Joining the Eighth and Ninth Circuits and handing down another debtor-friendly opinion, the Fourth Circuit cleaned up some of the mess that Congress made in Section 522(b)(3)(A) regarding exemptions claimed by individuals who change their domicile before filing bankruptcy.
The May 4 opinion by Circuit Judge Robert B. King rejected plausible interpretations of the statute that could leave some debtors ineligible for any exemptions, state or federal.
The debtor moved to West Virginia from Louisiana four months before filing bankruptcy. Utilizing Louisiana’s exemption statute, he claimed exemptions for about $3,500 of personal property located in West Virginia.
The trustee objected to the exemptions, contending that Louisiana exemptions could not be applied extraterritorially in view of the Supreme Court’s presumption against extraterritoriality. The bankruptcy court allowed the exemptions and was upheld on appeal by District Judge Irene M. Keeley of Clarksburg, W.Va.
Again upholding the exemptions in the circuit court, Judge King characterized Judge Keeley’s opinion as “well reasoned” and “comprehensive.” To read ABI’s discussion of Judge Keeley’s opinion, click here.
The Statutory Mess
Attempting to prevent abuse, Congress made a hash out of Section 522(b)(3)(A) and compounded the problem by adding the so-called hanging paragraph, which, Judge King said, “has been the subject of some dispute in the bankruptcy courts.”
Generally, a debtor is eligible for exemptions in the state where the debtor had been domiciled for 730 days before bankruptcy. To deter exemption shopping by people who would move within two years before bankruptcy to take advantage of another state’s more generous exemptions, 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.
The statute had a problem, however, because Section 522(b)(3)(A) would leave some debtors eligible for no exemptions. To fill the gap, Congress added the hanging paragraph, which allows the debtor to claim federal exemptions specified in Section 522(d) if (b)(3)(A) makes a debtor ineligible for any state’s exemptions.
The Case at Hand
The trustee conceded that the debtor could invoke Louisiana exemptions under Section 522(b)(3)(A) for property located in Louisiana. However, the trustee disputed the claim for exemptions covering the debtor’s property in West Virginia, even though Louisiana does not limit the application of its exemptions to Louisiana residents or to property in Louisiana.
The trustee argued for the presumption against extraterritoriality, also known as the anti- extraterritoriality approach, under which a bankruptcy court may not give extraterritorial effect to any state’s exemption laws. His theory would have precluded the debtor from using Louisiana law to exempt property in West Virginia.
The Fourth Circuit’s Analysis
Judge King said that “almost all courts” have rejected the trustee’s theory because it “would lead to nonsensical results.” An example: Debtors who move would be ineligible for exemptions because they likely would have no property in their former domicile, the only state in which they could have exemptions under the anti-extraterritoriality approach. Judge King said that the only bankruptcy court to adopt this theory was “promptly overturned on appeal.”
The second minority view, called the preemption approach, would permit a debtor to apply a state’s exemption laws to nonresidents and out-of-state property, even if state law does not allow extraterritorial effect. Like Judge Keeley, Judge King rejected the idea. If “Congress had intended to override state laws limiting the use of exemption schemes to in-state residents or in-state property, it would not have placed the hanging paragraph in Section 522(b)(3),” he said.
The preemption approach, he said, would make the hanging paragraph applicable only to debtors who had resided in foreign countries.
Judge King adopted the so-called state-specific approach, which is followed by the Eighth and Ninth Circuits and a majority of courts. He said it best embodies congressional intent and the bedrock principle that “exemptions are entitled to the most liberal construction in favor of the debtor.”
Judge King said there were no principles of Louisiana law that would bar out-of-state debtors from utilizing Louisiana’s exemption statute. He also rejected the trustee’s reliance on the Supreme Court’s presumption against extraterritoriality.
Citing Fourth Circuit precedent, Judge King said that the presumption does not apply to conduct that occurs largely within the U.S. Therefore, he allowed the debtor to rely on Louisiana law and exempt property in West Virginia.
A Proposal to ‘Fix’ Section 522
In the circuit court, pro bono co-counsel for the debtor was Eugene Wedoff, the immediate past president of American Bankruptcy Institute and a former bankruptcy judge in Chicago.
In a message to ABI, Judge Wedoff said that “Section 522 is very much in need of a Congressional ‘fix.’”
Judge Wedoff believes that Congress should “make the debtor immediately subject to the exemption law of the state to which a debtor has moved, but cap the homestead exemption and perhaps other very large exemptions for two years after the move at the level set by the debtor’s former state of domicile.”
Judge Wedoff said that his proposal would “eliminate the ‘millionaire’s loophole’ that Congress was concerned about in BAPCPA without creating the confusion caused by applying a state’s exemptions to debtors who are no longer domiciled in that state.”
The “simplest fix,” Judge Wedoff said, would be “a set of uniform federal exemptions, but that is very unlikely to be politically possible.”