In re Williams
MEMORANDUM OF DECISION
I. INTRODUCTION
The matter before the Court is the “Objection of Donald R. Lassman, Chapter 7 Trustee, to Debtor’s Claim of Exemption” (the “Objection”) filed by Donald R. Lass-man (the “Trustee”), the Chapter 7 trustee, and the “Debtor’s Opposition and Response to Objection of Donald R. Lassman, Chapter 7 Trustee, to Debtor’s Claim of Exemption” filed by Marybeth Bauer Williams (the “Debtor”). Through the Objection, the Trustee asserts that the sale proceeds of the Debtor’s former residence are no longer entitled to protection under the Massachusetts Homestead Statute
II. BACKGROUND
The facts are not in dispute. The Debtor previously owned certain real property located at 49 Shubael Gorham Road in Centerville, Massachusetts (the “Property”) with her spouse, Mark J. Williams (“Mark”). The Debtor and Mark separated on January 5, 2018, and a
On February 13, 2014, the Debtor filed a voluntary Chapter 7 petition. On “Schedule B — Personal Property” (“Schedule B”), she listed a checking account at Cape Cod 5 with a balance of $29,000.00 and identified the funds as being the “proceeds from the sale of former marital residence” (the “Proceeds Share”).
The Trustee was appointed on February 13, 2014. The Debtor appeared at the meeting of creditors held pursuant to
III. POSITIONS OF THE PARTIES
A. The Trustee
Although the Debtor claimed the Exemption pursuant to
While the Trustee concedes that, generally speaking, exemptions are fixed at the time of the bankruptcy filing, he rejects the notion that an exemption cannot be changed by post-petition events. Because this is an issue of first impression in this district, he relies on several decisions from other jurisdictions holding that any “snapshot rule” with respect to exemptions must be viewed in the context of the entire state
To the extent that the Debtor relies on In re Cunningham
B. The Debtor
The Debtor asserts that the Objection is without merit because exemptions are determined on the petition date, and, pursuant to
Apart from her other arguments, the Debtor also complains that she has been unfairly prejudiced by the timing of the Objection. She explains that had the Trustee filed the Objection shortly after the petition date, she would have been able to reinvest the Proceeds Share into a new homestead. The Debtor contends she detrimentally relied on the lack of an earlier objection, believing that the Proceeds Share would be forever exempt.
IV. DISCUSSION
Upon the filing of a bankruptcy petition, a estate is created “consisting] of
Notably,
In 2010, the Massachusetts Legislature enacted a comprehensive revision to the Massachusetts Homestead Statute. On its face, the purpose of this sweeping amendment was to extend homestead protection to circumstances where it had not applied under the prior law. This includes, inter alia, introducing the concept of an “automatic homestead exemption” in the amount of $125,000 which applies in the absence of a valid declared homestead exemption, expanding homestead rights to include those who “own” real estate through a beneficial interest in a trust, and offering limited protection to the proceeds resulting from a sale or casualty to the homestead.
On Schedule C, the Debtor claimed the Exemption pursuant to
In the absence of a valid declaration of homestead recorded under this chapter, an estate of homestead to the extent of the automatic homestead exemption shall exist in a home for the benefit of the owner and the owner’s family members who occupy or intend to occupy the home as a principal residence.25
As previously stated, an “[a]utomatic homestead exemption” is, subject to conditions not germane to this discussion, an exemption in the amount of $125,000.
The Trustee does not dispute that the Debtor is an “owner,” or that the Property contained a “home” that was used as her “principal residence.” The Property, however, was sold prepetition and the Exemption sought applies to the Proceeds Share. Nevertheless, the definition of “home” also includes “the sale proceeds as provided in clause (1) of subsection (a) of section 11... .”
(a) If a home that is subject to an estate of homestead is sold, whether voluntarily or involuntarily ... then the proceeds received on account of any such sale ... shall be entitled to the protection of this chapter during the following periods:
(1) in the event of a sale, whether voluntary or involuntary ... for a period ending on the date on which the person benefited by the homestead either acquires another home the person intends to occupy as a principal residence or 1 year after the date on which the sale ... occurred, whichever first occurs....30
As is apparent from the emphasized text, the protection afforded to sale proceeds is not absolute, but is expressly limited in duration to at most one year after the date
The United States Court of Appeals for the First Circuit has stated that “it is a basic principle of bankruptcy law that exemptions are determined when a petition is filed.”
While this is an issue of first impression in both Massachusetts and the First Circuit, published decisions reflect that other courts have analyzed such “vanishing exemptions” under Illinois, Texas, California, Arizona, and Oregon law in the bankruptcy context and, to be sure, there is authority to support the Debtor’s position. Two bankruptcy courts have upheld a debtor’s claim of exemption of prepetition sale proceeds notwithstanding the post-petition expiration of the exemption period under the applicable Illinois statute.
In re Lantz and its predecessor, In re Snowden, however, appear to represent a minority view with, respect to vanishing exemptions and have been criticized at length by another bankruptcy judge within Illinois.
The rationale of these cases is that state law exemptions must be analyzed “in terms of the exact scope of the rights [the statute] confers at the time of the bankruptcy petition,”
Myers thus confirms the basic holding from White v. Stump [266 U.S. 310 ,45 S.Ct. 103 ,69 L.Ed. 301 (1924) ] that the law and facts existing on the date of filing the bankruptcy petition determine the existence of available exemptions, but flags the important reminder that it is the entire state law applicable on the filing date that is determinative. Courts cannot apply a juridical airbrush to excise offending images necessarily pictured in the petition-date snapshot.43
The Fifth Circuit reversed the bankruptcy court’s and the district court’s application of a snapshot rule, concluding that neither court below applied the “entire Texas law ... applicable” and that
“freezing” the exemption for the proceeds simply because it was in effect at the date the petition was filed, effectively read the 6-month limitation out of the statute, and transformed an explicitly limited exemption into a permanent one.44
In sum, these courts reason that if state law only provides a limited exemption, the limitations which are “inextricably intertwined with the exemption” must be respected.
In contrast, the Debtor urges that a different result is mandated pursuant to well-established circuit precedent. Indeed, she argues that the First Circuit’s decision in In re Cunningham controls the outcome of this matter and is incompatible with the “entire law” approach adopted by the Fifth and Ninth Circuits. In In re Cunningham, a creditor holding a non-dischargeable debt sought to obtain the proceeds of the post-petition sale of the debtor’s residence, asserting that under the statute then in effect, the debtor’s properly claimed homestead exemption had terminated upon the sale of the property.
Certainly, In re Cunningham is binding precedent in this circuit and expressly held that the immunizing effect of
From the outset, it must be remembered that In re Cunningham involved the prior version of the Massachusetts Homestead Statute which did not provide an exemption for sale proceeds, so the possibility of an expiring exemption was not considered. More importantly, however, the exemption provided by the statute in that case was, in a sense, absolute.
The inherent limitation of
Lastly, the timing of the sale and the statutory basis of the exemption claimed are, in my opinion, dispositive factors. Viewing the petition date “snapshot” from In re Cunningham, the debtor held real property and that is what his claimed exemption protected. The First Circuit held that once that exemption fixed, the immunizing effect of
Additionally, the Debtor relies on In re Weinstein for the proposition that Massachusetts’ exceptions to its homestead exemption are preempted by the Bankruptcy Code.
Patriot asserts that the “property exempted” for purposes ofsection 522(c) must be defined by Massachusetts law, including all of its built-in limitations. Under this view, the exceptions to the homestead statute operate to define the value of the estate, which is the “property exempted,” and therefore there is no conflict between§ 522(c) and section 1(2)....
* * *
Congress has plenary power to enact uniform federal bankruptcy laws. See U.S. Const, art. 1, § 8, cl. 4 ; International Shoe Co. v. Pinkus,278 U.S. 261 , 265,49 S.Ct. 108 , 110,73 L.Ed. 818 (1929). Consequently, “[s]tates may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations.” International Shoe Co.,278 U.S. at 265 ,49 S.Ct. at 110 (noting that the intent of Congress in establishing uniform bankruptcy laws necessarily excludes inconsistent state regulation). We recognize that Congress afforded significant deference to state law by allowing bankruptcy debtors to choose state exemptions and by further allowing states to opt out of the federal exemption scheme entirely. See In re Boucher,203 B.R. 10 , at 12 [(Bankr.D.Mass.1996) ] (citing11 U.S.C. § 522(b) ). Yet, such deference does not warrant the conclusion that the “property exempted” insection 522(c) must be defined by first applying all the built-in exceptions to the state exemption statute. As the Supreme Court recognized in discussing the interplay between§ 522(f) and state exemption exceptions in Owen, the state’s ability to define its exemptions is not absolute and must yield to conflicting policies in the Bankruptcy Code.58
At first glance, the First Circuit’s apparent rejection of the creditor’s argument that a state exemption must be defined by reference to its “built-in limitations” would seem to support the Debtor’s argument. To put that statement in proper context, however, a brief discussion of the Supreme Court’s decision in Owen v. Owen, which was heavily relied upon in In re Weinstein, is appropriate.
In Owen v. Owen, the Supreme Court held that a debtor could avoid a pre-exist-ing judicial lien encumbering exempt property pursuant to
The question presented by this case is whether [a judicial lien] “impairs an exemption to which [petitioner] would have been entitled under subsection (b).” Since Florida has chosen to opt out of the listed federal exemptions ..., the only subsection (b) exemption at issue is the Florida homestead exemption described above. Respondent suggests that, to resolve this case, we need only ask whether the judicial lien impairs that exemption. It obviously does not, since the Florida homestead exemption is not assertable against pre-existing judicial liens. To permit avoidance of the lien, respondent urges, would not preserve the exemption but would expand it.
At first blush, this seems entirely reasonable. Several Courts of Appeals in addition to the Eleventh Circuit here have reached this result with respect to built-in limitations on state exemptions, though others have rejected it. What must give us pause, however, is that this result has been widely and uniformlyrejected with respect to built-in limitations on the federal exemptions. 61
Noting that
The question then becomes whether a different interpretation should be adopted for state exemptions. We do not see how that could be possible. Nothing in the text of§ 522(f) remotely justifies treating the two categories of exemptions differently. The provision refers to the impairment of “exemption[s] to which the debtor would have been entitled under subsection (b),” and that includes federal exemptions and state exemptions alike. Nor is there any overwhelmingly clear policy impelling us, if we possessed the power, to create a distinction that the words of the statute do not contain. Respondent asserts that it is inconsistent with' the Bankruptcy Code’s “opt-out” policy, whereby the States may define then-own exemptions, to refuse to take those exemptions with all their built-in limitations. That is plainly not true, however, since there is no doubt that a state exemption which purports to be available “unless waived” will be given full effect, even if it has been waived, for purposes of§ 522(f) — the first phrase of which, as we have noted, recites that it applies “[njotwithstanding any waiver of exemptions.” See Dominion Bank of Cumberlands, NA v. Nuckolls,780 F.2d 408 , 412 (C.A.4 1985). Just as it is not inconsistent with the policy of permitting state-defined exemptions to have another policy disfavoring waiver of exemptions, whether federal- or state-created; so also it is not inconsistent to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created. We have no basis for pronouncing the opt-out policy absolute, but must apply it along with whatever other competing or limiting policies the statute contains.64
Owen v. Owen is often cited for the principle that the “the state’s ability to define its exemptions is not absolute”
Now, with the understanding that Owen v. Owen concerned preemption, I do not read In re Weinstein to unequivocally reject all “built-in limitations” to a state’s exemption statute. Indeed, a state may very well provide and define an exemption •with an inherent limitation so long as it does not conflict with the Bankruptcy Code and its policies. In the absence of an actual conflict, a court would be hard pressed to justify not deferring to the state defined scope of an exemption with all its limitations.
Returning to the case at bar, I find no express conflict between
(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except—
(1)a debt of a kind specified in paragraph (1) or (5) of section 523(a) (in which case, notwithstanding any provision of applicable nonbankruptcy law to the contrary, such property shall be liable for a debt of a kind specified in such paragraph);
(2) a debt secured by a lien that is—
(A)(i) not avoided under subsection (f) or (g) of this section or under section 544, 545, 547, 548, 549, or 724(a) of this title; and
(ii) not void under section 506(d) of this title; or
(B) a tax lien, notice of which is properly filed;
(3) a debt of a kind specified in section 523(a)(4) or 523(a)(6) of this title owed by an institution-affiliated party of an insured depository institution to a Federal depository institutions regulatory agency acting in its capacity as conservator, receiver, or liquidating agent for such institution; or
(4) a debt in connection with fraud in the obtaining or providing of any scholarship, grant, loan, tuition, discount, award, or other financial assistance for purposes of financing an education at an institution of higher education (as that term is defined in section 101 of the Higher Education Act of 1965 (20 U.S.C. 1001)).71
As previously stated, this section generally immunizes “property exempted” against all prepetition debts. Unlike a pre-exist-ing debt exception, however, the one year period under
One might fairly say these observations simply beg the question of whether property “exempted under this section” can cease to be “exempted under this section” by virtue of a state exemption statute’s innate temporal limitation in existence on the petition date.
Analysis of the relevant sections of the Bankruptcy Code and case law do not yield a clear definitive answer. To the contrary, I find
As recognized by the First Circuit in In re Weinstein, “Congress afforded significant deference to state law by allowing bankruptcy debtors to choose state exemptions and by further allowing states to opt out of the federal exemption scheme entirely.”
Having determined that the Bankruptcy Code does not prevent the one year period contained in
In a case where a complaint for divorce ... has been filed in the probate court by or against a person entitled to the benefit of an estate of homestead, the spouse and minor children of that person may use, occupy and enjoy the homestead estate until ordered otherwise by the probate court....80
Applying the statutory text to the facts at hand, both Mark and the Debtor were “person[s] entitled to the benefit of an estate of homestead” at the commencement of the divorce proceeding. Regardless of who filed the complaint, they are also both “spouses” as defined in that section, implying that they each “may use, occupy and enjoy the homestead estate until ordered otherwise by the probate court.”
Without question, the phrasing of
Furthermore, I agree with the Debtor and predict that the Supreme Judicial Court would hold that
Y. CONCLUSION
In light of the foregoing, I will enter an order continuing the Objection generally.
Notes
.
. Schedule B, Docket No. 1.
. See
. Objection, Docket No. 18 at ¶ 4. Because "actual homestead" is not a defined term, I presume the Trustee means to suggest that the
. See Viegelahn v. Frost (In re Frost),
. Pasquina v. Cunningham (In re Cunningham),
. Id. at 323.
. Patriot Portfolio, LLC v. Weinstein (In re Weinstein),
. See
. In re Cunningham,
. In re Gasztold, 11-21287,
. See In re Weinstein,
. Because it is ultimately irrelevant to the outcome of this case, I will simply note that this argument is specious for the following reasons: (1) pursuant to
. Owen v. Owen,
. Owen v. Owen,
. Gordon v. Pappalardo (In re Gordon),
. In re Feliciano,
. Owen v. Owen,
.
.
. In re Genzler,
. See Garran v. SMS Financial V, LLC (In re Garran),
.
. In re Newcomb, 13-14840-WCH,
.
.
. Id. Specifically,
the aggregate of: (1) any of the following: (i) a single-family dwelling, including accessory structures appurtenant thereto and the land on which it is located; (ii) a 2 to 4-family dwelling, including accessory structures appurtenant thereto and the land on which it is located; (iii) a manufactured home as defined in section 32Q of chapter 140; (iv) a unit in a condominium, as those terms are defined in section 1 of chapter 183A, that is used for residential purposes; or (v) a residential cooperative housing unit established pursuant to chapters 156B, 157B, 180 or otherwise; (2) the stile proceeds as provided in clause (1) of subsection (a) of section 11; and (3) the proceeds of any policy of insurance insuring the home against fire or other casualty loss as provided in clause (2) of said subsection (a) of said section 11.
Id.
.
. Id.
.
. In re Cunningham,
. In re Zibman,
. In re Lantz,
. In re Snowden,
. In re Lantz,
. In re Lantz,
. See In re Stewart,
. In re Frost,
. In re White,
. In re Jacobson,
. Law v. Siegel, - U.S. -,
. Myers v. Matley,
. In re Zibman,
. Id. (emphasis in original).
. Id.
. In re Cunningham,
. Id. at 322-324.
. Id. at 324.
. Id.
. As will become more apparent below, I intentionally avoid the word "unlimited.”
. See In re Gunnison,
.See
. See
.
. In re Cunningham,
. For the sake of completeness, I note that both the Ninth and Fifth Circuits have held that the protection afforded to sale proceeds under the California and Texas statutes, respectively, can expire notwithstanding the post-petition conversion of the exempt asset into cash proceeds, a result seemingly at odds with In re Cunningham. See In re Jacobson,
.In re Weinstein,
. Id. at 682-683.
. Id. at 306-307.
.Id. at 308,
. Id. at 309-310,
.
. Owen v. Owen,
. Id. at 313,
. In re Weinstein,
. In re Konnoff,
. Owen v. Owen,
. In re Konnoff,
. Id. at 206-207.
. Law v. Siegel,
.
. Exception Definition, Dictionary.com, http ://dictionary .reference. com/browse/ exception?s=t (last visited July 31, 2014).
.
. Owen v. Owen,
. In re Cunningham,
. In re Weinstein,
. Owen v. Owen,
. Law v. Siegel,
. Owen v. Owen,
.
. Id.
.
. Id.
. Dwyer v. Cempellin,
. The “orders otherwise” language in