Monday, July 19, 2010

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

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

Debtor valued property for less then it's value.  Trustee failed to object.  Trustee asked court to allow him to sell property and give the Debtor her exempted value. 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 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.