This is a certified question case where there is underlying litigation going on in the bankruptcy court in Houston, Texas. The bankruptcy court (trial court) certified a question to the 5th Circuit Court of Appeals. This is pursuant to 28 USC Sec. 158(d)(2(A)(i)-(iii) and Bankruptcy Rule 8006, which allows the court or a party to appeal directly to the court of appeals in certain circumstances.

The question certified to the 5th Circuit for decision was: May a debtor claiming federal exemptions under Sec. 522 of the Bankruptcy Code ever exempt a 100% interest in an asset? The 5th Circuit's answer: Yes. A debtor may do so in certain cases because the relevant provisions of Sec. 522 cap the value of the asset a debtor may exempt, not the debtor's interest in that asset.

The trustee argued that a debtor may never exempt a 100% interest in an asset under the federal exemptions because allowing such an exemption removes the entire asset from the bankruptcy estate. The debtor argued that since the U.S. Supreme Court in Schwab v. Reilly, 560 U.S. 770, 794 n.21 (2010) seemed to permit exemption of a "full" or 100%" interest in an asset, then the asset itself would be removed from the bankruptcy estate, and any future increase in value, or higher value that the asset is really worth if it was mis-valued, would belong to the debtor.

The 5th Circuit answered the question put to it, but did not answer the ultimate question, stating: 

What the certified question does not ask us to determine, and thus we decline to address, is whether claiming a 100% interest in an asset as exempt allows the debtor to “walk away” with the asset itself and potentially benefit from any post-petition appreciation of it. This concern seems to be at the heart of the question that the parties wish us to address. Although we do not address the question today, we note that the Supreme Court has found “questionable” whether “a claim to exempt the full value of the equipment would, if unopposed, entitle [the debtor] to the equipment itself as opposed to a payment equal to the equipment’s full value,” explaining:

Section 541 is clear that title to the equipment passed to [the debtor’s] estate at the commencement of her case, and §§ 522(d)(5) and (6) are equally clear that her reclamation right is limited to exempting an interest in the equipment, not the equipment itself. Accordingly, it is far from obvious that the Code would “entitle” [the debtor] to clear title in the equipment even if she claimed as exempt a “full” or “100%” interest in it . . . .Id. 

Because this question of whether a debtor can walk away with the asset, as opposed to merely claiming the value of their 100% interest in the asset as exempt, is not expressly presented in the certified question, we decline to address it.

So the 5th Circuit answered the certified question, and returned the case to the bankruptcy court for further proceedings. 

Do you think this case was decided correctly? Do you think a debtor in bankruptcy claiming federal exemptions should be able to claim as exempt 100% of the asset itself or should they have to state a value? Please leave your questions or comments below.

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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