A woman in Arizona came into bankruptcy with two homes but emerged homeless, despite Bankruptcy Rule 1009(a), which allows debtors to amend their schedules “as a matter of course at any time before the case is closed.”
Home in Foreclosure at Filing
On filing a chapter 13 petition, which was later converted to chapter 7, the debtor claimed a homestead exemption in the house where she resided. She did not have title to the home because it had been sold in a trustee’s sale.
The debtor also owned a second house that she rented on the filing date.
When the debtor was unable to set aside the foreclosure sale, she filed amended schedules claiming a homestead exemption in the home she had rented. According to the debtor, she had moved into the home that she had been previously renting.
The trustee objected to the exemption in the home that had been rented on the filing date but that had become the debtor’s residence.
The debtor had two factors on her side. Bankruptcy Rule 1009(a) gave her the right to amend her schedules and claim an exemption. Arizona law allows claiming a homestead exemption at any time prior to a sale of the property.
Nonetheless, the bankruptcy judge sustained an objection to the amended exemption and was upheld in district court. In a non-precedential opinion on Nov. 27, the Ninth Circuit reached the same result.
The Snapshot Rule Prevails
The Ninth Circuit’s per curiam opinion is based primarily on the so-called snapshot rule stemming from White v. Stump, 266 U.S. 310, 313 (1924), where the Supreme Court held in 1924 that bankruptcy exemptions are fixed at the time of filing. Refining the rule, the high court held in 1943 that the “bankrupt’s right to a homestead exemption becomes fixed at the date of the filing of a petition in bankruptcy and cannot thereafter be enlarged or altered by anything the bankrupt may do.” Myers v. Matley, 318 U.S. 622, 628 (1943).
Although Rule 1009(a) and Arizona law “allow a debtor to assert a post-petition exemption, a debtor may do so only where the exemption could have properly been claimed as of the petition date,” the appeals court said.
The Court’s Superficial Analysis
The appeals court provided little analysis of the interplay between Rule 1009(a) and the snapshot rule, although the Supreme Court’s adoption of the Rule 1009(a) can alter prior precedent, such as the snapshot rule.
On a more nuanced level, the snapshot rule was designed to protect debtors, not hurt them. As shown by recent appeals court authority, the snapshot is designed to give finality to exemptions on the filing date so a debtor can liquidate exempt property after filing in chapter 7 without losing the exemption.
For example, the Fifth Circuit ruled in Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. Sept. 5, 2017), that exempt property on the filing date does not lose its exempt status even if it is converted to nonexempt property after the filing of a chapter 7 petition. In other words, the snapshot rule is a shield for the debtor, not a sword in the hands of a trustee.
The decision has no discussion of the implications of Arizona law allowing a homeowner to sell a homestead and continue the exemption by purchasing a new home within 18 months. If the exemption were fixed for all time on the filing date, it is unclear how the debtor could switch an exemption in the manner allowed by Arizona law.
There is likewise no discussion of the principle that homestead exemptions are to be liberally construed.
To read ABI’s discussion of the district court decision, click here.