Pennie R. Daly (the "Debtor") is before the court on the Amendment to Schedules that she filed on March 23, 2004, which added two life insurance policies on the Debtor's spouse to her schedule of personal property (Schedule B) and to her list of property claimed as exempt (Schedule C). On April 19, 2004, J. James Rogan, as trustee of the Debtor's bankruptcy estate (the "Trustee"), objected to the amended exemption claim. The Trustee's objection is based solely on the Debtor's failure to list the life insurance policies in the original Schedule B, and does not dispute that the policy proceeds are exempt under applicable law, K.R.S. 304.14-300(1), 304-14-330(1). Having considered the objection and supporting memorandum, the Debtor's response, and the arguments of counsel, the court concludes that the objection should be overruled.

Factual and Procedural Background

The Debtor and her spouse filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 7, 2002. Under "interests in insurance policies" on their Schedule B, the debtors indicated "none" and no insurance policy was listed on their Schedule C. There is no dispute that the insurance policies on the Debtor's spouse's life had no cash surrender value. The debtors' statement of financial affairs also failed to disclose any debt payments or gifts within the year preceding the bankruptcy filing while the Trustee discovered that the Debtor had transferred $2,800 to her mother during the 90 days preceding the commencement of the bankruptcy case for the purpose of making charitable contributions for the Debtor and her spouse. (1) While the Debtor's contributions to her church were not disclosed in the SFA, they were disclosed on her Schedule J. (2)

The Debtor's spouse died on March 27, 2003. On January 13, 2004 the Trustee took the Rule 2004 examination of the Debtor. (3) At that time, the Trustee learned that the Debtor had received a little over $125,000 in life insurance proceeds and had expended all but $6,396.79 of the proceeds. Uses of the funds included buying cars for the Debtor, her daughter, and her mother; paying off a car used as a trade-in; paying apartment rentals and other living expenses; paying attorney's fees for the Debtor and her daughter; making gifts to the Debtor's children, siblings, and church; purchasing bedroom furniture; and paying taxes, cemetery, and funeral expenses. On January 24, 2004, the Debtor turned over the unexpended balance of the insurance proceeds to the Trustee. There is no evidence that the Debtor was subjectively aware of any obligation to report the receipt of the insurance proceeds or turn them over to the Trustee. The Trustee relies on a letter of April 4, 2003 to the Debtor from one of her attorneys as putting the Debtor on notice that the funds may need to be turned over to the Trustee. To the contrary, the letter explained various Kentucky exemption statutes, i.e., it only offered reasons that the proceeds need not be turned over.

As stated above, the Amendment to Schedules was filed on March 23, 2004 and the Trustee's objection was filed on April 19, 2004. The court conducted a hearing on the objection on June 10, 2004.

Legal Discussion

Rule 1009(a) of the Federal Rules of Bankruptcy Procedure provides, in pertinent part: "A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed." "If, however, there is evidence of a debtor's bad faith or fraudulent concealment of an asset, a court may refuse a debtor's proposed amendment." In re Millsaps, 774 F.2d 1163 (Table), 1985 WL 13737, at **1 (6th Cir. 1985) (affirming denial of amendment of exemption claim to include asset omitted from original schedule of assets); accord, e.g., Kaelin v.Bassett (In re Kaelin), 308 F.3d 885, 889 (8th Cir. 2002); Osborn v. Durant Bank & Trust Co. (In re Osborn), 24 F.3d 1199, 1206 (10th Cir. 1994); In re Yonikus, 996 F.2d 866, 872 (7th Cir. 1993); Stinson v. Williamsson (In re Williamson), 804 F.2d 1355, 1358 (5th Cir. 1986); Lucius v. McLemore, 741 F.2d 125, 127 (6th Cir. 1984); Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982); In re Colvin, 288 B.R. 477, 481 (Bankr. E.D. Mich. 2003); In re Sumerell, 194 B.R. 818, 832 (Bankr. E.D. Tenn. 1996); In re Clemmer, 184 B.R. 935, 942 (Bankr. E.D. Tenn. 1995). "In the context of an amendment of exemptions, bad faith is determined by an examination of the totality of the circumstances." Colvin, 288 B.R. at 481; accord, Clemmer, 184 B.R. at 941. "Mere allegations of bad faith will not suffice; the objecting party must demonstrate the bad faith of the debtor by specific evidence." Colvin, 288 B.R. at 481 (citations omitted).

The Trustee has not offered specific evidence that the Debtor omitted the life insurance policies from the original schedules fraudulently or in bad faith. First, the policies were term policies and there was no reason to believe that the Debtor's spouse would pass away in the foreseeable future, so the policies had no present or apparent potential future value at the time the schedules were filed. See In re Monahan, 171 B.R. 710, 715 (Bankr. D.N.H. 1994) (lack of cash surrender value indicated that failure to list policy was inadvertent and did not result from bad faith). It is for this reason that the Trustee's reliance on the Colvin case is misplaced. There, the Michigan bankruptcy court found an intentional concealment based in large part on the debtors' knowledge of the right to a large tax refund at the time the bankruptcy papers were signed. Colvin, 288 B.R. at 482. In this case, on the other hand, the Debtor had no reason to believe that the insurance policies had any value at the time she signed the original Schedule B.

Second, after the death, the only information the Debtor received regarding the bankruptcy's effect on her receipt of the life insurance proceeds was a letter from an attorney concluding that the proceeds were exempt under Kentucky law. Third, while the debtors' interests in the policies were not disclosed, it is the proceeds of the policies that are presently in issue and the proceeds themselves did not exist at the time the schedules were filed; while the failure to disclose the policies may be grounds for rejecting an amended claim of exemption in the policies themselves, it is not grounds for denying an exemption in the proceeds. Fourth, the Trustee has not shown that the Debtor held an interest in either policy at the time the petition was filed: her spouse may well have been the policyholder and the Debtor merely a beneficiary, in which case any bad faith by the spouse in concealing his interest in the policy would not be imputed to the Debtor. See In re Howard, 6 B.R. 200, 223 (Bankr. S.D. Ohio 1980). The court concludes that the Trustee has not offered evidence that the Debtor is guilty of bad faith or fraudulent concealment in omitting the life insurance policies from the original schedules of assets sufficient to overcome Rule 1009(a)'s authorization for a debtor to amend schedules "as a matter of course at any time before the case is closed."


For the foregoing reasons, the court will enter a separate order overruling the Trustee's objection to the Debtor's amended exemption claim.

Copies to:

James D. Lyon, Esq.

J. James Rogan, Trustee

1. The Trustee asserted a claim for a recovery of those funds and, pursuant to an order entered on June 27, 2003, the claim was compromised for the sum of $800.

2. The Trustee also complains that the statement of financial affairs further indicated that there were no suits pending within the previous year to which the Debtor or her spouse was a party, while a foreclosure had been ordered by the Fayette Circuit Court four months before the petition was filed. The SFA also fails to disclose the debtors' prior residence address, being the property that was the subject of the foreclosure action, although there is no evidence that the debtors vacated the premises within the two years preceding the filing (or even that they used the property as their residence).

3. The Debtor's original bankruptcy attorney was granted leave to withdraw by an order entered on the date of the examination. The Debtor was not represented at the Rule 2004 exam, but the Debtor thereafter retained a new attorney who entered his appearance the same day that the Amendment to Schedules was filed.