The Case of the Vanishing Homestead Exemption

Posted by NCBRC - November 10, 2020

When the debtor failed to reinvest the proceeds from the sale of his exempt homestead within the period required by state homestead exemption law, the exemption vanished. McCallister v. Wells (In re Wells), No. 20-86 (D. Idaho Oct. 14, 2020).

The debtor filed for chapter 13 bankruptcy and listed the equity in his home as exempt under Idaho law. During his bankruptcy, he sold the home in order to use the proceeds to pay off one of his creditors. He did not reinvest in a new home as required by Idaho exemption law. The trustee sought to capture the proceeds of the sale for the bankruptcy estate on the basis that the debtor’s homestead exemption vanished when the debtor sold the home without reinvesting within one year. The bankruptcy court overruled the trustee’s objection to the exemption. The trustee appealed to the district court.

As an initial matter, the debtor argued that because he had a confirmed plan, the estate property had revested in him, and he already used the sale proceeds to pay off his creditor, the appeal was equitably moot.

To determine equitable mootness, the Ninth Circuit looks at “whether a stay was sought, whether the plan has been substantially consummated, whether third party rights have intervened, and, if so, whether any relief can be provided practically and equitably.” The court found the appeal was not moot. Although the trustee did not seek a stay, the court found that she ensured that the confirmed plan provided for treatment of sale proceeds through the estate in the event of success of her argument on appeal. The fact that the creditor’s interests may be negatively impacted by a decision in favor of the appellant did not persuade the court that equities should intervene. Rather, the court found that the bankruptcy court “will be able to craft a practical resolution to this matter that is in keeping with the plan provision anticipating a potentially successful appeal.”

The court turned to the substance of the appeal with reference to the cases of England v. Golden (In re Golden), 789 F.2d 698 (9th Cir. 1986), and Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012). In Golden, the debtor sold his home prior to filing for bankruptcy and entered bankruptcy with the proceeds from the sale. In Jacobson, the chapter 7 debtor sold his home post-petition and failed to reinvest as required by the exemption law. The Ninth Circuit found in both cases that the failure to reinvest eliminated the exemption.

The Wells court found that Golden and Jacobson dictated the result here.

The court was unpersuaded by the debtor’s argument that Owen v. Owen, 500 U.S. 305 (1991); Taylor v. Freeland & Kronz, 503 U.S. 638 (1992); and Law v. Siegel, 571 U.S. 415 (2014) mandate a different conclusion. The court noted that Owen and Taylor both predated Jacobson, and found that none of the three cases undermined its holding. Owen dealt with a situation where there was a conflict between bankruptcy law and state exemption law, and the court found no such conflict here. The Bankruptcy Code applies state exemptions as defined by state law and in this case, the scope of the debtor’s homestead exemption was circumscribed by the reinvestment requirement. With respect to Taylor, the court found that case imposed a requirement on the trustee to object to an exemption in order to be able to later overturn it on the basis that the exemption was ineffective from the outset. The court found that case inapplicable as, here, the trustee had no cause to object until the one-year reinvestment period lapsed. Finally, the court found that Law was inapplicable because Law prohibited a court from surcharging an exemption based on a debtor’s misconduct. In this case, there was no surcharge of the debtor’s exemption. There was simply a vanishing exemption based on operation of state law.

The court noted that while Jacobson and Golden have been criticized, as in Rockwell v. Hull (In re Rockwell), 968 F.3d 12, 23 (1st Cir. 2020) (blogged here), they remain good law.

The court reversed and remanded.

Wells D Ida Oct 2020


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