Appreciation in a Home Is Exempt in California, But Not in Washington, Circuit Says

Perceiving a pivotal difference between the California and Washington State exemptions, the majority on a Ninth Circuit panel refused to allow a chapter 7 debtor to exempt the post-petition appreciation in the value of her homestead.

District Judge Paul C. Huck of Miami, sitting by designation, wrote a 37-page dissent, decimating the majority’s 11-page opinion, in this writer’s opinion.

The majority’s opinion may not affect practice in California. However, practitioners in Washington State should study the majority opinion carefully and modify their tactics accordingly. Among other things, debtors in Washington should not underestimate the value of their homes when filing schedules initially, because assigning a low value at the filing date could bar the debtor from later realizing the maximum homestead exemption.

The state legislature in Washington could amend the exemption statute to prevent the state’s residents from being at a disadvantage compared to residents of other states.

The Facts

The individual debtor filed a chapter 7 petition in December 2013. She scheduled her home as being worth $250,000, subject to a mortgage of about $246,500. Utilizing the Washington State exemption, she claimed a $3,500 exemption to cover all the equity in her homestead.

The case quickly began to unravel, based on a reading of the bankruptcy court’s docket rather than the Ninth Circuit opinion. Nine months after filing, the mortgagee filed a motion to modify the automatic stay and alleged that the home was actually worth $325,000.

Meanwhile, the trustee had discovered an undisclosed, prepetition, fraudulent transfer of property. The trustee objected to the debtor’s discharge. Eventually, the debtor waived her discharge.

Evidently believing that the trustee would attempt to sell the home because the value had risen or was initially understated, the debtor amended her schedules in July 2016 to list the value of the property as $412,500. She also amended her exemptions to claim an exemption in “100% of fair market value, up to any applicable statutory limit.” The debtor apparently was attempting to exempt $125,000, the maximum homestead exemption under Washington State law.

The trustee objected to the amended homestead exemption. The bankruptcy judge sustained the exemption, holding that the amount of the exemption was frozen at the filing date in the amount of $3,500, because there had been no objection to the value of the home as of the filing date. The district court affirmed.

State Exemption Laws

The majority opinion by Circuit Judge N. Randy Smith saw a pivotal difference in the Washington State homestead exemption compared to the California exemption.

California law, Judge Smith said, allows “an exemption with a fixed dollar value, based on demographic criteria — not home equity.”

On the other hand, Judge Smith said that Washington State “applies a sliding scale in which ‘the homestead exemption shall not exceed the lesser of (1) the total net value of the [homestead] . . .  or (2) the sum of [$125,000] . . . .’”

The Majority Opinion

Comparing the two statutes, Judge Smith said that the Washington State exemption “is tied to the equity in the debtor’s home as of the filing date of the petition.” On the other hand, the California exemption “is determined by demographic criteria,” such as the number of people in the household.

For reasons we cannot adequately explain, Judge Smith concluded that “the homestead amount claimed at filing [in California] may exceed the home equity on the petition date.” Consequently, he said that Ninth Circuit precedent allows a California resident to exempt post-petition appreciation in value.

In Washington State, on the other hand, Judge Smith held that the exemption is limited to the equity in the home on the filing date. Because $3,500 was indisputably exempt on the filing date, “[t]hat amount was all that Washington’s exemption statute permitted her to exempt.”

Judge Smith added, “The fact that some debtors in our California cases were permitted to exempt more than the equity in their homes on the date of their bankruptcy does not establish [the debtor’s] entitlement to do the same in Washington.”

The Dissent

The majority’s opinion did not sit well with Judge Huck, whose dissent synthesizes Ninth Circuit precedent on homestead exemptions. We recommend reading his dissent in full text for a detailed overview of Ninth Circuit exemption law.

Beyond misreading Ninth Circuit precedent, Judge Huck said the majority violated three cardinal principles of bankruptcy law: (1) Exemptions are to be liberally construed in favor of debtors; (2) courts may not deny exemptions for reasons not stated in the statute, citing Law v. Siegel, 134 S. Ct. 1188 (2014); and (3) amendments to exemptions are permitted as of right, citing Bankruptcy Rule 1009(a).

Meticulously analyzing pertinent Ninth Circuit cases, he said that “binding and on-point Ninth Circuit precedent mandates that when a homestead appreciates in value postpetition, a debtor is entitled to amend her homestead exemption claim to include a portion of that appreciation in order to exempt from the bankruptcy estate the maximum amount permitted by state or federal law applicable to the debtor’s filing date.”

Among other authorities, Judge Huck quoted a Ninth Circuit Bankruptcy Appellate Panel opinion, upheld in the Ninth Circuit, as saying that the amount of a homestead exemption is determined when the property is sold rather than being fixed as of the filing date.

Judge Huck said that any differences in the two states’ statutes are “illusory,” because the attempt at characterizing California law as based on “demographic criteria” was “fashioned from whole cloth.” He said there was “no meaningful basis for treating California’s capped homestead exemption scheme differently from the federal and other state capped schemes.”

Judge Huck challenged the majority’s notion that a debtor may only exempt property in existence on the filing date. He said there is “no statute or caselaw [that] limits a debtor’s right to exempt only property which entered the estate” on the filing date. He cited authority for the proposition that a debtor may exempt property that comes into the estate after filing.

It therefore “follows,” he said, “that because postpetition appreciation is an estate asset, it is then subject to the maximum applicable homestead exemption irrespective of the amount of the exemption initially claimed by the debtor.”

As to the so-called snapshot rule for determining exemptions as of the filing date, Judge Huck said there is no case “which has extended the snapshot rule to freeze the amount of an exemption at filing.”