. [Finding of Fact No. 41]. He thereafter failed to contact the Trustee's counsel after she filed the Objection/Motion,
which caused the Trustee's counsel to prepare for the Hearing, but then the Debtors' counsel showed up at the Hearing and stated that he would stipulate to all of 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.]. Counsel for the Debtors then proceeded to incorrectly cite the law to this Court, [ see id. at 2:43:15–2:44:48 p.m.], and, when he attempted to call one of his clients to the stand, he discovered that he could not do so because, upon objection by the Trustee's counsel, he learned that he had failed to comply with the well-known Bankruptcy Local Rule requiring him to submit a witness list two days in advance of the Hearing [ Id. at 2:21:00–2:22:37 p.m.; BLR 9013–2]. In sum, the conduct of the Debtors' counsel has fallen short of acceptable standards.
By this time, counsel for the Debtors knew that this Court had already found his clients to be in bad faith during their Chapter 13 case, but he nevertheless continued to undertake his duties in a very nonchalant fashion. One would think that if one's clients have already been held to have acted in bad faith, then one would respond quickly, accurately, and politely to requests from the Chapter 7 Trustee or her counsel; and that one would strongly encourage one's clients to timely and accurately complete amended Schedules to comply with the applicable Code sections and Rules.
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.