Chapter 7 Debtor May Use “$0” Exemption on Asset Having Unknown Value; Mistaken Exemption Upheld

29 Mar Chapter 7 Debtor May Use “$0” Exemption on Asset Having Unknown Value; Mistaken Exemption Upheld

Grueneich v. Doeling, 2009 WL 605774 (8th Cir.BAP, Minn., March 11, 2009), held that a chapter 7 bankruptcy debtor can, in good faith, claim an exemption in an unknown amount (“0.00”), if the debtor has good reasons for doubting the value of an asset. In this case, the Eighth Circuit Bankruptcy Appellate Panel reaffirmed the continuing validity of In re Wick, 276 F.3d 412 (8th Cir.2002). The Wick case allowed a debtor to obtain an exemption up to the maximum dollar amount allowed by the exemption statute, even where the debtor listed the asset as having an “unknown” value, and listed the exemption amount as “unknown.”

In Grueneich, the bankruptcy debtor filed chapter 7 on March 27, 2007. He originally claimed two parcels of real estate as exempt pursuant to the federal homestead exemption, 11 U.S.C. section 522(d)1), in the amounts of $900.00 and $4,266.00. Neither of these were actually his homestead. He also listed stock in his corporation as having a value of “$0.00”; he did not claim any exemption for this stock. No objection to exemptions was filed.

Over one year later, the debtor filed amended schedules B and C. This time, he stated that the “corporate/LLC debt exceeds the value of asset in all instances.” He continued to value the stock at “0.00,” and he claimed the stock exempt under section 522(d)(5) with a value of “0.00.” The debtor included a notation that he was exempting any assets up the maximum dollar amount remaining under applicable law.

The debtor explained to the bankruptcy court that he had made these amendments because the trustee had received an offer to buy the stock for $2,500.00. The debtor further explained that he continued to believe the stock was worthless, and that the trustee had received the offer from an entity whose sole motivation was to harass the debtor.

The trustee objected to these exemptions on the ground of bad faith. The bankruptcy court held a hearing at which the trustee offered no evidence; the bankruptcy court also prevented the debtor from offering any evidence. Stating that the debtor was “gaming the system,” the court issued an order denying the exemption in the real estate, authorizing the trustee to sell the stock, and ordering that the debtor receive “0.00” as an exemption in the stock. The debtor appealed.

In reversing the bankruptcy court, the Bankruptcy Appellate Panel noted that the trustee had not objected to the debtor’s original exemption of the non-homestead real estate under the homestead exemption of section 522(d)(1). The mere fact that the debtor had filed amended exemptions later did not enable the trustee to object to the exemption of the real estate now, long after the thirty deadline for objections to exemptions had expired.

This was true even though the real estate had been improperly exempted under the homestead exemption (which was due to a typographical error made by the debtor’s lawyer). There was no evidence of bad faith in claiming the mistaken exemptions, and so the trustee was bound by his failure to object to the real estate exemptions when they were originally claimed.

Regarding the stock, the Bankruptcy Appellate Panel observed that the debtor was in an “unusual and difficult situation” regarding valuing and exempting that asset. The debtor appeared to firmly believe that the stock was, and continued to be, worthless. The debtor also believed that the offer to purchase the stock was not evidence of the stock’s value, but rather was only evidence of an entity’s intent to harass the debtor. No evidence had been allowed to be presented to support the debtor’s theory in this regard.

The Bankruptcy Appellate Panel held that without any evidence of the debtor’s bad faith in valuing the stock or in claiming the exemptions, the exemptions should be upheld. Furthermore, in accordance with In re Wick, the debtor was to receive any of the stock’s sale proceeds from the bankruptcy estate, up to the amount of his remaining “wildcard” exemption of $11,000.00, notwithstanding the fact that that the amount claimed exempt was “0.00.”

The Bankruptcy Appellate Panel held that the bankruptcy court had erred in finding bad faith on the part of the debtor, based solely on the debor’s having claimed exemptions in the manner approved by the Eighth Circuit Court of Appeals in In re Wick.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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