A petition for rehearing en banc is attacking a pair of opinions where the Fifth Circuit split with every other circuit and abandoned the snapshot rule by effectively holding that exemptions never become final even though the time for objection has run out.
Rehearing is being sought in Hawk v. Engelhart (In re Hawk), 16-20641, 2017 BL 250329 (5th Cir. July 19, 2017), where a Fifth Circuit panel held that assets in an individual retirement account lose their exempt status if funds are withdrawn after filing a chapter 7 petition but are not reinvested within 60 days as required by Texas law. To read ABI’s discussion of Hawk, click here.
Hawk expanded In re Frost, 744 F.3d 384 (5th Cir. 2014), where the Fifth Circuit held that the proceeds of a homestead sale are not exempt if the debtor sells the homestead after filing but does not reinvest the proceeds in another homestead within six months. Frost involved a chapter 13 case, but the Hawk opinion said that Frost applies equally in chapter 7.
In both cases, the Fifth Circuit invented the notion of conditional and unconditional exemptions. The appeals court even held that an unconditional exemption on the filing date can become conditional sometime after bankruptcy and result in the loss of an exemption that had been final.
Seeking rehearing by all active judges on the appeals court, the debtor in Hawk contends that the notion of conditional exemptions flies in the face of the snapshot rule followed in the Fifth Circuit and everywhere else. Until Hawk and Frost, the notion had been that exemptions are determined as of the filing date. If no timely objection is filed, the exemption becomes final.
In an amicus brief supporting the debtor, a professor, a former judge, and two lawyers argue that Hawk and Frost use an “extratextual contrivance” to “revest property in the estate” that had been taken out of the estate when there was no timely objection to the claimed exemption.
The amici argue that Hawk and Frost ultimately will mean that no exemption will become final if the property is sold after bankruptcy. Applying the rule from those cases, they say that an automobile or life insurance policy, despite being exempted, can be glommed by a trustee if they are sold after bankruptcy. Indeed, they say, the proceeds cannot be reinvested in property of the same type because Texas law does not provide a grace period for reinvestment like it does for IRAs and homesteads.
Contending there is a split of circuits, the amici say they are “aware of no other circuits allowing a trustee to pursue an exempt asset after the objection period has run.”
In our story in July discussing Hawk, we said, “Even after the chapter 7 case is closed, debtors may be exposed if a trustee reopens the case. It is therefore unclear how long debtors must hold exempt property after a chapter 7 case is closed.” The amici see the same dangers by asking, “Could a trustee reopen a closed case when assets change form?”
To read the Hawk opinion, click here. Responses to the rehearing petition are currently due by Aug. 14.
The amicus brief in Hawk was filed by Prof. Christopher G. Bradley of the Univ. of Kentucky College of Law, retired Bankruptcy Judge Leif M. Clark, and attorneys Stephen W. Sather and Michael Baumer, both of Austin.