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Third Circuit Rules that Appreciation is Property of the Estate Not the Debtor in a Chapter 7

In re Orton, __ F.3d ___ , 2012 WL 2948546  (3rd Cir. 2012)(J. McVerry).

The Third Circuit addressed the question of whether a debtor is entitled to any post-petition appreciation in value of the Estate’s assets that surpasses the dollar amount exempted.   The Debtor listed on Schedule A his 1/8th  interest in 34 acres of vacant land that is subject to an oil and gas lease.  He stated that the value of the entire parcel was $34,000 and claimed an exemption for $4,250 (one eighth) of the value of the whole.  On Schedule B he listed his 1/4th interest in royalty interest in the oil and gas lease, to which he assigned a market value of one dollar.  No well had been drilled and no royalties were due.  The Debtor claimed the wildcard exemptions for these two interests pursuant to 11 U.S.C. §522(d)(5) on both.  No party objected to the exemptions within 30 days as set forth by Federal Bankruptcy Rule 4003(b).  The Trustee filed a motion to close the case and to except the Debtor’s royalties for the benefit of the Estate in the event a well was ever drilled on the property.  The Debtor objected claiming that by exempting the full value of the assets he had removed them from the Estate, thereby securing for himself the benefits and risk of future appreciation free from any creditors’ claims.  The Bankruptcy Court and District Court reasoned that the Debtor only exempted an interest in an asset, rather than the asset itself, and thus was entitled to merely exempt the dollar amount listed as exempt in Schedule C accompanying his bankruptcy petition and not any future appreciation in value.  The Third Circuit, applying Schwab v. Reilly, 130 S.Ct. 2652 (2010) affirmed.  Merely listing as exempt on Schedule C the same dollar value of an asset that appears as estimated value on Schedule B does not indicate an intent to wholly exempt the asset from the estate.  The Third Circuit quoted Schwab, “Where the debtor intends to exempt the full value of the asset or the asset itself… the debtor should declare the value of the claimed exemption in the manner that makes the scope of the emption clear.”  Examples include listing the exempt value as “full fair market value (FMV) or 100% of FMV.”  But later, the Court noted that even if the debtor listed 100% FMV, “there was no way for the Debtor to escape the outcome of the decision” because using such an exemption is facially defective or invites an evidentiary hearing to determine fair market value.  More interestingly, the Third Circuit, citing In re Gebhart, 621 F.3d 1206, 1211 9th Cir. 2010) ruled that the Estate is entitled to any appreciation in the asset’s value, not the debtor where the debtor only exempts an interest in the asset, not the asset as a whole.

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Scott F. Waterman
110 West Front Street
Media, PA, 19063 USA