On an issue where the circuits are divided, the First Circuit upheld the two lower courts by ruling that a homestead exemption, valid on the chapter 13 filing date, is not lost if the debtor sells the home but does not reinvest the proceeds within six months as required by state law.
The July 30 opinion from the Boston-based appeals courts is the latest evidence of an eroding circuit split. As it now stands, only the Ninth Circuit has authority starkly at odds with the decision by the First Circuit. The Fifth Circuit is backing off from In re Frost, 744 F.3d 384 (5th Cir. 2014), where the appeals court ruled that the exemption is lost if a home is sold after a chapter 13 filing and the proceeds are not reinvested.
As noted by the First Circuit, the contrary Ninth and Fifth Circuit opinions were both written before the Supreme Court made important pronouncements about the inviolability of exemptions and a debtor’s property in Harris v. Viegelahn, 135 S. Ct. 1829 (2015), and Law v. Siegel, 571 U.S. 415 (2014).
The Facts
The debtor confirmed a chapter 13 plan under which he would retain his home and pay the mortgage directly. The home was in Maine, a state with a $47,500 homestead exemption. Maine opted out of federal exemptions.
One year after confirmation, the debtor decided to sell the home. The bankruptcy court approved the sale, which generated proceeds of almost $52,000 after paying the mortgage and closing costs. In accord with the bankruptcy court’s order, the debtor retained $47,500, his homestead exemption. More than $4,000 went to the trustee for distribution to creditors.
Five months after closing, the debtor converted the case to chapter 7 and received his general discharge. When a homeowner sells a home, Maine law requires reinvesting the proceeds in another homestead within six months to maintain the exemption.
When the debtor did not purchase another home within six months, the chapter 7 trustee objected to the allowance of the debtor’s homestead exemption in the proceeds. Chief Bankruptcy Judge Peter G. Cary of Portland, Maine, overruled the objection. The district court affirmed last year, prompting the trustee to appeal again.
To read ABI’s report on the district court opinion, click here.
The Code Governs
Circuit Judge O. Rogeriee Thompson began her analysis by citing the Supreme Court decisions from 1924 and 1943 establishing the so-called snapshot rule, where the debtor’s financial condition is frozen on the filing date. The rule means that an “asset will retain whatever status . . . it had when the debtor filed for bankruptcy,” she said.
Judge Thompson said, in substance, that an asset exempt on the filing date will retain its exemption unless there is a statutory exception permitting loss of the exemption.
Judge Thompson then inquired as to whether an exemption could be lost if a chapter 13 case was converted to chapter 7. Naturally, she cited Section 348(a) for the proposition that conversion from one chapter to another does not change the original filing date. In other words, “the estate does not begin anew” on conversion, she said.
“So, without a doubt,” Judge Thompson said, “we examine [the debtor’s] claim of a homestead exemption on the date he filed for his chapter 13 bankruptcy.”
Because there are no statutory exceptions regarding the homestead exemption, Judge Thompson upheld the lower courts. But what about Maine law, where the exemption is lost in six months absent purchasing another homestead?
Judge Thompson said that “Maine’s six-month period for protecting the value of that homestead would not apply. From our perspective, that is what the Code requires.”
Contrary Circuit Authority
The trustee wanted the First Circuit to follow contrary authority: Frost from the Fifth Circuit, and In re Jacobson, 676 F.3d 1193 (9th Cir. 2012), from the Ninth Circuit. Judge Thompson said “these cases are unpersuasive,” in part because neither “addresses the Code’s valued ‘fresh start’ principles articulated in Harris.”
Judge Thompson noted how Frost and Jacobson were written before the Supreme Court decided Harris and Law. The high court authorities tell lower courts that a debtor’s property or exemptions cannot be invaded absent statutory authority.
In this writer’s view, Frost has been all but abandoned by the Fifth Circuit. The New Orleans-based court has rejected Frost in cases where the facts were different. This writer is also of the opinion that a three-judge panel in the Fifth Circuit could rule contrary to Frost because it was impliedly overruled by Harris and Law.
To read about how subsequent panels of the Fifth Circuit have undermined Frost, click here.
On an issue where the circuits are divided, the First Circuit upheld the two lower courts by ruling that a homestead exemption, valid on the chapter 13 filing date, is not lost if the debtor sells the home but does not reinvest the proceeds within six months as required by state law.
The July 30 opinion from the Boston-based appeals courts is the latest evidence of an eroding circuit split. As it now stands, only the Ninth Circuit has authority starkly at odds with the decision by the First Circuit. The Fifth Circuit is backing off from In re Frost, 744 F.3d 384 (5th Cir. 2014), where the appeals court ruled that the exemption is lost if a home is sold after a chapter 13 filing and the proceeds are not reinvested.
As noted by the First Circuit, the contrary Ninth and Fifth Circuit opinions were both written before the Supreme Court made important pronouncements about the inviolability of exemptions and a debtor’s property in Harris v. Viegelahn, 135 S. Ct. 1829 (2015), and Law v. Siegel, 571 U.S. 415 (2014).