Denial of Motion to Reopen to Amend Exemption Was Abuse of Discretion

Posted by NCBRC - February 4, 2015

The bankruptcy court abused its discretion when it refused to reopen the debtor’s chapter 7 case to permit him to amend his schedules to claim his homestead exemption and seek avoidance of judicial liens. Ludvigsen v. Osborne (In re Ludvigsen), No. 14-39 (B.A.P. 1st Cir. January 16, 2015).

The debtor filed chapter 7 bankruptcy at a time that his residence was valued at $267,000 and was encumbered by eight judicial liens totaling over $700,000. He claimed a homestead exemption on Schedule C but listed the value as $0.00. He later sought to strip off seven of the judicial liens as impairing his homestead exemption and the bankruptcy court denied the motion due to his valuation of the exemption as $0.00. Ludvigsen obtained a discharge and his case was closed. Eight months later he sought to reopen, amend his scheduled exemption, and strip off the judicial liens. One of the lienholders objected and the bankruptcy court denied the motion.

The bankruptcy appellate panel began with the factors involved in considering a motion to reopen, finding that a court properly exercises its discretion to reopen when the purpose is to address a potentially meritorious substantive, rather than technical, issue. Because section 522 lien avoidance may afford relief to the debtor it has been recognized as sufficient cause for reopening a case under section 350(b).

The panel turned to whether the debtor’s having claimed his homestead exemption at $0.00 precluded the relief sought as a matter of law, noting that there are two schools of thought on this issue. Some courts find that the debtor need not claim a specific amount for the exemption, or even claim the exemption at all, to be able to avoid a judicial lien under section 522(f)(A). Other courts, such as In re Church, No. 08-16202, 2009 Bankr. LEXIS 3589 (Bankr. D. Mass. Nov. 3, 2009) upon which the bankruptcy court relied, find that the exemption must be claimed before section 522(f) can be used to strip off a judicial lien.

The bankruptcy court implicitly found that valuing the exemption at zero is tantamount to not claiming the exemption at all. The panel found that even under Church, this was too strict a reading of the requirements. That case and the cases it relied upon permit amendment of Schedule C to properly claim an exemption. Had the debtor been permitted to reopen his case, he could have amended his claimed exemption without leave of court and the remaining conditions of judicial lien stripping could have been addressed by the bankruptcy court. In addition, where the judicial lien creditor did not attempt to demonstrate prejudice by reason of the eight month delay in seeking to reopen the case, the doctrine of laches should not have precluded reopening.

The panel concluded that the bankruptcy court abused its discretion by refusing to reopen the case to allow Ludvigsen to amend his schedules and move to avoid the judicial liens.

Ludvigsen BAP 1st opinion

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  1. By Bankruptcy Briefs 2/4 | NACBA Now on February 4, 2015 at 4:40 pm

    […] Denial of Motion to Reopen to Amend Exemption Was Abuse of Discretion […]

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