Seth Edward Bergman and Courtny Renee Bergman
Case Information
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEBRASKA In thе Matter of: ) Case No. BK24-40437
)
SETH EDWARD BERGMAN and ) Chapter 13 COURTNEY RENEE BERGMAN )
)
Debtors, )
)
Order on Objection to Exemptions
This matter is before the court on July 17, 2024, on the objection to exemptions filed by the Chapter 13 trustee Erin McCartney. Dana R. Ulrich appeared for the trustee. Paul Rea appeared for the debtors Seth and Courtney Bergman.
The trustee objected to the debtors claiming the amount of their exemptiоns by using the check box on Schedule C that states, “100% of fair market value, up to any applicable statutory limit”. Because the form is an official form, and because the U.S. Supreme Court sanctioned use of a similar phrase, this part of the objection is denied. The trustee also objected to the amounts of the debtors’ exemptions and requested an evidentiary hearing. The request for hearing is granted. The court will set a further evidentiary hearing with live witness testimony. The debtors must appear at the hearing and will be subject to cross-examination by the trustee.
Findings of Fact The debtors filed their Chapter 13 petition on May 13, 2024. They claimed exemptions using Schedule C, Official Form 106C. The form requires a debtor provide four items of information – a debtor must briefly describe the property, state the “current value of the portion you own”, state the “amount of the exemption you claim”, and the “specific laws that allow exemption.” Under “amount of the exemption you claim”, the form provides two check boxes from which a debtor can select. The first box is followed by a blank line for a debtor to enter a dollar amount. The second box is followed by the words “100% of fair market value, up to any applicable statutory limit” (the “100% FMV Box”).
The debtors checked the 100% FMV Box for several assets including:
Property Value Exemption
Home $205,000 Neb. Rev. Stat. §§ 40-101 to 40-118 2017 Ford $9,000 Neb. Rev. Stat. § 25-1556(1)(e) Clothes $400 Neb. Rev. Stat. § 25-1556(1)(b) Jewelry $1,100 Neb. Rev. Stat. § 25-1552(1) 401K $25,000 11 U.S.C. § 522(b)(3)(C) The debtors used the first check box and entered a dollar value for aggregate exemptions spread across more than one asset.
The trustee objected stating several grounds. She asserts a debtor can only use the 100% FMV Box to exempt assets when the exemption is in kind, that is when it does not have a statutory dollar limit. She asserts the debtors may be using the 100% FMV Box to impropеrly remove assets from the estate. Finally, she argues she cannot determine the amounts the debtors claim as exempt and cannot determine whether the value of each asset exceeds applicable statutory limits, both of which require an evidentiary hearing.
Conclusions of Law
Official Form 106C
The debtors’ Schedule C is Official Form 106C. The form was adopted on December
1, 2015, by the Advisory Committee on Bankruptcy Rules. It was adopted, “in light
of the Supreme Court’s ruling in
Schwab v. Reilly
,
Schwab v. Reilly involved a valuation dispute. In , the debtor, Reilly, filed a Chapter 7 case, scheduling business equipment as an asset. Reilly claimed federal exemptions and used them to exempt the business equipment. At the time, Schеdule C had four columns, “description of property”, “specify law providing each exemption”, “value of claimed exemption”, and “current value of property without deducting exemption”. For the specific law providing her exemption of the business equipment, Reilly listed 11 U.S.C. § 522(d)(6), the tool of the trade exemption, and 11 U.S.C. § 522(d)(5), the wildcard exemрtion. She listed the current value of the business equipment as $10,718. Her exemptions equaled the value of the equipment. For the value of the claimed exemptions, Reilly listed $1,850 for the tool of the trade exemption and $8,868 from her wildcard exemption, for a total of $10,718. Schwab, the Chapter 7 trustee, possessed information indicating the equipment wаs worth up to $17,200. He did not timely object to the debtor’s exemptions. Nevertheless, he sought permission to sell the equipment for the debtor’s estate. The case reached the U.S. Supreme Court, which framed the issue:
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 amоunt within the limits that the Code prescribes.
Schwab v. Reilly
,
The Supreme Court reversed. It held a trustee was not required to object to a debtor’s exemptions to recover value over the exempt amount.
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 expressly declared exempt.
Id .
The majority of the Court focused on the wording of the applicable exemption
statutes. The statutes allowed a debtor to exempt, “The debtor’s aggregate interest,
not to exceed [a specified dollar amount] in value in [a type of asset]”. 11 U.S.C.
§ 522(d)(5) and (6). Reilly’s position was contrary to law because it turned an
exemption in an
interest
in property
up to a certain value
, into an exemption of the
property
itself – an exemption in full or in kind. ,
The majority also agreed with the trustee there was no reаson to object because
Reilly’s Schedule C contained no “red flags”. “The amounts Reilly listed in the
Schedule C column titled ‘Value of Claimed Exemption’ are facially within the limits
the Code prescribes and raise no warning flags that warranted an objection.”
,
Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100% of FMV.” Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits . If the trustee fails to object, or if the trustee objects and the objection is overrulеd, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption.
Id.
at 792–93 (emphasis added);
see also id.
at 789 n.16 (“Sсhedule C entries listing
the value of a claimed exemption as ‘unknown,’ ‘to be determined,’ or ‘100%’ are ‘red
flags to trustees and creditors,’ and therefore put them on notice that if they do not
object, the whole value of the asset—whatever it might later turn out to be—will be
exempt”.
Barroso-Herrans v. Lugo-Mender (In re Barroso-Herrans)
,
2015 Revision of Schedule C After Schwab , if a debtor states the value of an exemption as “100% of FMV”, it is a red flag, аnd the trustee is on notice to object. If the trustee does not object, and presumably assuming a debtor’s good faith, the entire value of the property is exempt regardless of its actual value.
Schwab
resulted in a revision to Schedule C in 2015. The revision changed the four
columns – “Current Value of Property Without Deducting Exemptions” became
“Current Value of Portion You Own”, and “Value of Claimed Exemption” became
“Amount of the Exemption You Claim”. The revision added two check boxes under
Amount of the Exemption You Claim. The first check box was followed by a blank
line. The second check box includes the words, “100% of fair market value up to any
applicable statutory limit”. This second box has been called the “
Schwab
Option”.
See, e.g., In re Farmer
, No. 16-42135,
But revised Schedule C does not contain a Schwab option. The Court in Schwab suggested a debtor use the words, “full fair market value” or “100% of FMV” as a red flag. The Committee did not strictly follow when it added the 100% of FMV Box to Schedule C. The Committee added the phrase “ up to any applicable statutory limit ”. This phase chаnges the red danger flag to perhaps a yellow caution flag. The instructions to the form make this clear:
Entries in the “amount of the exemption you claim” column may now be listed as either a dollar limited amount or as 100% of fair market value, up to any applicable statutory limit. For example, a debtor might claim 100% of fair market value for а home covered by an exemption capped at $15,000, and that limit would be applicable . This choice would impose no dollar limit where the exemption is unlimited in dollar amount, such as some exemptions for health aids, certain governmental benefits, and tax-exempt retirement funds.
See Committee Notes, Official Form 106C,
https://www.uscourts.gov/file/18725/download (emphasis added).
Under
Schwab’s
“red flag”, a trustee must object to an exemption amount of “100%
of FMV” to “preserve for the estate any value in the asset
beyond
relevant statutory
limits.” ,
Use of the 100% FMV Box The trustee asserts the 100% FMV Box is not appropriate for assets where the exemption statute has a value limit. This argument is not persuasive. The trustee points to the form’s instructions, which state:
For each item of property you claim as exempt, you must specify the amount of the exemption you claim. Usually , a specific dollаr amount is claimed as exempt, but in some circumstances, the amount of the exemption claimed might be indicated as 100% of fair market value. For example , a debtor might claim 100% of fair market value for an exemption that is unlimited in dollar amount, such as some exemptions for health aids.
See Instructions, Bankruptcy Forms for Individuals,
www.uscourts.gov/file/22710/download at 18 (emphasis added).
The instruction does not limit the 100% FMV Box to in-kind or in-full exemptions as
the trustee contends. Instead, it appears to allow a true
Schwab
red flag on the first
check box line in lieu of inserting a dollar amount. It cannot refer to the 100% FMV
Box. The 100% FMV Box is not just “100% of FMV”. It is “100% of FMV up to the
applicable statutory limit”. If the box was intended only for exemptions without a
statutory limit, the “up to the applicable statutоry limit” phrase is nonsensical or
unnecessary surplusage. Also, the Court in suggested a debtor could use a
similar phrase. Instructions on the form cannot override the Supreme Court.
The trustee asserts the 100% FMV Box prevents her from determining the amounts
the debtors claim as exempt. Her argument fails as it pertains to most aspects of the
debtors’ Schedulе C. The amount of the exemptions the debtors claim can generally
be determined from the amounts stated on Schedule C and the amounts stated in
each exemption statute.
See Schwab
,
On their Schedule C, the debtors stаte a value for every asset. Three of the claimed exemptions have statutory limits. The homestead exemption is limited to $60,000. See Neb. Rev. Stat. § 40-101. Not including five-year inflation adjustments, the vehicle exemption and personal property exemption the debtors used for jewelry are limited to $10,000 for a married couple. See Neb. Rev. Stat. §§ 25-1552(1); 25- 1556(1)(e). So, the dеbtors claim $56,000 for their homestead exemption. This is the amount they state as fair market value ($205,000 total value, minus the stated lien of $149,000). If their valuation is wrong, they state their intent to exempt up to $60,000, the applicable statutory limit. They can exempt no more. The same is true for the car and the jewelry. [4] For any exemption without a statutory limit, the amounts сlaimed are irrelevant.
The trustee next asserts use of the 100% FMV Box for exemptions with a dollar limit makes the amount of exemption claimed ambiguous. The trustee posits a hypothetical: a debtor has three assets, each valued at $5,000. For each asset the debtor claimed a personal property exemption under Neb. Rev. Stat. § 25-1552. The debtor selects the 100% FMV Box each time. Because Nebraska’s personal property exemption is less than $15,000, it is not clear how to divide the exemption. The trustee’s hypothetical does depict an ambiguity. In such a case, a debtor would have to clarify. If amended schedules were not filed, the trustee should object. But this case is not the hypothetical. There is no ambiguity. The debtors claimed only one exemption for each asset. When the debtors spread an exemption across two assets, as in the trustee’s hypothetical, they did not check the 100% FMV Box. They listed a dollar amount.
Finally, to the extent the debtors checked the 100% FMV Box as an attempt to
removе property from the estate as an end run of
Goetz v. Weber (In re Goetz)
, 95
F.4th 584 (8th Cir. 2024), the debtors fail.
[5]
In
Goetz
, the Eighth Circuit held a “post-
petition, pre-conversion increase in equity in a debtor’s residence became property of
her converted bankruptcy estate”.
Id
. Selecting the 100% FMV Box does not change
the applicable dollar limit on the claimed exemptions. It does not get around the
holding in
Goetz
. As stated above, the 100% FMV Box is not the red flag suggested in
Schwab
. It does not create an in-kind exemption. For exemptions with a statutory
limit, the box is a yellow flag, allowing a debtor to exempt his or her interest in an
amount
up to
each applicable statutory limit. Also, the Supreme Court in stated “it is far from obvious” the Code allowed a debtor to “cleаr title” in an asset by
claiming a 100% interest in it. ,
The debtors’ home is their most significant asset and the most likely to appreciate. To be certain, Nebraska’s homestead exemption is not an in-kind exemption. As the Eighth Circuit in Goetz noted:
Missouri's homestead exemption allows “[t]he homestead of every person, . . .
not exceeding the value of fifteen thousand dollars, . . . [to] be exempt.” Mo.
Rev. Stat. § 513.475.1. This allows the exemption of the homestead up to a
certain dollar amount, not the
in-kind
exemption of the entire residence.
In re Goetz
,
Conclusion A debtor is not prohibited from using the 100% FMV Box. But the box should be used sparingly. If a debtor selects the 100% FMV Box, the debtor must ensure the trustee can determine the amount of the exemption claimed from Schedule C and the applicable statute. If a debtor creates an ambiguity in claiming an aggregate exemption more than one time, an objection to exemptions will be sustained. The 100% FMV Box may have little to no value to a debtor. If a debtor uses the 100% FMV Box and the trustee objects, makes value an issue. The court will set the trustee’s objection for hearing with live witness testimony. The evidence at the hearing will establish the dollar amounts for the debtor’s Schedule C’s “current value of the portion you own”, and “amount of the exemption you claim”. At the hearing each party may present evidence of value. The debtor will be ordered to appear and will be subject to cross-examination by the trustee.
IT IS ORDERED: The trustee’s objection to claim of exemption (Doc. #18) is denied as to the debtor’s ability to use the “100% of fair market value, up to any applicable statutory limit” check box on Schedule C. The trustee’s request for hearing is granted, and an evidentiary hearing with live witness testimony will be scheduled on the issue of valuation.
Dated: July 18, 2024
BY THE COURT /s/ Brian S. Kruse Brian S. Kruse Bankruptcy Judge
Notes
[1] The debtor also scheduled a cat of “unknown” value and exempted it under Nebraska’s personal property exemption.
[2] The dissent in “would hold that a debtor’s valuation of exempt property counts and
becomes conclusive absent a timely objection.” ,
[3] Except, of course, for the cat.
[4] Likewise, if the value of an asset was less than the applicable statutory exemption, the amount claimed as exempt would be the stated fair market value.
[5] It is not clear the debtors so intended. During the hearing, the court understood the debtor’s counsel to concede the value of any asset over the applicable statutory limit was not removed from the estate.