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In re Lee

United States Court of Appeals, Ninth Circuit

May 7, 2018

In re Adam Lee, Debtor,
v.
Dane S. Field, Chapter 7 Trustee, Defendant-Appellee. Adam Lee, Plaintiff-Appellant,

          Argued and Submitted February 15, 2018 Honolulu, Hawaii

          Appeal from the United States District Court for the District of Hawaii Susan O. Mollway, District Judge, Presiding D.C. No. 1:15-cv-00278-SOM-RLP

          Ted N. Pettit (argued), Case Lombardi & Pettit, Honolulu, Hawaii, for Plaintiff-Appellant.

          Enver W. Painter Jr. (argued), Honolulu, Hawaii; Simon Klevansky and Nicole D. Stucki, Klevansky Piper LLP, Honolulu, Hawaii; for Defendant-Appellee.

          Before: Diarmuid F. O'Scannlain, Richard R. Clifton, and Sandra S. Ikuta, Circuit Judges.

         SUMMARY[*]

         Bankruptcy

         The panel affirmed the district court's affirmance of the bankruptcy court's turnover order compelling a debtor to relinquish possession of two properties.

         Before filing his petition in bankruptcy, the debtor transferred his interests in the two properties into a tenancy-by-the-entirety estate. He subsequently claimed an exemption for those interests under 11 U.S.C. § 522(b)(3). The bankruptcy trustee successfully brought an adversary proceeding to set aside the debtor's transfers of the property interests.

         The debtor argued that the trustee had failed to make a timely objection to his claimed exemptions, and therefore the exemptions were valid notwithstanding the avoidance of the transfer. The panel held that the trustee's adversary complaint contesting the basis for the exemptions qualified as an objection to those exemptions under Federal Rule of Bankruptcy Procedure 4003. The bankruptcy court therefore properly granted the turnover order, thus denying the claimed exemptions.

          OPINION

          IKUTA, CIRCUIT JUDGE

         Before filing a petition in bankruptcy, Adam Lee transferred his interests in two properties into a tenancy-by-the-entirety estate, and subsequently claimed an exemption for those interests under 11 U.S.C. § 522(b)(3). The trustee successfully brought an adversary proceeding to set aside Lee's transfers of those interests. When the trustee sought a turnover order to compel Lee to relinquish possession of the properties, Lee resisted. He argued that the trustee had failed to make a timely objection to the exemptions under Rule 4003 of the Federal Rules of Bankruptcy Procedure, and therefore Lee's exemptions were valid notwithstanding the court's avoidance of the transfer. The bankruptcy court disagreed. It granted the turnover order, thus denying the claimed exemptions. We hold that the trustee's adversary complaint contesting the basis for Lee's exemptions qualified as an objection to those exemptions under Rule 4003. We therefore affirm.

         I

         We begin by setting out the applicable bankruptcy law. The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate, in order to avoid distribution to the estate's creditors. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). A debtor may claim an exemption for "any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest . . . is exempt from process under applicable nonbankruptcy law." 11 U.S.C. § 522(b)(3)(B). As relevant here, Hawaii law allows for the creation of tenancy-by-the-entirety interests. Haw. Rev. Stat. § 509-2. "A tenancy by the entirety is a unique form of ownership in which both spouses are jointly seized of property such that neither spouse can convey an interest alone . . . ." Traders Travel Int'l, Inc. v. Howser, 753 P.2d 244, 246 (Haw. 1988). Hawaii law exempts such interests from creditors of an individual spouse. Sawada v. Endo, 561 P.2d 1291, 1296-97 (Haw. 1977); see also In re Cataldo, 224 B.R. 426, 429 (B.A.P. 9th Cir. 1998).

         The Bankruptcy Code requires the debtor to file a list of claimed exemptions, and provides that "[u]nless a party in interest objects, the property claimed as exempt on such list is exempt." 11 U.S.C. § 522(1). The Supreme Court has made clear that if the time period set out in the applicable bankruptcy rules expires without a qualifying objection, the exemption becomes final regardless "whether or not [the debtor] had a colorable statutory basis for claiming it." Taylor, 503 U.S. at 644; see also Law v. Siegel, 134 S.Ct. 1188, 1196 (2014) ("[A] trustee's failure to make a timely objection prevents him from challenging an exemption."). As a general rule, "exempt property immediately revests in the debtor" upon expiration of the objection period. In re Mwangi, 764 F.3d 1168, 1175 (9th Cir. 2014).

         Rule 4003 of the Federal Rules of Bankruptcy Procedure requires that a party in interest, including a trustee, "file an objection" to a claimed exemption "within 30 days after the meeting of creditors held under [11 U.S.C.] § 341(a) is concluded." Fed.R.Bankr.P. 4003(b)(1).[1] "However, Rule 4003(b), unlike some other bankruptcy rules, proscribes no particular form for objections to exemption claims." In re Spenler, 212 B.R. 625, 629 (B.A.P. 9th Cir. 1997). In addition, Rule 4003 imposes some procedural requirements. For instance, "[a] copy of any objection" must "be delivered or mailed to the trustee, the debtor and the debtor's attorney, and the person filing the list [of exemptions] and that person's attorney." Fed.R.Bankr.P. 4003(b)(4). Moreover, Rule 4003(c) provides that in any hearing under the rule, "the objecting party has the burden of proving ...


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