In re: James W. Corbett and Daisy A. Corbett

FILED APR 24 2014 1 NO FO PUBL A IO T R IC T N 2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EC-13-1126-DJuTa ) 6 JAMES W. CORBETT and ) Bk. No. 08-10861-A-7 DAISY A. CORBETT, ) 7 ) Debtors. ) 8 ______________________________) ) 9 DAISY A. CORBETT, ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M1 ) 12 JAMES E. SALVEN, Chapter 7 ) Trustee; CALIFORNIA ) 13 CORRECTIONAL PEACE OFFICERS ) ASSOCIATION, ) 14 ) Appellees. ) 15 ______________________________) 16 Submitted Without Oral Argument on March 21, 20142 17 Filed - April 24, 2014 18 Appeal from the United States Bankruptcy Court for the Eastern District of California 19 Honorable Fredrick E. Clement, Bankruptcy Judge, Presiding 20 21 Appearances: Appellant Daisy A. Corbett pro se on brief; D. Edward Hays and Martina A. Slocomb of Marshack 22 Hays LLP on brief for appellee California Correctional Peace Officers Association; appellee 23 James E. Salven, Chapter 7 Trustee pro se on brief. 24 25 1 This disposition is not appropriate for publication. 26 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 27 See 9th Cir. BAP Rule 8013-1. 28 2 By order entered October 17, 2013, this appeal was deemed suitable for submission without oral argument. See Fed. R. Bankr. P. 8012 and Ninth Circuit BAP Rule 8012-1.

1 Before: DUNN, JURY and TAYLOR, Bankruptcy Judges. 2 This appeal concerns disputes as to who is entitled to an 3 award of workers’ compensation benefits in the approximate amount 4 of $86,000 (“Benefits Award”). The debtor/appellant Daisy A. 5 Corbett (“Ms. Corbett”)3 appeals two of the bankruptcy court’s 6 orders that relate to the Benefits Award: 1) the order sustaining 7 the chapter 7 trustee’s (“Trustee”)4 objection to Ms. Corbett’s 8 claimed exemption in the Benefits Award (“Exemption Order”); and 9 2) the order overruling her objection to the Trustee’s final 10 account and distribution report (“Final Account Order”).5 11 12 3 In her opening brief, Ms. Corbett refers to herself both 13 as “Daisy A. Smith-Corbett” and “Daisy A. (Smith) Corbett.” To further confuse matters, in her reply brief she further refers to 14 herself as simply “Daisy A. Corbett.” To end the confusion, the appeal is captioned in her name as “Daisy A. Corbett.” Her 15 chapter 7 case was filed jointly with her husband, James W. 16 Corbett, but since the issues in this appeal relate solely to Ms. Corbett, we will make no further reference to Mr. Corbett. 17 However, as appropriate, we do refer from time to time to the Corbetts jointly as “debtors.” 18 4 19 Unless otherwise indicated, all chapter and section references are to the federal Bankruptcy Code, 11 U.S.C. §§ 101- 20 1532, and all “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 21 5 22 In the notice of appeal, Ms. Corbett, acting pro se, only referred to the Exemption Order. However, she discussed the 23 Final Account Order as well as the Exemption Order in her Statement of Issues on Appeal and included both orders in her 24 excerpts of record. In their briefs, the parties address both 25 orders, and appellees raise no issue of prejudice. We note that the orders arose from proceedings at the same hearing and are 26 related, and both orders were entered on the same date. 27 Accordingly, we address both the Exemption Order and the Final Account Order in this disposition. See Le v. Astrue, 558 F.3d 28 continue...

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1 To be blunt, the parties all have made a hash of this case. 2 The first bankruptcy judge assigned to the case provided some 3 guidance as to an appropriate procedural vehicle to resolve their 4 disputes. That guidance was ignored. After substantial time had 5 passed and the first bankruptcy judge had recused himself, a 6 successor bankruptcy judge was faced with the task of cleaning up 7 the mess. We VACATE and REMAND with respect to both orders. 8 9 FACTS 10 A. Ms. Corbett’s workers’ compensation claim 11 Several years prepetition, Ms. Corbett worked as a 12 correctional officer for the California Department of Corrections 13 and Rehabilitation. Tr. of January 30, 2013 hr’g, 29:14-16.6 14 Sometime in late 1996, while on the job, she was assaulted by an 15 16 17 18 5 ...continue 19 1019, 1023 (9th Cir. 2009); Shapiro v. Paradise Valley Unified School Dist. No. 69, 374 F.3d 857, 863 (9th Cir. 2004) (“Where ‘a 20 party seeks to argue the merits of an order that does not appear on the face of the notice of appeal,’ we consider two factors: 21 (1) whether the intent to appeal a specific judgment can be 22 fairly inferred, and (2) whether the appellee was prejudiced by the mistake.”), citing Lolli v. County of Orange, 351 F.3d 410, 23 414 (9th Cir. 2003). 24 6 Ms. Corbett only provided portions of the January 30, 2013 25 hearing transcript in her excerpts of record. We retrieved the entire January 30, 2013 hearing transcript from the bankruptcy 26 court’s electronic docket. See O’Rourke v. Seaboard Sur. Co. 27 (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 28 227, 233 n.9 (9th Cir. BAP 2003).

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1 inmate, sustaining an injury.7 Tr. of January 30, 2013 hr’g, 2 30:3-8. Due to her injury, Ms. Corbett became unable to work 3 sometime in 2005.8 4 At the time she became unable to work, Ms. Corbett was a 5 member of the California Correctional Peace Officers Association 6 (“CCPOA”), a union for correctional officers employed by the 7 California Department of Corrections and Rehabilition. As a 8 service to its members, the CCPOA established a disability 9 benefit trust fund (“disability benefit fund”).9 Participation 10 in the disability benefit fund was optional for CCPOA members. 11 The disability benefit fund advances funds to injured CCPOA 12 members until they receive workers’ compensation benefits. In 13 exchange for these advances, the CCPOA is granted a statutory 14 lien on any workers’ compensation benefits received by its 15 members.10 When she filed a claim for benefits through the 16 17 7 At the time she sustained her injury, Ms. Corbett was 18 working as a correctional officer at the California State Prison, Corcoran, a men’s prison. Tr. of January 30, 2013 hr’g, 19 29:14-24. 20 8 Both debtors reported in their Schedule I that they are 21 disabled and retired. 9 22 The disability benefit fund is a self-funded employee welfare benefit plan. The disability benefit fund is funded with 23 premiums paid by its participants and any investment earnings. 24 10 According to the CCPOA, it had a statutory lien on 25 Ms. Corbett’s workers’ compensation benefits under Cal. Labor Code § 4903. However, the CCPOA does not provide the applicable 26 subsection of Cal. Labor Code § 4903. 27 Cal. Labor Code § 4903 provides, in relevant part: 28 continue...

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1 disability benefit fund, Ms. Corbett signed an agreement titled, 2 “Reimbursement Agreement and Assignment of Proceeds” 3 (“Reimbursement Agreement”).11 4 5 10 ...continue 6 The appeals board may determine, and allow as liens against any sum to be paid as compensation, any amount 7 determined as hereinafter set forth in subdivisions (a) 8 through (i). If more than one lien is allowed, the appeals board may determine the priorities, if any, 9 between the liens allowed. The liens that may be allowed hereunder are as follows: 10 . . . 11 (b) The reasonable expense incurred by or on behalf of the injured employee, as provided by Article 2 12 (commencing with Section 4600) and, to the extent the employee is entitled to reimbursement under 13 Section 4621, medical-legal expenses as provided by 14 Article 2.5 (commencing with Section 4620) of Chapter 2 of Part 2. 15 (c) The reasonable value of the living expenses of an 16 injured employee or of his or her dependents, subsequent to the injury. 17 . . . (f) The amount of unemployment compensation disability 18 benefits that have been paid under or pursuant to the 19 Unemployment Insurance Code in those cases where, pending a determination under this division there was 20 uncertainty whether the benefits were payable under the Unemployment Insurance Code or payable hereunder; 21 provided, however, that any lien under this subdivision 22 shall be allowed and paid as provided in Section 4904. (g) The amount of unemployment compensation benefits 23 and extended duration benefits paid to the injured 24 employee for the same day or days for which he or she receives, or is entitled to receive, temporary total 25 disability indemnity payments under this division; provided, however, that any lien under this subdivision 26 shall be allowed and paid as provided in Section 4904. 27 11 The CCPOA included a copy of the Reimbursement Agreement 28 continue...

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1 The Reimbursement Agreement provided that the disability 2 benefits fund would pay her claims for any work-related injury or 3 illness conditioned on the CCPOA’s 4 right to reimbursement up to the full extent of benefits paid by the [disability benefit fund] on the 5 claims, in the event [Ms. Corbett] recover[s] (i) damages or proceeds . . . by award, settlement, 6 insurance or otherwise, for medical and other expenses (regardless of how such award, settlement or otherwise 7 is structured or itemized); or (ii) any proceeds from occupational insurance purchased by [her] employer, or 8 provided under state workers’ compensation acts, employer liability laws, or other laws providing 9 compensation for work-incurred injuries. 10 The Reimbursement Agreement further provided that, in 11 consideration of the advances given by the CCPOA, Ms. Corbett 12 must 13 repay and hereby assign to the [disability benefit fund] the proceeds of any and all recovery/ies made 14 from any responsible party or insurer to [her] or to any person or entity on [her] behalf, to the extent of 15 any benefits provided by the [disability benefit fund] . . . . 16 17 It also provided that, if Ms. Corbett failed to comply with 18 the Reimbursement Agreement, “the [disability benefit fund] may 19 offset the amount which should be reimbursed against any benefit 20 that may otherwise be (or become), payable under the [disability 21 benefit fund] on [her] behalf.” 22 Ms. Corbett apparently did not reimburse the CCPOA for any 23 of the funds advanced to her. 24 B. The debtors’ chapter 7 bankruptcy 25 On February 21, 2008, the debtors filed their chapter 7 26 27 11 ...continue 28 in its proof of claim (claim no. 11-1) filed August 1, 2011.

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1 bankruptcy petition. They did not list Ms. Corbett’s right to 2 workers’ compensation benefits as an asset on Schedule B. They 3 also did not list any lawsuits or actions relating to 4 Ms. Corbett’s workers’ compensation benefits on their statement 5 of financial affairs (“SOFA”). They further did not claim any 6 exemption in Ms. Corbett’s right to workers’ compensation 7 benefits on their Schedule C. However, the debtors did list the 8 CCPOA as a general unsecured creditor with a $56,658.20 claim on 9 their Schedule F. 10 Shortly after the § 341(a) meeting of creditors, the Trustee 11 filed an asset report on March 31, 2008.12 A day later, a notice 12 to file proofs of claim was filed, advising creditors to file 13 their proofs of claim by July 2, 2008. The CCPOA did not file a 14 proof of claim at that time. 15 After further investigation into the debtors’ financial 16 affairs, the Trustee filed a no asset report on April 16, 2008. 17 Tr. of January 30, 2013 hr’g, 7:1-6. The debtors received their 18 discharge on June 3, 2008. Their chapter 7 bankruptcy case 19 closed a week later. 20 Ms. Corbett apparently encountered some difficulties in 21 22 23 24 12 At the January 30, 2013 hearing, the Trustee explained 25 that he initially declared the debtors’ chapter 7 bankruptcy case an asset case because he “was looking at some property that was 26 in the debtors’ name, and there was – there was a bank account in 27 Hawaii.” Tr. of January 30, 2013 hr’g, 7:2-3. He also “was looking at the value of the car.” Tr. of January 30, 2013 hr’g, 28 7:3-4.

1 recovering her workers’ compensation benefits.13 She went before 2 the California Workers Compensation Appeals Board to pursue her 3 workers’ compensation benefits claim against the California 4 Department of Corrections and Rehabilitation. Sometime in 5 January 2011, the California Workers Compensation Appeals Board 6 decided in Ms. Corbett’s favor.14 The Benefits Award provided 7 reimbursement for her medical and/or legal expenses and further 8 medical treatment, among other things. 9 However, the Benefits Award provided that $85,986.90 in 10 workers’ compensation benefits would be withheld pending 11 resolution of issues involving the CCPOA’s lien claim. According 12 to the CCPOA, the California Workers Compensation Appeals Board 13 questioned whether Ms. Corbett’s chapter 7 discharge affected the 14 CCPOA’s lien. It directed the CCPOA to seek an order from the 15 bankruptcy court “clarifying that [the debtors’ chapter 7] 16 discharge [did] not affect lien rights.” 17 The CCPOA subsequently filed a motion to reopen the debtors’ 18 chapter 7 bankruptcy case on February 7, 2011. The bankruptcy 19 court granted the motion to reopen, entering an order four days 20 later (“Reopen Order”). The Reopen Order provided that the CCPOA 21 “shall have 30 days to file an adversary proceeding pursuant to 22 23 13 In a document titled “Support to Trustee’s Motion to 24 Compel Turnover of Funds” (“Non-Opposition”) filed by the debtors on August 16, 2011 (docket no. 65), Ms. Corbett stated that she 25 hired an attorney in September 2006 to help her obtain workers’ compensation benefits to pay for further medical treatment. 26 14 27 The Benefits Award later was amended to provide that the California Workers Compensation Appeals Board would retain 28 jurisdiction over the CCPOA’s statutory lien.

1 [Rule] 7001(2). If the adversary proceeding is not filed, the 2 case may be reclosed.” 3 The CCPOA then filed a motion titled, “Motion for Order to 4 Clarify that Discharge Does Not Affect Liens as a Matter of Law” 5 (“Motion to Clarify”), by means of which it sought an order from 6 the bankruptcy court confirming that the debtors’ discharge did 7 not terminate or otherwise affect its lien rights. The Motion to 8 Clarify alleged that, although the CCPOA had created and 9 perfected its lien against the Benefits Award, the California 10 Workers Compensation Appeals Board refused to determine whether 11 the CCPOA’s lien was properly perfected and valid under state law 12 until the CCPOA received such an order. The CCPOA contended that 13 its lien was unaffected by the debtors’ discharge as the debtors 14 had not taken any steps to invalidate the lien in their 15 bankruptcy case. 16 The Motion to Clarify also stated that the CCPOA was not 17 seeking a determination as to the validity, priority or extent of 18 its lien, because the California Workers Compensation Appeals 19 Board was the proper forum to decide those issues. The Motion to 20 Clarify further stated that the CCPOA was not seeking a 21 dischargeability determination, acknowledging that Ms. Corbett’s 22 personal liability on the debt owed to the CCPOA had been 23 discharged. 24 The debtors opposed the Motion to Clarify, arguing that the 25 bankruptcy court could not issue an order pursuant to the CCPOA’s 26 request. They maintained that because the issues involving the 27 Benefits Award still were pending before the California Workers 28 Compensation Appeals Board, such an order would constitute an

1 “advisory opinion” because there was no live case or controversy 2 before the bankruptcy court. Moreover, the debtors asserted that 3 the issues regarding the CCPOA’s lien were not ripe for 4 adjudication by the bankruptcy court because the California 5 Workers Compensation Appeals Board still had not determined that 6 the CCPOA had properly perfected its lien under state law. 7 Finally, the debtors contended that, contrary to its assertions, 8 the CCPOA was not seeking a “comfort” order – a confirmation that 9 the debtors’ discharge did not affect its lien. Rather, it was 10 requesting a determination on the nature, extent or validity of 11 its lien, an issue that must be addressed in an adversary 12 proceeding pursuant to Rule 7001. 13 The bankruptcy court held a hearing on the Motion to Clarify 14 on March 23, 2011. It denied the Motion to Clarify without 15 prejudice to filing an adversary proceeding for declaratory 16 relief. Tr. of March 23, 2011 hr’g, 14:12-13. The bankruptcy 17 court stated that the CCPOA was seeking “declaratory relief as to 18 whether or not . . . the prepetition contract to – that [gave] 19 rise to the lien survived the bankruptcy discharge and would 20 attach to an asset that didn’t come into existence until 21 postpetition.” Tr. of March 23, 2011 hr’g, 13:2-5. The 22 bankruptcy court therefore advised the CCPOA that it would 23 “require [the CCPOA] to file an adversary proceeding for 24 declaratory relief on that issue.” The bankruptcy court stressed 25 that it was “only going to litigate the issue whether the 26 prepetition contract [rode] through – can ride through and attach 27 to postpetition assets.” Tr. of March 23, 2011 hr’g, 14:23-25. 28 The bankruptcy court also advised the parties that it intended to

1 abstain from determining whether the CCPOA properly perfected its 2 lien. Tr. of March 23, 2011 hr’g, 14:21-22. 3 The bankruptcy court did not enter an order on the Motion to 4 Clarify. Instead, it entered civil minutes (docket no. 49) 5 setting forth its determinations. Unfortunately, the civil 6 minutes neither mentioned the requirement for an adversary 7 proceeding, designated the party responsible for its filing, nor 8 set a deadline for its filing. 9 Following the hearing on the Motion to Clarify, the 10 bankruptcy court reappointed the Trustee pursuant to the United 11 States Trustee’s request. 12 On July 27, 2011, the Trustee filed a motion to compel the 13 California Workers Compensation Appeals Board to turn over the 14 Benefits Award that it held (“Motion to Compel”). The stated 15 purpose of the Motion to Compel was to bring the Benefits Award 16 into the bankruptcy estate so that the bankruptcy court could 17 determine who owned it: the bankruptcy estate, the debtors or the 18 CCPOA. Neither the debtors nor the CCPOA opposed the Motion to 19 Compel.15 20 Following a hearing on the Motion to Compel, the bankruptcy 21 court entered an order (“Turn Over Order”) directing the 22 California Workers Compensation Appeals Board to turn over the 23 Benefits Award. The Turn Over Order directed the Trustee to hold 24 the funds “in a blocked account until final disposition is 25 approved by further order of this court.” The bankruptcy court 26 15 27 The debtors filed their Non-Opposition on August 16, 2011 (docket no. 65). The CCPOA filed a notice of non-opposition to 28 the Motion to Compel (docket no. 60) on August 25, 2011.

1 clearly intended that the Benefits Award funds would not be 2 released for distribution until after resolution of the dispute 3 between the CCPOA and Ms. Corbett. Despite the bankruptcy 4 court’s colloquy with the parties at the hearing on the Motion to 5 Clarify and the language in the Turn Over Order directing the 6 Trustee to hold the Benefits Award funds in a blocked account 7 until resolution by the court as to proper disposition of the 8 funds, no adversary proceeding ever was filed by the CCPOA to 9 obtain the necessary decision from the bankruptcy court. Nor was 10 an interpleader action filed by the Trustee. 11 Instead, on August 1, 2011, the CCPOA filed a proof of claim 12 in the amount of $85,986.90, all of which was characterized as 13 secured, based on a “lien on workers’ compensation benefits.” No 14 objections were filed to the CCPOA’s proof of claim. 15 After the Motion to Compel hearing, the Trustee did little 16 in the debtors’ bankruptcy case, except to obtain the bankruptcy 17 court’s approval to employ accountants and to withdraw the no 18 asset report (“Withdrawal”)(docket no. 83). He did note in the 19 Withdrawal that he collected funds “relating to an undisclosed 20 asset” and that, to date, the debtors had “neither amended to 21 disclose the [asset] nor [had they] claimed any exemption 22 therein.” The proof of service for the Withdrawal reflected 23 service on the debtors at their address as listed on the 24 bankruptcy court docket. 25 Although the Trustee withdrew the no asset report, he did 26 not file a new asset report. Further, no new deadline was set 27 for filing proofs of claim. 28

1 C. The debtors’ objection to the Trustee’s Final Account 2 On July 17, 2012, the Trustee filed his final report 3 (“Trustee Final Report”)(docket no. 85). The Trustee indicated 4 that he realized gross receipts of $85,986.90, i.e., the Benefits 5 Award. After paying $770.55 in bank service fees and $182.58 in 6 administrative expenses, he had a balance of $85,033.77. The 7 Trustee disclosed that he would distribute $76,202.18 to the 8 CCPOA on its secured claim, which would leave a balance of 9 $8,831.59. The balance then would be paid to the Trustee for his 10 fees and costs and for his accountants’ fees.16 The Trustee 11 indicated that there would be no distribution to the general 12 unsecured creditors on their claims.17 13 Also on July 17, 2012, the Trustee filed a notice of the 14 Trustee Final Report (“Trustee Final Report Notice”)(docket 15 no. 86). Through the Trustee Final Report Notice, the trustee 16 advised “any person wishing to object to any fee application that 17 has not already been approved or to the [Trustee] Final Report, 18 must file a written objection within 21 days from the mailing of 19 this notice, together with a request for a hearing and serve a 20 copy of both upon the Trustee . . . .” The Trustee Final Report 21 Notice further provided that “[i]f no objections are filed, the 22 Court will act on the fee application and the trustee may pay 23 dividends pursuant to [Rule] 3009 without further order of the 24 Court.” 25 26 16 The Trustee requested $7,549.35 in fees and $254.24 in 27 expenses. He also requested $1,028 for his accountants’ fees. 17 28 The allowed general unsecured claims totaled $115,593.06.

1 On the same day, an order was entered (“Objection Deadline 2 Order”)(docket no. 87), fixing the deadline for objections to the 3 Trustee Final Report at August 9, 2012.18 4 According to the proofs of service, the Trustee Final 5 Report, the Trustee Final Report Notice and the Objection 6 Deadline Order all were mailed to the debtors at their address as 7 listed on the bankruptcy court docket. No objections were filed 8 to the Trustee Final Report. 9 On August 10, 2012, the bankruptcy court entered an order 10 (“Trustee Fee Order”)(docket no. 91) authorizing the Trustee to 11 pay his fees and expenses and his accountants’ fees. On 12 October 23, 2012, the Trustee filed his final account and 13 distribution report (“Trustee Final Account”)(docket no. 92). He 14 reported that all funds on hand had been distributed pursuant to 15 the Trustee Final Report. 16 On November 21, 2012, the debtors filed an objection to the 17 Trustee Final Account (“Final Account Objection”), in which they 18 alleged that the CCPOA’s proof of claim was false. Specifically, 19 the debtors asserted that: 1) the CCPOA did not indicate whether 20 its claim included interest or arrears; 2) the CCPOA falsely 21 stated that its claim arose from money loaned, even though it 22 actually arose from contractual insurance; 3) at the time the 23 debtors filed for bankruptcy, the amount owed to the CCPOA was 24 $56,658.20, not $85,986.90; 4) the CCPOA’s claim was unsecured; 25 and 5) because the debtors scheduled the debt owed to CCPOA, it 26 27 18 That is, 21 days following the date of the notice of the 28 Objection Deadline Order, which was mailed out on July 19, 2012.

1 had been discharged. The debtors further contended that the 2 Trustee failed to investigate the CCPOA’s proof of claim. 3 The Trustee responded to the Final Account Objection, 4 arguing that the deadlines to disclose Ms. Corbett’s lawsuit 5 involving her workers’ compensation benefits, to claim an 6 exemption in the Benefits Award and to object to the Trustee 7 Final Account all had expired. He emphasized that the Trustee 8 Final Report Notice had been served on all parties, including the 9 debtors, and that distributions in accordance with the Trustee 10 Final Report had been made in accordance with the Trustee Fee 11 Order entered by the bankruptcy court after no timely objection 12 to the Trustee Final Report had been filed. 13 The CCPOA also responded to the Final Account Objection, 14 arguing that, because the chapter 7 case was not a surplus case, 15 the debtors lacked standing to object to final distribution. 16 They had not shown that they were directly or adversely affected 17 pecuniarily by the Trustee Final Account. Moreover, the CCPOA 18 asserted that debtors’ discharge did not affect the CCPOA’s 19 statutory lien. Although the debtors no longer were personally 20 liable on the debt owed to the CCPOA, the CCPOA’s lien passed 21 through their bankruptcy, still attached to the Benefits Award. 22 The CCPOA also maintained that the bankruptcy court had no 23 jurisdiction to determine the validity, priority or extent of its 24 lien because it arose under California workers’ compensation law. 25 It further contended that the debtors failed to object timely to 26 the Trustee Final Report. Although the deadline to object to the 27 Trustee Final Report was August 9, 2012, the debtors did not 28 object until November 21, 2012.

1 Finally, the CCPOA argued that, contrary to the debtors’ 2 assertions, the CCPOA did not file a false proof of claim. The 3 claim did not include interest. The basis for perfection was the 4 CCPOA’s statutory lien under Cal. Labor Code § 4903. Therefore, 5 even if CCPOA had not filed its proof of claim, its lien still 6 would encumber the Benefits Award. Moreover, neither the debtors 7 nor any other party had objected to the CCPOA’s proof of claim.19 8 At the January 4, 2013 hearing on the Final Account 9 Objection, the debtors admitted that the Final Account Objection 10 was untimely. However, referring to the bankruptcy court’s 11 statements at the March 23, 2011 hearing, the debtors claimed 12 that the bankruptcy court had determined that the CCPOA had only 13 a contract claim, not a lien. The debtors also contended that 14 the CCPOA failed to file its proof of claim timely by August 2, 15 2008, the original claims bar deadline. 16 The debtors stated that they initially did not schedule 17 Ms. Corbett’s workers’ compensation benefits as an asset because 18 they were unaware that her injuries had a monetary value, given 19 that she did not receive compensation for her work-related 20 injuries for many years. 21 22 19 The debtors filed a reply to the CCPOA’s response to the 23 Final Account Objection. The bankruptcy court declined to consider it because: 1) the debtors failed to file it timely; 24 2) the debtors failed to file it pursuant to the bankruptcy 25 court’s local rules; and 3) the debtors did not follow due process by allowing parties a chance to review it in advance. 26 Tr. of January 4, 2013 hr’g, 4:6-9. However, the bankruptcy 27 court permitted the debtors to make their arguments orally at the hearing. Tr. of January 4, 2013 hr’g, 4:9-10. The debtors 28 repeated all of the arguments made in their reply at the hearing.

1 The debtors also pointed out that, although the bankruptcy 2 court ordered the CCPOA to file an adversary proceeding for 3 declaratory relief, the CCPOA failed to do so. They further 4 alleged that although the Trustee assured the bankruptcy court 5 that he was going to hold the Benefits Award until the disputes 6 as to entitlement to the Benefits Award were resolved, he 7 distributed the Benefits Award without advising the debtors or 8 obtaining a hearing. Tr. of January 4, 2013 hr’g, 8:6-8. 9 The bankruptcy court declined to issue a ruling at that 10 time, instead continuing the hearing to January 30, 2013. 11 D. The Trustee’s objection to the debtors’ exemption claim 12 On November 28, 2012 and December 3, 2012, respectively, the 13 debtors amended their Schedule B to list the Benefits Award and 14 their Schedule C to claim an exemption in the entire amount of 15 the Benefits Award under California Code of Civil Procedure 16 (“CCP”) § 704.160. 17 The Trustee objected to the debtors’ amended Schedule C 18 (“Objection to Exemption”) because the Trustee Final Report 19 Notice had been served on all creditors and the debtors and the 20 21-day objection period had passed without any party objecting to 21 the Trustee Final Report and because the debtors did not timely 22 disclose and exempt the Benefits Award. The Trustee argued that 23 the debtors’ failure initially to disclose and exempt the 24 Benefits Award should bar their ability to do so once the 25 Benefits Award had been discovered and collected, funds were 26 distributed and the Trustee Final Account was filed. 27 The debtors responded, arguing that they did not act in bad 28 faith in omitting the workers’ compensation benefits from their

1 schedules. The debtors repeated arguments made at the January 4, 2 2013 hearing: 1) they did not list Ms. Corbett’s workers’ 3 compensation benefits as an asset initially because they were 4 unaware that her injuries had a monetary value, and 2) although 5 the bankruptcy court already determined that the CCPOA did not 6 have a lien but only a contract claim, the CCPOA knowingly and 7 fraudulently filed a secured proof of claim. 8 The debtors further contended that because workers’ 9 compensation benefits are exempt from chapter 7 bankruptcy 10 proceedings under CCP § 703.140(b), such benefits are not assets 11 of the bankruptcy estate. 12 The bankruptcy court set a hearing on the Objection to 13 Exemption for January 30, 2013. 14 E. The bankruptcy court’s determinations on the Final Account Objection and Objection to Exemption 15 16 Approximately one month before the January 30, 2013 hearing, 17 the bankruptcy judge who had been presiding over the debtors’ 18 bankruptcy case recused himself. Another bankruptcy judge 19 replaced him. Unfamiliar with the issues before it, the 20 bankruptcy court used the January 30, 2013 hearing as a means to 21 acquaint itself with the facts and the issues. Tr. of 22 January 30, 2013 hr’g, 37:14-15, 46:18-20, 47:22-24. 23 At that hearing, the bankruptcy court learned: 1) No 24 determination had been made as to the amount of the CCPOA’s lien 25 and whether the CCPOA’s lien attached or had been perfected. Tr. 26 of January 30, 2013 hr’g, 23:6-8, 24:3-4. 24:11-12. 2) At the 27 time she filed her chapter 7 bankruptcy petition, Ms. Corbett had 28 received funds from the CCPOA. Tr. of January 30, 2013 hr’g,

1 33:8-11. 3) The CCPOA did not initiate the adversary proceeding 2 because it believed, as a secured creditor, it did not need to. 3 Tr. of January 30, 2013 hr’g, 39:10-11. Instead, the CCPOA filed 4 a proof of claim, submitting evidence showing that it had a lien 5 against Ms. Corbett’s workers’ compensation benefits. Id. 6 4) The Trustee did not place the Benefits Award funds into a 7 blocked account pursuant to the Turn Over Order. Tr. of January 8 30, 2013 hr’g, 12:18-25, 13:1-4, 13:20-24. When asked why he did 9 not place the funds into a blocked account, the Trustee admitted 10 that he may not have understood what a blocked account was. Tr. 11 of January 30, 2013 hr’g, 17:3-4, 18:3-8. The Trustee believed 12 that it was sufficient for him to place the funds into a trust 13 account to which only he had access. Tr. of January 30, 2013 14 h’rg, 12:19-24. However, the Trustee also admitted that he knew 15 that he needed an order from the bankruptcy court to distribute 16 the funds. Tr. of January 30, 2013 hr’g, 18:24-15, 19:1-2. 17 The bankruptcy court continued the hearing on both matters 18 to February 27, 2013. At the February 27, 2013 hearing, the 19 bankruptcy court orally issued its determinations on both the 20 Final Account Objection and the Objection to Exemption. 21 Addressing the Objection to Exemption first, the bankruptcy 22 court acknowledged that Rule 1009(a) allows a debtor to amend her 23 schedules as a matter of course at any time, even upon reopening 24 of the bankruptcy case. Tr. of February 27, 2013 hr’g, 4:4-6. 25 Citing Goswami v MTC Distrib. (In re Goswami), 304 B.R. 386, 393 26 (9th Cir. BAP 2003), the bankruptcy court noted, however, that 27 the fact that a debtor can amend her Schedule C in her reopened 28 bankruptcy case did not mean that she had an absolute right to

1 have the amended claim of exemption allowed. Tr. of February 27, 2 2013 hr’g, 4:13-17. 3 Citing Arnold v. Gill (In re Arnold), 252 B.R. 778, 785-89 4 (9th Cir. BAP 2000), the bankruptcy court stated that an amended 5 claim of exemption may be disallowed on a showing of prejudice to 6 creditors or third parties, including the chapter 7 trustee. 7 Tr. of February 27, 2013 hr’g, 4:18-22. The bankruptcy court 8 recognized that the Trustee was objecting to the amended 9 Schedule C on the basis of prejudice. Tr. of February 27, 2013 10 hr’g, 4:25, 5:1. 11 Citing In re Shethi, 389 B.R. 588, 605 (Bankr. N.D. Ill. 12 2008), the bankruptcy court explained that the appropriate 13 inquiry in determining whether the debtor’s amended Schedule C 14 caused prejudice hinged on whether “a party [had] changed its 15 position in reliance on the original claim and would be adversely 16 impacted by an amendment thereto.”20 Tr. of February 27, 2013 17 hr’g, 5:10-12. The bankruptcy court then sustained the Trustee’s 18 Objection to Exemption, finding that the amended Schedule C was 19 prejudicial to the Trustee: 20 Here the trustee’s change in position and reliance on the debtors’ failure to exempt the compensation 21 proceeds earlier is clear. Because the debtor[s] never claimed the exemption [in the Benefits Award], the 22 trustee determined that CCPOA had lien rights to the proceeds over the estate and, accordingly, distributed 23 the proceeds to CCPOA as part of his statutory duty to administer the estate. 24 If the debtor[s] had claimed an exemption . . . in a timely manner, that would have established the 25 debtors’ standing to object to CCPOA’s claim since the 26 20 27 The bankruptcy court in Shethi cited 9 Collier on Bankruptcy ¶ 1009.02[1] (Alan N. Resnick & Henry J. Sommer, eds., 28 15th ed. rev. 2007) for this proposition.

1 . . . exemption proceeds would have set forth the debtors’ interest in the property, in addition to the 2 estate’s and CCPOA’s interests, and that would have at least halted . . . the trustee’s proposed distribution 3 until the debtors’ claim objection was resolved. Because the proceeds have now been administered 4 and distributed, this would cause prejudice to the trustee if the amendment is allowed. 5 6 Tr. of February 27, 2013 hr’g, 5:17-21, 6:1-7. 7 The bankruptcy court pointed out that the debtors had ample 8 time to amend their exemptions but did not do so until nearly 9 four months after the Trustee informed them of his intent to 10 distribute the funds from the Benefits Award to the CCPOA in the 11 Trustee Final Report. Tr. of February 27, 2013 hr’g, 6:8-11. 12 The bankruptcy court noted that the debtors had been 13 forewarned even earlier when the Trustee withdrew the no asset 14 report, which informed the debtors that he had collected the 15 Benefits Award as property of the estate to be administered to 16 creditors. Tr. of February 27, 2013 hr’g, 6:12-18. The 17 bankruptcy court then quoted the Withdrawal: “[the debtors have] 18 neither amended to disclose the Workers’ Compensation claim, nor 19 [have they] claimed an exemption.” Tr. of February 27, 2013 20 hr’g, 6:20-22. Such notice, the bankruptcy court reasoned, 21 “should have signaled to the debtors that they must act to 22 protect their interest before the trustee did what he proposed to 23 do.” Tr. of February 27, 2013 hr’g, 6:23-25. The bankruptcy 24 court ultimately determined that “it [was] simply too late for 25 the debtors to do anything,” once the Trustee distributed the 26 funds from the Benefits Award, on the assumption that the debtors 27 would not amend their claimed exemptions. Tr. of February 27, 28 2013 hr’g, 7:1-4. It therefore sustained the Trustee’s Objection

1 to Exemption. 2 The bankruptcy court stated that it did not find credible 3 the Trustee’s explanation of his understanding of his obligations 4 under the Turn Over Order. Tr. of February 27, 2013 hr’g, 5 13:1-4. However, it found that the Trustee’s noncompliance with 6 the Turn Over Order “made no difference in this case . . . 7 because the result was the same.”21 Tr. of February 27, 2013 8 hr’g, 13:9-10. 9 The bankruptcy court then turned to the debtors’ Final 10 Account Objection, which it overruled on three grounds. First, 11 the debtors lacked standing to object to the distribution because 12 they would not have benefitted from the change in the Trustee’s 13 proposed final distribution. Tr. of February 27, 2013 hr’g, 14 8:22-24. The bankruptcy court reasoned that, even if their 15 objection was sustained, the debtors would not be entitled to the 16 funds from the Benefits Award distributed to the CCPOA. Tr. of 17 February 27, 2013 hr’g, 8:11-14. Instead, because the debtors’ 18 amended claim of exemption was disallowed, the general unsecured 19 creditors would be entitled to the Benefits Award funds. Tr. of 20 February 27, 2013 hr’g, 8:15-19. 21 Second, even if the debtors did have standing, they had 22 waived the right to object to the Trustee Final Account when they 23 filed their objection after the deadline had passed, where they 24 25 21 The bankruptcy court admonished the Trustee, warning him 26 that “it [was] imperative that [he] follow the terms of the 27 [bankruptcy court’s] order specifically. And if [he was], in fact, unclear, [he] should seek clarification.” Tr. of 28 February 27, 2013 hr’g, 13:15-18.

1 had received the Trustee Final Report Notice. Tr. of 2 February 27, 2013 hr’g, 9:1-25, 10:1-13. Finally, Trustee 3 already had distributed the Benefits Award funds to the CCPOA. 4 Tr. of February 27, 2013 hr’g, 9:4-5. 5 The bankruptcy court entered both the Exemption Order and 6 the Final Account Order on March 5, 2013. Ms. Corbett timely 7 appealed both orders. 8 9 JURISDICTION 10 The bankruptcy court had jurisdiction under 28 U.S.C. 11 §§ 1334 and 157(b)(2)(A) and (B). We have jurisdiction under 12 28 U.S.C. § 158. 13 14 ISSUES22 15 1) Did the bankruptcy court err in sustaining the Trustee’s 16 objection to the debtors’ amended claim of exemption in the 17 Benefits Award? 18 2) Did the bankruptcy court err in overruling the debtors’ 19 objection to the Trustee Final Account? 20 21 STANDARDS OF REVIEW 22 We review the bankruptcy court’s factual findings for clear 23 error and its legal conclusions de novo. Continental Ins. Co. v. 24 Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 25 1011, 1019 (9th Cir. 2012). 26 27 22 The debtors list ten issues on appeal, but we have 28 distilled their essence down to two.

1 We review de novo questions involving a debtor’s right to 2 claim exemptions. Goswami v. MTC Distrib. (In re Goswami), 3 304 B.R. at 389; Arnold v. Gill (In re Arnold), 252 B.R. at 784. 4 We review the bankruptcy court’s overruling of an objection 5 to a trustee’s final report or final accounting for abuse of 6 discretion. See, e.g., Stasz v. Gonzalez (In re Stasz), 2011 WL 7 6934442 (9th Cir. BAP Nov. 30, 2011). A bankruptcy court abuses 8 its discretion if it applies an incorrect legal standard or 9 misapplies the correct legal standard, or if its fact findings 10 are illogical, implausible or without support from evidence in 11 the record. Trafficschool.com v. Edriver Inc., 653 F.3d 820, 832 12 (9th Cir. 2011). 13 14 DISCUSSION 15 A. The Exemption Order 16 Courts within the Ninth Circuit have held that a debtor may 17 amend her schedules, including the schedule of claimed 18 exemptions, at any time absent a showing of bad faith or 19 prejudice to third parties. See Rule 1009(a); Martinson v. 20 Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998); 21 Goswami v. MTC Distrib. (In re Goswami), 304 B.R. 386, 392-93 22 (9th Cir. BAP 2003); Magallanes v. Williams (In re Magallanes), 23 96 B.R. 253, 256 (9th Cir. BAP 1988). If a court finds that the 24 debtor’s amendment was prejudicial to third parties, the court 25 may deny leave to amend. See Michael, 163 F.3d at 529. 26 In this case, the bankruptcy court did not find that the 27 debtors filed their amended exemption claim in bad faith. 28 Instead, it based its decision on the lateness of the exemption

1 claim and the resulting prejudice, primarily to the Trustee, who 2 acted and changed his position in reliance on the debtors’ 3 failure to claim the exemption earlier. The Trustee paid his own 4 compensation and costs and distributed the balance of the 5 Benefits Award to the CCPOA because he determined that the 6 CCPOA’s lien rights were superior to the estate’s interest in the 7 Benefits Award. 8 However, as recognized by the bankruptcy court, “[s]imple 9 delay in filing an amendment does not constitute prejudice, nor 10 does prejudice occur because a claimed exemption, if untimely, 11 would be granted,” citing Andermahr v. Barrus (In re Andermahr), 12 30 B.R. 532, 534 (9th Cir. BAP 1983). This Panel considered the 13 issue of prejudice to the trustee in the event that a late 14 amended exemption claim is allowed in Arnold v. Gill 15 (In re Arnold), 252 B.R. 778 (9th Cir. BAP 2000). In Arnold, the 16 debtors filed amended Schedules B and C to claim an exemption in 17 proceeds from the settlement of an undisclosed personal injury 18 claim more than three years after their chapter 7 filing. Id. at 19 781-82. The trustee argued that allowing the amended exemption 20 claim would jeopardize his statutory compensation allowable under 21 § 326. Id. at 788. While recognizing the possibility of 22 prejudice to the trustee in such circumstances, this Panel 23 concluded that “such prejudice can be mitigated or eliminated by 24 conditioning allowance of the amended exemption on payment of 25 trustee’s and counsel’s fees and costs from assets not otherwise 26 27 28

1 available to the estate.”23 Id. at 789. 2 Such mitigation of harm can be accommodated on remand in 3 further proceedings before the bankruptcy court and is 4 particularly appropriate in this case because if the Trustee had 5 honored the “blocked account” requirement of the Turn Over Order 6 and its purpose, as discussed more fully infra, we would not be 7 here.24 As in Arnold, we conclude that prejudice to the Trustee 8 in the circumstances of this case does not warrant denial of 9 10 23 We recognize that the Supreme Court recently decided that 11 the provisions of the Bankruptcy Code do not allow surcharge of a debtor’s homestead exemption to pay administrative expenses, such 12 that the mitigation of prejudice may now be more difficult. See Law v. Siegel, 134 S. Ct. 1188 (2014). 13 24 14 Issues with respect to the Trustee’s compensation and reimbursement of expenses raise some questions in our minds that 15 have not been addressed by the parties: If the Benefits Award funds represented no more than the actual total of payments made 16 by the CCPOA to Ms. Corbett, without interest or costs, and the 17 Trustee was convinced that the CCPOA had a valid security interest in the Benefits Award, on what basis did the Trustee 18 claim that his compensation and costs could be paid from the 19 CCPOA’s collateral? Typically in such situations, where the trustee is paid from a secured creditor’s collateral funds, there 20 is an agreement between the trustee and the secured creditor to allow a “carve out” for the trustee’s compensation and costs, 21 perceived as beneficial to the secured creditor because the 22 secured creditor can rely on the trustee to collect and distribute the funds. However, again typically, such an 23 agreement is disclosed and approved by the bankruptcy court, following such notice and opportunity to request a hearing as is 24 appropriate in the circumstances. No such agreement or 25 arrangement is reflected in the record before us. Perhaps the Trustee simply relied on the CCPOA’s failure to object to the 26 Trustee Final Report by the deadline and treated that failure to 27 object as consent, following the bankruptcy court’s entry of the Trustee Fee Order. Resolving these issues on remand may prove 28 interesting.

1 Ms. Corbett’s amended exemption claim. 2 Neither does prejudice to the position of the CCPOA. The 3 CCPOA received the balance of the Benefits Award funds, but it 4 cannot be a surprise to the CCPOA that Ms. Corbett has asserted 5 an unresolved claim to the funds. Under CCP § 704.160(a), 6 “before payment, a claim for workers’ compensation or workers’ 7 compensation awarded or adjudged is exempt without making a claim 8 . . . . [A]fter payment, the award is exempt.” (Emphasis added.) 9 There are exceptions to the exemptions provided for in CCP 10 § 704.160(a) (see, e.g., CCP § 704.160(a) and (b)), but whether 11 any of them apply in the circumstances of this case has not been 12 adjudicated. 13 Based on the terms of the Turn Over Order, the parties and 14 the bankruptcy court expected that further proceedings would be 15 required to establish who among the estate, the CCPOA and 16 Ms. Corbett would be entitled to the Benefits Award funds. This 17 Panel held in Arnold that “theoretical disappointment of 18 expectations, without proof of actual damage,” does not support a 19 finding of prejudice to creditors. In re Arnold, 252 B.R. at 20 787. On remand, the CCPOA can continue to hold the Benefits 21 Award funds until there is a determination as to who, between the 22 CCPOA and Ms. Corbett, gets to keep them. 23 Ultimately, we conclude on the record in this case and based 24 on our published precedents, that the bankruptcy court erred in 25 sustaining the Trustee’s objection to Ms. Corbett’s amended 26 exemption claim based on prejudice, and we will vacate and remand 27 the Exemption Order for further proceedings before the bankruptcy 28 court.

1 B. The Final Account Order 2 The Final Account Order is more problematic. The bankruptcy 3 court overruled the Final Account Objection on three grounds: 4 1) the debtors’ lack of standing to object; 2) the debtors’ 5 failure to file a timely objection; and 3) that all estate funds 6 from the Benefits Award had been distributed. As to the first 7 ground, once the bankruptcy court had denied Ms. Corbett’s 8 amended exemption claim, she was in a position where she was 9 raising an objection as a debtor with respect to an insolvent 10 estate, and she had no pecuniary interest in the issue. By 11 vacating the bankruptcy court’s order denying her amended 12 exemption claim, we have revived her potential financial stake 13 and her standing with respect to the Final Account Order. 14 With regard to the third ground, we acknowledge that all of 15 the Benefits Award funds have been distributed by the Trustee, 16 but only to himself and estate professionals and the CCPOA. The 17 funds could be retrieved, if required, from those parties in 18 further proceedings before the bankruptcy court.25 19 As to the second ground, we recognize that Ms. Corbett filed 20 the Final Account Objection late, months after the August 9, 2012 21 deadline set in the Objection Deadline Order. However, in the 22 confused circumstances of this case, we conclude that 23 Ms. Corbett’s delay in filing the Final Account Objection was 24 25 25 We recognize that a very different situation, with a potentially different result, would be presented if the Benefits 26 Award funds had been distributed pro rata among all of the 27 debtors’ general unsecured creditors, possibly rendering this appeal equitably moot, but that is not the situation we face 28 here.

1 understandable and justifiable in light of her reasonable 2 expectation, based on the terms of the Turn Over Order and the 3 absence of an asset report in the case, that issues as to 4 entitlement to the Benefits Award funds would be decided in 5 further proceedings before the funds were distributed. There was 6 no knowing waiver. By filing his Trustee Final Report and the 7 associated notice and order, the Trustee confounded Ms. Corbett’s 8 expectations as to how entitlement to the Benefits Award would be 9 resolved. As noted by the bankruptcy court in admonishing the 10 Trustee with regard to his incredible interpretation of the 11 “blocked account” language of the Turn Over Order, “this order 12 was crafted to specifically preclude you from doing exactly what 13 you did.” 14 Clearly, the bankruptcy court had a means to “correct” the 15 conundrum that resulted in this appeal: the prematurely filed 16 Trustee Final Report. Although not articulated as such, the 17 Final Account Objection was in substance a motion for relief from 18 the combined impact of the Trustee Final Report and the Trustee 19 Fee Order pursuant to Civil Rule 60(b)(1), applicable in the 20 contested matters before the bankruptcy court pursuant to 21 Rule 9024, where there is no other conclusion in the face of the 22 Turn Over Order than that the Trustee Final Report was filed by 23 mistake. 24 While a motion filed under Civil Rule 60(b) is addressed to 25 the discretion of the bankruptcy court, “there are some 26 situations so extreme that the result is foreordained and it 27 would be an abuse of discretion . . . to deny the relief.” 28 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal

1 Practice and Procedure § 2857 (3d ed. 2012). This is one such 2 situation. The bankruptcy court chided the Trustee at length for 3 his failure to follow both the intent and the language of the 4 Turn Over Order. Resolution of the dispute between Ms. Corbett 5 and the CCPOA could not be circumvented merely because the 6 Trustee believed the funds he held under the Turn Over Order 7 belonged to the CCPOA. That determination was judicial in 8 nature, and not the Trustee’s to make. 9 Unlike the bankruptcy court, we cannot conclude on this 10 record that “there was no harm in this case.” In these 11 circumstances, we determine that it was error to overrule the 12 Final Account Objection. Further proceedings will be required so 13 that the issues relating to entitlement to the Benefits Award 14 funds can be resolved before the bankruptcy court. 15 16 CONCLUSION 17 For the foregoing reasons, we VACATE the Exemption Order and 18 the Final Account Order and REMAND this case for further 19 proceedings consistent with this disposition. 20 21 22 23 24 25 26 27 28