McLeod Law Offices

In May 7 decision the First Circuit Court of Appeals ruled that a debtor was limited to the amount of his stated objections. For those thinking of preparing cases on their own, or for others with perhaps different motives, the case teaches a good lesson: you reap what you sow.

In a chapter 7, all of the debtor’s property becomes property of the estate, and is sold. The proceeds of the sale are used to pay creditors and other administrative expenses. The debtor is permitted to keep property – what are referred to as exemptions. In addition to other documents, debtors are required to file schedule B, which identifies personal property, and schedule C, which sets forth the debtor’s claimed exemptions. The code requires that if any party wants to object to any claimed exemption of the debtor, the party must file an objection within 30 days following the conclusion of the creditors meeting, or Section 341 meeting. If that is not done, the property slips “beyond the estate’s grasp.”

In this case, the debtor listed on Schedule B a total of about $170,000 in money that was owed to him. On Schedule C, he claimed that the claims were only worth $8,000 and were otherwise exempt from the estate. No objection was filed. About a year later, the trustee asked the bankruptcy court to approve a settlement in the amount of $100,000.

The debtor argued that the estate had no interest in the lawsuits at all. But the Bankruptcy Court in Puerto Rico ruled that the debtor had not exempted the lawsuits, but only $4,000 partial interest in each suit. It approved a settlement where the proceeds could be paid to the trustee, with $8,000 paid to the debtor reflecting the amount of their exemption. The US District Court for the District of Puerto Rico affirmed and the debtor appealed.

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Everyone has found themselves saying that at one time or another. Perhaps it was the regrettable decision of a particular business venture (or business partner), or perhaps it was ordering the chicken salad special, rather than a turkey club. Or, perhaps, you happened to be joint debtors who recently learned what can happen when you do not do what you should have and could have done.

The debtor’s joint case was filed as a chapter 13 in July of 2007. At a later hearing, the debtors advised the court that they intended to convert the case to chapter 7. At a later 341 meeting, the debtors provided the trustee with a copy of their 2005 income tax return, but did not provide a copy of the 2006 tax return, even though that return had been filed. The Trustee warned the debtors to produce the return, and advised them that he would seek a dismissal of the case if it was not provided. The meeting was continued to the following month to allow the debtors time to give the returns to the trustee.

At the continued meeting, the debtors’ attorney appeared without the debtors and without the tax return despite what she relayed was “harsh admonitions to her clients” to produce the documents. The return was eventually provided 36 days after the deadline set forth in Section 521(e)(2)(A)(i).

This code provision requires the debtors to provide the trustee a copy of the federal income tax return required under applicable law for the most recent tax year ending immediately before the commencement of the case for which a federal income tax return was field. The code requires that the case be dismissed unless the debtor can establish that the failure to abide by the provision was beyond the debtor’s control, however, the court acknowledged that seeking dismissal was within the discretion of the trustee.

The Chapter 7 Trustee exercised that discretion and moved to dismiss the case because the debtor did not provide copies of the 2006 tax returns. In allowing the motion, the court noted that “Congress did not intend that trustees spend inordinate amounts of time chasing down tax returns from debtors who have sought relief in bankruptcy.”

In re Nordstrom, 381 BR 766 (Bankr.C.D.Cal., January 18, 2008).