In re Messina

Citation:
In re Messina, No. 11-1426 (3rd Cir. Aug. 6, 2012)
Tag(s):
Ruling:
The Third Circuit found that Schwab v. Reilly, 130 S. Ct. 2652 (2010) modified Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) so that Bankruptcy Rule 4003's 30-day time limit now only applies to three elements of an exemption on Schedule C. These elements are: (i) the description of the exempted property, (ii) the Code section cited in support of the claimed exemption, and (iii) the amount listed as the value of the claimed exemption. According to the Third Circuit, a Chapter 7 Trustee is not bound by the 30-day time limit with respect to other elements in Schedule C such as a debtor's estimation of a property's market value or the estate's right to retain any value above a claimed exemption. Thus, the Third Circuit affirmed a decision of the New Jersey District Court that had found that a Trustee timely objected to an exemption the Debtors asserted to the proceeds of a bankruptcy sale of their primary residence though this objection was filed more than 30 days after the Debtors had filed their amended Schedule C. The Third Circuit further affirmed that a mortgagee's defective lien remained valid as to them though not as to subsequent purchasers and creditors. For this reason, there was no equity for the Debtors to claim as exempt under Section 522(d). The Third Circuit finally held that because the Debtors had not claimed an exemption under Section 522(g), they could not receive any benefit from the Trustee's avoidance action against the mortgage company and subsequent sale of the residence even if there had been any equity.
Procedural context:
The Debtors appealed to the District Court which reversed the decision of the Bankruptcy Court finding that the Trustee had received sufficient notice of the Debtors' claim to the sale proceeds and so Taylor caused the Trustee's objection to be late. The Trustee appealed to the Third Circuit. Before oral argument could take place, the Supreme Court granted certiorari in Schwab, and the Third Circuit issued an order holding the appeal C.A.V. pending the Supreme Court's decision. After oral argument, the Third Circuit remanded the case back to the District Court to reconsider in light of Schwab. The District Court now affirmed the Bankruptcy Court's decision and found that under Schwab the Trustee did not have a duty to object to the Debtors' claimed exemption to the sale proceeds within 30-days of the filing of their amended Schedule C. The Debtors appealed sending the case back to the Third Circuit.
Facts:
Prior to filing bankruptcy, the Debtors took out two mortgages on their primary residence on of which was improperly acknowledged under the applicable New Jersey statute. After filing Chapter 7, the Debtors claimed an exemption in their home citing to Section 522(d) based on their belief that the defective mortgage was void and so there was equity available to them to exempt. Upon learning of the defective mortgage, the Trustee moved to avoid the lien of the mortgage company and to sell the home free and clear of all liens under Section 363. The sale proceeds netted the estate around $200,000, which after satisfying the one valid mortgage and a few other fees and expenses left the Trustee with $41,733. The Trustee then objected to the Debtors' claimed exemption asserting (i) that the Debtors had no equity to exempt as both mortgages fully encumbered the property as of the petition date and (ii) that their exemption did not extend to the sale proceeds. The Debtors cross-moved to compel the Trustee to turnover most of the money arguing (i) that the Trustee's objection was late as it was made after the 30-day period in Rule 4003(b) which under Taylor meant it was barred and (ii) that the defective mortgage was automatically void as of the petition date and so there was equity to exempt. The Bankruptcy Court ruled in favor of the Trustee holding that the Debtors' claimed exemption was improper as there was no equity since the defective mortgage was still valid as to the Debtors even though invalid as to subsequent purchasers and creditors. As to Rule 4003(b), the Bankruptcy Court held that Taylor did not cause the Trustee's objection to be untimely since the Trustee did not have sufficient notice of the Debtors' claim to any of the sale proceeds since in Schedule C the Debtors did not cite to Section 522(g).
Judge(s):
Fisher, Hardiman and Greenaway, Circuit Judges

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