Hull v. RockwellHull v. Rockwell
Nathaniel R. Hull and Verrill Dana LLP on brief for the appellant.
THOMPSON, Circuit Judge. Jeffrey J. Rockwell filed for Chapter 13 bankruptcy and exempted his home from the bankruptcy estate under Maine‘s homestead law. Later, while the bankruptcy was still proceeding, Rockwell sold that home, and, despite Maine‘s law, did not reinvest the proceeds of the sale in another homestead within six months. When he converted his bankruptcy to a Chapter 7 proceeding, Chapter 7 Trustee Nathaniel Richard Hull objected to Rockwell‘s homestead exemption. The bankruptcy court denied Hull‘s objection and the district court affirmed. Hull then appealed to us. Holding that the Bankruptcy Code dictates that Rockwell‘s homestead exemption maintains the status it held on the day Rockwell filed his bankruptcy petition, we affirm.
BACKGROUND
In 2001, Rockwell purchased property on B Street in South Portland, Maine. He still owned that property and was living thеre on August 19, 2015, when he filed for Chapter 13 bankruptcy. As he was entitled to under Maine law,
Rockwell proposed to pay the owner of the B street mortgage (i.e., one of his creditors) directly from his other assets and retain ownership and possession of the property. The bankruptcy court confirmed Rockwell‘s Chapter 13 plan in November 2015.
By December 2016, Rockwell‘s plans to retain the B Street Property had changed. Specifically, he sought the bankruptcy court‘s permission to sell the property for $160,000. Rockwell proposed that he would retain the $47,500 allowed by Maine‘s homestead exemption and contribute the remaining, non-exempt proceeds to his Chapter 13 reorganization plan. At the hearing on Rockwell‘s motion to sell the property, the Chapter 13 trustee expressed concern about Rockwell‘s proposed sale price, but nonetheless expected the court to grant the motion.
The bankruptcy court granted Rockwell‘s motion and ordered him to use the money from the sale to pay the closing costs and the mortgage. Rockwell was to pay any remaining, non-exempt funds from the sale to the Chapter 13 trustee to pay down Rockwell‘s debt.
On March 6, 2017, Rockwell finalized the sale of the B Street property. After paying the closing costs and the lender, $51,682.87 was left. He kept $47,500 (his homestead exemption as allowed by Maine law) and paid the remaining $4,182.87 to the Chapter 13 trustee. The Chapter 13 trustee did not object.
After the sale, Rockwell still lived at the B Street property, but he planned to move into a home on Bancroft Court, in Portland. Though Rockwell did not own the Bancroft Court property, in the months after the sale and prior to his move, he contributed to its upkeep. Specifically, Rockwell spent $18,806.23 of his homestead exemption on paint, tile, fuel oil,
A few months later, the Chapter 7 trustee, Hull, objected to Rockwell‘s use of the homestead exemption. Hull argued that Rockwell was no longer using the exemption to protect his interest in a homestead because he had not reinvested the proceeds of the sale as required by Maine law. Therefore, from Hull‘s perspective, the previously protected money -- specifically, the $28,693.77 that Rockwell had not yet spent when he converted his case to a
Chapter 7 case -- should become part of the bankruptcy estate and be used to pay off Rockwell‘s creditors.2
From Rockwell‘s point of view, he could take a homestead exemption of up to $47,500 when he first filed for bankruptcy in 2015 because he owned his residence at the time. Rockwell argued that the Bankruptcy Code and First Circuit precedent require that the bankruptcy court apply the “complete snapshot” rule, meaning the court evaluates Rockwell‘s affairs on the day he files for bankruptcy without considering any developments after that date (as if someone took a snapshot of the situation, leaving it frozen in time) to determine if assets are properly exempted from the bankruptcy estate.
The bankruptcy judge held a bench trial to resolve Hull‘s objection. The judge denied Hull‘s objection, explaining that “the complete snapshot view [of Rockwell‘s finances on the day he filed for bankruptcy] more faithfully adhere[d] to the Code, First Circuit authority, and the practicalities of administering a chapter 7 case.”
On September 4, 2018, Hull appealed to the United States District Court for the District of Maine, which affirmed the
bankruptcy court‘s decision. Hull filed a timely appeal to this court on October 22, 2019.
For the reasons that follow, we now affirm.
OUR TAKE
Before turning to the merits of Hull‘s appeal, we will give the reader some context on the Bankruptcy Code and law relevant to the instant litigation. When we review a district court‘s decision affirming a bankruptcy court‘s decision, as we do here, we review the bankruptcy court‘s decision directly. In re Sheedy, 801 F.3d 12, 18 (1st Cir. 2015). We review the bankruptcy judge‘s legal conclusions de novo and factual conclusions for clear error. In re Goguen, 691 F.3d 62, 68 (1st Cir. 2012).
A. The Bankruptcy Code Framework
When a debtor files for bankruptcy, his interests in property are either compiled into the bankruptcy “estate” from which (to the extent the estate can afford) his creditors will be paid, or those interests are exempted from the estate for the debtor to keep. See
to deny an exemption on a ground not specified in the Code.” Law v. Siegel, 571 U.S. 415, 425 (2014) (emphasis omitted).
Pursuant to
Exemptions are determined at the time the debtor files for bankruptcy. White v. Stump, 266 U.S. 310, 313 (1924); Myers v. Matley, 318 U.S. 622, 628 (1943) (“[T]he bankrupt‘s right to a homestead exemption becomes fixed at the date of the filing of the petition in bankruptcy . . . .“); In re Cunningham, 513 F.3d 318, 318 (1st Cir. 2008). This maxim is called the “snapshot” rule because the debtor‘s financial situation is frozen in time, as if someone had taken a snapshot of it.3 In re Awayda, 574 B.R. 692,
697 (Bankr. C.D. Ill. 2017) (noting the “snapshot rule [] controls the moment in time upon which a debtor‘s right to claim exemptions is based“). When the snapshot rule applies to an asset and the snapshot is “complete,” the asset will retain whatever status (i.e., exempt or part of the estate) it had when the debtor filed for bankruptcy and cannot be altered by circumstances that change later. See In re Williams, 515 B.R. 395, 401 (Bankr. D. Mass. 2014) (explaining that the snapsnot rule “focus[es] on the facts and law as they exist on the petition date“); see also In re Cunningham, 513 F.3d at 318. Other times, the snapshot is “incomplete,” meaning that the right circumstances could later alter the status of that asset relative tо the bankruptcy estate, much like one can edit a snapshot after it has been taken. See, e.g.,
B. Chapter 13 and Chapter 7 Bankruptcy
Chapter 13 bankruptcy, the type of bankruptcy Rockwell entered when he first filed in August of 2015, is an entirely voluntary process. Harris v. Viegelahn, 135 S. Ct. 1829, 1835
(2015). During a Chapter 13 bankruptcy, a debtor contributes some of the income he earns after filing to the estate.
If a debtor proceeds under Chapter 7, the chapter to which Rockwell converted his bankruptcy in 2017, all of his assets, other than the ones exempted from
A debtor may convert his bankruptcy from a Chapter 13 to a Chapter 7 proceeding at any time.
C. Analysis of the Present Case
1. The Code Controls this Analysis
Having erected the applicable legal framework, we now turn to the issue before us. No one disputes that on the day Rockwell filed for bankruptcy, he properly protected $47,500 of
his property from the bankruptcy estate by claiming Maine‘s homestead exemption,
At the outset, we recognize that the Supreme Court instructs that the rules of the Bankruptcy Code have the first and final say, even where equity might demand a different result. In Law v. Siegel, the Supreme Court held that the bankruptcy court had improperly awarded the value of the debtor‘s homestead exemption to pay for the Chapter 7 trustee‘s administrative expenses, even though the trustee generated those expenses solely when responding to the debtor‘s deliberate fraud. 571 U.S. at 422. The Court explained that the Bankruptcy Code permits debtors
to claim a homestead exemption and for the value of that exemption to be protected from paying, among other things, the administrative expenses of the estate. Id. The debtor in that case properly claimed the homestead exemption and no one filed a timely objection. Id. at 423. Despite the debtor‘s post-petition conduct, which included submitting fraudulent documents to the bankruptcy court in an effort to wrest a share of the estate back to himself, and despite the fact that this fraud directly caused the trustee to incur approximately half a million dollars in legal fees, the Code did not permit the bankruptcy court to make the debtor‘s homestead exemption available to defray those legal fees. Id. at 418-22, 427-28 (еxplaining that the bankruptcy court “may not contravene express provisions of the Bankruptcy Code by ordering that the debtor‘s exempt property be used to pay debts and expenses for
2. Exemptions are Analyzed on the date the Debtor Files for Bankruptcy
With this framing in mind, we recognize that the Code (which we know is supreme here) instructs that the estate does not begin anew when a debtor converts a Chаpter 13 bankruptcy proceeding into a Chapter 7 proceeding.
in the date of the filing of the petition, the commencement of the case, or the order for relief“). “[N]othing in the Code den[ies] debtors funds that would have been theirs had the case proceeded under Chapter 7 from the start.” Harris, 135 S. Ct. at 1838. So, without a doubt, we examine Rockwell‘s claim of a homestead exemption on the date he filed for his Chapter 13 bankruptcy. As previously noted, no one disputеs that Rockwell properly claimed Maine‘s homestead exemption on that date.
3. The Complete Snapshot Rule Applies
Therefore, the final concept we must wrestle with is whether to apply the partial or complete snapshot rule: that is, we consider whether to examine Rockwell‘s claimed homestead exemption as unchanging, in accordance with the complete snapshot rule, or apply the partial snapshot rule and afford Rockwell the homestead exemption only so far as he maintains his homestead. Again, the Code answers this questiоn for us. “Property that is properly exempted under
taxes and customs duties, (2) debt related to domestic support obligations, (3) liens that cannot be avoided or vоided, including tax liens, and (4) debts for a breach of fiduciary duty to a federal depository institution.” In re Cunningham, 513 F.3d at 323. Therefore, we must conclude that the complete snapshot rule applies to homestead exemptions taken pursuant to
This result lines up with the Code‘s priority of providing a “fresh start” for debtors. “[W]hile a Chapter 7 debtor must forfeit virtually all his prepetition property, he is able to make a ‘fresh start’ by shielding from creditors his postpetition earnings and acquisitions.” Harris, 135 S. Ct. at 1835. Debtors can best make a fresh start where they can make healthy financial choices moving forward, knowing what property is out of the reach of the pre-petition creditors. Indeed, “exemptions in bankruptcy cases are part and parcel of thе fundamental bankruptcy concept of a fresh start.” Schwab v. Reilly, 560 U.S. 770, 791 (2010) (internal quotation marks and citations omitted); accord In re Cunningham, 513 F.3d at 324 (“The efficacy of the fresh start policy requires finality that allows a
without fear of lingering creditors.“). “[A] central purpose of the [Bankruptcy Code] is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.‘” Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)). By protecting Rockwell‘s exempt property, which was proрerly exempted on the day of filing, from later being made available to creditors, the bankruptcy court in this case supported Rockwell in achieving the “fresh start” that the Code prizes.
We addressed this aspect of the Code before in In re Cunningham, involving a Chapter 7 filing, where we considered “whether the post-petition sale of the debtor‘s home, for which he had obtained a homestead exemption under the law of Massachusetts protecting it from creditors, cause[d] the proceeds of the sale to lose their exempt status under the Bankruptcy Code and become subject to pre-petition, nondischargeable debt.” In re Cunningham, 513 F.3d at 320. Cunningham, the debtor in that case, had properly claimed a homestead exemption under Massachusetts law. Later, he sold his home, made approximately $150,000 from
the sale, and moved to Florida.5 Id. at 322. One of Cunningham‘s creditors moved to have the proceeds from the sale used to satisfy Cunningham‘s debt. Id. at 321-22. The creditor argued, similar to Hull‘s argument here, that the once-exempt interest in the homestead was proper at the time Cunningham filed for bankruptcy, but once he sold the property, it no longer enjoyed the protection of Massachusetts’ homestead exemption and therefore could be collected to satisfy Cunningham‘s debts. Id. at 322. When analyzing that case, we noted that
4. Hull‘s Concerns
Trying to distinguish our Cunningham holding, Hull urges us to view this as a distinct Chapter 13 issue because Rockwell sold his home while proceeding in that type of bankruptcy. He tells us that “[t]he differences between a [C]hapter 7 case and a [C]hapter 13 case bear on the outcome of this appeal.” According to Hull, our analysis of the homestead exemption should include changes based on post-petition activity because after Rockwell filed his petition, “he retained, exclusive of the [C]hapter 13 trustee, possession of the house and the attendant decision-making authority over what to do with it and the proceeds arising from its sale.”6 Essentially,
The Code continues to inform our approach and we find this argument unavailing. The Code considers the transition from
a Chapter 13 to a Chapter 7 case and specifies how to examine these cases: we look to the date the petition was filed when evaluating exemptions.
We are unpersuaded by Hull‘s implication that we should ignore the connection between Chapter 13 and Chapter 7 proceedings. “Many debtors . . . fail to complete a Chapter 13 plan successfully.” Harris, 135 S. Ct. at 1835 (citing Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes, 90 Tex. L. Rev. 103, 107-111 (2011) for the proposition that only one third of Chapter 13 cases results in the debtor
successfully discharging debt). The simple fact of this case is that Rockwell did convert his case to a Chapter 7 bankruptcy, as many Chapter 13 debtors ultimately do.7 See id. As a result, we must view this as what it is: a Chapter 7 case.
Hull further argues that our holding will effectively read the six-month limitation out of the Maine statute in bankruptcy proceedings. Where, as here, the debtor exempts their homestead under Maine law and then later sells the homestead, Maine‘s six-month period for protecting the value of that homestead would not apply. From our perspective, that is what the Code requires. “To interpret
retroactive loss of the exemption.” In re Hageman, 388 B.R. 896, 900 (Bankr. C.D. Ill. 2008).
Finally, Hull reminds us that other circuits that have addressed similar questions have reached a result that is (or seems) at odds with the result we reach here. Hull points us to the Ninth Circuit‘s approach in In re Jacobson where a Chapter 7 debtor claimed a homestead exemption under California law, a creditor forced the sale of the homestead during the bankruptcy, and the debtor did not rеinvest the proceeds of the sale during the six-month period, as required by California‘s homestead statute. In re Jacobson, 676 F.3d 1193, 1197 (9th Cir. 2012). The Ninth Circuit held that the sale‘s proceeds belonged to the estate, once the six-month reinvestment period had passed. Id. The Ninth Circuit purported to apply the snapshot rule, explaining that the snapshot rule, in its view, incorporates “the entire state law[,] includ[ing] a reinvestment requirement for the debtor‘s share of the homestead sale proceeds.” Id. at 1199. Hull also relies upon the Fifth Circuit‘s approach in In re Frost, where a Chapter 13 debtor exempted his homestead pursuant to Texas‘s vanishing homestead law and then did not reinvest the proceeds within the required time limit. In re Frost, 744 F.3d 384, 385 (5th Cir. 2014). The Fifth Circuit held that the debtor lost the protection of the homestead exemption, declining to apply the complete snapshot rule. Id. at 388 (“[O]nce a new homestead has
been purchased, the funds become proceeds from the sale of a former homestead, which fall outside the protection of the Texas statute.” (emphasis in original)).
We find these cases unpersuasive. Neither of these cases addresses the Code‘s valued “fresh start” principles as articulated in Harris, 135 S. Ct. 1829, or the Supreme Court‘s admonishments in Law, 571 U.S. 415, that courts reach the result required by the text of the Bankruptcy Code. The Ninth Circuit issued its opinion in In re Jacobson in 2012, approximately two years before having the benefit of the Supreme Court‘s guidance in Law and three years before Harris. See In re Jacobson, 676 F.3d at 1193. The Fifth Circuit issued its opinion in In re Frost one day after the Supreme Court‘s decision in Law, but does not mention that case, and approximately one year before the Supreme Court‘s decision in Harris. See In re Frost, 744 F.3d at 384. We are, of course, bound by Supreme Court precedent, not that of our sister circuits, and reach our decision here in accordance with the Supreme Court‘s guidance.
The outcome is also not altered by our own decision in Howison v. Hanley, 141 F.3d 384 (1st Cir. 1998). In that case, more than two years before filing for bankruptcy, the debtor conveyed his intеrest in his homestead to his wife for no consideration “with the admitted purpose of putting it beyond the reach of his creditors.” Howison, 141 F.3d at 385. The district
court found that this was a fraudulent transfer and we affirmed. Id. When analyzing that case, we summarized Maine‘s homestead exemption statute,
Howison is not on point. It does observe that under Maine law proceeds received in the sale of an exempt homestead lose the protection of the exemption, and thus become available to creditors, if not reinvested in a residence within six months. Id. We agree. Howison said nothing at all, though, about the issue before
court‘s summary of Maine‘s homestead statute in Howison has no bearing on the outcome of this case.
In some circumstances, perhaps even in this circumstance, the result of this ruling will not prioritize the debt owed to creditors. Yet, “Congress bаlanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors[,]” Schwab, 560 U.S. at 791, and “it is not for courts to alter the balance struck by the statute.” Law, 571 U.S. at 427.
WRAP UP
For the foregoing reasons, the district court‘s order is affirmed. Costs awarded to Rockwell.
THOMPSON
CIRCUIT JUDGE