Bankruptcy Appellate Panel of the Ninth Circuit Affirms Bankruptcy Court Decision that A Debtor Cannot Claim A Florida Homestead Exemption In Property Located In Nevada

It is well-known that the Chapter 7 bankruptcy trustee’s primary responsibility is to “collect and reduce to money the property of the estate” so that a dividend can be paid to a debtor’s creditors. See 11 U.S.C. § 704(a)(1). One of the principal strategies that a bankruptcy trustee can utilize in recovering assets for creditors is ensuring that the exemptions claimed by a debtor are proper. While it is obvious that a bankruptcy trustee should object to exemptions that are blatantly inappropriate (i.e. claiming an exemption in an asset that is not identified under the applicable statute), a lesser known objection may be filed based upon the length of time that a debtor has resided in the state where the bankruptcy petition was filed.

The Bankruptcy Code, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), imposes a limitation on a debtor’s ability to claim certain state exemptions based on the length of time that the debtor may have resided in a state prior to his or her bankruptcy filing. Specifically, Section 522(b)(3)(A) provides that a debtor may claim property exempt under state law “that is applicable on the date of the filing of the petition at the place in which the debtor’s domicile has been located for the 730 days immediately preceding the filing of the petition, or if the debtor’s domicile has not been located at a single State for such 730–day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730–day period or for a longer portion of such 180–day period than any other place.” 11 U.S.C. § 522(b)(3)(A). In other words, a debtor may only claim the state law exemptions available in his state of residence if he has lived in that state for two or more years as of the petition date. If the debtor has not resided in the state of his residence for two or more years, then he may only claim the exemptions available in the state where he resided in the one hundred and eighty-day (180) period preceding the relocation to the state of his current residence.

Section 522(b)(3) further provides that the federal exemptions are the default in the event that a debtor was not domiciled in any state for the time periods identified in Section 522(b)(3)(A):

If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the Debtor may elect to exempt property that is specified under subsection (d).

See 11 U.S.C. § 522(b)(3).

The default language “in [Section] 522(b)(3) creates a safety net for debtors who are rendered ‘ineligible for any exemption’ by subparagraph (A), by allowing them to claim the federal exemptions set forth in § 522(d)” . . . and “if a debtor is unable to claim a state’s homestead exemption because of territorial restrictions, she is not then deprived of claiming any exemption.” In re Stephens, 402 B.R. 1 (10th Cir. BAP 2009).

The Houmand Law Firm recently represented a chapter 7 trustee that was appointed in the bankruptcy case captioned In re Mancuso (Case Number BK-S-16-10769-BTB), where the debtor relocated from Florida to Nevada approximately 600 days prior to his bankruptcy filing. The debtor purchased a home in Nevada and claimed the full amount of the Nevada homestead exemption, which is $550,000. The trustee timely filed an objection to the debtor’s exemptions, arguing that he was not permitted to claim the exemptions available under Nevada law due to the fact that he had not resided in Nevada for the 730-day period preceding his bankruptcy filing. The trustee further argued that the debtor was only permitted to claim the exemptions available under federal law because Florida, the state that where the debtor had resided prior to relocating to Nevada, limited its exemptions to Florida residents. In effect, since the debtor could not claim the exemptions under either Florida or Nevada law, he was only permitted to claim the federal exemptions under Section 522(b)(3). The implication of the objection filed by the trustee is that the debtor would only be permitted to claim a $23,675 homestead exemption under Section 522 as opposed to the $550,000 homestead exemption available under Nevada law.

The debtor opposed the trustee’s objection by arguing that he should be permitted to claim the exemptions available under Florida even if he was not a Florida resident at the time of his bankruptcy filing. The bankruptcy court sustained the objection filed by the trustee and held that the debtor was only permitted to claim the exemptions available under federal law. The debtor’s bankruptcy case was then converted to one under Chapter 13 and the debtor filed a notice of appeal.

On March 12, 2018, the Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) entered an order affirming the decision of the bankruptcy court. The BAP noted that there has been significant case law providing that an individual could not use Florida exemptions to exempt real property not located in the state of Florida. See In re Schlakman, 2007 WL 1482011; see also In re Sanders, 72 B.R. 124, 125 (Bankr. M.D. Fla. 1987). The BAP further rejected the debtor’s argument that a prohibition on extraterritorial application of Florida’s homestead exemption would be inconsistent with the bankruptcy code. While the BAP noted that there may equitable considerations, i.e. the prejudice to a debtor that has significant equity from having to claim a smaller homestead exemption available under federal law, the BAP held that any such equitable concerns must defer to the relevant state statute. Finally, the BAP rejected the approach adopted by the court in In re Camp, 396 B.R. 194 (Bankr. W.D. Tex. 2008), which held that the residency restrictions in Florida law relating to exemptions were preempted by Section 522(b). The BAP noted that what has been termed the “hanging paragraph” of Section 522(b) provides a solution:

The Camp court reasons that because § 522(b)(3)(A), in some situations, requires debtors to use the exemptions of a state where they do not reside, that provision preempts residency requirements. There is a fundamental problem with this conclusion, however, because if a state does not have residency restrictions, then the hanging paragraph of § 522(b) explicitly provides a solution by guaranteeing the debtor federal exemptions. Section 522 does not appear to conflict with state exemption laws at all, but, rather, it harmonizes with those laws.

Accordingly, the BAP adopted the majority approach concerning the extraterritorial application of exemption statutes, which requires an analysis of the applicable law of the particular state law governing the exemptions at issue to determine whether extraterritorial application of its exemption laws is permitted.

A copy of the BAP’s holding in   can be accessed below:

Mancuso v. Rick A. Yarnall, Chapter 13 Trustee; Victoria L. Nelson, Chapter 7 Trustee (BAP Case No. NV-16-1387-BHTa)5

5 The BAP’s decision in Mancuso is currently on appeal before the Court of Appeals for the Ninth Circuit.