Ninth Circuit Gets It Wrong on Exemption Amendment Case

Posted by NCBRC - December 19, 2018

“The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim.” Wilson v. Rigby, No. 17-35716 (9th Cir. Nov. 27,2018).

The circuit court applied its own version of the “snapshot” rule in holding that when her residence increased in value post-petition, Debra Wilson could not amend her schedules to increase the amount she claimed as her homestead exemption under Washington law. The court relied on language in Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206, 1211 (9th Cir. 2010) “that what is frozen as of the date of filing the petition is the value of the debtor’s exemption, not the fair market value of the property claimed as exempt.” The court reasoned that because section 541(a)(1) transfers all the debtor’s interest in property to the bankruptcy estate as of the petition date, and that property interest is subject to the debtor’s exemptions, the petition date is properly deemed the reference point for fixing the amount of the exemption.

In answer to Ms. Wilson’s, and NACBA/NCBRC in its amicus brief, arguments that relevant caselaw permits a debtor to amend her schedules to increase her homestead exemption upon post-petition appreciation, the court distinguished between cases involving California homestead law and Washington law. Specifically, the court found that Washington’s homestead statute ties the exemption amount to the debtor’s equity in the property while California’s homestead statute ties the amount to demographic criteria, allowing some debtors to claim an exemption in an amount greater than their equity.

In a lengthy dissent, Judge Paul C. Huck, (U.S. District Court for Southern Florida, sitting by designation) picked apart the majority’s reasoning.

With respect to the different operations of the homestead exemptions, Judge Huck maintained that the majority relied on a distinction without a difference. Both California and Washington homestead exemption laws cap the amount a debtor may exempt and the dissent discerned no reason why a debtor in California could capture appreciation to raise her exemption while a debtor in Washington could not. Further, Judge Huck noted that the distinction cited by the majority was not a relevant factor in any of the caselaw dealing with the issue.

Further, Judge Huck pointed out that the law is well-established that while entitlement to a homestead exemption may be established as of the petition date, the amount of the exemption is subject to later events. Judge Huck argued that the majority inappropriately dismissed the significance of Alsberg v. Robertson (In re Alsberg), 68 F.3d 312 (9th Cir. 1995). In that case, the debtor had no equity in his home at the time of his bankruptcy petition and therefore did not claim a homestead exemption in his schedules. Post-petition the value of the property went up such that the trustee was able to sell it for $121,000 over the liens. The debtor moved to amend his homestead exemption to the state homestead cap. The debtor alternatively sought to recover the entire $121,000 from the sale on the theory that because he had no equity in the property on the petition date, the property never entered the bankruptcy estate. The court did not buy the latter argument. Rather, the Ninth Circuit affirmed the lower courts’ decision that post-petition appreciation inured to the benefit of the bankruptcy estate and the debtor was limited to exempting the proceeds from the sale to the limit of California’s homestead exemption cap. The  Alsberg court relied in part on In re Hyman, 967 F.2d 1316 (9th Cir. 1992), which held that the exemption amount is determined at the time of sale rather than at the time of the petition. In fact, in the present case, Washington law provides that the exemption amount is established at the sale of the property when the amount of equity is indelibly determined.

The dissent also discussed Gebhart in which the debtor argued that the value of the property was frozen at the time he filed his petition such that any appreciation would not be part of the bankruptcy estate. The court disagreed and in so doing, made the misleading statement, relied on by the majority here, that the value of the debtor’s exemption was frozen at petition. However, as the dissent pointed out, it made the statement to further its conclusion that the value of the property itself was not frozen at the petition date and the bankruptcy estate, therefore, could reap the benefits of appreciation. The Gebhart court did not state, nor did its final holding support, the conclusion that the debtor could not increase his exemption claim up to the statutory cap to reflect the increase in equity.

The dissent also took issue with the majority’s conclusion that a debtor may not exempt property that enters the estate post-petition under section 541(a)(6), arguing that that conclusion finds no support in the statute or case law.

With respect to the majority’s application of the snapshot rule to fix the amount of the exemption a debtor may claim, the dissent argued that in so holding the majority had to contort or ignore binding precedent. Judge Huck further argued that the majority’s application of that rule ran counter to three fundamental bankruptcy principles: 1. liberally construing exemptions, 2. denying exemptions only when authorized by statute, and 3. permitting amendments to bankruptcy schedules. The dissent argued that the snapshot rule applies to exemptions only to the extent that they fix the debtor’s entitlement to claim the homestead exemption, not to fix the amount of the exemption itself.

Ms. Wilson filed a petition for rehearing en banc on December 11.

Wilson 9th Cir Nov 2018

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