Re: Trustee Sales in the 1st Circuit: A Reply to Attorney David G. Baker’s response to my article in the November 2015 issue of the American Bankruptcy Institute Journal[1] discussing In Re Traverse, 753 F.3d 19 (1st Cir.) , cert. denied sub nom. DeGiacamo v. Traverse, 1358 S.Ct. 459, 190 L.Ed. 2d 332 (2014)
Dear Sirs:
Attorney Baker and I agree on a number of things. We disagree about the effect of a claim of exemption. Attorney Baker says: “[o]nce the debtor’s interest in the property has been exempted, and thus withdrawn from the estate, the trustee cannot sell that interest.”[2] That statement is inaccurate.
We know it is inaccurate because trustees regularly sell debtors’ interests in exempt property and the fact that it is exempt does not impede that sale. Such sales occur whenever there is equity beyond the exemption. The fact that the property is exempt does not bar the trustee from conveying the debtor’s interest in it. Instead, the trustee will sell the property and pay the debtor the value of the interest.
If it were in fact true that “once the debtor’s interest in the property has been exempted, and thus withdrawn from the estate, the trustee cannot sell that interest,” then the purchaser would not receive good title. The purchaser would not receive good title because, on Attorney Baker’s theory, the trustee did not hold the debtor’s interest to convey.
A hypothetical: assume the debtor owned a vehicle. The vehicle is free and clear of liens. The debtor has utilized the federal exemptions. The vehicle is worth $20,000.00. The debtor claims an exemption of $3,675.00. The trustee sells the vehicle pursuant to 11 U.S.C. § 363(b). Does the debtor now own an undivided interest in the vehicle or has the purchaser acquired the vehicle free and clear of the debtor’s exemption? Attorney Baker’s proposition would yield the conclusion that the debtor owns an undivided interest in the vehicle together with the purchaser. That is an absurd result and cannot be the law.[3]
Consider instead a house. The house is unencumbered. The applicable homestead law is New Hampshire’s. The debtor claims $120,000.00 in homestead. The value of the house is $250,000.00. May the trustee sell the house? May the trustee sell the house free and clear of the debtor’s right to occupy the house? If the trustee can sell the debtor’s exempt interest in the house, that interest which Attorney Baker says has been “withdrawn from the estate”, by what power does the trustee do so?
Consider a third hypothetical: the debtor claims the house as exempt. The house is worth $150,000.00. The applicable homestead exemption is New Hampshire’s meaning the homestead is limited to $120,000.00. The debtor is incapable of maintaining insurance on the premises. The trustee has not abandoned the property. The trustee acquires insurance. Does the trustee insure the property for $150,000.00 or merely $30,000.00? If the property has been “withdrawn from the estate,” then the trustee insures the property for $30,000.00.[4] If, instead, the property is still property of the estate subject to administration by the trustee, then the trustee is obligated to acquire insurance in the amount of $150,000.00.
Consider a fourth hypothetical with the same facts: the value of the property is $150,000.00. The homestead exemption is $120,000.00. There is no insurance upon the premises. Debtor has left the house. The trustee fails to maintain the premises and the pipes freeze. The trustee’s failure is found to be grossly negligent. Is the trustee responsible for only $30,000.00 to creditors, or is the trustee responsible for the entire value of the property in his or her care, $150,000.00?
Attorney Baker’s theory that property claimed as exempt is “withdrawn from the estate”[5] runs into a further problem: when is it withdrawn from the estate? Is it withdrawn from the estate the moment it is claimed on Schedule C? Or instead, is it withdrawn from the estate on the date that the deadline for objecting to the claim of exemption passes? Or is it withdrawn from the estate the moment the petition is filed? There is no textual answer to those questions in the Code or the rules. There is no textual answer because it arises from a misreading of the text. Understanding exempt property to be property of the estate that is simply not liable for the payment of debts makes each of those answers are easy: the trustee is responsible for everything in his or her care. Under Attorney Baker’s understanding, once the property has been “withdrawn from the estate” none of those questions are easy.
In fact, while case law and practitioner jargon refers to “withdrawal from the estate,” the statute does not. The exemption statute, 11 U.S.C. § 522, permits a debtor to “exempt from property of the estate” certain property. 11 U.S.C. § 522(b)(1). The Code does not define “exempt.” The Code does not make the word “exempt” equivalent to the phrase “withdraw from the estate.” Instead, property of the estate is defined in 11 U.S.C. § 541(a)(1) by words with which we are all familiar: “All legal or equitable interest of the debtor and property as of the commencement of the case.” “All” means all. The plain meaning of 541(a)(1) is that exempt property is “exempt” but it is nevertheless property of the estate. There can be no other understanding of the words “all property” “as of the commencement of the case.”
The Code’s straightforward language including exempt property in the estate is matched by simple words describing when exempt property is no longer property of the estate. 11 U.S.C. § 554 tells us when property is no longer “property of the estate.” 11 U.S.C. § 554(d) provides: “unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.”
The Code thus provides that exempt property is property of the estate, if not abandoned under 11 U.S.C. § 554 or administered. [6] While the term “administration” is (like the term “exempt”) not defined, it is used and it is used in 11 U.S.C. § 704(a)(9) wherein the trustee is required to make a “final account of the administration of the estate.” The administration of the estate refers to the balance of the trustee duties under 11 U.S.C. § 704 which duties include being accountable for property received and to reduce to money the property of the estate. 11 U.S.C. § 704(a)(1) and (2). Given the obligation under 11 U.S.C. § 554(b) to abandon property which is not of benefit to the creditors of the estate, the best understanding of the word “administer” as used in 11 U.S.C. § 554 would be either to abandon the property as permitted under 11 U.S.C. § 554, or to sell the property as permitted and required under 11 U.S.C. § 704(a)(1).
The best reading of the Code is that property claimed exempt under Schedule C is property of the estate until it is abandoned or administered. Exempt property is property and is property of the estate which is “not liable” for the payment of any debt. 11 U.S.C. §522(c). Property claimed as exempt may be sold, and the only issue truly addressed by the 1st Circuit In re Traverse is: under what circumstances may the trustee sell free and clear of the debtor’s claim of exemption.
That issue was not fully explored by the 1st Circuit and has yet to be developed.
Very truly yours,
Edmond J. Ford
[1] Edmond J. Ford, “Trustee Sales in the First Circuit”, Am. Bankr. Inst. J., November 2015, at 14.
[2] David G. Baker “Letter to the Editor” XXXV, ABI Journal, 58, 59 (May 2016); But see, In re Traverse, 753 F.3d 19, 28 (1st Cir.), cert. denied sub nom. DeGiacomo v. Traverse, 135 S. Ct. 459, 190 L. Ed. 2d 332 (2014) (“The issue raised by this case is not whether Traverse's homestead exemption withdrew her home or merely the right to its proceeds from the property of the estate. The issue is whether a trustee's powers of sale under § 363 justify selling a debtor's asset where no equity remains for the estate beyond the senior claims of secured creditors and the debtor's own exempt interest.”)
[3] See, e.g. Schwab v. Reilly, 560 U.S. 770, 130 S. Ct. 2652, 2658, 177 L. Ed. 2d 234 (2010) (Trustee sells equipment despite debtor’s exemption).
[4] “’It is a basic principle that one may only insure property as to which one has an insurable interest.’ An ‘insurable interest’ is defined in OCGA § 33–24–4(a) to mean “any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.’ …mere possession of property, while it might give the possessor certain rights against a trespasser, is not in and of itself sufficient to create an insurable interest.”
Muhammad v. Allstate Ins. Co., 313 Ga. App. 531, 533-34, 722 S.E.2d 136, 139 (2012)(footnotes omitted); See, also, Hawkeye-Sec. Ins. Co. v. Reeg, 128 Ill. App. 3d 352, 355, 470 N.E.2d 1103, 1105 (1984)(“ Thus, generally speaking, a person has an insurable interest in property whenever he would profit by or gain some advantage by its continued existence or suffer loss or disadvantage by its destruction.”)
[5] Atty. Baker’s use of the words “withdrawn from the estate” has precedential support. Owen v. Owen, 500 U.S. 305, 308, 111 S. Ct. 1833, 1835, 114 L. Ed. 2d 350 (1991) (“An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor.”) But, the Supreme Court does not base any conclusion on that structure and qualifies “withdrawal” by its reference to “from the creditors.” Neither the Supreme Court, nor the First Circuit have held that exemption means that the interest exempted may not be administered. Instead, they allow the sale of such property and hold only that such exempt property is merely “not liable for the payment of any prepetition debt or administrative expense.” Law v. Siegel, 134 S. Ct. 1188, 1192, 188 L. Ed. 2d 146 (2014).
[6] 11 U.S.C. § 544 contemplates two forms of abandonment: abandonment by affirmative action of the trustee, 11 U.S.C. § 554(a) and (b), and deemed abandonment by the listing of the property and closing of the case, 11 U.S.C. § 554(c).