Chapter 7

Issues

The Supreme Court will determine whether undistributed funds in a Chapter 13 trustee’s possession must be returned to the debtor upon conversion to Chapter 7, or whether creditors have a right to those funds. See Brief for Respondent, Mary K. Viegelahn, Chapter 13 Trustee at i. Harris argues that the Third Circuit’s rule is right in that a debtor’s post-petition wages become part of the property of the estate and thus revert back to the debtor upon conversion. See Brief for Petitioner, Charles E. Harris, III at 18–20. Viegelahn, however, counters that the Fifth Circuit’s rule is the correct one because funds belong to creditors, as the Bankruptcy Code creates an escrow relationship between the trustee and creditors. See Brief for Respondent at 19–21. The resolution of this case has the potential to affect the incentives a debtor has to file under Chapter 13, and may also implicate the balance of equitable considerations between debtor and creditor. See Brief of Amicus Curiae the National Association of Consumer Bankruptcy Attorneys (“NACBA”), in support of Petitioner at 29; see Brief for Respondent at 28; Brief of NACBA at 25.

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Issues

Stephen Law filed for Chapter 7 bankruptcy, and Alfred Siegel was appointed as his bankruptcy trustee. Law filed for and was granted an exemption for a value of $75,000 in equity for his home under § 522 of the Bankruptcy Code. Throughout the bankruptcy proceedings, however, Law was uncooperative, and ultimately defrauded the court and Siegel. After Law fraudulently claimed a second mortgage on his home, the court granted Siegel’s request to revoke the previously granted exemption in order to pay administrative expenses for the proceedings. Law argues that by granting the revocation, the court frustrated Congress’s intent to give debtors sufficient funds to support themselves when they emerge from bankruptcy. Siegel responds that courts have the power to protect the judicial process through equitable revocation of exemptions when dishonest and misbehaving debtors act to damage the judicial process. The Supreme Court will decide whether bankruptcy courts have the power to revoke congressionally granted exemptions for debtors’ assets as punishment for debtor misconduct. The decision will impact debtors in bankruptcy and the security of the minimal assets they might retain after proceedings. 

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Robert Marrama sought to convert his Chapter 7 bankruptcy case to a Chapter 13 after meeting the requirements for Chapter 13. The bankruptcy court denied Marrama’s motion to convert based on Marrama’s prior bad faith conduct in failing to report in his bankruptcy schedules the value of a tax refund and vacation home. The Bankruptcy Appellate Panel and Court of Appeals for the First Circuit affirmed. In this case, the Supreme Court will determine whether courts have discretion to deny conversions based on an evaluation of the debtor’s conduct. The decision will hinge on the statutory language and legislative history of the Bankruptcy Code. While this issue may be limited to filings that occurred before Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it will give the court the opportunity to clarify the scope of the good faith requirement in bankruptcy proceedings and the amount of discretion afforded to bankruptcy judges.

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Upon losing their employment, Richard and Betty Jo Rousey rolled over their pensions and 401(k) accounts into individual retirement accounts (IRAs). The Rouseys had trouble finding new work, which led to their inability to pay their debts. They subsequently filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Western District of Arkansas. The bankruptcy trustee demanded that the Rouseys' IRAs be turned over to satisfy their debts, but the couple argued that their IRAs were exempt from the bankruptcy proceeding under 11 U.S.C. 522(d)(10)(E). This statute provides that any funds paid under a pension or similar plans or contracts on account of illness, disability, age, length of service or various other conditions may be exempt from the bankruptcy estate. The Bankruptcy Court, the Bankruptcy Appellate Panel, and the U.S. Court of Appeals for the Eighth Circuit have each held that the Rouseys' IRAs are not covered by 11 U.S.C. 522(d)(10)(E) and are thus not exempt from Chapter 7 proceedings.  The Supreme Court granted certiorari to decide whether IRAs are indeed exempt from bankruptcy estates under 11 U.S.C. 522(d)(10)(E).

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In 2005, Nadejda Reilly filed a Chapter 7 bankruptcy petition. On the petition she listed her business property as an exemption, demonstrating her intent to retain the entire property by declaring the property’s exemption amount to be equal to her estimation of the asset’s value. The bankruptcy trustee assigned to the case, William Schwab, did not object to Reilly’s exemption but later determined the business property had a higher value than Reilly’s estimation and sought to sell the property to recoup the difference. Reilly argued that Schwab’s failure to object within the thirty-day statutory period rendered the property exempt. Schwab countered that Reilly’s exemption was limited to the specific amount claimed and did not serve to fully exempt the property from distribution. Schwab also argued that the objection deadline applied only to the type of property claimed as exempt, not to the value. The United States Court of Appeals, Third Circuit disagreed, holding that Schwab was on notice that Reilly intended to fully exempt the property and failure to object in time rendered the property exempt. The U.S. Supreme Court’s decision will determine whether a debtor in a Chapter 7 proceeding successfully claimed a full exemption in an asset by declaring that the exemption value equals the asset’s value, and whether the thirty-day objection period applies.

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