Court May Not Deny Exemption Due to Debtor Misconduct

Posted by NCBRC - September 14, 2018

“A bankruptcy court has no authority under federal law to deny a debtor’s claim of exemptions on a ground that is not specified in the bankruptcy code.” Rucker v. Belew (In re Belew), No. 18-6007 (B.A.P. 8th Cir. Sept. 6, 2018).

Johnny Belew sought to amend his schedules to exempt assets he had failed initially to disclose. The trustee objected. The bankruptcy court found that it had no authority to deny a motion to amend exemptions for any reason not specified in the Code and overruled the trustee’s objections. The trustee appealed.

Law v. Siegel, 571 U.S. 415 (2014), states the principle that a court may not surcharge an exempt asset to pay administrative expenses incurred by reason of the debtor’s misconduct. That case did not involve the question of whether a court may decline to permit a debtor to amend his or her exemptions where the need for the amendment is caused by the debtor’s own failure to disclose the existence of the asset sought to be exempted. In the Eighth Circuit case of Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (2002), the court found that a debtor’s right to amend exemptions is not absolute and that a bankruptcy court has authority to decline to allow such amendments in response to debtor misconduct. This would resolve the issue under consideration in Belew were it not for the fact that, in Law, Justice Scalia went on to address this very scenario in dictum. There, he stated that “federal law provides no authority for bankruptcy courts to deny an exemption [or decline to allow an amendment to claim an exemption] on a ground not specified in the Code.”

The bankruptcy appellate panel, faced with a conflict between Eighth Circuit precedent and Supreme Court dictum, determined that, based on the recency of the dictum and the absence of any attenuating discussion since, it must follow Justice Scalia’s unambiguous and wholly applicable statement. The court noted that in giving dispositive weight to the dictum in Law, its decision harmonizes with the Sixth and Ninth Circuit conclusions when faced with the identical situation. See Ellmann v. Baker (In re Baker), 791 F.3d 677, 683 (6th Cir. 2015) and Lua v. Miller (In re Lua), 692 F. App’x 851, 852 (9th Cir. 2017).

The panel, therefore, affirmed the bankruptcy court decision.

Belew 8th BAP Sept 2018



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