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May 30, 2008

1st Circuit Rules on Exempting a Litigation Asset

Barroso-Herrans v. Lugo-Mender (In re Barroso-Herrans) 524 F.3d 341 (1st Cir., May, 2008)

Issue: When the chapter 7 debtor lists, as an asset, a lawsuit and values it at $4,000 and claims the $4,000 exempt, is the entire asset exempt or only $4,000?

Holding: Only $4,000 is exempt.

Appeal from District Court

At the time of the petition, the debtor had a lawsuit pending for damages.  The damages included accounts receivable owed to the debtor which was separately listed as an asset with a value of about
$170,000. The debtor valued the lawsuit on his schedule B at $4,000 and claimed the $4,000 exempt. Later, the trustee settled the case for about $100,000, which included resolution of the accounts
receivable.  The debtor claimed all of the funds arguing that he had claimed the asset, the suit, to be exempt in its entirety and that the trustee had not objected to the exemption. The bankruptcy court
held that only $4,000 was exempt. The District Court affirmed.

The 1st Circuit also affirmed. "The threshold question of what has been claimed calls for interpreting the schedules filed by the debtors.  To start, we ask how a reasonable trustee would have understood the filings under the circumstances." "[T]he $4,000 sum appears to be an implausible full valuation for law suits seeking to collect a vastly greater amount-over $4 million-from a government authority for unpaid invoices." "Had [the debtor] listed the value of the suits as `unknown'-as the debtor did in Taylor-or used a nominal sum like $1 as a placeholder, he would have a much stronger argument. `Use of terms like `100% [of the property's value],' `unknown,' `to be determined,' `tba' and `$1.00' are red
flags to trustees and creditors,' 1 Collier on Bankruptcy P. 8.06(1) (c)(ii) (15th ed. rev.2007), and therefore put them on notice that if they do not object, the whole value of the asset-whatever it might
later turn out to be-will be exempt."  "It is enough to resolve this case that the trustee's reading of the exemptions as limited to a $4,000 share of the proceeds from each law suit is objectively reasonable."

Note: I don't think listing the value as "unknown" and then exempting it does you much good in the 9th Circuit.

May 30, 2008 in Other Circuit Briefs | Permalink

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