Kevin Ray Dunaway

1
IN THE UNITED STATED BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
KEVIN R. DUNAWAY, ) Case No. 14-bk-88
)
Debtor. ) Chapter 7
___________________________________ )
MEMORANDUM OPINION
Martin P. Sheehan, the Chapter 7 trustee appointed to administer the Debtor’s bankruptcy
estate (the “Trustee”), objects to the Debtor’s amended claim of exemptions and asks the court to
prohibit the amendment based upon the application of res judicata and laches. The Debtor
asserts that his amendment is permitted by Federal Rule of Bankruptcy Procedure (“Rule”)
1009(a) and the Supreme Court’s holding in Law v. Siegel, 134 S. Ct. 1188 (2014).
For the reasons stated herein, the court will overrule the Trustee’s Objection to Claim of
Amended Exemptions.
I. BACKGROUND
On January 31, 2014, the Debtor filed his Chapter 7 voluntary petition. Among the
personal property disclosed on his Schedule B, the Debtor listed his one-third membership
interest in Three Guys Fitness, LLC (the “LLC”), a West Virginia limited liability company.
According to the Debtor, the debt owed by the LLC effectively caused his one-third interest to
have nominal value, which he scheduled at $100. Similarly, on his Schedule C – Property
Claimed as Exempt, the Debtor valued his interest in the LLC at $100 and claimed the same
value as exempt under § 38-10-4(e) of the West Virginia Code.1 Notably, the Debtor only
1 The Debtor actually exempted his interest generally under W. Va. Code § 38-10-4, but because
the available exemptions under West Virginia’s bankruptcy exemption scheme are found
specifically in the subsections thereof, the court presumes that the Debtor claimed his exemption
under subsection (e), which is commonly referred to as the “wildcard” exemption.
Dated: Monday, March 16, 2015 2:56:12 PM
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claimed $3,600 of his available exemption under subsection (e), leaving $8,200 of potential
exemptions available to him.2 The Trustee did not object to the Debtor’s claimed exemptions,
and on March 17, 2014, he indicated that the bankruptcy estate did not have assets available for
liquidation and distribution to creditors in this case. On May 12, 2014, however, the Trustee
withdrew his “no-asset” report and requested that the Clerk of Court issue notice to creditors to
file proofs of claim no later than August 12, 2014. On November 3, 2014, after the Trustee filed
his Report of Sale regarding his sale of the Debtor’s one-third interest in the LLC for $15,000,
the Debtor filed amended Schedules B and C. On his amended Schedule B, the Debtor valued
his one-third interest in the LLC at $8,300. On his amended Schedule C, the Debtor again
valued his one-third interest at $8,300 and used his previously-unclaimed “wildcard” exemption
of $8,200 to increase the amount of his claimed exemption in his one-third interest in the LLC
from $100 to $8,300.
II. DISCUSSION
The Trustee asserts that the court should disallow, based upon the application of res
judicata and laches, the Debtor’s amended claim of exemptions. He asserts that Rule 1001
requires such a result given its mandate that the Rules “be construed to secure the just, speedy,
and inexpensive determination of every case and proceeding.” Rule 1001. Additionally, he
asserts that the Debtor’s original claim of exemptions implicitly became final by the time he
proposed to sell the Debtor’s one-third interest in the LLC. In that regard, the Trustee asserts
that he relied upon the Debtor’s claimed exemption of $100 when he invested time and effort
into selling the asset for the benefit of the bankruptcy estate’s creditors, who he asserts were also
entitled to rely on the state of the record at that time in determining whether the proposed sale
was in their respective best interests.3
On August 28, 2014, the court disposed of an issue substantially similar to the one raised
in this case. See In re Scotchel, No. 12-09, 2014 WL 4327947 (Bankr. N.D.W. Va. Aug. 28,
2 Because the Debtor claimed a $14,000 exemption in his residence under W. Va. Code § 38-10-
4(a), he was left with $11,800 to claim property as exempt under the “wild card” exemption. See
W. Va. Code § 38-10-4(e) (making available as the “wildcard” exemption $800 plus any unused
exemption provided for by §38-10-4(a)). $11,800 - $3,600 = $8,200.
3 Neither Mr. Sheehan’s Motion to Sell Property nor the court’s order authorizing the sale make
any representation to the creditor body regarding an anticipated dividend to be received by them
based on the sale.
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2014). In Scotchel, the debtor originally valued his interest in an asset of the bankruptcy estate at
$1.00 and claimed an exemption therein in the amount of $1.00. He asserted that, to the extent
the asset belonged to the bankruptcy estate, his exemption effectively exempted from the
bankruptcy estate 100% of the value of the asset. Scotchel, 2014 WL 4327947 at *1. The trustee
is Scotchel, who is the Chapter 7 trustee here also, objected to Mr. Scotchel’s claimed exemption
and argued that the Supreme Court’s holding in Schwab v. Reilly, 560 U.S. 770 (2010),
precluded such an outcome. Id. Ultimately, the court issued an order dated October 16, 2012,
that sustained the Trustee’s objection to the extent that Schwab prohibits a debtor from
exempting, in the face of a timely objection, 100% of the fair market value of certain property of
the estate. Id. Mr. Scotchel subsequently amended his claimed exemption more than two years
postpetition and after the Trustee had made significant interim distributions and otherwise acted
under the belief that the court limited Mr. Scotchel’s exemption to $1.00. Id. at *2.4 The
Trustee thus objected and argued that the court should disallow Mr. Scotchel’s amended
exemption based upon either res judicata or equitable considerations of Mr. Scotchel’s bad faith
and the resultant prejudice to creditors. Id.
In overruling the Trustee’s objection to Mr. Scotchel’s amended claim of exemption
based on res judicata, the court agreed with Mr. Scotchel that nothing in its order dated October
16, 2012, precluded him from amending his claimed exemptions because the issue finally
resolved by that order was the effect of Mr. Scotchel’s formerly-claimed exemption of $1.00. Id.
at *3. The court also found that the record before the court did not support the Trustee’s
contention that Mr. Scotchel somehow waived his ability to amend his claimed exemption. Id.
n.5. Regarding the Trustee’s objection to Mr. Scotchel’s amended claim of exemption based
upon equitable considerations of bad faith and prejudice to creditors, the court likewise found his
argument to be unpersuasive. Specifically, the court followed the “emerging view” interpreting
the Supreme Court’s decision in Law v. Siegel, 134 S. Ct. 1188 (2014), as having explicitly
abrogated cases decided before it that held that a court could disallow a debtor’s exemption or
amended exemption based upon equitable considerations.
4 Notably, Mr. Scotchel’s amended claim of exemptions took advantage of a theretofore unused
portion of his exemption available under W. Va. Code § 38-10-4(e)—the same action taken by
the Debtor in this case.
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Because the facts of this case and the Trustee’s objection to the Debtor’s amended claim
of exemptions are substantially similar to Scotchel, the court will not depart from its holding in
that case. In fact, the court finds the Trustee’s arguments here to be less persuasive than those
raised in Scotchel based upon the facts of this case. More specifically, the Trustee objects to the
Debtor’s amended claim of exemptions based upon res judicata but acknowledges that, unlike in
Scotchel, the court has not yet issued any ruling regarding the Debtor’s original claim of
exemptions or his amended exemptions. He nonetheless argues that the original claim of
exemptions became final, at least implicitly and pragmatically, by the time he solicited proofs of
claim in this case and sought to liquidate the Debtor’s one-third interest in the LLC for the
benefit of creditors. He therefore urges the court to disallow the Debtor’s amended claim of
exemptions because he and the creditors were entitled to rely upon the Debtor’s claimed
exemptions at the time the court adjudicated his proposed sale of the Debtor’s one-third interest
in the LLC; essentially a res judicata-prejudice to creditors hybrid argument.
The court finds his argument in that regard unpersuasive and will overrule his objection
to the Debtor’s amended claim of exemptions based upon res judicata. Although the Trustee
acknowledges that this court has not yet entered any order in this case regarding the Debtor’s
claimed exemptions, he asserts that the court should employ what he terms as “administrative res
judicata” in a situation like this where the exemptions “became final” after no party in interest
timely objected to the Debtor’s claimed exemptions. Even assuming that is true—that the
Debtor’s claimed exemptions “became final” thirty days after he claimed them and nobody
objected—all that became final was the Debtor’s $100 claimed exemption of his one-third
interest in the LLC. Nothing in the Bankruptcy Code or Rules precludes a debtor from amending
his claimed exemptions, particularly in a case like this where he did not exhaust his available
exemptions on his initial Schedule C. See Rule 1009(a) (noting that a debtor may generally
amend his petition or schedules, including Schedule C, at any time before the case is closed). To
the extent that the Trustee asserts that Rule 1001 requires a different result “to secure the just,
speedy, and inexpensive determination of every case and proceeding,” the court does not believe
permitting the Debtor’s amended claim of exemptions here is at odds with the goal of Rule 1001,
particularly given the ensuing analysis.
Regarding the Trustee’s argument that the court should employ the doctrine of laches to
disallow the Debtor’s amended claim of exemptions, he argues that the doctrine is not an
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equitable one but is an established principle of law. He thus asserts that the Court’s holding in
Law v. Siegel does not preclude, as determined by the court in Scotchel, this court’s use of res
judicata, laches, estoppel, or similar principles to disallow the Debtor’s amended claim of
exemptions. The court, however, is unpersuaded.5 Notably, “laches” is defined as “2. The
equitable doctrine by which a court denies relief to a claimant who has unreasonably delayed in
asserting the claim, when that delay has prejudiced the party against whom relief is sought.”
Black’s Law Dictionary 1006 (10th ed. 2014) (emphasis added). And “estoppel by laches” is
similarly defined as “[a]n equitable doctrine by which some courts deny relief to a claimant who
has unreasonably delayed or been negligent in asserting a claim.” Id. at 668 (emphasis added).
The court thus finds that laches is nothing other than an equitable doctrine, which this court
cannot employ to restrict the Debtor’s otherwise unfettered ability to amend his claimed
exemptions “at any time before his case is closed.” Rule 1009(a) (emphasis added). Moreover,
even if the court were to employ the doctrine of laches in this case, it cannot find the Debtor’s
timing of his amended claim of exemptions here constitutes an “unreasonable delay,” which is at
the heart of laches. In that regard, the Trustee withdrew his “no-asset” report on May 12, 2014
and moved to sell the Debtor’s one-third interest in the LLC on July 21, 2014. The Debtor
contested the Trustee’s motion and filed a motion, which he later withdrew, to voluntarily
dismiss his case. Ultimately, the court granted the Trustee’s Motion to Sell on October 2, 2014,
and the Trustee filed his Report of Sale on October 21, 2014. The Debtor amended his claimed
exemptions less than fourteen days later. Less than six months passed from the day The Trustee
5 In addition to the court’s rejection of the Trustee’s specific objections in this case, the court is
similarly unpersuaded by the Trustee’s general assertion that neither estoppel nor laches “is a
‘general equitable power’ unavailable to the Bankruptcy Court post-Law v. Siegel . . . .” In that
regard, the Supreme Court noted 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.” Law v. Siegel, 134 S. Ct. at 1196 (citation
omitted). The court therefore finds that it can only disallow an exemption or amended
exemption if the statutory scheme creating the exemption also provides the basis for disallowing
it. The Supreme Court did note, however, that a debtor employing a state-created exemption
may be precluded by state law from claiming or amending an exemption if the state law provided
for such prohibition in certain contexts involving debtor misconduct. See Law, 134 S. Ct. at
1196-97 (citation omitted) (“It is true of course that when a debtor claims a state-created
exemption, the exemption’s scope is determined by state law, which may provided that certain
types of debtor misconduct warrant denial of the exemption.”). Mr. Sheehan has not articulated
such a basis, and the court is aware of none, to disallow the Debtor’s amended exemption in this
case.
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withdrew his “no-asset” report until the day that the Debtor amended his claimed exemptions.
The court thus finds no unreasonable delay on the Debtor’s part in amending his claimed
exemptions.
III. CONCLUSION
Based upon the foregoing analysis and in accordance with Rule 7052, made applicable to
this matter by Rule 9014(c), the court will enter a separate order overruling the Trustee’s
Objection to Claim of Amended Exemptions.
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