F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
July 25, 2007
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
In re: NICH OLA S LEE KU HN EL,
also known as N ick Kuhnel;
ELIZA BETH ANN KUHNEL, also
known as Lizz Kuhnel,
No. 06-8070
Debtors,
-------------------------
R. M ICHELE RUSSELL, Trustee,
Appellant,
v.
NICH OLA S LEE KU HN EL;
ELIZABETH A NN KU HN EL,
Appellees.
A PPE AL FR OM T HE UNITED STATES BANKRUPTCY
APPELLATE PANEL FO R TH E TENTH CIRCUIT
(BAP NO . W Y-06-022)
Submitted on the briefs: *
Frank B. W atkins, Riverton, W yoming, for A ppellant.
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
Stephen R. W inship, W inship and W inship, P.C., Casper, W yoming, for Appellee.
Before LUC ER O, BROR BY, and M cCO NNELL, Circuit Judges.
M cCO NNELL, Circuit Judge.
This bankruptcy case requires us to examine the relationship between
11 U.S.C. § 522(g) and Federal Rule of Bankruptcy Procedure 4003(b). Section
522(g) prevents a debtor from claiming exemptions in voluntarily transferred
property that the trustee recovers for the estate. Rule 4003(b) gives the trustee
thirty days to object to a debtor’s claimed exemptions. The bankruptcy court in
this case allowed the trustee to contest an exemption under § 522(g) after the Rule
4003(b) deadline had run, but the Bankruptcy Appellate Panel (BAP) held that the
trustee’s objection was time-barred. W e have jurisdiction under 28 U.S.C.
§ 158(d) and Fed. R. App. P. 6(b), and we now reverse the BA P.
I. Facts and Proceedings
On M ay 14, 2005, Nicholas and Elizabeth Kuhnel (debtors) purchased a
Chevy Trailblazer (truck), financed by Toyota M otor Credit Corporation
(Toyota). Toyota retained a purchase money security interest (PM SI) in the truck,
but neglected to perfect its security interest until June 23, 2005. That same day,
debtors filed for Chapter 7 bankruptcy protection. In their bankruptcy petition,
debtors claimed a combined state-law exemption in the truck, see W yo. Stat. Ann.
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§ 1-20-106(a)(iv), totaling $4,800. The bankruptcy estate’s trustee, R. M ichelle
Russell (trustee), held the required meeting of creditors on July 21, 2005, see
11 U.S.C. § 341; Fed. R. Bankr. P. 2003(a), but never objected to the exemption
until more than six months later, on January 27, 2006.
At some point, the trustee caused Toyota to consensually release its lien.
The trustee then objected to debtors’ claimed exemption, arguing that Toyota’s
lien resulted from a voluntary transfer that she recovered using her statutory
avoiding powers. D ebtors countered that the trustee’s objection was untimely
under Rule 4003(b) because it had not been filed within thirty days of the
creditors’ meeting. They also argued that because the truck had always remained
in their possession, there was no voluntary transfer of property recovered by the
trustee, and thus § 522(g) was not applicable.
The bankruptcy court sustained the objection, reasoning that debtors’
granting of the lien to Toyota w as a voluntary transfer, and there was no equity in
the truck. Additionally, citing Zubrod v. Duncan (In re Duncan), 329 F.3d 1195
(10th Cir. 2003), the bankruptcy court held that a timely objection under Rule
4003(b) w as not a prerequisite to the application of § 522(g).
Debtors appealed, and a divided BAP reversed. The majority first noted
that the trustee never initiated formal adversary proceedings to avoid Toyota’s
lien, but instead convinced Toyota to consensually release it. The majority found
that by acting without formal proceedings, the trustee failed to preserve Toyota’s
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lien for the benefit of the estate, and as a consequence, § 522(g) w as unavailing.
Looking instead to Rule 4003(b), the majority held that the trustee was required
to file her objection to the claimed exemption within thirty days after the meeting
of creditors. M oreover, the majority concluded that Duncan was not proper
authority for ruling otherwise because the fraudulent circumstances that existed in
that case were clearly absent from the present case.
The dissent, however, took the position that Duncan was not
distinguishable by virtue of its fraudulent transfer. Instead, the dissent found that
Duncan similarly involved a voluntary transfer of property recovered by the
trustee using his statutory avoiding powers. Reasoning that Toyota’s lien was the
result of a voluntary transfer by debtors as a matter of law, the dissent disagreed
with the majority’s ruling that formal adversary proceedings w ere necessary to
preserve the lien for the estate. Rather, the dissent argued that the effect of
Toyota releasing its lien was the same as if the trustee had initiated formal
adversary proceedings to avoid it – namely that the cloud on the truck’s title was
lifted. Asserting that an avoided lien is automatically preserved for the
bankruptcy estate, the dissent maintained that § 522(g) applied and Duncan
controlled the analysis. Believing that Duncan permitted a trustee to recover
voluntarily transferred property beyond the thirty-day window of Rule 4003(b),
the dissent concluded that the trustee’s objection should have been sustained.
This appeal followed.
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II. Analysis
“On appeal from BAP decisions, we independently review the bankruptcy
court’s decision. W e review the bankruptcy court’s legal determinations de novo,
and its factual findings under the clearly erroneous standard.” Lam pe v.
Williamson (In re Lampe), 331 F.3d 750, 753 (10th Cir. 2003) (italics, alteration,
citation, and quotation omitted).
The trustee contends that Rule 4003(b) does not bar her objection here
because debtors’ exemption is precluded by § 522(g). Alternatively, she argues
that the exemption is invalid because debtors held no equity in the truck. W e
agree with the trustee’s initial contention and therefore do not reach the latter.
A. Rule 4003(b)
W e begin with the general principle set forth by Rule 4003(b), which
requires a trustee to object to a debtor’s claimed exemption within thirty days of
the meeting of creditors:
A party in interest may file an objection to the list of property
claimed as exempt only within 30 days after the meeting of creditors
held under § 341(a) is concluded or within 30 days after any
amendment to the list or supplemental schedules is filed, whichever
is later. The court may, for cause, extend the time for filing
objections if, before the time to object expires, a party in interest
files a request for an extension.
Fed. R. Bankr. P. 4003(b).
Rule 4003(b) has been strictly interpreted by the Supreme Court, as well as
various courts w ithin this circuit. Indeed, the Supreme Court has held that a
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trustee’s failure to object to a debtor’s claimed exemption within the time
established by Rule 4003(b) prevents the trustee from later challenging the
exemption’s validity. Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992).
Similarly, the 10th Circuit BAP has held that “w hen no objection is made within
the time established by [Rule] 4003(b), [11 U.S.C.] § 522(l) provides that the
property claimed as exempt in the [d]ebtors’ schedules is exempt.” Kwiecinski v.
Cmty. First Nat’l Bank of Powell (In re Kwiecinski), 245 B.R. 672, 675 (B.A.P.
10th Cir. 2000). And in the context of extending the thirty-day period, this court
has held that the “precise time limitations” of Rule 4003(b) permit the bankruptcy
court to “extend the period for objections to exemptions only by acting within the
original time period.” Clark v. Brayshaw (In re Brayshaw), 912 F.2d 1255,
1256-57 (10th Cir. 1990).
These authorities tell us that the deadline established by Rule 4003(b) is
uncompromising and inflexible. The trustee does not dispute that her objection
was not filed w ithin thirty days after the creditors’ meeting. Therefore, unless
§ 522(g) somehow operates beyond the deadline of Rule 4003(b), the trustee’s
objection is necessarily barred.
B. 11 U.S.C. § 522(g)
“The purpose of section 522(g) is to prevent a debtor from claiming an
exemption in recovered property which was transferred in a manner giving rise to
the trustee’s avoiding powers, where the transfer was voluntary or where the
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transfer or property interest was concealed.” In re Duncan, 329 F.3d at 1201
(alteration and quotation omitted). The statute provides:
Notwithstanding sections 550 and 551 of this title, the debtor may
exempt under subsection (b) of this section property that the trustee
recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this
title, to the extent that the debtor could have exempted such property
under subsection (b) of this section if such property had not been
transferred, if –
(1)(A) such transfer was not a voluntary transfer of such
property by the debtor; and
(B) the debtor did not conceal such property . . . .
11 U.S.C. § 522(g)(1).
The trustee here asserts that an objection made under § 522(g) need not be
timely because the statute specifically prohibits a debtor from claiming an
exemption in voluntarily transferred property recovered by a trustee. Asserting
that debtors voluntarily transferred an interest in the truck by granting Toyota a
PM SI, the trustee contends that she recovered this interest by convincing Toyota
to release its lien. Not surprisingly, debtors dispute this analysis and argue that
there was no voluntary transfer and thus nothing to recover. As a result, debtors
claim that § 522(g) does not even apply and the trustee’s objection is time-barred.
For § 522(g) to apply, there must be both a voluntary transfer, as well as a
recovery. Under the bankruptcy code, a PM SI is an avoidable transfer if a
creditor fails to timely perfect its security interest. See 11 U.S.C. § 547(c)(3)(B);
Fid. Fin. Servs., Inc. v. Fink, 522 U.S. 211, 221 (1998). Here, because Toyota
failed to timely perfect its security interest, there was an avoidable voluntary
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transfer that satisfies the first criteria of § 522(g). The second requirement is
likewise satisfied as the trustee’s efforts to convince Toyota to release its lien
constitute a valid recovery. Indeed, a trustee need not initiate formal adversary
proceedings to recover property under § 522(g), so long as the trustee has taken
some action resulting in the reconveyance of the property to the estate. Glass v.
Hitt (In re Glass), 60 F.3d 565, 568-69 (9th Cir. 1995); In re Hicks, 342 B.R. 596,
599-601 (Bankr. W .D. M o. 2006). Given both the voluntary transfer and the
recovery, the exemption here was invalid under § 522(g). 1
Notwithstanding our determination that the exemption was invalid under
§ 522(g), we must nevertheless ascertain whether the statute permits a trustee to
lodge an untimely objection. W e had occasion to examine both § 522(g) and Rule
4003(b) in Duncan, and concluded that it does. Duncan involved a bankrupt
attorney who fraudulently transferred property to prevent it from being subject to
his creditor’s claim. In re Duncan, 329 F.3d at 1196-97. The trustee brought a
timely adversary proceeding and successfully avoided the transfer, but he did not
1
The BAP’s holding that an avoidance action was necessary to preserve the
lien for the estate suggests that a court could have compelled Toyota to assign its
lien to the trustee. W e disagree that any such assignment could have occurred. A
trustee cannot have greater rights than those originally possessed by a debtor. See
Paul v. M onts, 906 F.2d 1468, 1473 (10th Cir. 1990). Assigning the lien to the
trustee here would have left her with both the truck and the value of the lien,
thereby giving her greater rights than debtors had. The better logic, w e think, is
that the trustee could have sought at most, even with an avoidance action, only to
avoid Toyota’s lien; this would have left the estate’s property – that is, the truck
itself – unencumbered for liquidation.
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object to the debtor’s exemption within the thirty-day period set forth in Rule
4003(b). Id. at 1197. Consequently, when the trustee later attempted to sell the
property, the debtor demanded his exempted portion of the proceeds, arguing that
the exemption was valid because the trustee failed to timely object. Id. The
trustee responded that the exemption was invalid under § 522(g) because the
debtor had fraudulently transferred the recovered property. Id. W e agreed and
held that the debtor was “not entitled to claim a[n] . . . exemption in property
voluntarily transferred and recovered by the Trustee in an adversary proceeding,
notwithstanding the Trustee’s failure to object within the 30-day period of [Rule]
4003(b).” Id. at 1204.
Our decision in Duncan to disallow the exemption was based on the
rationale that “the trustee’s actions were not subject to the 30-day limitations
period governing objections to claimed exemptions because the trustee was not
contesting the exemptions per se; pursuant to 11 U.S.C. § 544(a), he was seeking
instead to avoid the transfer of property by the debtor.” In re Duncan, 329 F.3d
at 1203. W e explained that the deadline for the trustee’s recovery efforts fell
under 11 U.S.C. § 546(a)(1)(A) – not Rule 4003(b) – because the trustee had
initiated a formal avoidance action, and that to hold otherwise would render the
two-year limitations period of § 546 meaningless since it would effectively make
it a thirty-day period. In re Duncan, 329 F.3d at 1203.
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Duncan’s rationale applies here with perhaps even greater force because in
the absence of an avoidance action, the only time limit on the trustee’s recovery
efforts is Rule 4003(b). But because a trustee will rarely be able to recover
property within the thirty-day period of Rule 4003(b), the nature of § 522(g) is
such that it precludes exemptions in recovered property even beyond the time
limit imposed by Rule 4003(b). Duncan reconciles the apparent conflict: a
trustee acting under § 522(g) is not contesting the exemption per se, but rather is
asserting the fact that he or she has set aside a debtor’s voluntary transfer. Rule
4003(b) is not defiled because “[u]nless and until the trustee successfully avoids
the transfer . . ., the debtor is entitled to the exemption.” In re Duncan, 329 F.3d
at 1203 (citation omitted).
III. Conclusion
The judgment of the B ankruptcy Appellate Panel is REVERSED.
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