Bankruptcy News Flash: New Bankruptcy Ruling In Arizona May Affect Florida
Debtor Homestead Property
Creditors have always feared
states with large homestead protections. Florida,1 one
of the five homestead-protective debtor states,2
was considered by many to be the ultimate “debtor’s haven”3
and was the target of a great deal of criticism. Stocking cash into
real estate has never been disdained in Florida. Florida’s homestead
protectionism was succinctly described by Southern District of Florida
Bankruptcy Judge A. Jay Cristol, who told the New York Times,
“You could shelter the Taj Majal in this state and no one could do
anything about it.” 4 The creditor
community perceived this sheltering to be epidemic, especially in the Havoco
decision, when the Florida Supreme Court allowed a debtor to deliver
nonexempt cash to the homestead after a judgment creditor chased the
debtor to Florida, where he avoided attachment by purchasing a large
Reaction to Homesteads in Bankruptcy
Before April 20, 2005 – the
date President Bush signed into law the, Bankruptcy Abuse Prevention
and Consumer Protection Act6 (BAPCPA) –
bankruptcy exemption law for debtor havens was relatively
straightforward: If the state prohibited the federal exemptions, called
“opt out” legislation, its state exemption would dictate what property
was or was not exempt in the federal bankruptcy proceeding. The
Bankruptcy Code allows a state to opt out of the federal scheme of
exemptions in favor of state-established exemptions.7
For example, Florida, by virtue of §222.20, opted out of the federal
scheme.8 Three of the four other
homestead-protective states similarly opted out of the federal
In 2005, the “opt out” states10 with large homestead exemptions were the
concern of Congress, whose attention was alerted by the creditor
lobbyists who perceived severe debtor abuse in the five
homestead-protective states.11 This
concern spurred Congress to prevent the alleged bankruptcy abusers from
being unrightfully protected.12
Quasi-“opt-in”13 legislation ensued. Now,
in the opt-out states, a debtor may be limited in his or her homestead
if he or she has not resided in the homestead-protective state’s home
for the prescribed time recited by Congress.
The post-April 20, 2005, the
Code allegedly stamped out the ability to easily migrate from outside
jurisdictions to homestead-protective states.14
The basic formula is that anyone who resides in a state less than 730
days prior to filing bankruptcy will not be entitled to the
homestead-protective state’s exemptions.15
Debtors who reside in a homestead-protective state at least 730 days
but less than 1,215 days may have an exemption limitation (cap) for
their homestead of $125,000.16 The
majority of debtors who have resided continuously in the homestead for
1,215 days will not be affected by the new legislation.
As of April 20, 2005, Florida’s
Supreme Court’s protections recited in Havoco – where the
homestead’s sanctity will not be disturbed irrespective of its purchase
after creditor pursuit or even judgment – certainly should not apply in
the bankruptcy forum if the debtor moved into a Florida homestead (as a
resident) within 1,215 days.17
BAPCPA created a dichotomy
between those who are in bankruptcy and those who are not. In the
homestead-protective states, a nonfiler who moves to the state between
one day and 1,215 days can enjoy the entire homestead to be exempt.
Alternatively, a bankruptcy filer whose residency is also less than
1,215 days18 may be limited to a homestead
of a certain amount.19 Federal law clearly
hampers state homestead protections at least until the debtor’s
residency reaches 1,215 days.
Two Views on §522(p)
Just when the
homestead-protective states were about to throw in the towel and allow
the homestead cap to affect the unlimited homestead, an Arizona
bankruptcy judge granted a reprieve. Judge Randolph J. Haines issued an
opinion that Congress poorly drafted BAPCPA’s limit on the homestead
exemption to $125,000 for those who resided in the state between 730
days and 1,215 days.20
The argument is simple, but
requires review of complex clauses of the Code. Judge Haines demands a
reading of the statute as a whole as opposed to a narrow reading of the
homestead-cap section.21 In Arizona, the
limitations of homestead described above presently do not apply in
“opt-out” states – including homestead-protective states. In re
McNabb, 2005 WL 1525101 (Bankr. D. Ariz. 2005).
The McNabb court
required the $125,000 exemption to be seen through the wording of the
new bankruptcy provisions. First, the $125,000 cap on homestead refers
to §522(b)(3)22 as incorporated by §522(p).23 Before the cap of §522(p) applies, one
must read §522(b)(2), which states: “Property listed in this paragraph
is property that is specified under subsection (d), unless the
state law that is applicable to the debtor under paragraph (3)(A)
specifically does not so authorize” (emphasis added).
The McNabb court
showed that the Code, as a whole, reads differently than a section by
itself. First, “the $125,000 cap applies only ‘as a result of electing
under subsection (b)(3)(A) to exempt property under state or local
law.’ Code §522(b)(1) allows debtors to elect to exempt property listed
in either paragraph 2 [§522(b)(2)] or alternatively in paragraph 3
[§522(b)(3)].”24 The McNabb
court concluded that the limitations of §522(p) cannot apply because
“the election ostensibly made available by §522(b)(1) may be taken away
by a combination of state law and §522(b)(2).”25
The McNabb court concluded that without the debtor’s ability
to elect exemptions (Arizona is an “opt out” state where the debtor has
no right to elect federal as opposed to state exemptions – the
§522(b)(3)(A) election) the debtor cannot be limited to the $125,000
cab, which arises only “as a result of electing under
subsection (b)(3)(A) to exempt property under state and local law”26 (emphasis added).
The term “elect” arises in 11
U.S.C. §522(p) as well as §522(b)(3)(A). The prefatory language
limiting the homestead to $125,000 in §522(p) specifically requires the
debtor’s election, as it states that “as a result of electing under
subsection (b)(3)(A) to exempt property under state or local law, a
debtor may not exempt any amount of interest that was acquired by the
debtor during the 1,215-day period preceding the date of the filing of
the petition that exceeds in the aggregate $ 125,000 in value in [the
debtor’s] residence.”27 McNabb
concludes that because opt-out states prohibit election, debtors in
opt-out states cannot elect between federal or state exemption law. As
Arizonans cannot elect, then neither §522(b) nor 522(p) can limit their
Clear and unambiguous, this
apparent glitch of the new Code may upset creditors as it appears
§522(p) only applies in the minority of states that did not opt out.
The McNabb court concluded that the statute cannot be
second-guessed: “[H]ere there is no ambiguity nor absurdity in result.
The language is unambiguous in stating that the cap is imposed only ‘as
a result’ of an election, so if there is no election there can be no
cap. And the result can hardly be deemed absurd when it is consistent
with 163 years of bankruptcy law.” 28
In re Kaplan
Just when homestead-protective
states caught their breath after rejoicing over the McNabb
ruling, Florida reviewed this issue and disagreed. Utilizing the
“election theory” of McNabb, a Florida debtor sought to
prohibit the imposition of a limitation on homestead to $125,000 under
§522(p). The debtor received an opposite decision.
Judge Robert A. Mark, who
strongly disagrees with McNabb, rules for the trustee in Kaplan
and chastised the Arizona court’s McNabb decision.
The shaky platform supporting
the McNabb decision collapses unless the phrase “as a result
of electing under subsection (b)(3)(A) to exempt property
under state law” unambiguously means the statute only applies to
debtors who can choose between federal and state exemptions. This court
does not agree that the language is unambiguous . . .29
Judge Mark further wrote:
To arrive at this result [McNabb
decision to allow non-opting states to still use the unlimited
homestead] based on a strained and convoluted use of statutory
interpretation in the face of this unambiguous legislative intent is
simply wrong. 30
As of November 2005, the courts
could either side with Florida’s Kaplan or Arizona’s McNabb.
In Nevada, where the court had to choose between the two conflicting
decisions, the court sided with Judge Mark as it concluded that the
legislative intent was to limit the homestead exemption: “Congress
clearly intended to apply the provisions of [§522](p) to all debtors
and not merely those citizens of states that permit the use of federal
exemptions.”31 No other decisions had been
entered as of November 2005.
At present, one can only
speculate whether the other courts will agree with Judge Mark’s
directive to cease litigation over this issue.32
If that happens, then the mansion loophole should finally be closed for
the new residents of the homestead-protective states. Until then, this
issue and the many other ambiguous clauses of BAPCPA will be the
subject of future jurisprudence.
acres of unlimited exemption for homestead [Article X, §4, Fla.
Const.], all of IRA , all of ERISA plans, and all of life insurance and
2Florida, Kansas, Texas, South Dakota
and Iowa. This list also includes the District of Columbia.
3Havoco of America Ltd. V. Hill,
790 So.2d 1018 (Fla. 2001).
4Rohter, Larry. “Rich Debtors Finding
Shelter Under a Populist Florida Law,” N.Y. Times A-1 (July
5Havoco of America v. Hill, 790
So.2d 1018 (Fla. 2001).
6The President said at the time of the
Thank you all.
Please be seated. Welcome. Thank you very much for coming today. Today
we take an important action to strengthen -- to continue strengthening
our nation's economy. The bipartisan bill I'm about to sign makes
common-sense reforms to our bankruptcy laws. By restoring integrity to
the bankruptcy process, this law will make our financial system
stronger and better. By making the system fairer for creditors and
debtors, we will ensure that more Americans can get access to
11 U.S.C. §522(b) (1994).
White House Press Page:
8Owen v. Owen, 500 U.S. 305,
9Another exemption is for rural property
10Only Texas chose not to opt out. As
will be discussed below, this subjects Texas to the $125,000 of §522(p).
11 This does not include the rural
exemption allowed in Oklahoma.
12Concern existed in Congress about the
large homesteads. Representatives stated that BAPCPA "restricts the
so-called 'mansion loophole,' " which it identified as permitting
"debtors living in certain states [to] shield from their creditors
virtually all of the equity in their homes." It did not identify those
"certain states." H. Rep. 109- 31, 109th Cong., 1st Sess., text
accompanying footnote 71.
13Better coined “compelled in.”
14See new 11 U.S.C. §522(b).
1511 U.S.C. §522(b)(3)(A).
16There are exceptions for bank
defrauders and adjudicated DUI offenders.
17An exception for certain felons
prohibits the exemption scheme even after 1,215 days of residency. 11
18The residency must be 730 days in the
state before the date of the filing. 11 U.S.C. §522(b)(3)(A). If less
than 730 days, then the state exemptions of the state where he came
from apply. If a resident for 730 days, but less than 1,215 days, then
the exemption is $125,000 of real property acquired by the debtor
within 1,215 days of the filing – if the debtor elects to use the state
exemption as allowed under §544 and as elected under §522(b)(3)(A). See
11 U.S.C. §522(p).
19See footnote 20 for restrictions.
20In re McNabb, 2005 WL
1525101 (Bankr. D. Ariz. 2005); 326 B.R. 785 (Bankr. Ariz. 2005).
2111 U.S.C. §522(p).
22522(b)(3) Property listed in this
(A) subject to subsections (o)
and (p), any property that is exempt under federal law, other than
subsection (d) of this section, or 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 the 180 days
immediately preceding the date of the filing of the petition, or for a
longer portion of such 180-day period than in any other place….
Except as provided in paragraph (2) of this subsection and §§544 and
548 [11… §§544 and 548], as a result of electing under subsection
(b)(3)(A) to exempt property under state or local law, a debtor may not
exempt any amount of interest that was acquired by the debtor during
the 1,215-day period preceding the date of the filing of the petition
that exceeds in the aggregate $ 125,000 in value in-
(A) real or personal property
that the debtor or a dependent of the debtor uses as a residence….
re McNabb, 2005 WL 1525101 (Bankr. D. Ariz. 2005); 326 B.R. 785,
788 (Bankr. D. Ariz. 2005). Also look to footnote 7 for interesting
analysis how the new Code authorizes some sections interpreted herein,
but the related provisions will not become effective until Oct. 15,
2005, thereby making the reading slightly blinded.
25In re McNabb, 2005 WL
1525101 (Bankr. D. Ariz. 2005); 326 B.R. 785, 788 (Bankr. D. Ariz.
26In re McNabb, 2005 WL
1525101 (Bankr. D. Ariz. 2005); 326 B.R. 785, 788 (Bankr. D. Ariz.
2005). citing 11 U.S.C. §522(b)(1).
28In re McNabb, 2005 WL
1525101 (Bankr. D. Ariz. 2005); 326 B.R. 785, 789 (Bankr. D. Ariz.
29In re Kaplan, 331 B.R. 483,
486 (Bankr. S.D. Fla. 2005).
30In re Kaplan, 331 B.R. 483,
488 (Bankr. S.D. Fla. 2005).
31In re Virissimo, 2005 Bankr.
LEXIS 2085 (Bankr. D. Nev. 2005).
32Judge Mark wrote:
Over the coming months, or
years, courts will need to wrestle with some interpretation issues in
calculating the available exemptions under the cap in §522 (p) and (q),
including, for example, how to handle appreciation in the property.
Courts should focus on these issues and the scores of other issues
arising under the Reform Act that will engender bona fide debate. This
issue, however, should not engender such debate. Determining whether
the homestead caps apply in Florida should not be in dispute and should
not distract us further.
In re Kaplan, 331 B.R. 483, 488 (Bankr. S.D. Fla.
Florida Homestead Act may survive federal
In the first published
opinion interpreting a provision of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (“BAPCPA”), Judge Randolph J. Haines of
the District Bankruptcy Court, Phoenix Arizona, 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, 326 B.R. 785, 2005 WL 1525101, Case No.
0-05-07495-RJH (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
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
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
The court noted that the new law or amendment does not become effective
until 180 days after enactment, or October 17, 2005
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
The result, the court observed, is that a debtor in
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.
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.
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.
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.
Another Court Applies
judge in the Southern District of Florida has weighed in on the effect
of the BAPCPA amendments' caps on homestead exemptions. In re
Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 10/14/05). In Wayrynen,
the trustee objected to a debtor's claim of exemption for a homestead
with a $150,000 value which had been purchased a month prior to his
bankruptcy filing. 11 U.S.C. 522(p) imposes a $125,000 cap on
exemptions claimed for homesteads purchased within 1,215 days of the
petition date. The debtor responded by contending that the cap did not
apply in Florida, an "opt out" state which does not permit an election
between federal and Florida exemptions, and furthermore that the cap
did not apply because the equity in the homestead was derived from the
sale of a previous home in Florida which had been owned more than 1,215
days prior to the filing date.
Judge Friedman noted in Wayrynen, like Judge Haines in McNabb,
that the "as a result of electing" language in 522(p) could be
construed as meaning that a Florida resident (who, as a result of state
law, does not have the option of electing between federal and state
exemptions) is not subject to the cap. However, like Judge Mark (the
Chief Judge of the Southern District of Florida), Judge Friedman found
that such an interpretation would be contrary to the intention of the
Reform Act's drafters. He reconciled the language with the legislative
intent by finding that a Florida resident who claims a homestead
exemption under state law has made an election by having chosen to
reside in Florida, having chosen to purchase a residence in Florida,
having chosen to make it his or her permanent residence, and having
availed himself or herself of bankruptcy relief.
Nonetheless, the debtor prevailed on his second argument that the
equity in his current homestead in excess of the cap was still exempt
because it was derived from a previously owned Florida homestead owned
more than 1,215 days prior to the petition date. 522(p)(2)(B) provides
a "carve-out" from the cap which excludes the amount of any "interest
transferred from a debtor's previous principal residence (which was
acquired prior to the beginning of such 1215-day period) into the
debtor's current principal residence" if they are both in the same
The debtor had initially purchased a Florida residence in 1989 for
slightly less than $100,000. He sold that property in August 2002
(within 1,215 days of the petition date) for $250,000, realizing a
little more than $150,000 in equity. He then purchased another Florida
residence the next month for about $175,000. The second homestead was
then sold in March 2005 for $271,500, and a new homestead purchased for
$146,000. Judge Friedman found that the "interest transferred" from the
debtor's previous residence (the first property) amounts to $150,000
(the built-up equity realized upon its sale) which was reinvested in
the subsequent homesteads, and that since the amount of that "interest"
is excluded from the interest being claimed as exempt, the debtor was
entitled to claim the entire $150,000 present value of his current
homestead as exempt.
In so holding, Judge Friedman rejected the trustee's argument that the
reference in the "carve-out" to the Debtor's previous principal
residence" should be construed as referring only to the particular
property owned by the debtor immediately prior to the own being claimed
as exempt. Instead, he extended the protection of the carve-out to
prior homesteads owned by the debtor as well, on the basis that the
safe harbor appears to have been intended "to afford protection to
individuals like the Debtor who, rather than seeking to take advantage
of Florida's exemption provisions to shelter illicitly- or
improperly-obtained funds, simply have benefited as a result of their
ownership of Florida real property and the general appreciation of
property values attributable to previous intra-state transactions."
bankruptcy judge in Nevada has joined Judge Mark of Florida in
concluding that the 522(p) homestead exemption cap applies in all
states, and not just those which permit residents to elect between the
federal and state exemptions. In re Virissimo, 332 B.R. 201
(Bankr. D. Nev. 2005). As previously discussed here, at least one judge
in Arizona has held that the language used by Congress in 522(p) to
create a $125,000 cap on exemptions for homesteads purchased less than
1,215 days prior to bankruptcy does not apply in states where the state
legislature has prohibited debtors from selecting the federal rather
than state exemptions. In re McNabb, 326 B.R. 785 (Bankr. D.
Ariz. 2005). A Florida court has held to the contrary that 522(p) can
and should be interpreted consistently with legislative intent to
impose the cap on all state homestead exemptions. In re Kaplan,
2005 WL 2508151 (Bankr. S.D. Fla. 2005). The different results center
on the interpretation of the phrase in 522(p) which renders the cap
applicable "as a result of electing under subsection (b)(3)(A) to
exempt property under State or local law," and the extent of reliance
on legislative history. Judge Riegle in Virissimo joins the Kaplan
court in applying the cap broadly.
In divining the plain meaning of 522(p), Judge Riegle concludes that
there is an "election" for purposes of 522(p) when a debtor elects to
claim property as exempt, and "elects" to do so under 522(b)(3). She
suggests that a debtor always "elects" between exemptions under the
federal provisions under 522(b)(2) and the state or local provisions
under 522(b)(3), even if an "election" to use 522(b)(2) might be
ineffective if the state law prohibits use of the federal exemptions
and a timely objection is made.
Alternatively, Judge Riegle finds the statute ambiguous in that it is
susceptible to multiple interpretations and, like Judge Mark, concludes
that legislative history can be relied on when the clearly expressed
legislative intent is contrary to the strict language. Also like Judge
Mark, the Nevada court had no difficulty discerning Congressional
intent to apply the cap to all debtors and not solely those who reside
in states that permit the use of federal exemptions.
With three notable decisions already issued, the homestead cap -- which
was one of the most frequently discussed BAPCPA changes -- is proving
to be a continuing subject of debate and dispute.
Click here for the entire court opinion cited
The conflicting Florida opinion: Click here for the entire court opinion cited
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