Taylor v. Freeland Kronz

• Citation: 112 S.Ct. 1644,118 L.Ed.2d 280,503 U.S. 638,26 C.B.C.2d 487
• Decision Date: 21 April 1992
• Docket Number: No. 91-571,91-571
• Parties: TAYLOR v. FREELAND & KRONZ et al
• Court: United States Supreme Court

503 U.S. 638

112 S.Ct. 1644

118 L.Ed.2d 280

TAYLOR

v FREELAND & KRONZ et al.

No. 91-571.

Argued March 2, 1992.

Decided April 21, 1992.

Syllabus

On the schedule she filed pursuant to § 522(l ) of the Bankruptcy Code, debtor Davis listed as exempt property the expected proceeds from her pending employment discrimination suit. Petitioner Taylor, the trustee of Davis' bankruptcy estate, did not object to the claimed exemption within the 30-day period allowed by Bankruptcy Rule 4003(b). However, upon later learning that the discrimination suit had been settled for a substantial sum, Taylor filed a complaint in the Bankruptcy Court against respondents, Davis' attorneys in that suit, demanding that they turn over settlement proceeds as property of Davis' estate. Concluding that Davis had no statutory basis for claiming the proceeds as exempt, the court ordered respondents to "return" to Taylor a sum sufficient to pay off all of Davis' unpaid creditors, and the District Court affirmed. The Court of Appeals reversed, holding that the Bankruptcy Court had erred because Davis had claimed the money in question as exempt, and Taylor had failed to object to the claimed exemption in a timely manner.

Held: A trustee may not contest the validity of a claimed exemption after the Rule 4003(b) 30-day period has expired, even though the debtor had no colorable basis for claiming the exemption. Pp. 3-8.

(a) Because the parties agree that Davis did not have a statutory right to exempt more than a small portion of the lawsuit proceeds, let alone the full amount, Taylor apparently could have made a valid objection under § 522(l )—which provides, inter alia, that "property claimed as exempt . . . is exempt" "[u]nless a party in interest objects," but does not specify the time for objecting—if he had acted promptly under Rule 4003(b)—which establishes the 30-day objections period for trustees and creditors "unless, within such period, further time is granted by the court." P. 642

(b) However, Taylor's failure to promptly object precludes him from challenging the validity of the exemption at this time, regardless of whether or not Davis had a colorable statutory basis for claiming it. By negative implication, Rule 4003(b) indicates that a trustee may not object after 30 days unless a further extension of time is granted. Because no such extension was allowed by the Bankruptcy Court in this case, § 522(l ) has made the settlement proceeds exempt. This Court rejects Taylor's argument that, in order to discourage debtors from claiming meritless exemptions merely in hopes that no one will object, a court may invalidate an exemption after expiration of the 30-day period where the debtor did not have a good-faith or reasonably disputable basis for claiming it. To the extent that the various Code and Rules provisions aimed at penalizing debtors and their attorneys for improper conduct fail to limit bad-faith exemption claims, Congress, rather than this Court, may rewrite § 522(l ) to include a good-faith requirement. Pp. 643-645.

(c) Taylor's assertion that § 105(a) of the Code permits courts to disallow exemptions not claimed in good faith despite the absence of timely objections to such exemptions will not be considered by this Court, since that argument was first raised in Taylor's opening brief on the merits and was neither raised nor resolved in the lower courts. Pp. 645-646. [[SC2Q!]] 938 F.2d 420 (CA 3 1991), affirmed.

THOMAS, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, BLACKMUN, O'CONNOR, SCALIA, KENNEDY, and SOUTER, JJ., joined. STEVENS, J., filed a dissenting opinion.

Timothy B. Dyk, Washington, D.C., for petitioner.

Phillip S. Simon, Pittsburgh, Pa., for respondents.

Justice THOMAS delivered the opinion of the Court.

Section 522(l ) of the Bankruptcy Code requires a debtor to file a list of the property that the debtor claims as statutorily exempt from distribution to creditors. Bankruptcy Rule 4003 affords creditors and the bankruptcy trustee 30 days to object to claimed exemptions. We must decide in this case whether the trustee may contest the validity of an exemption after the 30-day period if the debtor had no colorable basis for claiming the exemption.

I

The debtor in this case, Emily Davis, declared bankruptcy while she was pursuing an employment discrimination claim in the state courts. The relevant proceedings began in 1978 when Davis filed a complaint with the Pittsburgh Commission on Human Relations. Davis alleged that her employer, Trans World Airlines (TWA), had denied her promotions on the basis of her race and sex. The Commission held for Davis as to liability but did not calculate the damages owed by TWA. The Pennsylvania Court of Common Pleas reversed the Commission, but the Pennsylvania Commonwealth Court reversed that court and reinstated the Commission's determination of liability. TWA next appealed to the Pennsylvania Supreme Court.

In October 1984, while that appeal was pending, Davis filed a Chapter 7 bankruptcy petition. Petitioner, Robert J. Taylor, became the trustee of Davis' bankruptcy estate. Respondents, Wendell G. Freeland, Richard F. Kronz, and their law firm, represented Davis in the discrimination suit. On a schedule filed with the Bankruptcy Court, Davis claimed as exempt property the money that she expected to win in her discrimination suit against TWA. She described this property as "Proceeds from lawsuit [Davis] v. TWA" and "Claim for lost wages" and listed its value as "unknown." App. 18.

Performing his duty as a trustee, Taylor held the required initial meeting of creditors in January 1985. See 11 U.S.C. § 341; Bkrtcy. Rule 2003(a). At this meeting, respondents told Taylor that they estimated that Davis might win $90,000 in her suit against TWA. Several days after the meeting, Taylor wrote a letter to respondents telling them that he considered the potential proceeds of the lawsuit to be property of Davis' bankruptcy estate. He also asked respondents for more details about the suit. Respondents described the procedural posture of the case and expressed optimism that they might settle with TWA for $110,000.

Taylor decided not to object to the claimed exemption. The record reveals that Taylor doubted that the lawsuit had any value. Taylor at one point explained: "I have had past experience in examining debtors. . . . [M]any of them . . . indicate they have potential lawsuits. . . . [M]any of them do not turn out to be advantageous and . . . many of them might wind up settling far within the exemption limitation." App. 52. Taylor also said that he thought Davis' discrimination claim against TWA might be a "nullity." Id., at 58.

Taylor proved mistaken. In October 1986, the Pennsylvania Supreme Court affirmed the Commonwealth Court's determination that TWA had discriminated against Davis. In a subsequent settlement of the issue of damages, TWA agreed to pay Davis a total of $110,000. TWA paid part of this amount by issuing a check made to both Davis and respondents for $71,000. Davis apparently signed this check over to respondents in payment of their fees. TWA paid the remainder of the $110,000 by other means. Upon learning of the settlement, Taylor filed a complaint against respondents in the Bankruptcy Court. He demanded that respondents turn over the money that they had received from Davis because he considered it property of Davis' bankruptcy estate. Respondents argued that they could keep the fees because Davis had claimed the proceeds of the lawsuit as exempt.

The Bankruptcy Court sided with Taylor. It concluded that Davis had "no statutory basis" for claiming the proceeds of the lawsuit as exempt and ordered respondents to "return" approximately $23,000 to Taylor, a sum sufficient to pay off all of Davis' unpaid creditors. In re Davis, 105 B.R. 288 (WD Pa.1989). The District Court affirmed, In re Davis, 118 B.R. 272 (WD Pa.1990), but the Court of Appeals for the Third Circuit reversed, 938 F.2d 420 (1991). The Court of Appeals held that the Bankruptcy Court could not require respondents to turn over the money because Davis had claimed it as exempt, and Taylor had failed to object to the claimed exemption in a timely manner. We granted certiorari, 502 U.S. ----, 112 S.Ct. 632, 116 L.Ed.2d 602 (1991), and now affirm.

II

When a debtor files a bankruptcy petition, all of his property becomes property of a bankruptcy estate. See 11 U.S.C. § 541. The Code, however, allows the debtor to prevent the distribution of certain property by claiming it as exempt. Section 522(b) allowed Davis to choose the exemptions afforded by state law or the federal exemptions listed in § 522(d). Section 522(l ) states the procedure for claiming exemptions and objecting to claimed exemptions as follows:

"The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt."

Although § 522(l ) itself does not specify the time for objecting to a claimed exemption, Bankruptcy Rule 4003(b) provides in part:

"The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) . . . unless, within such period, further time is granted by the court."

In this case, as noted, Davis claimed the proceeds from her employment discrimination lawsuit as exempt by listing them in the schedule that she filed under § 522(l ). The parties agree that Davis did not have a right to exempt more than a small portion of these proceeds either under state law or under the federal exemptions specified in § 522(d). Davis in fact claimed the full amount as exempt. Taylor, as a result, apparently could have made a valid objection under § 522(l ) and Rule 4003 if he had acted promptly. We hold, however, that his failure to do so prevents...