The Bankruptcy Court Does Not Have Authority to Deny an Exemption on Grounds Not Set Forth in the Bankruptcy Code

By Karl Johnson posted 16 days ago

Karl Johnson, Taft Stettinius & Hollister LLP
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editor: Jackie Williams, Manty & Associates, P.A.
In Rucker v. Belew (In re Belew), 943 F.3d 395 (8th Cir. 2019), the Court of Appeals for the Eighth Circuit considered whether the bankruptcy court had the authority to deny an exemption on grounds not specified in the bankruptcy code.

After conducting an investigation, the chapter 7 trustee discovered that the debtor placed $30,000 in cash in a home safe prior to filing. The cash was not disclosed on the debtor’s schedules, as amended. After the trustee’s discovery, the debtor amended his schedules a second time, identifying a possible interest in the cash and claiming an exemption in the same. The trustee objected to the amendment based on the alleged bad faith of the debtor. The bankruptcy court overruled the trustee’s objection, finding that the bankruptcy code did not grant the court authority to bar an amendment based on bad faith. The bankruptcy appellate panel affirmed the bankruptcy court.

The court of appeals determined that Kaelin v. Basset, 308 F.3d 885 (8th Cir. 2002), in which it stated that the bankruptcy court has the discretion to deny an amendment to an exemption if it “is proposed in bad faith or would prejudice creditors,” was abrogated by Law v. Siegel, 571 U.S. 415 (2014). In Law, the United States Supreme Court considered whether a surcharge could be assessed against a homestead exemption based on bad faith. As explained by the court of appeals, the Law court determined that “neither the bankruptcy court’s general statutory authority to issue necessary orders” under 11 U.S.C. § 105(a) “nor its inherent power to issue sanctions could be used to contravene the express statutory provisions authorizing exemptions.” The Eighth Circuit’s decision in abrogating Kaelin is consistent with the approach taken by the Sixth Circuit in Ellmann v. Baker (In re Baker), 791 F.3d 677 (6th Cir. 2015) and the Tenth Circuit in Clabaugh v. Grant (In re Grant), 658 F. App’x 411 (10th Cir. 2016).