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Winning While Losing in the Supreme Court - Schwab v. Reilly

By Henry Sommer

    A few weeks ago, Bob Lawless called the Supreme Court?s decision in Schwab v. Reilly  a non-event.  Some commenters expressed the view that it was a victory for trustees.  I have to disagree. I think it settled a very important issue that has been splitting courts and trustee practice for many years.  While technically a win for the trustee in the case, the opinion really represents a victory for debtors.

    The court?s ruling turned on the narrow issue of whether the trustee reasonably could interpret the debtor?s schedules as exempting only an interest of a specific dollar amount in her kitchen equipment, rather than all of the equipment.  The debtor in her schedules listed the same amount for the property in the columns labeled ?Value of Claimed Exemption? and ?Current Market Value of Property without Deducting Exemptions.?  The court accepted the trustee?s argument that it was reasonable for him to infer from this that the debtor only intended to exempt an interest in the equipment worth the amount listed, rather than her entire interest in the equipment.  Therefore, the court held, the trustee did not have to object to that exemption, which on its face exempted no greater amount than the statute permitted. In so doing, the majority rejected the conclusion of the courts below and the three dissenting justices that by listing the same amount in both columns the debtor manifested an intent to exempt the entire property.

    If that were all the court had held, I?d agree the case was not significant. However, by ruling in this narrow manner ?  focused on how this particular debtor?s schedules could be interpreted by the trustee ? the court also addressed the main concern raised by the National Association of Consumer Bankruptcy Attorneys (NACBA), which filed an amicus brief.  NACBA?s concern was that if trustees did not have to adhere to the objection deadline they could wait for months before acting and the question of whether property is exempt would remain in limbo.  The court set forth a very simple solution to this problem: The debtor need only make absolutely clear the debtor?s intent to exempt the entire asset by listing the exempt value as ?full fair market value (FMV)? or ?100% of FMV.? (Slip Opinion at 20-21).  Then the trustee will know that she must object within the time set by Rule 4003 or else the entire asset will be exempted.  Thus, the court rejected the argument often made by trustees that debtors cannot exempt the debtor?s entire interest in property ?in kind? if there is a dollar limit on the exemption. It specifically provided a way to do exactly that.

    This result should not present any problem for debtors represented by competent counsel, who should use the suggested language whenever there is any doubt about whether an exempted asset is within the amount of exemption allowed (assuming, of course, that there is a good faith argument the asset can be completely exempted.)  Some attorneys may want to include this language for every asset exempted. Unfortunately, as Bob suggested, pro se debtors such as Ms. Reilly are not likely to know they should do this. Amendments to Schedule C of Official Form 6 to provide an easy way to do this, perhaps with a box to be checked, would help standardize the process for all involved.

    The Supreme Court?s decision also should resolve the problem raised by cases like In re Chappell, (pending in the 9th Circuit, in which NACBA also filed an amicus brief) where the trustee attempts to keep a case open waiting for an asset like a debtor?s home to increase in value beyond the exemption amount.  (This practice, not such a big problem after the housing bust, also runs up against the language in section 522(a) that property should be valued as of the petition date for exemption purposes.) If the debtor clearly indicates an intent to exempt the entire asset, the trustee must file a timely objection, based on the value at the outset of the case, or the entire asset will be exempt.

    I also have to disagree with those who have stated that the decision will result in a new flood of exemption objections by trustees who want to keep their options open. The result in Reilly has been the law in some places for years, and trustees do not file numerous exemption objections that are not pursued.  They just have to evaluate property more promptly and decide within the exemption objection deadline (which can be extended in a couple of ways) whether they seriously believe an asset can be liquidated for an amount sufficiently above the exemption amount to produce a meaningful distribution to creditors. The prompt determination of whether property is exempt that should result is exactly what the statute and rules intended all along.
       

Full post as published by Credit Slips on July 08, 2010 (boomark / email).