by The Sixth Circuit found that prejudice to creditors was unlikely to be a legitimate basis for denying a debtor’s motion to amend her schedules to increase her exemption claim, and that even if it were a legitimate basis, the trustee failed to show the existence of such prejudice. Westry v. Lim (In re Westry), No. 14-1440 (6th Cir. Dec. 30, 2014).
In her original schedules the chapter 7 debtor claimed an exemption under section 522(d)(5) based on a pending worker’s compensation claim listed as amount “unknown.” After the bankruptcy had been administered but kept open pending resolution of the worker’s compensation claim, that claim settled for $25,000. A week later, the debtor filed a motion to amend her Schedule C to claim additional statutory exemptions under sections 522(d)(10)(C) and 522(d)(11)(E) to cover the claim in excess of what she could exempt under section 522(d)(5). Although there was no dispute that the debtor was entitled to the full amount of the exemptions she sought, the trustee objected on the basis that the late date of the amendment prejudiced creditors.
The bankruptcy court denied the motion to amend and the district court, finding that the bankruptcy court had implicitly found prejudice to creditors, affirmed.
The Sixth Circuit reversed.
On appeal the circuit court found that there was no dispute that the debtor’s failure to list the alternate exemptions was not a result of fraud or misconduct, but a clerical error. Therefore, the only initial issue was whether prejudice to creditors was a basis for denying her amendment.
The court turned to Law v. Siegel, 134 S. Ct. 1188 (2014), which was decided while the case was pending before the district court. In that case, the Court held that a homestead exemption could not be surcharged to pay the trustee’s costs of prosecuting the debtor’s fraudulent claim for the exemption. The Court held that while the lower court was within its discretionary power to sanction the debtor for his misconduct, section 522(k) prohibited it from using exempt funds to pay administrative fees. Nor could the exemption be denied on the basis of the debtor’s attempted fraud where the Code’s extensive list of exceptions to exemptions did not include that exception. The Sixth Circuit found that the language in Law, though not on all fours with the present case, “strongly suggest[ed]” that the bankruptcy court lacked authority to deny an exemption due to prejudice to creditors.
The court added that even if the bankruptcy court was within its authority to deny the amendment based on prejudice, there was not a sufficient showing of such prejudice to support the decision. Rather than finding actual prejudice to creditors, the bankruptcy court focused on the debtor’s failure to enumerate all the relevant exemptions at an earlier point in the bankruptcy proceedings. The only prejudice cited by the trustee related to the inconvenience of keeping the bankruptcy case open to allow her to occasionally monitor the worker’s compensation claim. There was no evidence that there were assets in the case that would have adhered to the benefit of creditors. The court found that the record did not support a finding of prejudice to creditors.