B.A.P. Holds Judge Does Not Have Authority To Prevent Debtor From Adding An Exemption to the Schedules (In re Gray et al., 9th Cir. B.A.P. 2014)

The 9th Circuit B.A.P. recently held that a bankruptcy judge does not have the authority to prevent a debtor from adding an exemption to his or her court papers based solely on the judge’s finding they had acted in bad faith.  The Panel intricately cites U.S. Supreme Court’s decision in Law v. Siegel in reaching its conclusion.

Summary holding:  Bankruptcy courts have no discretion under federal law to deny debtors leave to amend their exemptions absent express statutory authority.  The panel reversed a ruling to disallow an amended exemption.   In re Gray et al.; Gray et al. v. Warfield, No. 13-1502, 2014 WL 6972522 (B.A.P. 9th Cir. Dec. 9, 2014).
Facts:  Debtors filed Chapter 7, but failed to note their prepaid rent in their schedules.  At the 341 hearing, the trustee asked the Debtors about this prepaid rent they paid to their landlord.  The trustee sought turnover of this prepaid rent, and Debtors subsequently amended their schedules to exempt this amount.   The trustee objected and said that Debtors’ failure to disclose the prepaid payment is grounds for denial and may not amend their schedules now.  Debtors cite FRBP 1009(a) which allows amendments to schedules “as a matter of course before the case is closed”.  Bankruptcy Judge agreed with the trustee, and did not allow Debtors to make the amendment without conducting an evidentiary hearing.  The judge said Debtors acted in bad faith by intentionally concealing the payment.   The Debtors appealed, and the Ninth Circuit Bankruptcy Appellate Panel reversed saying

The Panel said the dicta in Law v. Siegel states that bankruptcy courts have no equitable power to deny exemptions to remedy bad-faith conduct.

Published Opinion here:  http://cdn.ca9.uscourts.gov/datastore/bap/2014/12/10/Gray-13-1502.pdf

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