Business Law

Masingale v. Munding (In re Masingale), 644 B.R. 530 (9th Cir. BAP 2022)

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The following is a case update analyzing a recent case of interest:

SUMMARY

In Masingale v. Munding (In re Masingale), 644 B.R. 530 (9th Cir. BAP 2022), the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeal (the “BAP”) held that an asset was fully exempt where chapter 11 debtors listed the value of their claimed exemption as “100% of FMV” and no objection to the exemption was filed. 

To read the full published decision, click here.

FACTS

In September 2015, Monte and Rosana Masingale (the “Debtors”) filed a chapter 11 petition.  In their schedule of exempt property (Schedule C), they claimed a homestead exemption in their residence.  Under section 522(d) of the Bankruptcy Code, they could exempt up to $45,950.  However, in the column for “Value of Claimed Exemption,” they typed “100% of FMV.”  No party objected to the Debtors’ claimed exemption.

Mr. Masingale passed away in 2016.  Mrs. Masingale continued to live in the home and prosecute the bankruptcy case.  A chapter 11 plan was confirmed in August 2017, but Mrs. Masingale was unable to complete the plan.  In November 2018, the case was converted to chapter 7.

In October 2021, Mrs. Masingale filed a motion to compel abandonment of the residence.  Mrs. Masingale argued that, under Schwab v. Reilly, 560 U.S. 770 (2010), and Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), the property was fully exempt because the Debtors had claimed an exemption in “100% of FMV” and no objection to the exemption had been filed.

The chapter 7 trustee (the “Trustee”) and the State of Washington (the “State”) – an alleged judgment lien creditor – opposed Mrs. Masingale’s motion.  They argued, among other things, that the amount of the exemption was fixed as of the petition date and that statements in Schwab regarding the effect of an exemption claimed in “100% of FMV” were dicta.  Soon thereafter, the Trustee filed a motion for authority to sell the property.

The Bankruptcy Court denied Mrs. Masingale’s motion to compel abandonment and granted the Trustee’s sale motion.  Among other things, the Bankruptcy Court held that the Debtors’ exemption was limited to $45,950.  The Trustee sold the home for $422,000, generating net proceeds (after paying costs of sale and a senior secured creditor) of about $223,000.

Mrs. Masingale appealed to the BAP.  According to the BAP’s opinion, the sole issue on appeal was “[w]hether the bankruptcy court erred in limiting the Masingales’ homestead exemption to $45,950.”  After rejecting arguments that the appeal was statutorily and equitably moot, the BAP reversed the Bankruptcy Court’s determination that the exemption was limited to $45,950.

REASONING

First, citing Bankruptcy Code section 522(l) and Taylor, the BAP reiterated that an unobjected-to claim of exemption is valid even if it is asserted in an amount that is larger than the law allows.  In Taylor, the Supreme Court held that if no one files a timely objection, an exemption claim is valid even if it has no “colorable basis” in the law.

Federal Rule of Bankruptcy Procedure (“FRBP”) 4003(b)(1) requires an objection to be filed within 30 days after the conclusion of the section 341(a) meeting of creditors.  The BAP noted that the objection period generally is reopened when a case converts to chapter 7, but not when the conversion occurs more than one year after entry of an order confirming a chapter 11 plan.  See Fed. R. Bank. P. 1019(2)(B).  Accordingly, the BAP concluded that the Debtors’ exemption claim is no longer contestable.  The BAP quoted the Supreme Court’s observation in Taylor that “[d]eadlines may lead to unwelcome results, but they prompt parties to act and they produce finality.”

Second, the BAP relied on the Supreme Court’s decision in Schwab for the proposition that a debtor may use the phrase “100% of FMV” to put parties on notice that the debtor intends to claim the full value of property as exempt.  In Schwab, the debtor had scheduled certain assets as having a value of $10,718 and claimed an exemption in the amount of $10,718.  When the trustee sought to sell the assets, the debtor argued that she had exempted the full value of the assets.  The Supreme Court rejected that argument because the debtor had declared the value of the claimed exemption in a particular amount.  In doing so, the Supreme Court said that:

[w]here, as here, it is important to the debtor to exempt the full market value of the asset . . . our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100% of FMV.”

Schwab, 560 U.S. at 792-93.

The BAP highlighted the Supreme Court’s guidance, as well as its statement that if a trustee fails to object to such an exemption claim “the debtor will be entitled to exclude the full value of the asset.”  Id. at 793.  The BAP observed that the Debtors “followed the Supreme Court’s suggestion to the letter.”  Because they did so, and because no party in interest objected to the exemption, the residence was fully exempt even though the claimed exemption exceeded the statutory limit.

Third, in the conclusion of its opinion – even though no party had requested sanctions below and the issue on appeal was limited to whether the Bankruptcy Court improperly limited the Debtor’s homestead exemption – the BAP noted that sanctions could be imposed against Mrs. Masingale and her counsel.  Citing 11 U.S.C. § 727(a)(4)(B), FRBP 9011, 18 U.S.C. § 152, and courts’ inherent powers, the BAP stated as follows:

We do not condone the conduct of the Masingales and their counsel, and we do not mean to immunize them from all consequences for making a baseless claim of exemption.  Improperly claiming exemptions, in the hope that no one will object, is risky at best.  As the Court recognized in Taylor, 503 U.S. at 644, bankruptcy courts can impose penalties against parties and attorneys who make assertions that lack any colorable legal basis or who engage in improper or bad-faith conduct.

The BAP reversed the portion of the Bankruptcy Court’s order that limited the amount of the Debtors’ homestead exemption, affirmed the order in all other respects, and – importantly – remanded “so the bankruptcy court may determine how to enforce the exemption and what other remedies, if any, are appropriate.”

AUTHOR’S COMMENTARY

1.  Analysis of the BAP’s Decision

The Trustee and the State have appealed the BAP’s decision to the Ninth Circuit Court of Appeals and have filed their opening briefs.  According to the appellants, Mrs. Masingale’s assertion that the Debtors intended to claim an exemption in “100% of FMV” is inconsistent with other statements made by the Debtors during the case, including in their confirmed plan.  The appellants also argue, among other things, that the Supreme Court’s comments in Schwab are dicta and that the Debtors’ homestead exemption is capped at $45,950.

In this author’s view, while the result may seem unfair, the BAP’s decision is consistent with the Bankruptcy Code, the FRBP, and binding Supreme Court precedent.  The Supreme Court’s statements in Schwab, that the appellants seek to disregard as dicta, were given in direct response to a policy argument made by the debtor in that case.  Unless the Ninth Circuit determines that the Debtors forfeited their “100% of FMV” exemption by making contradictory statements in other filings, the Ninth Circuit should affirm the BAP’s decision.

2.  Limited Impact of the BAP’s Decision

Regardless of how the Ninth Circuit rules, the impact of Masingale will be extremely limited.  In December 2015, Schedule C was revised to require debtors to either identify the dollar amount of a claimed exemption or check a box for “100% of fair market value, up to any applicable statutory limit.”  Thus, the issue in Masingale should not arise in any bankruptcy case filed within the last 7-1/2 years.

3.  Scope of the BAP’s Remand and Impact on the Ninth Circuit Appeal

Whether Mrs. Masingale or her former bankruptcy counsel should be sanctioned was not before the Bankruptcy Court or the BAP.  The BAP’s discussion of potential sanctions consisted of one paragraph in the opinion’s conclusion.  Nevertheless, the BAP remanded the matter to the Bankruptcy Court to “determine . . . what other remedies, if any, are appropriate.”  This has resulted in procedural and jurisdictional quandaries.

In a status conference held a week after the BAP decision was issued, the bankruptcy judge stated that “it is clear to me that I was given a directive to consider whether or not sanctions or penalties should be awarded” against Mrs. Masingale and/or her former counsel.  To afford due process, the Bankruptcy Court issued an order to show cause why the Debtors’ former counsel should not disgorge all or a portion of the fees it had been paid during the case (about $157,000).  Concerned that sanctioning Mrs. Masingale would run afoul of Law v. Siegel, 571 U.S. 415 (2014), the Bankruptcy Court is not considering monetary sanctions against her.

A few weeks later, the Bankruptcy Court entered a preliminary order on its OSC stating that “it would be appropriate to wait until the Ninth Circuit . . . has ruled on [the Trustee’s] appeal of the BAP’s decision.”  Based on discussions during hearings, this occurred because the outcome of the appeal may influence the amount of sanctions issued against the Debtors’ former counsel.  Further proceedings on the OSC are on hold pending resolution of the Ninth Circuit appeal.

Interestingly, the broad scope of the BAP’s remand may prevent the Ninth Circuit from exercising jurisdiction over the pending appeals.  Generally, when a BAP remands to the bankruptcy court with explicit instructions to engage in further fact-finding, the BAP’s order is not immediately appealable to the Ninth Circuit.  In re Marino, 949 F.3d 483 (2020); In re Gugliuzza, 852 F.3d 884 (9th Cir. 2017); In re Landmark Fence Co., Inc., 801 F.3d 1099 (9th Cir. 2015).  A BAP order is not “final” if it remands for factual determinations on a central issue.  Marino, 949 F.3d at 487.  Although the sanctions issue was not a central issue in the Bankruptcy Court, the BAP arguably made it one.  Whether the broad scope of the issues to be addressed on remand results in dismissal of the pending appeals remains to be seen.

4.  Has the Time to Object Actually Expired?

The Trustee and the State have conceded that the time for objecting to the Debtors’ exemption claim expired on December 27, 2015, and that the Trustee cannot still object.  Is that correct?

When the Supreme Court decided Taylor in 1992, FRBP 4003(b) required parties to file objections within 30 days after the conclusion of the meeting of creditors unless the period was extended by the bankruptcy court.  But FRBP 4003(b) was amended in December 2008.  Since then, “[t]he trustee may file an objection to a claim of exemption at any time prior to one year after the closing of the case if the debtor fraudulently asserted the claim of exemption.”  Fed. R. Bankr. P. 4003(b)(2) (emphasis added).  The Advisory Committee Note explains why: “Extending the deadline for trustees to object to an exemption when the exemption claim has been fraudulently made will permit the court to review and, in proper circumstances, deny improperly claimed exemptions, thereby protecting the legitimate interests of creditors and the bankruptcy estate.”  The record in Masingale reflects that the Trustee has never objected to the Debtors’ claimed exemption.  Neither the Trustee nor the State has mentioned FRBP 4003(b)(2) in any relevant brief filed in the Bankruptcy Court, the BAP, or the Ninth Circuit.

In 2015, the BAP held that the phrase “fraudulently asserted” should be construed in accordance with the common law definition of fraud and 11 U.S.C. § 523(a)(2), requiring (1) a representation (2) that the debtor knew was false, (3) that the debtor made with intent to deceive, (4) on which the hearer justifiably relied.  In re Stijakovich-Santilli, 542 B.R. 245, 255-56 (9th Cir. BAP 2015).  After Husky Int’l Elecs. v. Ritz, 578 U.S. 356 (2016), that formulation probably is too narrow.  Either way, if a claim of exemption for “100% of FMV” is so egregious as to warrant sanctions and a potential criminal referral for bankruptcy fraud, it should readily satisfy the “fraudulently asserted” standard of FRBP 4003(b)(2).  Query, then, whether Mrs. Masingale or her former counsel should suffer sanctions for filing a baseless exemption claim when the Trustee has not exercised (and may at this point be estopped from exercising) his right to object.

These materials were written by former ILC Co-Chair John N. Tedford, IV, of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles, California (jtedford@DanningGill.com).  Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC in Palm Desert, California. 


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