On Appeal From the United States District Court For the Western District of Pennsylvania; D.C. Civil Action No. 89-2156.
Stapleton and Alito, Circuit Judges, and Edward N. Cahn, District Judge.*fn*
This Chapter 7 bankruptcy case calls for us to interpret section 522 of the Bankruptcy Code. 11 U.S.C. § 522 (1988). Section 522(l) requires that a trustee or other party in interest file with the bankruptcy court any objections to property exemptions claimed by the debtor. In the absence of a filed objection, the property claimed by the debtor as exempt is exempt. The trustee in this case never filed an objection to the exemptions claimed by the debtor. Nevertheless, the bankruptcy court ordered the debtor and her attorneys to pay the trustee the value of part of the property the debtor had claimed as exempt. The district court affirmed. Because we conclude that such a result is unwarranted under the clear language of the Bankruptcy Code and Bankruptcy Rules, we will reverse the order of the district court.
On October 24, 1984, Emily Davis filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. Her total liabilities were $11,069.59. With her petition for bankruptcy, Davis filed the required "schedules" of her property. On Schedule B-2, on which the debtor lists personal property, Davis cited the potential proceeds of a discrimination lawsuit she had brought against TWA which was then pending on appeal. She indicated the value as "unknown." On Schedule B-4, on which a debtor claims property as exempt, Davis again identified the potential proceeds of the TWA lawsuit and listed the value as "unknown."
On November 26, 1984, Robert Taylor was appointed trustee in the bankruptcy proceeding. On January 4, 1985, Taylor conducted the statutorily required section 341(a) meeting of the creditors of Davis' estate. See 11 U.S.C. § 341(a) (1988). Davis and her counsel attended and indicated a possible recovery of $90,000 in the case against TWA.
On January 7, 1985, Taylor mailed a letter to Wendell Freeland and Richard Kronz of Freeland & Kronz, Davis' counsel in the pending TWA suit, advising them that the net proceeds of the lawsuit were an asset of the bankruptcy estate. However, neither Taylor nor any party in interest ever filed with the court a formal objection to Davis' claimed exemptions.
On September 11, 1987, Davis executed a settlement agreement with TWA under which TWA was to pay Davis $110,000. Of this amount, $23,483.75 was allocated to Davis for "back pay or front pay," $23,483.75 to Davis for release of all alleged tort and other claims against TWA, and $63,032.50 to Freeland & Kronz for attorney's fees and coats. On September 17, 1987, TWA issued a check for $71,516.25 payable to Davis and Freeland & Kronz. This check covered the release of tort claims and the attorney's fees. On September 21, 1987, TWA issued another check, payable to Davis, for $16,614.75, which was the amount of her back and front pay after deduction of $6,689.00 for payment of taxes. TWA also distributed $15,000 worth of travel vouchers to Freeland & Kronz pursuant to the settlement agreement.
On May 2, 1988, Taylor sent a letter to Freeland & Kronz requesting information on the status of Davis' cause of action against TWA. On May 6, 1988, Kronz informed Taylor of the settlement. On October 4, 1988, Taylor filed a complaint against Davis, Freeland & Kronz, Wendell Freeland, and Richard Kronz in the bankruptcy court to avoid post-petition transfers and to recover either the property transferred or the value of such property. On September 7, 1989, the United States Bankruptcy Court for the Western District of Pennsylvania ordered the defendants to return $23,483.75 plus interest to Taylor. 105 Bankr. 288 (Bankr. W.D. Pa. 1989). This represented the amount awarded in the TWA settlement for release of tort claims. Freeland & Kronz and the individuals Wendell Freeland and Richard Kronz (hereinafter Freeland & Kronz) appealed to the district court. On September 7, 1990, the United States District Court for the Western District of Pennsylvania affirmed the bankruptcy court's order. 118 Bankr. 272 (W.D. Pa. 1990). Freeland & Kronz filed a notice of appeal in this court from the district court's order.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157. The district court had jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28 U.S.C. § 158(d) over the appeal from the order of the district court.
The issue raised by this appeal is whether the bankruptcy court and the district court correctly interpreted section 522(l). Freeland & Kronz claims that the proceeds of Davis' TWA suit are exempt because Davis claimed them as exempt and no party in interest filed a timely objection to the claimed exemptions. Taylor argues that claimed exemptions that are invalid under section 522(b) cannot be considered valid solely because no party in interest filed an objection with ...