Bankruptcy Newsletter

Homestead Exemption Cap Didn't Limit Debtor's Exemption
Although a Chapter 7 debtor converted his non-residential property into a homestead within the 1,215 days preceding his petition filing, the acquisition of his ownership interest in the property outside of the 1,215-day period protected his homestead exemption from the Bankruptcy Code's homestead exemption cap.

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Although a Chapter 7 debtor converted his non-residential property into a homestead within the 1,215 days preceding his petition filing, the debtor's prior acquisition of his ownership interest in the property outside of the 1,215-day period protected his homestead exemption from the Bankruptcy Code's homestead exemption cap, the Ninth Circuit Court of Appeals has held. Thus, the debtor's claimed exemption of $240,000 was not limited to the statutory amount of $125,000.

The debtor purchased a parcel of undeveloped land in 1994. More than 10 years later, he was living in a trailer that he had moved onto the property, and recorded a declaration of homestead with the county recorder's office. Soon thereafter, he filed a Chapter 13 petition and a creditor objected to his claim of homestead exemption, contending that the homestead was not the debtor's bona fide residence. That case was voluntarily dismissed. When, in the summer of 2005, the debtor was cited by the county for illegally using a recreational vehicle for dwelling purposes, the debtor informed authorities that he was not using the trailer as a dwelling any longer, but was sleeping in a tent on the property.

A few months later, the debtor filed his Chapter 7 petition, and claimed the market value of the property, $240,000, as exempt under Nevada's homestead statute. The creditor again objected to the homestead exemption, and also asserted that the exemption, if valid, was subject to the statutory cap of $125,000 under 11 U.S.C.A. § 522(p)(1) since the homestead was acquired within 1,215 days of the debtor's petition filing. The Nevada bankruptcy court agreed that § 522(p) applied to limit the debtor's homestead exemption, ruling that the debtor's homestead was a property interest acquired within 1,215 days of petition filing. The debtor appealed, and, after the district court affirmed the bankruptcy court's ruling on this issue, among others, the debtor again appealed.

Under 11 U.S.C.A. § 522, the Ninth Circuit explained, a debtor can exempt certain property from the bankruptcy estate, protecting it from creditors. The Bankruptcy Code provides a list of available exemptions, and also allows states to require debtors to instead use state-law exemptions, as Nevada did. However, an amendment made to the Code, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), limits the ability of debtors to use state homestead exemptions. Under § 522(p)(1), a debtor exempting property under state or local law generally is precluded from exempting "any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate [a specified dollar amount] in value in...(D) real or personal property that the debtor or dependent of the debtor claims as a homestead." This provision, which applied in the debtor's case, was intended by Congress to close a "mansion loophole" via which debtors, prior to filing for bankruptcy protection, had converted nonexempt assets into expensive, exempt homesteads using state-law exemptions, thereby shielding assets from creditors, the Ninth Circuit explained.

According to the bankruptcy and district courts, the "interest" indicated in § 522(p)(1) included a homestead, and the debtor "acquired" his homestead interest when he moved onto the undeveloped property to establish his residence and filed his homestead declaration. The debtor disagreed, contending that his actions in establishing a residence on the property and recording the homestead declaration gave rise to a property "classification," rather than a property "interest." The debtor argued that the phrase "amount of interest," as used in the statute, was properly read to mean a quantifiable measure and thus could apply only to an ownership interest in property. The Court of Appeals noted that the amici brief of bankruptcy law professors took a different approach which emphasized the statute's use of the term "acquire." Under this approach, claiming a homestead designation on a property interest differed from acquiring the property interest, and only the latter event triggered § 522(p). The Court of Appeals concluded that "perfection of a homestead exemption does not constitute acquisition of a property interest for purposes of Section 522(p)(1)."

The Court of Appeals began its analysis with a recent Fifth Circuit decision, Wallace v. Rogers, 513 F.3d 212 (C.A.5 2008). In that case, the debtor inherited property outside the 1,215-day prepetition window but moved onto the property within the window. The debtor then claimed the Texas homestead exemption, which had no monetary limit, in filing for bankruptcy protection. A creditor objected on the grounds that the property had not been the debtor's homestead for the 1,215-day period. The Fifth Circuit, however, permitted the debtor to claim the full homestead exemption. It adopted the analytical approach used when federal tax lien law affected state property rights, which required a court to look first to state law to determine what rights the taxpayer had in the property that the government sought to reach, and then to look to federal law to determine whether those state law rights qualified as property or rights to property within the reach of federal tax lien law. The Ninth Circuit agreed that this approach provided the proper starting point for the issue before it.

Considering first Nevada homestead exemption law, the Court of Appeals explained that the homestead exemption was derived from the state constitution, which provided that homestead property was to be exempt from legal process and placed outside the reach of creditors. But while the substantive right gained from a Nevada homestead declaration was broad, it "is a 'legal protection of' the property interest, not 'an interest' in the equity or title of the property," the court said. The court explained that, as in the Wallace case governed by Texas law, under Nevada law the homestead exemption and the underlying property interest were discrete concepts, the first addressing the debtor's legal right to exempt property interests from the bankruptcy estate, and the second representing the debtor's vested economic interest in the property itself.

The Ninth Circuit was then faced with the question of whether the debtor's rights to a homestead exemption under state law were affected by § 522(p). The court noted that its answer to this question was different from that reached in the Wallace case, although it reached the same ultimate conclusion that § 522(p) did not limit the homestead exemption that could be claimed under state law if the debtor owned the property before the 1,215-day prepetition period. Unlike the Fifth Circuit, the Ninth Circuit said, it found the statute ambiguous, since the "salient" terms were not defined and had broad every-day definitions, requiring resort to sources beyond the statutory text to discern its meaning.

Considering first the statutory text, the Court of Appeals explained that the term "interest" was used in the statute to describe what was acquired by the debtor and could be subject to the statute's monetary limitation. It noted that various forms of relationships to real property were described as property "interests," including "possessory interests, leasehold interests, and ownership interests," and that these interests "run with the land," passing via purchasers through the chain of title. The court contrasted such interests with a homestead right, which generally did not run with the land, but was a personal right or privilege bestowed by statute or constitutional provision. Under Nevada law, the court continued, a homestead was defined in a manner that presupposed an existing, previously acquired property right which permitted the holder of such a right to claim a homestead. "Thus understood," the Ninth Circuit said, "a homestead is a 'categorization' of a status or a classification, not a property interest." This reading, the Ninth Circuit found, was supported by the verbs employed by the statute, which used "acquired" to refer to the interest that could be exempted, and "claims" with reference to a homestead, reflecting a substantive distinction between the two.

In addition, the use of "amount" to qualify "interest," the court said, meant that the "interest" had to be quantifiable, an interpretation consistent with an exception in the statute. The court determined that a homestead was not a quantifiable interest. Finally, the court addressed the word "acquired," which meant to gain possession or control of something. That term, the court said, would not commonly be used to refer to the classification of property as a homestead. Again, an exception within the statute supported this interpretation. Based upon its analysis, the Court of Appeals concluded that "the most plausible interpretation of Section 522(p)(1) is that the act of recording a homestead or moving onto the property to establish residency is not an 'amount of interest acquired' for purposes of applying the monetary cap in Section 522(p)." The Court of Appeals found that its interpretation was supported by the statute's legislative history, which, it pointed out, indicated that the statute targeted short-term ownership of homestead property, rather than the conversion of non-residential into residential property or a new declaration of a homestead through a formal process.

"We hold," the court said, "that 'any amount of interest that was acquired,' as used in Section 522(p)(1), means the acquisition of ownership of real property and that the monetary cap in Section 522(p) does not apply to property to which a debtor acquired title more than 1215 days before she or he filed a bankruptcy petition. That language does not include a homestead claim for the underlying property interest, which claim was recorded within the 1215-day period." Turning to the facts before it, the Court of Appeals ruled that the debtor's homestead exemption was not subject to the $125,000 statutory cap, given his purchase of the underlying property interest outside the 1,215-day period preceding his petition filing. In re Greene, 2009 WL 3152191 (C.A.9-Nev.).

Reductions were warranted in the fees sought by a Chapter 11 trustee's attorneys based upon the improper delegation of trustee tasks to the attorneys, such as for compiling and drafting a final report or for "securing" the eviction of the debtor's adult son from property that the trustee wished to sell. However, no reduction was warranted for de minimis entries, mostly in 0.1 hour increments, for time that attorneys spent in receiving telephone calls or e-mails that should have been directed to the trustee. It was more efficient for the attorneys to deal with these matters directly than to refer the caller or the e-mailer to the trustee. In re Tan, Lie Hung & Mountain States Investments, LLC, 2009 WL 2869935 (Bkrtcy.D.Or., Judge Radcliffe).

An attorney who represented a Chapter 7 debtor prepetition was not the "initial transferee," as that term was used in a bankruptcy statute governing the liability of transferees on avoided transfers, of funds that he received in a fiduciary capacity, and that he placed in a client trust account while awaiting instructions from his debtor-client as to how the funds were to be distributed. The mere fact that the attorney, in disbursing funds, had personally taken a check written on his trust account to a bank to obtain cashier's checks made out to the recipients designated by the debtor, so as to ensure that the funds were out of the trust account before he could be served with a writ of garnishment by a known creditor of the debtor, did not affect the attorney's status as a fiduciary who had no discretion regarding how the funds were disbursed. In re Harwell, 2009 WL 2868635 (M.D.Fla., Judge Moody).

A Chapter 7 debtor's failure to disclose, in response to a question on his statement of financial affairs (SOFA) as to whether he had made any "gifts" in the year immediately preceding the petition date, the expenses that he regularly paid for his long-time domestic partner, including the monthly payment on a motor vehicle that only the domestic partner drove, was not in the nature of a "false oath," such as might provide a basis for denial of the debtor's discharge. The payments were disclosed elsewhere on the bankruptcy schedules, and the debtor's attorney testified credibly that she would never consider reporting a debtor's ongoing, routine payments of a non-debtor spouse's or heterosexual co-habitant's bills as "gifts" and had advised the debtor not to so report the expenses which he paid on behalf of his male companion. In re Oliver, 2009 WL 1475046 (Bkrtcy.E.D.Tenn., Judge Stair).

A consignor's interest in automobiles consigned to a used car retailer was superior to the interest of a creditor of the retailer with a security interest in the retailer's inventory, even though the creditor filed a Uniform Commercial Code (UCC) financing statement regarding the retailer's inventory and the consignor did not, because the creditor had actual knowledge that the retailer was substantially engaged in the business of selling goods on a consignment basis. Although the UCC provided that a security interest in consigned goods was defeated by the creditor's imputed knowledge when a consignee "is generally known by his creditors" to be engaged in consignment selling, the UCC did not explicitly govern the case of a creditor with actual knowledge of consignment selling. The issue was one of first impression in California, but the Court of Appeal followed the majority rule from other states. Fariba v. Dealer Services Corp., 2009 WL 3191538 (Cal.App. 4 Dist.).