Vanishing Homestead Exemption Reappears in Bankruptcy Despite Conversion

Posted by NCBRC - November 7, 2019

The District Court for the District of Maine adopted the “complete snap-shot” rule for treatment of a homestead exemption attached to property the debtor owned at the time of his chapter 13 petition and sold during the pendency of that case, even though he failed to reinvest the proceeds within six months as required by state exemption law, and converted his case to chapter 7. Hull v. Rockwell, No. 18-385 (D. Me. Sept. 24, 2019).

When Jeffrey Rockwell filed his chapter 13 petition in August, 2015, he claimed an exemption on his residence for the maximum amount of $47,500. During the course of his chapter 13 plan, in March, 2017, Mr. Rockwell sold the property and contributed the proceeds over and above the amount of his exemption to his plan. In August, 2017, Mr. Rockwell converted his case to chapter 7. He received a discharge in November, 2017. In December, 2017, the trustee filed an objection to Mr. Rockwell’s homestead exemption because he had not reinvested the funds in a new homestead within six months as required by state exemption law. After a hearing, the bankruptcy court overruled the objection.

On appeal, the district court, relied on the general bankruptcy principals: 1) exemptions are determined when a petition is filed, 2) where bankruptcy law is in conflict with a state exemption law, state law must yield, and 3) in the event of conversion from chapter 13 to chapter 7, the petition date remains the date of the chapter 13 petition for purposes of fixing exemptions.

In the absence of First Circuit law on the issue of how to treat homestead exemptions where the debtor owned the property at the time of the petition, sold it during the bankruptcy case, and failed to reinvest the proceeds, the trustee argued that the Fifth and Ninth Circuits, in such cases as In re Frost, 744 F.3d 384, 388 (5th Cir. 2014) and In re Jacobson, 676 F.3d 1193, 1199 (9th Cir. 2012), have held that while exemptions are fixed as of the petition date, such exemptions incorporate the scope of the state exemption including a reinvestment requirement – the “partial snap-shot” rule.

In contrast, the debtor relied on other courts that have held that, once the bankruptcy petition is filed, exemptions are fixed regardless of state law requirements of reinvestment – the “complete snap-shot” rule. Those cases generally reason that to find otherwise would hold treatment of bankruptcy exemptions hostage to the occurrence or non-occurrence of a post-petition event.

The bankruptcy court in this case found that the “complete snap-shot view” hews more closely to the “Code, First Circuit authority, and the practicalities of administering a chapter 7 case.”

The district court agreed. Finding the bankruptcy court’s opinion well-reasoned and thorough, the district court deferred to the bankruptcy court’s knowledge of its own docket management. In particular, the district court deferred to the bankruptcy court’s pragmatic finding that the trustee’s view would encourage chapter 7 trustees to wait out the clock in instances involving vanishing exemptions in contravention of section 704(a)’s proscription to “expeditiously” administer chapter 7 cases.

The court turned next to the trustee’s argument that there is no inherent conflict between Maine’s reinvestment requirement and the Code which would preclude application of the exemption restriction. The trustee further argued that non-application of the reinvestment requirement would contravene Congress’s intent to allow the states to define their own exemptions. While the district court found some merit to this argument, it was not persuaded by it. The court distinguished In re Zibman, 268 F.3d 298 (5th Cir. 2001), which held that a homestead exemption on property sold pre-petition expired when the funds were not reinvested within six months, as involving an exemption that was conditional at the time of the bankruptcy petition. In contrast, the current case was comparable to In re DeBerry, 884 F.3d 526, 529 (5th Cir. 2018), where the debtor’s homestead, which he owned at the time of filing his petition, was subject to an unconditional exemption at that time and was therefore fixed.

The court discussed In re Cunningham, 513 F.3d 318, 320 (1st Cir. 2008), where the debtor sold his homestead property post-petition and the First Circuit held “that the proceeds from the sale of the home retain the exempt status of the home itself.” The court found that Cunningham instructed that exempt status established at the time of the petition remains in force throughout the bankruptcy.

The court also gave careful consideration to the trustee’s argument that applying a complete snap-shot approach gave bankruptcy debtors greater protection than non-bankruptcy debtors and that this result ran counter to legislative intent to protect debtor’s home rather than create an avenue for financial windfall to debtors who sell their residence during bankruptcy. The court agreed with the bankruptcy court’s finding that section 522(c)’s fresh start protections overrode state exemption limitations. Quoting from Cunningham, the court found “[t]he efficacy of the fresh start policy requires finality that allows a debtor to rebuild his life without fear of lingering creditors.”

The court thus affirmed the bankruptcy court’s order overruling the trustee’s objection to the debtor’s homestead exemption. The trustee has appealed to the First Circuit, No. 19-2074.

Rockwell D Me Sept 2019


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