In its opinion in Gray v. Warfield (In re Gray), 523 B.R. 170 (9th Cir. BAP 2014), the Ninth Circuit BAP held that the U.S. Supreme Court’s decision in Law v. Siegel, 134 S. Ct. 1188 (2014) precludes a bankruptcy court from denying a debtor’s amendment of his claim of exemption on equitable grounds.

Prior to filing bankruptcy, the Grays prepaid three months of rent on their residence, but did not list the prepaid rent as an asset in their schedules.  At the 341 meeting the trustee questioned their payment of $2707 to their landlord, at which time the debtors disclosed they had prepaid several months rent, including rent for the first two months after their bankruptcy filing.  Following the 341 meeting, the debtors amended their schedules to disclose the prepaid rent and also to assert an exemption in it, an exemption allowed by applicable state law.  The trustee filed an objection to the amended exemption, contending the debtors’ failure to list the asset initially constituted equitable grounds for denying the exemption, arguing the debtors acted in bad faith in failing to disclose the asset in the first place.  The bankruptcy court sustained the objection, and the debtors appealed. 

On appeal the BAP analyzed the question in light of the U.S. Supreme Court’s opinion in Law v. Siegel.  The BAP noted two pre-Law v. Siegel opinions which held that a debtor could be denied the right to amend his exemption schedule if the debtor’s failure to initially disclose the asset was done in bad faith:  (1) the Ninth Circuit’s opinion in Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998 (“Whether the [debtors] could amend their schedules post-petition is separate from the question whether the exemption was allowable.”); (2) Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982).  The BAP initially concluded that the distinction noted by the Ninth Circuit in Michael is meaningless—denying a debtor the right to amend an exemption schedule on equitable grounds has the identical effect of disallowing the exemption. 

The BAP then looked to well-settled case law to the effect that a claimed exemption is presumptively valid, and also that Fed. R. Bankr. Proc. 1009(a) gives a debtor the right to amend any schedule “as a matter of course at any time before the case is closed” without court approval.  The court also noted that, prior to Law v. Siegel, courts had crafted judicially created exceptions to limit the right to amend on a showing of either the debtor’s bad faith or prejudice to creditors. 

The BAP concluded that Law v. Siegel changed the landscape, and that courts no longer may deny a debtor’s right to amend his claims of exemption on findings of bad faith or other equitable grounds:  “The Supreme Court’s definitive position that the Bankruptcy Code does not grant bankruptcy courts ‘a general, equitable power . . . to deny exemptions based on a debtor’s bad-faith conduct’ is clearly irreconcilable with the use of judicially created remedies either to bar amendments or to disallow amended exemptions.” 

However, the BAP noted the Supreme Court in Law v. Siegel, recognizes that exemptions created under state law are governed in their allowance by state law.  Consequently, the BAP remanded the case to the bankruptcy court to determine if applicable state law provided equitable grounds for denial of the exemption.