Caswell v. Peavey, Trustee

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
CYNTHIA D. CASWELL,
DEBTOR
CASE NO.
05-00975-8-ATS
CYNTHIA D. CASWELL,
Plaintiff
v.
MICHAEL P. PEAVEY, TRUSTEE,
Defendant.
ADVERSARY PROCEEDING NO.
S-05-00250-8-AP
MEMORANDUM OPINION AND ORDER
ALLOWING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
AND DENYING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
Pending before the court are cross-motions for summary judgment
filed by the chapter 7 debtor and plaintiff, Cynthia D. Caswell, and
the chapter 7 trustee, Michael P. Peavey. A hearing was held in
Raleigh, North Carolina on October 12, 2005. For the reasons that
follow, the plaintiff’s motion for summary judgment will be allowed,
and the defendant’s motion for summary judgment will be denied.
This court has jurisdiction over the parties and subject matter
of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157, and the
General Order of Reference entered by the United States District Court
for the Eastern District of North Carolina on August 3, 1984. This is
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a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(B) and (E), which
this court may hear and determine.
The debtor, Cynthia Caswell, filed a petition for relief under
chapter 7 of the Bankruptcy Code on February 28, 2005. In her
schedules, she claimed as exempt a residence located at 805 South
Willowick Drive, Grovestown, Georgia that she owned together with her
former husband. Ms. Caswell contends that she did so in mistaken
reliance on a statement in a separation agreement executed on May 30,
2001, which describes the residence as being owned by the debtor and
her husband as tenants by the entirety. Ms. Caswell took the position
that the residence was exempt under the laws of the State of North
Carolina.
The trustee did not object to the exemption within the 30-day
period for filing objections under Rule 4003(b) of the Federal Rules of
Bankruptcy Procedure. He subsequently concluded that there was no
tenancy by the entirety because the debtor failed to establish the
tenancy under Georgia state law, where the property is located. The
trustee stated that he did not object to the exemption because the
debtor was "entitled to whatever result she might acquire" in the
parcel, which under the applicable laws proved to be nothing. He
therefore sought to seize the property, which had been sold and now
consists of cash proceeds.
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The debtor and trustee both agree that there is no colorable claim
for an exemption in the residence, and both filed motions for summary
judgment. The trustee argues that the lack of any statutory basis for
an exemption rendered it a "nullity," that the property is not exempt,
and that proceeds from its sale are property of the estate. The debtor
responds that under precedent established in Taylor v. Freeland &
Kronz, 503 U.S. 638 (1992), the debtor now has a valid claim of
exemption based on the trustee’s failure to file a timely objection.
This case is controlled by precedent established in Taylor. In
that case, as in this one, the debtor was found to have no statutory
basis for a claimed exemption. The debtor in Taylor sought to exempt
the proceeds of a discrimination-claim lawsuit. The trustee was aware
of the lawsuit and its potential value of between $90,000 to $110,000,
but was skeptical of its chances of success and considered it "a
nullity." He did not object to the claimed exemption within the 30-day
period allowed by Rule 4003(b) of the Federal Rules of Bankruptcy
Procedure. The claim subsequently was settled for a sizeable amount,
and the trustee filed a complaint seeking turnover of the settlement
proceeds. The debtor objected, but the trustee prevailed in both the
bankruptcy court and on appeal to the district court. On further
appeal, the Court of Appeals for the Third Circuit reversed, deciding
that the bankruptcy court could not require turnover because the debtor
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claimed the proceeds as exempt and the trustee failed to file a timely
objection.
The Supreme Court affirmed. The Court held that the trustee’s
failure to file a timely objection precluded him from later challenging
the validity of the exemption. Taylor, 503 U.S. at 642. Irrespective
of whether or not the exemption actually proves to have a colorable
statutory basis, the language of § 522(l) provides that "[u]nless a
party in interest objects, the property claimed as exempt on [a list
filed under 11 U.S.C. § 522(b)] is exempt." 11 U.S.C. § 522(l). The
trustee and creditors have 30 days from the § 341 meeting in which to
object, unless prior to the expiration of that time, the 30-day period
is extended by the court. After that, "[s]ection 522(l) . . . has made
the property exempt." Taylor, 503 U.S. at 643. The Court did not
qualify operation of the statute in any way; instead, property claimed
as exempt under § 522(b), whether or not it was properly claimed as
exempt in the first place, thereafter is exempt by operation of
§ 522(l).
The instant case is on all fours with Taylor. The debtor filed
her exemption in the mistaken belief that she could claim an exemption
in the Georgia property and later determined that the exemption could
not be legally supported. The debtor concedes that "the relevant law
and facts leave[] no conclusion other than no colorable claim for
exemption exists." Pl’s Mem. of Law in Support of M. for Summ. J. at
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2. Even so, the debtor argues, the trustee’s failure to object within
the time allowed means that the property, and the proceeds from the
completed sale of it, are exempt.
The court agrees. The trustee may well have prevailed had he
filed an objection within the allotted 30 days, or during an extension
of time in which to object, had he sought one. However, the trustee
did not do either of these things, and as a result, the property is
exempt under § 522(l) and the validity of the exemption can no longer
be challenged. Taylor, 503 U.S. at 644-45. The trustee takes the
position that because the exemption was claimed in error, he does not
need to object, because the debtor can still have "whatever result she
might acquire" under her claim, which should be nothing. Construing
the statute in this way would essentially negate the obligation of a
trustee (or any other party in interest, for that matter) to object
because exemptions would stand or fall on their own merits, without
regard to the expiration of statutory deadlines for objections. The
Taylor Court pointedly acknowledged that "[d]eadlines may lead to
unwelcome results, but they prompt parties to act and they produce
finality," both of which are integral to the smoothly functioning legal
process. Taylor, 503 U.S. at 644. A review of circuit court cases
decided since Taylor indicates that some courts have found grounds on
which to distinguish Taylor, but none of those are persuasive with
respect to the facts of this case, and there are no reported Fourth
Circuit opinions construing Taylor.
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For the foregoing reasons, the debtor’s motion for summary
judgment is ALLOWED, and the trustee’s motion is DENIED. A judgment
will be entered separately.
SO ORDERED.
DATED: October 24, 2005
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