CARLOS A GUTIERREZ HERNANDEZ

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: : CASE NO. 10-01762 (ESL)
:
CARLOS GUTIERREZ HERNANDEZ :
Debtor : CHAPTER 7
____________________________________:
OPINION AND ORDER
This case is before the court upon the Debtor’s Motion to Inform Amendment of Schedules
B & C to change the value of a certain case held before the Puerto Rico Court of First Instance from
“unknown” to the amount of $181,000 [Schedule B] and amend the claimed exemptions based on that
new added value [Schedule C] (“Motion to Amend”, Docket Nos. 29 & 30). The Chapter 7 Trustee
(the “Trustee”) filed an Objection to Amend Schedule C claiming that the Debtor: (i) filed his Motion
with the intention of hindering and obstruction the administration of the Trustee; (ii) failed to read
his schedules before filing his bankruptcy petition, which indicates a complete disregard for the
honesty duty imposed by the Bankruptcy Code; (iii) the Debtor’s attempt to amend at this stage of
the proceedings would be prejudicial to creditors and to the estate and it would frustrate the
distribution scheme contemplated by the Bankruptcy Code; and (iv) the Debtor’s right to claim an
exemption arises and is fixed on the date the petition is filed, and thus post-petition changes in the
Debtor’s factual circumstances or in the applicable law do not alter the status of an exemption
properly claimed (the “Objection”, Docket No. 31). For the reasons stated below, the Debtor’s
Motion to Amend is granted and the Trustee’s Objection is hereby denied.
Procedural Background
The Debtor filed his Chapter 7 bankruptcy petition on March 5, 2010 and corresponding
schedules (Docket No. 1). In Schedule B (Personal Property), the Debtor reported that he is a
plaintiff in a “cause of action against the PR Telephone Co. [in Case No.] DPE2007-1405 (703)
[before the] Bayamón Superior Court, for discrimination and salaries” and estimated its value as
“unknown” (the “PRTC Case”, Docket No. 1, p. 13, ¶ 21). He did not claim any exemption on that
PRTC case (Docket No. 1, pp. 16-17).
On March 26, 2010, the Trustee filed an Application for Leave to Employ the law office of
Luis E. Martin Lugo, Esq. to represent the bankruptcy estate in the contested matters in the PRTC
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case (Docket No. 10). On May 14, 2010, the court issued an Order approving Luis E. Martin Lugo,
Esq. as special counsel for the estate (Docket No. 14).
On February 23, 2012, the Debtor filed its Motion to Amend (Docket No. 30), to which he
tendered the proposed Amended Schedules B & C (Docket No. 29). The purpose to amend Schedule
B is to change the value of the Debtor’s interest in the PRTC case from “unknown” to $181,000
(Docket Nos. 30, ¶ 1, and 29, p. 2, ¶ 21). The purpose of amending Schedule C is to “reflect [the]
exemptions of the [PRTC case]” in the amount of $63,000 under 11 U.S.C. §§ 522(d)(5),
522(d)(11)(E) and 522(d)(11)(D) (Docket Nos. 30, ¶ 2 and 29, p. 5).
On March 3, 2012, the Trustee filed his Objection on the following grounds: (i) the Debtor
filed his Motion to hinder and obstruct the administration of the Trustee; (ii) he failed to read his
schedules before filing his bankruptcy petition, which indicates a complete disregard for the honesty
duty imposed by the Bankruptcy Code; (iii) his attempt to amend at this stage of the proceedings
would be prejudicial to creditors and to the estate and it would frustrate the distribution scheme
contemplated by the Bankruptcy Code; and (iv) that the right to claim an exemption arises and is
fixed on the date the petition is filed, and thus post-petition changes in the Debtor’s factual
circumstances or the in the applicable law do not alter the status of an exemption properly claimed
(the “Objection”, Docket No. 31).
On March 16, 2012, the Debtor filed an Objection to “Trustee’s Objection to Amend Schedule
C” (the “Reply to Objection”, Docket No. 32) averring that: (i) his request to amend Schedules B &
C are timely under Fed. R. Bankr. P. 1009(a); (ii) he disclosed the PRTC case from the very
beginning but that he had no knowledge of its value when he filed for bankruptcy nor did he have
access to that information at that moment; (iii) the Trustee was well aware of the PRTC case; (iv) he
has not breached his honesty duty in these proceedings nor acted in bad faith; (v) delay alone cannot
be construed as bad faith”; and (vi) the Trustee has not offered any evidence that the Debtor is
hindering, concealing or causing economic loss to creditors.
Applicable law & Analysis
(A) Exemptions in general
When a debtor files a bankruptcy petition, all of his/her/its assets become property of the
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bankruptcy estate [11 U.S.C. § 541] subject to the debtor’s right to reclaim certain property as exempt
under 11 U.S.C. § 522. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). A property
becomes exempt by operation of law when no objections are filed. See 11 U.S.C. § 522(l). But the
mere fact that debtors claim an exemption does not necessarily mean that they are entitled to it, since
there must be compliance with statutory requirements and then an order of the bankruptcy court to
that effect. See 9A Am. Jur. 2d Bankruptcy § 1392; In re Rolland, 317 B.R. 402, 412 (Bankr.
C.D.Cal. 2004); In re Colvin, 288 B.R. 477, 483 (Bankr. E.D.Mi. 2003); Carlucci & Legum v.
Murray (In re Murray), 249 B.R. 223, 230 (E.D.N.Y. 2000). Exemptions should be liberally
construed in furtherance of the debtor’s right to a “fresh start”. See In re Newton, 2002 Bankr.
LEXIS 2089 at *7, 2002 WL 34694092 at *3 (B.A.P. 1 Cir. 2002); Christo v. Yellin (In re Christo),st
228 B.R. 48, 50 (B.A.P. 1 Cir. 1999).st
(B) How to claim exemptions under 11 U.S.C. § 522
In order to be effective, a debtor must specifically describe the property claimed as exempt
and inform the value. See Nancy C. Dreher and Joan N. Feeny, Bankruptcy Law Manual, Volume
1 § 5:43 (2011-12), p. 941. Thus, a debtor is required to list the property claimed as exempt on the
schedule of assets that must be filed with the bankruptcy petition. See 11 U.S.C. § 522(l); Fed. Rs.
Bankr. P. 1007(b), 1007(I)(b) & 4003. A party in interest or the trustee may file an objection to the
list of property claimed as exempt within 30 days after the meeting of creditors held under 11 U.S.C.
§ 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules
is filed, whichever is later. Fed. R. Bank. P. 4003(b)(1). If an interested party fails to object to a
claimed exemption within the time allowed, the subject property will be excluded from the
bankruptcy estate even if the exemption’s value exceeds the statutory limits. 11 U.S.C. § 522(l);
Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644 (1992). In the instant case, there is no dispute
that the Trustee’s Objection is timely.
Notwithstanding, in Schwab v. Reilly, 130 S.Ct. 2652, 2668 (2010), the Supreme Court held
that the time limits for objecting to an exemption do not apply if the claimed exemption is valid on
its face. Schwab’s analysis rests on the determination that Section 522(a)(3)(B) defines the
“‘property’ a debtor may ‘clai[m] as exempt’ as the debtor’s ‘interest’ –up to a specified dollar
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amount– in the assets described in the category, not as the assets themselves.” Id. at 2661-62
(citations omitted). Under the Schwab doctrine, treating the entries as exemptions of an in-kind
interest would violate the Bankruptcy Code’s limits and fail to account for the distinction between
exemptions that include a monetary cap and those that allow debtors to exempt property regardless
of value. Id. at 2663, n.10. Thus, Schwab mandates that exemptions be claimed “in a manner that
makes the scope of the exemption clear”. Id. at 2668. In Massey v. Pappalardo (In re Massey), 465
B.R. 720 (B.A.P. 1 Cir. 2012), the debtor did not assign a monetary value to the claimed exemptionst
for his car and residence in their Schedule C, but rather claimed “100% of FMV [Fair Market
Value]”. Id. at 721. The Trustee timely challenged those claimed exemptions alleging that they were
improper. Id. at 722. The Massey court adopted the analysis in In re Salazar, 449 B.R. 890 (Bankr.
N.D.Tx. 2011), where the court posed two possible solutions to dealing with this type of claimed
exemptions. First, the court could hold an evidentiary hearing on the value of the debtor’s
exemptions. At such a hearing, the debtor has the initial burden of showing a plausible basis for the
claim that ‘100% of FMV of an asset falls within the statutory limit on the amount that may be
exempted under Section 522. In accordance with Schwab, if the objection is overruled, the asset
claimed will no longer be part of the estate, but if the objection is sustained, the debtor must forfeit
the value in excess of the statutory allowance. The second approach is for the court to “simply
declare that an objection to an exemption claim of ‘100% of FMV’ is a facially valid objection
because the debtor has failed to claim a set amount as contemplated by the exemption statute
allowing the exemption.” Salazar, 449 B.R. at 897. In this situation, the court will sustain the
objection “unless the debtor amends his exemptions to claim a dollar amount for his exempt
interest in the property.” Id. at 897 (emphasis added). The Salazar court adopted this approach [Id.
at 902], and the Massey court held that said approach “best recognizes the reasoning in Schwab”.
Massey, 465 B.R. at 728. Under either scenario, Fed. R. Bankr. P. 4003(c) mandates that “the
objecting party has the burden of proving that the exemptions are not properly claimed.”
In the instant case, the Debtor disclosed the PRTC case with his bankruptcy petition, albeit
with an “unknown” reported value. See Docket No. 1, p. 13 [Schedule B]. The Trustee was also
aware of its existence, course of action and status since at least March 26, 2010, when he filed the
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Application for Leave to Employ the law office of Martin Lugo, Esq. to represent the bankruptcy
estate (Docket No. 10). Thus, the Debtor’s Motion to Amend (Docket No. 23) is targeted precisely
to “claim a dollar amount for his exempt interest in the property”, namely the PRTC case, following
the Salazar reasoning, 449 B.R. at 902, as cited in In re Massey, 465 B.R. at 728. The court now
proceeds to analyze the merits of the amendment.
(C) Amendments to claimed exemptions under Fed. R. Bankr. P. 1009
Pursuant to Fed. R. Bankr. P. 1009(a), a debtor may amend a claim of exemptions at any time
before the case is closed as a matter of right. “The Rule adopts a permissive approach that freely
allows amendments to lists or schedules without court permission at any time during the case.”
Hannigan v. White (In re Hannigan), 2004 U.S. Dist. LEXIS 28802 at **12-13 (D.Ma. 2004) aff’d
at 409 F.3d 480 (1 Cir. 2005), quoting In re Robbins, 187 B.R. 400, 403 (Bankr. D.Ma. 1995) . Butst 1
the right to amend is not absolute. The court may disallow such amendments in exceptional
circumstances. For instance, caselaw has recognized two clear exceptions to this permissive
approach: (i) prejudice to creditors or the trustee and (ii) bad faith. In re Snyder, 279 B.R. 1, 6
(B.A.P. 1 Cir. 2002). Also see Nancy C. Dreher and Joan N. Feeny, Bankruptcy Law Manual,st
Volume 1 § 5:43 (2011-12), p. 941.
In determining whether the amendment would prejudice creditors, the appropriate inquiry is
not whether a creditor will recover less or be adversely affected by the amendment; instead, a court
must determine whether the creditor(s) would be adversely affected by having detrimentally relied
on the debtor’s initial position. Allan N. Resnick and Henry J. Sommes, 9 Collier on Bankruptcy,
¶ 1009.02[1] (16 ed. 2012); In re Talmo, 185 B.R. 637, 645 (Bankr. S.D.Fla. 1995) (“[P]rejudice mayth
be established by showing harm to the litigating posture of parties in interest. If the parties would have
taken different actions or asserted different positions had the exemption been claimed earlier, and the
interests of those parties are detrimentally affected by the timing of the amendment, then the prejudice
is sufficient to deny amendment.”). Delay to amend by itself and/or disappointment of creditors’
expectations do not constitute prejudice. In re Melber, 315 B.R. 181, 190 (Bankr. D.Ma. 2004), citing
Subsequently abrogated on other grounds.
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In re Arnold, 252 B.R. 778 (B.A.P. 9 Cir. 2000).th
Similarly, bad faith in amending a claimed exemption is generally identified as some sort of
attempt to conceal an asset. In re Cudeyro, 213 B.R. 910, 918 (Bankr. E.D.Pa. 1997). Bad faith can also
be found when debtors intentionally undervalue their home in the schedules to reflect no equity. In re
Hannigan, 409 F.3d at 483-484. Such bad faith is determined by an examination of the totality of the
circumstances. See Berliner v. Pappalardo (In re Puffer), 674 F.3d 78, 82 (1 Cir. 2012), citing Marramast
v. Citizens Bank of Mass. (In re Marrama), 430 F.3d 474, 482 (1 Cir. 2005), aff'd at 549 U.S. 365st
(2007); In re Lombardo, 370 B.R. 506, 512 (Bankr. E.D.N.Y. 2007) as adopted in In re Fernandez
Rosado, 2010 Bankr. LEXIS 4440 at *33, 2010 WL 5019023 at *11 (Bankr. D.P.R. 2010); Accord Pope
v. Clark (In re Clark), 274 B.R. 127, 137 (Bankr. W.D.Pa. 2002) (“Bad faith … is determined by
examining the totality of the circumstances.”); Gold v. Guttman (In re Guttman), 237 B.R. 643, 651
(Bankr. E.D.Mi. 1999); In re Hardy, 234 B.R. 94, 95 (Bankr. W.D.Mo. 1999); In re Clemmer, 184 B.R.
935, 942 (Bankr. E.D.Tn. 1995). The “totality of the circumstances test cannot be reduced to a
mechanical checklist”: it “derives from equity”. In re Puffer, 647 F.3d at 82. “This matters because
equitable concepts are peculiarly insusceptible to per se rules.” Id. at 82.
“A mere allegation by an objector of bad faith [or prejudice] is insufficient.” Wood v. Premier
Capital, Inc. (In re Wood), 291 B.R. 219, 228 (B.A.P. 1 Cir. 2003), quoting In re St. Angelo, 189 B.R.st
24, 26 (Bankr. D.R.I. 1995). In both instances, an objection to the proposed amendment must be fact-
intensive and through specific evidence. See In re Colvin, 288 B.R. 477, 481-482 (Bankr. E.D. Mich.
2003) (“Mere allegations of bad faith will not suffice; the objecting party must demonstrate the bad faith
of the debtor by specific evidence.”); In re St. Angelo, 189 B.R. 24, 26 (Bankr. D.R.I. 1995) (“Intent
to conceal is a factual determination to be made by a bankruptcy court...”).
The court finds that the Trustee’s tersely encryptic Objection (Docket No. 31) fails to refer
to a single fact in support of its legal conclusions, and consequently the Trustee has failed to meet
his burden under Fed. R. Bankr. P. 4003(b). Pursuant to the cited caselaw, the Trustee has failed to
show any prejudice whatsoever or bad faith by the Debtor. Likewise, no intention of hindering or
obstructing the administration of the Trustee can be inferred from the record and much less from the
Trustee’s Objection. Furthermore, the record of this case shows that Debtor did not attempt to
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conceal the PRTC case. To sustain his position, the Trustee cites in passim In re Rice, 452 B.R. 623
(Bankr. E.D.Mi. 2011), for the proposition that the Debtor did not read his initial schedules when he
filed the bankruptcy petition, which constitutes reckless disregard for the truth that bars him from
amending his schedules. A careful reading of that case demonstrates that the facts are inapposite to
the instant one and is ergo inapplicable. In In re Rice, the debtor acknowledged that he did not read
all the schedules but rather “scanned them”. 452 B.R. at 626. In the case at bar, the Debtor duly
disclosed the existence of the PRTC with its assigned case number at the Bayamon Superior Court.
Therefore, the Trustee’s Objection is denied. The Trustee has not contested the validity of
the Debtor’s amended claimed exemptions, and thus an evidentiary hearing on the value of the
Debtor’s claimed exemptions is unwarranted.
Conclusion
In view of the foregoing, the Debtor’s Motion to Amend (Docket No. 30) is hereby granted
and the Trustee’s Objection (Docket No. 31) is hereby overruled. Consequently, the Debtor is
allowed to amend his Schedule B and C (Docket No. 29).
IT IS SO ORDERED.
In San Juan, Puerto Rico, this 14 day of June, 2012.th
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