STATEMENT OF THE ISSUES

I.         Did the court err in suppressing the doctrine of res judicata and collateral estoppel based on the Judge ruling of July 19, 2006?

II.        Did the court err in suppressing the Debtor’s Truth-In-Lending notice of rescission of

            September 21, 2006?

III.       Did the Debtor meet his burden of proof?

On September 21, 2006, Appellant filed a motion to amend his schedules to add unsecured creditors per Rule 1009 to add unsecured creditors before the case is closed. An evidentiary hearing on this motion was heard on November 9, 2006 based on objection by creditors and the Trustee. On November 9, 2006, the Bankruptcy Court issued an order that denied the motion to amend schedules (Transcript of 11/9/06, 8:15-25, 9:1-8). Appellant then filed a notice of appeal. 

Pierre R. Augustin, Pro Se, Debtor (hereinafter “Appellant-Debtor”), Jonathan A. Goldsmith, Trustee (hereinafter “Appellee”) and DanversBank, Ameriquest Mortgage, Commonwealth Land Title Insurance Company, New Century Mortgage, Chase Home Finance and Deuthsche Bank National Trust (hereinafter “creditors”).

Appellant-Debtor achieved the cherished American dream of owning his home in January 1999. On March 18, 2002, he conveyed the property to his business, 26-28-30 Cedar Street, Inc., subject to two mortgages. On May 17, 2002, Appellant-Debtor obtained a loan with DanversBank for the amount of $55,000 on behalf of AdMerk Corp. Inc., secured by his principal dwelling. The DanversBank mortgage note was assigned to Commonwealth Land Title Insurance Company.

On March 27, 2003, Appellant-Debtor obtained an Ameriquest Mortgage in the amount of $244,000, portions of which were used to pay the original two mortgages. On April 15, 2004, Appellant-Debtor consolidated debts and refinanced his mortgage with New Century Mortgage for $280,000. Also, the New Century mortgage note was assigned to Chase Home Finance. Then Chase assigned it to Deuthsche Bank National Trust.

By June 2002, Appellant-Debtor has started a business of exporting merchandise purchased in the United States to Haiti with the DanversBank’s loan. From 2002 to September 25, 2005, much of Appellant-Debtor’s energies and dominant thought were vested on how to keep himself from financial ruin by experimenting with innovative ideas and strategies to turn around his ailing business in Haiti. The business thrived until 2005 when the political climate worsened and the economical activities in Haiti came to a sudden stop or stagnation. 

Appellant-Debtor’s cash flow was non-existent or just enough to barely meet the business operating expenses in Haiti only. Consequently, Appellant-Debtor ended up depleting all his cash reserves including his pension funds for retirement to keep the business a float. Meanwhile, in the capital of Haiti, Port-au-Prince, the environment became extremely dangerous with waves of kidnapping incidences and killing aimed primarily at business people. 

Thus, Appellant-Debtor having realized that his life is in danger (Transcript of 12/7/05, 2:14-19), despite having invested time, money, effort, prestige and energy to say the least, Appellant-Debtor chose to escape Haiti to save his life (Transcript of 12/7/05, 11:11-17), abandoned his business dreams and lost all of the money he had invested in Haiti. Therefore, Appellant-Debtor found himself in difficulties to maintain his financial obligations in the United States and to provide support for his family as well.

Upon returning to the United States in July 2005, Appellant-Debtor begged DanversBank to give him 3 months to find a professional job, but the bank says no, threatened to seize his property, and demanded payment in full despite knowing of his financial hardship (Transcript of 12/7/05, 15:23-25, 16:1-20. Reluctantly, Appellant-Debtor was forced to file for bankruptcy (Transcript of 12/7/05, 16:16-17) and invoked the TILA right of rescission on September 21, 2006 as a defense to foreclosure to protect his property rights. Therefore, Appellant-Debtor's business dreams and family life, at least in the way he had conceived it in his mind or accustomed to were shattered, destroyed and dismantled as a result of circumstances that were beyond his control or his sphere of influences. Retrospectively, filing complaint, motions and appeal briefs in Federal Court are extremely complex tasks that involve the mastery of unfamiliar concepts such as substantive law, procedures, forms, formats, terminology, service and legal research which at first create anxiety, confusion and panic for Appellant-Debtor since he lacks years of special training in the law. Thus, Appellant-Debtor had to amend his schedules, with prior approval from the Bankruptcy Court (Transcript of 3/23/06, 10:18-21, 11:1-3, 11:20-25, 12:1-9) as follows:

1. October 11, 2005 – Motion to Amend Schedules A through J

2. November 10, 2005 – Motion to Correct Schedules A through J

3. February 17, 2006 – Motion to Amend Schedule F to add Unsecured Creditor

4. April 10, 2006 – Motion to Amend Schedule F to add Unsecured Creditor

5. July 3, 2006 – Motion to Amend Schedule F to add Unsecured Creditor

6. July 3, 2006 – Motion to Amend Schedule B & C for Civil Suit; 06-10368

7. September 21, 2006 – Motion to Amend Schedules B and C to moved Secured Creditors as Unsecured because Plaintiff’s TILA Right of Rescission has voided the security interest in his home

SUMMARY OF ARGUMENT OF ISSUES

This case addresses the doctrine of res judicata and the standard of allowing amendments under Federal Rules of Bankruptcy Procedures, 1009(a). The standard under Rule 1009(a) in allowing amendments is whether there is bad faith on the part of the Appellant-Debtor or prejudice to creditors and Appellee. Thus, when the time to object has expired and a final order on a exemption of claim has been granted by the Bankruptcy court, res judicata applies regardless of whether the claim of exemption was or was not scheduled properly and/or there is or is not prejudice to creditors and Appellee.   Thus, the Bankruptcy court erred when it concluded that Appellant-Debtor was not entitled to amend his schedules to add unsecured creditors. Based on the principle of res judicata, the Appellee and creditors objections should be barred.

Appellant-Debtor was left with the only viable option of his TILA Rescission right filed on September 21, 2006as a defense to foreclosure (15USC 1635(i)) as enacted by Congress to protect his property rights. If any of the creditors or Appellee disputes the Appellant-Debtor’s right to rescind, they should have filed a declaratory judgment action within twenty days after receiving the rescission notice, before the deadline of October 10, 2006 to return the Appellant-Debtor’s money or property and record the termination of its security interest according to 15 USC 1635(b).

The security interest is void and of no legal effect irrespective of whether the creditor makes any affirmative response to the notice. Any misgivings creditors may have about the technical nature of the requirements should be addressed to Congress or the Federal Reserve Board, not the courts.  

As the Supreme Court observed in Taylor, “[d]eadlines may lead to unwelcome results, but they prompt parties to act and they produce finality.” Taylor v. Freedland & Konz, 503 U.S. at 644, 112 S.Ct. at 1648. Taylor honored Congress by giving effect to what it had enacted through Section 522(l) and what it had adopted through through F.R.B.P.4003(b). The Appellee was on notice that the Appellant-Debtor intended to keep the property claimed as exempt. The Appellee and creditors chose not to object to Appellant-Debtor’s to exempt his property which was authorized by the Bankruptcy court with no objection. Thus, there can be no fresh start unless Appellant-Debtor can be assured that the property he has claimed has exempt is free of subsequent efforts by the Appellee or creditors to set aside that right and protection.

The Bankruptcy Code defines "property" very broadly as all legal and equitable interests of the Appellant-Debtor and any property that is community property of the Appellant-Debtor and his spouse. 11 U.S.C. § 541. Even the property that the Appellant-Debtor selects as exempt property is "property of the estate" until the exemption claims are final (generally 30 days after the 341 meeting held on November 3, 2005).

Property which the Appellant-Debtor may exempt and which the Appellant-Debtor does exempt does not become property of the estate, unless a timely objection (usually by the Appellee) was filed. Chapter 7 estate does not include property interests or income acquired by the Appellant-Debtor after the commencement of the bankruptcy case. Federal Rule of Bankruptcy Procedure provides that if the creditors or the Appellee did not object to the Appellant-Debtor's claimed exemptions within 30 days from the date that the 341 meeting concluded, unless further time was granted by the court, (F.R.B.P. 4003(b)), along with burden of proof that the exemptions were not properly claimed (F.R.B.P. 4003(c)), then the exemptions are deemed allowed (11 U.S.C. § 522(l)), even if the claimed exemptions are not legally allowable or are invalid as a matter of law. (See Taylor v. Freeland & Kronz, 503 U.S. 638, 112 Sup. Ct. 1644 (1992)).

Upon 30 days of the 341 Meeting, the exempt property is removed from the estate and reverts to the Appellant-Debtor. When an exemption as to that property has become final, it loses its character as property of the estate (In re Norman, 157 B.R. 460 (C.D. Cal. 1993)(exempt property is not property of the estate after it is properly exempted)). 

Federal law allows Appellant-Debtor to exempt property from the estate effectively on the date of filing the petition. Section 522(b) states: “... an individual debtor may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection.” 11 U.S.C. § 522(b). Exemption has the primary effect of removing property from the estate, allowing Appellant-Debtor to retain the exempted property for purposes of support and advancing a fresh start. See 11 U.S.C. § 542(a) (exempt property is not required to be turned over to the Appellee); Sherk v. Texas Bankers Life & Loan Ins. Co. (In re Sherk), 918 F.2d 1170, 1174 (5th Cir. 1990) (property found by the bankruptcy court to be exempt “is no longer property of the estate”); In re Gagnard, 17 B.R. 811, 813 (Bankr.W.D. La. 1982) (exempt property, though initially property of the estate, “becomes property of the debtor”).

Any scheduled property that the Appellee does not administer is deemed abandoned upon the closing of the case. Under 11 U.S.C. § 554(c), property that has been "scheduled," under 11 U.S.C. § 521(1), is deemed to have been abandoned by the Appellee at the close of the bankruptcy case unless it has been "administered". Also, the usual ground for abandonment is that the property is of no value to the estate. Because the Appellant-Debtor 's property was scheduled as exempt, on April 17, 2006, the Appellee filed a Trustee’s Report of No Distribution that states: “…has received ‘no property’ nor paid any money on account of the estate except exempt property, and diligent inquiry having been made, Appellee states that there is no nonexempt property available for distribution to creditors.  

Pursuant to FRB 5009, Appellee certifies that the estate is fully administered and requests that the report be approved and the Appellee discharged from any further duties. (Entered: 04/17/2006, Case #: 05-46957). Once the Appellee has filed a final report certifying that the estate has been fully administered, if no objection is filed within thirty days, there is a presumption that full administration has taken place regardless of whether the case is closed. Once the presumption is in place, property with no value to the estate that has not been administered is deemed abandoned. 

"Section 522(l) says that '[u]nless a party in interest objects, the property claimed as exempt on such list is exempt.' Rule 4003(b) gives Appellee and creditors 30 days from the initial creditors' meeting to object. By negative implication, the Rule indicates that creditors may not object after 30 days 'unless, within such period, further time is granted by the court.”

The Bankruptcy Court did not extend the 30-day period. Section 522(l) therefore has made the property exempt. (Fed. R. Bankr. P. 1009; In re Olson, 253 B.R. 73 (B.A.P. 9th Cir. 2000); see also In re Kaelin, 308 F. 3d 885 (8th Cir. 2002) (debtor who promptly amended to exempt cause of action after he first learned about it was permitted to claim exemption). 

Pursuant to the fresh-start policy for debtors under chapter 7, Appellant-Debtor may transfer to the post-petition estate any property deemed exempt from the chapter 7 estate, post-petition earnings, and any property acquired after filing (other than that governed by the exceptions of 11 U.S.C. § 541(a)(5)). (In re Brannan, supra, 40 B.R. 20, 23, fn. 2.) Where events that give rise to a cause of action occur following the filing of the chapter 7 petition, that cause of action is not property of the bankruptcy estate. (In re Bobroff (D.C.Pa. 1984) 43 B.R. 746, 751, affd. 766 F.2d 797.)

The cause of action by Appellant-Debtor on February 28, 2006, to enjoin the foreclosure on his property was not part of the bankruptcy estate because it was listed as exempt and neither the creditors nor the trustee filed a timely objection within 30 days from the date that the 341 meeting was concluded. Here, the causes of action relating to Plaintiff's complaint at the Massachusetts Federal District Court occurred after the bankruptcy petition was filed on September 26, 2005. That cause of action was triggered by the result of the granting from relief of stay to DanversBank which prompted Appellant-Debtor to seek out a better understanding of civil and bankruptcy law. 

Appellant-Debtor filed a Motion to amend his bankruptcy schedules on July 3, 2006, in good faith based on a discovery while conducting legal research on Sunday, July 2, 2006 at around 6 p.m. Thus, Appellant-Debtor’s amendment is analogous to the Equitable tolling which is a principle of tort law stating that a statute of limitations shall not bar a claim in cases where the Appellant-Debtor, despite use of due diligence, could not or did not discover the injury until after the expiration of the limitations period. "Equitable tolling allows courts to extend the statute of limitations beyond the time of expiration as necessary to avoid inequitable circumstances." Johnson v. Nyack Hosp., 86 F.3d 8, 12 (2d Cir. 1996).

Appellant-Debtor's amendment of his schedules to include his claim of the civil suit Case #: 06-10368 was allowed with “No Objection” by the bankruptcy court (See Docket # 94 of case #: 05-46957) on July 19, 2006 and no objection was filed by neither the Appellee nor the creditors. In retrospect, Appellant-Debtor states that there was absolutely no objection by the Appellee or creditors to the motion to amend schedules and the motion was allowed by the bankruptcy court uncontested. Also, neither the Appellee nor the creditors ever filed an appeal within the 10 days or time limit. 

In page 2 of Appellant-Debtor’s civil complaint, he stated that TILA was in the Jurisdiction of all the claims against the creditors in that civil action. At #6 of page 14 of civil complaint, Appellant-Debtor explicitly stated that the New Century Mortgage Note which was assigned to Chase and now to 'Deuthsche Bank National Trust' is in violation of TILA and Regulation Z claims. In page 17 of that civil complaint, Appellant-Debtor did mention rescission and statutory damages. 

The issue is whether res judicata applies after the 30 days of the 341 meeting and the July 19, 2006 amendment of his schedules granted by the Bankruptcy Court is a final and nonappealable order which should have precluded the Appellee and creditors from objecting as pointed out in Appellant-Debtor’s Memorandum of Law in opposition to the Appellee and creditors motion to object submitted to the Bankruptcy Court prior the hearing. (See In re Magallanes, 96 B.R. 253, 256 (9th Cir. BAP 1988).

Res Judicata, also known as claim preclusion, bars the relitigation of issues which were actually litigated as well as issues which could have been litigated within the time limit after the 341 meeting and the July 3, 2006 Appellant-Debtor’s amendment of his schedules. Appellant-Debtor noted that res judicata bars the relitigation of previously litigated claims or causes of action and that four factors are examined to determine whether the doctrine of res judicata applies: (1) identity of parties; (2) identity in subject matter; (3) the issues are the same and relate to the subject matter; and (4) the capacities of the persons are identical in reference to both the subject matter and the issues between them (see Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir. 1983)). Thus, Appellant-Debtor has met the 4 factors of res judicata discussed above.

Collateral estoppel bars relitigation of previously litigated issues and involves an analysis of four similar factors: (1) whether the issue decided in the prior adjudication was identical with the issue presented in the present action; (2) whether the prior adjudication resulted in a judgment on the merits; (3) whether the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior adjudication; and (4) whether the party against whom collateral is asserted had a full and fair opportunity to litigate the issue in the prior proceeding. 

Federal Res Judicata and Collateral Estoppel do apply in this instance congruently. Appellee or any other party should not be allowed to relitigate claims, which has been the subject of a previous final order. (Possehl v. Ossino, 28 Mass. App. Ct. 918 (1989), (FDIC v. Shearson-American Express Inc., 996 F.2d 493 (1st Cir. 1993)). The doctrine of res judicata clearly prohibit Appellee from relief to a final judgment that could have been objected by Appellee or any creditors in the motion filed by Debtor on July 3, 2006 in the bankruptcy court to list his civil suit claim. (See, In re McIntyre, 328 B.R. 356 (Bankr. D. Mass. 2005). 

Res Judicata are applicable based on 3 factors: 1) a final judgment on the merits of an earlier suit, 2) sufficient identicality between the causes of action in the earlier action and 3) sufficient identicality between the parties, (In re Iannochino, 242 F.3d 36 (1st Cir. 2001)).   Hence, 1) Existence of Final Judgment: Final judgment was issued on July 19, 2006 by Judge Rosenthal which was not appealed timely per Bankruptcy rule 8002 resulted as being final and unappealable, 2) Identicality of Issues: Rescission and Recoupment claims are an integral part of TILA and Regulation Z, 3) Identicality of Parties: Appellee, creditors and Appellant-Debtor are the same parties in his chapter 7 bankruptcy. Reversely, once judgment has been entered, new claims generally cannot be raised and new theories cannot be argued. Therefore, once a matter has been decided, the parties cannot later assert a new theory to obtain the relief from what was already decided.  Thus, res judicata prevents a later attempt to object to the exemption on a different theory.

The principles of finality are very important in the judicial process. “The preclusive effects of a final judgment on the merits will not be ignored, even if final judgment may have been wrong or rested on a legal principle subsequently overruled on another case.” (Citing Tosco Corp. v. Hodel, 611 F. Supp. 1130, 1158 (D.C. Colo. 1985)). Appellee and creditors seek to have the Court ignore all of the principles of finality. 

A further analysis will find that: (1) there is a final judgment on the merits in a prior action (Final judgment resulted by default after the 30-days of the 341 meeting and was issued on July 19, 2006 by Judge Rosenthal); (2) the second action is based on a different claim, but is based on a closely related issue that was actually litigated and directly determined in a prior action; (3) the parties had a full and fair opportunity to litigate the issue in the first action and there are no circumstances that justify affording them a second opportunity to retry the issue. Neither the creditors nor the Appellee objected to the motion to amend schedules filed on July 3, 2006 and rule on by the court on July 19, 2006, exempting his claims from property of the estate.  

If claims are not discovered until later, the failure to schedule them initially is not fatal, because schedules may be amended and because there is rarely any prejudice to the creditor if schedules are amended during the case. (See Ryan Operations, Gen. P’ship v. Santiam-Midwest Lumber Co., 81 F. (3d Cir. 1996) (suit on claim not listed in bankruptcy schedules not barred by judicial estoppel, as debtor had not attempted to play fast and loose with rules and failure to list claim had no impact on bankruptcy case); Donato v. Metro. Life Ins. Co., 230 B.R. 418 (N.D. Cal. 1999) (failure to disclose lawsuit as an asset on schedules did not judicially estop debtor from pursuing it); Elliot v. ITT Corp., 150 B.R. 36 (N.D. Ill. 1992) (failure to initially schedule debt as disputed or note cause of action and failure to deal with it in prior chapter 13 cases which had been dismissed did not estop debtors from raising consumer protection claims against creditor after those claims were discovered)).  

Likewise, Appellant-Debtor did not discover the TILA violations until September 17, 2006 (excusable neglect, inadvertence) at about 5 a.m.. Appelant-Debtor timely filed the schedules to reflect his invocation of the TILA right of rescission on September 21, 2006 whereby all secured creditors and servicers security interest in his property was voided and classified as unsecured debt per TILA rule. Appellant-Debtor did timely list his claims and in line with the Truth-In-Lending Act (TILA) since the security interest is automatically voided per TILA and Regulation Z upon rescission, the secured mortgage note is no longer secured. Thus, Appellant-Debtor was merely advocating for his right in amending his schedules by re-classifying secured creditors as unsecured note holder since TILA states that upon rescission, the security interest is void, rendering the debt, if any, unsecured (See In re Perkins, 106 B.R. 863, 874 (Bankr. E.D.Pa. 1989); In re Brown, 134 B.R. 134 (Bankr. E.D.Pa. 1991); In re Moore, 117 B.R. 135 (Bankr.E.D. Pa. 1990)).

Appellant-Debtor had alerted the court that the amendment was in good faith (there was no intention by Appellant-Debtor to hide the asset) and it would not prejudice any creditors (In determining whether Appellant-Debtor’s amendment would prejudice creditors, the appropriate inquiry is not whether a creditor will recover less or be adversely affected by the amendment (Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (8th Cir. 2002); see also In re Arnold, 252 B.R. 778 (B.A.P. 9th Cir. 2000) (neither delay, by itself, nor disappointment of creditors’ expectations is prejudice)). Whereas the Appellant-Debtor acted promptly to amend schedules after learning of the cause of action and there was no prejudice to creditors or Appellee except the economic loss that occurs whenever property is claimed as exempt as in this analogous case, the lower courts erred in denying a debtor the right to amend (Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (8th Cir. 2002). 

Once Appellant-Debtor obtains a judgment, the creditors generally cannot bring a new action to undo the judgment by reopening the Appellant-Debtor’s past granted amendment and pushing new defenses tactics. The evident rationale is that claim preclusion simply must apply when the effect of the creditors and Appellee’s collaterally asserted defense would be to nullify the earlier granted amendment for the Appellant-Debtor. The rule applies whether or not the prior granted amendment was not contested; the rule indeed is especially important because it works to guarantee that even non contested amendment cannot be undone by later objection.  

Courts in other jurisdictions have applied the doctrine of res judicata to bar a second attempt to relitigate an exemption claim which has already been determined by the court (See Goldsmith v. M. Jackman & Sons, Inc., 327 F.2d 184 (10th Cir. 1964).   The objection of the exemption proceedings initiated by the Appellee and creditors involved the same cause of action. Res judicata dictates whether decided matters are subject to reopening. If Appellee and creditors could just reopen their adjudicated disputes, there would be neither an end to litigation, nor any beginning of judicial authority. Finality is not just an efficient policy, it is a necessary condition for the existence of a judiciary. Thus, the Bankruptcy court erred when it concluded that Appellant-Debtor was not entitled to amend his schedules and the Appellee and creditors objections should be barred by the principle of res judicata.

A Truth-In-Lending Act (TILA) rescission action may not be barred by prior or subsequent TILA litigation which did not involve rescission (Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354 (D. Ariz. 1989) (state court action involving, inter alia TIL disclosure violations did not bar a subsequent action based on rescission notice violations in conjunction with same transaction which were not alleged or litigated in prior action) (See also In re Laubach, 77 B.R. 483 (Bankr. E.D. Pa. 1987) (doctrine of merger bars raising state and federal law claims arising from a transaction on which a previous successful federal TILA action was based; merger does not bar, however, rescission-based on the same transaction)).

Specific TILA violations do not necessarily have to be alleged with particularity (Brown v. Mortgagestar, 194 F. Supp. 2d 473 (S.D. W. Va. 2002) (notice pleading is all that is required in TILA case); Herrara v. North & Kimball Group, Inc., 2002 WL 253019 (N.D. Ill. Feb.. 20, 2002) (notice pleading sufficient; response to motion to dismiss can supplement complaint by alleging facts re specific documents assigned); Staley v. Americorp. Credit Corp., 164 F. Supp. 2d 578 (D. Md. 2001) (Appellant-Debtor need not specify specific statute or regulations that entitle him to relief; court will examine the case for relief on any possible legal theory); Hill v. GFC Loan Co., 2000 U.S. Dist. Lexis 4345 (N.D. Ill. Feb. 15, 2000). Appellant-Debtor need not plead an error exceeded the applicable tolerance, since this is an affirmative defense (15USC 1635(i)), (Inge v. Rock Fin. Corp., 281 F.3d 613 (6th cir. 2002)). Any loan amount greater than $25,000 that is secured by the Appellant-Debtor’s principal residence (real property) is subject to TILA. 

Appellant-Debtor filed a copy of the notice of rescission letter in the bankruptcy court notifying the attorneys representing creditors as well as having certified receipt return of proof of delivery to the Lawyers as proof of notification according to the Official Staff Commentary, 226.2(a)(22)-2, authorizing service on attorney. The Truth-in-Lending law empower Appellant-Debtor to exercise his right in writing by notifying creditors of his cancellation by mail to rescind the mortgage loan transactions per (Reg. Z §§ 226.15(a)(2), 226.23(a)(2), Official Staff Commentary § 226.23(a)(2)-1) and 15 U.S.C. § 1635(b). Thus, the security interest or lien arising by operation of law on Appellant-Debtor’s property becomes automatically void (15 U.S.C. § 1635(b); Reg. Z §§ 226.15(d)(1), 226.23(d)(1) (See also 69 Fed. Reg. 16769, 16771-72 (Mar. 31, 2004) (reiterating that security interest becomes void when consumer rescinds), even if a court has not yet ruled on the validity of the plaintiff’s rescission (Willis v. Friedman, Clearinghouse No. 54,564 (Md. Ct. Spec. App. May 2, 2002)). But, the timeframe for any of the creditors to object or to challenge the TILA notice of rescission has already expired on October 10, 2006 according to TILA strict liability rule.

The filing of Bankruptcy tolls or extends the rescission time as Appellant-Debtor had filed for bankruptcy on September 26, 2005 and obtained a discharge on September 26, 2006. Also, the principle of equitable tolling does apply to TILA 3 years period of rescission since despite due diligence, Appellant-Debtor could not have reasonably discovered the concealed fact of TILA violations in-depth and explicitly until September 17, 2006 at about 5 a.m.. The equitable tolling principles are to be read into every federal statute of limitations unless Congress expressly provides to the contrary in clear and ambiguous language, (See Rotella v. Wood, 528 U.S. 549, 560-61, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000)). Since TILA does not evidence a contrary Congressional intent, its statute of limitations must be read to be subjected to equitable tolling, particularly since the act is to be construed liberally in favor of consumers.

The process starts with the consumer’s notice to the creditor that he or she is rescinding the transaction. As the bare bones nature of the FRB model notice demonstrates, it is not necessary to explain why the consumer is canceling. The FRB Model Notice simply says: “I WISH TO CANCEL,” followed by a signature and date line (Arnold v. W.D.L. Invs., Inc., 703 F.2d 848, 850 (5th cir. 1983) (clear intention of TILA and Reg. Z is to make sure that the creditor gets notice of the consumer’s intention to rescind)). 

As noted by the Official Staff Commentary, the creditor’s interest in the property is “automatically negated regardless of its status and whether or not it was recorded or perfected.” (Official Staff Commentary §§ 226.15(d)(1)-1, 226.23(d)(1)-1). Also, the security interest is void and of no legal effect irrespective of whether the creditors make any affirmative response to the notice. Also, strict construction of Regulation Z would dictate that the voiding be considered absolute and not subject to judicial modification (See Badaracco v. Commissioner of Internal Revenue, 464 U.S. 386, 398, 104 S. Ct. 76, 78 L. Ed. 2d 549 (1984). This requires creditors to submit canceling documents creating the security interest and filing release or termination statements in the public record. (Official Staff Commentary §§ 226.15(d)(2)-3, 226.23(d)(2)-3.)

The statute and Regulation Z states that if creditor disputes the consumer’s right to rescind, it should file a declaratory judgment action within the twenty days after receiving the rescission notice, before its deadline to return the consumer’s money or property and record the termination of its security interest (15 USC 1625(b) (See also Robertson v. Strickland (In re Robertson), 333 B.R. 894, 898, 904 n. 14 (Bankr. M.D. Fla. 2005) (after rescission, consumer is not responsible for loan discount fee, mortgage broker fee, closing fee, recording fees, mortgage note stamps or intangible tax). Also, as a matter of contract law, the original loan has no longer been paid off early once the refinance loan is rescinded, so no prepayment penalty is owed by Appellant-debtor (Official Staff Commentary §§ 226.23(d)(2)-1)). 

The statute and Regulation Z make it clear that, if Appellant-Debtor has the extended right and chooses to exercise it, the security interest and obligation to pay charges are automatically voided. (Cf. Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 704-05 (9th Cir. 1986) (courts do not have equitable discretion to alter substantive provisions of TILA, so cases on equitable modification are irrelevant). The statute, section 1635(b) states: “When an obligor exercises his right to cancel…, any security interest given by the obligor… becomes void upon such rescission”. Also, it is clear from the statutory language that the court’s modification authority extends only to the procedures specified by section 1625(b). 

Non-compliance is a violation of the act which gives rise to a claim for actual and statutory damages under 15 USC 1640. Creditors are obligated to return those charges to Appellant-Debtor (Pulphus v. Sullivan, 2003 WL 1964333, at *17 (N.D. Apr. 28, 2003) (citing lender’s duty to return consumer’s money as reason for allowing rescission of refinanced loan); McIntosh v. Irwing Union Bank & Trust Co., 215 F.R.D. 26 (D. Mass. 2003) (citing borrower’s right to be reimbursed for prepayment penalty as reason for allowing rescission of paid-off loan). 

The voiding of the security interest is not a procedure, in the sense of a step to be followed or an action to be taken. The statute makes no distinction between the right to rescind in three day or extended in three years for federal and four years under Mass. TILA, as neither cases nor statute give courts equitable discretion to alter TILA’s substantive provisions. Since the rescission process was intended to be self-enforcing, failure to comply with the rescission obligations subjects creditors to potential liability as well as assignees (See Madel v. GMAC Mortgage Corp. (In re Madel), 2004 WL 4055247 (Bankr. E.D. Wis. Nov. 8, 2004) (assignee is liable for its own TIL violation if it fails to respond properly to rescission notice). 

First, by operation of law, the security interest and promissory note automatically becomes void and the consumer is relieved of any obligation to pay any finance or other charges (15 USC 1635(b); Reg. Z-226.15(d)(1),226.23(d)(1). See Official Staff Commentary § 226.23(d)(2)-1. (See Willis v. Friedman, Clearinghouse No. 54,564 (Md. Ct. Spec. App. May 2, 2002) (Once the right to rescind is exercised, the security interest in the Appellant-Debtor’s property becomes void ab initio). (See Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996) (all that is required is notification of the intent to rescind, and the agreement is automatically rescinded).

When Appellant-Debtor rescinds within the context of a bankruptcy, courts have held that the rescission effectively voids the security interest, rendering the debt, if any, unsecured. (See In re Perkins, 106 B.R. 863, 874 (Bankr. E.D.Pa. 1989); In re Brown, 134 B.R. 134 (Bankr. E.D.Pa. 1991); In re Moore, 117 B.R. 135 (Bankr.E.D. Pa. 1990)). Thus, Appellant-Debtor has a legal basis to amend his schedules to classify secured debt as unsecured debt as explicitly states in TILA.

Second, the creditors must return any money, including that which may have been passed on to a third party, such as a broker or an appraiser and to take any action necessary to reflect the termination of the security interest within 20 calendar days of receiving the rescission notice which has expired (15 USC 1635(b); Reg. Z-226.15(d)(2),226.23(d)(2)).

Appellant-Debtor is prepared to discuss a tender obligation, should it arise, and satisfactory ways in which to meet this obligation (Basnight v. Diamond Developers, Inc., 146 F. Supp. 2d 754 (M.D.N.C. 2001) (where creditor refused to cancel, borrower’s duty to return the property never arose). The termination of the security interest is required before tendering and step 1 and 2 have to be respected by creditors.  

Appellant-Debtor, as a judicial notice to this Court, affirmed that the creditors has forfeited the right to retain any of the loans proceeds (In re Lang, Clearinghouse No. 45,907 (D. or. Aug. 1, 1990) since negation of tender duty is appropriate where creditors did not comply with rescission notice since the fundamental duty of the court is to protect the integrity of the statutory policy. (Congress’ intended operation of the statute, as evidenced by the 1635(b) creditor-forfeiture provision, clearly calls for a ‘debtor windfall’ if the creditor does not respond to a valid rescission notice by following the statutory dictates (French v. Wilson, 446 F. Supp. 216, 220 (D.R.I. 1976)). Such a result helps to assure self-enforcement and ultimately promotes uniform compliance by creditors with the Truth-In-Lending Act.

Once the court finds a violation such as not responding to the TILA rescission letter, no matter how technical, it has no discretion with respect to liability (In re Wright, supra. At 708; In re Porter v. Mid-Penn Consumer Discount Co., 961 F,2d 1066, 1078 (3d. Cir. 1992); Smith v. Fidelity Consumer Discount Co., Supra. At 898. (See also Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996) (creditor’s failure to accept consumer’s valid rescission nullified the security interest and relieved the consumer of her obligation to lender). (See Bilad v. Household Fin. Corp. (In re Bilal), 296 B.R. 828 (D. Kan. 2003) (after security interest is voided, secured creditor becomes unsecured)). Any misgivings creditors may have about the technical nature of the requirements should be addressed to Congress or the Federal Reserve Board, not the courts. 

According to Collier on Bankruptcy, Appellant-Debtor has a right to amend the petition, lists, schedules or statement as a matter of course until the case is closed. Thus, for example, before the closing of the case, the Appellant-Debtor may amend the exemption schedule to include property that had been omitted (Lucius v. McLemore, 741 F.2d 125, 11 C.B.C.2d 296 (6th cir. 1984); In re Doan, 672 F.2d 831, 6 C.B.C.2d 306 (11th Cir. 1982); In re White, 61 B.R. 388 (Bankr. W.D. Wash. 1986); see also In re Baker, 71 B.R. 312 (Bankr. W.D. La. 1987) (permitting amendment to schedules of assets and liabilities filed by the trustee in an involuntary case to enable the debtor to claim exemptions).

The permissive approach to amendments has been construed to give courts no discretion to reject amendments unless the Appelant-Debtor has acted in bad faith or concealed property or the amendment would prejudice creditors (In re Yonikus, 996 F. 2nd 866 (7th Cir. 1993) (clear and convincing evidence of prejudice or bad faith required to deny right to amend); In re Williamson, 804 F.2d 1355, 15 C.B.C. 2d 1225 (5th Cir. 1986); In re Doan, 672 F.2d 831, 6 C.B.C.2d 306 (11th cir. 1982)). No court approval is necessary for an amendment filed before the case is closed (In re Michael, 163 F.3d 526 (9th Cir. 1998)). 

In determining whether bad faith or fraud exists, the courts look to the totality of the circumstances (In re Clemmer, 184 B.R. 935 (Bankr. E.D. Tenn. 1995)). The courts will refuse an amendment only upon showing a clear and convincing evidence of bad faith (In re Yonikus, 966 F.2d 866, 872 (7th Cir. 1993), In re Sumerell, 194 B.R. 818, 832 (Bankr. E.D. Tenn. 1996)). Other courts have required a ‘strong showing of abuse” (In re Davidson, 164 B.R. 782 (Bankr. S.D. Fla. 1994), aff’d in part and rev’d in part, 178 B.R. 544 (S.D. Fla. 1995)). 

As a general rule, the courts may deny Appellant-Debtor the opportunity to amend the schedules or may strike an amendment, if he intentionally conceals an interest in property that is property of the estate from creditors by omitting it from the schedules. Under those circumstances the courts may infer a fraudulent intent (In re Miller, 255 B.R. 221 (bankr. D. Neb. 2000) (intentional concealment found where, although they claimed no ownership interest, debtors paid for insurance and were loss payees on the property); Ward v. Turner, 176 B.R. 424, 427 (E.D. La. 1994) (debtor withheld financial information and concealed assets and sought amendment to claim exemptions under Texas laws three years after claiming Louisiana exemptions). 

In re Arnold, 252 B.R. 778 (B.A.P. 9th Cir. 2000) (no bad faith when lawsuit was disclosed in statement of affairs and trustee was clearly aware of it, even though it was not listed as an asset)). Thus, for example, the Court of Appeals for the Eight Circuit in Kaelin v Bassett (In re Kaelin), (308 F.3d, 885 (8th Cir. 2002)), allowed a debtor to amend his schedule of exemptions to claim as exempt a cause of action soon after he learned that the cause of action existed.  Because the debtor acted promptly to exempt the cause of action and because the debtor had not concealed the property, the court found that no bad faith existed.

Mere pre-petition bad faith, however, is generally insufficient. There must be some bad faith that relates to the bankruptcy case rather than mere pre-petition acts by the debtors to protect their property. (In re Clemmer, 184 B.R. 935 (Bankr. E.D. Tenn. 1995)). Thus, for example, a court may be reluctant to deny the debtor an opportunity to amend the schedules to claim an exemption as a punishment for fraud unrelated to the exemption.

There is nothing in the record showing that Appellant-Debtor’s amendment would cause any prejudice to the creditors or Appellee than that normally associated with a claim of exemption (See In re Arnold, 252 B.R. at 785 (“Merely showing prejudice is not enough: the court must balance the prejudice to the debtor of disallowing the exemption against the prejudice to third parties in allowing the exemption.”) (quoting In Re Brown, 56 B.R. 954 958 n. 11 (Bankr. E.D. Mich. 1986)). In determining whether the amendment would prejudice creditors, the appropriate inquiry is not whether a creditor will recover less or be adversely affected by the amendment (Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (8th Cir. 2002); see also In re Arnold, 252 B.R. 778 (B.A.P. 9th Cir. 2000) (neither delay, by itself, nor disappointment of creditors’ expectations is prejudice)). Instead, a court must determine whether the creditor would be adversely affected by having detrimentally relied on the debtor’s initial position. 

Only when a creditor has changed its position in reliance on the original statement and would be adversely affected by amendment to that statement, may it be said that the creditor will be prejudiced by permitting the amendment (In re Williamson, 804 F.2d 1355, 15 C.B.C.2d 1225 (5th Cir. 1996)). For example, a debtor may be denied the right to exempt property if it has already been sold by the trustee (In re Hardage, 69 B.R. 681 (Bankr. N.D. Tex. 1987) (refusing debtor’s request to add to the list of exemptions property that had already been sold)). However, even in that situation, a debtor may have the right to exempt the proceeds of the sale (In re Williamson, 844 F.2d 1166 (5th cir. 1988)). And if the prejudice can be mitigated, for example, by costs incurred, the exemption should be allowed (In re Arnold, 252 B.R. 778 (B.A.P, 9th Cir. 2000)).

In summary, it is clear that the general rule nationally, is that debtors have a liberal right to amend their petition and schedules (In re Harris, 886 F2 1011, 1015 (8th Cir. 1989). “The bankruptcy court has the discretion to deny the amendment of exemptions (only) if the amendment is proposed in bad faith or would prejudice creditors.” (In re Kaelin, supra, at page 888, citing In re Micahel, 163 F3 526, 529 (9th Cir. 1998) and In re Doan, 672 F2 831, 833 (11th Cir. 1982)). And bad faith and prejudice are the only recognized exceptions to the free right of the debtor to amend. (In re Kaelin, supra, at 889; see also, In re Doan, supra). “Adding secured claims that became ‘unsecured’ per the Truth-In-Lending Act (TILA) is not a recognized exception to the general rule that Appellant-Debtor shall have the free right to amend schedules.

Further, the bad faith of the debtor or prejudice to creditors must be shown by clear and convincing evidence. (In re Yonikers, supra.) And prejudice to a creditor does not turn on whether a creditor would recover less or be adversely affected by the amendment. (In re Kaelin, supra.) Rather, the prejudice must be that the creditor relied upon the debtor’s initial position to his detriment. (In re Williamson, supra.) Examples of “prejudice” used in In re Kaelin, supra, were “actual economic loss beyond the loss that occurs when any asset is claimed as exempt…(or) if a litigation posture had been prejudiced…”(In re Kaelin, supra, at 891.)

Since, as noted above, classifying ‘secured claims that became ‘unsecured claims’ per the Truth-In-Lending Act (TILA) is not a recognized exception to the general rule that Appellant-Debtor shall be allowed to amend, and since no “bad faith” is even hinted at by the Appellee, it must be assumed that the Appellee is attempting to use the “prejudice’ exception to justify his opposition to the Appellant-Debtor’s right to amend. 

There are, of course, situations where the Appellee and creditors would be prejudiced by an amendment. An example would be where a debtor amended exemptions to exempt an asset which the Trustee had already sold and distributed the proceeds to creditors. Or, alternatively, it has been suggested that the exemption could be shifted to the proceeds of the sale of an asset. In other words, the better course is deemed to be to allow the amendment in almost all circumstances and then make appropriate adjustment to do equity. 

By contrast, in the present situation, pursuant to the fresh-start policy for debtors under chapter 7, a debtor may transfer to the post-petition estate any property deemed exempt from the chapter 7 estate, post-petition earnings, and any property acquired after filing (other than that governed by the exceptions of 11 U.S.C. § 541(a)(5)). (In re Brannan, supra, 40 B.R. 20, 23, fn. 2.) Where events that give rise to a cause of action occur following the filing of the chapter 7 petition, that cause of action is not property of the bankruptcy estate. (In re Bobroff (D.C.Pa. 1984) 43 B.R. 746, 751, affd. 766 F.2d 797.)

The cause of action by Appellant-Debtor on February 28, 2006, to enjoin the foreclosure on his property located at 28 Cedar Street in Lowell, Massachusetts was not part of the bankruptcy estate because it was listed as exempt and neither the creditors nor the trustee filed a timely objection within 30 days from the date that the 341 meeting was concluded. Here, the cause of action relating to Debtor’s complaint at the Massachusetts Federal District Court occured after the bankruptcy petition was filed on September 26, 2005.

Consequently, the property ceased being property of the estate by operation of Section 522(l) when neither the Appellee nor any other party of interest filed a timely objection. This interpretation of Section 522(l) is consistent with the Supreme Court’s decision in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644 (1992). The debtor in Taylor was the plaintiff in a discrimination lawsuit that was on appeal when the debtor filed her bankruptcy petition. The debtor in Taylor listed the litigation/judgment in her asset schedules as “Proceeds from lawsuit - - [Davis v. TWA”] and “Claim for lost wages.” Id. At 640. She also listed its value as “unknown.” The debtor further claimed as exempt all of the award she ultimately expected to receive once damages were assessed. The trustee chose not to object to the exemption claimed. The lawyer for the debtor in Taylor asserted that the lawsuit ceased being property of the estate by operation of Section 522(l) as soon as the deadline under Federal Rule of Bankruptcy Procedure 4003(b) had passed for the trustee and other parties in interest to object to the debtor’s claimed exemption. 

In that case, the bankruptcy court ruled that the debtor’s attorney had to return the portion of the settlement proceeds it had received and the district court affirmed. However, the court of appeals reversed and the Supreme Court affirmed the court of appeals. The Supreme Court unequivocally in Taylor that the 30-day period by Fed.R.Bankr.P.4003(b) set a clear deadline within which the trustee or another party in interest must object to an exemption claimed by the debtor. However, equally important in Taylor is a separate determination by the court: [that the property of the estate that is claimed as exempt ceases being property of the estate once the deadline passes without objection]. Thus, Section 522(l) operates to remove from the bankruptcy estate interests that had become property of the estate. Congress’ desire to provide a bankrupt debtor with a “fresh start” justifies this difference. Exempt property never became property of the estate (See generally, 5 Collier on Bankruptcy, ¶541.HH[1]-[3]. (15th Ed. Rev. 2005).

The text of Rule 1009 and the case law interpreting Rule 1009 is clear; Appellant-Debtor has a free right to amend debtor’s petition, lists, schedules or statement as a matter of course at any time before a case is closed. This is the general rule and absent two narrow exceptions noted below, courts have no discretion to deny a debtor’s right to amend. 

The only two recognized exceptions to the general rule are: Cases where the debtor exercised bad faith and cases where allowing an amendment would prejudice creditors. The case law indicates that even these exceptions should be avoided if possible. Rightfully classified secured debts that became unsecured in his schedules per the Truth-In-Lending Act (TILA) is not a recognized exception to the general rules.

Given that the Appellee has obtained an Order sustaining the Appellee’s objection to Appellant-Debtor’s amendment, this alone is insufficient to create enough “prejudice” to justify denying a Appellant-Debtor the ability to amend. There was no “prejudice” to creditors and Appellee in the Bankruptcy Court. 

Moreover, the Appellee and creditors objections should have been barred by the principle of res judicata as outlined in this brief. Because no extreme and unmitigateable prejudice to creditors and Appellee existed in the case below, the Bankruptcy Court was incorrect in denying the Appellant-Debtor the right to amend his exemptions and the Court’s Order denying Debtor’s right to amend his exemptions should be reversed.

CERTIFICATE OF SERVICE

I hereby certify that a true copy of the above document is filed at US District Court, District of Massachusetts, on May 11, 2007 and served by United States Postal Mail, postage upon Appellee.

X ____________________________________       Pierre R. Augustin, 28 Cedar Street,

                                                                                    Lowell, MA 01852, 617-202-8069

2. I have read the foregoing Appeal filed herein and knowing the contents thereof have found that the allegations of fact set forth therein are true of my own personal knowledge, except as to those allegations based on information and belief which I believe to be true.

Signed under the penalties of perjury this 11^th day of May 2007.

STATE OF ___________________________COUNTY OF _____________________________

appeared ___________________________, proved to me through satisfactory evidence of

identification, which was _______________________________________________________,

to be the person whose name is signed on the preceding or attached document, and

acknowledged to me that s/he signed it voluntarily for its stated purpose.

                                                                                                Notary Public

                                                                                                My Commission Expires:

United States District Court, District of Massachusetts

Appellant Affidavit/Affirmation in Support of His Brief

I, Pierre R. Augustin, affirm the following under penalty of perjury, being duly sworn, deposes and says:

1)   I am the Appellant in this action, and I respectfully submit this affidavit/affirmation.

2)   This Appeal Brief is to support Appellant general right to amend schedules.

3)   I have personal knowledge of facts, which bear on this motion. In view of the foregoing, it is respectfully submitted that this Appeal to reverse the order below be granted.

I declare under penalty of perjury that the foregoing is true and correct, except as to those allegations based on information and belief, which I believe to be true.

                                                       Signature, Pro Se, Appellant, Pierre-Richard Augustin,

                                                       28 Cedar Street, Lowell, MA 01852, (617) 202-8069

STATE OF _______________________________COUNTY OF _____________________________

On this _____ day of __________, 2007, before me, the undersigned notary public, personally appeared

___________________________, proved to me through satisfactory evidence of identification, which

was _________________________________________________________, to be the person whose name

is signed on the preceding or attached document, and acknowledged to me that s/he signed it voluntarily

                                                                                                Notary Public

                                                                                                My Commission Expires: