Russell v. Kuhnel (In Re Kuhnel)

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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