To halt forum shopping, Congress made a muddle out of Section 522(b)(3)(A), dealing with exemptions claimed by individuals who change their domicile before bankruptcy. In some situations, problems were compounded by a hanging paragraph that came along with the BAPCPA amendments in 2005.
Congress sought to deter exemption shopping by people who would move before bankruptcy to take advantage of another state’s more generous exemptions. If the debtor has not been domiciled in one state for 730 days before filing, Section 522(b)(3)(A) provides that the debtor must take exemptions from the state where he or she resided for the largest part of the 180 day period before the 730 day period.
And then there’s the hanging paragraph. If (b)(3)(A) makes a debtor ineligible for any state’s exemption, the hanging paragraph allows the debtor to claim federal exemptions specified in Section 522(d).
The appeal that came to District Judge Irene M. Keeley of Clarksburg, W.Va., involved facts that slipped between the cracks. In her June 27 opinion, Judge Keeley upheld the bankruptcy court by crafting a result that Congress likely would have intended, although the statute itself did not provide an answer.
The debtors moved from Louisiana to West Virginia a few months before filing a chapter 7 petition. They owned potentially exempt property in both states. Concededly, they were required to take Louisiana exemptions, but Louisiana is a state that opted out of federal exemptions, making the hanging paragraph seemingly inapplicable.
The trustee objected to exemptions claimed on property in West Virginia. The bankruptcy judge ruled that West Virginia property was exempt, and Judge Keeley agreed.
Judge Keeley laid out how courts disagree on the result. Property in the new state, she said, is sometimes, never, or always exempt in similar situations, depending on which approach the court takes.
The trustee argued that applying Louisiana exemptions to property in West Virginia was a constitutionally prohibited extraterritorial application of state law by virtue of the Fourteenth Amendment.
Judge Keeley rejected the argument. She said that one state cannot impose its laws on another state, but Congress is at liberty to select one state’s laws and make them applicable extraterritorially, as occurs in Section 522(b)(3)(A).
Judge Keeley followed the majority approach, which she called the “state-specific interpretation,” that allows using the former state’s laws in another state if the former state’s law permits. In other words, if the former state’s laws do not prohibit applying exemptions to people or property in another state, then the court “should apply the [former] state’s exemptions to the debtor’s property, wherever located.”
The state-specific approach has the “plainest meaning” and “the most liberal interpretation that feasibly may be applied to Section 522(b)(3)(A),” a statute, Judge Keeley said, that is “a choice of law provision.”
The debtors were entitled to exempt property in West Virginia because Judge Keeley concluded that Louisiana does not prohibit application of its exemptions to people or property out of state.