United States Court of Appeals
For the First Circuit
No. 07-1757
IN RE: JORGE BARROSO-HERRANS; MADELEINE ROSARIO-FARRULA,
Debtors.
__________
JORGE BARROSO-HERRANS; MADELEINE ROSARIO-FARRULA,
Appellants,
v.
WIGBERTO LUGO-MENDER, CHAPTER 7 TRUSTEE,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jay A. García-Gregory, U.S. District Judge]
Before
Boudin, Chief Judge,
Lynch, Circuit Judge,
and Keenan,* Senior District Judge.
Fernando E. Longo-Quiñones with whom Berríos & Longo Law
Offices, P.S.C. was on brief for appellants.
Luisa S. Valle-Castro with whom Carmen D. Conde-Torres and C.
Conde & Associates were on brief for appellee.
May 7, 2008
*
Of the Southern District of New York, sitting by designation.
BOUDIN, Chief Judge. In 1996, the Puerto Rico Aqueduct
and Sewer Authority ("PRASA") hired Powertronics Electrical and
Mechanical Contractor, Inc. ("Powertronics") to manage two
construction projects. The projects were never completed;
Powertronics was dissolved; and its owners, Jorge Barroso-Herrans
and his wife Madeleine Rosario-Farrulla, filed two law suits in the
Puerto Rico courts against PRASA: the law suits blamed the agency
for the failure of the projects and their company, and sought over
four million dollars in assorted damages.
On the same day as the suits against PRASA were filed--
August 30, 1999--Barroso and his wife ("debtors" or just "Barroso")
filed for bankruptcy in the federal bankruptcy court for Puerto
Rico, under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et
seq. (2000). The relevant details of their filings are as follows:
• On their list of assets (Schedule B), the
debtors included two accounts receivable,
from PRASA, for "improvements to sanitary
distribution system"--one for "Punta
Santiago" and the other for "Aguas
Claras" (the sites of the two failed
construction projects). The former was
listed as having a value of $102,843.21;
the latter, $67,608.98.
• On the same schedule, the debtors
included as assets "civil suit KAC 99-
1225" and "civil suit KAC 99-1226"--the
two suits filed against PRASA--and listed
each as having a value of $4,000. The
suits included but were not limited to
collection of the accounts receivable.
• On their list of assets claimed as exempt
from property of the estate (Schedule C),
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11 U.S.C. § 522(b), Barroso included
"Civil Suit KAC 99-1225 Powertronics v.
PRASA" and "Civil Suit KAC 99-1226
Powertronics v. PRASA." In the column
headed "Value of Claimed Exemption"
Barroso wrote $4,000 for each suit.
During the subsequent meeting of creditors, see 11 U.S.C.
§ 341, the Chapter 7 trustee Wigberto Lugo-Mender was given copies
of the complaints in the two pending suits against PRASA. Parties
in interest have thirty days from a creditors' meeting to object to
any of a debtor's claimed exemptions, Fed. R. Bankr. 4003(b); Lugo
filed no objections to the exemptions concerning the two
Powertronics suits.
Just over a year later, on February 28, 2001, Lugo
requested that the bankruptcy court authorize an agreement he had
reached with Barroso and his counsel concerning the prosecution of
the two suits: for Barroso's counsel to represent Barroso and the
estate jointly in the suits and for the debtors and the estate to
split any proceeds from the suits equally after paying counsel a
contingency fee. The bankruptcy court agreed to the joint
representation but refused to commit in advance to a particular
distribution of the proceeds or to counsel's fee arrangement;
Barroso's counsel then withdrew and Barroso declined to cooperate
with Lugo in pursuing the suits.
At this point, in August 2001, Barroso first asserted in
the bankruptcy court that the two suits against PRASA had been
entirely exempted from inclusion in the estate and that the estate
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therefore had no interest in the suits at all--a position to which
Lugo strongly objected. That dispute came to the forefront when
Lugo unilaterally negotiated a settlement with PRASA, calling for
a payment of $100,000 to the estate in exchange for waiving all of
Barroso's claims against the agency.
In December 2002, Lugo presented that settlement to the
bankruptcy court for approval; the debtors objected. After
extensive proceedings, the bankruptcy court approved it. It held
that Barroso had exempted not the law suits but rather only a
$4,000 partial interest in each suit, so the trustee could settle
the suits and simply pay a total of $8,000 to the debtors. The
court also suggested that Barroso had acted in bad faith. The
federal district court affirmed and this appeal followed.
When an individual files for bankruptcy, all of his
property--including causes of action--becomes property of the
estate. 11 U.S.C. § 541. But the debtor is entitled to claim as
exempt, and so retain, some assets. 11 U.S.C. § 522(d). The
statute enumerates both what kind of assets may be exempted, e.g.
an "interest . . . in one motor vehicle," id. § 522(d)(2), and the
maximum value of those exemptions, e.g. "not to exceed $2,400 in
value," id. Absent objection to a claimed exemption within thirty
days of the creditors meeting, the property claimed as exempt
belongs to the debtor and not the estate--even if the exemption was
improper. Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992).
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But, as we have earlier recognized, Taylor does not tell
us what has been claimed as exempt--only that whatever has been
claimed as exempt is beyond the estate's grasp once the deadline
has elapsed. Mercer v. Monzack, 53 F.3d 1, 3 (1st Cir. 1995),
cert. denied, 517 U.S. 1103 (1996). In this case the focus is on
the "threshold question . . . whether the property in dispute is in
fact the property of the estate listed as exempt." Id. Only if
the exemptions claimed the full proceeds of both law suits, rather
than a $4,000 share in each, does Taylor apply.1
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. How much deference ought to be paid to the
bankruptcy judge on this question could depend on the extent to
which any disputed facts (as opposed to the interpretation thereof)
form the basis for the dispute. Here, the standard of review,
which is arguably de novo since no pertinent facts are disputed,
cf. Indianapolis Life Ins. Co. v. Herman, 516 F.3d 5, 11 (1st Cir.
2008), does not affect the outcome.
1
Even if Barroso had exempted the law suits in full, the
bankruptcy court's finding of bad faith might justify setting aside
the exemption, see 11 U.S.C. § 105(a). But the Supreme Court has
left that question unresolved. Taylor, 503 U.S. at 645; Mercer, 53
F.3d at 4 n.4. As we shall see, there is no need to reach the
matter in this case or to resolve Barroso's claim that the finding
of bad faith was tainted by procedural flaws or violated seventh
amendment guarantees of a jury as fact-finder.
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Turning then to the filings, a debtor's bankruptcy
petition (among other disclosures) lists separately his assets
(Schedule B) and those of the listed assets claimed as exempt
(Schedule C). Barroso listed the PRASA accounts receivable on the
assets schedule at a total of $170,452.19 and listed each of the
two PRASA law suits at issue on his asset schedule and again in the
same terms and amounts ($4,000 each) on his schedule of claimed
exemptions. Barroso says that the law suits, consistently listed
on both schedules, clearly embraced all of the proceeds of the law
suits and not just a $4,000 share of each.
A problem with such a reading is that the $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. Barroso explains away
that discrepancy as a function of expected value; at the time of
filing, he says, the suits were contingent assets worth only $4,000
apiece. This is a dubious assertion on its face, and even without
Barroso's cooperation the suits were settled for $100,000.2
But there is an even more serious difficulty with the
explanation. The law suits sought damages for, among other things,
the accounts receivable. In Schedule B those accounts were valued
2
The selection of the $4,000 figure for each suit makes rather
more sense when one considers that the statutory provision under
which these exemptions were claimed, 11 U.S.C. § 522(d)(5),
includes a cap that at the time worked out to approximately $9,000.
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at $170,452.19 with no discount, even though collection of that sum
was also subject to the risk that the suits would fail. The easy
way to reconcile this undiscounted valuation with the valuation of
the suits, which sought to collect the same accounts receivable, is
to treat the law suit listings as for shares of proceeds.
Had Barroso listed the value of the suits as "unknown"--
as the debtor did in Taylor--or used a nominal sum like $1 as a
placeholder, In re Green, 31 F.3d 1098, 1100 (11th Cir. 1994), 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.
But Barroso used none of these "red flag" terms. In
their absence and given the much higher valuations of the accounts
receivable, the trustee might reasonably assume that the $4,000
figure reflected not the expected value of the full law suit but
rather the face value of a $4,000 interest in the suit's proceeds.
After all, the schedules did not contain any explicit indication
that expected value calculations were being employed. Cf. Kuhns v.
Bd. of Govs. of Fed. Res. Sys., 930 F.2d 39, 42 (D.C. Cir. 1991)
(under accounting principles, "reasonably possible" contingent
liabilities are disclosed in a note).
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Courts have no settled or fixed rule on how to approach
this type of ambiguity, see In re Anderson, 377 B.R. 865, 876
(B.A.P. 6th Cir. 2007) (collecting cases), although in legal
documents ambiguity is traditionally construed against the drafter,
United States v. Seckinger, 397 U.S. 203, 210 (1970), and that
canon has special force in this context: after Taylor, a failure to
object to a claimed exemption has very harsh consequences for the
estate, and so it is most fair to place on the debtor the burden of
claiming exemptions unambiguously. See In re Hyman, 967 F.2d 1316,
1319 n.6 (9th Cir. 1992).3
Anderson itself held that "when a debtor schedules an
exemption with identical market and exemption values . . . the
debtor is clearly indicating the intention to exempt the property
in full, regardless of its actual value," 377 B.R. at 875; but
other courts have taken the opposite view, id. at 876, and still
others have introduced other factors into the analysis--such as
what the parties understood and how they behaved post-filing, e.g.,
In re Wick, 276 F.3d 412, 416 (8th Cir. 2002). There are many
variants and it may be early for courts to construct rigid rules.
It is enough to resolve this case that the trustee's
reading of the exemptions as limited to a $4,000 share of the
3
See also 4 Collier on Bankruptcy, supra, at P. 522.05(2)(B)
("Before Taylor, the courts had recognized some leeway for debtors
in listing their exempt property. After Taylor, this relative
leniency has been more constrained, given the harsh consequences of
a failure to object.").
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proceeds from each law suit is objectively reasonable: this reading
alone reconciles the law suit valuations with the accounts
receivable valuations; a $4,000 valuation for an entire multi-
million dollar law suit including the accounts receivable makes no
sense; and nothing in the schedules suggests that the $4,000
figures reflected an enormous and improbable discount based on the
risk that the suits would be lost.4
Indeed, if Barroso's schedules truly exempted both law
suits in full, Barroso had no reason to negotiate with Lugo over
those suits--let alone to offer the estate half of the proceeds.
Accord Wick, 276 F.3d at 416. By contrast, on the premise that the
estate owned the suits (save for an $8,000 share), the sharing and
counsel fee agreement made sense for Lugo because without Barroso's
cooperation (as the main witness) the suits would be much more
difficult to pursue.
Affirmed.
4
Barroso might perhaps have claimed not a flat sum of $8,000
but rather a percentage share of the proceeds, which may have
fluctuated in value from $8,000 since the time of filing (based on
how the risks played out relative to expectations). See In re
Polis, 217 F.3d 899, 902-03 (7th Cir. 2000) (Posner, J.). In all
events, nobody has raised this rather theoretical point.
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