When a state law that precludes application of the debtor’s state-created homestead exemption conflicts with federal bankruptcy law, state law must yield. In re Smither, No. 14-40607 (Bankr. D. Mass. Nov. 30, 2015).
In Smither, the trustee objected to Mr. Smither’s claimed homestead exemption on the basis that her had fraudulently transferred property to his non-debtor spouse to deprive creditors of access to the assets. Under Massachusetts exemption laws the homestead exemption does not protect against debts based “upon an execution issued from a court of competent jurisdiction to enforce its judgment based upon fraud, mistake, duress, undue influence or lack of capacity.” Mass. Gen. Laws ch. 188, § 3(b)(6).
Here, the trustee argued that under dictum in Law v. Siegel, 134 S. Ct. 1188, 1196-97 (2014) that “[i]It is of course true that when a debtor claims a state-created exemption, the exemption’s scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption,” precludes Mr. Smither’s exemption claim.
The court found that the trustee’s arguments suffered from two lethal problems. First, at the time of the petition, there was no judicial finding with respect to the claim of fraud so the exception to exemption under state law was not applicable. Second, once the petition was filed, the status of the homestead exemption was established and because section 522(f)(1)(A) of the Bankruptcy Code permits avoidance of a judicial lien that impairs an exemption the federal law preempts contradictory state law. While it is true that under Law, a state court exemption may be denied in bankruptcy if, under state law, the exemption would not be available to the debtor, when that unavailability is a result of state law that conflicts with federal law on the same subject, the state law must give way.
Tags: Exemptions
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