Fourth Circuit Applies Choice of Law Approach to Exemptions

Posted by NCBRC - May 17, 2018

The “state-specific” approach to application of exemption laws applies when determining whether the debtor may use the exemptions from his former domicile state with respect to property located in the bankruptcy state. Sheehan v. Ash, No. 17-1867 (4th Cir. May 4, 2018).

In their chapter 7 bankruptcy filed in West Virginia, Keith and Phyllis Ash sought to apply the exemption laws of their prior domicile state, Louisiana, to exempt approximately $3,500 in various items of personal property located in West Virginia. The trustee objected to application of Louisiana exemption law. The bankruptcy court overruled the objection and the district court affirmed. Sheehan v. Ash, No. 1:16-cv-109 (N.D. W. Va. June 27, 2017).

Section 522(b)(3)(A) of the Bankruptcy Code provides that a debtor use the exemptions applicable in the state in which he has been domiciled for the 730 days prior to filing for bankruptcy. If the debtor has not lived in a single location for 730 day, he must use the exemptions from the state in which he primarily lived in the 180 days preceding the 730 day period. If application of the preceding rule would render the debtor ineligible for any exemptions, the hanging paragraph to section 522(b)(3) provides that the debtor may use the federal exemptions. In this case, the Ashes moved to West Virginia within the 730-day period and had lived in Louisiana prior to that. Louisiana’s exemption scheme is not restricted to current residents of the state.

On appeal, the Fourth Circuit delineated three approaches to the issue of application of a state exemption scheme to a bankruptcy filed outside that state. The “anti-extraterritorial” approach prohibits application of out-of-state exemptions to property located in the bankruptcy state. The court, like others addressing it, rejected this approach as nullifying portions of the federal exemption provisions. The court likewise rejected the “preemption” approach which would permit use of the bankruptcy state’s exemption scheme with respect to non-residents and property held outside the state regardless of the state laws in that regard. Again, application of that approach would render the federal provision for recourse to the federal exemptions largely unnecessary. The court settled on the third, “state-specific” approach which, it noted, has been almost universally adopted by courts around the country. Under that approach choice-of-law rules apply to permit a debtor to use the exemption law of his prior domicile if appropriate under section 522(b)(3) and if those state laws permit extraterritorial application.

The court was unpersuaded by the trustee’s argument that this third approach ran counter to the Supreme Court’s presumption against extraterritoriality endorsed in Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108 (2011). The court found that Kiobel was directed to application of United States laws in other countries and was based on the Court’s concern about international discord. The same concerns do not apply in the domestic, bankruptcy context.

Finding that the third, state-specific, approach harmonized with the federal exemption scheme and Congress’s preference for debtor-friendly interpretation of exemption laws, the Fourth Circuit joined the majority and affirmed the district court’s decision on that basis.

Ash 4th Cir opinion May 2018


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