Mercer v. Monzack

May 1, 1995 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1346
ROBERT A. MERCER, JR.,
Debtor, Appellant,
v.
JASON MONZACK, ESQUIRE,
Appellee.
The opinion of this Court issued on April 25, 1995 is
amended as follows:
On page 4, between lines 5-6: begin new with "The bank-
ruptcy court took the position that a Rule ..."
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1346
ROBERT A. MERCER, JR.,
Debtor, Appellant,
v.
JASON MONZACK, ESQUIRE,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Raymond J. Pettine, Senior U.S. District Judge]
Before
Cyr, Boudin and Stahl,
Circuit Judges.
Robert A. Mercer, Jr. on brief pro se.
Christopher L. Russo and Kirshenbaum & Kirshenbaum on brief
for appellee.
April 25, 1995
CYR, Circuit Judge. Robert A. Mercer, Jr., challenges
CYR, Circuit Judge.
a district court judgment affirming a bankruptcy court order
disallowing most of Mercer's exemption claim relating to a
$50,000 settlement fund in a personal injury action. We affirm.
I
I
BACKGROUND
BACKGROUND
After Mercer was injured in an automobile accident in
January 1990, he sued for compensatory damages, then filed a
chapter 7 petition while the lawsuit was still pending. His
amended schedules of assets valued the personal injury claim at
$40,000, and Schedule B-4 asserted related exemptions in the
manner set out in the margin.1 The chapter 7 trustee interposed
no Rule 4003(b) objection to the list of property claimed as
exempt. See Fed. R. Bankr. P. 4003(b) (fixing 30-day limitation
period for filing objection); see also Bankruptcy Code 522(l),
1The pertinent entries in Schedule B-4 were as follows:
Type of Property:
Location, Description, Exempt
Use Statute Amount
Possible personal injury DEBTOR
Settlement
Disability 11 USC 522(d)(10)(C) 100%
Payment on account of 11 USC 522(d)(11)(D) $7,500
personal bodily injury
Payment in compensation for 11 USC 522(d)(11)(E) 100%
loss of future earnings
Any property selected by 11 USC 522(d)(5) $3,750
debtor
2
11 U.S.C. 522(l). The personal injury action eventually
generated a $50,000 settlement fund, with no specification as to
what, if any, portion represented compensation for a
"disability," "personal bodily injury" or "loss of future
earnings."2
Mercer nevertheless contended that the entire $50,000
was exempt because he had claimed the entire fund exempt as
compensation for a "disability" under Bankruptcy Code
522(d)(10)(C) or compensation for lost future earnings under
Bankruptcy Code 522(d)(11)(E). See supra note 1. Since no
Rule 4003(b) objection was submitted within the 30-day limitation
period, Mercer argued that the bankruptcy court lacked
jurisdiction to entertain the motion to disallow his exemption
claim. He relied on Taylor v. Freeland & Kronz, 112 S. Ct. 1644(1992), which held that a bankruptcy court could not order a
chapter 7 debtor's attorney to turn over proceeds ultimately
recovered in a prepetition lawsuit brought by the debtor, where
the trustee had decided to file no Rule 4003(b) objection to an
exemption claim in the lawsuit proceeds notwithstanding the fact
that there was no colorable legal basis for claiming an exemption
in the total amount recovered.
The chapter 7 trustee in the instant case responded
2Unlike the unlimited exemptions for "disability" and "lost
earnings," the exemption for "personal bodily injury"
compensation had been capped at $7,500. See Bankruptcy Code
522(d)(11)(D), 11 U.S.C. 522(d)(11)(D) (subsequently increased
to $15,000). The trustee did not contest the $7,500 exemption.
Thus, $42,500 remains in dispute on appeal.
3
that he had filed no Rule 4003(b) objection because Mercer had
claimed allowable exemptions in the settlement proceeds
representing compensation for "disability" or lost future
earnings. Consequently, it remained for the bankruptcy court to
determine whether the $42,500 in dispute did, in fact, constitute
compensation for disability and/or lost future earnings.
The bankruptcy court took the position that a Rule
4003(b) objection is not required unless the exemption claim
as was the case in Taylor, 112 S. Ct. at 1646 raises a "red
flag"; that is, unless the exemption claim includes unambiguous
language indicating that the debtor is asserting an exemption
claim which would exceed the maximum statutory allowance. Mercer
v. Monzack, 158 B.R. 886, 888 (Bankr. D.R.I. 1993). The
bankruptcy court hypothesized, for example, that a Rule 4003(b)
objection might have been necessary if Mercer had listed the
exemption claim simply as "Disability" and the exempt amount as
"100%," instead of breaking down the settlement fund into four
alternative components. But since the Mercer exemption claim was
framed in four alternative parts, each asserting facially valid
statutory exemptions under section 522(d), see supra note 1, the
bankruptcy court concluded that it raised no "red flag"
sufficient to trigger the limitation period in Rule 4003(b).
The bankruptcy court therefore ruled that Taylor did
not preclude its assertion of jurisdiction to determine whether
the settlement fund represented compensation for disability or
lost future earnings. Mercer, 158 B.R. at 888. It then found
4
that the settlement fund included no compensation for disability
or lost future earnings. Id. at 888-89. Accordingly, the
bankruptcy court ordered Mercer to turn over all but $7,350 to
the chapter 7 trustee.3 The district court affirmed on
intermediate appeal. Mercer v. Monzack, 170 B.R. 759 (D.R.I.
1994).
II
II
DISCUSSION
DISCUSSION
Although in complete agreement with the result reached
below, we write to illustrate that Taylor in no sense suggests
that the bankruptcy court is divested of jurisdiction to hear and
determine the issue presented on appeal: whether the "property
of the estate" actually in dispute was listed as exempt on
Schedule B-4, thereby triggering the 30-day limitation under Rule
4003(b). See Bankruptcy Code 522(l), 542(a), 11 U.S.C.
522(l), 542(a); Fed. R. Bankr. P. 4003(c). In the end, we
reject Mercer's implicit assumption that Taylor licenses debtors
unilaterally to transform property of the estate into property of
the description appearing on Schedule B-4.
We begin with the procedural mechanism in section
522(l): The debtor shall file a list of
property that the debtor claims as
exempt under subsection (b) of this
section. . . . Unless a party in
interest objects, the property
claimed as exempt on such a list is
3The $7,350 figure reflects certain other adjustments to
Mercer's exemption claim not material to the present appeal. See
supra note 2.
5
exempt.
Bankruptcy Code 522(l), 11 U.S.C. 522(l) (emphasis added).
That is, absent inclusion on "a list of property that the debtor
claims as exempt," "property of the estate" is not exempted by
operation of law under section 522(l), regardless whether a Rule
4003(b) objection was filed. Id.; see, e.g., Seror v. Kahan (In
re Kahan), 28 F.3d 79, 81 (9th Cir. 1994), cert. denied, 115 S.
Ct. 1100 (1995). Indeed, the 30-day limitation on objections
under Rule 4003(b) does not begin to run until the debtor lists
the "property claimed as exempt." See Fed. R. Bankr. P. 4003(b).
The "property of the estate" plainly listed as exempt
in Taylor, 112 S. Ct. at 1647-49 though not of a kind entitled
to exemption under Bankruptcy Code 522(d) nonetheless became
exempt by operation of law, as explicitly provided in section
522(l), in the absence of a timely Rule 4003(b) objection to the
unambiguous exemption claim in Schedule B-4. Nothing in Taylor
intimates that "property of the estate" not plainly listed in
Schedule B-4 nonetheless becomes exempt by operation of law under
section 522(l). See, e.g., Addison v. Reavis, 158 B.R. 53, 59-60
(E.D. Va. 1993), aff'd, 32 F.3d 562 (4th Cir. 1994); Seror, 28
F.3d at 82; In re Sherbahn, 170 B.R. 137, 139-40 (Bankr. N.D.
Ind. 1994); Ainslie v. Grablowsky (In re Grablowsky), 149 B.R.
402, 405-06 (Bankr. E.D. Va. 1993). Thus, it remained for the
bankruptcy court to determine whether the "property of the
estate" actually in dispute became exempt by operation of law as
6
Mercer maintained, or remained subject to administration for the
benefit of creditors as the chapter 7 trustee contended.
The threshold question is whether the property in
dispute is in fact the property of the estate listed as exempt.
In stark contrast to Taylor, the bankruptcy court found and
Mercer does not contest on appeal that no part of the disputed
$42,500 listed on Schedule B-4 is either compensation for a
disability 522(d)(10)(C) or lost future earnings
522(d)(11)(E) as distinguished from compensation for
personal bodily injury (the maximum $7,500 exemption under
522(d)(11)(D) as compensation for personal bodily injury is not
at issue). Rather, in a giant interpretive leap beyond Taylor,
Mercer asks us to assume that the amount in dispute became exempt
by operation of law under section 522(l) notwithstanding the
uncontested finding that it is not compensation for a disability
or lost future earnings.
True, Taylor requires that we interpret and apply
section 522(l) and Bankruptcy Rule 4003(b) according to their
literal intendment. But section 522(l) neither states nor
implies that property of the estate becomes property of the kind
the debtor describes on Schedule B-4. Rather, as the Court
recognized in Taylor, 112 S. Ct. at 1646, absent a timely Rule
4003(b) exemption, property of the estate plainly listed on
Schedule B-4 becomes exempt by operation of law under
section 522(l) without regard to whether it is property of the
kind entitled to exemption under section 522(d).
7
Notwithstanding Mercer's argument that he intended to
exempt the entire settlement fund, Schedule B-4 plainly listed
discrete statutory citations supporting the various exemption
claims, thereby restricting both the focus of the exemptions
claimed and the description of the particular right or interest
in property of the estate to which the claims applied.
Consequently, pursuant to its exclusive summary jurisdiction,
see, e.g., In re Stumpff, 109 B.R. 1014, 1017 (Bankr. E.D. Okla.
1989), it remained for the bankruptcy court to determine whether
the disputed right or interest in property of the estate was
listed on Schedule B-4.
Neither Taylor, the Code, nor the Rules of Bankruptcy
Procedure require parties in interest to interpose Rule 4003(b)
objections to Schedule B-4 exemption claims in order to preserve
their right to invoke the summary jurisdiction of the bankruptcy
court to determine whether property of the estate became exempt
by operation of law. What parties in interest may not do,
however, is let the limitation period for objections under Rule
4003(b) expire, then enlist the jurisdiction of the court in an
effort to set aside an exemption allowed by operation of law in
property of the estate under section 522(l) simply because the
property listed as exempt would not have been entitled to
exemption under section 522(d) but for their failure to object
pursuant to Rule 4003(b).4
4The Supreme Court has not excluded the possibility that
Bankruptcy Code 105(a), 11 U.S.C. 105(a), might enable a
bankruptcy court to set aside exemptions not claimed in good
8
III
III
CONCLUSION
CONCLUSION
In sum, we affirm on the ground that the property of
the estate at issue on appeal was neither listed as exempt on
Schedule B-4, nor became exempt by operation of law under
Bankruptcy Code 522(l).
The district court judgment is affirmed; costs to
The district court judgment is affirmed; costs to
appellee.
appellee.
faith. See Taylor, 112 S. Ct. at 1649.
9