July 14, 2010
Some Thoughts on Schwab and Exemptions
I commented last week that the problem that the Supreme Court tried to resolve in Schwab v. Reilly needed to be fixed by the powers to be. Spoken like the true debtor lawyer I am. The Supremes clearly got it right in Schwab. Most exemption statutes provide that the debtor may exempt "an interest" in a vehicle or jewelry or cooking utensils "up to" a certain amount. So when the debtor exempts on Schedule C, $3,000 of her $100,000 Ferrari which she also values at $3,000, there is nothing to object to exemption-wise. The car is clearly still property of the estate until it is abandoned and subject to being administered. And the claimed exemption of $3,000 is unassailable once the objection period runs.
Problem one to be fixed is that the debtor often does not know what the property is worth, especially if it is an interest in litigation or receivables of unknown collectibility, equipment or royalties for which there is no ready market, a fractional interest in a closely held company.
Problem two is that the trustee often does nothing until a buyer happens to come along (not the case in Schwab by the way). This could be 6 or 12 months after the case is filed. The debtor should not be in limbo like that.
I had a case several years ago where the trustee decided to sell a home 2 or 3 years after the petition date. There was other property of the estate and therefore the trustee did not file a "no-asset report" and the case did not close. Property values were rising and the home had increased in value a few hundred thousand dollars. The debtor lost the home. It was still property of the estate. I know that the attorney who filed the case committed malpractice by not seeking an order abandoning the property. The problem for the client is that during the delay, he put a new roof on the home, paid off a second mortgage, painted, new carpets etc etc all of which now belonged to the estate.
The 30 day time limit in Rule 4003 was designed to get this stuff resolved in a reasonable time. As Justice Ginsburg says in her dissent, the trustee is supposed to make a determination of value of every asset in order to decide what to sell and what to abandon. The 30 day time limit is a reasonable time. And if its not, the trustee can ask for more time.
One last add, Justice Thomas's comment that the debtor can simply indicate that the claimed exemption is 100% of the property is a little strange. The problem with that is that the debtor will be claiming an exemption that is not allowed (usually) under the exemption statute. It will force the trustee to object but I would be a little concerned about sanctions personally.
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Much dicussion has emerged and the 1.3 million Chapter 7 and 13 cases - along with their various scenarios - have not yet cropped up.
A ruling should never create more problems than the one it sought to rectify. Especially one that defies the command (Trustee must Object within 30 days).
One person wants to keep her diamond ring from her great great grandmother. It appears to be an arcaic costume jewelry piece and the exemption is allowed for $1000.
Someone steps into the case with notes a year later that they heard the ring was worth $20,000. Litigation on the issue begins. The ring is seized, allegations (and maybe even a charge) of Bankruptcy Fraud begins - for under-declaring an asset. It gets locked into evidence.
Two years later they go to trial. Both sides get an appraiser and find out it is not a diamond.
Beyond all the subjectives and egg on face. The estate has now spent an additional $7341.20 on litigation on the matter leaving only $22.
Can the petitioner file to get her full $1000?
Or in the case of Schwab, does the Petitioner lose money from the exemption amount when the auction sale, cost of storage, insurance, auctioneer, ads and attorney for Trustee run up bills to $10,000.
Who gets the money - the exemption or the process?
Times 1.7 million Trustee's who can now utilize the TOOL - of letting petitioner claim the exemption - get benefit of utilizing the equipment and then sue after the fact - when the petitioner sold the business which was increased due to a new sandwich design that had nothing to do whatsoever with where the cooking equipment came from.
And I thought the bogus Judicial Immunity assignment in the Tom Petters bankruptcy case was a departure from common sense!
Posted by: Laser Haas | Jul 15, 2010 7:54:47 AM