Facts:
On Nov. 1, 2005, an involuntary petition is filed against the debtor who, seven months previously, had moved from a state with a maximum homestead exemption (State A) of $15,000 in value to a state with an unlimited homestead exemption (State B). The debtor's new state of residence is an opt-out state, which prohibits its citizens from electing the federal exemptions. The value of the debtor's new residence is $500,000 and it was purchased in part from the proceeds of the sale of the debtor's former residence and part from the proceeds of the liquidation of certain previously nonexempt investments. Four and one-half years prior to the filing of the petition, the debtor had been involved in an automobile accident in which he caused serious physical injury to another person as a result of driving while intoxicated. What are the debtor's rights to exempt his recently acquired residence? What challenges can a creditor raise?
Analysis:
1. Effect of failure to complete pre-bankruptcy credit counseling.
The first consideration is whether this individual is eligible to be a debtor under 11 U.S.C. 109(h) if he has not received a pre-bankruptcy briefing from an approved credit counseling agency, nor performed a related budget analysis. Accordingly, he cannot file a certificate from the agency as required by §521(b) and therefore may be dismissed from bankruptcy.
There are two exceptions to the requirement for pre-bankruptcy credit counseling. First, a debtor is excused from the requirements of §109(h) if the debtor resides in a district for which the U.S. Trustee has determined that the credit counseling agencies in the district are not able to provide the required services. §109(h)(2)(A).
Second, there is an exigent-circumstance exception to the requirement for pre-filing counseling that waives the requirement if a debtor describing the exigency states that he attempted to obtain credit counseling services from an approved agency but was unable to obtain the services within the five-day period beginning on the date the request was made. §109(h)(3). In this case, the debtor cannot take advantage of this provision because he cannot show that he attempted to obtain counseling prior to being placed into bankruptcy. Accordingly, because the debtor is ineligible to be a debtor, the petition may be void, or voidable. (A discussion of the practical and procedural aspects of a filing against an ineligible debtor is beyond the scope of this article.)
As a result of this anomaly, the question has been raised as to whether an involuntary bankruptcy can ever be successfully maintained against an individual under BAPCPA, the argument, of course, being that the debtor is almost never going to comply with the counseling requirements of §109(h). On the other hand, it may be argued that §109(h) is not applicable to an individual against whom an involuntary petition has been filed. By the precise terms of §109(h), pre-bankruptcy credit counseling is required in the 180-day period preceding the filing of the petition by such individual. Since an involuntary petition is not filed by the debtor, an argument can be made that the counseling requirement does not apply.
2. Which state’s exemptions apply?
Assuming that the debtor passes the hurdle of credit counseling, the first question is whether the debtor can invoke the unlimited homestead provisions of his “new” state (State B) of residence. BAPCPA amended §§522(a)(2) and (3) of the Code to extend the residency requirement for invoking the exemptions of a particular state from the current 180 days to 730 days. Specifically, §522 (a)(3)(A), as amended, states that an individual debtor may exempt "any property that is exempt under…state or local law that is applicable on the date of the filing of the petition at the place in which the debtor’s domicile has been located for at least 730 days immediately preceding the date of the filing of the petition….”
In this case, the debtor has only lived in State B for seven months. Therefore, he has not met the 730-day residency requirement and cannot take advantage of the more generous homestead exemption in State B. Under this circumstance, amended §522(3)(A) goes on to state that “if the debtor’s domicile has not has not been located [in] a single state for such 730-day period, [the applicable exemption is that of] the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place….”
As long as the debtor lived in State A for the greater part of 180 days before the 730-day period (2 to 2-1/2 years) before the filing of the petition, he would be entitled to use the exemptions allowed in state A. Here, assuming State A is not an opt-out state, the debtor will be entitled to either the $15,000 state homestead exemption or the $18,450 federal homestead exemption.
3. Effect of BAPCPA on the homestead exemption.
Assuming that the debtor is eligible to use the unlimited homestead exemption allowed by State B, several of the amendments to the Code would impact the result, as would as the first case decided under BAPCPA, In re McNabb, 326 B.R. 725 (Bankr. D. Ariz. 2005).
BAPCPA amended §522 to limit the amount of equity a debtor can exempt, even in a state with unlimited homestead exemptions, in certain circumstances. First, §522(o) reduces the amount a debtor can exempt in a residence to the extent that the equity resulted from the liquidation of nonexempt property, within 10 years before filing, with the intent to hinder, delay or defraud creditors. Second, §522(p) limits a debtor to $125,000 in equity to the extent that the equity was acquired in the 1,215-day period prior to filing. This limitation does not apply to a roll-over of equity from the sale of a previous residence in the same state. Third, §522(q) limits an exemption to $125,000 in several other situations. First, if the court determines that the debtor has been convicted of a felony that demonstrates that the filing of the case was an abuse of Title 11, or second, if the debtor owes a debt arising from 1) a violation of security laws; 2) fraud, deceit or manipulation in a fiduciary capacity in connection with the purchase or sale of any securities; 3) a violation of §1964 of Title 18; or 4) any criminal act, intentional tort or willful or reckless misconduct that caused serious physical injury or death to another individual in the previous five years. The limitations of §522(q) do not apply to the extent that the equity is reasonably necessary for the support of the debtor and any dependent of the debtor.
4. Effect of BAPCPA on the liquidation of nonexempt investments.
In this case, the debtor liquidated certain previously nonexempt investments and added the proceeds to his residence in State B, creating potentially nonexempt equity in the residence. The ability of the debtor to exempt the full amount depends on whether the debtor liquidated those nonexempt assets in an attempt to avoid his creditors. If so, §522(o) will operate to reduce the debtor’s exemption by that amount.
Additionally, to the extent that the debtor liquidated his nonexempt investments within 1,215 days (3.3 years) before the petition was filed, the creditors will argue that under §522(p), the debtor is limited to $125,000 in equity from the liquidation of those assets.
Although it does not appear relevant in this case, a debtor who files jointly with his spouse may claim that each individual (see §522(a) is entitled to $125,000 under §§522(o) and (p)).
5. Effect of BAPCPA on the rollover of equity from previous residence.
The equity that the debtor received from the sale of his first home, which was subsequently used to pay, in part, for the current home, is not exempt from the $125,000 ceiling in §522(p)(1). Section 522(p)(2)(B) states: “For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1,215-day period) into the debtor’s current principal residence if the debtor’s previous and current residences are located in the same state.” Since the debtor moved from another state, he does not qualify for this exception.
6. Effect of BAPCPA on the debt arising from drunk-driving injuries.
The injuries the debtor caused as a result of driving drunk also have an impact on his allowable exemptions. Under §522(q)(1), if a debtor elects to use state exemptions, he is limited to $125,000 in equity in his residence if the debtor owes a debt arising from “any criminal act, intentional tort, or willful or recklessness conduct that caused serious physical injury or death to another individual in the preceding five years.” (§522(q)(1)(B)). The debtor caused the accident within the five-year period, so §522(q) may apply. To the extent that the debtor owes a debt as a result of the accident, and because driving while intoxicated is clearly a criminal act, the creditors will argue that the debtor is limited to $125,000 of equity because he caused serious physical injury to another person.
7. The McNabb effect.
In In re McNabb, supra, the debtors filed a motion to abandon property because they believed that they were entitled to exempt the full amount of the homestead equity under Arizona’s exemption laws. The creditors opposed the motion, alleging that both §§522(o) and (p) were potentially applicable to limit the amount of the debtor’s exemptions. The court noted that both sections became effective immediately upon the President’s signing of the bill and therefore applied to the case, even though the majority of the provisions of BAPCPA, including the residency requirement, are not effective until Oct. 17, 2005.
In determining the possible limits of the debtors’ exemptions if the creditor’s allegations of fraud were well-grounded, the court strictly construed the amendments made by BAPCPA. It began by noting that, by the precise terms of the amendment, §522(p) applied if a debtor elected the state, rather than the federal, exemptions. The court noted that Arizona is an “opt-out” state, prohibiting the use of federal exemptions. Therefore, according to the court, the debtor did not elect the state exemptions. As a result, the court, citing its duty to interpret strictly unambiguous statutory language, held that the limits imposed by §§522(o) and (p) were not applicable in Arizona, and "[t]he fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning." McNabb, supra n.11.
8. Other considerations.
Other issues that may be raised in the context of exemption laws and the increased residency requirements in BAPCPA include:
Effective date:
The provisions of §§522(o), (p) and (q) all became effective immediately upon the President’s signing of the bill.
Domicile:
New §522(a)(3) allows the debtor to choose the exemptions of the state in which the debtor’s “domicile” is located in the 730-day period before filing. However, "domicile" is not necessarily defined as the place in which a debtor’s house is located. Rather, "domicile" is a more fluid concept that is determined by both facts and intent. This is explained by the court in In re Vaughan, 188 B.R. 234 (Bankr. E.D. Ky. 1995):
[Domicile] is of more extensive signification and includes, beyond mere physical presence at the particular locality, positive or presumptive proof of an intention to constitute it a permanent abiding place. "Residence" is of a more temporary character than "domicile." "Residence" simply indicates the place of abode, whether permanent or temporary; "domicile" denotes a fixed, permanent residence to which, when absent, one has the intention of returning.
Id. at 237 (quoting Minick v. Minick, 149 So. 483 (Fla. 1933)).
If justified by the facts, a debtor might argue that even though he had a “residence” in State A, his domicile was in State B for the required 730 days, thus affording him the benefit of the exemptions available in State B.
Extraterritoriality:
This concept operates to allow parties in one jurisdiction to operate under the laws of another jurisdiction. In the bankruptcy context, extraterritoriality would permit the exemption laws of one state to be operative in another state. Here, even though the petition was filed in State B, the exemption laws of State A will be invoked. However, the law of at least one state, Texas, bars the application of its homestead exemption outside of its boundaries. In other states where exemption laws are silent, courts have nevertheless held that their homestead laws do not have extraterritorial effect. See, e.g., In re Drenttel, 309 B.R. 320 (8th Cir. BAP 2004), and cases cited therein. The pre-emptive effect of the Bankruptcy Code over conflicting state laws will be at issue for courts facing this question.
This small sortie into the convolutions of the homestead exemptions of BAPCPA, as demonstrated by the McNabb decision, provides some indicia of the mountains of court decisions and case law to come.