Opinion
Case No. 10-37871-svk
12-13-2013
In re David E. Kriesel and Elaine Kriesel, Debtors.
THE FOLLOWING ORDER IS APPROVED AND ENTERED AS THE ORDER OF THIS COURT:
_____________
United States Bankruptcy Judge
Chapter 7
DECISION AND ORDER OVERRULING TRUSTEE'S OBJECTION
TO AMENDED CLAIM OF EXEMPTION
On November 5, 2010, David and Elaine Kriesel filed a Chapter 7 petition. At the § 341 meeting of creditors held on December 13, 2010, the Trustee questioned the Debtors about an account receivable listed in their Schedules and the amount of a reverse mortgage on their residence. The Trustee also asked: "Do you understand if somebody does die and leave you money or property in the next six months, you must notify me?" Mr. and Mrs. Kriesel both answered, "Yes." At the conclusion of the meeting, the Trustee requested certain information about the account receivable, and the Debtors' attorney provided the information about one week later. On April 18, 2011, five months after filing his bankruptcy petition, David Kriesel died. Even though she received $12,500 in life insurance proceeds in May 2011, Mrs. Kriesel did not report her husband's death to the Trustee or her own attorney.
The Trustee did not pursue the scheduled account receivable for almost two years. He did not even write a demand letter for some 14 months after the meeting of creditors. On October 26, 2012, he filed a Motion for Turnover of the account receivable (the "Turnover Motion"). In her Objection to the Turnover Motion, filed November 13, 2012, Mrs. Kriesel first informed the Trustee and the Court that David Kriesel had died. On January 25, 2013, Mrs. Kriesel filed amended schedules, disclosing the life insurance proceeds and claiming them exempt. On January 28, 2013, the Trustee filed his Objection to the amended exemptions.
Meanwhile, the Turnover Motion litigation advanced. On February 6, 2013, the Trustee filed an adversary proceeding against the Debtors' daughter and her husband who allegedly owed the account receivable. The adversary proceeding, Turnover Motion and Objection to exemptions were consolidated for purposes of trial. The parties attempted mediation but it was not successful.
On November 20 and 21, 2013, the Court held a trial, and ruled against the Trustee on the adversary proceeding and Turnover Motion. The remaining issue was the Debtor's exemption of the life insurance proceeds under 11 U.S.C. § 522(d)(11)(C). That statute allows exemption of a payment under a life insurance contract which insured the life of a person on whom the debtor was dependent. The Trustee does not argue that the Debtor cannot exempt the life insurance proceeds under the applicable statute. Instead he objects to the exemption because the life insurance proceeds were not disclosed to or turned over the Trustee promptly.
At the trial, Mrs. Kriesel testified she did not remember being informed at the § 341 meeting of her duty to disclose and turn over the insurance proceeds. She testified she remembers little of the year after her husband's death, as it was a very hard time. She stated that she did not know that she should have told her attorney about the insurance proceeds but if she had known, she would have told him. She used the insurance proceeds to pay for her husband's funeral and for maintenance on her home so she could continue to live there. She denied trying to hide the money from creditors; she just did not know she had to report it.
In the Order dismissing the complaint in the adversary proceeding, the Court made findings which are relevant to this Objection. The Court found that due to her age, memory loss or ill health, Mrs. Kriesel was mistaken in her belief about the account receivable. The evidence also revealed that the Debtors had been married for nearly sixty years, and Mrs. Kriesel was 83 years old at the time of the § 341 meeting. In her April 2013 Deposition, an exhibit admitted as part of the trial, Mrs. Kriesel testified that her husband died suddenly and that she is suffering from terminal health problems.
Bankruptcy Rule 1009 gives debtors a general right to amend their schedules "as a matter of course at any time before the case is closed." The Seventh Circuit recognizes this permissive approach, with the caveat that amendments can be denied on a showing by clear and convincing evidence of bad faith, concealment of assets, or prejudice to creditors or third parties. In re Yonikus, 996 F.2d 866 (7th Cir. 1993).
In this case, due to the Debtor's age, memory loss, grief over the sudden death of her husband and ill health, she either did not understand or did not remember her duty to report the receipt of the life insurance proceeds to the Trustee. The Court finds the Debtor's testimony completely credible and, despite the delay in reporting the insurance proceeds, there is no evidence of bad faith or fraudulent attempt to conceal assets.
In its discussion of Rule 1009, the Yonikus court approvingly cited In re Doan, 672 F.2d 831 (11th Cir. 1982). Interpreting Rule 110, the predecessor to Rule 1009, Doan recognized that mere delay in claiming a valid exemption is not the type of prejudice that should invalidate the exemption.
Applying this reading of Rule 110, we rule that the amendment should have been allowed. As we discuss below, we find no bad faith. The lower court cited prejudice to creditors as a reason for denying leave to amend. We find no evidence of prejudice on the record. Simple delay in filing an amendment where, as here, the case is not closed does not alone prejudice creditors. Nor does prejudice to creditors occur merely because a claimed exemption, if held timely, would be granted.672 F.2d at 833. This Court is faced with a similar record. Mere delay in an open case is not evidence of prejudice.
This case is comparable to the Court's decision in In re Meyers, 431 B.R. 823 (Bankr. E.D. Wis. 2010), where the debtors inadvertently failed to schedule a tax refund received after the § 341 meeting. When the Trustee intercepted the refund, the debtors amended their schedules to claim it exempt. The Court found no bad faith, fraudulent concealment, or prejudice and allowed the amendment. As in Meyers, the life insurance proceeds were received after the case was filed, and Mrs. Kriesel testified credibly that she did not intentionally conceal them from the Trustee.
In conclusion, the Trustee failed to carry his burden of proving by clear and convincing evidence that the Debtor's amendment to exempt the post-petition life insurance proceeds should be disallowed.
IT IS THEREFORE ORDERED: that the Trustee's Objection to the Amended Claim of Exemption is overruled.