TAYLOR v. FREELAND & KRANZ
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Timothy B. Dyk
Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-571, Robert J. Taylor, Trustee, v. Freeland & Kronz.
Mr. Dyk: Mr. Chief Justice and may it please the Court:
The question in this Chapter 7 bankruptcy case is whether section 522(1) of the code, which provides for the raising of challenges to exemptions, in combination with Bankruptcy Rule 4003, which generally requires that that objection be made within 30 days after the meeting of creditors, is an absolute bar as, the Third Circuit held in this case, to a challenge to the exemption raised at a later time.
There is a conflict in the circuits on this issue.
There are three different positions that the lower Federal courts have taken.
One represented by the Third Circuit in this case, which held that the 30-day period is an absolute bar, a second line of cases that the court at a later time can reexamine the exemption de novo, and a third line of cases holding that after the 30-day period the exemption may be challenged if it lacks a good faith statutory basis.
We are urging in this case that the Court adopt this third position, which is represented by decisions of the Fifth, Sixth, and Eighth Circuits.
In a bankruptcy case the first act is the filing of the petition by the debtor, and at the same time that the petition is filed the debtor will also file a schedule of assets and a list of claimed exemptions, and in this case when the petition was filed on October 24th, 1984, the debtor made a claim of exemption for a lawsuit which she had pending against TWA, and she characterized it in the schedules as a claim for lost wages with the value unknown.
At that time, the case had wound its way through the State system.
She had been successful in convincing the commonwealth court to affirm a judgment in her favor, and the case had been briefed and argued before the Pennsylvania supreme court.
Within the time allowed in the code, the trustee appointed by the court, the petitioner in this case, held a meeting of creditors as he was required to do and examined the debtor about her assets, and in particular about this claim, and noted at the time that this was a possible asset case, meaning there were possible assets here to satisfy the claims of creditors, that asset being the claim against TWA, and shortly after the meeting of creditors he wrote to counsel for the debtor and advised them that he considered this claim to be an asset of the estate, i.e., that he considered it to be nonexempt.
The claim continued and ultimately was resolved by settlement in favor of the debtor, and she collected approximately $110,000, and the question now is, the case having remained open for this time for the express purpose of pursuing this claim, whether the trustee in bankruptcy can now go after these proceeds, which were allowed to him in the amount of $23,000 here by the bankruptcy court... can go after these proceeds to satisfy the claims of creditors.
Now, the contention is by the respondents and the holding of the Third Circuit is that that is not permissible because section 522(1) of the Bankruptcy Code says that if there's no objection filed within 30 days after the creditors meeting that the property claimed as exempt is exempt.
Unknown Speaker: Is that in the code?
Mr. Dyk: That is in the code, in 522(1) of the code.
The time period... 30-day time period is not specified in the code but in--
Unknown Speaker: That's what I wanted to know.
Mr. Dyk: --Yes, that's in Bankruptcy Rule 4003.
It specifies the 30-day period.
Unknown Speaker: Mr. Dyk, do you claim that all of the recovery is open for the trustee to seek recovery?
I thought you thought only a portion of it was recoverable.
Mr. Dyk: We have only pursued a portion of it, and the Bankruptcy Court only allowed a portion of it to be reached, the $23,000, but I think that at the time that the bankruptcy petition was filed that there was a strong argument that all of that could be reached, even the part covered by attorney's fees, because there was no equitable lien with respect to the claim itself, but only an equitable lien under State law that would have arisen after the proceeds were received.
Unknown Speaker: But I guess as the case comes to us we don't have to get into that.
We deal only with a portion of it.
Mr. Dyk: The judgment of this Court would only determine a portion of it, and we're only claiming the right to the $23,000.
The claims of the creditors in this case were only $11,000, so the $23,000 will be sufficient to cover that and the administrative expenses.
Unknown Speaker: Did you argue the application of the new sentence in section 105 in the court below?
Mr. Dyk: No, that was not argued in the court below.
It has come up in some other cases, but it was not argued in the court below here.
Unknown Speaker: So it's being urged for the first time here.
Mr. Dyk: That's correct, Justice O'Connor, and we believe that's appropriate, because what the second sentence of section 105(a) says is that no provision of the code shall be construed to prevent a challenge based on an abuse of process, and the question of whether 522(1) was a bar to the trustee's claim here was something that was heatedly contested in the lower court, and we're merely saying in this Court that section 105(a) instructs as to how to interpret section 522(1).
Unknown Speaker: If it were to apply, how do you think abuse of process should be defined?
Mr. Dyk: Well, I think it certainly doesn't mean abuse of process in the common law sense, but if you look at Prosser or the Restatement of Torts, abuse of process in the common law sense would be, for example, using a writ of sequestration to get property or the improper issuance of criminal process, or the use of process to commence an improper civil action.
Unknown Speaker: You think that the claiming of an exemption which the statute doesn't allow is an abuse of process?
Mr. Dyk: I think it is an abuse of process not in the common law sense but in the sense that this Court has used the term abuse of process, for example, in the Cooter & Gell case.
What is involved here in section 105(a) is not the conferring of a right of action on the trustee or the party of interest.
It's not conferring a common law right of action, it's simply saying that the time limits of the code will not be enforced if there's an abuse of process.
I think there are some interesting comparisons that can be made between these provisions of the bankruptcy rules that govern here and the Federal Rules of Civil Procedure, and in some respects that's a rather exact parallel.
Under the Federal Rules of Civil Procedure, if a complaint is filed and allegations in the complaint are not controverted under Rule 8(d) of the Federal Rules of Civil Procedure the allegations of the complaint are to be taken as true, and I think one could look at 522(1) as essentially saying the same thing, that if a claim is made for an exemption and there's no timely objection to that, that the exemption will be taken as established, but just as under the Federal Rules of Civil Procedure that that is not the end of the matter, so, too, we suggest that under the Bankruptcy Code that's not the end of the matter, either.
In other words, that merely because you file a late answer doesn't mean that the court does not have the power to come in and give relief from a default later on in the course of the proceedings.
Unknown Speaker: What is the process that is abused here, the filing by the debtor claiming the exemption?
Mr. Dyk: Well, Chief Justice, we're not suggesting that the term abuse of process was used here in the common law sense.
We suggest that it was meant--
Unknown Speaker: Well, no, but surely... I mean, when you say abuse of process, there's a verb and a preposition and a noun, and the noun is process, and what is the process?
Mr. Dyk: --The claim is that the abuse of process was the act of filing the list of exemptions and making a claim of exemption that did not have a good faith statutory basis.
Unknown Speaker: So the listing of exemptions is a form of process, in your view.
Mr. Dyk: Not of the common law, but within the scope of section 105(a).
There's no... we suggest that if you look at section 105(a) there's no question but that in dispensing with these time limits where there's an abuse of process that Congress was concerned with the situation in which improper claims or claims without reasonable basis--
Unknown Speaker: But the first sentence, Mr. Dyk, begins the court may issue any order, process, or judgment, and that suggests that they're talking about process in the sense of something of a writ, or something that the court issues.
Mr. Dyk: --Well, I think that the language of the second sentence, which refers to no provision of this title providing for the raising of an issue by a party in interest, shall be construed to preclude the court from sua sponde taking any action or making any determination necessary or appropriate to prevent an abuse of process.
The language of that sentence suggests to us that what they were talking about was a concern with the time limits in the code and the language fits rather exactly with section 522(1), and what they are suggesting is that the time limit would result in an abuse of process in the sense of a bad faith claim, or something of that sort, that the claim would have power to excuse.
We don't think that section 105(a) really made any change with respect to the inherent powers of the bankruptcy courts in this area, and in fact there is authority that even before this provision in the code, even under the old Bankruptcy Act, that the bankruptcy courts did have equitable powers in this area to do the sort of thing that we are urging should be done in this case.
Unknown Speaker: Under your submission, Mr. Dyk, I take it it becomes relevant whether there's a colorable basis for the claim, or a reasonable basis for the claim, and my concern is is that that propels us into something of a collateral inquiry, and this case illustrates the point.
The issue isn't really presented in this case, but it illustrates the point.
Isn't front pay exempt?
Mr. Dyk: Front pay, to the extent it's necessary for the support of the debtor, would be exempt.
Back pay is not exempt.
Unknown Speaker: So it seems to me that in this case if she thought there was a possibility of front pay that that was the basis for claiming the exemption.
Mr. Dyk: If that were the case, that would be true, but I think that the record pretty clearly establishes first of all that the claim at the time of the bankruptcy filing was worth $110,000 and the later calculations made at the time of the settlement show that only approximately even as of that time only about 30 percent of that claim was for front pay as opposed to back pay.
Unknown Speaker: But then to that extent at least it would be exempt, would it not?
Mr. Dyk: It would be exempt to the extent that it was a claim for front pay, but after all at the time of the filing of the bankruptcy petition the award of the Pittsburgh Human Relations Commission that was being defended had a provision in it that she would recover from the time that she was discriminated against up until the time that her class of supervisor was no longer employed by TWA in Pittsburgh, and that was a date before the filing of the bankruptcy petition.
So if you just looked at the Human Relations Commission decision there wouldn't have been any award of front pay but merely an award of back pay for the period before the filing of the bankruptcy petition.
Unknown Speaker: But at a minimum does not this illustrate the complexity and the difficulty of enforcing the rule that you propose?
Mr. Dyk: Well, I think that there can be situations in which it is complex, but it is not such an unusual thing, after all, under Rule 11, and there is an equivalent of Rule 11 in the bankruptcy rules which is section 9011 that the courts routinely make this kind of determination and make a determination as to whether claims have a reasonable basis.
That is essentially the standard that we are urging here that ought to be applied under section 522 and section 105(a).
Unknown Speaker: Do you have any idea, Mr. Dyk, what percentage of people filing for bankruptcy are represented by attorneys when they file as opposed to, say, people who start civil law suits in the Federal courts?
Mr. Dyk: I don't know the answer to that, Mr. Chief Justice, but one of the problems here is that the bankruptcy courts are inundated with this filings.
Last year there were 880,000 bankruptcy filings, 291 bankruptcy judges to deal with all of those filings, and a real need on the part of the bankruptcy courts to rely on the good faith of debtors in claiming exemptions, otherwise the whole system would collapse.
Unknown Speaker: How many... what percentage of all of the filings involve a trustee?
Mr. Dyk: Well, all of the Chapter 7 filings would involve a trustee and the vast--
Unknown Speaker: Which is this one.
Mr. Dyk: --Which is this one, and the vast--
Unknown Speaker: So it isn't the bankruptcy judges that are any more... they are more inundated than the trustees.
Mr. Dyk: --The trustees have been pretty inundated, too, even--
Unknown Speaker: Well--
Mr. Dyk: --Even--
Unknown Speaker: --The trustee is the person who failed to object here, or any creditors failed to object--
Mr. Dyk: --Well, the... Justice--
Unknown Speaker: --Isn't that right?
Mr. Dyk: --That is correct.
The creditors would not have objected.
You're dealing with a situation in which there was $11,000 in claims.
No creditor has a sufficient monetary incentive to raise an objection or to investigate the case.
They rely on the trustee--
Unknown Speaker: Well, you seem to have it now.
The creditors seem to have an interest now.
Mr. Dyk: --Well, I think it's not the creditors, it's the bankruptcy trustee who's--
Unknown Speaker: Well, the trustee certainly didn't do what he should have done.
Mr. Dyk: --He did not do what he should have done in the technical sense, but what he did was immediately after the meeting of creditors he wrote a letter to the debtor's counsel handling this TWA case for her and advised them specifically of his position.
This was not a case in which the trustee laid back and did not inform people of his position, and the case was specifically kept open for this purpose.
There was not technical compliance with the bankruptcy rules in the sense that there was an objection filed with the court, but everybody knew what the trustee's position was at the time, and the bankruptcy court was made aware of it, too, but these kinds of slip-ups are going to occur when you have this many bankruptcy proceedings.
At the time that this case was going on, the trustee here had approximately two or three hundred of these cases a year, which I think is typical of bankruptcy trustees all across the country.
Unknown Speaker: Where did you file... where did the trustee file the suit?
Mr. Dyk: He filed it within the context of the bankruptcy proceeding.
It's a so-called adversary proceeding within the context of the bankruptcy, and the bankruptcy was not closed at the time that this claim was asserted in the adversary proceeding.
Essentially what he was doing was--
Unknown Speaker: Was it... a bankruptcy judge ruled on it?
Mr. Dyk: --Yes. The bankruptcy judge ruled on it and determined that the exemption should be invalidated to the extent of $2,300.
He did not agree with the trustee's position to invalidate the whole $110,000 of the settlement.
He said I'm going to exercise discretion, I'm only going to set aside the exemption to the extent of $23,000 and not the whole settlement.
Unknown Speaker: What if it had been closed, Mr. Dyk?
What if the whole bankruptcy proceeding had been closed?
You'd be making the same argument anyway, wouldn't you?
I mean, I don't see that this provision... does this provision say as long as 105(a)... does that apply only when the proceeding is still open?
Mr. Dyk: Well, I would think it would only apply while the proceeding was still open.
Unknown Speaker: Why is that?
Mr. Dyk: Well, if you look at the bankruptcy proceeding as being parallel to ordinary civil proceedings in the Federal courts the filing of the petition is like a complaint, the objection to the exemption is like the answer, and then the closing of the case is like final judgment in the case, so if after the closing of the case there were a desire to reopen the judgment in a sense, one would have to proceed under the bankruptcy rule.
It's equivalent to Rule 60(b) of the Federal Rules of Civil Procedure, and that rule is bankruptcy rule 9024, but... and there's another rule, 5010, which provides for the reopening of closed cases, but in other words you would have to take this additional step of trying to reopen the case before you could challenge the exemption.
One might look at the effort to challenge the exemption before the closure of the case as similar to an effort to set aside a default within the Federal Rules context relying on Rule 55.
Unknown Speaker: Well, I... it makes a big difference to me how I view this case if I think, well, it's only going to apply where you have a trustee who didn't make a technical objection but he did write to the lawyers and he did know there was a problem there and kept the case open in order to be able to use 105(a), and if he hadn't done that, bygones is bygones, once there's the discharge and the case is closed it's all over with, but I'm not sure that that's what would happen.
You say the case could be reopened whenever somebody combs through the whole thing and finds out there was a mistake.
Mr. Dyk: Well, I wasn't suggesting that the case could be opened without a very substantial showing.
I mean, it's like the reopening of a judgment under Rule 60(b), that there would have to be a significant showing and I'm also--
Unknown Speaker: Like bad faith?
Mr. Dyk: --A significant--
Unknown Speaker: Like bad faith?
Wouldn't that be a significant showing?
Mr. Dyk: --Well, I think under Rule 60(b) you could... after the 1-year period after the judgment you could only reopen the judgment for a showing of fraud.
Mere bad faith wouldn't be sufficient.
Now, it's true that under the bankruptcy rule and the Bankruptcy Code they don't have the same strict time limits of Rule 60(b), but we would agree, and I think that the interpretation of the rules and cases would support that, that this would have to be within a reasonable time.
Unknown Speaker: Arguably, you would also have to make a showing of cause for the trustee's not making the objection soon, if it was apparent on its face--
Mr. Dyk: Yes, I--
Unknown Speaker: --Which you don't think is necessary in order to recover here, right?
Mr. Dyk: --Well, I think the showing of good cause similar to what appears in Rule 55, the default provision of the Federal Rules, would be an appropriate gloss on this, and if you look back to the equity practice before the adoption of Rule 55, which would govern both the bankruptcy courts and Federal courts, I think there would need to be some showing of good cause necessary for that kind of reopening.
Unknown Speaker: Well, after all the rule just says a trustee or creditor may file within 30 days.
Do you concede that that means that after 30 days under the rule they're just foreclosed, unless you can rely on 105?
Mr. Dyk: Well, unless you can rely on 105 or equity practice to reopen it.
I mean, it's just like 8(d) of the Federal Rules of Civil Procedure, which says if you don't controvert an allegation it's taken as admitted.
If you don't controvert the exemption it's taken as admitted after 30 days, but our suggestion is that that does not restrict the power of the bankruptcy court to come in after the 30-day period and to reopen where there's a showing of good cause and bad faith.
Unknown Speaker: Well, but again, why don't we impose a cause requirement there and not just a cause requirement in order to reopen?
That is to say, in addition to the fact that there be no legal basis for the claimed exception, why don't we impose also a requirement that there be some plausible reason why the trustee did not object as he should have?
Mr. Dyk: We agree that that would be an appropriate gloss.
Unknown Speaker: Even when no reopening is necessary.
Mr. Dyk: Even when no reopening is necessary.
Unknown Speaker: What's the good reason here?
Mr. Dyk: Well, we would, I think... one could look at the parallel in Rule 55 of the Federal Rules of Civil Procedure which has a good cause requirement in it to set aside a default before the entry of judgment, and the good cause requirement under Rule 55 is interpreted as being essentially a three-part test, that there be a meritorious defense, no prejudice to the other party and no bad faith by the party seeking to reopen the judgment, and so we would suggest that that might be the way that good cause would be defined, and if that were defined in that way, we would think that the trustee in this case would easily satisfy it.
Unknown Speaker: Do we really want to import that much of the rather complicated Federal Rules of Civil Procedure into bankruptcy proceedings?
Mr. Dyk: Well, Mr. Chief Justice, I don't think that we're suggesting that we import the Federal Rules of Civil Procedure into the bankruptcy proceedings.
I think what I'm suggesting is that there are two bases here for reading 522(1) as not being an absolute bar.
One is the specific language of section 105(a), which allows the courts to dispense... expressly allows the courts to dispense with the time limits where there's an abuse of process, and that in turn is based on the historic equity powers of the bankruptcy courts to reopen while the case is still pending based on a showing of good cause.
Unknown Speaker: But you're also saying we should carry over at least concepts from the Federal Rules of Civil Procedure, and it seems to me if we carry over two or three in this case the next case we're going to be asked to carry over some more, and pretty soon we won't know what concepts from the Federal Rules of Civil Procedure apply in bankruptcy and which don't.
Mr. Dyk: Well, it's not so... the suggestion that I'm making, Mr. Chief Justice, is not so foreign to the Bankruptcy Code.
Section 9006 of the bankruptcy rules is a very close parallel and was modeled after rule 6 of the Federal Rules of Civil Procedure, and it is rule 9006 of the Bankruptcy Code that the respondents are relying on here to say that the court cannot extend the time for filing the objections after the 30-day time period has run, so there is an exact parallel here between--
Unknown Speaker: But there you have a bankruptcy rule that very closely tracks a Federal Rule of Civil Procedure, but it strikes me some of your argument, or your rule based on 8(d) and 55 and 60(b), you're just drawing analogies without any real reference point in the Bankruptcy Code.
Mr. Dyk: --Well, the reference point in the Bankruptcy Code, Mr. Chief Justice, would be the provisions of section 105, which for a long time have confirmed the continuing power of the bankruptcy courts to act as courts of equity.
I'm not suggesting that the specific provisions of the Federal Rules of Civil Procedure be imported in here and applied to bankruptcy.
I'm simply saying that those Rules of Civil Procedure to some extent are modeled after the old equity practice in that quite apart from the second sentence of section 105(a) the bankruptcy courts retain these inherent equitable powers to reexamine actions that were taken in the course of proceedings.
Unknown Speaker: So the negligence of the trustee should really never be a bar where there's an abuse of process.
Mr. Dyk: No, I'm not suggesting that, Justice White.
I think that the... if there was egregious--
Unknown Speaker: Well, the trustee... do you think the trustee should have filed a claim... I mean, should have filed an objection?
Mr. Dyk: --Well, there's no question that he should have filed--
Unknown Speaker: Why didn't he?
Mr. Dyk: --Why didn't he?
I think there were two reasons: one, he wasn't convinced that the debtor's representations that there was a valuable claim here were correct, and second, while it doesn't appear in the record, my understanding is that the practice at that time in that district was the trustees voiced their objections by notations at the meeting of creditors rather than the filing of formal objections.
That wasn't consistent with the rules, but it is an explanation as to why he proceeded in this way rather than in the correct way.
Unknown Speaker: Well, he did disregard the rule.
Mr. Dyk: He did disregard the rule, there's no question about that, but he did--
Unknown Speaker: Not just negligently, on purpose.
Mr. Dyk: --Well--
Unknown Speaker: Isn't that right?
Mr. Dyk: --I suppose on purpose in the sense that he thought that it was permissible to disregard it and did that, but he did advise the debtor immediately after the creditors meeting about the claim that he had.
There wasn't any prejudice to the creditor here.
Mr. Chief Justice, I'd like to reserve the remainder of my time.
Argument of Phillip S. Simon
Chief Justice Rehnquist: Very well, Mr. Dyk.
Mr. Simon, we'll hear from you.
Mr. Simon: Mr. Chief Justice, and may it please the Court:
The respondents are requesting that they be allowed to retain their fees in this case.
They prosecuted a cause of action for the debtor through three appellate courts in Pennsylvania.
Petitioner has framed the issue in terms of whether, under section 522(1) of the code, a bankruptcy court may exempt property because no one objected.
The plain language of section 522(1) provides unless a party in interest objects, what's claimed as exempt is exempt.
The language is not ambiguous, nor has petitioner argued that it is.
Unknown Speaker: But Mr. Simon, is it not true that the real objection is that he didn't make a timely objection?
He did make known his objection.
Mr. Simon: I don't believe that is... it is... I don't believe that is true, because the trustee commenced an action under section 549 of the code to recover property transferred.
He did not at that point, as his complaint will show, specifically call into question the exemption claimed, et cetera.
He just simply claimed that it was property of the estate.
Unknown Speaker: Well, that's a pretty good challenge to the claim of exemption.
Mr. Simon: In a manner of speaking, it is, but--
Unknown Speaker: Well, it can't be both exempt and property of the estate.
Mr. Simon: --We responded that it was not property of the estate because it had been prior... had been exempted out of the estate under the clear language of section 522(1).
Unknown Speaker: Yes, but that would not be a complete answer if there were no timeliness requirement.
He could say well, I'll make my objection now.
Your basic argument is the objection was made too late.
Mr. Simon: That's certainly correct.
Unknown Speaker: So the real question is not on what 522(1) requires or means, but rather what the bankruptcy rule requires.
Mr. Simon: Certainly the bankruptcy rules flesh out the code requirement.
Unknown Speaker: Well, if you didn't have the bankruptcy rule you'd have no case, because he could say I'm now making my objection.
Mr. Simon: That's true, but formerly he has never, to this day, objected.
Unknown Speaker: Well, he might do it today.
He'd still be okay, if it weren't for the bankruptcy rule--
Mr. Simon: That's certainly correct.
Unknown Speaker: --Because the estate's still opened, isn't it?
Mr. Simon: That's certainly correct, Your Honor.
Unknown Speaker: Well, he filed his suit, though, in the bankruptcy court, right in the bankruptcy case.
Mr. Simon: That's correct.
Unknown Speaker: Well, that's a... and if he was trying to recover property he certainly was objecting to the claim of exemption.
Mr. Simon: My point, I guess, is that there is nothing in his complaint that--
Unknown Speaker: Said objection.
Mr. Simon: --Made him realize that it had been objected... or, excuse me, claimed as exempt.
There's nothing in his complaint that makes him aware, or makes us aware, excuse me, that he was calling into question a specific exemption.
Unknown Speaker: Well, but you responded by saying that the property was exempt.
Mr. Simon: That's true, certainly.
The courts that have not enforced the clear language of section 522(1) and rule 4003 have done so largely on the basis that it would create a scheme of exemption by declaration, so to speak.
This is a policy argument, and we don't believe you reach policy arguments in a case where the language is so clear, the legislative history is so clear--
Unknown Speaker: May I just make one other observation?
On the rule, you're reading the word may as thought it said must, aren't you?
Mr. Simon: --I'm reading the word may, I believe, to say a creditor may object, he does not have to object, but the time limit set out later in the rule... may object within 30 days of a meeting of creditors held pursuant to a certain rule unless further time is granted by the court within such period, and further bankruptcy rule--
Unknown Speaker: So you're saying that it really means must, and that's a fair reading.
I'm not suggesting it isn't, but you really are reading the word may as though it said must.
Mr. Simon: --As it regards the time limit, certainly.
Unknown Speaker: Yes.
Mr. Simon, what do you suppose the meaning of section 105 is, and could the second sentence, the new sentence added to section 105, ever be relied upon in one of these bankruptcy cases to overcome the failure to make a timely objection to an acclaimed exemption?
Mr. Simon: I believe it can, frankly.
The second sentence of 105 states that there is no provision of this title shall be construed to prevent the court from sua sponte taking action necessary or appropriate to enforce orders, rules, and abuse of process.
Unknown Speaker: What do you think abuse of process means as applied to an exemption claim?
Mr. Simon: Well, certainly if there was no objective basis in fact, or no arguable basis in law, it was clearly an outrageous matter.
If it was a perversion of the process, yes, it could be read that way, and properly read that way.
However, we don't believe that factually exists in this case.
Unknown Speaker: Well, the court below had no... apparently made no reliance upon, did not consider, the possible application of section 105.
Mr. Simon: That's certainly true.
Unknown Speaker: So is it still open in the court below to consider that possibility?
Mr. Simon: Well, again, to some extent pardons must be bound by what they raise or don't raise, and this particular provision speaks in terms of court orders, rules, and abuse of process.
Certainly the rules are very strict in this arena, as they are in... throughout the Federal Rules of bankruptcy procedure.
They generally provide for short time limits to expedite and move cases, and clearly--
Unknown Speaker: Well, is there any express time limit for use of section 105, and if so, what is it?
Mr. Simon: --No, there certainly is not, Your Honor.
It is a general... it is in a provision of the code that speaks to the general equity powers of the court.
However, here you have a specific, if you want to term it legal statutory scheme, partly set out in the code, of course, and partly set out in the rules.
Unknown Speaker: I want to be clear of your position.
You said that if the claim has no basis in law or is outrageous or is a perversion of the process, then the 105 section would apply.
It seems to me that that brings you much closer to Mr. Dyk's position than I had thought your brief indicated, or are you saying that--
Mr. Simon: Well--
Unknown Speaker: --105 is not applicable in any event?
Mr. Simon: --Pardon me.
I believe it must be read in light of the specific rules in statutory scheme.
For example, if on the 30th day of the running of the objection period the court had allowed extension because... on its own motion or ruling had allowed extension and directed the trustee to review the claim of exemption, that would be perfectly proper, perfectly within the equity powers of the court.
Unknown Speaker: Well, I take it no one contends the court lacks the power... or do you contend that the court lacks the power to give an extension of time if the trustee requests it?
Mr. Simon: No.
Certainly under rule 4003, if it's requested within the period and granted within the period--
Unknown Speaker: Well, what is your position if the claim... the exemption has no basis in law, which was your phrase?
Does the failure to file an objection within 30 days prevent the trustee from later claiming that that was an improper listing on the exemption sheet?
Mr. Simon: --Yes, certainly there must be a bright line.
Unknown Speaker: So that it doesn't make any difference that there was no basis in law.
I just want to know what your position is.
Mr. Simon: Eventually it must not.
Eventually there must be a bright line.
I'm trying not to be overrestrictive of the reading of the equitable--
Unknown Speaker: Well, bright lines are usually overrestrictive of cases where fairness might call for a different result, aren't they?
Mr. Simon: --Certainly.
I guess I'm suggesting that 105 must be read in relation or construed with the code section and the rule sections, and they are so strict and so clear, as you will... if you will, that the equitable provisions must again be--
Unknown Speaker: But--
Mr. Simon: --Construed strictly.
Unknown Speaker: --But time limits are always strict.
I mean, a time limit is a time limit, and you know, 105 applies... 105(a) applies to provisions providing for the raising of an issue by a party.
You acknowledge, however, that abuse of process is not process in the common law sense, that abuse of process means abuse of the... embraces abuse of the judicial process.
Mr. Simon: Certainly.
Unknown Speaker: Okay.
Mr. Simon: In this case, however, the only action taken by the court was approximately 3-1/2 years after the objection to exemption period had run.
That is, if you will, a 40-times extension of the objection to exemption period.
At some point, there must be finality in these matters.
Unknown Speaker: Did you know... I take it the trustee did notify some people that... about his position with respect to the estate's interest in the possible recovery.
Mr. Simon: That's certainly correct, Your Honor.
Unknown Speaker: Did the debtor know that?
Mr. Simon: My client, Freeland & Kronz, knew that by letter directed to them, and that was an inquiry letter which they answered.
Unknown Speaker: So it was no surprise that the trustee made a claim 3-1/2 years later.
Mr. Simon: Well, indeed it... whether it should or should not have been a surprise, it was.
Unknown Speaker: Although it was wholly consistent with his letter 3-1/2 years before.
Mr. Simon: To some extent.
He claimed in the letter that the net proceeds of the cause of action were property of the estate.
That was before the exemption to objection period had run.
There was really no way to knowing whether he, after further inquiry, thought it was unlikely there would be a recovery and did not choose to exempt, or object to the exemption, or he just failed to take action for some other cause.
Unknown Speaker: Mr. Simon, your finality requirement would simply be satisfied by the finality of the closing of the case, wouldn't it?
Mr. Simon: It could be, certainly.
Unknown Speaker: Why wouldn't that be enough?
Mr. Simon: Well, simply stated, I guess, because there's specific code and rule language that calls for an earlier deadline, and--
Unknown Speaker: Well, doesn't that... I mean, if that's your criteria, you're reading 105 pretty much out of the statute, aren't you?
Mr. Simon: --I am reading 105 to be severely limited, because it contains the language necessary or appropriate to enforce orders, rules, or prevent abuse of process.
There were no prior orders here, and--
Unknown Speaker: No, but you're not depending on orders, you're depending on process, and you have conceded that process can be an abuse of the judicial process, not process referring to some document issued, and the judicial process is an on-going one which only concludes with the closing of the case.
Mr. Simon: --Well, if I stated that or implied that, it's broader than I intended.
Unknown Speaker: Well, I thought... I guess we'd better get clear on that, because I thought that Justice Scalia specifically asked you that question to clarify that point, so I think we do not understand what you mean by abuse of process.
Mr. Simon: When I say process, the code and the rules, the statutory scheme is the process, or is--
Unknown Speaker: Well, if the statutory scheme is the process, then I suppose the process continues until the case is closed.
Mr. Simon: --But I... I'm not sure if I understand the inquiry of the Court, but--
Unknown Speaker: Well, the inquiry started with your claim that in administering 105 there is an interest in finality which must be served in construing it as to when a 105 sua sponte objection may be raised, and I said, isn't that interest served sufficiently by saying it's got to be raised before the case is closed, and since you concede that process means judicial process, i.e. the whole statutory scheme, it would seem consistent with your view of process to say that a 105 sua sponte objection could be raised by the court or inquiry could be made by the court at any time until the case is closed.
Mr. Simon: --Well, certainly the case closing could be a deadline, but I guess I'm saying that there is a specific deadline in this statutory scheme, and there is no real reason for going outside of that scheme except in very extreme and unusual cases where there are... where... and you don't have that concern not only specifically in this case but the court did not really take any sua sponte action except years into the future in this case after the exemption period had run.
Unknown Speaker: Basically your defense here is that this is not an extreme case, isn't that right?
Mr. Simon: Certainly.
Unknown Speaker: --Why isn't it an extreme case?
Do you say that there was a valid legal basis for exemption of the entire claim?
Mr. Simon: Absolutely, because under the exemption scheme the debtor had three arguable bases for exemptions under 522(d)(5), the so-called wild card exemption allows $4,150 in any property.
Also, future earnings, and arguably, though perhaps weak, a claim for loss of pension.
It's unquestionable that her attorneys claimed loss of pension rights, whether ultimately there was an entitlement.
Unknown Speaker: Well, would that have covered the entire claim?
I mean, you're talking about a claim that was worth $110,000.
You know, the $6,000 isn't going to cover much of that.
Mr. Simon: We don't believe that that was, indeed, on the appropriate date, the date of the petition filing, that that lawsuit was worth $110,000.
Unknown Speaker: Well, the claim... that's what had... I thought that the letter from your firm to the trustee said that, that that had been what the award had been.
Mr. Simon: There was a letter--
Unknown Speaker: Did I make this up?
I don't think I made it up.
Mr. Simon: --No.
No, certainly there was a letter from an associate in the firm of Freeland & Kronz that responded to the trustee's inquiry, and that letter certainly did state that there was no way of ascertaining the value of the claim to Ms. Davis other than calculating back pay and interest, and he had calculated that at $110,000.
That occurred after the petition date, and it was based on the assumption that there was final liability which turned out... at that time, which turned out to be incorrect, at least at that time.
But more importantly, at that time there had not been damages testimony.
The Pittsburgh Human Relations Commission had entered an order that said you're entitled to wage loss for a period from 1976 until the time that the defendant no longer employed a certain category of employee in Pittsburgh, and if you make that calculation, as we have done in our brief, that amounts to roughly $9,000 or $10,000 in damages, so at that point in time, the burden was on the debtor through her attorneys to in effect reverse that commission order.
Now, they later went forward towards a trial on damages and the matter was, of course, eventually settled, but at that point in time, at the critical point in time, the filing of the bankruptcy petition, liability was not finally determined.
Yes, the case has a see-saw history and the last court that had ruled was in the debtor's favor, but more importantly the claim that it was worth $110,000 in my client's word was... at that time was a flight of fancy.
There was a specific commission order in place, and those damages were severely limited, and the testimony at trial was similar, that the only evidence presented was the claim was not as valuable at that time.
Unknown Speaker: Are you saying--
--Mr. Simon, did your opponent rely in the court of appeals on bankruptcy... on section 105(a)?
Mr. Simon: No, Your Honor.
That was not raised.
Unknown Speaker: Not raised at all.
Mr. Simon: No.
Unknown Speaker: Mr. Simon, as I understand it, you're saying, number 1, the amount of the claim was low at the relevant period, i.e., maybe $9,000 or $10,000, and I think you're also saying that the value of that claim as an asset was not even the amount of the claim itself, because it was subject to contingencies.
Mr. Simon: That's certainly correct.
Unknown Speaker: Yes, okay.
Mr. Simon: If there are no further inquiries from the Court, I would ask to be excused.
Unknown Speaker: Very well, Mr. Simon.
Mr. Dyk, do you have rebuttal?
You have 3 minutes remaining.
Let me... do you agree that your clients did not raise the issue of section 105 in the court of appeals?
Rebuttal of Timothy B. Dyk
Mr. Dyk: That is correct, Mr. Chief Justice.
The issue in the court of appeals, however, was whether section 522 was a bar, and that's the same issue in this court as in the lower courts, and we're suggesting that in interpreting section 522, that the Court should look to section 105, which--
Unknown Speaker: But you didn't suggest that to the court of appeals.
Mr. Dyk: --That's correct.
Unknown Speaker: Nor in your petition for certiorari.
Mr. Dyk: That's correct.
It was... well, the petition for certiorari noted the conflict in the circuits and--
Unknown Speaker: Well, I know, but you didn't even cite--
Mr. Dyk: --That's correct, we did not, in the petition.
Unknown Speaker: --And the first time it appeared here was in the briefs.
Mr. Dyk: In the opening brief, that's correct.
Just to respond to one point, the bankruptcy court... and this appears at page 40(a) of the appendix to the petition, the bankruptcy court made a specific finding that the court finds that the value of the cause of action on October 24, 1984, and that's the date of the filing of the bankruptcy petition, was $110,000... specific finding... and the letter from the respondent's own lawyer characterized it at that time as a claim for back pay and interest.
There's no exemption under the code for back pay and interest except to the extent of the catch-all exemption which everyone agrees in this case would only allow an exemption of $3,950.
Unknown Speaker: Mr. Dyk, if a trustee is puzzled as to whether the exemption is applied, is there a formulation where he can have some sort of a running objection just to leave the time open, or is his only option to ask for a hearing?
Mr. Dyk: He could ask for an extension of time under rule 4003, and if the extension of time is granted before the expiration of the period the court can act on the extension of time.
What we're suggesting is that there is an additional power in section 105 and in the prior equity practice which allows the court to remedy a default of this kind.
I just note for the Court's benefit that there is a case that we didn't cite in our brief.
I call opposing counsel's attention to it.
It's Wayne Gas Company, 300 U.S. 131, which does discuss the equitable powers of a bankruptcy court to do this sort of thing.
Unknown Speaker: Do you think the question you did raise in your petition subsumes this position--
Mr. Dyk: Justice--
Unknown Speaker: --This is just another argument for saying 522 didn't bar.
Mr. Dyk: --That's correct, Justice White.
It seems to us that relying on section 105 in this context, which uses the word construed--
Unknown Speaker: But I suppose you... even if we get to 105, I would suppose that it wouldn't surprise you if we said we're not going to fool with 105.
I mean, we're not going to decide the case based on that, we're going to send it back.
Mr. Dyk: --Well, I... it wouldn't surprise me, Justice White, if the case were ultimately sent back for a decision by the bank--
Unknown Speaker: To see what effect 105 had.
Mr. Dyk: --Well, to have him exercise his discretion under section 105, yes.
Chief Justice Rehnquist: Thank you, Mr. Dyk.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 91-571, Taylor against Freeland and Kranz will be announced by Justice Thomas.
Argument of Justice Thomas
Mr. Thomas: This case comes to us on a writ of certiorari to the United States Court of Appeals for the Third Circuit.
It started in 1984 when Emily Davis filed a bankruptcy petition.
At that time, Davis was pursuing a lawsuit against her employer.
On a schedule filed with the Bankruptcy Court, Davis claimed that the proceeds from this lawsuit would be exempt from distribution to creditors.
She listed the value of the proceeds as unknown because she did not know whether she would win or lose the lawsuit.
The bankruptcy trustee did not object.
Several months later, while the bankruptcy case still was pending, Davis won $110,000 judgment against her employer.
The trustee asked the Bankruptcy Court to include this money in Davis' bankruptcy estate so that he could distribute it to the creditors.
The Bankruptcy Court granted the trustee's request, and both the District Court and the Court of Appeals for the Third Circuit affirmed its decision.
In an opinion filed today with the Clerk's office, we now reverse the Court of Appeals.
Davis claimed the proceeds from the lawsuit as exempt property.
The relevant bankruptcy rule gave the trustee only 30 days to object to this claim.
The trustee missed this deadline.
Although the trustee argues that Davis had no statutory basis for claiming the property as exempt, we have no authority to create an exception to the 30-day period.
The proceeds, therefore, are exempt for distribution to creditors.
Justice Stevens has filed a dissenting opinion.