In the first published opinion interpreting a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Judge Randolph Haines has held that the limitation on homestead exemption amounts contained in §522(p) is inapplicable in states that do not permit their residents to elect federal exemptions. In re McNabb, 2005 WL 1525101 (Bankr. D. Ariz. June 23, 2005). In the context of an objection to the debtor’s claimed homestead exemption, Judge Haines was called upon to determine the applicability of several new provisions regarding exemptions contained in BAPCPA as well as interpret the $125,000 cap on homestead exemption contained in §522(p).
In this case, the debtor purchased a new home in Arizona just over one year prior to filing his chapter 7 petition there. He had previously lived in the state of California. He listed the residence on his Schedule A with a value of $330,000 and on Schedule D as being subject to a lien in the amount of approximately $205,500. The resulting equity would be completely exempt under Arizona law, which provides for a homestead exemption of up to $150,000. The debtor moved for an order compelling the chapter 7 trustee to abandon the residence as being exempt. Certain creditors objected to that motion on several grounds, as to one of which the trustee joined. The court quickly dispatched the creditor’s contention that, pursuant to §522(b)(3)(A), as amended by BAPCPA, debtor was required to claim exemptions under California law. The court noted that that amendment does not become effective until 180 days after enactment, or October 17, 2005. Accordingly, it did not govern the case before the court. The creditors also contended that the value of the debtor’s homestead was attributable at least in part to certain alleged fraudulent transfers and that §522(o), as added by BAPCPA, required that the homestead claim be adjusted accordingly. The court held that while that provision is one applicable to cases filed on or after the date of enactment, its effect could only be determined after an evidentiary hearing.
The principal focus of Judge Haines’s opinion is the creditor’s contention that pursuant to §522(p), added by BAPCPA, debtor’s claim of homestead was limited to $125,000 in value as it was acquired within 1,215 days of the date of the filing of the petition. The debtor claimed the cap was inapplicable because it applies only “as a result of electing under subsection (b)(3)(A) to exempt property under state or local law.” Section 522(b)(1) generally allows debtors to elect to exempt property pursuant to either paragraph 2 (federal bankruptcy exemptions) or paragraph 3 (state exemptions and federal nonbankruptcy exemptions). The Code also, however, authorizes states to prohibit their residents from claiming federal exemptions, an option selected by a number of states including Arizona. The result, the court observed, is that a debtor in Arizona has no right to “elect” state exemptions, because they are the only exemptions available to such a debtor. The court concluded that because the language of §522(p) applies only as a result of making such an election it can apply only in those states where such an election is available, that is those states that have not elected to opt out.
Applying principles of statutory interpretation, the court held that it could look to the legislative history only if the language was ambiguous or the interpretation adopted would lead to absurd results. In this instance, the court concluded that neither was the case. The election language used in the statute compels the conclusion that if there is no election, there can be no cap. Because the result is consistent with the statutory scheme that has existed under the Bankruptcy Code and its various predecessors for many years (that is, no uniform federal exemption), it is neither absurd nor clearly at odds with congressional intent. (Elsewhere in its opinion, however, the court does concede that the effect of this interpretation is to render this limitation applicable only in Texas and Minnesota—the only two states that have not chosen to opt out of the federal exemptions and permit exemption claims in excess of $125,000.) The court concludes that, even were it appropriate, reference to the limited legislative history available on BAPCPA would not be helpful in its interpretation, as it provides no insight as to the nature of the problem Congress was attempting to address in this section.
The court also reasoned that its conclusion was supported by the language of other provisions of BAPCPA, including another section at issue in the case, §522(o), which simply applies to all state exemption claims made pursuant to §522(b)(3)(A), without reference to an election. The court draws additional support for its conclusion from the interplay between §522(q) and new §727(a)(12), which requires denial of discharge if the court finds that §522(q)(1) “may be applicable” to the debtor and there is a proceeding pending in which the debtor might be found guilty of a felony or liable for a debt of the kind described in §522(q)(1). Specifically, subparagraph A of §727(a)(12) provides that the court must determine whether §522(q)(1) is applicable, indicating that it is applicable to some and not to others. The court concludes that the only function such a hearing might serve would be to permit the court to make a determination that the debtor had elected state exemptions where such election is available. Section 522(q)(2) does, however, offer another potential function for such a hearing in that it provides that §522(q)(1) is not applicable to the extent the amount claimed is reasonably necessary for the support of the debtor and any dependent of the debtor. Presumably, the court would need to hold a hearing to make such a determination.
Two other provisions of §522 may shed light on the court’s conclusions, one of which offers additional support for its holding, the other of which may support a different inference. In §522(b), Congress addresses the choice of exemptions in cases involving debtors who are husband and wife and provides that they may not split exemptions, with one choosing federal exemptions and the other state and nonbankruptcy federal exemptions. It further provides that if they cannot agree on the alternative to be elected, they shall be deemed to have elected the federal exemptions “where such election is permitted under the law of the jurisdiction where the case is filed.” In this provision, Congress clearly appears to use the term in a way that suggests that if such a choice is not permitted, there is no “election.” Another addition made by BAPCPA, to §522(b)(2), provides that if the effect of the new domiciliary restrictions is to render the debtor ineligible for any exemption, the debtor may “elect to exempt property that is specified under subsection (d).” Here, the word “elect” is used in a context in which the debtor essentially has no choice other than the one given by this new provision.
The court’s decision is amply supported by its inferences from statutory language and structure, but is not free from doubt and is sure to be controversial. In concluding, the court invites Congress, as part of the process of technical corrections now underway, to change the language of the statute if the interpretation adopted is inconsistent with its intent.