Exemptions

The snapshot rule governs whether the chapter 13 debtor may claim a homestead exemption for one residence after the residence for which she originally claimed the exemption was subject to foreclosure. Earl v. Lund Cadillac, LLC, No. 16-16428 (9th Cir. Nov. 27 2017) (unpublished).

When Rachael Earl filed her chapter 13 petition she owned two residential properties: Claiborne and Sunnyvale. She resided in the Claiborne property and she claimed it as her homestead exemption. Unable to stop the foreclosure proceedings on that property, however, Ms. Earl converted to chapter 7 and sought to claim an exemption in the Sunnyvale property. The bankruptcy court sustained the unsecured creditor’s objection, and the district court affirmed.White v. Stump, 266 U.S. 310, 313 (1924) teaches that exemptions are fixed at the time of filing the petition. Under this “snapshot” rule, exemptions claimed post-petition may be allowed only if they could have been claimed on the petition date. Likewise, while under Rule 1009(a) the debtor has right to amend her exemptions at any time before the case is closed, the amended exemption must still be one she could have claimed on the petition date.

The court looked to Arizona law to determine whether Ms. Earl could have claimed the Sunnyvale property as her homestead at the time she filed her petition. In Arizona, entitlement to a homestead exemption depends upon the debtor’s actually residing on the property. In this case, Ms. Earl lived, at all relevant times, in the Claiborne residence. The fact that she converted from chapter 13 to chapter 7 did not change the result, even if the court were to agree with those cases looking at exemptions as of the conversion date, as Ms. Earl still lived in the Claiborne property at the time of the conversion.

Because Ms. Earl had no right to claim the exemption under state law, she had no right to amend her bankruptcy exemptions to claim it post-petition. The court affirmed.

Earl 9th Cir opinion Nov 2017

In chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate, and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition. Hawk v. Engelhart (In re Hawk), No. 16-20641 (5th Cir. Sept. 5, 2017).

Chapter 7 debtors, Gregory and Marcie Hawk, listed an IRA on their schedules and claimed an exemption for the account funds under Texas exemption law. The trustee did not object within thirty days and the court allowed the exemption. Over several months, the Hawks withdrew funds from the account and did not roll them over into a new retirement account within sixty days as required under Texas law. The bankruptcy court found that the funds had lost their exempt status and ordered the Hawks to turn them over to the trustee. The district court affirmed. [Read more…] about In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over

Because the debtor had no equity in her residential property to which it could attach, the Sixth Circuit found that the bankruptcy court properly authorized sale of the property and denied her claim for exemption based on her state law redemption rights. Brown v. Ellman (In re Brown), No. 16-1967 (6th Cir. March 20, 2017).

Susan Brown’s residence was valued at $170,000 and was secured for more than $200,000. When she filed her chapter 7 petition, she indicated her intent to surrender the property. The trustee sought an order allowing him to sell the property for $160,000 and use the proceeds to pay administrative costs and make distributions to creditors. Ms. Brown objected and claimed an exemption under section 522(d) based on her state law redemption rights. She did not seek a stay of the sale. The sale went forward and the bankruptcy court denied Ms. Brown’s exemption claim on the basis that she had no equity in the property. The district court affirmed.

On appeal, the circuit court began with the jurisdictional issues of mootness and standing.

With respect to the trustee’s claim that the appeal was moot, the court began with section 363(m) which provides that an appeal of an order authorizing the trustee’s sale of property is moot if the debtor failed to seek a stay of the sale and it was conveyed to a bona fide purchaser. While some courts have treated this as a per se rule, others have added the requirement that the person seeking a finding of mootness show that an order on appeal would “materially alter” the sale of the property. In re ICL Holding Co., 802 F.3d 547, 554 (3d Cir. 2015); C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1239 (10th Cir. 2011). The issue was unsettled in the Sixth Circuit. Official Comm. of Unsecured Creditors v. Anderson Senior Living Prop., LLC (In re Nashville Senior Living, LLC), 620 F.3d 584 (6th Cir. 2010).

The court adopted the reasoning expressed by the third and tenth circuits that, where an appeal of the order authorizing the sale will not affect the underlying transaction, the appeal is not moot. Here, the trustee, who carries the burden of showing mootness, failed to argue that a finding on appeal in favor of the debtor would alter the sale. Nor was the case moot under Article III principles because the appellate court would be able to issue effective relief.

The trustee next argued that Ms. Brown had no standing to appeal because she had no equity in the property and therefore no claim to any of the proceeds from the sale. The court disagreed with the trustee’s framing of the issue. Ms. Brown sought an exemption based on her state law redemption rights. If the bankruptcy court had granted her motion, she would have been entitled to the exempted portion of the proceeds. Therefore, she had standing as a party who was “affected adversely” by the court’s decision.

Turning to the merits, the court addressed whether the bankruptcy court erred in denying her exemption under section 522(d).

The circuit court agreed with the bankruptcy court’s finding that “that any exemption on the basis of the value of the debtor’s redemption rights must attach to some equity held by the debtor after satisfaction of the secured liens on the property. . . Absent such equity, the debtor had no interest to which the claimed exemption could attach.” The court rejected the argument that Law v. Siegel mandated reversal of the bankruptcy court’s decision. Rather, the court found that where Law dealt with the court’s power to surcharge a debtor’s exemption under section 105, it was faced with whether the exemption under section 522(d) applied at all. The court concluded that “Section 522 will not support an exemption on the basis of state-law redemption rights in a piece of property if the proceeds from the sale of that property are insufficient to satisfy the prior obligations owed to the secured creditors.”

In its amicus brief, NCBRC argued, among other things, that section 522(d) protects a debtor’s “interest” in property, as distinguished from “value,” and such interest may be possessory. The Code, which favors exemptions as furthering the debtor’s fresh start, does not require that an exemption attach to equity. Unfortunately, though the court deemed NCBRC’s brief “helpful,” it misconstrued or otherwise failed to address, this argument.

Brown 6th Cir opinion March 2017

A state property tax refund intended to “provide property tax relief to certain persons who own or rent their homesteads,” is not “government assistance based on need,” for purposes of Minnesota exemptions. Hanson v. Seaver (In re Hanson), No. 16-6023 (B.A.P. 8th Cir. Jan. 6, 2017).

Upon objection by the chapter 7 trustee, the Bankruptcy Court found debtor, Sheri Lynn Hanson, was not entitled to the public assistance exemption based on her refund under the Minnesota Property Tax Refund Act.

On appeal, Ms. Hanson argued that In re Hardy, 787 F.3d 1189 (8th Cir. 2015), which reversed the BAP to hold that the Missouri child tax credit refund was exemptible public assistance, abrogated Manty v. Johnson (In re Johnson), 509 B.R. 213 (B.A.P. 8th Cir. 2014), in which the BAP held that the Property Tax Refund Act was not exemptible as public assistance. The BAP rejected this argument, finding that the Eighth Circuit decision in Hardy was based on its disagreement with the BAP as to whether the child tax credit refund fit the definition of government assistance based on need. Relying on the history of amendments to the statute which were geared toward increasing benefits to poorer taxpayers, the circuit court found that the child tax credit refund fit the definition of public assistance.

Turning to the legislative history of the property tax refund statute, the court found amendments to that Act showed that the legislature had “rais[ed] the maximum eligible household income and lower[ed] the threshold income percentage for higher income individuals.” Taking into consideration the property tax relief statute as a whole, the court noted that other sections were not tied to income. Contrary to Ms. Hanson’s assertion, the court saw “no basis in the legislative history for a finding that the Act was intended to benefit low-income homeowners.” Based on this analysis, the court found that it was bound by the holding in Johnson and affirmed the bankruptcy court decision.

Hanson 8th BAP opinion Jan 2017