MARCIA PHILLIPS PARSONS, Bankruptcy Judge.
This case is presently before the court upon the objection filed by Wachovia Bank of South Carolina ("Wachovia") to the debtors' claim of exemptions in certain personal property owned by them. Wachovia alleges that the exemptions should be denied because the debtors have substantially undervalued their property and have acted in bad faith by their prepetition transfers of certain assets and their failure to list these assets in their schedules. For the reasons set forth below, the court will sustain the objection with respect to the majority of the exemptions claimed by the debtor, the court having concluded
This joint chapter 7 case was filed by the debtors, husband and wife, on May 18, 1995. Along with the filing of the petition, the debtors filed their required schedules and statements, including Schedule B, the List of Personal Property and Schedule C, the List of Property Claimed As Exempt. Schedule B indicated that as of May 18, 1995, the debtors had an interest in the following personal property:
CURRENT MARKET VALUE OF Cash on hand $ 60.00 Checking accounts $ 427.94 Various household goods and furnishings [this listing was itemized] $ 2,135.00 Clothing $ 200.00 Jewelry [with separate appraisal list] $ 2,165.00 Mink stole, fox and full length mink, eight place settings of silverware $ 1,700.00 Three firearms $ 50.00 Office equipment (desk, three chairs and table) $ 50.00 Air conditioning unit (Fully secured) $15,000.00 IBM AT personal computer, typewriter, P 51 computer with printer, non-running riding mower, washer and dryer, VCR, wicker sofa, three chairs, coffee table and aluminum patio furniture $ 435.00 __________ TOTAL $21,841.00 TYPE OF PROPERTY DEBTORS' INTEREST
All of the items of personal property set forth on Schedule B were restated and claimed as exempt on Schedule C pursuant to TENN.CODE ANN. § 26-2-102,
Fed.R.Bankr.P. 4003 sets forth the procedures with respect to exemptions and any objections thereto and provides that "in any hearing [on objections to exemptions] the objecting party has the burden of proving that the exemptions are not properly claimed." Fed.R.Bankr.P. 4003(c). Such burden is by a preponderance of the evidence. In re Shurley, 163 B.R. 286, 291 (Bankr.W.D.Tex.1993). Accordingly, Wachovia has the burden of proving that the debtors are not entitled to the exemptions they have claimed.
The court will first address Wachovia's assertion that the debtors have substantially undervalued their assets. Specifically, Wachovia alleges that the household goods and furnishings listed in Schedules B and C as having a collective value of $2,135.00, actually have a fair market value of $27,405.00 based on the appraisal conducted by Wachovia's expert. The wide disparity between the two amounts is attributable in part to the fact that different valuation methods were applied by the parties. The values set forth in the schedules were based on the debtors' opinion of the furnishings' "liquidation value,"
Testifying at trial as to value was Wachovia's expert, Kimball Sterling, a Johnson City appraiser and auctioneer, the debtors' expert, Rex Davis, and debtor Amy Sumerell. Mr. Sterling stated that he was in the business of evaluating and selling used furniture, antiques, and entire contents of homes and had done so for numerous years. He testified that he frequently testifies as an expert appraiser and has handled numerous estate auctions including that of the late Alex Haley, the noted Pulitzer Prize winner. Based on his examination of the debtors' household furnishings, Mr. Sterling concluded that the collective fair market value of the furnishings, within ten percent, was $27,405.00. Mr. Sterling testified that he based this amount on what he thought he could sell the items for at an auction with three weeks advertising, and was so confident that he could obtain this price at auction that he was willing to immediately purchase all of the items included in the appraisal for $19,700.00.
Mrs. Sumerell testified that since the filing of the schedules, she had revised her estimation of the value of the household goods and furnishings from $2,135.00 to $3,460.00 based on the actual invoices for many of these items of furniture, the majority of which were purchased more than 15 years ago. Using these invoice prices, Mrs. Sumerell estimated the furnishings' present value and then reduced it by 80% to arrive at the goods' "wholesale" price, which totaled $3,460.00.
11 U.S.C. § 522 governs the exemptions available to a debtor in a bankruptcy case and provides that the debtor may elect certain specified federal exemptions set forth in subsection (d) of § 522 or the exemptions available to a debtor under applicable state law, unless the state has opted out of the federal exemptions. See 11 U.S.C. § 522(b)(1). Tennessee, along with numerous other states, has opted out of the federal bankruptcy exemption scheme, making the federal exemptions unavailable to a debtor who resides in Tennessee. See TENN.CODE ANN. § 26-2-112; In re Haga, 48 B.R. 492 (Bankr.E.D.Tenn.1985).
The debtors have claimed their household goods and furnishings exempt pursuant to the provisions of TENN.CODE ANN. § 26-2-102 which provides that "personal property to the aggregate value of four thousand dollars ($4,000.00) debtor's equity interest shall be exempt. . . ." Unlike § 522 of the Bankruptcy Code which defines value for purposes of that section as "fair market value as of the date of the filing of the petition,"
Assumably because § 522 of the Bankruptcy Code specifically defines value for exemption purposes as fair market value, the debtors concede that fair market value is the appropriate standard, appropriately noting that the Sixth Circuit Court of Appeals, albeit in dicta, has endorsed the fair market value standard. See G.M.A.C. v. Bell (In re Bell), 700 F.2d 1053, 1055 (6th Cir.1983) (discussion of value for redemption purposes). The debtors note, however, that § 522 does not further define the phrase "fair market value" and gives no guidance as to how it should be determined. The debtors assert that there is a split of authority between the different jurisdictions as to the definition of fair market value and maintain that the phrase should be interpreted in a liquidation context, citing In re Walsh, 5 B.R. 239 (Bankr.D.C.1980).
In Walsh, as in the present case, the issue was what standard of valuation should be applied to property claimed as exempt by a debtor under 11 U.S.C. § 522. The court recognized that the usual and accepted meaning of fair market value was that set forth in BLACK'S LAW DICTIONARY which "assumes agreement between owner willing but not obligated to sell for cash and buyer desirous but not compelled to purchase." Id. at 241, citing BLACK'S LAW DICTIONARY 716 (4th ed. 1968). The court observed, however, that the definition is "not invariable" but "varies with the circumstances surrounding a given object and situation to which it is sought to apply the term." Id., quoting John W. McDougall Company v. Atkins, 201 Tenn. 589, 301 S.W.2d 335, 337 (1957). Concluding that the courts have construed fair market value in the context in which the valuation question arose, the Walsh court held that fair market value, as it is used to define "value" in § 522, must be interpreted in the liquidation context in a chapter 7 case "inasmuch as the purpose of valuation under the exemption provisions is ultimately to determine whether such property is subject to liquidation by the trustee because it is in excess of specified monetary amounts." Id.
Despite the debtors' characterization of a "split of authority" on this issue, Walsh is the only case wherein this contextual approach to evaluation of exemptions has been directly applied. Cf., In re Ricks, 40 B.R. 507, 509 (Bankr.D.C.1984) (in dicta, court cited Walsh with approval in resolving issue of whether value is limited to equity interest). Since the Walsh decision was rendered in 1980, more than half a dozen courts have considered the issue of the appropriate valuation standard for § 522 purposes. All have rejected Walsh by name and have concluded that value should be measured by the traditional concept of fair market value, the amount the debtor would receive from a voluntary and willing buyer if the debtor were not under a compulsion to sell, rather than a hypothetical liquidation. See In re Mitchell, 103 B.R. 819 (Bankr.W.D.Tex.1989); Windfelder v. Rosen (In re Windfelder), 82 B.R. 367 (Bankr. E.D.Penn.1988); In re Allen, 44 B.R. 38 (Bankr.D.N.M.1984); In re Frazier, 33 B.R. 175 (Bankr.D.Md.1983); Swink v. Henderson (In re Henderson), 33 B.R. 149 (Bankr. D.N.M.1982); Nellis v. Rosenbaum (Matter of Nellis) 12 B.R. 770, 772 (Bankr.D.Conn. 1981). See also In re Penick, 170 B.R. 914 (Bankr.W.D.Mich.1994) (rejecting Walsh in determining value for redemption purposes under § 722 as inequitably favoring the debtor and arguing that it would create a new "bankruptcy market" specifically for redemption and exemption purposes).
The most thorough discussion of this issue is that presented by Judge Clark in In re
Id. at 822.
This court is persuaded by the reasoning and the analysis of Mitchell and the majority cases and specifically rejects Walsh. Both Walsh and the debtors are incorrect in stating that the purpose of valuation under the exemption provision is to aid the trustee in determining whether there is property available to the estate for liquidation. While the values set forth in the schedules may be ultimately used by the trustee for that purpose, the primary purpose of the valuation is to determine that the values do not exceed the monetary limits placed on the exemptions by Congress or, as in this case, the Tennessee legislature. To allow liquidation value rather than fair market value would disregard the "cap" which the legislature has placed on personal property exemptions. As stated by Judge Clark in Mitchell:
In re Mitchell, 103 B.R. at 824.
Such a result would also ignore that the purposes of the exemptions are (1) to give the debtors a so-called "grub-stake" to begin their fresh start and (2) to act as a safety net, so that the debtor and his family are not completely impoverished due to creditor collection action or bankruptcy such that they become wards of the state. 3 COLLIER ON BANKRUPTCY ¶ 522.02 (15th ed. 1995); Prater v. Reichman, 135 Tenn. 485, 187 S.W. 305 (1916) (the public policy underlying the exemption statutes is to restrain a creditor from satisfying his debt out of certain kinds of property which are necessary for the maintenance of the debtors and their families); 13 TENN.JURIS. Exemptions from Execution and Attachment § 3 (1984), n. 10 citing Lisenbee v. Holt, 33 Tenn. (1 Sneed) 42 (1853) ("It was thought better and more in accordance with humanity and the interest of the state, that creditors should lose their just claims to that extent, than that the wives and children of unfortunate debtors should be reduced to entire destitution, and possibly become a charge to the community."). The assumption underlying the exemption statutes is that these purposes will be achieved by a debtor retaining rather than liquidating the exempt property as shown by the fact that the exemptions are for the most part designed to preserve the basic necessities for daily living — clothing, shelter, a minimal amount of personalty, and tools of the trade. Accordingly, from a debtor's point of view, liquidation of exempt property is inapposite. See In re Mitchell, 103 B.R. at 823.
For these reasons, this court holds that fair market value as used in § 522(a)(2) of the Bankruptcy Code has its generally
The debtors make the further argument that in determining fair market value, there must be a reduction for hypothetical costs of sale. Mr. Sterling testified that if he were to auction the debtors' household goods and furnishings, his costs would run anywhere from 14% to 35% depending on the size and location of the sale and the requirements of the seller, with his average cost about 25% of the gross sales. The debtors argue that any fair market value determined by this court should be reduced not only by such costs of sale, but also sales tax and a trustee's statutory commission, asserting that the estate would not realize these sums if the subject property were liquidated.
Again, the debtors are inappropriately applying liquidation considerations to a non-liquidation valuation. As stated above, the amount the estate would receive in a hypothetical liquidation is not the appropriate standard for determining fair market value for exemption purposes. By definition, in claiming property as exempt, a debtor is proposing that he or she be allowed to retain the property rather than have the property liquidated. Therefore, cases which have considered the issue of valuing property for § 522 purposes have refused to deduct transaction costs in the valuation process, concluding that because no transaction costs are contemplated, none may be deducted. See In re Windfelder, 82 B.R. at 372; Anderson v. Lucidore (In re Anderson), 68 B.R. 313 (Bankr.W.D.Penn.1986); Clendennen v. Equibank (In re Clendennen), 67 B.R. 909 (Bankr.W.D.Penn.1986); In re Rehbein, 49 B.R. 250 (Bankr.D.Mass.1985); Matter of Nellis, 12 B.R. at 772. See also Hunter Press, Inc. v. Connecticut Bank & Trust Company, 420 F.Supp. 338, 343 (1976) (court held that for purposes of construing the term "fair valuation" under the Bankruptcy Act, costs of sale should not be subtracted from the market price).
Although the Sixth Circuit Court of Appeals has not specifically ruled on this issue in the exemption context, it has held that in establishing the value of a creditor's collateral when the property is being retained by the debtors, deduction for purely hypothetical costs of sale is neither required nor permitted. See Huntington National Bank v. Pees, (In re McClurkin), 31 F.3d 401 (6th Cir.1994). At issue in McClurkin was the proper valuation of a secured claim pursuant to the provisions of 11 U.S.C. § 506(a) and whether such valuation should exclude hypothetical sales costs.
Although the present case involves valuation of property for exemption purposes rather than a valuation of the extent of a secured creditor's interest in property, the same reasoning applies. In both situations, the debtor is retaining the subject property, no liquidation will occur and thus no costs of sale will result. Accordingly, it would be inappropriate to reduce the value of the property by costs of liquidation which are purely hypothetical.
This court having determined that value for purposes of 11 U.S.C. § 522 means fair market value as that term is generally understood without any deduction for hypothetical costs, the court must determine the fair market value of the property in which the debtors are claiming their exemptions. The only testimony as to the fair market value of the debtors' household goods
Notwithstanding the appropriate standard, the debtors seek to discredit the appraisal conducted by Mr. Sterling. They assert that the values placed by him on the furnishings are not reasonable because the majority of their furniture is at least 15-20 years of age and is well used
While purchase price is relevant if the purchase were close in time to the determination of value, purchase prices of sales that occurred 15-20 years ago are only remotely relevant to today's market value. Cf. Matter of Reynolds, 17 B.R. 489 (Bankr. N.D.Ga.1981) (the more recent the purchase, the greater the relevancy of purchase price to current market value). And, while in the debtors' eyes their furnishings may be well-worn and of little value, in Mr. Sterling's observation the debtors' furniture is "premier secondary market items" and "the kind of stuff that today's young married people are looking for." The court found Mr. Sterling extremely knowledgeable and credible regarding the current market for antique reproductions, used furniture, antiques and collectibles
The debtors contend that certain items listed in Mr. Sterling's appraisal should be excluded because they belong to the debtors' two adult children who live with the debtors.
Mr. Sterling testified that he included in his appraisal all of the goods and furnishings which he found within the debtors' house with the exception of certain items in the basement and an exercise machine in the upstairs master bedroom which Mr. Sumerell identified during the appraisal as belonging to his son. Mr. Sumerell, on the other hand, testified that Mr. Sterling ignored the information that some of the basement items (the only items mentioned by name were a copier and exercise equipment) belonged to the debtors' son and nevertheless included the items in the appraisal. There was no testimony, however, that Mr. Sterling was ever advised that the debtors did not own the "Bedroom" and "Twin Bedroom" items that the debtors now assert belong to their daughter Missy.
Wachovia contends that the debtors should be estopped from asserting that these disputed items are their children's. Wachovia observes that these items were found in the debtors' home and the debtors did not indicate in their statement of financial affairs that they were holding property for any other person.
With respect to the cradle, the quilt and the Lanier copier, an examination of Schedules B and C indicate that these items were not listed in these schedules and thus have not been claimed in this bankruptcy as belonging to the debtors and exempt. Because the debtors have asserted no ownership interest in these items and have correspondingly not claimed them exempt, they should properly be excluded from Mr. Sterling's appraisal. The court finds it plausible that the debtors might not think of items belonging to their children that live with them when asked if they were "holding" property for some other person. Accordingly, the court is not persuaded that the debtors should be estopped
With respect to the Victorian Bed, the Queen Anne computer table and desk, however, Mr. Sterling was correct in including these items in his appraisal because these items are listed by the debtors in Schedules B and C as belonging to them. Schedules B and C recite that the debtors own and are claiming as exempt, five beds — three beds at $20.00 each plus the twin beds. In his appraisal, Mr. Sterling lists five different beds including the Victorian bed. Because only five beds were found in the house and the debtors assert in their schedules that they own five beds, the claimed exemption in five beds must include the Victorian bed.
Although the debtors testified at trial that the Queen Anne computer table and desk listed on Mr. Sterling's appraisal and located in the "Basement" belong to their son Patrick, this table and desk are listed in Schedules B and C as property of the debtors and exempt as tools of the trade under TENN. CODE ANN. § 26-2-103. The debtors are barred by the doctrine of judicial estoppel from directly contradicting their own sworn schedules. They can not now deny that they own these items and assert, to the contrary, that they are owned by their children.
With respect to the remaining pieces of furniture that the debtors claim belong to their children, the court is unable to ascertain from the debtors' generic listing of furniture in their schedules whether these items are listed in the debtors' Schedules B and C. No effort was made by either party to reconcile the schedules with Mr. Sterling's detailed appraisal so that a determination could be made as to whether the items found and examined by Mr. Sterling in the debtors' house were included in their schedules. "If the evidence is such that a decision on a point cannot be made one way or the other, the party with the burden of proof loses." In re Shurley, 163 B.R. at 291, quoting Texas Distributors, Inc. v. Local Union No. 100, 598 F.2d 393, 402 (5th Cir.1979). Because Wachovia has the burden of proof on this issue and tendered no evidence disputing Mrs. Sumerell's testimony that the items were in fact her children's (except for the answer to statement 14 of the Statement of Financial Affairs which the debtors have satisfactorily explained), all other items listed above which the debtors assert belong to their children should be excluded from Mr. Sterling's appraisal.
Although Wachovia asserted in its objection that the debtor significantly undervalued all of their personal property, Wachovia only presented evidence as to the value of the debtors' household goods and furnishings and tools of the trade. No proof was tendered by Wachovia to dispute the value placed by the debtors on their firearms, jewelry, clothing and fur coats. Under Fed. R.Bankr.P. 4003(c), the party objecting to a debtor's exemptions has the burden of proving that the exemptions are not properly claimed. See also In re Shurley, 163 B.R. at 286. Since Wachovia offered no proof as to the value of these items, its objection to the debtors' claim of exemptions in these items must be denied.
As noted by Wachovia in its brief, upon a determination by the court that the debtors have undervalued their assets, it will be necessary for the debtors to amend their list of exemptions to set forth the proper values if they desire to continue to assert exemptions in the subject property. Wachovia alleges that the debtors should be denied the opportunity to amend Schedules B and C to accurately reflect the true value of their property, arguing that the debtors have acted in bad faith and with the intent to defraud the bankruptcy estate and its creditors. As evidence of bad faith, Wachovia alleges that Mr. Sumerell has concealed his ownership of Hampton Apartments, a 47-unit apartment building, and that the debtors through Mr. Sumerell's corporation
With respect to Hampton Apartments, it is undisputed that Patrick Sumerell, the debtors' son, has actual title to the property, having purchased it from Progressive Enterprises, an apparently unrelated third party, on September 21, 1993. Patrick Sumerell signed a promissory note for $85,800.00 and deed of trust in connection with the purchase, pledging the apartments as security for payment of the note. The evidence indicates that it was originally contemplated that the apartments would be purchased by Bristol University since the purpose of the purchase was to provide housing for the school's baseball team at its Bristol Campus. Craven Sumerell and the baseball coach for Bristol University negotiated the purchase on behalf of the school and Bristol University made a $500.00 down payment. In a letter dated August 13, 1993, to Bristol University, the agent for the seller made inquiry as to whom would be signing on behalf of Bristol University and Craven Sumerell responded in a handwritten note that he would be signing for the school. There was no evidence as to how it came about that five weeks later, Patrick Sumerell purchased the property instead of Bristol University.
Despite his ownership, Patrick Sumerell had little to do with the apartments.
Apparently, neither the debtors' nor Patrick Sumerell's 1993 tax return made any reference to the Hampton Apartments. However, the 1994 income tax returns filed by the debtors on April 15, 1995 listed Hampton Apartments as being wholly owned by them. Correspondingly, Patrick Sumerell's 1994 tax return gave no indication that he owned the apartments. At trial, both the debtors and Patrick Sumerell testified that their 1994 returns were incorrect due to an error by their accountant and that their returns had been recently amended to reflect the correct ownership.
As further evidence of bad faith, Wachovia refers to a 1990 Cadillac and a 1982 Mercedes used and operated by the debtors as their personal vehicles, but titled in the names of their adult children. These automobiles were not listed by the debtors in their schedules as property in which they have an interest. The evidence offered at trial indicated that the vehicles in question have apparently always been used by the debtors as their personal vehicles, although they were originally titled in the name of Bristol University. On February 19, 1993, Bristol University transferred the 1990 Cadillac automobile with a mileage of 59,300 to Missy Sumerell and in May 1993, transferred the 1982 Mercedes automobile with mileage of 303,280 to Patrick Sumerell. There is no dispute that no consideration was given for the transfers. Craven Sumerell testified that
Notwithstanding the transfers, the debtors continued to operate and maintain the automobiles as their own after the transfers and do so at the present time. The debtors testified that they rely on these automobiles for transportation and that they do not have access to any other vehicles. At his August 3, 1995 deposition, Mr. Sumerell stated that these vehicles were used exclusively by him and his wife, but at trial testified that his previous statement was no longer true — that the vehicles are also used by his daughter and son. On cross-examination, Mr. Sumerell admitted, however, that his son has another automobile, also a Mercedes, and that his daughter is away at college, presently studying abroad. He noted that on occasion his daughter has taken the Cadillac to school with her, but conceded that his wife uses the automobile more than his daughter.
Fed.R.Bankr.P. 1009(a) provides that 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. Based on this language, many courts, including the Sixth Circuit Court of Appeals, have concluded that a court has no discretion to deny a request to amend unless the debtor has acted in bad faith or prejudice to creditors would result if the amendment were allowed. Matter of Yonikus, 996 F.2d 866 (7th Cir.1993); Stinson v. Williamson (Matter of Williamson), 804 F.2d 1355 (5th Cir.1986), appeal after remand, 844 F.2d 1166 (1988); Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir.1984) (per curiam); Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir.1982); Magallanes v. Williams (In re Magallanes), 96 B.R. 253 (9th Cir. BAP 1988); Ward v. Turner, 176 B.R. 424 (E.D.La.1994), appeal dismissed, 66 F.3d 322 (5th Cir.1995), cert. denied, ___ U.S. ___, 116 S.Ct. 1027, 134 L.Ed.2d 106 (1996); In re St. Angelo, 189 B.R. 24 (Bankr.D.R.I.1995); In re Fournier, 169 B.R. 282 (Bankr.D.Conn. 1994).
Several courts have held that in order for an amendment to be denied on this basis, bad faith must be established by clear and convincing evidence in light of the permissive language of Fed.R.Bankr.P. 1009(a) and the well-established principle that exemptions are to be liberally construed in favor of the debtor.
Minimal evidence was presented to the court regarding the financial problems sustained by Bristol University and the debtors that led to the closing of Bristol University and later, to the filing of the debtors' bankruptcy case,
Wachovia's response, of course, is that it is irrelevant whether the debtors or Bristol University owned the apartments and the vehicles because Mr. Sumerell was the sole stockholder of Bristol University. In its post-trial memorandum, Wachovia refers this court to the case of Eisenberg v. Casale (In re Casale), 62 B.R. 889 (Bankr.E.D.N.Y. 1986), affirmed, 72 B.R. 222 (E.D.N.Y.1987), where property owned by the debtor's corporation and transferred prepetition to the debtor's attorney without consideration was brought into the debtor's estate because the transfer was a sham and a fraud as evidenced by the fact that the debtor and his family occupied the property and always had, they paid no rent to the attorney, the attorney
While at first blush the Casale case appears on point to the present case and therefore persuasive authority, there are important substantive and procedural differences between the two cases which renders Casale inapplicable. First, Casale was a turnover action wherein the trustee sought the turnover of property of the estate pursuant to 11 U.S.C. § 542. The only issue before that court was whether a home in which the debtor was residing was property of the estate; the validity of the debtor's exemptions was not at issue, so there was no determination by Casale whether the debtor's conduct warranted a denial of his exemptions.
Secondly, of significant importance to the Casale court's conclusion that the debtor had an interest in the subject property was the court's finding that the debtor's corporation which initially owned the property was a shell, a mere facade for the debtor's own operations. The corporation's sole function was to build and hold legal title to the debtor's home and to serve the personal needs of the debtor. Id. at 898. Bristol University, on the other hand, from what the court surmises, was not a shell corporation. It owned substantial assets and was engaged in the business of owning and operating a school of higher learning, with three campuses. Thus, its corporate structure is not so easily disregarded and its corporate veil must be pierced before its assets could be considered part of its shareholder's bankruptcy estate.
It is clear, as illustrated in Casale, that the debtors at a minimum have a beneficial interest in at least the automobiles due to their possession and use of the vehicles regardless of who has legal title and that this equitable interest is property of the estate. This interest should have been disclosed by the debtors in their schedules. There has been no request by the trustee, however, that the debtors turnover these interests and the court is not convinced that the debtors' failure to disclose this equitable interest is of sufficient magnitude to warrant the conclusion that the debtors have been acting in bad faith.
Nor does the debtors' undervaluation of their household furnishings provide a sufficient basis for a finding of bad faith. Although it is clear that these assets were substantially undervalued, the values were based on the debtors' opinion of the goods' liquidation value, their valuation was supported by the testimony of their expert and there was at least an arguable position that liquidation value was the appropriate standard.
As in Clemmer, the evidence does establish that the debtors engaged in prepetition efforts
Furthermore, this court is not persuaded that even if the requisite showing of bad faith or fraud had been established, that denial of exemptions, unrelated to the alleged fraud, is the appropriate remedy. The Bankruptcy Code is silent as to the effect of fraud on exemptions, except for § 522(g) which deals with an exemption claimed as to recovered property.
In the few cases where a trustee or creditor has requested that a debtor's exemptions be denied as punishment for fraud unrelated to the claimed exemptions, the courts have generally been reluctant to do so in the absence of any specific statutory authority. See In re Hayes, 119 B.R. 86 (Bankr.E.D.Va.1990); Everwed Co. v. Ayers (In re Ayers), 25 B.R. 762 (Bankr.M.D.Tenn. 1982). But see In re Gaines, 106 B.R. 1008 (Bankr.W.D.Mo.1989), opinion quashed, 121 B.R. 1015 (W.D.Mo.1990), dismissed, Gaines v. Nelson, 985 F.2d 564 (8th Cir.1991). As noted above, the Bankruptcy Code supplies no such authority nor is any provided by the state of Tennessee. See 3 COLLIER ON BANKRUPTCY ¶ 522.08 (15th ed. 1995) (if state exemptions are claimed, the court must refer to state law to determine whether the conduct warrants denial of the exemptions). There is no Tennessee statute
In the Ayers case, the trustee argued that the debtors' claim of exemptions should be denied because the debtors were guilty of fraud. The debtors therein had failed to claim certain property exempt which could have been claimed exempt, other property was not dealt with as specifically as it should have been, and the debtors postpetition purchased property with nonexempt, prepetition funds. In re Ayers, 25 B.R. at 778. The Ayers court concluded that the trustee had not proven that the debtors were guilty of fraud and further overruled the objection on the basis that the alleged fraud was unrelated to the exemptions. Id. The court quoted with approval the following language from the treatise COLLIER ON BANKRUPTCY:
Id. at 778-779, quoting 3 COLLIER ON BANKRUPTCY ¶ 522.08 n. 10 (15th ed. 1981).
Id. at 88-89.
Other courts have shown this same reluctance even in circumstances where there is a connection between the fraud and the exemption. For example, in a case from the Western District of Texas, In re Swift, 124 B.R. 475 (Bankr.W.D.Tex.1991), the bankruptcy court refused to deny the debtor's exemption claims even though the debtor engaged in prebankruptcy planning with the intent to defraud his creditors, stating:
Id. at 482-483; see also In re Clemmer, 184 B.R. at 944-945 (court's refusal to deny exemptions as punishment for debtor's prepetition concealment of assets based in part on absence of Tennessee statutory or case law authority); In Crews v. First Colony Life Insurance Company (In re Barker), 168 B.R. 773 (Bankr.M.D.Fla.1994) (court refused to disallow an otherwise valid state law exemption on the basis of fraud in the absence of any express authority in the Bankruptcy Code and in light of the availability of other express remedies: denial of discharge, dismissal of case, and avoidance of the fraudulent
This court agrees that caution should be exercised before a court utilizes its equitable powers to fashion a remedy for fraud that is not expressly authorized by the Bankruptcy Code. This principle is demonstrated by the Supreme Court's ruling in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), wherein the court held that a trustee in a chapter 7 case could not successfully object to a debtor's claimed exemption after the time provided by Fed.R.Bankr.P. 4003(b) had run, even though the debtor had no colorable basis in law for claiming the exemption. The court rejected the trustee's argument that the court had the discretion to invalidate exemptions after the expiration of the 30-day period if the debtor did not have a good faith basis for claiming the exemptions despite the trustee's assertion that such a ruling would encourage abusive, bad faith exemption claims by debtors. The court observed that debtors and their attorneys face penalties under various provisions for engaging in improper conduct in bankruptcy proceedings and that these provisions may limit any abuses. "To the extent that they do not, Congress may enact comparable provisions to address the difficulties that [the trustee] predicts will follow our decision. We have no authority to limit the application of section 522(1) to exemptions claimed in good faith." Id. at 644-645, 112 S.Ct. at 1648-1649. Although the court refused to consider whether the courts may disallow exemptions not claimed in good faith based on their § 105(a) powers (the trustee having not raised this issue before the lower courts), inherent in the court's ruling is the directive that courts should be wary before providing remedies for policy reasons for which there is no authority in the Code. See In re Brown, 178 B.R. 722, 725 (Bankr.E.D.Tenn.1995).
As several courts have noted, the Code expressly provides other punishments for fraud: a denial of discharge completely or of a particular debt, dismissal of the case, or, if the fraud was in connection with the transfer of an asset, avoidance of the transfer and recovery of the asset. See 11 U.S.C. § 548. Clearly, Congress knew how to fashion remedies for fraud. Congress' failure to expressly provide for denial of exemptions in the event of fraud suggests that this omission was intentional.
Furthermore, caution is particularly appropriate in the area of exemptions, which have historically been liberally construed in favor of the debtor, not as a reward but because such a policy furthers the public interest of promoting a fresh start and preventing the debtors and their dependents from becoming completely destitute. In the absence of legislative authority, any decision that would revise this policy should be rendered sparingly, only where the fraud or bad faith is of such magnitude that no other authorized remedy is sufficient to protect and safeguard the public interest. See 11 U.S.C. § 105(a) ("the court may . . . tak[e] any action or mak[e] any determination necessary or appropriate . . . to prevent an abuse of process").
In conclusion, the debtors are directed to file a new Schedule C setting forth their exemption claims in accordance with the rulings of the court set forth in this memorandum. All personalty claimed exempt must be valued at the value set out in the appraisal prepared by Kimball Sterling, unless provided otherwise in this memorandum. An order will be entered contemporaneously with the filing of the memorandum opinion.
As noted by Judge Stair in Clemmer, this statute pertains only to the truth and sufficiency of the assertion of the exemption and has no bearing on any fraudulent conduct that may have occurred prior to claiming the exemption. In re Clemmer, 184 B.R. at 945.
Simons v. Lovell, 54 Tenn. (7 Heisk.) 510, 514 (1872).