(CN) - In a case that affects a great number of Americans, lawyers argued Tuesday before the Supreme Court over whether a creditor still has a right to challenge a bankrupt woman's claim that her belongings were worth exactly what she's allowed to keep under law. A skeptical Chief Justice John Roberts said that such a match would be a "remarkable coincidence."
"If her claim is improper, then the trustee has an obligation to object to it," Justice Ruth Bader Ginsburg countered, suggesting responsibility lay with the trustee.
Ginsberg was unique among the justices in emanating a clear sympathy for the caterer at the center of the case. She said the trustee should have been able to tell from the paperwork that the woman was exempting all her possessions, suggesting that she had given fair notice.
Justice Antonin Scalia appeared less sympathetic. "She wanted to have her cake and eat it too," he said. "Nobody thinks that's an honest valuation of the equipment. It's simply adding up the exemption she was entitled to."
Chief Justice Roberts echoed Scalia's skepticism. "Well, that would be a remarkable coincidence if her equipment happened to be worth exactly what Congress said she could exempt," Roberts said.
"In her inventory, she gives figures, and they add up to the amount that she's claiming," Ginsburg countered, "so she evidently thinks that those numbers will cover all of her business equipment."
Nadejda Reilly, who owned a catering business, filed for Chapter 7 bankruptcy in 2005, which allowed her to keep $10,718 worth of property. On the forms, she said that the value of her kitchen equipment totaled the same amount as the exemption.
An auctioneer chosen by William Schwab, the appointed trustee in the bankruptcy, appraised Reilly's cooking equipment at $17,000. But Schwab failed to file an objection to Reilly's assessment before the 30-day deadline.
Schwab moved in bankruptcy court to sell all Reilly's equipment and pay back $10,718, but Reilly argued that Schwab couldn't sell her tools because of the missed deadline.
"This is really my concern," Ginsberg said. 'It seems what she wants is her cooking equipment, not the money equivalent."
Craig Goldblatt, from WilmerHale, represented trustee Schwab. He said it was not clear in the forms that Reilly was exempting all of her equipment and argued that Schwab had no reason to object to Reilly keeping $10,718 worth of property.
G. Eric Brunstad, from Dechert, represented the bankrupted Reilly. He maintained that Reilly had accurately assessed the value of her kitchen equipment, and that she had clearly marked a box on the form saying she had no non-exempted assets. He added that it is up to the trustee to object to any appraisals that are questionable.
"You're requiring the trustee to object to everything, lest he lose the $100,000 that it turns out this is worth," Roberts said to Brunstad
"One of my concerns is that the trustees simply don't have time in every case to have a creditors' meeting and go through every asset," Justice Anthony Kennedy said.
Justice Sonia Sotomayor, who has extensive experience in financial law from her days on the 2nd Circuit bench -- that has jurisdiction over federal cases involving Wall Street -- addressed Brunstad in pointing out a potential weakness in his argument. "It is an inducement to undervalue your property for a debtor," she said, "in the hopes that an overly worked trustee won't have either the time or opportunity or wherewithal to understand that the value is off."
Justice Stephen Breyer asked why the issue had even come before the Supreme Court, saying the trustee and Reilly should have been able to work out any disagreement, but appeared to give more blame to the trustee. "And if in fact 30 days thereafter and you don't need any more time, so you don't ask the judge for more time, file an objection," he said. "What's the problem?"
I think both sides have an argument," Kennedy said diplomatically to Brunstad. "I don't think it's at all clear-cut."
But he added, "I am concerned that in every case, under your rule, the trustee is at risk unless he makes an objection, and I think that's just going to make bankruptcy proceedings much more protracted and much more complex."
The bankruptcy court sustained Reilly's objection to the sale in an unreported opinion. The district court and the 3rd Circuit affirmed.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.