Taylor v. Freeland & Kronz

Emily Davis (debtor) sued her employer, Trans World Airlines (TWA), for discrimination. A Pennsylvania state court found TWA liable, and TWA appealed. In October 1984, while the appeal was pending, Davis filed for Chapter 7 bankruptcy. Davis filed a list of claimed exemptions under 11 U.S.C. § 522(l), in which she claimed the expected proceeds from the TWA litigation as exempt property. Chapter 7 trustee Robert Taylor (plaintiff) learned from Davis’s lawyers, the law firm of Freeland & Kronz (Freeland) (defendant), that Davis potentially could receive $110,000 from the litigation. Taylor informed Freeland that Taylor considered any litigation proceeds as to be property of Davis’s bankruptcy estate. However, Taylor never formally objected to Davis’s claimed exemption because, despite Freeland’s claims, Taylor apparently believed the lawsuit had no value. In October 1986, the Pennsylvania Supreme Court held that TWA was liable for discrimination, and TWA settled with Davis for $110,000. TWA issued a $71,000 check to Davis and Freeland, which Davis signed over to Freeland to pay her legal fees. Taylor filed a complaint against Freeland in the bankruptcy proceeding, asserting that the $71,000 belonged to Davis’s bankruptcy estate. Freeland argued that the money was rightfully Freeland’s because Davis had claimed the litigation proceeds as exempt. The bankruptcy court found that Davis had no legal basis for claiming the exemption and ordered Freeland to remit $23,000 to Taylor so that Taylor could satisfy the claims of Davis’s creditors. The district court affirmed, but the Third Circuit reversed. The Third Circuit explained that Davis had claimed the litigation proceeds as exempt under § 522(l), and Taylor had failed to object to that claimed exemption within the time limit provided by Federal Rule of Bankruptcy Procedure 4003(b). Accordingly, the Third Circuit held that Freeland did not have to remit the money. The United States Supreme Court granted certiorari. In proceedings before the Supreme Court, both parties agreed that Davis had no legal basis for claiming the exemption for the full amount of the litigation proceeds.