For Those Of Us Who Practice Bankruptcy Law, U. S. Supreme Court Clarifies Trustees Role In Chapter 7 Cases. Read The Synopsis Below.
The case is SCHWAB v. REILLY, No. 08–538.
Read the syllabus from the court below:
Respondent Reilly filed for Chapter 7 bankruptcy when her catering business failed. She supported her petition with, inter alia, Schedule B, on which debtors must list their assets, and Schedule C, on which they must list the property they wish to reclaim as exempt. Her Schedule B assets included cooking and other kitchen equipment, to which she assigned an estimated market value of $10,718. On Schedule C, she claimed two exempt interests in this “businessequipment”: a “tool[s] of the trade” exemption for the statutory-maximum “$1,850 in value,” 11 U. S. C. §522(d)(6); and $8,868 underthe statutory provisions allowing miscellaneous, or “wildcard,” ex-emptions up to $10,225 in value. The claimed exemptions’ total value($10,718) equaled Reilly’s estimate of the equipment’s market value.Property claimed as exempt will be excluded from the bankruptcy es-tate “[u]nless a party in interest” objects, §522(l), within a certain 30-day period, see Fed. Rule Bkrtcy. Proc. 4003(b). Absent an objection,the property will be excluded from the estate even if the exemption’svalue exceeds what the Code permits. See, e.g., §522(l); Taylor v. Freeland & Kronz, 503 U. S. 638, 642–643. Although an appraisal revealed that the equipment’s total marketvalue could be as much as $17,200, petitioner Schwab, the bank-ruptcy estate’s trustee, did not object to the claimed exemptions be-cause the dollar value Reilly assigned to each fell within the limits of§§522(d)(5) and (6). Schwab moved the Bankruptcy Court for per-mission to auction the equipment so Reilly could receive the $10,718 she claimed exempt and the estate could distribute the remainingvalue to her creditors. Reilly countered that by equating on ScheduleC the total value of her claimed exemptions in the equipment withthe equipment’s estimated market value, she had put Schwab and
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her creditors on notice that she intended to exempt the equipment’s full value, even if it turned out to be more than the amounts she de-clared and that the Code allowed. She asserted that the estate had forfeited its claim to any portion of that value because Schwab had not objected within the Rule 4003(b) period, and that she would dis-miss her petition rather than sell her equipment.
The Bankruptcy Court denied Schwab’s motion and Reilly’s condi-tional motion to dismiss. The District Court denied Schwab relief, re-jecting his argument that neither the Code nor Rule 4003(b) requires a trustee to object to a claimed exemption where the amount thedebtor declares as the exemption’s value is within the limits the Codeprescribes. Affirming, the Third Circuit agreed that Reilly’s ScheduleC entries indicated her intent to exempt the equipment’s full value. Relying on Taylor, it held that Schwab’s failure to object entitledReilly to exempt the full value of her equipment, even though that value exceeded the amounts that Reilly declared and the Code per-mitted.
Held: Because Reilly gave “the value of [her] claimed exemption[s]” onSchedule C dollar amounts within the range the Code allows for what it defines as the “property claimed as exempt,” Schwab was not re-quired to object to the exemptions in order to preserve the estate’sright to retain any value in the equipment beyond the value of the exempt interest. Pp. 6–23.
(a) Reilly’s complicated view of the trustee’s statutory obligation, and her reading of Schedule C, does not accord with the Code. Pp. 6–
15.
(1)
The parties agree that this case is governed by §522(l), which states that a Chapter 7 debtor must “file a list of property that thedebtor claims as exempt under subsection (b) of this section,” andthat “[u]nless a party in interest objects, the property claimed as ex-empt on such list is exempt.” Reilly asserts that the “propertyclaimed as exempt” refers to all of the information on Schedule C, in-cluding the estimated market value of each asset. Schwab and amicus United States counter that because the Code defines such property as an interest, not to exceed a certain dollar amount, in a particular asset, not as the asset itself, the value of the property claimed exempt should be judged on the dollar value the debtor as-signs the interest, not on the value the debtor assigns the asset. Pp. 6–9.
(2)
Schwab and the United States are correct. The portion of §522(l) that resolves this case is not, as Reilly asserts, the provision stating that the “property claimed as exempt on [Schedule C] is ex-empt” unless an interested party objects. Rather, it is the portion that defines the objection’s target, namely, the “list of property that
Cite as: 560 U. S. ____ (2010) 3
Syllabus
the debtor claims as exempt under subsection (b).” Section 522(b) does not define the “property claimed as exempt” by reference to the estimated market value. It refers only to property defined in §522(d),which in turn lists 12 categories of property that a debtor may claim as exempt. Most of these categories and all the ones applicable heredefine “property” as the debtor’s “interest”—up to a specified dollaramount—in the assets described in the category, not as the assets themselves. Schwab had no duty to object to the property Reillyclaimed as exempt because its stated value was within the limits theCode allows. Reilly’s contrary view does not withstand scrutiny be-cause it defines the target of a trustee’s objection based on Schedule C’s language and dictionary definitions of “property” at odds with theCode’s definition. The Third Circuit failed to account for the Code’s definition and for provisions that permit debtors to exempt certainproperty in kind or in full regardless of value. See, e.g., §522(d)(9).Schwab was entitled to evaluate the claimed exemptions’ propriety based on three Schedule C entries: the description of the business equipment in which Reilly claimed the exempt interests; the Codeprovisions governing the claimed exemptions; and the amounts Reillylisted in the column titled “value of claimed exemption.” This conclu-sion does not render Reilly’s market value estimate superfluous. It simply confines that estimate to its proper role: aiding the trustee inadministering the estate by helping him identify assets that mayhave value beyond the amount the debtor claims as exempt, or whose full value may not be available for exemption. This interpretation isconsistent with the historical treatment of bankruptcy exemptions.Pp. 9–15.
(b)
Taylor does not dictate a contrary conclusion. While both Tay-lor and this case concern the consequences of a trustee’s failure to ob-ject to a claimed exemption within Rule 4003’s time period, Taylor es-tablishes and applies the straightforward proposition that an interested party must object to a claimed exemption if the amountthe debtor lists as the “value claimed exempt” is not within statutorylimits. In Taylor, the value listed in Schedule C (“$ unknown”) wasnot plainly within those limits, but here, the values ($8,868 and$1,850) are within Code limits and thus do not raise the warning flagpresent in Taylor. Departing from Taylor would not only ignore thepresumption that parties act lawfully and with knowledge of the law;it would also require the Court to expand the statutory definition of “property claimed as exempt” and the universe of information an in-terested party must consider in evaluating an exemption’s validity.Even if the Code allowed such expansions, they would be ill advised.Basing the definition of “property claimed exempt,” and thus an in-terested party’s obligation to object under §522(l), on inferences that
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party must draw from preprinted bankruptcy schedules that evolveover time, rather than on the facial validity of the value the debtorassigns the “property claimed as exempt” as defined by the Code, would undermine the predictability the statute is designed to pro-vide. Pp. 16–18.
(c)
Reilly’s argument threatens to convert the Code’s goal of giving debtors a fresh start into a free pass. By permitting a debtor “towithdraw from the estate certain interests in property, . . . up to cer-tain values,” Rousey v. Jacoway, 544 U. S. 320, 325, Congress bal-anced the difficult choices that exemption limits impose on debtorswith the economic harm that exemptions visit on creditors. This Court should not alter that balance by requiring trustees to object toclaimed exemptions based on form entries beyond those governing anexemption’s validity under the Code. In rejecting Reilly’s approach,the Court does not create incentives for trustees and creditors to sleep on their rights. The decision reached here encourages a debtorwishing to exempt an asset’s full market value or the asset itself to declare the value of the claimed exemption in a way that makes itsscope clear. Such declarations will encourage the trustee to objectpromptly and preserve for the estate any value in the asset beyondrelevant statutory limits. If the trustee fails to object, or his objectionis overruled, the debtor will be entitled to exclude the asset’s full value. If the objection is sustained, the debtor will be required either to forfeit the portion of the exemption exceeding the statutory allow-ance or to revise other exemptions or arrangements with creditors topermit the exemption. See Rule 1009(a). Either result will facilitate the expeditious and final disposition of assets, and thus enable thedebtor and creditors to achieve a fresh start free of Reilly’s finalityand clouded-title concerns. Pp. 19–22.
534 F. 3d 173, reversed and remanded.
THOMAS, J., delivered the opinion of the Court, in which STEVENS, SCALIA, KENNEDY, ALITO, and SOTOMAYOR, JJ., joined. GINSBURG, J., filed a dissenting opinion, in which ROBERTS, C. J., and BREYER, J., joined.
Read the syllabus from the court below:
Respondent Reilly filed for Chapter 7 bankruptcy when her catering business failed. She supported her petition with, inter alia, Schedule B, on which debtors must list their assets, and Schedule C, on which they must list the property they wish to reclaim as exempt. Her Schedule B assets included cooking and other kitchen equipment, to which she assigned an estimated market value of $10,718. On Schedule C, she claimed two exempt interests in this “businessequipment”: a “tool[s] of the trade” exemption for the statutory-maximum “$1,850 in value,” 11 U. S. C. §522(d)(6); and $8,868 underthe statutory provisions allowing miscellaneous, or “wildcard,” ex-emptions up to $10,225 in value. The claimed exemptions’ total value($10,718) equaled Reilly’s estimate of the equipment’s market value.Property claimed as exempt will be excluded from the bankruptcy es-tate “[u]nless a party in interest” objects, §522(l), within a certain 30-day period, see Fed. Rule Bkrtcy. Proc. 4003(b). Absent an objection,the property will be excluded from the estate even if the exemption’svalue exceeds what the Code permits. See, e.g., §522(l); Taylor v. Freeland & Kronz, 503 U. S. 638, 642–643. Although an appraisal revealed that the equipment’s total marketvalue could be as much as $17,200, petitioner Schwab, the bank-ruptcy estate’s trustee, did not object to the claimed exemptions be-cause the dollar value Reilly assigned to each fell within the limits of§§522(d)(5) and (6). Schwab moved the Bankruptcy Court for per-mission to auction the equipment so Reilly could receive the $10,718 she claimed exempt and the estate could distribute the remainingvalue to her creditors. Reilly countered that by equating on ScheduleC the total value of her claimed exemptions in the equipment withthe equipment’s estimated market value, she had put Schwab and
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her creditors on notice that she intended to exempt the equipment’s full value, even if it turned out to be more than the amounts she de-clared and that the Code allowed. She asserted that the estate had forfeited its claim to any portion of that value because Schwab had not objected within the Rule 4003(b) period, and that she would dis-miss her petition rather than sell her equipment.
The Bankruptcy Court denied Schwab’s motion and Reilly’s condi-tional motion to dismiss. The District Court denied Schwab relief, re-jecting his argument that neither the Code nor Rule 4003(b) requires a trustee to object to a claimed exemption where the amount thedebtor declares as the exemption’s value is within the limits the Codeprescribes. Affirming, the Third Circuit agreed that Reilly’s ScheduleC entries indicated her intent to exempt the equipment’s full value. Relying on Taylor, it held that Schwab’s failure to object entitledReilly to exempt the full value of her equipment, even though that value exceeded the amounts that Reilly declared and the Code per-mitted.
Held: Because Reilly gave “the value of [her] claimed exemption[s]” onSchedule C dollar amounts within the range the Code allows for what it defines as the “property claimed as exempt,” Schwab was not re-quired to object to the exemptions in order to preserve the estate’sright to retain any value in the equipment beyond the value of the exempt interest. Pp. 6–23.
(a) Reilly’s complicated view of the trustee’s statutory obligation, and her reading of Schedule C, does not accord with the Code. Pp. 6–
15.
(1)
The parties agree that this case is governed by §522(l), which states that a Chapter 7 debtor must “file a list of property that thedebtor claims as exempt under subsection (b) of this section,” andthat “[u]nless a party in interest objects, the property claimed as ex-empt on such list is exempt.” Reilly asserts that the “propertyclaimed as exempt” refers to all of the information on Schedule C, in-cluding the estimated market value of each asset. Schwab and amicus United States counter that because the Code defines such property as an interest, not to exceed a certain dollar amount, in a particular asset, not as the asset itself, the value of the property claimed exempt should be judged on the dollar value the debtor as-signs the interest, not on the value the debtor assigns the asset. Pp. 6–9.
(2)
Schwab and the United States are correct. The portion of §522(l) that resolves this case is not, as Reilly asserts, the provision stating that the “property claimed as exempt on [Schedule C] is ex-empt” unless an interested party objects. Rather, it is the portion that defines the objection’s target, namely, the “list of property that
Cite as: 560 U. S. ____ (2010) 3
Syllabus
the debtor claims as exempt under subsection (b).” Section 522(b) does not define the “property claimed as exempt” by reference to the estimated market value. It refers only to property defined in §522(d),which in turn lists 12 categories of property that a debtor may claim as exempt. Most of these categories and all the ones applicable heredefine “property” as the debtor’s “interest”—up to a specified dollaramount—in the assets described in the category, not as the assets themselves. Schwab had no duty to object to the property Reillyclaimed as exempt because its stated value was within the limits theCode allows. Reilly’s contrary view does not withstand scrutiny be-cause it defines the target of a trustee’s objection based on Schedule C’s language and dictionary definitions of “property” at odds with theCode’s definition. The Third Circuit failed to account for the Code’s definition and for provisions that permit debtors to exempt certainproperty in kind or in full regardless of value. See, e.g., §522(d)(9).Schwab was entitled to evaluate the claimed exemptions’ propriety based on three Schedule C entries: the description of the business equipment in which Reilly claimed the exempt interests; the Codeprovisions governing the claimed exemptions; and the amounts Reillylisted in the column titled “value of claimed exemption.” This conclu-sion does not render Reilly’s market value estimate superfluous. It simply confines that estimate to its proper role: aiding the trustee inadministering the estate by helping him identify assets that mayhave value beyond the amount the debtor claims as exempt, or whose full value may not be available for exemption. This interpretation isconsistent with the historical treatment of bankruptcy exemptions.Pp. 9–15.
(b)
Taylor does not dictate a contrary conclusion. While both Tay-lor and this case concern the consequences of a trustee’s failure to ob-ject to a claimed exemption within Rule 4003’s time period, Taylor es-tablishes and applies the straightforward proposition that an interested party must object to a claimed exemption if the amountthe debtor lists as the “value claimed exempt” is not within statutorylimits. In Taylor, the value listed in Schedule C (“$ unknown”) wasnot plainly within those limits, but here, the values ($8,868 and$1,850) are within Code limits and thus do not raise the warning flagpresent in Taylor. Departing from Taylor would not only ignore thepresumption that parties act lawfully and with knowledge of the law;it would also require the Court to expand the statutory definition of “property claimed as exempt” and the universe of information an in-terested party must consider in evaluating an exemption’s validity.Even if the Code allowed such expansions, they would be ill advised.Basing the definition of “property claimed exempt,” and thus an in-terested party’s obligation to object under §522(l), on inferences that
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party must draw from preprinted bankruptcy schedules that evolveover time, rather than on the facial validity of the value the debtorassigns the “property claimed as exempt” as defined by the Code, would undermine the predictability the statute is designed to pro-vide. Pp. 16–18.
(c)
Reilly’s argument threatens to convert the Code’s goal of giving debtors a fresh start into a free pass. By permitting a debtor “towithdraw from the estate certain interests in property, . . . up to cer-tain values,” Rousey v. Jacoway, 544 U. S. 320, 325, Congress bal-anced the difficult choices that exemption limits impose on debtorswith the economic harm that exemptions visit on creditors. This Court should not alter that balance by requiring trustees to object toclaimed exemptions based on form entries beyond those governing anexemption’s validity under the Code. In rejecting Reilly’s approach,the Court does not create incentives for trustees and creditors to sleep on their rights. The decision reached here encourages a debtorwishing to exempt an asset’s full market value or the asset itself to declare the value of the claimed exemption in a way that makes itsscope clear. Such declarations will encourage the trustee to objectpromptly and preserve for the estate any value in the asset beyondrelevant statutory limits. If the trustee fails to object, or his objectionis overruled, the debtor will be entitled to exclude the asset’s full value. If the objection is sustained, the debtor will be required either to forfeit the portion of the exemption exceeding the statutory allow-ance or to revise other exemptions or arrangements with creditors topermit the exemption. See Rule 1009(a). Either result will facilitate the expeditious and final disposition of assets, and thus enable thedebtor and creditors to achieve a fresh start free of Reilly’s finalityand clouded-title concerns. Pp. 19–22.
534 F. 3d 173, reversed and remanded.
THOMAS, J., delivered the opinion of the Court, in which STEVENS, SCALIA, KENNEDY, ALITO, and SOTOMAYOR, JJ., joined. GINSBURG, J., filed a dissenting opinion, in which ROBERTS, C. J., and BREYER, J., joined.
Labels: Constitutional Rights, The Constitution, U. S. Supreme Court
posted by KYJurisDoctor at 12:37 PM
1 Comments:
While most of the changes under the new bankruptcy laws are aimed at those looking to discharge their debts under Chapter 7 bankruptcy, there are some changes to the process of filing Chapter 13 Bankruptcy as well. Under Chapter 13, the person declaring bankruptcy will still work to pay back the debts. The creditors will work out monthly payments based on how much the individual has after accounting for living expenses. However, under the new bankruptcy laws, the IRS decides how much the living expenses should be. The individual filing bankruptcy has no control over the living expenses. This means that many people have to live on far less than they are used to having, causing many changes in their standards of living.
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