In certain instances, the trustee can “avoid” or set aside certain pre-petition transfers of property. This post addresses the question whether, and under what circumstances, a debtor may assert an exemption to all or part of recovery by trustee. The particular situation involves something that commonly occurs: movement of legal title and/or possession of a vehicle to and from parents and their children.
Section 522(g) of the Bankruptcy Code provides that debtors may exempt property the trustee recovers if the debtor could have exempted the property had it not been transferred, so long as the transfer was involuntary and the debtor did not conceal it. "The purpose of § 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 transfer or property interest was concealed." Rainsdon v. Farson (In re Farson), 387 B.R. 784, 798 (Bankr. D. Idaho 2008).
The first issue to resolve is whether the property has been “transferred.” At first blush this might seem to be simple enough. But things are never as simple as they seem. Consider the parents in In re Leach, 522 B.R. 841 (Bkrtcy. D. Idaho 2018). Debtor bought a 2008 Subaru for their daughter to take to college, but titled it in their names. Debtors made the payments for a time, but eventually daughter took them over. Daughter then married, and debtors allowed her to retain possession without any transfer of title.
Debtors filed their Chapter 7 case May 31, 2018, listing legal title to a 2000 Impreza noted to have been given to their adult daughter in 2014. On Schedule C, debtors claimed the vehicle exempt. The problem is obvious: debtors did not own a 2000 Impreza. The mistake came to light at the Section 341 meeting, and it seems clear everyone agreed it was a mistake.
Several months later, trustee demanded that the 2008 Impreza be turned over. Shortly thereafter, debtors amended Schedule B to correct the vehicle description, and amended Schedule C to claim it exempt. Trustee objected on the same day, arguing that Section 522(g) precluded the claim of exemption. Trustee argued that the vehicle had been voluntarily “transferred” the vehicle to the daughter, and that trustee had “recovered” it.
The Bankruptcy Court, citing the Ninth Circuit, noted the “extremely” broad construction afforded the term “transfer:”
A transfer is a disposition of an interest in property. The definition of transfer is as broad as possible. Many of the potentially limiting words in current law are deleted, and the language is simplified. Under this definition, any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody, and control are interests in property. Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1282 (9th Cir. 1996)
Applying the broad definition, the court agreed with trustee that, notwithstanding no transfer of legal title, a transfer nevertheless occurred. A possessory interest only is an asset or interest subject to transfer. The court then moved to the construction of the word “recovery.”
One would not expect the construction of the word “recovery” to be problematic. One would be mistaken. It turns out that shortly after July 8, 2018, when both debtors and trustee knew about the mistake, the 2008 Impreza was returned to debtors by their daughter; not due to any action by trustee (his turnover demand came about a month later), but because she had purchased a new car and no longer needed it. “Thus, both legal title and possession rested with Debtors by the time Trustee wrote the demand letter.” Leach, at 846.
Now, to the court’s credit, it did observe that it would not take an expansive reading of the law to find a recovery. In other words, it was a close call. But, citing the liberality with which exemption provisions are construed, the court held that trustee had not made a “recovery,” and hence debtors were not precluded by 522(g) from asserting an exemption claim.
On balance, this is not bad result. I think it fair to say that these types of cases will be very fact intensive, and that each case will stand on its merits. But, it should be noted that formal action is not needed to constitute a “recovery,” and that are any number of ways a trustee’s actions could amount to a “recovery.” See Sumner, 2007 WL 7144357, at *2, 2007 Bankr.LEXIS 4406, at *8-9 (noting that, "[a]trustee may ‘recover' property in a number of ways, including by merely using the threat of avoidance powers to induce a debtor or transferee to return the property to the estate.") (citing In re Hicks, 342 B.R. 596 (Bankr.W.D.Mo. 2006) (citing Glass v. Hitt, 60 F.3d 565). (my emphasis).