by The Bankruptcy Appellate Panel for the Eighth Circuit found that a Missouri exception to its homestead exemption was preempted by section 522(c) of the federal exemption scheme. In re Moore, 495 B.R. 1 (B.A.P. 8th Cir. July 8, 2013).
Prior to purchase of her homestead property the debtor signed a guarantee of lease agreement with the predecessor to J&M Securities (hereinafter J&M). After her purchase of the homestead, but arising out of the pre-purchase lease agreement guarantee, J&M acquired a judicial lien on the property. In her later bankruptcy, the debtor sought to exempt her homestead under Missouri’s exemption statute which applies to debtors in bankruptcy under section 522’s opt-out provision.
Because it post-dated the debtor’s acquisition of the homestead, the debtor was entitled to avoid the judgment lien under section 522(f). Farrey v. Sanderfoot, 500 U.S. 291, 301 (1991). But in Missouri’s exemption scheme there is an exception to exemption providing that “[s]uch homestead shall be subject to attachment and levy of execution upon all causes of action existing at the time of the acquiring [sic] such homestead.” (emphasis added). J&M relied on this exception in its objection to the exemption.
The issue on appeal before the BAP boiled down to whether, under the operation of state law, the lien impairs an exemption to which the debtor “would have been entitled [] but for the lien itself.” See Owen v. Owen, 500 U.S. 305 (1991). J&M argued that the debtor was not entitled to the Missouri homestead exemption at all, and therefore, the judicial lien could not impair that exemption under section 522(f). As stated by the BAP, J&M’s argument was “that since the statute makes the homestead subject to prior causes of action, and since J&M’s judgment arose out of a prior cause of action, debtor does not have any value to which the homestead exemption could attach since the judgment lien exceeds the value of debtor’s interest in the property.” The court found that under the Supreme Court ruling in Owen, J&M’s argument failed.
Section 522(c) itemizes the types of debts to which an exemption cannot be applied. Unlike the Missouri law, the enumeration does not include debts based on causes of action arising prior to acquisition of the homestead. The question addressed by the BAP, therefore, was whether, when Congress allowed the states to apply their own exemptions in lieu of the federal exemptions, it also allowed the states to apply their own exceptions to those exemptions even where the exception may conflict with those set forth in section 522(c). The BAP found that it did not stating: “To the extent § 513.510 would except Moore’s homestead from exemption as to J&M specifically, we hold that this type of exception is preempted by the specific exceptions listed in § 522(c) of the Code. To the extent § 513.510 would except Moore’s homestead from exemption from property of the estate, we hold that this result is at odds with the Code’s exemption scheme–and is also preempted.”
Other courts have likewise held that state exceptions to exemptions must yield to the federal exception scheme. Patriot Portfolio v. Weinstein (In re Weinstein), 164 F.3d 677 (1st Cir. 1999); Tower Loan of Mississippi, Inc. v. Maddox (In re Maddox), 15 F.3d 1347, 1356 (5th Cir. 1994); Wachovia Bank and Trust Co. N.A. v. Opperman (In re Opperman), 943 F.2d 441 (4th Cir. 1991).
J&M has appealed this decision to the Eighth Circuit Court of Appeals. J&M Securities v. Moore, No. 13-3098.