In Re Kane
OPINION SUSTAINING TRUSTEE’S OBJECTION TO DEBTORS’ HOMESTEAD EXEMPTION
The debtors in this case, Steven and Linda Siegel Kane, filed a chapter 7 bankruptcy on July 29, 2005. In their schedules, they listed a home in Las Vegas worth $318,000, and noted that it was subject to a $158,000 mortgage, leaving them some $160,000 in equity. Their current schedules claim a homestead exemption in the entire amount of this equity under Nevada law. 1
The Kanes’ bankruptcy trustee, James F. Lisowski, Sr., objected to this claim of exemption. He asserts that Section 522(p) of the Bankruptcy Code, a relatively new provision of the Code added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 2 limits the exemption to $125,000. Specifically, the trustee asserts that Section 522(p) caps a debtor’s homestead exemption at $125,000—regard-less of any higher exemption adopted by state law, such as in Nevada—if the debtor had not owned the homestead or a predecessor homestead in the same state for at least 1,215 days before filing bankruptcy. 3
The debtors did not meet this ownership requirement. They lived in California from February 1997 to December 2004. At the first meeting of creditors held under Section 341(a), they testified that they had purchased their Nevada property at the beginning of 2005. They therefore did not own their Nevada homestead (or a predecessor homestead in Nevada) for the 1,215-day period required by Section 522(p). This is the crux of the trustee’s objection. 4
Does this mean, as the Kanes argue, that the 1,215-day ownership requirement of
Three of the cases involve essentially the same fact pattern that is present here: debtors who did not own their homestead for at least 1,215 days in a state that opted out of the federal exemption scheme, thereby making it impossible for the debt- or to “elect” between state and federal exemptions. Judge Mark in Florida and my colleague, Judge Riegle in Nevada, conclude that under these facts, the homestead exemption is capped, while Judge Haines in Arizona says that it isn’t because the debtor made no “election.” In the fourth case, Judge Friedman in Florida considered the rollover of property within the same state and found no cap, and in the fifth case, Judge Hale in Texas held that the debtors’ increased equity in their homestead during the 1,215 days before filing was not subject to the cap.
Judge Mark found the text of
On the other hand, Judge Haines said that though the result was odd, the text of the statute is clear, and he was required to apply it unless and until Congress changed it (which, he suggested, Congress should do). In the meantime, he said, if the debtor made no election between state and federal exemptions, there is no cap.
In re McNabb,
Judge Friedman in Florida thought that there should be a cap, but inasmuch as the debtor had rolled over a previous homestead property, he applied the “safe harbor” of
This court concurs with Judges Mark and Riegle—the cap applies to all debtors who do not satisfy the 1,215-day rule—but for different reasons than either of them advanced. Whether the text is ambiguous or nоt, it is still possible to consider and implement what Congress unambiguously intended and to overcome the drafters’ unfortunate choice of words. 7
Closing the “Mansion Loophole”
The history of
In deferring to state law exemptions, the current system ... multiplies the opportunities fоr forum shopping and prebankruptcy asset conversion.... Unlimited homesteads have led to national ridicule and the efforts of some less needy and better represented families to find literal and figurative shelter in generous states. 9
In the years since the commission’s report, during which bankruptcy bills were debated yearly,
10
the mansion loophole was always on legislators’ minds.
11
See
Melis
The debate culminated in 2005. During the debate on S.256, the bill that became the 2005 amendments, Representative James Sensenbrenner, Republican of Wisconsin, assured the House that the bill closed the “ ‘millionaire’s mansion’ loophole in the current bankruptcy code that permits corporate criminals to shield their multi-million dollar homesteads.” 151 Cong. Rec. H2048 (daily ed. April 14, 2005). In the Senate, Tom Carper, Democrat of Delaware, told his colleagues: “[UJnder current law, a wealthy individual in a State such as Florida or Texas can go out, if they are a millionaire, and take those millions of dollars and invest that money in real estate, a huge house, property, and land in the State, file for bankruptcy, and basically protect all of their assets.... With the legislation we have before us, someone has to figure out that 2$ years ahead of time people are going to want to file for bankruptcy and be smart enough to put the money into a home ...”
Id.
at S2415-16 (daily еd. March 10, 2005). These statements on the floor of both chambers were echoed in the House Report on S.256, which flatly stated that: “The bill ... restricts the so-called ‘mansion loophole’ ... by requiring a debtor to own the homestead for at least 40 months [1,215 days] before he or she can use state exemption law; current law imposes no such requirement.” H.R. Rep. No. 109-031 at 15-16 (2005), U.S.Code Cong. & Admin.News 2005, pp. 88, 102.
12
See also
But as
In the first place, as noted above, legislators were repeatedly assured that the bill closed the mansion loophole, which many of them said they wanted to do. In the second place, there is no discernible or feasible public policy that is served by (or was discussed) linking the $125,000 cap to a debtor’s choosing between state and federal exemptions. Whether a debtor elects exemptions or gets them by dеfault is completely unrelated to the problem that Congress was trying to solve—a debtor’s ability to shield assets by buying a homestead in a state with an unlimited exemption. As written,
Under the circumstances, this court has no doubt that the “result of electing” requirement in
In addition, the literal text would seem to make a distinction between Texas, an opt-in state where the debtor can choose between state and federal exemptions, and Florida, an opt-out state where the debtor has no choice. As both Texas and Florida have been cited as states where wealthy debtors have used the mansion loophole, there is no imaginable reason for making this distinction and treating the two states differently. See also note 21 infra.
Scrivener’s Error
But if the word “electing” is a drafting mistake, does it fall under the “scrivener’s error” doctrine that would allow this court to correct it? Or can only Congress correct its drafting mistakes, particularly when the resulting wording of the stаtute is clear and unambiguous, however perverse the result? 14
The problem of when, how, and even whether a court can correct a legislature’s mistake in drafting a law—that is, when the legislature intends one thing but inadvertently drafts and enacts another—goes back to the earliest cases in this country’s legal history, 15 and it has been an ongoing subject of discussion and debate. 16 A key problem is that when a court decides to ignore the clear words and plain meaning of a statute, there is always a danger that what it thinks is a drafting mistake actually represents a substantive decision by the legislature, perhaps the result of an unseen legislative compromise. In that case, rather than helpfully correcting a mistake, the court might bе improperly rewriting the law. If the court is mistaken and the words of the statute are indeed what the legislature intended, then when the court substitutes what it thinks the legislature meant for what the statute says, it abandons its proper role as the legislature’s agent and, not incidentally, violates the separation of powers that is basic to our constitutional structure.
As a result, there is a strong and longstanding view that the words of a statute are supreme and, if they are clear, they should be taken as fully embodying what the legislature intended. If the text is not ambiguous, that is the end of the inquiry. As no less than Oliver Wendell Holmes, Jr.
But that is not the end of the matter. Even the strictest textualists concede that sometimes a drafting error is so obvious that a court properly acts as the legislature’s agent by fixing it. As the Supreme Court has told us: “The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’ In such cases, the intention of the drafters, rather than the strict language, controls.”
United States v. Ron Pair Enters.,
But acknowledging that it may sometimes be necessary for a court to reform a statute in order to implement the intent of the legislature does not answer the question of when and under what circumstances such reformation is proper. How can a court be sure that the text is not what the legislature meant?
Courts find it easiest to reform a statute when the suspect text makes no sense whatever.
17
It is somewhat harder when the text makes literal sense but it is absurd, or when applying it would lead to an absurd result.
18
It is hardest to do when, as in the current case, the text makes sense but yields a perverse result. The more substantive the change, the more wary a court must be about making it. As the Supreme Court hаs said, “The fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning.”
Union Bank v. Wolas,
All statutory construction begins, of course, “with the language of the statute itself.”
United States v. Ron Pair Enters.,
The Plain Meaning of
But how can a court be sure that Congress did not mean what it enacted? Justice Antonin Scalia is one of the strictest, if not the strictest, textualists active today. Studying his methods of statutory interpretation has a payoff for a trial court. If the methods used by Justice Scalia would lead to the reformation of the statute, then the statute probably should be reformed, and little time need be spent in discerning the proper or ultimate test for all federal statutes. 19
Not surprisingly, Justice Scalia’s jurisprudence on this point intentionally makes it very difficult for a court to revise a statute’s written text or to interpret it contrary to its plain meaning. Very difficult, perhaps, but not impossible. Even Justice Scalia has acknowledged that a court can correct a scrivener’s error, which he defines as a case “where on the very face of the statute it is clear to the reader that a mistake of expression (rather than of legislative wisdom) has been made.” 20
In his opinions, Justice Scalia has occasionally set out the high standard that, in his view, a court must meet before it may substitute legislative intent for legislative enactment. In brief, he requires that two conditions be met before such variance is permissible. First, the plain meaning of the statute under consideration must lack any rational purpose—not just what Congress may have intended, but any plausible congressional purpose. In
Holloway v. United States,
for example, Justice Scalia disagreed with the majority’s willingness to reform an otherwise unambiguous statute because he found a “plausible congressional purpose in enacting this language— not what I necessarily think was the real one.”
Holloway v. United States,
But there must be more. A second element for Justice Scalia is that the intended meaning to be used must be obvious. “The
sine qua non
of any ‘scrivener’s error’ doctrine, it seems to me, is that the meaning genuinely intended but inadequately expressed must be absolutely clear,” he wrote. “[OJtherwise we might be rewriting the statute rather than correcting a technical mistake.”
United
Applying these tests, Justice Scalia has occasionally been willing to override the plain meaning of a text before him, as he was in
Green v. Bock Laundry Mach. Co.,
Green lost. He then appealed, arguing that the trial court had allowed the impeachment evidence to be admitted without weighing its probative value against its prejudicial effect. He cited
Did this rule apply in a civil case? The plain language of the rule appeared to establish a different standard for admitting impeachment evidence against a civil defendant than against a civil plaintiff, such as Green. It seemed to require a court to weigh the prejudicial effect of a witness’s testimony to a civil defendant but to allow the automatic admissibility of evidence of prior felony convictions detrimental to a civil plaintiff.
In a concurring opinion, Justice Scalia wrote:
We are confronted here with a statute which, if interpreted literally, produces an absurd, and perhaps unconstitutional, result. Our task is to give some alternative meaning to the word “defendant” inFederal Rule of Evidence 609(a)(1) that avoids this consequence; and then to determine whetherRule 609(a)(1) excludes the operation ofFederal Rule of Evidence 403 [which requires the weighing].
I think it entirely appropriate to consult all public materials, including the background ofRule 609(a)(1) and the legislative history of its adoption, to verify that what seems to us an unthinkable disposition (civil defendants but not civil plaintiffs receive the benefit of weighing prejudice) was indeed unthought of, and thus to justify a departure from the ordinary meaning of the word “defendant” in the Rule.
As a result, Justice Scalia read the word “defendant” to mean “criminal defendant.”
Id.
at 529,
Conclusion
In the view of this court, the text of
This court is, of course, reluctant to say that although Congress enacted X it actually meant Y, and it does not do so lightly. But in this case, the scrivener’s error is obvious from the extensive record and from common sense: The intent of Congress is crystal clear, and there is no feasible rationale or policy for enacting what the text of the statute says. Indeed, strictly applying the words of
The trustee’s objection is sustained, and the Kanes’ homestead exemption is limited to $125,000. 22 A separate order pursuant to Bankruptcy Rule 9021 will be entered.
Appendix
States With Homestead Exemptions Greater Than $125,000 23
Jurisdiction OptAEn? dollar limit Citation
States where a debtor makes an election between state and federal exemptions:
D.C. Yes Unlimited
Texas Yes Unlimited
Massachusetts Yes $500,000 Mass. Ann. Laws ch 188, §§ 1 and 1A
Minnesota Yes $200,
Rhode Island Yes $200,
States where a debtor has no choice and must use the state exemption:
Florida No Unlimited
Iowa No Unlimited
Kansas No Unlimited Kan. Stat. Ann § 60-2301
Oklahoma No Unlimited Okla. Stat. Title 31, § 1.A.1
Nevada No $350,
Arizona No $150,000 Ariz.Rev.Stat. 33-1101
Notes
. The Nevada homestead exemption is currently $350,000. It is contained in
. Pub.L. No. 109-8, § 322(a), 119 Stat. 23, 74-75 (2005).
. Most of the new bankruptcy law became effective on October 17, 2005—180 days after being signed by the President—but
.
. The text of this statute reads: "Any exemptions specified in subsection (d) of
. In their initial briefs, the debtors argued that since
The court rejects the debtors' argument for several reasons: First, there is no constitutional right to file for bankruptcy.
Cf.
Thomas Kelch,
The Mythology of Waivers of Bankruptcy Privileges,
31 Ind. L.Rev. 897, 900 (1998) ("Not only is there no constitutional right to file bankruptcy, but Congress need not even create a bankruptcy law”);
United States v. Kras,
Second, state law exemptions must fall when in conflict with federal law; that is the teaching of Article VI of the Constitution, the Supremacy Clause.
See, e.g.
Finally, President Bush signed the 2005 changes to the bankruptcy law into law on April 20, 2005, and the Kanes had or could have had full knowledge of the provisions of the law when they filed for bankruptcy in July. To their credit, the debtors did not renew or expand on this argument in their supplemental briefs.
.
. The unlimited homestead exemption was a concern as early as the first American bankruptcy law, in 1800, although the concern then was that the federal law would affect the homestead of Jeffersonian plantation owners. See Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence 196-98 (2002). It also is fairly unique; as noted by Professor Charles Tabb, the concept of an unlimited exemption "is unimaginable in the rest of the world." Charles J. Tabb, Lessons from the Globalization of Consumer Bankruptcy, 30 Law & Soc. Inquiry 763, 777 (2005).
. Nat'l Bankr.Rev. Comm'n, Bankruptcy: The Next Twenty Years, National Bankruptcy Review Commission Final Report, October 20, 1997, at 124 (footnotes omitted).
. Indeed, President Clinton "pocket vetoed" bankruptcy reform in 2000 at least in part because it did not close the mansion loophole. See Memorandum of Disapproval for Bankruptcy Reform Legislation, 3 Pub. Papers 2730, 2730-31 (Dec. 19, 2000), reprinted in 2000 U.S.C.C.A.N. D85 (opposing the bill because "the loophole for the wealthy is fundamentally unfair and must be closed.”).
. See, e.g., the statement by twelve members of Congress that was included as Additional Views in the House Report on the proposed Bankruptcy Reform Act of 1999:
[W]e should start with individuals like Marvin Warner, a former ambassador to Switzerland and the owner of a failed Ohio Savings & Loan, who paid off only a fraction of $300 million in bankruptcy claims while keeping his multi-million-dollar horse ranch near Ocala, Florida.
Or Martin A. Siegel, a former Wall Street investment banker convicted of insider trading. While facing a $2.75 billion civil suit, hе bought a $3.25 million, 7,000-square-foot beachfront home in Ponte Ve-dra Beach.
Or former baseball commissioner Bowie Kuhn, whose Manhattan law firm went into bankruptcy. After creditors seized his weekend house in the Hamptons and were about to attach his $1.2 million home in Ridgewood, New Jersey, Kuhn acquired a million-dollar house in Florida with five bedrooms and five baths.
Or Dr. Carlos Garcia-Rivera, a Miami physician with no malpractice insurance, who was named in four separate malpractice actions, filed for bankruptcy protection,and kept a $500,000 home with a 100-foot swimming pool.
Or the Dallas developer, Talmadge Wayne Tinsley, who filed under chapter 7 after incurring $60 million in debts. Tins-ley objected to the Texas law that permitted him to keep only one acre of his $3.5 milliоn, 3.1-acre magnolia-lined estate. But that acre included a five-bedroom, six-and-a-half-bath mansion with two studies, a pool and a guest house.
Or the movie actor, Burt Reynolds, who declared bankruptcy in 1996, claiming more than $10 million in debt. Reynolds kept a $2.5 million home—appropriately named 'Valhalla'—while his creditors received 20 cents on the dollar.
The situation in Florida has become so notorious that one Miami bankruptcy judge told the New York Times, 'You could shelter the Taj Mahal in this state and no one could do anything about it.’
This is a national problem that demands a uniform solution.... [Djebtors who live in the 45 states that cap the exemption [...] are free to relocate to one of the five so-called ‘debtors’ рaradises' that have no cap at all.”
H.R.Rep. No. 106-123, at 378-79 (1999) (additional dissenting views of several members) (footnotes omitted). See also H.R.Rep. No. 108-40 (pt. I), at 131 (2003); H.R.Rep. No. 107-3 (pt. I), at 488-91 (2001) (additional dissenting views of several members) (footnotes omitted); S.Rep. No. 106-49, at 76 (1999) (additional views of Sen. Kohl); S.Rep. No. 105-253, at 46 (1998).
Indeed, Senators Kohl and Sessions requested and received a report from the General Accounting Office on the effect of unlimited homesteads. See Gen. Accounting Office, Pub. No. GAO/GGD-99-118R, Bankruptcy Reform: Use of the Homestead Exemption by Chapter 7 Bankruptcy Debtors in the Northern District of Texas and the Southern District of Florida in 1998 (1999), reprinted at http://www.gao.gov/ar-chive/1999/gg99118r.pdf.
. In the House, Representative Sensenbren-ner placed a "Summary of Principal Provisions” of the S. 256 into the record. It said the bill
[c]loses the 'mansion loophole’ for greedy corporate culprits: Under current bankruptcy law, debtors living in certain states can shield from their creditors virtually all of the equity in their homes. In light of this, some debtors actually move to thesestates just to take advantage of their 'mansion loophole' laws. S. 256 closes this loophole for abuse by requiring a debtor to reside in the state for at least 2 years ... [and] ... to own the homestead for at least 40 months before he or she can use state exemption law.
151 Cong. Rec. H2049 (daily ed. April 14, 2005).
. The homestead exemption in the District of Columbia is unlimited (
The appendix tо this opinion contains a table of the current homestead exemptions for each state whose homestead exemption is greater than $125,000, along with each state's status as "opt-in” (the debtor has a choice) or "opt-out” (the debtor has no choice). It shows that there are five opt-in jurisdictions that have homestead exemptions greater than the $125,000 cap. In addition, there are only eight opt-out states where the homestead exemption, the only homestead the debtor may claim, is greater than $125,000. Thus, if
. This debate is strictly about noncriminal statutes. Different rules of interpretation, as well as the rule of lenity, apply for apparent drafting errors in criminal statutes.
See, e.g., United States v. Moore,
.
See, e.g., Huidekoper’s Lessee v. Douglass,
.The literature on this subject is enormous, to say the least. See William D. Popkin, Statutes in Court: The History and Theory of Statutory Interpretation (1999). Particularly helpful in аnalyzing the current case were Jonathan R. Seigel, What Statutory Drafting Errors Teach Us About Statutory Interpretation, 69 Geo. Wash. L.Rev. 309 (2001) and Michael S. Fried, A Theory of Scrivener's Error, 52 Rutgers L.Rev. 589 (2000).
.
See, e.g., U.S. v. Pabon-Cruz,
. A 1934 Louisiana law said litigants could impeach the testimony of the other side's witnesses "in any unlawful way,” which was clear but absurd. The State Supreme Court held that the prefix "un” was an accident and that the legislature had meant "in any lawful way,” and that's the way it construed it.
Scurto v. LeBlanc,
. As Justice Scalia himself has noted, the Supreme Court has not given unambiguous instructions on how to detect or treat legislative ambiguity. As he lamented in a dissent issued in 1992: "I have the greatest sympathy,” he wrote, "for the Court of Appeals who must predict which manner of statutory construction we shall use for the next Bankruptcy Code case.”
Dewsnup
v.
Timm,
. Antonin Scalia, Common-Law Courts in a Civil-Law System: The Role of the United. States Federal Courts in Interpreting the Constitution and the Laws, in A Matter of Interpretation: Federal Courts and the Law 3, 20 (Amy Gutmann ed., 1997).
.An argument might be made that the "electing” language was part of an unexpressed compromise, in which Congress limited the homestead for the residents of some states but not others. That argument is weak to begin with—it is difficult to believe that anything was unexpressed with respect to the limitation on homesteads—but more to the point is the impact of limiting the statute only to states that allow their residents to choose the exemptions in
. Given this disposition, it is unnecessary to decide the claims that equity due to appreciation accrued during the 1,215-day period preceding the commencement of the case, as well as equity attributable to the principal portion of any mortgage payments made during that same time, are subject to the cap regardless of the period of debtor’s residency.
See In re Blair,
. This table is limited to states whose homestead exemptions are greater than $125,000, because that is the limit under