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In Re: Hon. Jerome B. Simandle v. Steven R. Neuner

January 31, 2011

IN RE: HON. JEROME B. SIMANDLE IN THE MATTER OF STERGIOS AND RENEE MESSINA, DEBTORS. DEBTORS/APPELLANTS,
v.
STEVEN R. NEUNER, TRUSTEE/APPELLEE.



ON APPEAL FROM AN ORDER OF THE UNITED STATES BANKRUPTCY COURT FOR THE STERGIOS T. AND RENEE A. DISTRICT OF NEW JERSEY MESSINA, [Case No. 06-14240/GMB]

The opinion of the court was delivered by: Simandle, District Judge:

OPINION

I. INTRODUCTION

This matter is before the Court on the Debtors' appeal from the Bankruptcy Court's March 3, 2007 Order granting the motion of Steven Neuner ("Trustee"), to value at zero the claimed exemptions in the residence of the Debtors, Stergios and Renee Messina ("Debtors"). Following a lengthy procedural history, the appeal has returned to this Court after the Third Circuit Court of Appeals vacated this Court's Order of December 17, 2007, to reconsider in light of the recent Supreme Court decision of Schwab v. Reilly, __ U.S. __, 130 S. Ct. 2652 (June 17, 2010). In this Court's 2007 Opinion, In re Messina, 2007 WL 4440873 (Dec. 17, 2007) [Docket Item 8], the Court decided the issue in favor of the Debtors, reversing the Bankruptcy Court, and holding that the Trustee's late objection to Debtors' claimed exemptions was barred under Taylor v. Freeland v. Kronz, 503 U.S. 638 (1992). On remand, the Court must determine whether, in light of the additional guidance provided by Schwab, the Trustee had a duty to object to the Debtors' claimed exemptions within the 30-day limit imposed by Fed. R. Bankr. P. 4003(b). For the reasons stated below, the Court finds that the Trustee had no duty to object within 30 days under Schwab and consequently affirms the Bankruptcy Court's Order.

II. BACKGROUND AND PROCEDURAL HISTORY

This case began in the U.S. Bankruptcy Court for the District of New Jersey on May 15, 2006 when Debtors filed a Chapter 7 voluntary bankruptcy petition. In support of their petition, the Debtors filed schedules listing, inter alia, the value of their residence at $230,000, two claims on the residence in an amount exceeding $500,000, and claimed exemptions in the residence under, primarily, the homestead exemption.

Relevant to resolving the instant appeal, the Debtors filed an amended Schedule C in which they claim two exemptions in their residence. In the "Description of Property" column of Schedule C, the first asset in which Debtors claimed an exempt interest is their residence, described as "251 Waymouth Rd., Mullica Township, NJ." (Debtors' 2007 Br. Ex. A-9 at 5, Docket Item 3-13.) In the column labeled "Specify Law Providing Each Exemption," Debtors cited 11 U.S.C. § 522(d)(1) and 11 U.S.C. § 522(d)(5).*fn1 (Id.) In the column labeled "Value of Claimed Exemption," Debtors listed $36,900 for the § 522(d)(1) exemption and $250 for the § 522(d)(5) exemption, the maximum allowed under the statutory provisions cited. In the column titled "current value of property without deducting exemption," the debtors listed the full estimated value of the residence of $230,000. (Id.)

On two other schedules, the Debtors identified two different claims against the residence. On Schedule D, the Debtors listed a secured claim of $113,657.86 on the residence held by Litton Loans. (Id. at 3.) On Schedule F, the Debtors listed, as an "unsecured non-priority claim," a claim of $396,171.13 held by National Penn Bank. (Id. at 4.) Neither of these encumbrances on the residence were referenced or listed on Schedule C.

Trustee did not object to Debtors' exemptions within the 30-day limit of Rule 4003(b), and no extension of time was granted by the Bankruptcy Court. (Bankruptcy Tr. 5:14-15, Feb. 26, 2007) ("It is undisputed that the trustee did not object to the debtors' claimed interest in the homestead."). See Fed. R. Bankr. P. 4003(b) (requiring objection to exemption by interested party within 30 days of initial creditors' meeting or filing of amended Schedule C).

Months before the expiration of the Rule 4003(b) deadline, Debtors notified the Trustee of the National Penn Bank mortgage on the residence and informed him of certain defects of that mortgage, through correspondence on June 14, 2006 and June 21, 2006. (Debtors' Br. Ex. A-4 at 12-14.) Specifically, Debtors indicated that the National Penn Bank mortgage had not been properly acknowledged by the Debtors before a notary when it was executed. (Id. at 13.) Thereafter, Trustee initiated an adversary proceeding so that the estate could avoid the National Penn Bank mortgage lien. Neuner v. National Penn Bank et al. (In re Messina), Ch. 7 Case No. 06-14240, Adv. No. 06-2013 (Bankr. D.N.J. filed July 5, 2006). On August 21, 2006, Trustee submitted a motion for court approval of the sale of the residence. On August 30, 2006, Debtors submitted their amended Schedule C listing the additional exemption in the residence under § 522(d)(5). The sale of the residence was approved with liens, claims and interest to attach to all sale proceeds on September 11, 2006. Debtors did not object to the sale or the Order approving sale. On September 13, 2006 the sale produced net proceeds for the estate in the amount of $200,209.64. (Trustee's 2007 Br. at 10, Docket Item 4.)

On October 18, 2006, Trustee filed a Notice of proposed settlement, later reflected in a November 8, 2006 Consent Order, in which National Penn Bank consented to avoidance of its mortgage lien on the residence pursuant to 11 U.S.C. § 544(a)*fn2 and N.J. Stat. Ann. 46:17-3.1*fn3 , with the amount of the lien to be assigned and transferred to Trustee and preserved against Debtors

After the sale was complete and approved by the Bankruptcy Court, on November 17, 2006, Trustee filed a motion seeking an order to value the Debtors' exemption in the residence at zero and to deny Debtors any exemptions to the proceeds from the sale of the home. Debtors subsequently cross-moved seeking an order requiring Trustee to pay the claimed exemption of $36,900.00 pursuant to 11 U.S.C. § 522(d)(1) and $250.00 pursuant to § 522(d)(5). Debtors argued that Trustee's valuation motion was out of time and therefore barred by Fed. R. Bankr. P. 4003 and the rule of Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) and that, in any event, they were entitled to the exemption on the merits because the mortgage was void at the time Debtors filed their Chapter 7 petition rather than simply voidable by the Trustee.

The Bankruptcy Court, in an oral decision on February 26, 2007, granted Trustee's motion to value at zero the Debtor's exemptions and denied Debtors' cross motion to compel payment of their claimed exemptions. The Bankruptcy Court held that Debtors' claimed exemptions under §§ 522(d)(1) and (5) were improper, because those sections of the Code only authorize the exemption of home equity owned by the Debtors at the time of filing the petition. (Bankruptcy Tr. 5:20-23, Feb. 26, 2007.) Thus, the Bankruptcy Court found, because the amount owed on the two mortgages exceeded the value of the residence, the Debtors had no equity to claim as exempt. (Id. at 5:17-20.) The Bankruptcy Court rejected the Debtors' claim that the National Penn mortgage was void rather than voidable, finding under New Jersey law that the mortgage was only void against future creditors such as the Trustee, but still valid as against the Debtors. (Id. at 6:7-12.)

Regarding Debtors' timeliness argument, the Bankruptcy Court held that the Trustee's late objection was proper because the Debtors' Schedule C failed to give the Trustee sufficient notice of their effort to seek exemptions in the proceeds of the sale of the residence. (Id. at 7:8-13.) To claim as exempt the proceeds of the Trustee's sale of the residence, the Bankruptcy Court found, the Debtors would have had to claim their exemption under § 522(g), which provides authority for debtors to claim exemptions in the proceeds of a sale following a trustee's avoidance action in limited circumstances. (Id. at 7:13-17.) The Bankruptcy Court rejected the Debtors' argument that the Trustee's late objection to their exemptions should be barred under Taylor, because by claiming their exemptions under § 522(d) rather than § 522(g), the Debtors had not given the Trustee sufficient notice of their intent to claim an exemption in the proceeds of the sale of the residence. (Id. at 8:15-21.) The Bankruptcy Court, consequently, entered an order on March 3, 2007, granting Trustee's motion to value debtor's exemptions at zero.

This Court originally considered this appeal by the Debtors in 2007 and issued an Opinion and Order reversing the Bankruptcy Court's decision on December 17, 2007 [Docket Items 8 & 9]. The Court interpreted the Taylor rule to prohibit the Trustee's late objection even in a case where the Debtors claim an exemption to which they are not entitled in any amount. The Court determined that the Debtors' schedules taken as a whole -- accurately listing the residence, the two mortgages and the amount claimed as exempt -- gave the Trustee adequate notice of the Debtors' intent to claim their exemption from the value of the residence after the National Penn Bank mortgage was voided by the Trustee. The Court therefore determined that Taylor demands that Trustee's duty to object to the Debtors claiming an exemption in the equity of the residence must be barred after the expiration of the 30 days specified in Rule 4003(b). Consequently, the Court reversed the Order of the Bankruptcy Court in favor of the Debtors.

The Trustee appealed that Order to the Third Circuit Court of Appeals, which heard the case in oral argument on March 3, 2009 [Court of Appeals Docket No. 08-1134]. Subsequent to oral argument, the Supreme Court granted certiorari in a different Third Circuit case titled In re Reilly, 534 F.3d 173 (3d Cir. 2008), a case in which the Third Circuit had prevented a trustee's late objection to an improper exemption under Taylor. The Third Circuit reserved decision on the instant case until the Supreme Court decided Reilly, which it did on June 17, 2010, in Schwab v. Reilly, __ U.S. __, 130 S. Ct. 2652 (2010). There, the Supreme Court reversed the Third Circuit and articulated more specifically the circumstances in which Taylor applies and the trustee has a duty to object within the 30-day time ...


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