In Re: Reilly ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
7-21-2008
In Re: Reilly
Precedential or Non-Precedential: Precedential
Docket No. 06-4290
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-4290
IN RE: NADEJDA REILLY,
Debtor
WILLIAM G. SCHWAB,
Chapter 7 Trustee,
Appellant
Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 05-cv-02489)
District Judge: Honorable James M. Munley
Argued November 6, 2007
Before: SCIRICA, Chief Judge, AMBRO,
and JORDAN, Circuit Judges
(Opinion filed July 21, 2008)
William G. Schwab, Esquire (Argued)
Jason Z. Christman, Esquire
811 Blakeslee Boulevard Drive East
P.O. Box 56
Lehighton, PA 18235
Counsel for Appellant
Gino L. Andreuzzi, Esquire (Argued)
Suite II
85 Drasher Road
Drums, PA 18222
Counsel for Appellee
Martin P. Sheehan, Esquire
Sheehan & Nugent
41 Fifteenth Street
Wheeling, WV 26003
Counsel for Amicus-Appellant
National Association of Bankruptcy Trustees
OPINION OF THE COURT
2
AMBRO, Circuit Judge
We decide whether a Chapter 7 trustee who does not
lodge a timely objection to a debtor’s exemption of personal
property may nevertheless move to sell the property if he later
learns that the property value exceeds the amount of the claimed
exemption. Where, as here, the debtor indicates the intent to
exempt her entire interest in a given property by claiming an
exemption of its full value and the trustee does not object in a
timely manner, we hold that the debtor is entitled to the property
in its entirety.
I. Background
Debtor Nadejda Reilly is a cook with a one-person
catering business. On April 21, 2005, she filed a Chapter 7
bankruptcy petition with all of the necessary schedules and
statements. Relevant to this appeal, she listed as personal
property on her Schedule B an entry of “business equipment”
with a value of $10,718. On her Schedule C, where Reilly
claimed certain property as exempt from the bankruptcy, she
again listed the “business equipment” with a value of $10,718.
She claimed an exemption for the full $10,718 value of the
property, asserting $1,850 of it under 11 U.S.C. § 522(d)(6) and
$8,868 under 11 U.S.C. § 522(d)(5). Appellant William
Schwab, who serves as the bankruptcy trustee in this matter, did
not object to the exemption within the 30-day period prescribed
by Federal Rule of Bankruptcy Procedure 4003(b).
3
Schwab later sought an appraisal of the business
equipment—which consists of catering utensils and
instruments—and determined it to have a value of
approximately $17,200. He then filed a motion before the
Bankruptcy Court to sell the business equipment in order to
recoup the value, less the $10,718 exemption, for the bankruptcy
estate. Reilly filed a timely answer to the motion to sell,
asserting that the business equipment had become fully exempt
when the period for filing an objection expired and was
therefore not subject to sale by the trustee.
The Bankruptcy Court for the Middle District of
Pennsylvania held a hearing on the matter and ultimately denied
Schwab’s motion to sell. It agreed with Reilly that the property
was fully exempt from the bankruptcy estate because Schwab
had not filed a timely objection to Reilly’s claim of exemption.
Schwab appealed, but the District Court for the Middle District
of Pennsylvania denied the appeal. Specifically, the District
Court found that Reilly had demonstrated her intent to exempt
the entire value of the business property by listing the $10,718
figure as both the value of the property and the amount of the
exemption. Because she exempted the entire value without a
timely objection from the trustee, the District Court held that
Reilly was entitled to the entire value of the exempted property,
even if it was worth more than she had stated on the exemption
forms. Schwab now appeals to us.
II. Jurisdiction and Standard of Review
4
The Bankruptcy Court had jurisdiction pursuant to 28
U.S.C. §§ 157(b) and 1334. The District Court had jurisdiction
under 28 U.S.C. § 158(a)(1). We have jurisdiction pursuant to
28 U.S.C. §§ 158(d)(1) and 1291. Our review is plenary. See
Interface Group-Nevada, Inc. v. Trans World Airlines, Inc. (In
re Trans World Airlines, Inc.), 145 F.3d 124, 130 (3d Cir. 1998).
In exercising plenary review, we apply the same standard as the
District Court. Id. at 131. Thus, we “review the bankruptcy
court’s legal determinations de novo, its factual findings for
clear error[,] and its exercise of discretion for abuse thereof.”
Id. (citing Ferrara & Hantman v. Alvarez (In re Engel), 124
F.3d 567, 571 (3d Cir. 1997)).
III. Analysis
A.
When a debtor files for bankruptcy under Chapter 7, he
or she must file, among other items, a document known as a
“Schedule B,” which lists all of his or her personal property.
Fed. R. Bankr. P. 1007(b)(1). This property forms the basis of
the estate to be distributed to creditors. 11 U.S.C. § 541. The
debtor is allowed to claim certain property as exempt from the
bankruptcy estate, such that it is not distributed to creditors. Id.
§ 522.1
1
Specifically, § 522(d) lists the categories of and amounts for
property that may be exempted from bankruptcy. As noted,
5
In order to exempt property from the bankruptcy estate,
the debtor must file “a list of property that the debtor claims as
exempt.” Id. § 522(l). This document is known as a “Schedule
C,” and it requires the debtor to list both the value of the
exemption claimed and the current market value of the property
before the exemption is taken.
After the debtor files the bankruptcy petition and
appropriate schedules, the bankruptcy trustee holds a meeting of
the creditors, where he verifies the information contained in the
debtor’s materials. Id. § 341. After this meeting, any party in
interest, including the bankruptcy trustee, can object to an
exemption taken by the debtor on his or her Schedule C. This
process is governed by Federal Rule of Bankruptcy Procedure
4003. It provides in relevant part:
(a) Claim of exemptions.
A debtor shall list the property claimed as exempt under
§ 522 of the Code on the schedule of assets required to
be filed by Rule 1007. If the debtor fails to claim
Reilly claimed $1,850 of the business equipment exempt
under § 522(d)(6), which allows for the exemption of the
debtor’s tools of her trade. She claimed the remaining $8,868
as exempt under § 522(d)(5)’s “wildcard” exemption, which
allows the debtor to protect, subject to monetary caps,
miscellaneous property of her choosing.
6
exemptions or file the schedule within the time
specified in Rule 1007, a dependent of the debtor may
file the list within 30 days thereafter.
(b) Objecting to a claim of exemptions.
A party in interest may file an objection to the list of
property claimed as exempt only within 30 days after
the meeting of creditors held under § 341(a) is
concluded or within 30 days after any amendment to the
list or supplemental schedules is filed, whichever is
later. The court may, for cause, extend the time for
filing objections if, before the time to object expires, a
party in interest files a request for an extension. Copies
of the objections shall be delivered or mailed to the
trustee, the person filing the list, and the attorney for
that person.
(c) Burden of proof.
In any hearing under this rule, the objecting party has
the burden of proving that the exemptions are not
properly claimed. After hearing on notice, the court
shall determine the issues presented by the
objections. . . .
Fed. R. Bankr. P. 4003. Under Rule 4003(b), then, the trustee,
as a party in interest, has 30 days from the close of the creditors’
7
meeting under § 341(a) (or the date of filing any supplemental
schedules or amendment to the exempt-property list, whichever
is later) 2 to object to any exemptions a debtor claimed on his or
her Schedule C. If no objection is made, “the property claimed
as exempt on [the Schedule C] is exempt.” 11 U.S.C. § 522(l).
As noted, Reilly claimed her business equipment as
exempt on her Schedule C, and she listed the value of the
property as $10,718 and the value of the exemption as $10,718.
The trustee, Schwab, did not object to Reilly’s exemption of her
business equipment within 30 days of the conclusion of the
creditors’ meeting, nor did he timely seek an extension of the
time in which to make an objection. Schwab, however, argues
that he was not required to file a timely objection because he
was not objecting to the propriety of Reilly taking the exemption
as such; rather, his objection goes to the value of the property
claimed as exempt. Stated another way, he contends that Rule
4003 and § 522(l) only place a 30-day limit on the trustee’s
ability to object to an exemption on the ground that it was not
properly taken—that there is no statutory basis for claiming the
exemption—and does not control objections to property
valuation. Schwab claims that applying Rule 4003 to objections
to an exemption’s valuation would invite gamesmanship among
2
As we know of no such supplemental schedule or
amendment, we use throughout this opinion the close of the
creditors’ meeting as our starting point.
8
debtors, who would seek to undervalue their assets. He also
asserts that trustees would be forced to object to the valuation of
an exemption every time the debtor values the property and the
exemption identically.
B.
The starting point for our analysis is the Supreme Court’s
decision in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992).
There the Court had an opportunity to consider the application
of Rule 4003’s 30-day limit on objections to exemptions. The
debtor in Taylor had filed a Chapter 7 petition for bankruptcy
while she was pursuing an employment discrimination claim on
appeal before the Pennsylvania Supreme Court. On her
schedules before the Bankruptcy Court, she listed as exempt the
proceeds from her lawsuit and claim for lost wages. She listed
both the value of the asset and the amount of the exemption as
“unknown.” Id. at 640. During the initial meeting of creditors,
the debtor’s attorneys informed the bankruptcy trustee that the
debtor might win a $90,000 judgment in her suit. After the
creditors’ meeting, the trustee investigated the potential lawsuit
further, but ultimately did not object to the claimed “unknown”
exemption. Id. at 640–41. The lawsuit later settled for
$110,000, $71,000 of which was paid by a check to the debtor
and her attorneys. The debtor signed this check over to her
attorneys as payment for their representation, and the trustee
filed a complaint against the attorneys in Bankruptcy Court,
contending that the money was part of the bankruptcy estate. Id.
9
at 641. The Supreme Court disagreed, holding that the trustee
had forfeited his right to challenge the claimed exemption by not
filing a timely objection.
Justice Thomas, writing for the Court, explained that the
debtor did not have a right to exempt “more than a small portion
of the[] proceeds” from the lawsuit on her Schedule C, but she
nevertheless “claimed the full amount as exempt” when she
listed the value of the lawsuit as “unknown” and the value of her
exemption as “unknown.” Id. at 642. The Court held that the
trustee could have objected to the exemption under Rule 4003
within the 30-day period and his failure to do so thereby
rendered the full amount of the proceeds from the lawsuit
exempt. Id. at 642.
The trustee in Taylor argued, as does the trustee in our
case, that Rule 4003 governs inquiries into the “validity of an
exemption” only and does not “preclude judicial inquiry” into
valuation. Id. at 643. The Court was unpersuaded, reasoning
that
[d]eadlines may lead to unwelcome results, but they
prompt parties to act and they produce finality. In this
case, despite what respondents repeatedly told him,
Taylor did not object to the claimed exemption. If
Taylor did not know the value of the potential proceeds
of the lawsuit, he could have sought a hearing on the
issue, or he could have asked the Bankruptcy Court for
10
an extension of time to object. Having done neither,
Taylor cannot now seek to deprive [the debtor] of the
exemption.
Id. at 644 (emphasis added) (citations omitted). The trustee
further argued that allowing property to become exempt in this
manner would create improper incentives for debtors to claim
property as exempt in the hope that a trustee would not object
and then the full amount of the exemption—beyond what was
legally available—could pass through the bankruptcy estate and
be pocketed by the debtor. Id. The Court rejected this concern,
noting that trustees are already safeguarded from such risks by
various provisions of the Bankruptcy Code that penalize debtors
for engaging in improper conduct in the course of a bankruptcy.
Id.3
3
As the Court explained,
[d]ebtors and their attorneys face penalties under
various provisions for engaging in improper conduct in
bankruptcy proceedings. See, e.g., 11 U.S.C. §
727(a)(4)(B) (authorizing denial of discharge for
presenting fraudulent claims); Rule 1008 (requiring
filings to “be verified or contain an unsworn
declaration” of truthfulness under penalty of perjury);
Rule 9011 (authorizing sanctions for signing certain
documents not “w ell grounded in fact
and . . . warranted by existing law or a good faith
argument for the extension, modification, or reversal of
existing law”); 18 U.S.C. § 152 (imposing criminal
11
C.
Schwab and amicus National Association of Bankruptcy
Trustees contend that Taylor is not applicable in our case
because Reilly’s exemption was not objectionable on its face.
According to Schwab, the amount of the exemption that Reilly
claimed—$10,718—was proper, which means that, “[a]s
opposed to Trustee Taylor, the Trustee here could not have
made a valid objection under 11 U.S.C. § 522(l) to this
exemption. [Schwab] intends to pay [Reilly] her exemption
from the proceeds of the business equipment.” Schwab’s Reply
Br. 4. Thus, Schwab argues that Taylor “‘simply does not
address whether a debtor’s valuation of property becomes
conclusive in the absence of a timely objection pursuant to 11
U.S.C. § 522(l) and Rule 4003(b).’” Id.
We disagree, as we believe this case to be controlled by
Taylor. Just as we perceive it was important to the Taylor Court
penalties for fraud in bankruptcy cases). These
provisions may limit bad-faith claims of exemptions by
debtors. To the extent that they do not, Congress may
enact comparable provisions to address the difficulties
that Taylor predicts will follow our decision. We have
no authority to limit the application of § 522(l) to
exemptions claimed in good faith.
Taylor, 503 U.S. at 644–45.
12
that the debtor meant to exempt the full amount of the property
by listing “unknown” as both the value of the property and the
value of the exemption, it is important to us that Reilly valued
the business equipment at $10,718 and claimed an exemption in
the same amount. Such an identical listing put Schwab on
notice that Reilly intended to exempt the property fully. At that
point, had Schwab doubted Reilly’s valuation of her business
equipment, he should have had the property appraised and/or
sought a hearing pursuant to Rule 4003(c). Alternatively, if he
was not able to seek an appraisal within Rule 4003’s 30-day
time limit, he could have requested an extension before that
deadline passed. But once Rule 4003’s 30-day period elapsed
without Schwab filing an objection or a request for an extension,
the property became fully exempt from the bankruptcy estate
regardless of its ultimate market value.
D.
In reaching our holding today, we recognize that there is
a split of authority on this issue among courts that have
considered it. Compare Allen v. Green (In re Green), 31 F.3d
1098 (11th Cir. 1994), and Olson v. Anderson (In re Anderson),
377 B.R. 865 (6th Cir. B.A.P. 2007), with Stoebner v. Wick (In
re Wick), 276 F.3d 412 (8th Cir. 2002), and Hyman v. Plotkin
(In re Hyman), 967 F.2d 1316 (9th Cir. 1992). Taking these
cases in reverse order, Hyman, which was decided just after
Taylor, involved debtors who had claimed a $45,000 state-law
homestead exemption in their house, which was valued at
13
$415,000 and was subject to $347,611 in encumberances. 967
F.2d at 1318. When the trustee moved to sell the house, the
debtors claimed that they had exempted the entirety of their
house because the trustee had not filed a timely objection to the
exemption under Rule 4003. The Court of Appeals for the
Ninth Circuit disagreed because the debtors had not signaled
their intent to exempt the entirety of the property, but merely
$45,000 of the unencumbered property. Id. at 1319. Hyman is
distinguishable from the case before us because the debtor here
claimed an exemption in the amount of the entire value of the
property. Had Reilly claimed only a $10,000 exemption in
property she valued at $10,718, we might have a case that
resembles Hyman. But where the debtor indicates her intent to
exempt the entirety of the property by listing the value of the
property and the value of the exemption as identical,
Taylor proves more instructive.
Wick from the Eighth Circuit provides a closer case. The
facts there appear much the same as Taylor. The debtor had
listed the value of certain stock options as “unknown” and
claimed an exemption in an “unknown” amount. 276 B.R. at
414. The trustee did not object, even though the maximum
statutory exemption was $3,925. Id. at 416. Ultimately, the
debtor exercised her stock options and received $97,200, and the
trustee sought to compel the turnover of the stock option
proceeds less the $3,925 exemption. The debtor relied on
Taylor, but the Eighth Circuit Court of Appeals found it
distinguishable because there was evidence in the record
14
establishing that the debtor in Wick only intended to exempt a
portion of the stock options, whereas the debtor in Taylor
intended to exempt the property in full. Id. at 416–17. The
Court further rejected the debtor’s assertion that, as a matter of
law, one fully exempts an asset by listing both the value of the
stock options and the value of the exemption as “unknown,”
reasoning that “when a specific dollar figure given by statute
limited the amount of the exemption, and the trustee did not
forsake an interest in the options[,] . . . listing ‘unknown’ does
not, by itself, render the options fully exempt.” Id. at 416.
We believe this result to be inconsistent with Taylor.
Unlike our Eighth Circuit colleagues in Wick, we read Taylor to
mean that, where the debtor signals her intention to exempt
certain property in its entirety by listing an identical entry for the
property’s value and the amount of the exemption, the trustee
must object pursuant to Rule 4003 lest the property be rendered
fully exempt.
In contrast to Hyman and Wick, the Court of Appeals for
the Eleventh Circuit and the Bankruptcy Appellate Panel of the
Sixth Circuit have reached conclusions similar to ours—namely,
that where a debtor shows her intent to exempt the entirety of
certain property and the trustee does not object within Rule
4003’s time-frame, the asset passes through the bankruptcy
estate and becomes fully exempt, even if it is later discovered
that the property has a higher value than the exempted amount.
In Green, the debtor filed a Schedule C claiming her pending
15
lawsuit as exempt. She listed the lawsuit as having a value of $1
and claimed an exemption of $1 as well. 31 F.3d at 1098. The
trustee did not object to the exemption, even though he
understood that the $1 value did not represent the suit’s actual
estimated value. When the debtor received a $15,000 settlement
from the suit, the trustee sought to have that money become part
of the bankruptcy estate. He argued that, because the debtor had
only listed a $1 exemption on her Schedule C, the bankruptcy
estate was entitled to all proceeds from the lawsuit in excess of
the $1 exemption. Id. at 1099. The debtor claimed that the
trustee’s failure to file a timely objection pursuant to Rule 4003
precluded him from seeking those funds. The Eleventh Circuit
Court of Appeals agreed with the debtor. It reasoned that “an
unstated premise” of Taylor was “that a debtor who exempts the
entire reported value of an asset is claiming the ‘full amount,’
whatever it turns out to be.” Id. at 1100. The trustee’s failure
to file a timely objection thus meant that the entire value of the
lawsuit was exempt from the bankruptcy estate.
Finally, in Anderson the Bankruptcy Appellate Panel of
the Sixth Circuit (“B.A.P.”) considered a situation where the
debtors sought to exempt their 50% interest in a co-owned
property. The debtors claimed on their Schedule C that the
property was worth $30,000, and thus their 50% interest was
$15,000. They claimed an exemption of $15,000. 377 B.R. at
869. Well after Rule 4003’s 30-day period had expired, the
trustee sought an appraisal of the property and determined it to
be worth $60,000. The trustee initiated an adversary proceeding
16
in which she sought to sell the property and recoup for the
bankruptcy estate the value of the debtors’ 50% share in excess
of the $15,000 exemption. The debtors claimed that they had
fully exempted their 50% interest in the property,
notwithstanding its subsequently appraised value, and the B.A.P.
agreed. It read Taylor as standing for the principle that, “when
a debtor makes an unambiguous manifestation of intent to seek
an unlimited exemption in property, . . . absent a timely
objection, that property is exempt in its entirety, even if its
actual value exceeds statutory limits, and it is no longer property
of the estate.” Id. at 875. In reaching this determination, the
B.A.P. noted that the burden for Rule 4003 objections rests on
the trustee, and not the debtor, meaning that any ambiguity
should be resolved in the debtor’s favor. Id. at 876–77.
Anderson provides the closest analog to the case before
us. In both instances, the debtors signaled their intent to exempt
the property in its entirety by claiming an exemption for the full
value of the property. Moreover, both trustees could have
conducted appraisals of the exempted property within Rule
4003’s 30-day period but failed to do so. Both could have asked
for more time but did not, and both had the burden to object but
did not. Add to these facts the reasoning in Taylor, and the
result rests in favor of the debtor.
* * * * *
It is worth noting that our holding today accords with
17
bankruptcy’s promise of a fresh start. Once the period for
objection lapses, all parties involved know what property
belongs to the bankruptcy estate and what remains with the
debtor.4 The debtor can then use that property with the
knowledge that it is her own and will not be subject to later
liquidation for the benefit of creditors. This is not the case
where the debtor claims an exemption in an amount less than the
value listed on the schedules. In that circumstance, the trustee
is entitled to claim for the bankruptcy estate the value of the
property in excess of the exemption sought, without the need for
a timely objection. See In re Hyman, 967 F.2d at 1319. But
where the debtor lists a value for the property and claims an
exemption in the same amount, the trustee is on notice of the
debtor’s valuation and has ample time to seek confirmation that
4
See 9 Collier on Bankruptcy ¶ 4003.02[1] (Alan N. Resnick
& Henry J. Sommer eds., 15th ed. rev. 2005) (“Normally, if the
debtor lists property as exempt, that listing is interpreted as a
claim for exemption of the debtor’s entire interest in the
property, and the debtor’s valuation of that interest is treated as
the amount of the exemption claimed. Were it otherwise—that
is, if the listing were construed to claim as exempt only that
portion of the property having the value stated—the provisions
finalizing exemptions if no objections are filed would be
rendered meaningless. The trustee or creditors could always
claim that the debtor’s interest in the property was greater than
the value claimed as exempt and still object to the debtor
exempting his or her entire interest in the property after the
deadline for objections had passed.”).
18
the debtor’s claimed value represents the true worth of the asset.
Finally, we are mindful of the trustee’s concern that our
holding today will encourage gamesmanship among crafty
debtors who may seek to undervalue their property with the
hope of having it bypass the bankruptcy estate. But as
Taylor reminds us, there are significant protections in place for
both the trustee and the bankruptcy estate. See 503 U.S. at
644–45; supra note 3. Moreover, on the facts here, there is no
reason to suspect bad behavior on the part of the debtor. Indeed,
it is quite to the contrary. The kitchen equipment Schwab here
seeks to sell has significant sentimental value to Reilly, having
been bought for her by her parents. When faced with Schwab’s
motion to sell, Reilly attempted to have the bankruptcy
proceeding dismissed, saying that she would find a way to pay
all of her creditors rather than lose the equipment. And, in any
event, if Schwab discovered bad faith by Reilly, bankruptcy and
criminal law allow recourse.
We thus affirm the judgment of the District Court.
19