Trustees Can Take Hostages! – They’re Called “Exemptions”

A few weeks ago the Bankruptcy Appellate Panel for the Ninth Circuit issued a decision which all chapter 7 trustees should welcome. The BAP upheld the decision of Bankruptcy Judge Kathleen Thompson, of the Central District of California, surcharging the Debtor’s homestead and household goods exemptions in the amount of the attorney fees and other costs incurred by the Trustee as a result of the Debtor’s refusal to vacate the home and related legal shennanigans aimed at frustrating the sale. In re Onubah, 2007 WL 2701336 (Bankr. App. 9th Cir. August 31, 2007).

Mr. Onubah claimed a $75,000 homestead exemption in property which the Trustee ultimately contracted to sell for $2.3 Million. Onubah did not oppose the Trustee’s motion to sell, but he refused to vacate the property prior to close of escrow. The Trustee filed a turnover motion, but before the motion could be heard Onubah converted his chapter 7 case to chapter 11. Judge Thompson granted a re-conversion motion together with the turnover motion, but on the scheduled day of the turnover Onubah informed the Trustee that an involuntary bankruptcy petition had been filed against him. He refused to vacate, under color of the alleged new automatic stay. Judge Thompson later found that the petitioning creditors were colluding with Onubah. Apparently these petitioning creditors do this for a living in order to frustrate evictions. Ah, that wacky Central District! Onubah did not deny that all of these legal maneuvers were intended solely to frustrate the sale.

Ultimately, the Trustee was required to employ US Marshalls to evict Onubah, and the Trustee then had to store his household goods. The sale then closed. Judge Thompson then granted the Trustee’s motion to surcharge Onubah’s (presumably previously allowed without objection) homestead and household goods exemptions, in an amount representing the total of legal fees, storage charges, Marshall’s fees and locksmith charges.

In affirming, the BAP held that this result was mandated by the Ninth Circuit’s decision in Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004). Still, the Onubah decision represents a significant extension of Latman. In Latman, the Court deducted from the debtor’s “wild card” exemption the amount of some pre-petition sale proceeds which the debtor had failed to account for. The opinion in Latman states that a surcharge of exemptions cannot be “punitive” in nature, and the Onubah opinion echoes this. The Latman surcharge passed muster because it prevented the debtor from shortchanging the estate by keeping money beyond the exempted amount, by subtracting that exact amount from the exemption.

In contrast, the decision in Onubah looks a bit more like sanctions (another word for “punishment”) imposed because of the Debtor’s improper litigation behavior. Onubah did not appeal this decision to the Ninth Circuit. For the time being, Trustees have a powerful new weapon against Debtors who fight wars of attrition to prevent assets from being liquidated for the benefit of creditors.