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July 11, 2010

Schwab v. Reilly, Another Bankruptcy Problem Congress Should Fix

Schwab v. Reilly, --- U.S. ---, 2010 WL ------- (2010)

Issue:  Is a chapter 7 trustee required to object to the valuation of property claimed exempt by a debtor on schedule C within the 30 day time limit proscribed under FRBP 4003?
Holding:  No.    
Justice Clarence Thomas for a 6-3 court,
Ginsburg dissented with Roberts and Breyer joining

This chapter 7 debtor’s Schedule B “included an itemized list of cooking and other kitchen equipment that she described as ‘business equipment,’ and to which she assigned an estimated market value of $10,718.”  On her Schedule C, she claimed the property exempt as “tools of the trade” in the amount of $1,850 and also exempt under the wildcard in the amount of $8,868 for a total of $10,718.  The trustee obtained an appraisal which valued the property at $17,200 but did not object to the exemption.  He moved the court for permission to sell the property offering to give the debtor $10,718 out of the sale proceeds.  The debtor objected arguing that, by the time of the hearing on the sale motion, it was too late to sell the property since the trustee had not objected to the exemption.  “She argued that by equating on Schedule C the total value of the exemptions she claimed in the equipment with the equipment’s estimated market value, she had put [the trustee] and her creditors on notice that she intended to exempt the equipment’s full value, even if that amount turned out to be more than the dollar amount she declared, and more than the Code allowed.”  She indicated that she would prefer her case be dismissed rather than have the equipment sold.  The bankruptcy court agreed with the debtor and denied the motion to sell the property.  The district court and the court of appeals both affirmed.  The court of appeals ruled that by using the same amount to value the property and claim the exemption, she “indicated” an intent to claim all of the property as exempt.  “Such an identical listing put [the trustee] on notice that [the debtor] intended to exempt the property fully.”  This triggered the trustee’s duty to object within the statutory period.   

The Supreme Court reversed.


The starting point for our analysis is the proper interpretation of [the debtor’s] Schedule C.  If we read the Schedule [the debtor’s] way, she claimed exemptions in her business equipment that could exceed statutory limits, and thus claimed exemptions to which [the trustee] should have objected if he wished to enforce those limits for the benefit of the estate.  If we read Schedule C [the trustee’s] way, [the debtor] claimed valid exemptions to which [the trustee] had no duty to object.

The debtor is entitled under section 522(b) to exempt property listed in section 522(d).  Section 522(l) states, “[u]nless a party in interest objects, the property claimed as exempt on [Schedule C] is exempt.”  But under 522(l) the debtor may only claim exemptions under section 522(b) and therefore the trustee has a duty to object only if the exemptions claimed are improper under 522(b).  Since the debtor had the right to claim $10,718 exempt, there was no requirement that the trustee object.  Most exemptions “define the ‘property’ a debtor may ‘clai[m] as exempt’ as the debtor’s ‘interest’—up to a specified dollar amount—in the assets described in the category, not as the assets themselves.” 
“[T]he Code’s definition of the ‘property claimed as exempt’ in this case is clear.  As noted above, §§522(d)(5) and (6) define the ‘property claimed as exempt’ as an ‘interest’ in [the debtor’s] business equipment, not as the equipment per se.  Sections 522(d)(5) and (6) further and plainly state that claims to exempt such interests are statutorily permissible, and thus unobjectionable, if the value of the claimed interest is below a particular dollar amount.”

The decision also discusses the relationship between this case and the earlier Supreme Court case of Taylor.   In Taylor, the debtor listed the value of the exemption as “unknown.”   This made the claimed exemption objectionable on its face because the statutory exemption was limited to a certain amount.  When the trustee did not object, his right to object was lost.  There is also a discussion about the practical effect of the ruling, that is, the delay and uncertainty to the debtor caused by the failure of the trustee to timely object.  The decision states that if it is important to the debtor to claim the asset itself exempt, the debtor may list the “exempt value as ‘full fair market value (FMV)’ or ‘100% of FMV.’"

In her dissent, Justice Ginsburg focuses on the language of section 522(l) and FRBP 4003(b) which says that unless a party in interest objects, the property claimed by the debtor as exempt is exempt.  She says that the debtor “made her position plain,” she listed each item of property and a specific value for each and claimed each exempt.  “Because an asset’s market value is key to determining the character of the interest the debtor is asserting in that asset, Rule 4003(b) is properly read to require objections to valuation within 30 days, just as the Rule requires timely objections to the debtor’s description of the property, the asserted legal basis for the exemption, and the claimed value of the exemption.”  She argues that the trustee is required, as part of his duties, to determine the value of every asset in a case anyway and if he needs more time, he can ask for more time or simply continue the meeting of creditors so that the 30 time limit will be delayed.   

July 11, 2010 in Supreme Court | Permalink


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Given the clarity of the rule in view of the Supreme Court's decision -- a debtor who wants to claim an exemption in an asset regardless of its value was told exactly which words she needs to use on her schedules in order to do that -- what problem is left for Congress to fix?

Posted by: Bankruptcy Nerd | Jul 11, 2010 5:07:51 PM

The fix goes beyond the case to the windfall (and court deadlocks) the decision created. A Trustee need not authenticate, qualify or quantify an issue that Congress designed to be a finality in the 30 day period. The Law of exempt was crafted with the over-all consideration that Chptr 7's are the perponderance of the case loads; and the exemption would resolve the issues with the least amount of litigation.

Now, arguing semantically, a Trustee can seek every asset to go thru a lengthy process; and in this case while not even doing the sine qua non of objecting as required by the Code.

Thus your case can be the eve (or maybe even after it is closed) and the Trustee can - after the fact - argue ABC item is worth more. Mind you he has no bids, just an appraiser (who also may have been looking for the job of selling).

This has created an obfuscation of the issue at hand - by permitting a party the latitude to fail to act - the gain of benefit for his/her neglect or abandon - nunc pro tunc.


And my living for over 20 years has been made as an appraiser/liquidation consultant!

Posted by: Laser Haas | Jul 12, 2010 6:21:29 AM

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