Jennifer St. Hill

The debtor also suggests in her memorandum that no determination of the1
trustee’s objection should be made until her motion under section 707(a) to voluntarily dismiss
this case is resolved. That dismissal request, however, was just filed and will not be heard for 30
days. Furthermore, this chapter 7 case has been pending for more than one year. 	Therefore, I
decline the debtor’s invitation to delay the ruling in the present dispute.
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 7
JENNIFER ST. HILL 	:
Debtor 	: 	Bankruptcy No. 04-30919F
.................................................
MEMORANDUM
.................................................
Before me is the chapter 7 trustee’s objection to the debtor’s latest amended
claims for exemption. The debtor asserts that her real and personal property are exempt
under Pennsylvania law. Previously, she had asserted that this property was exempt by
virtue of federal bankruptcy law, which assertion was successfully challenged, in part, by
a prior objection from the trustee.
The trustee, Marvin Krasny, Esquire, now objects to the allowance of the
debtor’s amended state law exemption claims on the bases of: res judicata; laches and
prejudice; bad faith; the existence of joint unsecured debts; and the misapplication of state
law as to certain personal property. The debtor defends her amended exemptions against
the trustee’s numerous challenges. 1
An evidentiary hearing was held wherein the following relevant facts were
proven.
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I.
A.
I begin with a lengthy chronology of some of the numerous filings and
orders entered in this bankruptcy case, as the trustee asserts that these filings and orders
support his pending objections.
The debtor filed a voluntary bankruptcy petition under chapter 7 on August
11, 2004, and estimated on her petition that she had no non-exempt property available for
distribution to creditors. See Voluntary Petition (“Statistical/Administrative
Information”). On September 7, 2004, she filed her bankruptcy schedules and statement
of financial affairs as mandated by Fed. R. Bankr. P. 1007(b). Ex. T-1.
On Schedule A, the debtor disclosed ownership of real property located at
217 West Indian Creek Road, Wynnewood, PA, which property she valued at
$542,000.00, with secured claims of $640,843.38. Id. (Schedules A & D). She listed this
real property as jointly owned with her husband, and identified the lien claims against the
property as joint debts. Id. On Schedule B, the debtor revealed various items of personal
property, including a 2003 Ford Expedition and a 1999 Lexus automobile. She valued
this personal property in the total amount of $44,550, and disclosed that all of this
property was owned solely by her. Id. (Schedule B and Summary).
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By virtue of section 522(b)(1), individual debtors can elect between the federal2
exemptions found in section 522(d) and state law exemptions, unless state law precludes an
election of the federal exemptions. Pennsylvania has not opted out of the federal exemptions.
See Kaplan v. First Options of Chicago, Inc., 189 B.R. 882, 888 n.6 (E.D. Pa. 1995).
Accordingly, debtors in this district may choose between state and federal bankruptcy
exemptions.
The debtor actually scheduled the value of the claimed exemption of her real3
property as $0.00, possibly based upon her assertion that the liens against the realty exceeded its
value.
3
On Schedule C, the debtor elected the federal bankruptcy law exemptions
found in 11 U.S.C. § 522(d). 	Thereafter, she claimed that all of her property, including2
the Wynnewood real property, were exempt by virtue of 11 U.S.C. § 522(d)(1)-(d)(5). 3
Ex. T-1 (Schedule C). On Schedule F, the debtor listed all her creditors holding
unsecured claims. On that schedule, she identified 10 creditors that held claims jointly
against herself and her husband. Id. Among those creditors was “PIDC”, which was
scheduled as holding two joint unsecured claims totaling $2,872,168.15. Id.
Shortly thereafter, on September 15, 2004, the debtor filed an amended
Schedule F (the list of unsecured creditors) as well as an amended Statement of Financial
Affairs. Ex. T-2. These amendments did not alter the number of joint unsecured
creditors, nor did they modify the amounts scheduled as owed to PIDC on two claims. Id.
The chapter 7 trustee then presided over a meeting of creditors, pursuant to
section 341, on October 5, 2004. The docket entries reflect that he filed on that same date
a report stating that this meeting had not been concluded, and that he was investigating
the possibility that the debtor had an interest in non-exempt property. See Ex. T-11
(docket Entry #18).
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The debtor still estimated the value of the claimed exemption of her realty as4
$0.00.
The trustee’s objection had referenced the attachment of a document estimating5
the value of the real property at $900,000, but no such attachment was included with this
pleading.
4
On November 10, 2004, the debtor filed her second set of amendments to
the bankruptcy schedules. Ex. T-3. Among other matters, these amendments increased
the disclosed value of her jointly owned real property to $552,000 (schedule A ), added4
three personal property items relating to stock ownership on schedule B (without
changing her assertion that all personal property listed was owned solely by her), and
claimed these stock ownership interests exempt by virtue of section 522(d)(5) on an
amended schedule C. Ex. T-3.
On November 24, 2004, the trustee concluded the meeting of creditors, and
again reported that he was investigating the existence of non-exempt property. Ex. T-11
(docket entry # 41). To assist in that investigation, and to aid in the recovery and
disposition of all non-exempt property, on December 6, 2004, the trustee filed an
application to engage counsel. Ex. T-11 (docket entry # 44). That application (as later
modified) was approved on December 16, 2004. Ex. T-11 (docket entry # 52).
On December 27, 2004, the trustee filed a motion to compel the debtor to
provide access to her real property. On December 29, 2004, the trustee also filed an
objection to the debtor’s amended claim of exemptions as scheduled on November 10th.
The trustee’s objection, in part, stated that the debtor’s residence should be valued at
more than the $552,000 that the debtor reported, alleged that there was substantial equity5
in the property, and asserted that, under section 522(d)(1), the debtor was limited to an
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$18,450 homestead exemption in this equity. The debtor did not oppose the trustee’s
exemption objection in any fashion. On February 2, 2005, I sustained the trustee’s
objection and entered an order: limiting the debtor’s real property exemption under
section 522(d)(1) to an amount not to exceed $18,450; striking a personal property
exemption under section 522(d)(2) as duplicative; and restricting the debtor’s 522(d)(5)
exemption in outstanding receivables to $975 plus any unused homestead exemption. Ex.
T-7. I also issued an order that day granting the trustee’s appraiser access to the debtor’s
real property. Ex. T-11 (docket entry #84). The debtor did not file a notice of appeal
from either of these orders.
On February 15, 2005, the trustee filed an application to engage a real estate
appraiser. Almost immediately thereafter, on February 17, 2005, the debtor filed her third
group of amended schedules, this time involving schedules B, C, I and J, as well as her
Statement of Financial Affairs. Ex. T-4. 	These amendments, inter alia, added to her list
of personal property two previously undisclosed bank accounts (valued at a total of
$1,000), which accounts were then claimed as exempt under section 522(d)(5). Id. The
debtor continued to elect the federal bankruptcy exemptions on her newly amended
schedule C. Id.
On March 17, 2005, I entered an order permitting the trustee to engage a
real estate appraisal firm named Pamela Lazar Appraisals. Ex. T-11 (docket entry #104).
On April 4, 2005, Mr. St. Hill, the debtor’s husband, was granted relief from the
automatic stay to prosecute a child custody action against the debtor in state court. Ex. T-
11 (docket entry #118). On April 11, 2005, the trustee moved to engage a real estate
broker, which request was granted on April 15, 2005. Ex. T-11 (docket entries ##122,
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For reasons not explained, the trustee withdrew his motion to compel access on6
May 6, 2005, and on that same date filed another motion requesting the same relief. The debtor
filed her response to this second motion on May 10, 2005.
This notice then triggered notice from the clerk to creditors, informing them that7
a 90 day bar date has just been set for the filing of proofs of claim. See Fed. R. Bankr. P.
3002(c)(5); Ex. T-11 (docket entry #136). Prior to such notice, creditors had been informed that
they need not file any proofs of claim, based upon the debtor’s estimate that no dividend to
creditors would be made. See Fed. R. Bankr. P. 2002(e); Ex. T-11 (docket entry #13).
6
125). The trustee also filed another motion, on April 22, 2005, to require the debtor to
provide access to her real property. Ex. T-11 (docket entry #128). The debtor filed an
answer in opposition to this motion on May 5, 2005. 	On April 25, 2005, the trustee filed6
a notice with the clerk of court that there were non-exempt assets available for
distribution to creditors. Ex. T-11 (docket entry #131). 7
On May 27, 2005, the debtor filed her fourth set of amendments to her
bankruptcy schedules. Ex. T-6. On amended schedule B, the debtor now asserted that
most of her personal property was jointly owned with her husband, rather than being
owned solely by herself. Id. In addition, on her newly amended schedule of exemptions,
schedule C, the debtor attempted to change her exemption election from federal
bankruptcy law, i.e., section 522(d), to non-bankruptcy law, i.e., state law. In other
words, by this amendment the debtor was asserting for the first time that her real and
personal property were exempt under Pennsylvania law. Ex. T-6. Citing for most items
“Pa. Entireties Law,” the debtor scheduled as exempt her interest in the realty, which she
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The debtor contends that the new realty valuation of $600,000 was an “erroneous8
transposition of the amount set forth on Schedule ‘A,’ i.e., $552,000, onto a Summary of
Schedules.” 	See Debtor’s Memorandum, at 2. Although I do not sustain the trustee’s argument
that this modified valuation, later reduced, constitutes bad faith, I confess that I do not find the
debtor’s explanation understandable.
7
now valued at $600,000, plus numerous items of personalty. Other personal property8
was claimed as exempt pursuant to 42 Pa. C.S.A. §§ 8123 or 8124. Id.
On June 23, 2005, the trustee filed his instant objections to the debtor’s
May 2005 amended exemptions. Realizing perhaps that simply amending her exemption
election to Pennsylvania law might accomplish little by itself (for reasons to be discussed
below), debtor’s counsel, on June 27, 2005, for the fifth time submitted amended
schedules. This time, the debtor filed an amendment to schedule F—the disclosure of all
unsecured creditors—so that she now asserted that all of her unsecured creditors (except
the Internal Revenue Service) purportedly held claims against only the debtor, rather than
some holding joint claims against the debtor and her husband. Ex. T-5. Thus, the debtor
for the first time maintained, inter alia, that the claims of PIDC were solely against her.
While the debtor may now contend that PIDC holds no claim against her
husband, the claims register reflects that PIDC Local Development Corporation filed an
unsecured proof of claim in the amount of $3,414,474.70, based upon a loan
guarantee/suretyship. Ex. T-8. Attached to this claim is a copy of the guarantee or
suretyship agreement signed by the debtor and her husband. Id.
In addition to this proof of claim, National Penn Bank filed a secured proof
of claim in the amount of $631,485.30, with the collateral being the Wynnewood real
property located on Indian Creek Road. Ex. T-9. The court claims register also reveals
total unsecured proofs of claims in the amount of $3,548,589.97. Ex. T-10.
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8
Finally, for purposes of this chronology, I note that a hearing was held on
the trustee’s motion to compel access to the debtor’s real property along with the debtor’s
opposition thereto. After review of the parties’ submissions, I granted the trustee’s
motion on the terms specified in my memorandum and order dated June 13, 2005.
Thereafter, the trustee filed an adversary proceeding seeking permission to sell the
debtor’s and her non-debtor husband’s interest in the Wynnewood realty, pursuant to 11
U.S.C. § 363(h). That proceeding is still pending.
B.
While the trustee presented only documentary evidence in support of his
objections, the debtor offered testimony from herself and her husband.
This testimony revealed that the debtor is a licensed attorney, but does not
practice bankruptcy law. N.T. at 10. She stated that she paid little or no attention to the
classification of her debts as individual or joint when initially completing her bankruptcy
schedules. N.T. at 11. Now that she has concentrated on this issue, she has concluded
that only her mortgage and tax obligations are joint debts. N.T. at 11-12.
The debtor also testified that her scheduled valuation of the Wynnewood
realty, which residence is currently occupied by herself, her husband, and her three
children, was based upon a document from the county assessor’s office. N.T. at 13.
(That document was not offered in evidence, nor shown to the witness.)
The debtor is a shareholder of a corporation called St. Hill and Associates,
P.C., which entity was a collection agency she ran with her husband. N.T. at 29. Her
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husband was corporate CEO. N.T. at 18, 28. She testified that she is the sole guarantor
of the PIDC loan obligation, N.T. at 21-22; however, both debtor and her husband
concede that he signed the loan guarantee or suretyship agreement. Ex. T-8; N.T. at 23-
24, 26. Mr. St. Hill stated that although he signed this loan document, he believes he did
so only in a capacity as a witness. N.T. at 26-27. (Beside the signatures of the debtor and
her husband, there appear to be signatures of two witnesses on Ex. T-8.) PIDC seems not
to agree with the debtor’s assessment of her husband’s liability, because Mr. St. Hill has
been named by that creditor as a defendant in a pending state court lawsuit. N.T. at 30-
31. Mr. St. Hill stated that he is hoping that PIDC will cease its lawsuit against him and
is negotiating for that result. N.T. at 32.
Finally, when the debtor commenced her bankruptcy case, she and her
husband were estranged and the latter did not reside at the Wynnewood home. N.T. at 8-
9. A few months ago, they apparently reconciled, N.T. at 9, 24, and he now opposes the
trustee’s sale of the realty. N.T. at 25.
II.
Fed. R. Bankr. P. 4003(b) requires that any objection to an amended
exemption claim be filed within 30 days. The failure to timely object to these amended
exemptions may result in their being allowed, regardless of their merit. See Taylor v.
Freeland & Kronz, 503 U.S. 638 (1992). Therefore, I understand the trustee’s perceived
need to object to the debtor’s May 2005 amended exemptions, and he has done so within
the requisite time limit. Nonetheless, the practical significance of either allowing or
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disallowing the debtor’s newly claimed state law exemptions cannot presently be
answered.
In all likelihood, the most valuable asset the debtor owns, and an asset that
the trustee apparently believes will afford a meaningful distribution to creditors, is her
real property in Wynnewood. The debtor opposes the trustee’s sale of the realty, and her
recently amended bankruptcy schedules are obviously designed to support this opposition.
But other than a conclusory statement by the debtor that the realty is worth about
$550,000, and an unproven assertion by the trustee that an appraiser has valued the realty
at $1.5 million, Trustee’s Memorandum, at 11 (no appraisal testimony or report was
offered), there is no persuasive evidence by which one can value this property at present.
North Penn Bank, the mortgagee, has filed a claim stating that it is owed
more than $630,000. Unless the value of the realty, after costs of sale, exceeds the
amount due this mortgagee and any other creditor with a valid lien against this collateral,
the trustee will be unable to sell the realty. See, e.g., In re K.C. Machine & Tool Co., 816
F.2d 238, 246 (6th Cir. 1987) (trustee should abandon property if the liens exceed the
value of the collateral). Therefore, the practical effect of this objection to the
administration of this chapter 7 bankruptcy case depends upon the value of the realty.
The trustee hopes to demonstrate its considerable worth after marketing the property.
There is a second reason that renders the importance of this dispute
questionable. If PIDC holds an allowed unsecured claim for $3.4 million jointly against
the debtor and her husband, as it has asserted in its filed proof of claim, then the debtor’s
attempted election change from the federal homestead exemption under section 522(d)(1)
to Pennsylvania’s entireties exemption is largely ineffective.
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Under Pennsylvania law, entireties property is not owned by either spouse;
rather, it is owned by the marital unit. See, e.g., Lindenfelser v. Lindenfelser, 396 Pa.
530, 534 (1959); In re Estate of Bullotta, 798 A.2d 771, 774 (Pa. Super. 2002). Thus, in
Pennsylvania, a creditor of only one spouse cannot execute on property owned by both
spouses as tenants by the entireties, because the marital unit itself is not the obligor. See,
e.g., Napotnik v. Equibank and Parkvale Sav. Ass’n, 679 F.2d 316, 319 (3d Cir. 1982);
Klebach v. Mellon Bank, N.A., 388 Pa. Super. 203 (1989); Reliance Ins. Co. v.
Schoolfield Constr. Co., 14 Pa. D. & C. 4th 490, 494 (Pa. Com. Pl. 1992).
Under section 522(b)(2)(B), Congress permits a debtor to claim as exempt
in her bankruptcy case all entireties property owned by the debtor and non-debtor spouse
to the extent that property is exempt under applicable nonbankruptcy law. In
Pennsylvania, this results in tenancy by the entireties property being exempt from the
claims of creditors who hold claims only against one spouse. Napotnik v. Equibank and
Parkvale Sav. Ass’n; see also In re Cordova, 73 F.3d 38, 40 (4th Cir. 1996). This
entireties exemption, however, is not allowed against a creditor with a claim against both
spouses. Napotnik v. Equibank and Parkvale Sav. Ass’n; see Sumy v. Schlossberg, 777
F.2d 921, 928 (4th Cir. 1985); In re Pepenella,103 B.R. 299, 302 (M.D. Fla. 1988).
Accordingly, if the debtor’s Wynnewood residence has a net worth in
excess of its liens, and if PIDC holds a valid unsecured joint claim, the trustee may be
entitled to sell the realty, whether or not the debtor’s amended exemption claim is
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The limit on the trustee’s ability to sell would stem from section 363(h). A9
bankruptcy trustee can only sell property owned by a debtor and a non-debtor in certain
circumstances defined by that subsection. The trustee has filed a complaint for relief under
section 363(h) and Mr. St. Hill has opposed it. That proceeding is presently pending, and its
outcome is unaffected by whether the debtor can now elect the state exemptions. See
Schlossberg v. Barney, 380 F.3d 174, 182 (4th Cir. 2004) (“11 U.S.C. § 363(h) . . . permits a
trustee to sell entireties property for the benefit of joint creditors of the debtor and her spouse . . .
under certain circumstances.).
12
allowed. 	In those circumstances, the import of the trustee’s current challenge would be9
felt only by the non-joint creditors of the debtor. These individual creditors could only
receive a distribution from the sale of the debtor’s realty if the trustee’s present objection
were sustained. However, the extent of the distribution to such individual creditors, and
thus the benefit they would receive from this dispute, would be affected by the size of
PIDC’s allowed unsecured claim.
I appreciate that the debtor and her husband now contend that PIDC holds
only an individual claim against the debtor. While that issue is not presently before me,
my review of the guarantee/suretyship agreement, Ex. T-8, does support the trustee’s
contention that it was signed by Mr. St. Hill as a guarantor/surety, and not as a witness.
Therefore, it is likely that PIDC holds a joint claim.
For the reasons just expressed, I have doubts about the practical
significance of the instant contested matter before me. Nonetheless, I cannot conclude
that the outcome is clearly irrelevant to the administration of this case. And as both
parties have had the opportunity to fully present and argue their respective positions, I
now turn to the trustee’s specific objections to the debtor’s amended exemption claim,
recognizing that future rulings or events may determine its import.
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III.
As I noted at the outset of this memorandum, the trustee raises five grounds
for denying the debtor her current effort to elect Pennsylvania exemption laws to protect
her interest in real and personal property from liquidation by the trustee. First, the trustee
asserts that the debtor cannot amend her exemption schedule “at this late date because the
exemptions have been litigated and the issue regarding the exemptions is res judicata.”
Motion, ¶ 11. Similarly, the trustee also asserts that allowing the debtor to amend her
exemptions at this time is prejudicial to the trustee, who has proceeded to administer the
assets based upon the debtor’s election of the federal exemptions. Motion, ¶ 12. Third,
the trustee argues that the debtor amended many of her schedules in bad faith; she has
grossly undervalued her real property; and she is not paying the mortgage on her property,
evidencing a lack of intent to preserve the value of her property, but rather just buying
time to reside on the property at her creditors’ expense. The trustee maintains that such
conduct warrants a denial of the amended exemptions.
The trustee also contends that the debtor is not entitled to exempt the
property under the Pennsylvania entireties law to the extent that her debts are held jointly
with her husband, the co-owner of entireties property. And, finally, the trustee contends
that certain real property is not exempt under 42 Pa.C.S.A. §§ 8123 and 8124, as claimed
by the debtor.
For purposes of this contested matter I need only discuss three of the
trustee’s contentions.
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A.
Although Fed. R. Bankr. P. 1009(a) affords a debtor the opportunity to
amend her bankruptcy schedules, including her schedule of exemptions, at any time prior
to the closing of the case, see, e.g., Matter of Yonikus, 996 F.2d 866, 871-72 (7th Cir.
1993), it is well understood that this right to amend has certain equitable constraints. See
In re Kaelin, 308 F.3d 885, 889 (B.A.P. 8th Cir. 2002); Matter of Yonikus, 996 F.2d at
872; In re Doan, 672 F.2d 831, 833 (11th Cir. 1982).
Given the tremendous number of bankruptcy cases filed, careful
investigation of a debtor’s financial affairs by creditors, the bankruptcy trustee, or the
court cannot be viewed as a routine procedure. For that reason, debtors must fully and
honestly answer the questions posed to them by the official forms—particularly, the
statement of financial affairs and the bankruptcy schedules. See In re Tully, 818 F.2d
106, 110 (1st Cir. 1987) (“The [bankruptcy] statutes are designed to insure that complete,
truthful, and reliable information is put forward at the outset of the proceedings, so that
decisions can be made by the parties in interest based on fact rather than fiction. . . .
Neither the trustee nor the creditors should be required to engage in a laborious
tug-of-war to drag the simple truth into the glare of daylight.”); Payne v. Wood, 775 F.2d
202, 205 (7th Cir. 1985) (“The operation of the bankruptcy system depends on honest
reporting.”). Therefore, in a voluntary chapter 7 bankruptcy filing such as this one, the
debtor—who knows or should know all relevant information about her financial
affairs—must bear primary responsibility for accurate and complete bankruptcy schedules
and financial statement.
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The trustee might have also noted in this regard that the debtor has changed her10
position as to the ownership of much of her personal property. His expressed concern, however,
about the debtor’s lack of mortgage payments fails to acknowledge that few if any chapter 7
debtors will tender mortgage payments when a bankruptcy trustee is trying to sell their residence.
And if the realty is over-encumbered, the mortgagee can protect its interest by seeking relief
under section 362(d).
15
Accordingly, when a debtor willfully or recklessly fails to accurately
disclose her financial affairs to the bankruptcy trustee and her creditors, she may, in
certain instances, lose her ability to claim property as exempt. Typically, the loss of that
right comes from a willful or reckless failure to disclose the existence of an asset. See,
e.g., Matter of Yonikus, 996 F.2d at 868; In re Grogan, 300 B.R. 804, 808 (Bankr. D.
Utah 2003). The ability to claim an exemption may also be lost by the willful or reckless
valuation of an asset. Grossly undervaluing an asset may preclude the debtor from
amending her exemption schedules. 	See, e.g., In re Hannigan, 409 F.3d 480 (1st Cir.
2005); In re Bauer, 298 B.R. 353, 357 (B.A.P. 8th Cir. 2003). Thus, were a debtor to
swear to the trustee on her schedules that a $1.5 million property was worth only
$550,000, this may well justify denial of an amendment to exempt that property. Cf. In re
Colvin, 288 B.R. 477, 482 (Bankr. E.D. Mich. 2003) (the size of the undisclosed asset
may itself be evidence of intentional or reckless conduct).
In this instance, the trustee complains that the debtor has grossly
undervalued her home and recklessly classified certain of her creditors as holding first
joint and then individual claims. 	Insofar as the value of the Wynnewood property is10
concerned, as mentioned earlier, I cannot reach any conclusion on the basis of the
evidentiary record before me.
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I infer the existence of this litigation from Mr. St. Hill’s motion to terminate the11
bankruptcy stay to resolve a pending state court custody dispute.
16
I find it a closer question regarding the debtor’s recent attempted
modification of the classification of her joint obligations to individual ones, and the
change of ownership of her personal property from individual to joint. As an attorney,
and as one who was involved in state family court litigation with her then estranged
husband, 	one might expect that the facts surrounding outstanding liabilities and property11
ownership would have been well known to her. While carelessness or oversight by a
debtor may not constitute bad faith, see In re Hannigan, 409 F.3d at 483, reckless conduct
may. See In re Rolland, 317 B.R. 402, 415-16 (Bankr. C.D. Cal. 2004) (debtors acting
with reckless disregard for accuracy of information contained in their schedules, failing to
disclose substantial value in their home, have been denied right to amend exemptions for
bad faith) (citing In re Bauer).
Were this the only reason offered by the trustee to deny the debtor’s
proposed amendment, I may not be persuaded. See generally In re Kaelin. However,
because the issues of res judicata and prejudice are clearly demonstrated, I shall focus
upon them.
B.
Res judicata, or claim preclusion “applies to claims that ‘were or could have
been raised’ in a prior action involving the ‘parties or their privies’ when the prior action
had been resolved by ‘a final judgment on the merits.’” In re Graham, 973 F.2d 1089,
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1093 (3d Cir. 1992) (quoting Allen v. McCurry, 449 U.S. 90, 94 (1980)); see also
Lubrizol Corp. v. Exxon Corp., 929 F.2d 960, 963 (3d Cir. 1991) (“Federal law of claim
preclusion requires a defendant to demonstrate that there has been (1) a final judgment on
the merits in a prior suit involving (2) the same parties or their privies and (3) a
subsequent suit based on the same cause of action.”). “Claim preclusion thus bars
relitigation of any claim that could have been raised in the prior action even if it was not
so raised.” In re Graham, 973 F.2d at 1093.
Although application of this preclusion principle in bankruptcy cases most
often involves prepetition state court judgments, see generally In re Genesys Data
Technologies, Inc., 245 F.3d 312 (4th Cir. 2001), it also applies to all bankruptcy court
rulings that are final orders. See In re Fulton Bellows & Components, Inc., 301 B.R. 723
(Bankr. E.D. Tenn. 2003) (denial of debtor’s motion to reject union contract, pursuant to
11 U.S.C. § 1113, precluded a second motion for the same relief, even though new
proposals had been offered to the union). For example, an order granting debtor’s
counsel’s application for an allowance of fees may preclude a later malpractice claim
against that attorney, if the claim is based upon the quality of the bankruptcy
representation. See, e.g., Grausz v. Englander, 321 F.3d 467 (4th Cir. 2003); In re
Iannochino, 242 F.3d 36 (1st Cir. 2001).
In this contested matter, the chapter 7 trustee is correct that the preclusive
effect of res judicata has been deemed relevant to disputes involving objections to a
debtor’s exemption claims. See, e.g., In re Wolfberg, 255 B.R. 879 (B.A.P. 9th Cir.
2000); In re Magallanes, 96 B.R. 253 (B.A.P. 9th Cir. 1988); In re Daniels, 270 B.R. 417
(Bankr. E.D. Mich. 2001). 	This follows because an order either sustaining or overruling
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Rule 7054(a) incorporates Fed. R. Civ. P. 54(a). The latter defines a judgment12
as including “any order from which an appeal lies.” And Fed. R. Bankr. P. 9014(c) incorporates
Rule 7054 into contested matters, such as objections to exemption claims. See In re Daniels, 270
B.R. 417, 421 (Bankr. E.D. Mich. 2001); In re Bandkau, 187 B.R. 373, 374 (Bankr. M.D. Fla.
1995).
18
an objection to an exemption claim is subject to immediate appeal and thus constitutes a
final judgment, as defined by Fed. R. Bankr. P. 7054(a). 	See, e.g., Kollar v. Miller, 17612
F.3d 175 (3d Cir. 1999) (appeal from order sustaining the trustee’s objection to the
debtor’s exemption); In re Price, 2004 WL 2550590 (W.D. Tex. Oct. 27, 2004) (appeal
from a denial of an objection to an exemption); In re Ladd, 319 B.R. 599, 603 (B.A.P. 8th
Cir. 2005) (“The order resolving the objection to the exemption is a final judgment.”); see
also 9 Collier on Bankruptcy, ¶ 4003.03[2], at 4003-13 (15th ed. rev. 2005) (“An order
denying a claim of exemption is a final, appealable order.”).
Recently, claim preclusion was utilized by the Bankruptcy Appellate Panel
for the Eighth Circuit to bar an attempt by debtors to amend their exemption election from
federal bankruptcy law to state law. In re Ladd. In so doing, the appellate court observed
that while Fed. R. Bankr. P. 1009(a) permits a debtor to file amended schedules,
including amendments of the exemption schedule, this procedural rule does not mandate
that such amended exemptions be allowed:
Rule 1009 does not prevent the Trustee from objecting to a
newly asserted exemption nor does it prevent the bankruptcy
court from denying a new theory for exempting property on
the grounds of res judicata where the court has already ruled
on the exemptibility of such property.
Id., at 603.
In other words, where a debtor has claimed certain property as exempt, the
bankruptcy trustee has objected to that exemption claim, and there has been a final, non-
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The debtor contends that a debtor is always free to amend her exemptions unless13
the order sustaining the objection expressly states otherwise. Debtor’s Memorandum, at 2. She
cites no authority for this contention and I find it unpersuasive. Unless the order resolving the
exemption dispute grants leave to amend, claim preclusion will result.
19
appealed ruling sustaining the trustee’s objection, all of the elements of claim preclusion
have been established, and so the debtor cannot later amend her exemptions to claim that
same property as exempt under a different statute:
Once an objection to the exemption of an asset has been filed,
the debtor must raise all theories for the exemption of that
asset prior to the resolution of the exemption issue.
Otherwise, res judicata prevents a later attempt to exempt the
asset on a different theory.
Id., at 603. 13
Accordingly, in Ladd, where a bankruptcy trustee had successfully objected
to the debtors’ claim of a federal homestead exemption based upon section 522(d)(1), the
debtor was not permitted more than one year later to file an amended exemption schedule
C seeking to claim that same real property as exempt under state law.
The result in Ladd was presaged by two decisions from the Bankruptcy
Court for the District of Minnesota. In In re Walls, 249 B.R. 506 (Bankr. D. Minn. 2000),
a debtor claimed as exempt his interest in an IRA account under federal bankruptcy law,
and the trustee objected. After the trustee’s objection was sustained, the debtor was
barred from amending his exemption to claim that IRA account as exempt under state
law. Similarly, in In re Marshall, 224 B.R. 399 (Bankr. D. Minn. 1998), a debtor was
precluded from amending his exemption claim involving a pending tort action to utilize
federal bankruptcy law after the trustee’s successful objection to the debtor’s earlier
exemption claim of that same asset under state law.
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20
As so limited, the application of res judicata will not preclude a debtor from
filing amended exemptions under Rule 1009(a), unless a final order denying an
exemption claim for the same asset has previously been entered. See generally In re
Magallanes. As a result, whenever a trustee has filed an exemption objection, the debtor
is obligated to analyze this objection and make any necessary amendments prior to any
ruling; not afterward.
As one court has observed, the obligation of a debtor to carefully review
and modify her exemption claims when challenged by the bankruptcy trustee, or be
precluded from later amendment, mirrors the trustee’s duty to analyze promptly the
debtor’s exemption claims or be barred from any later challenge, as held in Taylor v.
Freeland & Kronz. Both requirements have a salutary effect upon the administration of
bankruptcy cases:
They promote the expeditious resolution of exemption claims
and the efficient administration of the bankruptcy estate. The
inverse implication of Taylor’s holding that the trustee is
precluded from asserting a valid objection to a debtor’s
claimed objection, where he has failed to object within the
time limits established by the procedural rules, is that the
debtor may not assert a valid claim of exemption, where he
has failed to appropriately defend that claim when attacked by
the trustee’s objection.
In re Daniels, 270 B.R. at 424.
In this dispute, the record is clear that the trustee objected to the debtor’s
exemption claims in December 2004 and his objection as to the debtor’s realty (and other
property) was sustained by a final order dated February 2, 2005. The debtor did not file a
notice of appeal from this adjudication, nor did she seek reconsideration under Fed. R.
Bankr. P. 9023, nor relief from that order by virtue of Fed. R. Bankr. P. 9024.
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While a debtor in Pennsylvania may elect either the federal bankruptcy14
exemptions or the state exemptions by virtue of section 522(b), she “cannot elect the most
favorable exemptions in each scheme: [s]he must weigh the advantages of each scheme and then
choose one or the other.” Matter of Dyke, 943 F.2d 1435, 1438 (5th Cir. 1991). (Indeed, in joint
bankruptcy cases, both spouses must make the same election. See 4 Collier on Bankruptcy, ¶
522.04[6] (15th ed. rev. 2005)). In other words, a debtor cannot claim some property as exempt
under state law and other property as exempt under federal bankruptcy law. Section 522(b)
requires her to choose only one exemption scheme for all property.
The February 2005 order addressed the debtor’s claim of federal bankruptcy
exemptions, and she is now limited to that choice. Therefore, I need not consider whether the
debtor’s May 2005 amended state law exemption claims involve property not previously claimed
as exempt.
In addition, since the trustee never objected to the debtor’s February 17, 2005
amendment to her exemptions, which amendment still elected the federal bankruptcy
exemptions, I need not address whether any aspect of that earlier amendment was precluded.
See E.E.O.C. v. U.S. Steel Corp., 921 F.2d 489, 491 n.2 (3d Cir. 1990) (res judicata defense may
be waived).
21
Accordingly, her amended schedule C, filed more than three months later, to exempt the
same property but utilizing a different legal theory is now barred. 14
C.
The trustee also maintains that even if the debtor were not prohibited from
amending her exemption claims by the preclusive effect of the February 2005 order, her
current attempt to do so must be barred as prejudicial. I shall consider this alternative
argument. See In re Daniels (finding both res judicata and laches applicable as a bar
against the debtors’ attempt to amend their exemption claims).
As I previously observed in In re Cudeyro, 213 B.R. 910 (Bankr. E.D. Pa.
1997), it is well settled that a debtor’s right to amend her exemptions will be prohibited
upon a showing of bad faith or prejudice. See, e.g., In re Hannigan, 409 F.3d at 481 (“[A]
bankruptcy court has discretion to deny the amendment of exemptions where the
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22
amendment would prejudice creditors or where the debtor has acted in bad faith or
concealed assets.”); In re Kaelin, 308 F.3d at 888; Payne v. Wood, 775 F.2d at 205; In re
Doan, 672 F.2d at 833.
Since amendments to schedules are generally permitted as a matter of
course, it is incumbent upon the party objecting to the proffered amendment to
demonstrate that prejudice or bad faith warrant denial of the right to amend a debtor’s
exemption claims. Tignor v. Parkinson, 729 F.2d 977, 979 (4th Cir. 1984); see In re
Kobaly, 142 B.R. 743, 748 (Bankr. W.D. Pa. 1992). One indicia of prejudice appears to
be the existence vel non of reliance made upon the debtor’s exemption election prior to
the proffered amendment.
Thus, prejudice may arise, for example, where a trustee has engaged in
efforts to sell certain property, which efforts he or she might have foregone had the debtor
initially claimed such property as exempt. That is, in those instances the trustee may be
understood to have acted in reliance upon the debtor’s initial schedules, and having taken
such actions may be prejudiced if the amendments were allowed. See, e.g., Matter of
Eldridge, 15 B.R. 594, 595 (Bankr. S.D.N.Y. 1981) (debtors attempted to change
exemptions after trustee had contracted to sell the subject property); In re Santoro, 3 B.R.
at 212 (debtors attempted to claim exemptions after the trustee had sold subject property);
see also Hardage v. Herring Nat. Bank, 837 F.2d 1319, 1324 (5th Cir. 1988) (prejudice
may occur if creditors have detrimentally relied upon the debtor’s original exemption
claim).
Another instance of prejudice may arise when debtors attempt to amend
their exemptions “after they have sought relief relating to the originally claimed
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23
exemption.” In re Gonzalez, 149 B.R. 9, 11 (Bankr. D. Mass. 1993) (debtors denied
increased homestead exemption amendment after lien avoidance litigation).
Prejudice has also been found to accrue where a debtor exhibits “inordinate delay” in
amending his exemption schedules. In re Jelinek, 97 B.R. 429, 432 (Bankr. N.D. Ill.
1989) (discussing In re Patel, 43 B.R. 500 (N.D. Ill. 1984)).
As stated by one court, prejudice may be found to attend such delay:
To allow a debtor to amend his claim of exemptions at this
late date would clearly be inequitable and would hinder the
diligent administration of the bankruptcy estate by the
Trustee. Because to allow the Debtor to amend his claim of
exemptions at this late date would have an adverse impact on
creditors whose rights have attached to the assets of the
bankruptcy estate and because a late amendment to the
Debtor’s claim of exemptions would hinder the diligent
administration of the bankruptcy estate by the Trustee, the
amendment is not seasonable and, therefore, not allowed.
In re Snow, 21 B.R. 598, 600 (Bankr. E.D. Cal. 1982).
Phrased somewhat differently, “[a]t some point, the debtor’s election of
either the state or federal exemptions must become irrevocable so as to avoid any unfair
prejudice to the trustee and unsecured creditors.” In re Brewer, 17 B.R. 186, 188 (Bankr.
M.D. Tenn.), aff’d, 22 B.R. 983 (M.D. Tenn. 1982); see In re Duggan, 4 B.R. 709, 711
(Bankr. N.D. Tex. 1980) (“[a]t some point the right to switch from one system to another
must end and there be some finality to a choice); In re Korff, 14 B.R. 189, 193 (Bankr.
E.D. Mich. 1981); see also In re Reed, 1995 WL 227389 (9th Cir. 1995) (debtor might
have been entitled to amend exemptions, but lost that entitlement by “plung[ing] the
bankruptcy estate into lengthy litigation,” and by not requesting his amendment in a
seasonable manner).
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24
In this contested matter, the trustee has demonstrated that prejudice would
arise by permitting the debtor now to switch her exemption election from federal to state
law.
The record is clear that the trustee has already undertaken a number of steps
in order to sell the debtor’s Wynnewood realty in reliance upon her limited homestead
exemption under section 522(d)(1). He has engaged counsel, as well as a real estate
broker and an appraiser. He has successfully litigated with the debtor over the extent of
her federal homestead exemption, and twice filed pleadings to compel access to her real
property, which access was granted. He has also commenced litigation to sell the non-
debtor’s interest in that property.
Furthermore, the trustee had placed the debtor on notice that he did not
accept her assertion that her real estate was fully exempt, beginning as early as the first
meeting of creditors in early October 2005. Certainly, the trustee’s position regarding the
existence of non-exempt equity in the realty should have been clear to the debtor no later
than December 2004, when he asserted that such equity justified his opposition to her
federal homestead exemption, and warranted reasonable access to that real property. Yet
the debtor waited about six months to file an amendment changing her exemptions
election to Pennsylvania law, during which time the trustee has expended considerable
effort in seeking a sale.
Apparently, the debtor believes that the trustee has greatly overvalued her
realty. And if her opinion of value proves correct, the property will be overencumbered
and the trustee ultimately may not receive authority to sell under section 363. But if the
trustee’s opinion of value is correct, in light of the trustee’s actions and the debtor’s
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25
delay, it would be inequitable to permit the debtor to change her mind and now utilize
state law to exempt her property. See In re Szymanski, 189 B.R. 5 (N.D. Ill. 1995); In re
Jelinek.
Accordingly, for the aforementioned reasons, the trustee’s objection to the
debtor’s amended exemption schedule, filed on May 27, 2005, will be sustained. An
appropriate order shall be entered.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 7
JENNIFER ST. HILL 	:
Debtor 	: 	Bankruptcy No. 04-30919F
.................................................
ORDER
.................................................
AND NOW, this 2nd day of September 2005, for the reasons stated in the
accompanying memorandum, it is hereby ordered that the trustee’s objections to the
debtor’s amended exemptions, filed with this court on or about May 27, 2005, are
sustained and those exemptions are disallowed.
____________________
BRUCE FOX
United States Bankruptcy Judge
copies to:
Ms. Jennifer St. Hill
217 West Indian Creek Road
Wynnewood, PA 19096
Gretchen M. Santamour, Esquire
Wolf, Block, Schorr and Solis-Cohen, LLP
1650 Arch Street, 22nd Floor
Philadelphia, PA 19103
David A. Scholl, Esquire
6 St. Albans Avenue
Newtown Square, PA 19073
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