Bankruptcy

Schwab v. Reilly -- The Amicus Brief

By Bob Lawless

Last week, I agreed to join an amicus brief in the pending U.S. Supreme Court case of Schwab v. Reilly. This case will not receive a lot of medial attention, but it could have a big practical effect on the approximately 1.5 million bankruptcy cases that it looks like the U.S. will be experiencing each year. The amicus brief was filed on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA) and four law professors (Ken Klee of UCLA, Richard Lieb of St. John's, Michael D. Sousa of Denver, and myself).

The amicus brief supports a debtor, Nadejda Reilly, who claimed an exemption in her bankruptcy for tools of the trade, namely kitchen equipment for her restaurant. On the schedule where she was to claim her exemptions, Reilly listed the value of the equipment as $10,718 and claimed an exemption in the equipment of the same amount, combining the federal $1,850 tools-of-the-trade exemption with $8,868 of her federal "wild-card exemption." More than 30 days after the meeting of creditors, the trustee filed a motion to sell the equipment because, based on an appraisal, he believed it to be worth more than $17,000.

Nobody disputes that the equipment is eligible for the exemption. Rather, the question is whether the trustee procedurally defaulted by not acting more promptly. Federal Rule of Bankruptcy Procedure (FRBP) 4003(b) requires that any objection to an exemption be made within 30 days after the meeting of creditors, and section 522(l) of the Bankruptcy Code states that absent an exemption, the property claimed on the list of exemptions "is exempt." Despite these clear rules, my initial instinct was that the trustee should win. The more I thought about the case, however, the more I became convinced the debtor is right.

My initial mistake was to make a distinction only a lawyer would make, namely that there is a distinction between the value of the thing and the thing itself. Thus--and this is exactly the trustee's position--Reilly's exemption is vindicated by selling the property and giving her the amount of her exemption, namely $10,718. Lawyers often like to talk about value as if it was some objective measuring stick, albeit a measuring stick with a lot of uncertainty but still objective. Of course, that conception is wrong. For example, there is plenty of literature to show that Reilly likely would value the equipment much higher, simply because she currently owns it (the endowment effect), than anyone else. Slapping a value on the asset is to make a bunch of normative judgments about the asset. Granted, the law makes normative judgments all over the place, but we should not pretend that we are not making normative judgments when we use the language of valuation.

Once I got beyond the idea that this case is merely about a dispute over the value of the asset in question, it became much easier for me. Debtors usually claim exemptions to protect the thing claimed in the exemption. That is certainly true here as Reilly said she wanted to dismiss the bankruptcy case rather than turn over the equipment to the trustee. I don't like the idea of the creditors--represented by the trustee--to lose a recovery simply because a deadline passed, but some deadline has to be set. Otherwise, bankruptcy debtors always would be at risk of losing a claimed exemption long after a bankruptcy case passed.

Imagine this conversation as a bankruptcy lawyer: "You know that car you protected in your bankruptcy last year? The trustee now wants to sell it because it's market value is higher." There has to be a deadline. The rules committee might have picked a year or seven days or a three months. Any choice of a deadline is arbitrary. The rules committee chose thirty days. The statute cuts off any further objections past that date. End of analysis.

For the debtor to lose, I think the Supreme Court would have to make the technical distinction between value and the thing itself. That is a lawyer's distinction, not a plain and ordinary interpretation of the statutory scheme. In addition to all the usual reasons to prefer the plain and ordinary meaning, this meaning is also the one that best effectuates the purpose of the bankruptcy law.

Full post as published by Credit Slips on September 30, 2009 (boomark / email).