Milo J Karhu, II and Cynthia S Karhu

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
MILO J. KARHU II
and CYNTHIA S. KARHU,
DEBTORS.
CASE NO. 12-00615-8-JRL
CHAPTER 7
ORDER
This matter came before the court on the trustee’s motion to compel turnover and
delivery of property to the trustee and objection to debtors’ claim of exemptions filed by the
trustee. A hearing was held on July 18, 2012 in Wilmington, North Carolina.
BACKGROUND
Milo (“male debtor”) and Cynthia Karhu (“female debtor”)(collectively, “debtors”) filed
a voluntary petition under chapter 7 of the Bankruptcy Code on January 25, 2012. The § 341
meeting of creditors was held on February 27, 2012. At that meeting, the female debtor
disclosed that her mother died on February 15, 2012, and by virtue of her mother’s death, the
female debtor, as a beneficiary, became entitled to an interest in an annuity formerly owned by
her mother. On February 28, 2012, the debtors filed an amended schedule C-1 claim of
SO ORDERED.
SIGNED this 24 day of July, 2012.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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exemptions, which did not address the annuity. The trustee investigated the annuity and
determined that the female debtor is a designated beneficiary of an Individual Flexible Premium
Variable Annuity Contract between the female debtor’s mother and Hartford Life and Annuity
Insurance Company (“Hartford”). As a result of his investigation, the trustee discovered that the
estate’s interest in the annuity is valued at approximately $4,232.65. The debtors received their
discharge on April 30, 2012.
On May 17, 2012, the trustee filed a motion to compel Hartford to turnover funds
constituting the value of the annuity to which the estate was entitled. On June 4, 2012, the
debtors filed an objection to the trustee’s motion to compel turnover, indicating that they would
amend their schedules to exempt up to $4,999.00 of the annuity under the female debtor’s
wildcard exemption. On June 10, 2012, the female debtor filed amended schedules B and C.
The amended schedule B added the “Female Debtors unknown interest in deceased mother’s
Hartford Life and Annuity insurance policy” and valued the annuity as “unknown.” The
amended schedule C claims a $4,999.00 exemption in the annuity asset, pursuant to the female
debtor’s wildcard exemption. The trustee contends that the debtors’ share of the annuity
constitutes property of the bankruptcy estate to which the trustee is entitled, and the trustee
requests an order requiring Hartford to turnover and deliver to the trustee funds in the amount of
the female debtor beneficiary’s share of the contract value of the annuity. On June 19, 2012, the
trustee filed an objection to exemptions, claiming that the trustee and the estate would be
prejudiced by the debtors’ knowing delay in scheduling and asserting an exemption in the
annuity.
In response, the debtors state that they intend to turn over all of the annuity proceeds with
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the exception of $4,999.00. Further, the debtors contend that they will amend their schedules to
exempt the female debtor’s interest in her deceased mother’s annuity in the amount of $4,232.65,
pursuant to N.C. Gen. Stat. § 1C-1601(a)(2). At the hearing, the debtors argued that they were
not acting in bad faith in their delay and did not know the exact amount of the female debtor’s
interest in the annuity to amend the schedules.
DISCUSSION
Rule 1009 of the Federal Rules of Bankruptcy Procedure provides, “[a] voluntary
petition, list, schedule, or statement may be amended by the debtor as a matter of course at any
time before the case is closed.” FED . R. BANKR . P. 1009. Rule 1009 is generally understood to
allow a debtor to amend the claim of exemptions. See In re Cudeyro, 213 B.R. 910, 915 (Bankr.
E.D. Pa. 1997). “Under a plain reading of Rule [1009], a court ordinarily does not have
discretion to deny leave to amend or to require a showing of good cause.” Tignor v. Parkinson,
729 F.2d 977, 978 (4th Cir. 1984). Nevertheless, as recognized in Tignor, “exceptional
circumstances such as bad faith on the part of a debtor or prejudice to the trustee or creditors
may prevent the debtor in bankruptcy from amending the petition or schedules.” In re Agee, 456
B.R. 740, 743 (Bankr. M.D.N.C. 2011). “Prejudice has also been found to accrue where a debtor
exhibits ‘inordinate delay’ in amending his exemption schedules.” Cudeyro, 213 B.R. at 920.
Further, “an amendment is prejudicial if it impairs a trustee in the diligent administration of the
estate.” In re Scott, Case No. 00-10993C-7G, 2002 WL 1284281 (Bankr. M.D.N.C. June 3,
2002).
In the present case, the female debtor timely disclosed her interest in her deceased
mother’s annuity at the § 341 meeting on February 27, 2012. However, the female debtor
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delayed the filing of her amended schedules for nearly four months. On June 10, 2012, the
female debtor filed amended schedules B and C. The amended schedule B added the “Female
Debtors unknown interest in deceased mother’s Hartford Life and Annuity insurance policy” and
valued the annuity as “unknown.” The amended schedule C claims a $4,999.00 exemption in the
annuity asset, pursuant to the female debtor’s wildcard exemption. The failure timely to amend
schedules created a fiduciary duty on the part of the trustee to investigate the female debtor’s
interest in the annuity and led to significant time and expense in the diligent administration of the
bankruptcy estate by the bankruptcy trustee. Given these facts, the court finds that the female
debtor’s untimely amendment to her schedules was prejudicial to the trustee in the diligent
administration of the estate, and therefore, the trustee’s objection to the debtors’ claim of
exemptions should be sustained.
CONCLUSION
Based on the foregoing, the trustee’s objection to the debtors’ claim of exemptions is
SUSTAINED. The trustee’s motion to compel turnover and delivery of the proceeds of the
annuity by Hartford Life and Annuity Company to the trustee is GRANTED.
END OF DOCUMENT
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