CA1: dealing with a strained reading of claimed exemptions from a bankruptcy estate

In re Barroso-Herrans v. Lugo Mender, No. 07-1757.  This is actually a fairly interesting theoretical issue.  Government contractors got into a dispute with the commonwealth of Puerto Rico.  Then didn’t get paid.  So, the contractors sued the commonwealth and simultaneously filed for bankruptcy.  In their list of assets, they listed the lawsuits as an account receivable.  The bankruptcy court authorized Barraso’s lawyer to represent both Barrasco and the estate in prosecution of the suits.  But then Barrasco started asserting that the suits were not part of the estate anyway, and objected when the bankruptcy trustee “unilaterally negotiated a settlement” for about $100,000 on a $170,000 claim, which called for payment of the funds to the estate.  The bankruptcy court held that “...Barroso had exempted not the law suits but rather only a $4,000 partial interest in each suit, so the trustee could settle the suits and simply pay a total of $8,000 to the debtors.”  There was a suggestion of bad faith.  The First says that the determination of what has been claimed as being an exception (and not part of the estate) is really a factual matter of interpreting the schedules filed by the debtors, but a legal matter of “how a reasonable trustee would have understood the filings under the circumstances.”  So, looking at the schedules, the First says that Barrasco’s reading is implausible, it can’t figure out how the debtors discounted the contract disputes from well over $100,000 to $4,000, rather than listing the value as “unknown.”