Bankruptcy: Bankruptcy Exemptions - Intentional Tort

    The United States Bankruptcy Court at Alexandria, Virginia, in the case of In Re: Scott, entered a judgment in favor of the creditor in the amount of $12,735 on a theory of conversion. In doing so, the Bankruptcy Court determined that the judgment was nondischargeable under Bankruptcy Code §523(a)(6). In Scott the Bankruptcy Court found that the creditor hired the debtor to look after the creditor's elderly mother, paying the debtor $28,000 in advance wages. The debtor quit the job six weeks later and refused to return the unused funds. The debtor subsequently filed for bankruptcy and the creditor filed a nondischargeability complaint. In the debtor's bankruptcy schedules she listed exemptions of a car, clothing, household goods, jewelry and a savings account. The creditor challenged both the specific items claimed as well as the debtor's right to claim any exemptions at all against a claim for an intentional tort. 

    In regard to the creditor's challenge for specific items, the Bankruptcy Court found that Virginia state law exemptions include the homestead exemption under Virginia Code §34-4 and the poor debtor's exemption under Virginia Code §34-26. The Court ruled that the debtor was entitled to claim a "poor debtor's" exemption on the car, and that the debtor's interest in the vehicle was less than $2,000. The Court also found that the debtor's claim for $5,400 in exemptions for the household goods did not exceed the amount allowed under Virginia Code §34-4. The Bankruptcy Court denied the debtor's "poor debtor's" claim for exemption for a herringbone gold necklace, as there was no evidence that the necklace was a family heirloom. The Bankruptcy Court also denied the debtor's claim for an exemption in a $300 savings account as tenants by the entirety property.

    In regard to the creditor's claim that the debtor was not entitled to any exemptions because Virginia law does not allow for the assertion of Virginia exemptions against a claim based on an intentional tort, the Bankruptcy Court examined the bankruptcy statutes and the results that other courts had reached on similar questions. The Bankruptcy Court noted that other courts had reached different opinions. However, the Bankruptcy Court decided that since Congress had specifically legislated as to the type of claims that could be enforced against exempt property, and since the creditor's claim in this case did not fall within any of the enumerated exceptions, in this case, the debtor was entitled to her exemptions notwithstanding the fact that the creditor held a nondischargeable claim based upon an intentional tort.

Bankruptcy: Poor Debtor's Exemption - Objection in a Chapter 13 Plan

     In the case of In re Bonner, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, ruled that a credit union, which did not perfect its lien on a car the debtor purchased with a credit union loan, could not prevent confirmation of the debtor's Chapter 13 plan. The Court did, however, sustain the credit union's objection to the debtor's claim of a $2,000 "poor debtor's exemption" in the car under Virginia Code §34-5.

     In Bonner the credit union maintained that its purchase money security interest, though not perfected as to third parties, could be enforced in a Chapter 13 case notwithstanding Bankruptcy Code §544(a). The Court ruled, though, that the avoidance powers under §544 extend to trustees in Chapter 13. The Court cited the case of In re Freeman, where another court had held that a Chapter 13 debtor shares the trustee's status as a hypothetical lien creditor under §544. Accordingly, the Court ruled that since either the debtor or trustee is deemed to have exercised the hypothetical lien creditor's rights at the time of filing, the transfer of the security interest by the debtor to the credit union had been nullified. The claim filed by the credit union was therefore unsecured, and the debtor had properly provided for it under the plan.
     Nevertheless, the Court ruled that pursuant to Virginia Code §34-5, the poor debtor's exemption could not be claimed against a debt for the purchase of such property or any part thereof. Unlike the exception included in Virginia Code §34-26(8), which provides only a valid purchase money security interest with priority over the exemption, the restriction in §34-5 is not conditioned on the creditor possessing an enforceable lien. Therefore, the Court reasoned that the credit union's failure to perfect its security interest simply had no bearing. Accordingly, the Court sustained the credit union's objection to the poor debtor's exemption.

Bankruptcy: Homestead Exemptions - Household Furnishings

     In the case of In Re: John W. Haynes, Jr., the United States Bankruptcy Court at Alexandria, Virginia, ruled that the debtor was entitled to claim as "poor debtor's" exemption from the bankruptcy estate two TV's, a VCR and a stereo as part of his "household furnishings" exempt under Virginia Code §34-26.
     In Haynes, the creditor, a bank, argued that the items claimed as exempt by the debtor were not the type of property that was necessary to run a household, unlike beds, dressers, stoves, eating utensils and other items listed in the statute.
     The Bankruptcy Court, however, stated that it did not read Virginia Code §34-26 so narrowly. In interpreting the statute, the Bankruptcy Court stated that it looked first to the statute's plain language; the Bankruptcy Court noted that the language of the statute was quite broad. The statute allows debtors to exempt from creditor process "all household furnishings", including the items listed in the statute, so long as their value does not exceed $5,000. The term "furnishings" does not necessarily exclude televisions, stereos and VCR's, and the statute includes "non-furniture" items -- such as eating utensils and plates -- as examples of "household furnishings." The Bankruptcy Court also noted that the statute did not contain the term "necessary," which was once included in an earlier version of the statute. The Bankruptcy Court stated that it did not view exceptions under the current statute as being limited to items necessary for maintaining a household. In addition, the Bankruptcy Court noted that longstanding Virginia precedent established that exemption statutes are to be construed liberally. Accordingly, the Bankruptcy Court overruled the creditor's objection concerning the electronic equipment.

Bankruptcy: Unperfected Purchase Money Lien

     In the case of In re Johnson the United States Bankruptcy Court, Eastern District of Virginia, at Richmond, ruled that a Chapter 7 debtor's claim of homestead and poor debtor's exemptions in her automobile should be denied because the debtor had not paid the purchase price of the car, and thus the car was subject to a debt to the credit union that made the loan for the purchase price. Had the car been non-purchase money security interest, the result would have been different.
     In determining the facts the Court found that the debtor purchased the car using credit union loan proceeds, that the debtor intended to grant a security interest in the vehicle to the credit union, and that the credit union's lien was not recorded on the vehicle's certificate of title.
     The debtor claimed a $5,500 homestead exemption under Virginia Code §34-4, and a $2,000 poor debtor's exemption under Virginia Code § 34-26. The credit union that loaned the debtor the money to buy the car had a purchase money security interest pursuant to Virginia Code §8.9-107(b).
     Although a purchase money security interest had attached to the vehicle, a second step of perfection is required for the interest to be enforceable as to third parties -- a notation must appear on the vehicle's certificate of title. Testimony was given that no notation of a security interest appeared upon the title to the car. The credit union, therefore, held an unperfected purchase money security interest in the vehicle.
     The Court ruled the credit union's unperfected interest was subordinate to the rights of a lien creditor, and that the statutory definition of "lien creditor" under the Virginia Code included a trustee in bankruptcy.
     The Court was left with the question whether the debtor could exempt property in which the credit union held an unperfected purchase money security interest, and in which the value of the property was exceeded by the debt owed on the property. Exemptions under both Virginia Code §§ 34-4 and 34-26 cannot be claimed against debts for the purchase price of the property, or for any part of the purchase price.
     The debt created in Johnson was for the purchase price of the car, as the loan application, note and security agreement clearly illustrated. Many of the cases in which Virginia Code §34-5 have been applied have involved a merchant creditor, or an actual seller of the goods for which the purchase price was not paid, rather than a third-party creditor.
     The Court held that the debtor's claimed exemptions were improper because they were for property, the purchase price of which had not been paid, and the property was subject to a debt for the purchase price. The Court further held that a third-party creditor could prevail under Virginia Code §34-5 if the creditor successfully showed that its loan proceeds were used to acquire the collateral, and that it had a valid purchase money security interest.
     As an alternative basis for its holding that the debtor's claimed exemption of $4,500 was improper, the Court looked to the language of Virginia Code §34-4, which allows an exemption of personal property up to $5,000 "in value", plus personal property of $500 "in value", for each dependent. Even if the exemption were properly claimed, the debtor in Johnson had no equity in the car. The credit union held a purchase money security interest, which was valid between it and the debtor. The value of the car was stated by the debtor to be $18,000 and the loan balance was approximately $19,000. The Court has held on prior occasions, as it did in this instance, that where the debtor has no equity in the exempted property, no exemption exists.
     Further, the Court held that because the debt on the car exceeded its claimed value, there was no amount to be claimed exempt under Virginia Code §34-26(8). Finally, the Court noted that if it were to allow the claimed exemptions, the debtor would retain the property exempted, subject to the security interest of the credit union. This would result in the improper outcome in which a creditor holding an unperfected security interest would be placed ahead of the trustee.
     The lesson in Johnson - perfect your liens. Remember that had this been a non-purchase money security interest case, the result would have been different there would have been no lien. Set up systems to ensure lien protection.

Bankruptcy: Homestead Exemptions

     Virginia Code §34-26 and §34-4 provide for commonly used exemptions in bankruptcy.
     Virginia Code §34-26 is the "poor debtor's" exemption. This law was updated in 1992. Instead of listing exempt items such as horses, oxen, cattle, bushels of wheat, corn, etc. (as it was pre-1992), the statute now sets out categories with dollar limitations: tools of trade up to $10,000.00; household furnishings up to $5,000.00; family heirlooms up to $5,000.00; motor vehicles up to $2,000.00; and wearing apparel up to $1,000.00.
     Virginia Code §34-4 provides for a flat $5,000.00 exemption per head of household.
     The 1992 statutory charges resulted in an increase in the debtor's effective exemptions of personal property, as well as severe a decrease in effectiveness of the previous frequently used "Sheriff's levy" on personal property.