In re Goldstein
- Reporters:
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The issue before the Court concerns the “look-back” period in
I. Factual and Procedural History.
The Debtor resided in Maryland from November 2016 through November 2018. She eventually relocated to Maine and, on November 3, 2021, filed her petition for bankruptcy relief. In schedules accompanying her petition, the Debtor claimed exemptions in various assets under Maryland state law. The Trustee objected to most, but not all, of the Debtor‘s exemptions. The Court conducted an initial hearing on the Trustee‘s objections on February 3, 2021 and then continued the matter several times while, inter alia, the Bankruptcy Appellate Panel for the First Circuit (the “Panel“) considered the appeal of an order issued in In re O‘Neil, 2020 WL 3634387 (Bankr. D. Me. June 19, 2020), pursuant to which Judge Michael A. Fagone overruled the Trustee‘s objections to an exemption on a similar issue under the same Maryland statute.
As of the last hearing held on this matter, on April 28, 2021, no ruling had issued in the O‘Neil appeal, but a decision was expected in short order. This expectation, coupled with confirmation from Debtor‘s counsel that no amendments to the Debtor‘s exemption claims would be forthcoming, led the Court to take the matter under advisement pending the Panel‘s decision. On May 24, 2021, the Panel dismissed O‘Neil for lack of jurisdiction, leaving this Court to forge ahead to make its own determination as to the Trustee‘s objections. Dudley v. O‘Neil (In re O‘Neil), 2021 WL 2069922 (1st Cir. B.A.P. May 21, 2021).
II. The Applicable Law.
Generally, upon the commencement of a bankruptcy case, all of the debtor‘s legal and equitable interests in property become part of the bankruptcy estate.
III. Issues and Positions of the Parties.
The parties agree that when it comes to claiming exemptions, the state law applicable to the Debtor is Maryland state law.
The Debtor claimed an exemption in “household goods” under this tools-of-the-trade exemption, to which the Trustee objects, on the grounds that the general term “household goods” does not qualify under the specific language used to describe the tools-of-the-trade exemption in
The second set of Maryland exemptions includes a homestead exemption and a wild card exemption available only in a bankruptcy proceeding and only to “any individual debtor domiciled in this State.”
The Court turns first to the objection to the tools-of-the-trade exemption and then to the larger, more complex question of whether the Debtor is eligible to claim the wild card exemption.
IV. Analysis
A. The Tools-of-the-Trade Exemption Claimed in Household Goods Under Md. Code § 11-504(b)(1).
A debtor is required to list the assets he or she claims as exempt from the bankruptcy estate. Fed. R. Bankr. P. 4003(a). This Court‘s local rules require a debtor to “disclose the debtor‘s exemption claims with meaningful particularity and the debtor must be prepared to provide detailed information regarding the assets claimed as exempt at the meeting of creditors.” D. Me. LBR 4003-1. The Debtor has made no such effort with respect to her claim of exemption in “household goods” under Maryland‘s tools-of-the-trade exemption.
The term “household goods” is not explicitly included in the list of personal property comprising the tools-of-the-trade exemption.
On its very face, the term “household” is seemingly at odds with the purpose of the tools-of-the-trade exemption, which is to protect assets necessary to engage in commercial activity. Viewed in its entirety, the Maryland exemption scheme is carefully crafted to exempt separate, specific categories of personal and real property and evidences a coordinated effort to avoid overlap and duplication between those categories. Property described as “household goods” fits squarely within
Even if one could make the argument that “wearing apparel, books, tools, instruments, or appliances” somehow includes “household goods,” however, the Debtor
The Taylor court noted that, unlike other exemptions set forth in
The Court cannot judge the reasonability of an explanation that has not been offered in the first instance. As the Debtor has not provided any rationale as to how the overly broad category of property she is claiming as exempt is necessary to her profession, the Trustee‘s objection is sustained.
B. The Wildcard Exemptions Claimed under Md. Code § 11-504(f)(1)(i)(1).
Turning now to the more involved inquiry, the Trustee also objected to the Debtor‘s claim of a wild card exemption in 15 Dolomite Drive, Unit 2-41A, a 2011
The plain language of
(i) The anti-extraterritoriality approach.
The first approach Fernandez discussed, and quickly rejected, was the anti-extraterritoriality interpretation adopted by the bankruptcy court in In re Fernandez, 445 B.R. 790 (Bankr. W.D. Tex. 2011). Under this approach, state laws have no extraterritorial effect and, therefore, debtors are precluded from claiming exemptions to protect property in one state under the laws of another state. Fernandez, 2011 WL 3423373 at *7. The Fernandez court observed that the bankruptcy court was the only court to endorse the anti-extraterritoriality view, and quickly dispatched this analysis
(ii) The preemption approach.
A second method by which to interpret
There are three types of preemption: express, occupy the field and conflict. Fernandez, 2011 WL 3423373, at *19. See also, Sheehan v. Pevevich, 574 F.3d 248, 252 (4th Cir. 2009). The Fernandez court analyzed all three arguments but found them lacking. It uncovered no statutory language or legislative history expressly preempting state residency limitations. Fernandez, 2011 WL 3423373, at *19. Arguments in favor of implied preemption likewise failed. The court concluded that Congress did not
Although the word “preemption” does not appear in the O‘Neil decision, its rationale closely aligns with the preemption view adopted by other courts. In re O‘Neil, 2020 WL 3634387, at * 3 (Bankr. D. Me. June 19, 2020). The O‘Neil court first held that the “unmistakable import” of
While the Court finds merit in the preemption approach, it declines to adopt it for several reasons. As noted above, there is nothing in the statutory text or the legislative history which supports an intent by Congress to preempt limitations on the applicability of its exemptions. If Congress so intended, it could have easily and explicitly stated its intent to preempt the state exemption laws which are provided so much deference in
Critics of this argument point to case law finding that Congress’ deference to states in this area is not complete. See O‘Neil, 2020 WL 3634387, at *3 (collecting cases). While there are times when federal courts override state law exemption limitations in favor of the policies informing Congress’ formulation of the Bankruptcy Code, nothing in
The Camp bankruptcy court had reasoned that residency restrictions in a state‘s exemption laws are choice of law provisions, that
§ 522(b)(2) and (b)(3)(A) are also choice of law provisions, and that when the Bankruptcy Code provisions say the exemption laws of a particular state apply to a debtor, the state‘s choice of law provisions that would make its exemptions unavailable to that debtor conflict with the Bankruptcy Code and are preempted. This reasoning might be sound if the Bankruptcy Code provisions did not establish any federal exemptions but merely adopted state exemption laws for all debtors, and the rules in§ 522(b) simply established which state‘s laws would apply in each case. Perhaps because so many states have exercised the opt-out option, it is easy to forget that§ 522(b) in fact does something quite different. First, it adopts a default rule that all debtors can claim either (1) the federal exemptions or (2) the applicable state-law exemptions plus nonbankruptcy federal exemptions. Then it authorizes the states to eliminate option 1 in some cases. Finally, under the BAPCPA amendments, it provides a back-up protection that restores a debtor‘s option to choose the federal exemptions in the event the domiciliary requirement of§ 522(b)(3)(A) would render that particular debtor ineligible for any exemptions. As the Tenth Circuit Bankruptcy Appellate Panel suggested in Stephens, it does not appear that Congress was trying to preempt any state laws in§ 522(b) , but instead that it intended to authorize the states in some cases to preempt federal exemption law that would otherwise apply.
Townsend, 2012 WL 112995, at *6 (citing In re Camp, 396 B.R. 194 (Bankr. W.D. Tex. 2008) (Camp I) (overturned, Camp v. Ingalls (In re Camp), 631 F.3d 757 (5th Cir. 2011) (Camp II); Stephens v. Holbrook (In re Stephens), 402 B.R. 1 (10th Cir. B.A.P. 2009))). In this light, the hanging paragraph actually resolves any conflicts which might otherwise form the basis for conflict preclusion. Indeed, this is the way most courts have interpreted the hanging paragraph. See, e.g., Shell v. Yoon (In re Shell), 499 B.R. 610 (N.D. Ind. 2003); Cole, 2011 WL 3207369, at *3; In re Nickerson, 375 B.R. 869 (Bankr. W.D. Mo. 2007); In re Underwood, 342 B.R. 358 (Bankr. N.D. Fla. 2006).
While critics of the preemption interpretation argue that the approach renders the hanging paragraph largely superfluous, advocates assert that it serves other purposes.
Given that the extended look-back provision created an increased potential for a disconnect between current state of domicile and the exemptions available from the former state of domicile, the Court finds it likely that Congress intended the hanging paragraph to address any problems that might arise from that potential disconnect. Thus, even if some of the Garrett court‘s scenarios work to prevent the hanging paragraph from becoming surplusage, they do not negate the Court‘s conclusion that Congress intended the hanging paragraph to alleviate some of the possible harsh effects of state exemption law eligibility requirements.
Fernandez, 2011 WL 3423373 at *21. This Court interprets Congress’ addition of the hanging paragraph as an effort to eliminate any conflict preemption concerns rather than to address the extremely uncommon examples described in Garrett.
In light of the foregoing, this Court concludes that the most logical and plain reading of the statute requires courts to give effect to residence requirements in state exemption laws and, therefore, rejects the preemption approach.
(iii) The state-specific approach.
Finally, the majority view, and the one the Trustee urges this Court to adopt, is the state-specific approach. “Generally, under this approach, if the state‘s exemption statutes or decisional authority interpreting them do not explicitly limit the use of the exemption
The Fernandez court acknowledged that courts adopting the state-specific approach are varied in their rationale but noted that most such courts take the view that
While the state-specific approach has its critics, the arguments raised to discredit this interpretation are more easily overcome than those raised in opposition to the preemption approach. For instance, some argue that the state-specific interpretation yields an absurd result where, as in Idaho and Wisconsin, a state‘s exemption scheme
The Garrett court offered yet another criticism of the state-specific approach. Specifically, that court contends that, if any interpretation renders the hanging paragraph superfluous, it is the state-specific view, not the preemption approach. Garrett, 435 B.R. at 444-46. Unlike the Maryland exemption statute before this Court, the North Carolina statute at issue in Garrett not only limited the exemptions themselves to residents, but also its opt-out statute. Id. at 443. The Garrett court argued that effect cannot be given to one residency requirement (the limitation on claiming exemptions) and not the other (the limitation on the applicability of the opt-out provision). Id. In other words, if the court were to adopt the trustee‘s argument that only North Carolina residents are eligible to claim exemptions, it would also be true that only North Carolina residents are precluded from claiming federal exemptions. Under
The argument is not without merit but, as the Garrett court conceded, at least seven states, including Maryland, limit the availability of some or all of their exemptions to residents but do not so limit their opt-out provisions. Garrett, 435 B.R. at n. 13.
Finally, the Court notes that, as the Garrett court conceded, at present the hanging paragraph saves debtors formerly domiciled in one of at least seven states, who would otherwise be ineligible for any exemptions. See Garrett, 435 B.R. at 444 n. 13; Brown et al., supra, App. C (listing the opt-out rules and extraterritoriality requirements for all the states). The Court finds it much more likely that Congress intended the hanging paragraph to handle the problem posed by seven states’ laws than that it intended to aid foreign debtors or debtors recently returning to the United States from foreign countries. Because the hanging paragraph appears intended to assist in the event that a state restricts the extraterritorial effect of its exemptions, the Court finds that the total preemption argument is not persuasive, notwithstanding the existence of other possible scenarios to which the hanging paragraph might apply.
Fernandez, 2011 WL 3423373, at *21. In those instances, the hanging paragraph is essential to allow debtors the opportunity to claim federal exemptions. Id. Simply put, the purpose behind the hanging paragraph is much clearer under the state-specific approach than the preemption approach.
In addition to the statutory construction, there is one final factor weighing in favor of the state-specific approach. Congress enacted BAPCPA in April of 2005 and it became effective in October of 2005. Since that time, an overwhelming number of courts considering the issue have held that nonresident debtors are precluded from claiming exemptions under statutes limited to those domiciled in the applicable state. See, e.g., Camp II, 631 F.3d at 760; Shell, 499 B.R. at 616; In re Abel, 622 B.R. 312 (Bankr. D. Utah 2020); Withington, 594 B.R. at 706-707; In re Capelli, 518 B.R. 873 (Bankr. N.D. W. Va. 2014); In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012); Long, 470 B.R. 190-91; In re Footen, 2012 WL 669849 (Bankr. D. Oreg. February 29, 2012); Townsend, 2012 WL 112995, at *7; In re Beckwith, 448 B.R. 757 (Bankr. S.D. Ohio 2011); Cole, 2011 WL 3207369, at *4; Nickerson, 375 B.R. at 872; Underwood, 342 B.R. at 362. If this state-specific interpretation runs counter to Congress’ purpose, that legislative body has had ample time to clarify its intent.
For the foregoing reasons, the Court hereby sustains the Trustee‘s objection to the Debtor‘s claim of exemptions in 15 Dolomite Drive, Unit 2-41A, a 2011 Honda Accord, household goods, clothing, jewelry, and a Bank of America checking account under
C. The Availability of Federal Exemptions.
The Court feels compelled to address a final issue which may flow from its order sustaining the Trustee‘s objection. While the following analysis is dicta, the Court hopes that this discussion helps inform any amendments Debtor‘s counsel might make as a result of this decision. Counsel for the Debtor appears to believe that the Debtor is only entitled to claim federal exemptions if none of Maryland‘s exemptions are available to her.7 That view is not entirely without basis. The question is whether the word “any” in the hanging paragraph‘s phrase “ineligible for any exemption” is intended to mean any
Courts are seemingly just as divided on this issue as they are on the question of whether residency requirements are preempted by
This issue is not before the Court today, but for what it is worth to the Debtor as she plans her next steps, the Court finds the approach set forth in Withington and Kelsey to be most consistent with the policy of liberally construing exemptions in favor of debtors. Therefore, it is likely this Court would permit a debtor barred from claiming a particular exemption under applicable state law to claim that exemption under
Read as a whole, the statute allows a debtor to claim either bankruptcy exemptions under (2) or non-bankruptcy exemptions under (3). But if a state has opted out of the bankruptcy exemptions, then as a general rule the bankruptcy exemptions are not an available choice for the debtor in that state. He is stuck with the state law exemptions. If applicable state law does not provide for an exemption for a certain kind of property, then it is not the Domiciliary Provision that has harmed him, but only state law. The Safety Net is not implicated merely because the debtor cannot claim exemptions for everything available under the Bankruptcy Code or under his new state‘s laws. It is only applicable when state law and the Domiciliary Provision combined have caused him to lose an otherwise available non-bankruptcy exemption.
Withington, 594 B.R. at 706-07. In other words, an exemption is not unavailable for purposes of the hanging paragraph simply because the state has not provided an exemption for a particular type of property. The Debtor should keep these comments in mind when amending her Schedule C.
For the foregoing reasons, the Trustee‘s objections are hereby SUSTAINED with respect to the Debtor‘s claim of exemptions in: (1) household goods under
A separate Order shall enter.
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