Section 3.75 Time Limitations

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

2. (§3.75) Time Limitations

Objections must be filed within 30 days after the conclusion of the meeting of creditors or within 30 days after any amended or supplemental schedule is filed. Fed. R. Bankr. P. 4003(b). An extension may be granted for cause if requested before the expiration of the time to object. Id. It is important that objections be filed timely, and this is underscored by 11 U.S.C. § 522(l), which provides that, “[u]nless a party in interest objects, the property claimed as exempt on such list is exempt.” Courts had been construing this objection deadline to not validate improperly claimed exemptions, at least when there was not a good faith basis for the exemption. See, e.g., In re Peterson, 920 F.2d 1389 (8^th Cir. 1990). But in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), the Supreme Court ruled that a Chapter 7 trustee could not contest the validity of a claimed exemption after the 30-day objection period had expired and no extension had been obtained, even though the debtor had no colorable basis for claiming the exemptions. In that case, the debtor claimed an exemption for the full amount of any proceeds of a pending discrimination suit, although only a small amount was actually exemptible. The trustee, believing the suit had no value, did not object to the improper exemption. The debtor eventually won $110,000, and the trustee made demand to pay over the approximately $23,000 it would take to pay the debtor’s unsecured creditors in full. But the trustee’s failure to object proved fatal to his claim.

Needless to say, the Taylor, 503 U.S. 638, decision was an open invitation to claim questionable exemptions (subject, of course, to the good faith requirements of Federal Rule of Bankruptcy Procedure 9011) in the hope that the trustees or creditors would fail to act in time, a practice referred to as “exemption by declaration.” Accordingly, cases decided since Taylor have found ways to prevent abuse without violating the mandate in Taylor. In In re Shelby, 232 B.R. 746 (Bankr. W.D. Mo. 1999) (Koger, C.J.), the trustee questioned the value of the debtors’ household goods but did not object to the exemption. Once it was determined that the property was worth substantially more than the amount scheduled, the debtors claimed that the property was no longer available to the estate because of the trustee’s failure to object. The court held that the 30-day time limit of Federal Rule of Bankruptcy Procedure 4003 only ran as to the validity of the claimed exemption, not the valuation. In reShelby, 232 B.R. at 756. Taylor, 503 U.S. 638, was distinguished because the debtor had scheduled the asset for an “unknown” amount. This effectively removed the asset from the estate when no objection was filed. In reShelby, 232 B.R. at 760-61 (claiming an exemption of $1 for a contingent claim has the same effect because it is obvious that the exemption is intended to be complete). In In reShelby, however, the debtors were ultimately limited to the amount of the exemption claimed:

[A] Chapter 7 trustee is not bound by the debtor’s valuation of property and . . . the trustee may challenge the market value that a debtor has placed on property claimed as exempt for which the debtor has a legal basis for claiming the exemption beyond the 30-day time period of Rule 4003(b). In this case, the Shelbys have a legal basis for claiming their...