PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 11-1426
_____________
IN RE: STERGIOS T. MESSINA and RENEE A. MESSINA,
Appellants
______________
APPEAL FROM THE UNITED STATES DISTRICT
COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. Action No. 1:07-cv-01677-JBS)
District Judge: Honorable Jerome B. Simandle
EXERCISING APPELLATE JURISDICTION OF AN
ORDER
OF THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW JERSEY, CAMDEN
(B.C. No. 06-14240)
Bankruptcy Judge: Honorable Gloria M. Burns
______________
Argued: September 20, 2011
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Before: FISHER, HARDIMAN, and GREENAWAY, JR.,
Circuit Judges.
(Opinion Filed: August 6, 2012)
______________
David A. Kasen (argued)
Kasen & Kasen
Society Hill Office Park, Suite 3
1874 East Marlton Pike (Route 70)
Cherry Hill, NJ 08003-2044
Counsel for Appellants
Steven R. Neuner (argued)
Neuner and Ventura LLP
Willow Ridge Executive Office Park
750 Route 73 South, Suite 210
Marlton, NJ 08053-4133
Counsel for Appellee
______________
OPINION
______________
GREENAWAY, JR., Circuit Judge.
Stergios and Renee Messina (“Appellants”) appeal the
January 31, 2011 Order of the District Court for the District
of New Jersey, issued after the District Court’s appellate
review of the final order of the Bankruptcy Court. The
District Court affirmed the Bankruptcy Court’s March 6,
2
2006 Order granting Appellee’s 1 motion to value Appellants’
exemption at zero and denying Appellants’ cross-motion for
an order requiring Appellee to pay Appellants the exemptions
claimed in their Chapter 7 bankruptcy petition. In its 2007
Opinion, the District Court decided the issue in favor of the
debtors (Appellants), reversing the Bankruptcy Court, and
holding that the Trustee’s late objection to Debtors’ claimed
exemptions were barred under Taylor v. Freeland & Kronz,
503 U.S. 638 (1992).
On remand, the District Court determined whether, in
light of the additional guidance provided by the Supreme
Court’s opinion in Schwab v. Reilly, _U.S._, 130 S. Ct. 2652
(2010), the Trustee has a duty to object to the Debtors’
claimed exemptions within the 30-day limit imposed by Fed.
R. Bankr. P. 4003(b). The District Court found that the
Trustee had no duty to object within 30 days under Schwab
and affirmed the Bankruptcy Court’s holding. The Debtors
appealed. For the reasons below, we shall affirm the District
Court’s Order.
I. BACKGROUND
On July 5, 2002, Renee Messina obtained a loan from
National Penn Bank, secured by an $118,000 mortgage on
residential property owned by her and her husband Stergios.
Appellants later executed a second mortgage on their
residence with Aames Funding Corporation, d/b/a Aames
1
Appellee in this action is the attorney of record and is also
referred to as “Trustee.” Appellants are also referred to as
“Debtors.”
3
Home Loan for $118,000. The second mortgage was serviced
by Litton Home Loans.
In May 2006, Appellants filed a voluntary Chapter 7
petition in the United States Bankruptcy Court for the District
of New Jersey, along with the accompanying Bankruptcy
Schedules. On Schedule A, entitled Real Property, Appellants
listed their primary residence and valued the residential
property at $230,000. Appellants submitted an amended
Schedule C, where they claimed two exemptions in their
residence. In the “Description of Property” column of
Schedule C, the asset in which Appellants claimed an
exemption is their residence, described as “251 Weymouth
Rd., Mullica Township, NJ.” (See Appellants’ Br. at 1.) In
the column labeled “Specify Law Providing Each
Exemption,” the Appellants listed 11 U.S.C. § 522(d)(1) and
11 U.S.C. § 522(d)(5). In the column labeled “Value of
Claimed Exemption,” the Appellants listed $36,900 for the §
522(d)(1) exemption and $250 for the § 522(d)(5) exemption.
These are the maximum exemptions allowed under the
statutory provisions cited. In the column labeled “Current
Value of Property Without Deducting Exemption,” the
Appellants listed the full estimated value of the residence,
$230,000. On Schedule D, Appellants listed Litton Home
Loans as a creditor holding a secured claim of $113,657.86.
On Schedule F, Appellants listed National Penn Bank as
holding an unsecured non-priority claim in the amount of
$396,171.13. The amounts claimed on Schedule D and
Schedule F were not referenced or listed on Schedule C.
Appellee did not object to Appellants’ exemptions
within the 30-day limit provided by Fed. R. Bankr. P.
4
4003(b). 2 Before the 30-day limitation period ran, Appellants
informed Appellee that there were certain defects related to
the National Penn Bank mortgage; specifically, that it had not
been properly acknowledged by the Appellants (signed before
a notary) when it was executed. According to Appellee and
the banks, the mortgage’s defects in acknowledgement and
recording made it defective as to subsequent purchasers and
creditors, but not as to Appellants, who were the original
parties to the mortgage agreement.
Thereafter, using his ‘Strong-Arm’ powers pursuant to
11 U.S.C. § 544(a), and relying on N.J. Stat. Ann. § 46:17-
3.1, Appellee sought to avoid the National Penn Bank
mortgage lien on the residence, and to preserve the value of
the avoided mortgage for the benefit of the estate, pursuant to
11 U.S.C. § 551. 3 The Trustee did so by filing a “Complaint
to Avoid Mortgage and Other Liens,” against National Penn
Bank and others, wherein he listed the residential property for
sale, and submitted a sale offer to the Bankruptcy Court for
approval. Appellee also moved for an order authorizing that
the sale of the residential property was free and clear of liens,
claims and interests, pursuant to 11 U.S.C. § 363(f), with such
liens claims and interests to attach to the sale proceeds. 4 The
2
Fed. R. Bankr. P. 4003(b) requires an interested party to
object to exemptions within 30 days of the initial creditors’
meeting or the filing of the amended Schedule C.
3
The Bankruptcy Code permits the debtor to eliminate some
types of liens that interfere with an exemption claimed in the
bankruptcy. See 11 U.S.C. § 551.
4
Under 11 U.S.C. § 363 – Use, sale, or lease of property –
The trustee or debtor-in-possession may sell property free and
5
motion was granted and the Bankruptcy Court issued a
Consent Order, with no objection from Appellants. The sale
of the property was free and clear of all liens, and netted
proceeds of $200,209.64. After payment of subordinate liens
and sale expenses, as well as certain other fees and expenses
allowed by the Bankruptcy Court, Appellee retained
approximately $41,733, pending the outcome of this appeal. 5
The proceeds from the sale were placed into the bankruptcy
estate.
Appellee also filed a notice of proposed settlement,
where the National Penn Bank mortgage would be avoided,
pursuant to N.J. Stat. Ann. § 46:17-3.1, and assigned to
clear of an interest in the property provided that one or more
of the provisions under Section 363(f) is satisfied. Subsection
(f) permits a trustee to sell property only if:
(1) applicable nonbankruptcy law permits sale of such
property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such
property is to be sold is greater than the aggregate
value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or
equitable proceeding, to accept a money satisfaction of
such interest.
5
Appellants’ claim to substantially all of the remaining funds
is the basis of this dispute. There would have been $15,417
remaining for the Trustee to apply to the estate debts if
Appellants had received their exemption money.
6
Appellee by specific terms and the automatic assignment
provisions of 11 U.S.C. § 551.
After the sale of the property, Appellee filed a ‘Motion
to Value the Debtors’s Exemption in their Former Residence
at a Zero Value’ or in the alternative, ‘to Declare it
[Appellants’ Exemption] Not to Extend to Sale Proceeds.’ 6
Appellee asserted that Appellants had no equity in their home
to which the homestead exemption could attach, and because
of the continuing validity of the National Penn Bank
Mortgage assigned to them, Appellants’ claim of exemption
in the residence was subordinate to, and did not extend to,
Appellee’s rights to the sale proceeds as successor mortgagee,
and therefore, Appellants’ exemption had no value. As such,
Appellants would be denied access to proceeds from the sale
of the residence.
Appellants cross-moved, seeking an order requiring
Appellee to pay the claimed exemption of $37,150.
Appellants contended that Appellee’s valuation motion was
out of time and therefore barred by Fed. R. Bankr. P. 4003(b)
and the rule of Taylor 7, and that, in any event, they were
entitled to the exemption on the merits because the National
Penn Bank mortgage was void as of the date and time of the
filing of the Chapter 7 bankruptcy, rather than voidable by
Appellee.
6
This motion was treated as an objection to the exemption.
7
In Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), the
Supreme Court of the United States held that even when an
exemption claimed on Schedule C is without legal
justification, it will stand if no objection is made within 30
days.
7
In a February 26, 2007 oral decision, the Bankruptcy
Court granted the Trustee’s motion to value Debtors’
exemptions at zero and rejected Debtors’ claim that the
National Penn Bank mortgage was void. The Bankruptcy
Court denied Debtors’ cross-motion to compel payment of
their claimed exemptions, and held that Debtors had no
“present or available future claim by way of exemption to any
net proceeds of the sale of 251 Weymouth Road, Mullica
Township, New Jersey which the Trustee received, is holding
or previously disbursed.” (App. 53.) The Bankruptcy Court
held that Debtors’ “claimed exemptions under § 522(d)(1)
and (5) were improper, because those sections of the Code
only authorize the exemption of home equity owned by the
Debtors at the time of filing the petition.” (Bankruptcy Tr.
5:20-23, Feb. 26, 2007.) The Bankruptcy Court also found
that, because the amount owed on the two mortgages
exceeded the value of the residence, the Debtors had no
equity to claim as exempt. Debtors claim that the National
Penn mortgage was void rather than voidable was rejected by
the Court, which found that under New Jersey law, the
mortgage was only void against future creditors such as the
Trustee, but was still valid against the Debtors. (Id. at 56:7-
12.)
In addition, the Bankruptcy Court held that the
Trustee’s late objection was proper because the Debtors’
Schedule C failed to give the Trustee sufficient notice of their
effort to seek exemptions in the proceeds of the sale of the
residence. 8 (Id. at 7:8-13.) The Court also rejected the
8
The Bankruptcy Court found that in order for the Debtors to
claim the proceeds of the Trustee’s sale of the residence as
exempt, they would have had to claim their exemption under
8
Debtors’ argument that the Trustee’s late objection to their
exemptions should be barred under Taylor, because by
claiming their exemptions under § 522(d) instead of § 522(g),
the Debtors had not given the Trustee sufficient notice of
their intent to claim an exemption in the proceeds of the sale
of the residence. (Id. at 8:15-21.) Consequently, the
Bankruptcy Court issued an Order on March 3, 2007, granting
Trustee’s motion to value Debtors’ exemptions at zero.
On April 10, 2007, Debtors filed an appeal of the
Bankruptcy Court’s order to the United States District Court
for the District of New Jersey, arguing that the Bankruptcy
Court erred in: (1) permitting Trustee’s late objection; (2)
valuing the residence exemptions at zero; and (3) denying
Debtors from claiming exemptions from the proceeds of the
sale.
On December 17, 2007, the District Court reversed the
Bankruptcy Court’s order, holding that, under Taylor, the
Trustee’s motion was barred because he failed to timely
object within the 30-day period provided by Rule 4003(b).
The District Court held that the Debtors’ Schedules, taken as
a whole, accurately listing the residence, the two mortgages
and the amount claimed as exempt, and gave the Trustee
adequate notice of the Debtors’ intent to claim their
exemption from the value of the residence after the National
Penn Bank mortgage was voided by the Trustee. As a result,
the District Court reversed the Order of the Bankruptcy Court
§ 522(g), which provides authority for debtors to claim
exemptions in the proceeds of a sale following a trustee’s
avoidance action in limited circumstances. (Id. at 7:13-17.)
9
in favor of the Debtors and ordered that the matter be
remanded to the Bankruptcy Court for further proceedings.
Appellee filed a Notice of Appeal to this Court, and
oral argument was heard on March 3, 2009. Before oral
argument, the Supreme Court of the United States granted
certiorari in Schwab. In Schwab, a trustee was barred from
objecting to an improper exemption because it was past the
30-day limit provided by Fed. R. Bankr. P. 4003(b), pursuant
to the rule elucidated in Taylor. The Third Circuit issued an
Order on April 30, 2009, holding the appeal C.A.V. pending
the decision of the Supreme Court in Schwab. This Court
also ordered supplemental briefs within ten days of the
Supreme Court’s decision. On July 9, 2010, after oral
argument, this Court issued an opinion indicating that because
the District Court did not have the benefit of Schwab when it
made its initial decision, its December 17, 2007 Order was
vacated. The matter was remanded to the District Court for
redetermination in light of Schwab.
On remand, the District Court addressed whether, in
light of the additional guidance provided by Schwab,
Appellee had a duty to object to Appellants’ claimed
exemptions within the 30-day time limit imposed by Fed. R.
Bankr. P. 4003(b). On January 31, 2011, the District Court
submitted its Opinion and Order, affirming the March 6, 2007
Order of the Bankruptcy Court, and holding that Appellee had
no duty to object within 30 days, under Schwab. On February
14, 2011, Appellants filed a timely Notice of Appeal.
10
II. JURISDICTION
The Bankruptcy Court had jurisdiction to hear and
determine Appellee’s motion, pursuant to 28 U.S.C. §
1334(a) and (b) and 28 U.S.C. § 157(a) and (b). The
Bankruptcy Court also had jurisdiction related to a Standing
Order of Reference entered by the District Court for the
District of New Jersey. The District Court had jurisdiction to
review the Order of the Bankruptcy Court, pursuant to 28
U.S.C. § 158(a).
We have jurisdiction to review the Order of the
District Court, pursuant to 28 U.S.C. § 1291.
III. ANALYSIS
A. Chapter 7 Bankruptcy and the Role of the Trustee
When a party files a Chapter 7 bankruptcy petition, the
United States Trustee appoints an impartial case trustee to
administer the case and liquidate the debtor’s nonexempt
assets. 11 U.S.C. §§ 701, 704. The Bankruptcy Code allows
the debtor to keep “exempt” property, but a trustee liquidates
the debtor’s remaining assets, which are now the property of
the bankruptcy estate. Id., Schwab, 130 S. Ct. at 2657
(quoting 11 U.S.C. § 541). The Bankruptcy Code specifies
the types of property debtors may exempt, as well as the
maximum value of the exemptions a debtor may claim in
certain assets. Id. Property a debtor claims as exempt will be
excluded from the bankruptcy estate unless a party in interest
objects. Id. (Internal citations omitted.)
11
The main role of a trustee in an asset case (such as this
one) is to liquidate the debtor’s nonexempt assets in a manner
that maximizes the return to the debtor’s unsecured creditors.
See 11 U.S.C. § 721. This occurs when the trustee sells the
debtor’s property if it is free and clear of liens, as long as the
property is not exempt, or if it is worth more than any security
interest or lien attached to the property and any exemption
that the debtor holds in the property. Id. The trustee may
also attempt to recover money or property under his
“avoidance powers,” which include the power to: (1) set aside
preferential transfers made to creditors within 90 days before
the petition; (2) undo security interests and other prepetition
transfers of property that were not properly perfected under
nonbankruptcy law at the time of the petition; and (3) pursue
nonbankruptcy claims available under state law. Id.
B. Schwab and Schedule C
In addition to the petition itself, the debtor also files a
number of additional forms, including, but not limited to: (1)
Schedules of assets and liabilities; (2) a Schedule of current
income and expenditures; (3) a statement of financial affairs;
and (4) a Schedule of executor contracts and unexpired
leases. Fed. R. Bankr. P. 1007(b). One of the Schedules that
must be filed is Schedule C – “Property Claimed as Exempt”.
Appellee argues that when the bankruptcy case was filed,
there were two mortgages of record in the chain of title, one
held by National Penn Bank, and one held by Litton Home
Loans; neither of which were included on either the originally
filed Schedule C list of exemptions claimed or the later
amendment to Schedule C.
12
In Schwab, the Supreme Court modified Taylor,
holding that Rule 4003’s 30-day time limit applies to
objections based on “three, and only three” elements of a
claimed Schedule C exemption: (1) the description of the
exempted property; (2) the Code provisions governing the
claimed exemptions; and (3) the amount listed in the column
titled “value of claimed exemption.” Schwab, 130 S.Ct. at
2663. When the objection is based on other elements, the
debtor’s market value estimation and the estate’s right to
retain any value in the property beyond the value of the
exempted interest, the 30-day time limit does not apply. See
id. at 2665, n.15. According to the Supreme Court in
Schwab, a trustee or other interested party has no obligation
to object to an exemption claim unless the basis for that claim
is found on the face of Schedule C. See id. at 2665. In
addition, when determining whether an exemption is
objectionable, Appellee only has to “evaluate the propriety of
the claimed exemptions based on three, and only three, entries
on Reilly’s Schedule C: the description of the [asset] in which
[the debtor] claimed the exempt interests; the Code provisions
governing the claimed exemptions; and the amounts [the
debtors] listed in the column titled ‘value of claimed
exemption.’” Id. at 2663.
C. The National Penn Bank Mortgage and New Jersey
Law
Under the Bankruptcy Code, an individual debtor is
allowed to protect specific property from creditors because
that property is exempt under federal bankruptcy law or under
the laws of the debtor’s home state. 11 U.S.C. § 522(b).
Both parties in this case agree that state law governs the
definition of property interests. They also agree that the
13
National Penn Bank mortgage was defective in
acknowledgment and recording, and falls within the category
of “unregistered mortgages” discussed in N.J. Stat. Ann. §
46:17-3.1.
Both Appellants and Appellee rely on N.J. Stat. Ann. §
46:17-3.1 as support for their respective positions. The
statute reads:
Every mortgage or conveyance in the nature of
a mortgage of and for any lands, shall be void
and of no effect against a subsequent judgment
creditor, or bona fide purchaser, or mortgagee
for a valuable consideration, not having notice
thereof, unless such mortgage shall be
acknowledged or proved according to law, and
be recorded, either by registry as hereinbefore
provided or by recording in full, or lodged for
that purpose with the county recording office of
the county in which such lands are situated, at
or before the time of entering such judgment or
of recording or lodging with said county
recording officer, the said mortgage or
conveyance to such subsequent purchaser or
mortgagee, provided nevertheless, that such
mortgage as between the parties and their heirs
shall be valid and operative.
N.J. Stat. Ann. § 46:17-3.1 (repealed 2012).
Appellants argue that at the time the bankruptcy
petition was filed, the National Penn Bank mortgage was void
and of no effect. Appellants claim that their property interests
14
were enhanced by Appellee’s exercise of his avoidance
powers because the National Penn Bank mortgage was “void
by statute and void by case law” immediately when they filed
for bankruptcy, pursuant to N.J. Stat. Ann. § 46:17-3.1, and
for that reason, they have equity in their residence. They
further argue that because of that equity, they properly
selected the $36,900 exemption, pursuant to § 522(d)(1) of
the Bankruptcy Code, and the $250 exemption, pursuant to §
522(d)(5) of the Bankruptcy Code. 9
In support of their position, Appellants cite to In re
Buchholz, 224 B.R. 13 (Bankr. D.N.J. 1998). In Buchholz,
the Bankruptcy Court held that under N.J. Stat. Ann. § 46:17-
3.1, an improperly recorded mortgage was “unsecured as of
the date the petition was filed” against the Chapter 12 debtor
in possession. Id. at 23. Appellants argue that just like the
improperly recorded mortgage in Buchholz, the National
Penn Bank mortgage was improperly recorded and therefore
void as against them. Appellants also argue that the Court
should allow their exemption in their residence because
without the National Penn Bank mortgage they had an interest
greater than their claimed exemptions.
Additionally, Appellants assert that when the
bankruptcy petition was filed, the property reverted to the
estate, giving Appellee all the rights, powers and status of a
9
11 U.S.C. § 522(d)(1) provides that the aggregate interest is
not to exceed $21,625 in value, in real property or personal
property. At the time Appellants filed, each debtor could
exempt up to $18,450 of equity owned by the debtor.
Pursuant to 11 U.S.C. § 522(d)(5), Appellants could claim an
additional $1,150 per person as an exemption.
15
bona fide purchaser. At the same time, the National Penn
Bank mortgage became void and of no effect because it was
not properly acknowledged. 10 Lastly, under New Jersey state
law, the National Penn Bank did not have a valid secured
claim and Appellants had the ability to exempt their interest
in the property under 11 U.S.C. § 522(d)(1) and (5) of the
Bankruptcy Code, and did so.
Contrarily, Appellee urges that the National Penn
Bank mortgage was not void upon filing, but was recorded in
the chain of title of Appellants’ residence on the date of filing
for bankruptcy. As such, it was not invalid on its face.
Appellee contends that unless there was some ruling by a
court or some other filing, there was a “presumption of
validity” regarding the National Penn Bank Mortgage.
(Appellee Br. at 22.) Appellee argues that “even a
defectively recorded mortgage remains a presumptively valid
lien on title until a court of competent jurisdiction makes a
finding upon evidence that is clear, convincing and
satisfactory that it is void.” Id.
Appellee asserts that the secured claim was void as to
the claims of junior lienholders, but it was always valid as to
Appellants. (Appellee Br. at 10.) Appellee claims that a
valid recording is only required to preserve the priority of a
mortgage against junior lien holders and bona fide purchasers
for value without notice. See Appellee Br. at 17, see also Cox
v. RKA Corp., 164 N.J. 487, 496-97 (N.J. 2000).
10
Appellants argue that because the National Penn Bank
mortgage was not acknowledged in the presence of a notary
public as required by law, it was not properly executed, and
was therefore void under New Jersey state law.
16
Furthermore, argues Appellee, Buchholz, upon which
Appellants heavily relied, is inapposite. In Buchholz, the
Bankruptcy Court held that because the mortgage was
defectively acknowledged, the accompanying debt was
unsecured under applicable New Jersey state law. 224 B.R. at
23. The Court also found that the debtor’s obligation to pay
the loan was not eliminated under state law. The
acknowledgement, whether faulty or not, has no bearing on
whether the mortgage is void.
In the present case, we find that National Penn Bank’s
mortgage was unsecured as of the date the petition was filed,
as it was defectively acknowledged, and failed to perfect
National Penn Bank’s security interest. However, Appellants
are still obligated to pay the National Penn Bank mortgage
under state law and the National Penn Bank mortgage was
still valid as to Appellants. See Buchholz, 224 B.R. at 23; see
e.g., Moore v. Riddle, 82 N.J. Eq. 197, 203 (Ch. 1913) (a
certificate of acknowledgement is not essential to validity).
Equity
Appellants argue that they are entitled to the
exemption they claimed in their residence. They argue that
through Appellee’s sale, equity was created in the residence,
to which the exemption they declared could attach. We
disagree.
At the time of the initial filing, Appellants’ property
interest in their residence was subject to two mortgages, one
of which was held by National Penn Bank. Any equity in the
property was subject to those mortgages. Filing for
bankruptcy does not create new property rights or value
17
where there previously were none. See Butner v. United
States, 440 U.S. 48, 55 (1979). Appellants’ property interests
were determined as of the date they filed for bankruptcy. See
Kollar v. Miller, 176 F.3d 175, 178 (3d Cir. 1999) (“The
estate is determined at the time of the initial filing of the
bankruptcy petition . . .”). There was no equity in the
property to exempt at the time Appellants filed for
bankruptcy, because the combination of the two mortgages
was greater than the value of the exemption itself. Appellants
would either need to have avoidance powers similar to those
of Appellee, or have the ability to benefit from the avoidance
Appellee obtained from National Penn Bank. Appellee
claims that Appellants are not entitled to the proceeds from
the avoidance but are only entitled to the equity in the
residence, which Appellee claims is zero because the two
mortgages totaled more than the estimated value of the
property. Appellee contends that Appellants are attempting to
recover from the avoidance he obtained from National Penn
Bank.
We have previously held that a debtor is not entitled
to benefit from any avoidance. In re Cybergenics Corp., 226
F.3d 237, 244-47 (3d Cir. 2000) (noting that courts have
limited a debtor’s exercise of avoidance powers to
circumstances in which such actions would in fact benefit the
creditors, not the debtors themselves); see, e.g., Wellman v.
Wellman (In re Wellman), 933 F.2d 215, 218 (4th Cir. 1991)
(holding that the avoidance powers provide for recovery only
if the recovery is for the benefit of the estate). However, a
debtor may benefit from an avoidance if he files an
exemption, pursuant to 11 U.S.C. § 522(g). “[T]he basic
purpose of section 522(i)(2) is to make such property
available to the debtor as well as the estate, but only as
18
expressly provided; that is, ‘to the extent that the debtor may
exempt such property under subsection (g) [of section 522] or
paragraph 1 of [section 522(i)]’.” See In re Simonson, 758
F.2d 103, 106 (3d Cir. 1985). Appellants very clearly stated
that they had no intention of filing under 11 U.S.C. § 522(g).
As such, the fact that they filed for Chapter 7 but did not file
for an exemption under 11 U.S.C. § 522(g) precludes them
from receiving anything from Appellee’s avoidance action.
The District Court correctly held that the avoidance of
the National Penn Bank mortgage was a separate asset from
that claimed as an exemption by Appellants, as they claimed
an exemption in the residence, not in the proceeds from the
sale of the residence.
D. Timeliness of Appellee’s Objection to Appellants’
Claimed Exemption
Appellants contend that Appellee failed to timely
object to their claimed exemption, pursuant to Taylor and for
that reason, they are entitled to their claimed exemptions.
They argue that Appellee had forfeited his claim to any
portion of the property value because he had not objected
within 30 days, as provided by Rule 4003(b). In Taylor, the
Supreme Court of the United States held that even when an
exemption claimed on a Schedule C form is without legal
justification; it will stand if no objection is made within 30
days. Id. at 643-44.
However, Taylor is no longer controlling on this issue.
As Appellants’ case was proceeding, the Supreme Court of
the United States was considering similar issues in Schwab.
19
We held this case C.A.V. while the Supreme Court decided
Schwab, which now governs.
In Schwab, the debtor (Reilly) filed for Chapter 7
bankruptcy, claiming exemptions in her business equipment,
pursuant to 11 U.S.C. § 522(d)(5) and (6). The trustee,
Schwab, did not object to Reilly’s claimed exemptions
because the dollar amount Reilly assigned to each exemption
fell within the limits permissible pursuant to 11 U.S.C. §
522(d)(5) and (6). 11 Because the appraisal of the exemption
indicated that the total market value of Reilly’s business
equipment could be as much as $17,200, the trustee petitioned
the Bankruptcy Court for permission to auction the claimed
equipment. This would allow Reilly to receive the $10,718
she claimed as exempt, and allow the estate to use the
remaining proceeds to distribute to Reilly’s creditors. Reilly
objected to the petition, arguing that by equating the total
value of the exemptions she claimed in the equipment with
the equipment’s estimated market value on Schedule C, she
had put Schwab and her creditors on notice that she intended
to exempt the equipment’s full value, even if that amount
turned out to be more than the dollar amount she declared,
and more than the Bankruptcy Code allowed. Reilly
contended that because her Schedule C filing put the trustee
on notice, the trustee was obligated to object within the 30
day time period allowed under Rule 4003(b) and because he
did not object, Schwab forfeited his claim to any value in the
equipment.
11
Reilly claimed exemptions in her business equipment
totaling $10,718.
20
The Bankruptcy Court of the Middle District of
Pennsylvania agreed with Reilly, and denied Schwab’s
motion to sell the equipment. Schwab appealed to the District
Court. Id. The District Court denied Schwab relief, rejecting
his argument that neither the Code nor Fed. R. Bankr. P.
4003(b) requires a trustee to object to a claimed exemption
where the amount the debtor declares as the exemption’s
value is within the limits the Code prescribes. Id.
We held that “Schwab’s failure to object to Reilly’s
claimed exemptions entitled Reilly to the equivalent of an in-
kind interest in her business equipment, even though the
value of that exemption exceeded the amount that Reilly
declared on Schedule C and the amount that the Code allowed
her to withdraw from the bankruptcy estate.” Id. at 2659. We
affirmed the District Court’s affirmance of the Bankruptcy
Court. The Trustee appealed to the Supreme Court of the
United States.
The Supreme Court reversed and remanded, and
clarified the trustee’s duty to object within 30 days. The
Supreme Court held that:
“The issue is whether an interested party must
object to a claimed exemption where, as here,
the Code defines the property the debtor is
authorized to exempt as an interest, the value of
which may not exceed a certain dollar amount,
in a particular type of asset, and the debtor’s
schedule of exempt property accurately
describes the asset and declares the ‘value of
[the] claimed exemption’ in that asset to be an
amount within the limits that the Code
21
prescribes. Fed. Rule Bankr. Proc. Official
Form 6, Schedule C (1991) (hereinafter
Schedule C). We hold that in cases such as this,
an interested party need not object to an
exemption claimed in this manner in order to
preserve the estate’s ability to recover value in
the asset beyond the dollar value the debtor
declared exempt.” 12
Id. at 2657.
In the present case, Appellants claimed exemptions in
the property pursuant to 11 U.S.C. § 522(d)(5) and (6).
Although Appellee failed to object to the exemptions within
the 30 day time limit prescribed by law, it did not result in an
automatic forfeiture of his right to object, pursuant to
Schwab. Id. at 2658. The District Court initially relied on the
basis of Fed. R. Bankr. P. 4003(b) and Taylor. Rule 4003(b)
provides that “a party in interest may file an objection to the
list of property claimed as exempt only within 30 days after
… any amendment to the list or supplemental schedules is
filed.” 11 U.S.C. § 522(l) provides the consequences for
failure to object: “unless a party in interest objects, the
property claimed as exempt on such list is exempt.” We
vacated and remanded to allow the District Court to
reconsider in light of the Supreme Court’s decision in
Schwab.
12
The value of the claimed exemption may not exceed a
certain dollar amount, in a particular type of asset, and the
debtor’s Schedule of exempt property must accurately
describe the asset. Schwab, 130 S. Ct. at 2658.
22
The District Court was required to make two
determinations: (1) whether the Trustee’s late objection is
barred by Rule 4003(b), regardless of the merits of the
objection itself; and (2) if after Schwab, the objection is not
barred under Fed. R. Bankr. P. 4003(b), whether the Trustee’s
objection should be upheld on the merits.
In deciding the first question, the District Court was
required to determine whether the asset the Debtors claimed
as exempt on their amended Schedule C is the same asset that
the Trustee was seeking to shield from Debtors. The District
Court reasoned that “[i]f the proceeds of the recovered
National Penn mortgage are the same asset that Debtors
claimed as exempt, then Trustee’s motion would seem to be
merely an out-of-time objection to the value claimed as
exempt, barred even after Schwab.” (Messina v. Neuner (In
re Messina), 2011 U.S. Dist. LEXIS 9637, *19 (D.N.J. Jan.
31, 2011)). However, if “the asset claimed as exempt is a
separate asset which Debtors then sought to reach through
their claimed exemption, then Trustee’s objection, after
Schwab, would not be barred by Rule 4003(b).” Id. The
District Court found that the Debtors’ amended Schedule C
claimed an exemption in only the equity in the residence
owned by Debtors at the time they filed their petition. Id. at
*17. The Court reasoned that “[w]ere the proceeds of an
avoided mortgage deemed to be reachable under § 522(d)
despite the language of § 550, there would be no need for the
separate subsection of § 522(g).” Id. at *20.
The District Court also found that the Trustee’s
objection “was not time-barred because he had no duty to
object within 30 days under Schwab.” The Court concluded
that “the Trustee’s objection, to applying Debtors’ claimed
23
exemption in the equity in their house to the separate asset of
proceeds recovered by the Trustee’s voidance of the National
Penn mortgage, falls outside of the three elements of
Schedule C identified in Schwab, and is therefore not subject
to Rule 4003(b)(2)’s 30-day limitation.” Id. at *21-22.
The second question the District Court addressed was
whether to affirm the Bankruptcy Court’s ruling on the
merits. The Trustee argued that the National Penn Bank
mortgage continued to be valid as against the Debtors at the
date they filed their Chapter 7 petition. The Trustee also
distinguished Buchholz, in that as a Chapter 12 debtor in
possession, the debtor in that case possessed the avoidance
powers of the trustee. Those powers are not available to the
Chapter 7 Debtors in this case.
The District Court agreed with the Trustee’s reasoning,
stating that “the holding of In re Buchholz is not applicable in
a case where, as here, the Debtors are not acting pursuant to
the voidance powers of a debtor in possession.” (In re
Messina, at *25.) The District Court held that “Buchholz is
not applicable to a Chapter 7 debtor as found in this case, and
that consequently, the National Penn mortgage was not
automatically void as against Debtors on the date the petition
was filed. As a result, the Trustee is correct that Debtors did
not have an equity interest in their residence to claim as
exempt on their Schedule C.” Id. at *26.
The District Court concluded “after careful analysis of
the record before it, that the Trustee had no duty to object to
Debtors’ effort to extend their claimed exemption in the
equity of their residence to the separate asset of the recovered
National Penn mortgage within 30 days, and that the
24
Bankruptcy Court therefore properly considered Trustee’s
objection.” Id. The District Court also concluded that the
Bankruptcy Court properly granted Trustee’s motion to value
at zero Debtors’ claimed exemptions in their residence.
The District Court applied Schwab appropriately and
concluded that the 30-day time period in which to object to
Appellants’ exemptions under Rule 4003(b) did not preclude
the Trustee from objecting. The Trustee’s objection was
timely. Further, the Trustee’s objection is valid. Appellants
did not provide sufficient notice through their disclosure in
Schedule C that they intended to exempt the property’s full
value. Under Schwab, Appellee must prevail.
IV. CONCLUSION
For the reasons set forth above, we shall affirm the
Order of the District Court.
25