Schwab v. Reilly

PETITIONER: William G. Schwab
RESPONDENT: Nadejda Reilly
LOCATION:

DOCKET NO.: 08-538
DECIDED BY: Roberts Court (2009-2010)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 560 US 770 (2010)
GRANTED: Apr 27, 2009
ARGUED: Nov 03, 2009
DECIDED: Jun 17, 2010

ADVOCATES:
Craig G Goldblatt - on behalf of the petitioner
G. Eric Brunstad, Jr. - for the respondent
Jeffrey B. Wall - Assistant to the Solicitor General, Department of Justice, for the United States, as amicus curiae, supporting the petitioner

Facts of the case

In April 2005, Nadejda Reilly filed Chapter 7 bankruptcy. Pursuant to standard practice, she listed equipment related to her catering business as "exempt" from the bankruptcy proceedings and valued the equipment at over $10,000. Creditor William Schwab independently had Ms. Reilly's business equipment appraised at over $17,000. He then sought a motion for the Bankruptcy Court to sell Ms. Reilly's equipment and turn over the proceeds, less the value of her exemption. Ms. Reilly countered that the business equipment had become fully exempt when Mr. Schwab failed to timely object when she listed the equipment as exempt. The Bankruptcy Court agreed and denied Mr. Schwab's motion to sell off Ms. Schwab's equipment. A federal district court in Pennsylvania affirmed the Bankruptcy Court. On appeal to the U.S. Court of Appeals for the Third Circuit, the court affirmed, holding that Mr. Schwab's failure to file a timely objection to Ms. Reilly's exemption barred him from moving to sell the property.

Question

1) When a debtor claims an item "exempt" from bankruptcy proceedings, is the exemption limited to the value claimed by the debtor, or regardless of the value claimed, does the exempted item become "fully exempt" after the creditor fails to make a timely objection to the exemption?

2) Does a creditor who wishes to sell a debtor's "exempted" item need to timely object to its exempt status in order to move for its sale, even if its real value exceeds the value claimed by the debtor?

Media for Schwab v. Reilly

Audio Transcription for Oral Argument - November 03, 2009 in Schwab v. Reilly

Audio Transcription for Opinion Announcement - June 17, 2010 in Schwab v. Reilly

John G. Roberts, Jr.:

In case 08-538, Schwab versus Reilly, Justice Thomas has the opinion of the Court.

Clarence Thomas:

This case comes to us on a Writ of Certiorari in the United States Court of Appeals for the Third Circuit.

Petitioner William Schwab is a trustee of respondent Reilly’s Chapter 7 bankruptcy estate.

Reilly filed for bankruptcy when her catering business failed.

When a debtor files for bankruptcy, the bankruptcy code provides that, all of the debtor’s assets become property of the bankruptcy estate, subject to the debtor’s right to reclaim certain property as exempt.

The bankruptcy code specifies the types of property debtors may exempt and also limits the value of the exemptions a debtor may claim in certain assets.

Property a debtor claims as exempt, will be excluded from the bankruptcy estate unless a party in interest such as a trustee like Schwab objects to the exemption within a certain time period.

In this case, we resolve the disagreement among the Courts of Appeals about what kind of information triggers the duty to file such an objection.

Reilly’s professional cooking equipment was one of the assets that became property of the bankruptcy estate.

This equipment had sentimental and professional value to Reilly and quite understandably, she wished to exempt it.

The bankruptcy code and rules require debtors who wish to exempt certain property, from their estates to fill out a form, that form is known as a Schedule C and on that form they must provide certain information about their exemption and the property to which the exemption applies.

The dispute in this case arose because it is possible to read the information on Reilly's Schedule C form in one of two ways.

Either as a claim to exempt the entire value of her cooking equipment which would be objectionable because the equipment's total value exceeds the dollar amount that the code allows for exemptions in such assets or it could be read as a claim to exempt only an interest in the equipment worth a certain dollar amount within the code’s limits, which would then be proper and therefore unobjectionable.

The bankruptcy code provisions that Reilly cited on her Schedule C, entitled her to exempt an interest in her cooking equipment, not to exceed a certain dollar amount because Reilly Schedule C expressly listed the value of the claimed exemption as a specific dollar amount below the code’s limits.

Schwab did not object to the exemption before he asked the bankruptcy Court for permission to sell the cooking equipment, so that he could pay Reilly the amount of her exemption and distribute the equipment's remaining value to Reilly’s creditors.

Reilly object into the proposed sale on the grounds that Schwab should have read her Schedule as a claim to exempt the equipment in its entirety even though its appraised value exceeded the code’s exempted limits.

The District Court agreed with Reilly and held that Schwab’s failure to make a timely objection entitled her to keep the equipment.

Court of Appeals affirmed citing this Court’s 1991 decision in Taylor versus Freeland, that the deadline for bankruptcy objections must be strictly enforced.

In an opinion on file with the clerk today we reverse the judgment of the Court of Appeals, a better Schedule C entries must be read in light of the code, the bankruptcy code provisions that govern the exemptions set forth in the Schedule and code’s requirement must control over a debtor’s intent or a standalone reading of the Schedule.

In this case, the code provisions that govern Reilly’s exemptions define the property that she claimed exempt as an interest in her cooking equipment, not as a equipment itself, and place a specific dollar limit on the value of that interest because the dollar value Reilly assigned the interest on Schedule C was below the code’s specified limits.

Schwab was entitled to treat her claim as a valid exemption in the amount she listed and thus did not have to object to the claim, in order to preserve for the estate, the value in the equipment beyond that amount because Reilly’s claimed the exemption in the equipment was not objectionable, neither Bankruptcy Rule 4003’s deadline for making objections, nor our Taylor decision, if in enforcing that deadline applies here.

Justice Ginsburg has filed a dissenting opinion in which the Chief Justice and Justice Breyer have joined.