Supreme Court rules objection to bankruptcy exemption not required to recover excess value

[JURIST] The US Supreme Court [official website; JURIST news archive] on Thursday ruled [opinion, PDF] 6-3 in Schwab v. Reilly [Cornell LII backgrounder; JURIST report] that a trustee assigned to a Chapter 7 bankruptcy [Cornell LII backgrounder] case is not required to object to the exemptions made by the debtor in order to preserve the estate's right to retain any value in the asset beyond the value of the exempt interest. The US Court of Appeals for the Third Circuit held [opinion, PDF] that the debtor intended to fully exempt the asset and that the trustee had to object within 30 days. Justice Clarence Thomas, writing the opinion for the court, reversed the circuit court opinion and held that under § 522 of the Bankruptcy Code [text] the debtor is only entitled to the dollar amount she claimed, not the full value of the asset. Thomas concluded that:

because the Code defines such property as an interest, not to exceed a certain dollar amount, in a particular asset, not as the asset itself, the value of the property claimed exempt should be judged on the dollar value the debtor assigns the interest, not on the value the debtor assigns the asset.
Justice Ruth Bader Ginsburg dissented, joined by Chief Justice John Roberts and Justice Stephen Breyer.

In 2005, Nadejda Reilly filed a Chapter 7 bankruptcy petition and claimed two exempt interests in "business equipment," estimating the value at $10,718. Although an appraisal revealed that the equipment's total market value could be as much as $17,200, the bankruptcy estate's trustee William Schwab, did not object to the claimed exemptions because the dollar value Reilly assigned to each fell within the limits maximum limits imposed by the Code. Schwab moved the Bankruptcy Court for permission to auction the equipment so Reilly could receive the dollar value she claimed exempt and the estate could distribute the remaining value to her creditors. Reilly argued that Schwab's failure to object within the thirty-day statutory period rendered the property exempt. Schwab countered that Reilly's exemption was limited to the specific amount claimed and did not serve to fully exempt the property from distribution. Schwab also argued that the objection deadline applied only to the type of property claimed as exempt, not to the value.

 

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