Third Circuit Allows Trustee Retention of Post-Discharge Appreciation

Posted by NCBRC - July 24, 2012

Relying on Schwab v. Reilly, 130 S.Ct. 2652 (2010), the Third Circuit has found that the chapter 7 trustee is entitled to the value of future appreciation in an asset the debtor has exempted under the wildcard exemption to the extent the value exceeds the dollar amount exempted. In re Orton, No. 11-4157 (3rd Cir. July 20, 2012) (affirming the decisions of the bankruptcy and district courts for the Western District of Pennsylvania).

The asset involved was a one eighth parcel of vacant land valued at $4,250 and an interest in royalties based on an oil and gas lease for that land. Because there were, in fact, no wells on the property, the royalty interest was valued at $1.00. It was agreed that these values represented the actual value of the assets and that they fell below the exemption limit.

The trustee sought to close the case but declined to abandon the royalty interests, seeking instead to keep the case open to the extent that the bankruptcy estate could reap the value of potential future drilling.

The decision came down to the distinction between whether, when the debtor exempted the asset in an amount that represented its full value at that time, he exempted the asset itself or merely his interest in the asset to the extent claimed exempt. Just as in Schwab, the debtor argued that by claiming the exact value of the asset as listed in the petition, he had essentially exempted the entire asset and thereby removed it from the clutches of the trustee. The court disagreed stating that under Schwab, the debtor had to provide actual notice of his intention to exempt 100% FMV by using words to that effect rather than by simply equating the claimed exemption with the claimed value.

The case includes some troubling dicta suggesting that even if the debtor claimed the exemption as 100% FMV, as many debtors relying on Schwab have done, the exemption would still be reduced to a specific monetary amount to which the debtor would be held.

Orton opinion


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