June 17, 2010

Supreme Court Decides Schwab v. Reilly

On June 17, 2010, the Supreme Court decided Schwab v. Reilly, No. 08-538, holding that, when a bankruptcy debtor claims exemptions under section 522(d) of the Bankruptcy Code that are within the dollar amounts set forth in that section, the bankruptcy trustee need not object to the exemptions within 30 days to preserve the estate's right to retain any value in the exempted property in excess of the statutory exemption amount.

When Nadejda Reilly's catering business failed, she filed a Chapter 7 bankruptcy petition that listed among her assets cooking and other kitchen equipment, to which she assigned an estimated market value of $10,718. She claimed exempt interests in this property equal to her estimate of the property's value. Schwab, the bankruptcy trustee, did not object to her exemption claim within 30 days, as required by Bankruptcy Rule 4003(b), although an appraisal revealed that the total value of the property covered by the claim could be as much as $17,200. When the trustee requested permission to sell the equipment, pay Reilly the amount of her claimed exemption, and use the excess to pay creditors, Reilly objected, arguing that she had put the trustee on notice that she was claiming exemption for the full value of the equipment, whatever it proved to be, and that the trustee had waived the estate's claim to any excess value by failing to object. The Bankruptcy Court agreed with Reilly and denied the trustee's requested relief. The Court of Appeals for the Third Circuit affirmed.

The Supreme Court reversed. It held that, because Reilly stated the "value of [her] claimed exemption[s]" within the range that the Bankruptcy Code allows for "property claimed as exempt," the trustee was not required to object to the exemptions to preserve the estate's right to retain the potential excess value of the equipment beyond the amount she had claimed. The Code defines the subject of an exemption claim as "an interest," not to exceed a certain dollar amount, in a particular asset, not the asset itself. Therefore, the value of the claimed exemption should be judged by the dollar value the debtor assigns to the interest, not the value assigned to the asset. Here, the trustee had no reason to object to Reilly's exemption claim because its stated value was within the limits allowed by the Code. The Court rejected the argument that its interpretation made a debtor's market value estimates superfluous, suggesting that those estimates are valuable in helping the trustee to identify assets that may have value beyond the amount the debtor claims as exempt. The Court also rejected the Third Circuit's reasoning that the case was controlled by Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), explaining that Taylor holds only that the trustee must object to a claimed exemption if the amount the debtor lists as the "value claimed exempt" is not within the statutory limit; here, Reilly's claimed amount was within the limit, so no objection to the claimed exemption was required to preserve the estate's entitlement to the value that exceeded that amount.

Justice Thomas delivered the opinion of the Court, in which Justices Stevens, Scalia, Kennedy, Alito, and Sotomayor joined. Justice Ginsburg filed a dissenting opinion, in which Chief Justice Roberts and Justice Breyer joined.

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