9th Circuit BAP Provides Clarity for When a Debtor Can Exempt Property Post-Petition

9th Circuit BAP Provides Clarity for When a Debtor Can Exempt Property Post-Petition

March 7, 2019

Recently, in In re De Jesus Gomez, 592 B.R. 698 (B.A.P. 9th Cir. 2018), the Ninth Circuit Bankruptcy Appellate Panel clarified how 11 U.S.C. § 522(g) limits a debtor’s right to claim exemptions in property after the trustee exercised its avoiding powers to recover an interest in that property.

There, the debtor filed a chapter 7 petition and originally scheduled one vehicle (2001 Ford Focus), claiming an exemption for the full value of the car. He did not disclose ownership of a 2012 Chevrolet Malibu, which he had purchased two months prior to filing his petition. After the debtor amended his Schedule A/B to include the Malibu and the amount of the creditor’s interest, the trustee discovered that the creditor failed to perfect its lien before the petition date. The trustee, pursuant to §§ 549-550, brought and succeeded in an adversary proceeding against the creditor for avoidance and recovery of the postpetition transfer.

After the trustee sought to obtain possession of the Malibu, the debtor amended his Schedule C to exempt the full value of both the Focus and the Malibu under California law. The trustee objected, arguing (among other things) that § 522(g)(1) precludes the debtor from exempting the Malibu. The debtor disagreed, relying on Law v. Siegel, 571 U.S. 415 (2014) for his argument that any property can be exempted up until the date of the bankruptcy’s closing.

The court, however, agreed with the trustee and held that where a debtor voluntarily transfers property in a way that triggers the trustee’s avoidance powers, and that property is returned to the estate, the debtor is not entitled to claim an exemption on the property. Implicit in the court’s ruling is that perfection of a security interest in a vehicle is a “voluntary transfer” for § 522 purposes. The court distinguished Law v. Siegel in order to clarify the debtor’s mistaken position. Law does not provide that any property can be exempted at any time prior to closing; rather, it stands only for the general principle that a bankruptcy court cannot deny an exemption that is otherwise allowed by statute. To the extent that Law created any ambiguity as to the application of § 522, it appears the court in De Jesus Gomez cleared up the confusion.

This case provides important reminders for creditors and debtors. Creditors must be diligent in perfecting their security interests. Perfecting a security interest postpetition is a voluntary “transfer” within the meaning of the bankruptcy code and therefore, is subject to avoidance under § 549.  Likewise, debtors cannot rely on Law v. Siegel (or related case law) for a mistaken belief that they may amend their Schedule C to exempt any property at any time prior to closing of the case.

By: Alex Wilson