Opinion
Case No. 11-57923
04-18-2014
In re: BETH ANN COLEMAN, Debtor.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
__________
John E. Hoffman, Jr.
United States Bankruptcy Judge
Chapter 7
Judge Hoffman
OPINION AND ORDER GRANTING IN PART AND
DENYING IN PART TRUSTEE'S
NOTICE OF PROPOSED COMPROMISE
This matter is before the Court on the notice of proposed compromise ("Notice") (Doc. 39) filed by D. William Davis, the Chapter 7 trustee ("Trustee") appointed in the bankruptcy case of Beth Ann Coleman ("Debtor"). By the Notice, the Trustee seeks authority to compromise for the sum of $50,000 a wrongful termination lawsuit filed by the Debtor against Wheeling Jesuit University. The Trustee also seeks authority to pay the associated attorney fees and expenses out of the Debtor's exempt portion of that settlement. The Debtor filed a memorandum in opposition to the Notice ("Response") (Doc. 40), and the Court, following a telephonic status conference, directed the parties to brief the issues involved. Both the Trustee and the Debtor filed briefs (Docs. 45 and 49, respectively) in compliance with the Court's directive.
The document filed by the Trustee is entitled "Notice of Proposed Compromise," but appears on the case docket under the title "Application to Compromise Controversy with Debtor, Beth Ann Coleman Filed by Trustee D[.] William Davis." For purposes of this Order, the Court will refer to it as the "Notice."
I. Jurisdiction
The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2)(A).
II. Factual Background
The Debtor filed a Chapter 7 bankruptcy petition on July 29, 2011 ("Petition Date"). She listed under Question 21 of her Schedule B—Personal Property a "wrongful termination lawsuit vs. Wheeling Jesuit University filed December 2010," with an "unknown" value (Doc. 1). At the time of filing, the Debtor did not list this asset as exempt. In September 2011, the Trustee filed an application to employ William A. Kolibash as special litigation counsel to pursue the wrongful termination lawsuit on behalf of the estate (Doc. 26). The application stated that the Trustee and Kolibash agreed to continue the contingent fee arrangement that had been in place between the Debtor and Kolibash prior to the Petition Date. On November 1, 2011, the Court entered an order (Doc. 31) authorizing the Trustee to employ Kolibash.
Question 21 requires a debtor to list "[o]ther contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims," and further requires the debtor to give the estimated value of each such claim.
A year and a half later, on May 7, 2013, the Debtor filed amendments to her schedules (Doc. 37). First, she amended Schedule B to change her answer to Question 21. Amended Question 21 describes the claim as "lost wages and other claims from wrongful termination lawsuit vs. Wheeling Jesuit University filed December 2010" and changes the value of the claim from "unknown" to $50,000. Second, the Debtor amended her Schedule C—Property Claimed as Exempt to add the wrongful termination claim. In the Schedule C amendment, she lists the current value of the claim—without deducting the exemption—as $50,000. Under Ohio Revised Code § 2329.66(A)(13) (which permits an exemption of 75% of disposable earnings owed to a person), she claims $37,500 as exempt. She also claims an additional $1,150 of the wrongful termination claim as exempt under the "wild card" portion of Ohio's exemption statute (Ohio Revised Code § 2329.66(A)(18)). The amendments to Schedules B and C were served electronically on the Trustee and United States Trustee the day they were filed (Doc. 37). The Trustee filed no objection to the newly-claimed exemptions.
On June 28, 2013, the Trustee filed the Notice, in which he disclosed that the wrongful termination lawsuit had been settled for the sum of $50,000. The settlement agreement attached as an exhibit to the Notice attributes $37,500 of the settlement amount to wages and $12,500 to non-economic damages (Notice, Ex. A at 2). The Notice asks the Court to approve the settlement, to limit the Debtor's exemption to 75% of the wage portion of the settlement (or $28,125) plus the amount of $1,150 in recognition of the wild card exemption, and to approve payment of Kolibash's fees and expenses (collectively, "Fees") in the amount of $19,167.12. So far, so good. At the same time, the Trustee proposed to apportion payment of the Fees from the two components of the settlement: i.e., he would pay 75% from the wage portion, and 25% from the damages portion. By doing so, he would deduct $14,375.34 from the wage portion and $4,791.78 from the damages portion. As a result of this distribution scheme, the Debtor, rather than receiving her exemption amount of $28,125 attributable to wages, along with the $1,150 attributable to the "wild-card," would instead receive a reduced amount of $4,811 from the wage portion, and $1,150 from the damages portion, for a total of $5,961. The bankruptcy estate would receive the remaining $6,558.09 from the settlement. The Trustee apparently derived these figures after making his proposed deductions from the amounts he actually has on hand.
While the amended exemption was listed as $37,500, or 75% of the $50,000 settlement, the parties are in apparent agreement that the proper calculation is 75% of the wage portion of the settlement, or $28,125. In addition, the calculations set forth in the Trustee's Notice and brief contain a number of minor mathematical errors that may be either typographical or computational. Rather than set forth each error and explain it, the Court will instead attempt to use the correct numbers in place of the erroneous ones.
On September 18, 2013, the Court entered an order (Doc. 43) authorizing the Trustee to pay the Fees. The Trustee made a payment to Kolibash on account of the fees on September 20, 2013. See Tr. Br. at 1-2.
A complicating factor in this dispute is that the Trustee did not actually receive $50,000 from Wheeling Jesuit University in settlement of the underlying lawsuit. The university issued two checks: one for $12,500 reflecting the damages portion of the award, and a second one, in the amount of $19,186.34, purportedly reflecting an after-tax distribution of the wage portion of the settlement, despite language in the settlement agreement that required the Debtor to be solely responsible for payment of taxes. Thus, the actual amount the Trustee had available to distribute—the total of the two checks—was $31,686.34. The Trustee sought and received authority from the Court to pay the Fees in the amount of $19,167.12, leaving $12,519.22 in the Trustee's hands. The papers contain no explanation as to why 49% of the wage portion of the settlement was withheld for taxes. From the information set forth on Debtor's Schedule I—Current Income of Individual Debtor(s), it would appear that Debtor is instead in a 15% tax bracket. At any rate, the Debtor concedes that the withheld amounts were taken from the exempt portion of the funds. Debtor's Br. at 4.
Understandably, the Debtor was not happy with this proposed division of the settlement proceeds. Her Response (Doc. 40) took issue with the Trustee's payment of fees from the exempt amount of the settlement funds prior to applying all non-exempt funds to the payment of attorney fees.
The Trustee then filed his brief (Doc. 45) and changed his calculation to the further detriment of the Debtor. In his brief, he stated that after the Fees were deducted from the two components of the settlement amount in the proportions set forth above, there would remain $7,708.22 in the damages component, and $23,124.66 in the wage component. The Trustee would allow the Debtor her wild-card exemption in full from the damages portion, leaving the Trustee $6,558.22 from the damages component. Then, he would permit the Debtor an exemption of 75% of the $23,124.66 remaining of the wage portion, or $17,343.49, leaving the Trustee $5,781.17 from the wage component. Under the Trustee's calculations, then, the estate would retain a total of $12,339.39 ($6,558.22 + $5,781.17). Because the current balance on hand with the Trustee is $12,519.22, the Debtor would, at the end of the day, receive $179.83 in cash back for her wage exemption. The Trustee sets forth no legal basis for this proposed apportionment of the settlement proceeds. Instead, he asserts that it would be fair "for the Debtor to bear some of the costs for attorney's fees and expenses in this matter so that the estate would have more money to pay Debtor's creditors," and argues that "Debtor signed the contingent fee contract with William A. Kolibash and she and the estate should share the cost of his fees and expenses before her exemptions are paid to her." Tr. Br. at 4, 5.
The Trustee does not address the equities of allowing the Debtor to retain only $179.83 of her exemption in wages after $18,413.66 was withheld to pay taxes on the wage portion of the settlement.
The Debtor filed a reply brief (Doc. 49) in which she points out that the claimed exemptions total $29,275, and that after deducting this amount from the settlement total, the estate was left with $20,725, from which special counsel was paid $19,167.12. Thus, argues the Debtor, the amount to which the Trustee is entitled on behalf of the estate is limited to $1,557.88.
III. Legal Analysis
Despite couching his proposal in terms of shared sacrifice, the Trustee's calculations are rather an attempt to surcharge the Debtor's exemptions. The Court cannot approve the Trustee's proposed surcharge of the exemption for three reasons. First, the Trustee did not assert a timely objection to the exemptions claimed by the Debtor. A party in interest has 30 days after the meeting of creditors or after the filing of any amendment to the list of property claimed as exempt within which to file an objection. Fed. R. Bankr. P. 4001(b)(1). In the absence of a timely objection, the property listed is exempted from the bankruptcy estate, and a later challenge to the validity of the exemption is unavailing. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). Here, the Trustee did not challenge the validity of the exemptions, and in fact, appears to recognize the validity of the exemption in both the Notice and his brief. But by seeking to deduct the Fees from the exempt portion of the settlement, he is, in essence, attacking the Debtor's right to claim the exemptions—and doing so well after the time limit imposed by Rule 4001(b)(1) for such a challenge has expired.
Second, the Trustee misreads 11 U.S.C. § 522(k), which provides that "[p]roperty that the debtor exempts under this section is not liable for payment of any administrative expense except [in certain circumstances not applicable in this case]." He asserts that § 522(k) is inapplicable because Ohio has opted out of the federal exemptions and the Ohio exemption statute does not contain any prohibition on using exempt assets for payment of administrative expenses. But § 522(k) creates a blanket prohibition on the use of exempt property, whether claimed under the federal or state exemptions, for payment of administrative expenses. See Law v. Siegel, 134 S. Ct. 1188, 2014 WL 813702 (March 4, 2014) (holding that § 522(k) prohibits surcharging a debtor's exemption for the payment of administrative expenses); In re Turner, 190 B.R. 836, 841 (Bankr. S.D. Ohio 1996) (same). Further, there would be no reason to expect that the Ohio exemption statute would contain language comparable to that found in § 522(k), because the term "administrative expense" has a bankruptcy-specific meaning. Although it is not statutorily defined, the term "administrative expense" found in § 503(b) of the Bankruptcy Code generally encompasses those expenses necessary for the preservation and administration of the bankruptcy estate. Here, the Fees fall under the category of administrative expenses. In fact, the Trustee acknowledges that the "payment [to Kolibash] was authorized as an administrative expense under [11] U.S.C. § 503(b)(2)." Tr. Br. at 5. Ohio's exemption statute, by contrast, lists the property that an individual within the state may hold exempt from creditors. Its application is not limited only to those individuals who seek bankruptcy protection.
Finally, the Trustee offers no statutory basis for his proposed surcharge of the Debtor's exemptions. While there are reported decisions permitting the surcharge of an exemption when the Debtor has engaged in fraudulent conduct, failed to cooperate with the trustee, or concealed assets, there is no suggestion that the Debtor did anything of the sort here or otherwise engaged in conduct that resulted in damage to her bankruptcy estate. And even if there had been, the line of authority allowing the surcharge of a debtor's exemptions is no longer good law following the Supreme Court's recent decision in Law v. Siegel. In Siegel, the Supreme Court held that, even in the face of egregious misconduct by the debtor, there is simply no Bankruptcy Code-based authority permitting a trustee to surcharge a debtor's exemptions in order to pay administrative expenses. The Court found that § 522 "does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate," and that "[t]he Code's meticulous—not to say mind-numbingly detailed—enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions." 134 S. Ct. at 1196, 1198. In short, the type of surcharge the Trustee proposes here would, as in Siegel, violate the express terms of § 522(k).
See, e.g., Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004) (failure to account for loss of proceeds from sale of property); In re Nolan, No. 09-31456, 2013 WL 3153849 (Bankr. W.D. N.C. June 19, 2013) (refusal to turn over property to Trustee); In re Karl, 313 B.R. 827 (Bankr. W.D. Mo. 2004) (failure to cooperate with Trustee in recovering property from family member).
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The Trustee here did not invoke the broad equitable powers granted by § 105(a) of the Bankruptcy Code in seeking the relief he requests. But reliance on § 105(a) would have been unavailing in any event. For Siegel makes clear that bankruptcy courts may not resort to § 105(a) to fashion a remedy that contravenes an express provision of the Bankruptcy Code. See id. at 1195. As stated, § 522(k) prohibits the surcharge of exempt property for the payment of administrative expenses. And § 105(a) cannot give what § 522(k) directly takes away.
IV. Conclusion
For the reasons set forth above, the Trustee's Notice is GRANTED insofar as it seeks approval of the $50,000 amount of the compromise. The Debtor's exemption is limited to 75% of the wage portion of the settlement ($28,125) plus $1,150 from the damages portion of the settlement for a total exemption in the settlement proceeds of $29,275. The Fees were previously approved by separate order (Doc. 43). The Trustee's Notice is DENIED to the extent the Trustee seeks to surcharge the Debtor's exemption by apportioning the Fees in the manner set forth in the Notice and Brief.
IT IS SO ORDERED. Copies to: Default List