4 ABR 500 UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re:	)
	)	Chapter 7
MARGARITA HALL aka	)	Case No. A92-00033-DMD
Margarita Kempenar, aka	)
Maggie Kempenar, aka	)
Maggie Hall,	)
	)
Debtor.	)
___________________________________	)

MEMORANDUM REGARDING DEBTOR'S AMENDED
CLAIM OF EXEMPT PROPERTY

     Hearings on the trustee's objections to the debtor's amended claims of exempt property were held in December of 1996 and February of 1997. J. Mitchell Joyner appeared for the debtor and Walter Featherly appeared for the trustee, Larry Compton. Allowance of exempt property is a core proceeding under 28 U.S.C. § 157(b)(2)(B). This court has jurisdiction over the dispute in accordance with 11 U.S.C. § 1334(b) and the district court's order of reference.

Background

     Margarita Hall (Hall), formerly known as Maggie Kempenar and now known as Margarita McDonald, is an employee of the U.S. Postal Service. On January 31, 1989, she was a passenger in a vehicle driven by Joe McDonald. McDonald was heading south on Arctic Boulevard. Chila A. Harms was heading north on Arctic. Harms made a left turn onto Fireweed Lane. McDonald's vehicle struck Harms' vehicle as he proceeded straight through the intersection. Harms was cited for failing to yield the right of way. No one claimed they were injured at the scene of the accident.

     Within days of the accident, Hall saw a physician and a chiropractor for neck and back pain. She lost about two weeks of work in 1989 and was placed on light duty at the post office. She was instructed to avoid heavy lifting. Despite regular chiropractic care and anti-inflammatory medication from her physician, Hall continued to have substantial back pain which sometimes radiated into her legs.

     Hall retained Michael J. Patterson to represent her on a contingency

   4 ABR 501 fee basis in a personal injury action against Chila Harms. Joe McDonald joined Hall as a plaintiff. The suit was filed in Anchorage Superior Court in December of 1990. Tim Redford appeared as defense counsel for Ms. Harms. He was retained by State Farm Insurance as her attorney. State Farm's policy limits were $100,000 plus Rule 82 attorney's fees. Patterson submitted a settlement evaluation to State Farm in June of 1991. He indicated that Hall would need a laminectomy in the future. His "damages summary" stated that Hall had current medical expenses of nearly $12,000, with projected future medical expenses of $40,000. He also included damages of $30,000 for "non-market services" and $1,410 for past wage loss. His summary reflected special damages totaling $83,183.30. He alleged $150,000 for past and future pain and suffering. The total of all damages claimed was $233,183.30. Patterson offered to settle for policy limits of $100,000 plus Rule 82 attorney's fees. State Farm rejected the offer.

     Patterson submitted another demand letter to State Farm on January 9, 1992, just prior to the filing of Hall's bankruptcy petition. He emphasized the significance of medical damages, stating that costs for Hall's surgery would exceed $30,000. The surgery was scheduled for January 15, 1992. He also discussed her depression, future wage loss of at least six to eight weeks and possible loss of her job altogether following completion of her surgery. State Farm responded with an offer of judgment for $28,000.01. Hall rejected the offer.

     Hall filed for bankruptcy on January 10, 1992. She retained J. Mitchell Joyner as her attorney, based upon a referral from Patterson. Joyner assisted Hall in preparing her petition, schedules and statements. Hall's schedules contain no reference to her pending personal injury claim. In her schedule B, at paragraph 20, Hall indicated she had no contingent and unliquidated claims of any nature. She failed to list Michael Patterson as a possible creditor, or as a party to an executory contract. She did not claim any portion of the personal injury claim as exempt under schedule "C". She did, however, list the personal injury claim in paragraph 4.a of her statement of financial affairs. The suit was described as follows:

Personal injury - Superior Court Third Judicial District at Anchorage - Pending - JOE MCDONALD AND MAGGIE KEMPENAR v. CHILA A. HARMS, Case No. 3AN-90-9930 Civil.

   4 ABR 502 Hall was, in fact, the only plaintiff in the personal injury suit at the time of her petition. McDonald had been dismissed as a plaintiff prior to Hall's bankruptcy filing.

     Following the bankruptcy filing, Hall had a laminectomy on her back. It was performed by Dr. Michael Newman on January 15, 1992, and she was released from the hospital on January 18, 1992. Hall did not return to work for several months. She lived off of her accumulated sick pay as she recuperated.

     She attended her § 341 meeting on February 14, 1992. Joyner, and Gordon Zerbetz, the trustee, questioned her regarding the personal injury action. Relevant portions from a transcript of proceedings for the § 341 meeting follow:

EXAMINATION BY MR. JOYNER:
Q Ms. Hall, I'm showing you a copy of your Chapter 7 bankruptcy petition. Did you assist our office in preparing that petition?

A Yes.

Q And did you provide us with the information that's contained in that petition?

A Yes.

Q And to the best of your knowledge, is there any information that's contained in that petition changed?

A No.

Q Do you have any assets that were not disclosed in that petition for Chapter 7 bankruptcy?

A No.

Q Do you have any debts that were not disclosed in that Chapter 7 bankruptcy?

A No.

MR. JOYNER: Okay. I have no further questions.
. . . .

MR. JOYNER: The -- I would add, though, that one of the assets that is listed is a personal injury action that Ms. Kempinar (ph) presently has. I'll be applying to the court for appointment of her attorney -- her current attorney in that 4 ABR 503 matter, Michael Miller -- or Michael Patterson to continue representing her and be appointed as the attorney representing her in that matter. At this stage, I think it's just in litigation. It hasn't been settled and there's no -- there is -- they don't even have a -- I don't know if they have a trial date yet.
. . . .

BY MR. JOYNER (Resuming):

Q Is that a personal injury action stemming from a vehicle accident?

A Yes.

Q Okay. And you have lost wages from that?

A Yes.

Q And you have medical expenses from that?

A Yes.

THE TRUSTEE: And the attorney is Michael --

MR. JOYNER: Patterson.

THE TRUSTEE: -- Patterson.
. . . .

BY THE TRUSTEE:
. . . .

Q Was this Nissan, was it in the automobile accident?

A No.

Q Did you have another car that you lost in the accident?

A No, that was my boyfriend's vehicle that I was the passenger in that car.

Q I see. Does this suit also involve your boyfriend, the lawsuit?

A No.

Q The personal injury lawsuit?

A Well, he was --

MR. JOYNER: Is he a plaintiff in the action as well, in the lawsuit?

THE WITNESS: No, not that I am aware of.

MR. JOYNER: Okay, Michael Patterson doesn't represent him?
4 ABR 504
THE WITNESS: No.

(Pause)

THE TRUSTEE: I don't think I have any further questions at this time. Mr. Joyner, I would appreciate you keeping me informed on Mr. Michael Patterson, the attorney for the personal injury suit, and what action is going to be taken.

MR. JOYNER: Sure. We'll serve you with all the copies of the appointment of him as the attorney in this matter.

THE TRUSTEE: Very well. Thank you very much. We're off the record.

Pl's Ex. 22, Tr. of Proceedings, § 341 Meeting of Creditors of Margarita Hall, February 14, 1992, p. 3, l. 1 - p. 6, l. 22.

     After the § 341 meeting, on February 25, 1992, Joyner mailed a pleading entitled "(1) APPLICATION FOR ORDER AUTHORIZING AND APPROVING THE EMPLOYMENT OF THE LAW OFFICES OF MICHAEL J. PATTERSON AS COUNSEL FOR THE DEBTOR; AND (2) BANKRUPTCY RULE 2014(a) STATEMENT" to trustee Gordon Zerbetz. Zerbetz did not file the application. Joyner did not follow up with him regarding it. Hall's discharge was entered by the Clerk on May 19, 1992.

     Patterson continued working diligently on the personal injury action. He retained a vocational expert, John Deisher, and an economist, Donald Lyon. Deisher investigated Hall's employment situation. He found that if Hall was unable to pass a job duty evaluation at the post office after a six month period, she would lose her job. Her job required the ability to lift up to seventy pounds. Based upon the possible loss of her job, Lyon prepared an estimate of future wage loss. Under Lyon's analysis, Hall would have future lost wages of $380,000 if she were to lose her post office job and assume a low-paying clerical position. Hall does not have the education or the skills for a higher-paying job. Tim Redford deposed Deisher and Lyon in June of 1992 for State Farm.

     As the trial date approached Redford and State Farm's claims representatives took a hard look at Hall's claims. Although they disputed liability, they were concerned about Hall's recuperation and the possibility of recurrent back problems affecting her work life. Hall

   4 ABR 505 also had substantial medical expenses due to her recent surgery. The trial was originally scheduled for July of 1992. Because of a third party complaint against McDonald, it was continued to November 2, 1992. As the continued trial date approached, State Farm upped its offer substantially, to $90,000. Patterson and Joyner were sharing office space at the time this offer was made. Patterson contacted Joyner and asked him if the settlement could be accepted and the proceeds disbursed in accordance with his contingency fee agreement. Joyner, without contacting the trustee Gordon Zerbetz, advised Patterson that he could proceed with the settlement and disbursals. In reliance on Joyner's advice, Hall accepted the settlement. Patterson received a check for $33,610.10, representing a one-third contingency fee plus costs of $3,610, and Hall received the remaining $56,390. Patterson and State Farm did not allocate the settlement to any particular portion of her claim, such as future lost wages or pain and suffering.

     Zerbetz never made any follow up inquiries regarding the status of the settlement. Larry Compton replaced him as trustee on May 9, 1993. Compton faxed inquiries about the status of the personal injury claim to Joyner on February 24, 1994, and July 19, 1994. Joyner did not respond to either fax, and testified he doesn't recall receiving them. Compton learned of the settlement from the debtor's then husband, Joe McDonald, who called Compton regarding Hall's bankruptcy in May of 1995. McDonald wanted to know why the case was still pending as he and Hall wanted to refinance their house. He told Compton that Hall had received over $56,000 in proceeds and spent them.

     After learning of the settlement, Compton sent a third fax to Joyner, dated May 27, 1995. This fax got Joyner's attention. Compton told Joyner that he knew about the settlement. Joyner advised Compton that the proceeds were exempt and that he was amending the schedules appropriately. Compton filed an adversary action against Hall and Patterson seeking turnover of the settlement funds and revocation of discharge. He also objected to the debtor's claim of exempt property, belatedly filed by Joyner on July 13, 1995, which claimed just Hall's share of the proceeds to be exempt.

     I initially held a hearing on the trustee's objection to Hall's amended exemptions in October of 1995, but required the submission of

   4 ABR 506 further evidence. Patterson then submitted a motion for nunc pro tunc employment by the estate. After it was denied, the debtor again amended her claim of exempt property on November 28, 1995, indicating that the full $90,000 in settlement proceeds were exempt.

     Hall has continued to work full time at the post office after recuperating from the surgery of January, 1992. She still complains of back pain and sees a physician. She is no longer married to McDonald. She testified that the settlement proceeds were put in a joint account with him. Other than a $2,000 gift to her mother, she has no idea of where the money went.

Analysis
     Rule 1009(a), Fed. R. Bankr. P., permits the debtor to amend her schedules "as a matter of course at any time before the case is closed." Generally, the amendment may be made at any time during the pendency of the case and will be allowed absent a showing of bad faith or prejudice to third parties. In re Magallanes, 96 B.R. 253, 256 (9th Cir. BAP 1988); In re Andermahr, 30 B.R. 532, 533 (9th Cir. BAP 1983). Because the right to amend is liberally construed, bad faith or prejudice must be shown through clear and convincing evidence. Magallanes, 96 B.R. at 256; In re Talmo, 185 B.R. 637, 644-645 (Bankr. S.D. Fla. 1995); In re Kobaly, 142 B.R. 743, 748-749 (Bankr. W.D. Pa. 1992).

     The trustee has not sustained his burden of proof on the issue of bad faith by clear and convincing evidence. The debtor is an unsophisticated woman with little education. She relied completely upon her attorneys in the personal injury and bankruptcy proceedings. She candidly discussed the personal injury action with the initial trustee at the meeting of creditors. Her former husband was the one who disclosed the settlement to trustee Larry Compton. The debtor did not act in bad faith.

     Nor do I find the actions of Joyner or Patterson to have been taken in bad faith. Unquestionably, Joyner did a poor job of preparing the petition and schedules. He was negligent in failing to properly schedule the personal injury lawsuit and file Hall's claim of exemptions in a timely manner. He did, however, list the personal injury action in Hall's statement of financial affairs, discuss it with the trustee at the

   4 ABR 507 § 341 meeting of creditors, and submit a proposed application for Patterson's employment to Zerbetz after the meeting. Joyner improperly advised Patterson that Hall could accept the settlement and that the $90,000 in settlement proceeds could be disbursed. Further, he conveniently ignored Larry Compton's repeated requests for information, until it became apparent that Compton knew of the settlement. In spite of this, I believe Joyner was simply negligent and did not intentionally engage in bad faith conduct. Moreover, he received no kickback in fees from Patterson after settlement of the claim.

     Patterson is not a bankruptcy practitioner. He, like Hall, relied on Joyner to properly advise him regarding bankruptcy issues. Patterson honestly believed disbursal of the funds was legitimate. He did not intentionally conceal assets or defraud the estate. I conclude that amendment of the schedules cannot be denied on bad faith grounds.

     The trustee and the estate have suffered substantial prejudice, however, due to the debtor's failure to promptly file amended schedules when she received the settlement proceeds in September, 1992. $90,000 in estate funds are gone and may never be recovered. Patterson's contingent fee has been paid. Ms. Hall and her husband somehow spent the balance, more than $56,000, and have nothing left. If timely and accurate amendments had been filed, the trustee would have had the opportunity to protect the estate's interest in the funds. Moreover, the estate has incurred inordinate and unnecessary attorney's fees and costs solely because of Mr. Joyner's failure to file accurate amendments to Hall's schedules promptly after the settlement proceeds were received.

     Hall argues that there is no real prejudice to the estate because all of her assets, including the settlement proceeds, were exempt in any event. Hall claims the settlement proceeds exempt under 11 U.S.C. § 522(d)(11)(D) and (E). With regard to her claim of exemptions under subsection (d)(11)(D), Hall is not entitled to the increase in exemptions for personal bodily injury claims brought about by the Bankruptcy Reform Act of 1994. Effective October 22, 1994, the exemption provided by § 522(d)(11)(D) for a payment for personal bodily injury was increased from $7,500 to $15,000. H.R. 5116, 103d Cong. § 108(d)(8)(1994). The debtor filed in 1992. The increased exemption amount is not retroactive, and does not apply to cases that were pending prior to the adoption of the 1994 Act. Pub. L. 103-394 § 702(a), Oct. 22, 1994, 108 Stat. 4106. Since Hall's case was pending prior to the adoption of the 1994 Act, she

   4 ABR 508 cannot receive the benefit of the increased exemption.

     As only $7,500 of the settlement proceeds could be claimed exempt under the version of § 522(d)(11)(D) in effect at the time Hall filed her petition, the balance of the proceeds would have to be exempt under § 522(d)(11)(E), which allows a debtor to exempt:

     (11) The debtor's right to receive, or property that is traceable to --

. . . .
(E) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

In this case, there was no allocation of the settlement proceeds by the parties. Nor can this court find, through its own allocation, that all of the remaining proceeds would have been exempt had they been claimed in a timely manner in 1992. Unquestionably, if the debtor had promptly filed amended schedules in 1992, after her surgery and prior to her return to full heavy-duty work at the post office, a substantial portion of the settlement would have been exempt under § 522(d)(11)(E). I conclude that the largest portion of Hall's settlement is attributable to special damages arising from the possible loss of her future income reasonably necessary for her support. I base this on the testimony of Hall, Michael Patterson, Tim Redford (attorney for State Farm), the medical records and experts John Deisher and Donald Lyon.

The release Hall gave to State Farm in settlement, however, was for all claims. In 1992, there were other major components of Hall's personal injury claim which could not have been claimed exempt. Hall's past medical expenses were substantial. Although an accurate accounting of her medical expenses has never been compiled, they totaled at least $30,000 when the settlement was procured. Additionally, the debtor lost two to three months of wages, some occurring after the accident and the bulk after surgery. Damages for past lost wages would total at least $7,500. Hall also claimed special damages of $30,000 for "non-market" services. Additionally, physical and mental pain and suffering were

   4 ABR 509 major elements of her claim. Hall suffered extensive pain from 1989, through her surgery in 1992, and beyond. Her suffering was well documented in medical records and resulted in depression.

     I conclude that even if the debtor had timely amended her claim of exemptions in 1992, at least 30% of the settlement proceeds could be conservatively allocated to non-exempt portions of her claim. Thus, the estate did suffer real and substantial prejudice from the debtor's failure to timely amend her schedules. This prejudice arises in addition to the thousands of dollars in needless attorney's fees and costs incurred by the estate because of Hall's failure to file timely amendments. Finally, even if I were to overlook the prejudice suffered by the estate and allow the debtor's amended exemptions, very little of the settlement proceeds could be allocated to loss of future earnings at this time. Since her recovery from surgery, the debtor has suffered no loss in wages, instead consistently earning more each year.

     Hall cites In re Corbi, 149 B.R. 325 (Bankr. E.D.N.Y. 1993) in support of her position. In Corbi, the court allowed the debtor to claim certain proceeds arising from a personal injury settlement as exempt even though they were not listed as exempt in his petition. Corbi is distinguishable from Hall's case, because in Corbi no disbursements had yet been made. The funds had been retained in the debtor's attorney's trust account pending a determination of the debtor's exemptions by the bankruptcy court. There was no prejudice to the estate as the funds had not been not disbursed prior to their disclosure. Corbi simply does not apply here.

Conclusion
     Because the estate has suffered prejudice from the debtor's failure to file timely exemption schedules, her amended claim of exemptions, insofar as they seek to exempt the $90,000 settlement proceeds, will be disallowed and stricken. An appropriate order and judgment shall be entered accordingly.

     DATED: March 31, 1997.

BY THE COURT

DONALD MacDONALD IV

United States Bankruptcy Judge