Absent Objection 100% FMV Exemption May Exceed Statutory Cap

Posted by NCBRC - November 8, 2022

A claimed exemption for 100% of FMV is allowed when no party in interest objects despite the fact that once the property appreciated post-petition, the exemption was greater than the statutory limit. Masingale v. Munding (In re Masingale), No. 22-1016 (B.A.P. 9th Cir. Nov. 2, 2022).

In their chapter 11 bankruptcy petition, the debtors claimed a homestead exemption in the amount of “100% of FMV [Fair Market Value],” listing the value of their residence as $165,430 with an encumbrance of $130,724. No party objected to the exemption. Mr. Masingale died during the course of the bankruptcy, and Ms. Masingale failed to complete the confirmed chapter 11 plan. The bankruptcy court converted her case to chapter 7.

The debtor then moved for an order permitting her to sell the home for $400,500 and claim the proceeds as fully exempt. The trustee objected arguing that the home was property of the bankruptcy estate and that the debtor’s homestead exemption should be limited to section 522(d)(1)’s statutory amount of $45,950. The debtor withdrew the motion to sell and, instead, filed a motion to compel the trustee to abandon the property. Again, the trustee objected. He moved to sell the property for the benefit of the estate.

The bankruptcy court denied the debtor’s motion to compel abandonment and granted the trustee’s motion to sell. The trustee sold the property and, after paying off the mortgage and costs, reaped over $222,000. The debtor appealed.

The issue before the Ninth Circuit BAP was whether the debtor’s homestead exemption was limited to the $45,950 statutory cap.

Before addressing that question, though, the panel dealt with the threshold question of whether the appeal was rendered moot by the sale of the property. It found that it was not because the debtor did not seek to undo the sale. Nor was the appeal equitably moot for essentially the same reason. Although the trustee had distributed a portion of the sale proceeds he failed to show that, if the debtor were successful on appeal, he could not either pay her through the remaining proceeds, or claw back payments to unsecured creditors.

The panel turned to the substantive question of whether section 522(l) precluded the trustee from raising any objection to the debtor’s exemption. The panel found that it did. That section provides that “[t]he debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt.” In Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), the Supreme Court held that even blatantly improper exemption claims survive if no party objects.

Rule 1019(2)(B)(i), gives the trustee another crack at objecting to an exemption within thirty days of a case being converted from chapter 11 to chapter 7. However, that rule applies only if the conversion occurred within one year of confirmation of the chapter 11 plan. In this case, the trustee failed to object to the exemption when originally filed, and the case was converted more than one year after plan confirmation.

The panel turned next to the impact of the exemption value being listed as 100% of FMV. In Schwab v. Reilly, 560 U.S. 770 (2010), the debtor listed a specific exemption amount within the statutory exemption limit which was also equal to the scheduled value of the property. When the property appreciated during the bankruptcy case, the trustee sought to sell it and keep for the estate the excess over the claimed exemption. The debtor argued that by listing the exemption in the same amount as the petition-date value of the property she essentially sought to exempt the property in the amount of its full value.

The Supreme Court disagreed. It found that because the original claimed exemption amount was within the statutory limit, the trustee was not put on notice to object to the exemption. The Court therefore held that the exemption was limited to the actual amount listed by the debtors. The Court opined, however, that to avoid that problem, the debtor could have claimed ‘100% of FMV’ to put parties in interest on notice that he intended to claim the full value of the property as exempt.

In this case, the debtors took the Supreme Court’s suggestion and claimed the value of their exemption as 100% of FMV, thereby putting the trustee on notice to object. The panel found that under Schwab this claim was equivalent to whatever value the property had upon sale. The panel further found that, under Taylor, the trustee’s failure to file a timely objection mandated allowance of the claimed exemption in that amount.

The panel rejected the trustee’s argument that the case here was comparable to the facts in Schwab because at the time of the petition, 100% of FMV was within the statutory limit. The panel found that, unlike the debtor in Schwab, the debtor here did not claim a specific dollar amount. “If the State disagreed with the exemption claim, or was not sure how much the Masingales were claiming, the State should have objected and allowed the bankruptcy court to resolve the matter.” Additionally, the panel stated that parties could not rely on information from other bankruptcy schedules to determine the value of a claimed exemption.

The trustee next argued that, based on Klein v. Chappell (In re Chappell), 373 B.R. 73, 76 (9th Cir. BAP 2007), aff’d sub nom. In re Gebhart, 621 F.3d 1206 (9th Cir. 2010), a debtor’s homestead exemption can never exceed the statutory limit. The panel disagreed. In those cases, the debtors had claimed homestead exemptions in specific dollar amounts which were equal to the value on the petition date and less than the statutory limit. When the property appreciated they claimed to have exempted the entire value of the property and removed it from the bankruptcy estate. The bankruptcy appellate panel in Chappell and the Ninth Circuit in Gebhart found that Schwab governed and held the debtors’ claims to the dollar amount listed on the exemption claim.

The panel here stated that those cases simply did “not address a case in which the debtor exempts ‘100% of FMV.’”

The panel also rejected the trustee’s argument that the debtor should be judicially estopped from changing value of the exemption as it stood at the time of her petition. The panel reasoned that the debtor had claimed the entire value of the property at all times and therefore never took inconsistent positions giving rise to judicial estoppel.

Likewise, the “snapshot rule” did not freeze the debtor’s exemption as it stood at the time of the petition. Here, the panel held as a matter of first impression that the debtor’s “claim of an exemption equal to ‘100% of FMV’ includes postpetition appreciation and becomes incontestable if there is no timely objection.”

While the panel reversed the bankruptcy court’s denial of the exemption as claimed by the debtor, it admonished the debtor and her counsel for “making a baseless claim of exemption,” even though, as the panel acknowledged, the debtors did exactly what the Supreme Court in Schwab endorsed. The panel remanded with the additional instruction to the bankruptcy court to consider whether sanctions under its inherent power were appropriate.

Masingale BAP 9th Cir Nov 2022


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