In Schwab v. Reilly, the United States Supreme Court recently reversed a decision from the 3rd Circuit Court of Appeals regarding the need for a bankruptcy trustee to lodge an objection to an exemption where the property is actually worth more than the amount claimed by the exemption. The Supreme Court took the opportunity in this case to also clarify its prior ruling in Taylor v. Freeland & Kronz, 503 US 638 (1992), in which some circuits had since inferred a debtor’s ability to exempt the full value of the property by merely claiming the total assigned value as exempt without further statement of his or her intention. The Schwab Court further clarified its prior ruling by distinguishing the failure of the debtor to assign any value to the property (Taylor) and those instances where the debtor undervalued the property (Schwab).

The Chapter 7 trustee in Schwab argued that it was not necessary to file an objection to the debtor’s exemption within the time period assigned by Rule 4003 of the Federal Rules of Bankruptcy Procedure because he was merely seeking to liquidate the property in excess of the exemption claim. In response, the debtor argued that the trustee was barred from such relief as her schedules provided notice of her intention to claim the full value of the property exempt and she alternatively sought to dismiss her bankruptcy case in the event the trustee was successful in his liquidation efforts. The bankruptcy court judge denied both the trustee’s motion to auction the property and the debtor’s motion to conditionally dismiss her bankruptcy case. The Third Circuit affirmed finding that the trustee had notice of the debtor’s intention and failed to lodge an objection within the time period allotted.

The Supreme Court reversed the 3rd Circuit’s decision, concluding that the court had gone too far by interpreting Taylor to permit a debtor to claim an exemption for the full value of the property without explicitly defining his or her intentions to do so. The Supreme Court further clarified that in the context of Rule 4003, the Trustee is merely bound to make objections to an exemption predicated upon the Debtor’s schedules. The Supreme Court denied the Debtor’s assertions that such a ruling created a cloud on title because the Debtor was only entitled to remove from the estate the amount of property set forth in the exemptions. Thus, any property in excess of such exemptions remained titled in the estate until such time as the trustee administered or abandoned the property. Finally, the Supreme Court expressly denied Debtor’s assertions that its ruling provided incentives for trustees delay and articulated that the ruling merely required the debtors to more carefully assign values and to better disclose his or her intentions on the bankruptcy schedules.

The attorneys in Larkin Hoffman’s Bankruptcy Practice Group have substantial experience in complex bankruptcy issues and are able to assist with any questions about this case or any other bankruptcy or insolvency questions that you may have.