06/20/2011 09:20:00 AM EST
Texas Bankruptcy Courts Split Over Application of Schwab v. Reilly
The Supreme Court's decision in Schwab v. Reilly, 130 S.Ct. 2652 (2010) last term
provoked a lot of concern about the finality of exemptions. Under Taylor v. Freeland & Kronz, 503 U.S.
638 (1992) [an enhanced version of this opinion is available to lexis.com
subscribers / unenhanced version available from lexisONE Free Case Law],
a trustee's failure to timely object to an exemption, even a frivolous one,
meant that the asset left the estate. However, in Schwab
v. Reilly, the Supreme Court held that an exemption of a specific
dollar amount in value of property exempted only the value claimed but not the
asset itself, allowing a trustee to sell the asset if the value ultimately
exceeded the amount of the debtor's exemption.
I have written about Schwab v. Reilly and its consequences here
Now Texas Bankruptcy Judges are struggling with whether
Schwab permits, or even dictates, that a debtor may claim 100% of fair market
value, forcing the trustee to object within 30 days. Judge Michael Lynn and
Judge Craig Gargotta have held that claiming 100% of FMV is permissible, In re Moore, 442 B.R. 865 (Bankr. N.D.
Tex. 2010) [enhanced version only], In re Dominguez-Ortega, No. 10-61416 (Bankr. W.D. Tex. 5/17/11),
while Judge Robert Jones has ruled the opposite way, In re Salazar, 2011 Bankr. LEXIS 1117 (Bankr. N.D. Tex. 2011) [enhanced version only].
Because Judge Gargotta's opinion is the latest word, I
will start with his ruling in this post. The transcript is not yet available online.
In the Dominguez-Ortega
case, the court was faced with objections filed by the chapter 7 and chapter 13
trustees in six cases in which the debtors claimed 100% of FMV. Relying upon
the Moore decision and scholarly
articles from the American Bankruptcy Institute, Judge Gargotta denied the
objections. He stated:
As everyone knows, in Schwab v. Reilly, the Supreme Court unequivocally says
at least two things--it may say other things in addition to that.
One, that one hundred percent of fair market value on
Schedule C is permissible and correct.
And second, that the trustee may not be bound by the 30
day objection period under Federal Rule of Bankruptcy Procedure 4003(b).
Transcript, pp. 6-7. He went on to adopt the reasoning of
Judge Lynn of the Northern District. He stated:
(T)he judges in the (Fort Worth) division had the
First of all, fair market value of one hundred percent is
the correct methodology. It puts the trustee on notice to object within 30
days. Then there can be an evidentiary hearing . . . regarding whether or not
that's a fair objection.
For purposes of the proceedings here in Waco, I agree
with that. I think that's exactly what the Supreme Court requires.
Second as to the discussion that we had on the record day
about whether or not debtors may use a numeric amount for the interest they
claim as an aid, they are free to do that, but they are not required to do
that. And I will leave it up to them as to whether or not they want to do that.
Transcript, pp. 8-9.
Judge Gargotta acknowledged that his ruling would result
in more work for the trustees and the court, but stated that his mandate was to
follow the Supreme Court.
Now, what is the consequence to the Court? Well, the
consequence to the Court is, in those situations where the trustee thinks that
. . . when (the debtors) use the designation of one hundred percent of fair
market value, that it may exceed the amount of the interest in an asset, the
trustee is going to have to object, and I'll have to conduct a hearing on it
and we'll . . . figure out how that plays out.
I recognize that, ultimately, it may increase the
litigation in this Court. But, by the same token, I'm of the opinion, and I
think it's unequivocally clear that what debtors are doing in that consequence
is precisely what the Supreme Court ordered, and I'm not going to alter their
methodology in terms of claiming it.
I apologize to both Mr. Hendren and Mr. Studensky if it
increases their workload. That is not my intent. Rather, I am complying with
what the Supreme Court commands.
Transcript, p. 10.
Read the entire article at A Texas
Bankruptcy Lawyer's Blog
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