Kenneth L. Kaelin v. Daniel Bassett

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 01-6043EM
In re: *
*
Kenneth L. Kaelin, *
*
Debtor. *
*
*
Kenneth L. Kaelin, *
* Appeal from the United
Debtor - Appellant, * States Bankruptcy Court
* for the Eastern District of
v. * Missouri
*
Daniel Bassett; Patricia Bassett; *
*
Creditors - Appellees, *
*
John V. LaBarge, Jr., *
*
Trustee - Appellee. *
*
Submitted: November 30, 2001
Filed: January 2, 2002
Before KOGER, Chief Judge, SCOTT and DREHER, Bankruptcy Judges.
DREHER, Bankruptcy Judge.
This is an appeal from an order of the bankruptcy court1 dated July 3, 2001,
which denied Appellant's motion to amend Schedule C - Property Claimed as Exempt.
For the reasons stated below, we affirm the decision of the bankruptcy court.
FACTS and PROCEDURAL HISTORY
Appellant, Kenneth L. Kaelin (“Kaelin”), while intoxicated, drove into the back
end of a snow plow operated by Appellee, Daniel Bassett (“Bassett”), thereby injuring
Bassett. After Kaelin's liability insurer, IGF Insurance Company (“IGF”), failed to
settle Bassett's claims, Bassett retained counsel to represent him and his wife, Patricia
Bassett (collectively “the Bassetts”). The Bassetts made several attempts to settle
their claims against Kaelin within his $25,000 liability policy coverage before
sending a final demand letter (“settlement offer”) on September 2, 1997. The
settlement offer notified Kaelin's counsel that the offer would remain open until
September 19, 1997. If the offer was not accepted, the Bassetts expressed the intent
to obtain a judgment against Kaelin for actual and punitive damages and to employ
all means available to collect the excess judgment and punitive damages from Kaelin
as well as from IGF. IGF did not accept the Bassetts' settlement offer and the
Bassetts pursued their case to trial. In March 1998, a jury awarded the Bassetts
approximately $1,553,000.00 in damages, including $500,000.00 punitive damages.
Based on the information available to the Bassetts' counsel he believed that
IGF acted in bad faith in failing to accept the Bassetts' offer to settle their claims
against Kaelin for the $25,000.00 policy limits. The Bassetts attempted to allow
Kaelin an opportunity to limit his personal liability in exchange for his assignment
and/or cooperation in pursuing a possible bad faith claim against IGF. Kaelin refused
to cooperate in pursuing a bad faith suit against IGF.
1
The Honorable David P. McDonald, United States Bankruptcy Judge for
the Eastern District of Missouri.
2
In response to this lack of cooperation, the Bassetts filed an involuntary
petition in bankruptcy against Kaelin. John LaBarge was appointed chapter 7 Trustee
("the Trustee"). Kaelin's bankruptcy schedules listed the bad faith claim against IGF
as a contingent, non-liquidated claim with no value, and he alleged that the claim was
exempt. The Bassetts and the Trustee objected to this claim of exemption. Before
the hearing on the objection the parties reached a settlement. This settlement
provided that if the Bassetts recovered in the bad faith suit they would completely
release Kaelin, and if not, they would refrain from garnishing Kaelin's wages until his
daughter reached the age of eighteen. The bankruptcy court was informed of the
settlement and a consent order was entered providing that Kaelin's bad faith refusal
to settle the claim against IGF was non-exempt property.
Shortly thereafter, the Trustee filed an application to employ counsel for the
"purpose of pursuing a bad faith claim against IGF Insurance Company for their
refusal to settle" the Bassetts' claims against Kaelin. The bankruptcy court approved
this application. Two months later the Trustee filed an amended application to
employ seeking to expand the scope of his counsel's employment to include the
pursuit of a possible claim of legal malpractice against Kaelin's personal injury
attorneys. Within eight days of the application, Kaelin amended Schedule B -
Personal Property to list an unliquidated tort claim for legal malpractice of unknown
value against his personal injury attorneys and filed a motion for leave to amend
Schedule C - Property Claimed as Exempt to exempt this legal malpractice claim.
Kaelin also filed a motion opposing the expansion of the Trustee's attorney’s
representation to include pursuit of the possible legal malpractice claim. In addition,
Kaelin filed a motion to set aside the consent order sustaining the prior objection to
exemption and to rescind the consent agreement. The motion asked the bankruptcy
court to set aside the December 6, 2000, order, which had declared the bad faith
refusal to settle claim against IGF Insurance Company non-exempt property. The
motion also asked the bankruptcy court to set aside the November 2, 2000 settlement
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agreement between Kaelin and the Bassetts concerning their handling of the tort
litigation between Debtor and the Bassetts.
At the hearing on the motions, Kaelin's counsel admitted that he had no
objection to the original agreement, but wanted to block the malpractice litigation, not
for his client's benefit, but for the purpose of preventing the Bassetts from suing
Kaelin's personal injury lawyers. Kaelin's counsel confirmed to the bankruptcy court,
and reaffirmed to this appellate panel at oral argument, that it was Kaelin's intent to
abandon any malpractice claims.2 When counsel was asked why his client wanted to
abandon the cause of action--probably to his client's own detriment--no logical
explanation was forthcoming either to the bankruptcy court or this appellate panel.3
Kaelin's attempt to protect his personal injury attorneys perplexed the
bankruptcy court and continues to perplex this appellate panel. With no logical
explanation as to why Kaelin wanted to exempt an asset for the sole purpose of
abandoning it, the bankruptcy court found that Kaelin did not propose to amend his
schedules in good faith and denied the motions. Kaelin does not appeal from the
denial of the motion to set aside the consent order or from the order denying
rescission of the settlement agreement. Kaelin appeals only from the order denying
his motion to amend his Schedule C -Property Claimed Exempt.
2
Kaelin testified at the hearing that he was never dissatisfied with the work
of his personal injury attorneys and never considered a legal malpractice claim
against them.
3
The Bassetts had obtained an order from the bankruptcy court determining
that Kaelin's debt to the Bassetts was non-dischargeable.
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ISSUES
1. Whether the bankruptcy court erred in finding that Kaelin's attempt to amend
his exemptions to include the legal malpractice claim was in bad faith.
2. Whether the bankruptcy court erred in finding that Kaelin's attempt to amend
his exemptions to include the legal malpractice claim was prejudicial to the Bassetts
or the Trustee.
3. Whether the bankruptcy court erred in considering whether the malpractice
cause of action would be exempt if the amendment was allowed.
DECISION
I. Standard of Review
An appellate court reviews the bankruptcy court's conclusions of law de novo
and its findings of fact for clear error. See FED. R. BANKR. P. 8013; Martin v. Cox
(In re Martin), 140 F.3d 806, 807 (8th Cir. 1998); Merchants Nat'l Bank v. Moen (In
re Moen), 238 B.R. 785, 790 (B.A.P. 8th Cir. 1999). The bankruptcy court has the
discretion to disallow the amendment of exemptions if the amendment has been made
in bad faith or prejudices third parties. See Martinson v. Michael (In re Michael), 163
F.3d 526, 529 (9th Cir. 1998); Doan v. Hudgins (In re Doan), 672 F.2d 831, 833
(11th Cir. 1982); Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 256
(B.A.P. 9th Cir. 1988); Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir. 1984). The
bankruptcy court's decision to allow an amendment is reviewed only for abuse of
discretion. See Dennis v. Dillard Dep't Stores, Inc., 207 F.3d 523, 525 (8th Cir.
2000); Tatge v. Tatge (In re Tatge), 212 B.R. 604, 610 (B.A.P. 8th Cir. 1997)(citing
Williams v. Little Rock Mun. Water Works, 21 F.3d 218, 224 (8th Cir.
1994)(amendment may be denied on bad faith grounds). An abuse of discretion is a
decision based on an erroneous view of the law or clearly erroneous factual findings.
KHBS Broadcasting Co. v. Sanders (In re Bozeman), 226 B.R. 627, 631 (B.A.P. 8th
Cir. 1998).
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Questions regarding the right of a debtor to claim exemptions are questions of
law subject to de novo review, whereas the issue of a debtor's intent is a question of
fact reviewed under the clearly erroneous standard. Coughlin v. Cataldo (In re
Cataldo), 224 B.R. 426, 428-429 (B.A.P. 9th Cir. 1998); Szymanski v. Herzog (In re
Szymanski), 189 B.R. 5, 6-7 (N.D. Ill. 1995). In this case, the Bassetts and the
Trustee have not challenged the legal sufficiency or basis of Kaelin’s exemptions;
rather, they are contending that Kaelin's bad faith and prejudicial conduct precludes
him from amending his exemptions. Therefore, any findings by the bankruptcy court
on bad faith or prejudice are reviewed for clear error. Arnold v. Gill (In re Arnold),
252 B.R. 778, 784 (B.A.P. 9th Cir. 2000). "A finding of fact is 'clearly erroneous'
when, although there is evidence to support it, the reviewing court on the entire
evidence is left with a definite and firm conviction that a mistake has been
committed." Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985)(quoting
United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). A bankruptcy court's
factual findings may not be overturned on appeal merely because the appellate court
may have decided the issue differently. See Anderson, 470 U.S. at 573.
II. Bad Faith
A debtor's right to amend a schedule is covered by Federal Rule of Bankruptcy
Procedure 1009(a) which reads:
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
debtor shall give notice of the amendment to the trustee and to any entity
affected thereby. On motion of a party in interest, after notice and a
hearing, the court may order any voluntary petition, list, schedule, or
statement to be amended and the clerk shall give notice of the
amendment to entities designated by the court.
FED. R. BANKR. P. 1009(a).
The Eighth Circuit has recognized the general rule in favor of permitting liberal
amendment of exemption claims. Armstrong v. Harris (In re Harris), 886 F.2d 1011,
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1015 (8th Cir. 1989). Absent a showing of bad faith or prejudice to the creditors, a
debtor may amend the list of property claimed as exempt "as a matter of course at any
time before the case is closed." FED. R. BANKR. P. 1009(a); In re Hardy, 234 B.R. 94,
95 (Bankr. W.D. Mo. 1999). However, upon a showing of “bad faith” the
bankruptcy court may prevent the debtor from amending the claimed exemptions. See
Doan, 672 F.2d at 833 (noting that bad faith by debtor or prejudice to creditors might
bar amendment).
Bad faith is generally determined from the totality of the circumstances.
Hardy, 234 B.R. at 95 (citing In re Alesia, 28 B.R. 46, 51 (Bankr. N.D. Ill. 1982)). See
also Cedar Shore Resort, Inc. v. Mueller ( In re Cedar Shore Resort, Inc.), 235 F.3d
375, 379 (8th Cir. 2001)(balanced totality of the circumstances in determining “bad
faith” chapter 11 filing); Noreen v. Slattengren, 974 F.2d 75, 76 (8th Cir.
1992)(examined totality of the circumstances in determining if chapter 13 plan filed
in “bad faith”). Here, the circumstances considered by the bankruptcy court in
determining whether the motion to amend was filed in bad faith included an almost
two year delay between the filing of the case and the proposed amendment and the
continued attempts by Kaelin and his attorney to prevent the Bassetts from pursuing
IGF on the bad faith claim by initially claiming an exemption in the IGF proceeds and
later in their attempt to rescind the settlement agreement. The most important factor
considered by the bankruptcy court, however, was that the stated purpose for seeking
the exemption was not so that Kaelin could pursue and benefit from it, but so as to
allow Kaelin to abandon the asset. Although Kaelin's counsel was very forthright
with his admission that Kaelin did not intend to pursue any claim of attorney
malpractice, this insistence appears contrary to the best interests of Kaelin and to the
Bassetts.
Kaelin and his counsel have both conceded that the exemption was not sought
to provide Kaelin with a fresh start, but to protect Kaelin's personal injury attorneys
from a potential claim. "The purpose of allowing debtor exemptions is to help ensure
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that a 'debtor [who] goes through bankruptcy comes out with adequate possessions
to begin his or her fresh start.'" Marine Midland Bank v. Scarpino, 113 F.3d 338, 340
(2d Cir. 1997)(quoting H.R. REP. No. 95-595, at 126 (1977), reprinted in, 1978
U.S.C.C.A.N. 5963, 6087); see also In re Moore, 251 B.R. 380 (Bankr. W.D. Mo.
2000). Clearly, it was the intent of Kaelin or his counsel to hinder or delay a possible
recovery by the Bassetts and the Trustee and not to preserve the asset for Kaelin's
benefit. This attempt to delay a creditor in the collection of a non-dischargeable debt
amounts to “bad faith,” and the bankruptcy court so held. See, e.g., Hatcher v.
United States Trustee (In re Hatcher), 218 B.R. 441, 448 (B.A.P. 8th Cir. 1998); In
re Mattson, 241 B.R. 629, 638 (Bankr. D. Minn. 1999). The bankruptcy court
determined that such conduct was "strange" and "bizarre" since any effort by the
Trustee to collect the assets of the debtor would ultimately be for his benefit and not
harm Kaelin "one iota.” All of these factors, when considered in the “totality of the
circumstances,” constitute sufficient cause to find “bad faith.” The bankruptcy court's
“bad faith” determination is a factual finding that can be overturned only if it is
clearly erroneous. Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d 426, 434
(5th Cir. 1994). Because the finding of bad faith is supported by the record, the
bankruptcy court's finding is not clearly erroneous and, therefore, the denial of the
motion to amend is not an abuse of discretion.
III. Prejudice
We can affirm the bankruptcy court’s decision if either “bad faith” or
“prejudice” has been shown. Because we have determined that the bankruptcy court
did not err in denying the motion to amend on the basis of “bad faith,” it is not
necessary to address whether the proposed amendment was prejudicial. See Hanson
v. F.D.I.C., 113 F.3d 866, 869 (8th Cir. 1997)(appellate court may affirm on any
ground supported by the record).
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IV. The Merits of the Exemption
The final issue raised by Kaelin is his assertion that the bankruptcy court
should not have considered the merits of the exemption in determining whether to
allow the amendment. Kaelin misconstrues the decision of the bankruptcy court.
While the court complied with the request by counsel for Kaelin to read case
authority indicating that the exemption was meritorious under Missouri law, the
bankruptcy court's order makes no mention of the underlying validity of the
exemption and same appears to have played no role in the decision whether to allow
the amendment in the first place. Moreover, having asked the court to consider the
merits of the exemption, Kaelin is foreclosed from objecting to the court's having
done so.
ACCORDINGLY, we affirm.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
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