Bankruptcy

Decision in Schwab Is an Irritating Nonevent

By Bob Lawless

The Supreme Court handed down its decision in Schwab v. Reilly today. Schwab looks like a technical case only of interest to bankruptcy specialists because it requires the parsing of specific language in section 522(l) of the Bankruptcy Code and rule 4003(b) of the Federal Rules of Bankruptcy Procedure. In fact, Schwab is of great practical importance and could have had an effect on almost every one of the more than 1.6 million bankruptcy cases that consumers will file this year.

Schwab revolves around how debtors may claim their bankruptcy exemptions--the property that bankruptcy law allows the debtor to keep and is part of the fresh start the bankruptcy system is supposed to give debtors. Exemptions are important in most every consumer bankruptcy case (including chapter 13 where they determine the amount debtors must pay in the chapter 13 plan). For nonspecialists, here is some background on the case. If you're familiar with Schwab and the Bankruptcy Code and rules, you might want to skip the next two paragraphs.

Glossing over a lot of detail, it is sufficient to understand that the Bankruptcy Code gives the debtors what basically amounts to a shopping list and says the debtor can pick items they own off the shopping list to keep after a chapter 7 bankruptcy case. (Because a chapter 13 plan must pay creditors at least as much as they would receive in chapter 7, in chapter 13 exemptions play a role in determining how much the debtor must pay.) Often exempt items are limited in dollar amounts but not always. For example, the federal statute allows a debtor to keep a motor vehicle not to exceed $3,255 in value but all professionally prescribed health aids regardless of value. The federal list of exemptions lists twelve different items, and in many cases, the bankruptcy exemptions that a debtor can keep are determined by state law. My favorite exemption case involves whether a broken riding lawn mower in someone's front yard could count as "furniture."

In Schwab, the debtor had claimed an exemption of $10,718 in business equipment and had listed that amount as the value of the equipment. Her bankruptcy trustee objected after an appraiser told him the equipment was worth at least $17,000. The trustee moved to auction the business equipment and pay the debtor $10,718 in cash from the proceeds of the sale. The debtor responded by pointing out the trustee had missed the thirty-day deadline for objection to exemptions in Federal Rule of Bankruptcy Procedure 4003(b). The trustee responded that he was not objecting to the exemption just its valuation, and the deadline did not apply. The bankruptcy court, district court, and court of appeals all held for the debtor. In a 6-3 vote, the Supreme Court reversed.

I have a lot of reactions to the Schwab decision, but I wanted to focus on just two points. First, it turns out to be pretty much a nonevent for everyone but the debtor in this case. The Supreme Court spent much of its decision discussing whether the bankruptcy trustee should have interpreted the debtor's exemption claim as being in the thing itself or just the value of the exemption in the thing. (My previous post on this case discussed this very point.) Where the debtor wrote "exemption in asset = $10,718, value of asset = $10,718," should the trustee have interpreted this as a claim to the actual equipment or just $10,718 in value from the equipment? Regardless of how that language should have been interpreted, the Court lays out a road map for future cases. The Court says that, in the future, if the debtor wants to claim the thing itself rather than just the value of the exemption, just write something like "exemption in asset = $10,718, value of asset = $10,718 (100% of fair market value)."

Well-informed attorneys will simply fill out the bankruptcy schedules to satisfy the Court's magic formula (and I understand some attorneys already followed this practice). The Court's approach in Schwab and other decisions, however, does raise the bar on being well-informed, and it raises huge issues for pro se debtors as the dissent notes. To know the rule, one must look at not only the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, but also one must look through case law. OK, how hard is that? Actually, as a theoretical matter, pretty hard. On any issue, the search is essentially to prove a negative--that no provision of the relevant authority contains a contrary directive. The Bankruptcy Code and Federal Rules of Bankruptcy Procedure are relatively self-contained as compared to the vast body of case law. I'm not saying the Court is wrong to set a clear rule in Schwab. I'm glad it did set a clear rule, and CLEs and other professional materials will take care of seeing that attorneys are well informed on what the Court directs. I'm just saying let's not to be too sanguine about courts plugging holes in statutory schemes.

My second reaction to Schwab surely stems from signing an amicus brief on what turned out to be the losing side. The decision is irritatingly illogical, and its reasoning is in internal conflict. The Court dismisses the debtor's arguments about how the trustee should have understood her claim of exemptions by saying this understanding defies the plain words of the Bankruptcy Code, and the statute has to be the final arbiter. I also think the Court is just plain silly where it tries to parse the difference in meaning between "property" and "interest," but that is beside the point. If the Bankruptcy Code trumps whatever intent the debtor had in the way she claimed her exemptions in this case, then it also should trump whatever intent a future debtor has when writing "100% FMV" next to the claim of the exemption. Yet, the Court clearly says that is all debtors have to write to get the result the debtor in Schwab wanted. The Court shouldn't be able to have it both ways, but I did not get a vote.

Full post as published by Credit Slips on June 17, 2010 (boomark / email).