In the wake of Schwab v. Reilly, 560 U.S. 770 (2010), Bankruptcy Judge John E. Hoffman, Jr., of Columbus, Ohio, explained when a trustee must or cannot object to a homestead exemption claiming “100% of FMV,” or fair market value.

The debtor owned a modest home. On Schedule C, Official Form 106C, Part 1, paragraph 2, the debtor listed his home. Under the column titled, “Amount of the exemption you claim,” the debtor checked the second box followed by the words, “100% of fair market value, up to any applicable statutory limit.” The debtor left the first box unchecked where the debtor could have inserted a dollar amount being claimed as exempt.

The chapter 13 trustee objected to the homestead exemption, contending that the debtor violated Schwab because the debtor had not claimed an exact dollar amount.

In his June 3 opinion, Judge Hoffman overruled the objection to the homestead exemption, writing a treatise on what Schwab means.

The Split Before Schwab

If no one objects when a debtor claims an exemption of more than the law allows, Judge Hoffman said that the debtor retains the above-limit exemption, even if there was no basis for the exemption. He went on to lay out the genesis of the circuit split resulting from the possibility of above-limits exemptions.

The circuit split evolved following Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), where the debtor claimed an exemption in a lawsuit. Believing the lawsuit had no value, the trustee did not object to the exemption claim. As it turned out, the debtor settled and received $110,000.

The trustee then sought to recover the $110,000 for the estate, but the Supreme Court held that the trustee’s failure to object to the exemption precluded a later challenge even if there was no basis for the exemption in the first place.

Subsequent to Taylor, Judge Hoffman said that some circuits have held that a trustee must object when a debtor claims an exemption in the full scheduled value. Other circuits, he said, have decided that the trustee does not lose the equity above the exemption when the statute lists a specific dollar amount.

The Supreme Court granted certiorari in Schwab to resolve the split.

What Schwab Means

In Schwab, state law specified the dollar amounts for exemptions the debtor was claiming for kitchen equipment. The debtor claimed that the exemptions covered all of the equipment with a claimed value of about $11,000. The trustee did not object.

Later, the trustee moved to sell the equipment after obtaining an appraisal showing a much higher value. The Third Circuit held that the property was exempt, whatever the actual value, because the trustee had not objected. The Supreme Court reversed in a 6/3 opinion.

Because the debtor in Schwab had claimed that the exemption was within statutory limits, Judge Hoffman described the Court as holding that the trustee “did not need to object to preserve the estate’s right to retain any surplus value in the equipment.” In other words, he said, the debtor “failed to put [the trustee] on notice of her intent to fully exempt the equipment beyond the statutory limits by simply claiming exemptions equal to the equipment’s scheduled value.”

Judge Hoffman quoted the Supreme Court where Justice Clarence Thomas explained how a debtor could exempt the full market value of an asset:

[T]he debtor [must] declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100% of FMV.” Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits.

Schwab, supra, 560 U.S. at 792-3.

When a debtor claims an exemption in 100% of FMV, Judge Hoffman said that a trustee must object to preserve value for the estate above the dollar amount of the exemption. However, he said, “nothing in Schwab supports the position that debtors must specify a dollar amount of a claimed exemption for it to be clear” when the debtor uses today’s Form 106C.

Form 106C After Schwab

After Schwab, Judge Hoffman said that “Schedule C was revised to make it more difficult for debtors to obtain above-limit exemptions.” He explained, “Schedule C no longer permits debtors to fully exempt assets without regard to applicable statutory limits, e.g., by claiming an exemption amount of ‘100%’ or ‘100% of fair market value.’”

Quoting the treatise by former Bankruptcy Judge Keith M. Lundin on chapter 13, Judge Hoffman said that “Schedule C now ‘prompts the debtor to make a choice between entering a dollar amount or checking the box for the phrase 100% of fair market value, up to any applicable statutory limit.’” When debtors select the second option, he said, “they do not claim 100% of fair market value as exempt — they claim ‘100% of fair market value, up to any applicable statutory limit[,]’ as exempt.” [Emphasis in original.]

“In short,” Judge Hoffman said, “the plain language of Schedule C now makes claimed exemptions of ‘100% of fair market value’ subject to ‘any applicable statutory limit.’” As a result, he said, “Any value in that property beyond the statutory limit is, by definition, nonexempt property — that is, property of the estate.”

Red Flags

Judge Hoffman said there are “red flags” when a debtor fails “to specify the dollar value of a claimed exemption.” For example, he said, take a situation where the debtor “attempts to circumvent the form’s limits” by “writing ‘100%’ or ‘unknown’ where a dollar amount should be entered.”

In those circumstances, Judge Hoffman said, “the Trustee would have needed to object to preserve any non-exempt value for the estate.”

Holding

Judge Hoffman overruled the trustee’s objection to the exemption claim. He held that Schedule C, revised after Schwab, “does not require an objection, because claiming such an exemption [by checking the second box] automatically preserves for the estate any value in the asset above relevant statutory limits.”