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In re Garcia

United States Bankruptcy Appellate Panel of the First Circuit

June 24, 2015

PAUL GARCIA, Debtor. DAVID ROSS, Appellant,
v.
PAUL GARCIA, Appellee

Page 174

[Copyrighted Material Omitted]

Page 175

Appeal from the United States Bankruptcy Court for the District of Massachusetts. Bankruptcy Case No. 13-13829-WCH. (Hon. William C. Hillman, U.S. Bankruptcy Judge).

Before Deasy, Finkle, and Cary, United States Bankruptcy Appellate Panel Judges.

OPINION

Page 176

Cary, U.S. Bankruptcy Appellate Panel Judge.

This appeal is part of a 22 year-long effort by creditor David Ross to recover a multi-million dollar personal injury award against debtor, Paul Garcia. Ross' collection efforts have thus far been thwarted by the debtor's bankruptcy. This appeal addresses Ross' challenge of two orders of the bankruptcy court: (1) the order denying his motion to vacate the order permitting the debtor to amend Schedule A; and (2) the order allowing the debtor's amended motion to partially avoid Ross' lien (collectively " the Orders" ). For the reasons discussed below, we AFFIRM the Orders.

BACKGROUND

On June 25, 2013, the debtor filed a chapter 7 petition and the requisite schedules, and the following day a chapter 7 trustee was appointed. On his Schedule A-Real Property, the debtor listed residential property (the " Property" ), which he valued at $745,000.00. He based this value on a comparative market analysis a local broker completed on June 8, 2013 (the " $745,000.00 Valuation" ). On Schedule C-Property Claimed as Exempt, he claimed a $500,000.00 exemption in the Property pursuant to state law. On his Schedule D-Creditors Holding Secured Claims, the debtor reported that Ross held a $4,050,623.00 lien on the Property (the " Judicial Lien" ).

Two months later, the debtor filed a

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motion pursuant to § 522(f)[1] (the " Lien Avoidance Motion" ), seeking to partially avoid the Judicial Lien. In it, the debtor valued his interest in the Property at $696,778.00, a figure he derived by deducting a broker's commission, recording fee, and the cost of tax stamps from the $745,000.00 Valuation. He also stated that the Property was subject to a first mortgage in the amount of $71,101.00. According to the debtor, the Judicial Lien impaired the $500,000.00 homestead exemption to which he would have been entitled and therefore should be avoided to the extent of $3,924,946.00. Based on the formula set forth in § 522(f), the debtor asserted that the amount of the surviving lien should be $125,677.00.

Ross filed an opposition to the Lien Avoidance Motion, arguing that the debtor understated the value of the Property by inappropriately deducting hypothetical liquidation costs. Then, in connection with the trustee's efforts to market and sell the Property, the trustee and Ross, relying on the $745,000.00 Valuation, stipulated that there was equity to partially satisfy the Judicial Lien.

In February 2014, approximately eight months after the petition date, the trustee obtained a comparative market analysis of the Property of $625,000.00 to $660,000.00 from a realtor (the " $625,000 - $660,000 Valuation" ), based in part on the condition of the Property. The Property was then marketed for sale. In September 2014, nearly fifteen months after the petition date, the debtor procured a formal appraisal of the Property which valued it at $635,000.00 as of the petition date (the " $635,000.00 Appraisal" ). Based on this reduction in value, the debtor filed the motions giving rise to this appeal, including his: (1) motion to amend the Lien Avoidance Motion (the " Motion to Amend" ); (2) Motion to Amend Schedule A; and (3) his amended Lien Avoidance Motion (the " Amended Lien Avoidance Motion" ).

In the Motion to Amend, the debtor explained that when he filed the original Lien Avoidance Motion he had relied on the $745,000.00 Valuation used on the petition date because he could not afford the cost of a formal appraisal. He indicated further that he believed the $745,000.00 Valuation was based only on a " drive-by" viewing and, therefore, it failed to take into consideration structural damage to the Property. Urging the court to adopt the $635,000.00 Appraisal, the debtor argued that it took into account the Property's deferred maintenance, which remained unchanged since the petition date. Emphasizing that the trustee had not received even a " lowball" purchase offer for the Property and had filed a report of no distribution, the debtor asked the court to grant the Motion to Amend.

In his Motion to Amend Schedule A, the debtor sought to adjust the value of the Property to conform to the $635,000.00 Appraisal. Arguing that the Property was of no value to the estate, he maintained that the proposed amendment would not impair the interests of any party.

In the Amended Lien Avoidance Motion, the debtor recalculated the amount of impairment to reflect the reduced value of the Property as follows:

Judicial Lien

$4,050,623.00

First Mortgage

$71,101.00

Total Liens

$4,121,724.00

Exemption

$,000.00

Total

$4,621,724.00

Less Property Value

-$635,000.00

Amount of Impairment

-$635,000.00

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Without a hearing, the court entered separate orders granting the Motion to Amend (the " Order Amending Lien Avoidance Motion" ) and the Motion to Amend Schedule A (the " Order Amending Schedule A" ). Twenty-two days later, Ross filed an opposition to the Amended Lien Avoidance Motion (the " Opposition" ), accompanied by a June 2006 appraisal which valued the Property at $875,000.00 (the " $875,000.00 Appraisal" ). He asserted that: the $745,000.00 Valuation most accurately reflected the Property's worth, the Property's alleged decline in value was the result of the debtor's own conduct, and permitting the debtor to avoid his lien based on the Property's reduced value would cause Ross undue prejudice. Accordingly, Ross asked the court to: (1) deny the Amended Lien Avoidance Motion; (2) schedule an evidentiary hearing; and (3) value the Property at $745,000.00.

He also simultaneously filed a motion to vacate the Order Amending Schedule A (the " Motion for Reconsideration" ) which the debtor opposed, in part on the ground that Ross lacked any support for his challenge to the $635,000.00 Appraisal. Although Ross acknowledged that Fed. R. Bankr. P. 1009(a) permits a debtor to amend a claim of exemptions at any time before the case is closed, he asserted two exceptions to that right: prejudice to creditors or the trustee, and bad faith. Ross argued that both exceptions applied.

In support of the " prejudice exception," Ross reiterated that he had relied on the debtor's initial representations concerning the Property's worth in refraining from pursuing other potential assets of the debtor. With respect to the bad faith exception, he argued that the $635,000.00 Appraisal, although performed in September 2014, purported to state a value of the Property as of the petition date. The debtor disagreed and the court scheduled both matters for a nonevidentiary hearing. The hearing notice provided: " If, in the course of the nonevidentiary hearing, the court determines the existence of a disputed and material issue of fact, the court will schedule an evidentiary hearing."

At the outset of the hearing, the court readily denied the Motion for Reconsideration, reasoning " [i]t doesn't matter what [the debtor] puts on his schedules." The court then shifted its ...


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