Below, Stanford Law School’s Anthony Dick recaps yesterday’s oral argument in Schwab v. Reilly. Anthony’s earlier preview of the case is available here. Check the Schwab v. Reilly (08-538) SCOTUSwiki page for additional updates.

At oral argument in Schwab v. Reilly on November 3rd, the Court grappled with the question of the proper rule to apply when a debtor claims an ambiguous exemption in bankruptcy. The debtor in this case was a caterer who filed a Schedule C bankruptcy form valuing her cooking equipment at $10,718. On the same form, she claimed an exemption in the equipment worth the full $10,718"”within her permissible exemption amount. The trustee did not object to this claimed exemption within the required thirty-day period, but he did inform the debtor that he believed the cooking equipment was actually worth closer to $17,000"”which exceeded the debtor's statutory exemption limit. The trustee claimed the right to sell the equipment, give the debtor $10,718 in cash to cover her claimed exemption, and distribute the excess profit to her creditors. The debtor moved to call off the bankruptcy proceeding in response, but the bankruptcy court denied the motion. This left the court to resolve a dispute over what was covered by the exemption that the debtor had claimed"”and which the trustee had ratified by failing to object within thirty days.

The debtor argued that because her claimed exemption covered the full estimated value that she had assigned to her cooking equipment on the Schedule C form, she had demonstrated her intent to exempt the equipment in its entirety, which would allow her to retain the equipment itself rather than cash from its sale. The trustee claimed that the debtor had only signaled her intent to exempt a $10,718 interest in her equipment. When the equipment turned out to be worth more than that, the debtor was not entitled to retain the excess value, which would amount to a windfall resulting from her own undervaluation of assets.

The Court's focus at argument was whether to construe the ambiguity of the debtor's claimed exemption against the debtor or the trustee. The Justices' questions reflected the parties' competing concerns. On the debtor's side, they asked whether the Schedule C form gives debtors a fair chance to claim an asset as fully exempt: Because the form only asks for the estimated and exempt value of an asset, what clearer way is there for the debtor to claim an asset as fully exempt, within the guidelines of the form, other than to claim an exemption equal to the asset's value? As an additional consideration, the Justices asked whether the burden of clarifying ambiguities should fall on trustees"”who are repeat players familiar with the bankruptcy law and its operation"”rather than on debtors, who are often unfamiliar with the process.

Conversely, the Court probed whether construing ambiguities against the trustee would lead to unreasonable administrative burdens, because it might encourage trustees to file preemptive objections to virtually every exemption claimed by a debtor for the full value of an asset, lest the asset turn out to be worth more than the debtor's valuation. The federal government also joined in the argument on the side of the trustee, arguing that it would be unreasonable to construe a debtor's claimed exemption as exceeding the amount that a debtor in bankruptcy is statutorily entitled to claim.

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