Schwab v. Reilly
560 U.S. 770, 177 L. Ed. 2d 234, 2010 U.S. LEXIS 4974 (2010)
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Rule of Law:
When a debtor claims a bankruptcy exemption as an interest in property up to a specific dollar amount that is facially within statutory limits, a trustee is not required to object to the claim within the 30-day period under Rule 4003(b) to preserve the estate's right to the asset's value exceeding that claimed dollar amount.
Facts:
- Nadejda Reilly's catering business failed, leading her to file for Chapter 7 bankruptcy.
- On her bankruptcy schedules, Reilly listed business equipment with an estimated market value of $10,718.
- On Schedule C, Reilly claimed two exemptions in the equipment: a $1,850 "tools of the trade" exemption under § 522(d)(6) and an $8,868 "wildcard" exemption under § 522(d)(5).
- The total value of her claimed exemptions, $10,718, was equal to the estimated market value she listed for the equipment.
- Both of the individual exemption amounts Reilly claimed ($1,850 and $8,868) were within the statutory dollar limits for those types of exemptions.
- An appraisal conducted before the 30-day objection period expired revealed that the actual market value of the equipment could be as high as $17,200.
Procedural Posture:
- William Schwab, the trustee of Nadejda Reilly's bankruptcy estate, filed a motion in the U.S. Bankruptcy Court for the Middle District of Pennsylvania seeking permission to auction Reilly's business equipment.
- The Bankruptcy Court denied Schwab's motion.
- Schwab, as appellant, appealed the decision to the U.S. District Court for the Middle District of Pennsylvania.
- The District Court affirmed the Bankruptcy Court's ruling in favor of Reilly, the appellee.
- Schwab, as appellant, appealed to the U.S. Court of Appeals for the Third Circuit.
- The Court of Appeals affirmed the lower courts' rulings in favor of Reilly, the appellee.
- The U.S. Supreme Court granted certiorari.
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Issue:
Does a bankruptcy trustee's failure to object within the 30-day timeframe to a debtor's claimed exemption, where the debtor lists the value of the claimed exemption as a specific dollar amount within statutory limits, prevent the trustee from selling the asset and recovering value in excess of that dollar amount for the estate?
Opinions:
Majority - Justice Thomas
No. A trustee is not required to object to a claimed exemption when the debtor defines the exempt property as an interest with a specific dollar value that falls within the statutory limits. The Bankruptcy Code defines the property a debtor may claim as exempt not as the asset itself, but as the debtor's 'interest' up to a specified dollar amount in the asset. Because Nadejda Reilly listed specific, facially valid dollar amounts for her exemptions ($1,850 and $8,868), the trustee, William Schwab, had no duty to object. The trustee was entitled to take the claimed exemption at face value, which was an interest worth $10,718, not the equipment in-kind. This holding is distinguished from Taylor v. Freeland & Kronz, where the debtor listed the value as '$ unknown,' an entry that was facially invalid and thus required an objection. A debtor's listing of identical figures for the market value and the exemption value does not, by itself, constitute a claim for the full in-kind asset that would require an objection if undervalued.
Dissenting - Justice Ginsburg
Yes. A trustee's failure to object to a debtor's valuation of exempt property within the 30-day period should make that valuation conclusive. By listing the identical amount ($10,718) as both the equipment's market value and the value of the claimed exemption, Reilly clearly signaled her intention to exempt the property itself, not just a dollar-value interest. This should have put the trustee on notice that an objection was necessary if he believed the property was undervalued. The majority's holding undermines the finality of the 30-day objection rule and impedes the debtor's 'fresh start' by creating prolonged uncertainty over whether they can retain their exempted property. Challenges to valuation are the most common type of objection, and removing them from the rule's governance drastically reduces its effectiveness.
Analysis:
This decision clarifies the scope of a bankruptcy trustee's duty to object to exemption claims, establishing a bright-line rule based on the facial validity of the claimed exemption's dollar value. It prioritizes a textualist reading of the Bankruptcy Code's definition of exempt property as a limited 'interest' over inferences of a debtor's unstated intent to exempt an entire asset. The ruling protects the bankruptcy estate from losing value in undervalued assets but places a new burden on debtors to be explicit (e.g., by writing '100% of FMV') if they intend to exempt an asset in its entirety. This holding significantly reduces litigation over trustee objections by allowing trustees to rely on the face of the debtor's schedules.
