On October 30, 2009, the U.S. Supreme Court will consider the issue presented in Schwab v. Reilly (08-538 Third Circuit) of whether the trustee in a chapter 7 proceeding is free to sell assets claimed as exempt by the debtor where the appraised value of those assets exceeds the exemption properly claimed under section 522 of the Bankruptcy Code.  In Reilly, the claimed exemption was within the total amount authorized by the combination of two exemptions established in section 522 of the Code:  subsection (d)(6)’s exemption for  “tools of the trade” and subsection (d)(5)’s “wildcard exemption,” which allows a certain dollar amount to be allocated to any asset of the debtor’s choice.  Because the trustee suspected that the appraised value of the assets claimed as exempt may have exceeded the amount of the exemption, he did not object to the claimed exemption within the statutory 30-day period, but rather, sought to sell the assets outright, paying the exempt amount to the debtor while retaining the excess for distribution to her creditors. 

Because she objected to this treatment, Reilly moved both to dismiss her bankruptcy petition and, later, to block the liquidation of her assets.  Reilly asserted that because the amount of her exemption matched exactly the scheduled value of the assets, her intention was plainly shown to be that of retaining the assets  – not just receiving their equivalent value in cash.  This was so because the assets were necessary for the operation of her business and had particular sentimental value to her. 

The bankruptcy court denied Reilly’s motion to dismiss her petition, but granted her motion to block the sale of the assets claimed as exempt.  The trustee appealed to the Third Circuit Court of Appeals, which affirmed the bankruptcy court’s ruling in reliance on its prior ruling in Taylor v. Freeland & Kronz.  In Taylor, the debtor improperly claimed the proceeds of a pending lawsuit as exempt, and listed the value of the proceeds as “unknown.”   Because the trustee failed to object timely to the claimed exemption, the court found that he had waived any claim to the proceeds of the lawsuit.  The Third Circuit panel held 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 . . . lest the property be rendered fully exempt.”

This is the issued to be decided by the Supreme Court: by claiming an exemption in her assets for the same dollar amount as their estimated value, did Reilly truly signal her intent to exempt the assets fully, thereby requiring the trustee either to object or to agree to the full exemption for the assets?  The Supreme Court’s decision will clarify this issue and, subject to properly claimed exemptions, will offer guidance to future debtors and their attorneys on whether matching exemption claims to valuation amounts will be sufficient to retain the physical assets and not just their value.

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