In re Montanez

In re: William & Dulcie Montanez, Debtors.

Case No. 18bk24734

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

April 1, 2020

Chapter 7

Honorable LaShonda A. Hunt

MEMORANDUM OPINION

Introduction

Pending before the court is the motion of Chapter 7 Trustee Cindy Johnson to compel turnover of funds by debtors William J. Montanez and Dulcie M. Montanez.¹ The Trustee contends that although the Montanezes properly claimed an exemption under Illinois law in proceeds from the pre-petition sale of their residence, their failure to then reinvest those proceeds in another homestead within the one-year statutory time limit caused the funds to revert to the bankruptcy estate. The Montanezes challenge the turnover request on two grounds—first, as untimely since the Trustee failed to object to the proceeds exemption, and second, as contravening the well-established snapshot rule that provides for property of the estate to maintain its exempt status held on the petition date. The Trustee counters with arguments about the supremacy of state exemption schemes and her ability to stand in the shoes of a hypothetical lien creditor and levy under state law. For the reasons discussed below, the court agrees with the Montanezes, and so the Trustee's motion will be denied.

Background

The following facts are undisputed and drawn from the pleadings and bankruptcy docket, of which this court takes judicial notice. See Inskeep v. Grosso (In re Fin. Partners), 116 B.R. 629, 635 (Bankr. N.D. Ill. 1989). Around June 21, 2018, the Montanezes sold their home and received $12,176 in sale proceeds, which they placed in a separate savings account at Bridgeview Bank. (Dkt. 24 ¶¶ 3-4). A couple of months later, the Montanezes filed a joint Chapter 7 petition on August 31, 2018. (Id. ¶ 1). They listed the Bridgeview Bank savings account containing $12,176 on Schedule A/B and claimed an exemption in those proceeds under 735 ILCS 5/12-906 on Schedule C.² (Dkt. 1 at 12, 17). The Trustee held the initial § 341 meeting of creditors on or about October 9, 2018,³ then continued the meeting to November 13, 2018, and finally to December 27, 2018. (Dkts. 11, 14). The Trustee filed an initial report of assets on January 3, 2019. (Dkt. 17). However, she did not object to the Montanezes' exemption.

Instead, on August 16, 2019, the Trustee sought to compel them to turn over the sale proceeds because the exemption officially expired on June 21, 2019—one year after the sale—when the Montanezes had not used them to purchase a new homestead. (Dkt. 24). The Trustee maintained that if the proceeds were no longer exempt under Illinois law then they likewise lost their exemption in the bankruptcy case. The Montanezes disagreed, asserting that since the Trustee never objected to the exemption, the proceeds had passed out of the estate and were no longer recoverable for distribution to pre-petition creditors. They also argued that the snapshot rule governed, meaning that state law in existence on the petition date determines a property'sexemption status and the property maintains that status throughout the bankruptcy case. The Trustee responded that there was no need for her to object before the exemption actually expired, or at all, given that the estate holds an unexempted equitable interest. She also insisted that bankruptcy law should bow to Illinois law when applying state exemptions, or else, contrary to the intent of the Illinois legislature, a conditional exemption would be treated as permanent for a bankruptcy debtor. (Dkt. 30).

The parties later filed supplemental authority in support of their respective positions, with each pointing to recent Seventh Circuit rulings. (Dkts. 40, 46). The Montanezes cited In re Burciaga, 944 F.3d 681 (7th Cir. 2019), as affirming the validity of the snapshot rule, while the Trustee relied on In re Jaffe, 932 F.3d 602 (7th Cir. 2019), for the premise that an exemption may be limited by a contingent future interest. The court heard oral argument on February 6, 2020, after which the Trustee submitted a list of additional authority for consideration. The matter was then taken under advisement.

Jurisdiction

The court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 151. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (E).

Discussion

When a bankruptcy petition is filed, an estate is created which encompasses all property of the debtor, even property later claimed to be exempt. 11 U.S.C. § 541(a)(1), (a)(2); Owen v. Owen, 500 U.S. 305, 308 (1991); In re Geise, 992 F.2d 651, 655 (7th Cir. 1993). Property vests in the estate immediately and is available to satisfy prepetition claims. Burciaga, 944 F.3d at 685. But debtors may remove certain property from the estate by claiming exemptions under § 522(b).Owen, 500 U.S. at 308; Payne v. Wood, 775 F.2d 202 (7th Cir. 1985). Once removed, the property generally passes through the bankruptcy and returns to the debtors. Payne, 775 F.2d at 204.

Debtors can use exemptions enumerated by the Bankruptcy Code or under applicable nonbankruptcy law. 11 U.S.C. § 522(b)(1)-(3). That said, states may choose to require debtors to use state exemptions only. Owen, 500 U.S. at 308 ("[n]othing in subsection (b) (or elsewhere in the Code) limits a state's power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all."). Illinois has done just that. See 735 ILCS 5/12-1201; Clark v. Chicago Mun. Emp. Credit Union, 119 F.3d 540, 543 (7th Cir. 1997). The state of affairs and the state law applicable on the petition date determine what is and is not exempt in a bankruptcy case. 11 U.S.C. § 522(b)(3)(A); Owen, 500 U.S. at 314 n.6 (deferring to this statutory language). This focus on the petition date is known as the "snapshot" rule: the parties take a snapshot of the case on the filing date and all rights are fixed. In re Awayda, 574 B.R. 692, 695-96 (Bankr. C.D. Ill. 2017).

The Supreme Court first recognized the snapshot rule's application for homestead exemptions in White v. Stump, 266 U.S. 310, 313 (1924) (explaining that "the point of time which is to separate the old situation from the new in the bankrupt's affairs is the date when the petition is filed"). The Court later affirmed the principle "that the bankrupt's right to a homestead exemption becomes fixed at the date of the filing of the petition in bankruptcy and cannot thereafter be enlarged or altered by anything the bankrupt may do." Myers v. Matley, 318 U.S. 622, 628 (1943). At issue substantively is whether the snapshot rule still controls in the face of a conditional state law exemption. But before the court can reach that question, the Trustee has to overcome an initial hurdle—her lack of objection to the Montanezes' proceeds exemption.

I. Requirement to Object to Exemptions

The Montanezes had a right to claim the proceeds exemption under applicable Illinois law as of the petition date in August 2018, 735 ILCS 5/12-906, and they properly did so on their Schedule C. See 11 U.S.C. § 522(l); Fed. R. Bankr. P. 1007, 4003. At that point, any interested party who opposed this property being exempted and removed from the estate needed to file an objection within thirty days after the trustee concluded the § 341 meeting of creditors. Fed. R. Bankr. P. 4003(b)(1). Without a timely objection, "the property claimed as exempt on [Schedule C] is exempt." 11 U.S.C. § 522(l). Nevertheless, the court can extend that deadline for cause if a request is filed before the thirty days expires. Fed. R. Bankr. P. 4003(b)(1).

Here, the Trustee adjourned and continued the Montanezes' § 341 meeting several times, with the final meeting held on December 27, 2018. A week later, she filed an initial report of assets in the case. A § 341 meeting concludes at the end of its scheduled date and time, unless the Trustee adjourns and files a notice of the next date and time. See Fed. R. Bankr. P. 2003(e), Advisory Committee Notes, 2011 Amendments; see also Jenkins v. Simpson (In re Jenkins), 784 F.3d 230, 238 (4th Cir. 2015) ("because the meeting was never adjourned, we hold it was concluded").⁴ For that reason, the thirty-day clock began to run after the December meeting, with the Trustee (or any other interested party) having until January 26, 2019 to object.

The Trustee did not seek an extension of the time to object nor did she file an objection to the proceeds exemption. In that situation, the law is clear—a trustee who fails to make a timely objection may not later contest an exemption. Taylor v. Freeland & Kronz, 503 U.S. 638, 643-44(1992). Even if the debtors claim an invalid exemption with no colorable basis, interested parties must lodge a timely objection in order to challenge the exemption. Id.; cf. Schwab v. Reilly, 560 U.S. 770, 795 (2010) (granting turnover of any value exceeding a scheduled exemption amount, as that value was not exempted and thus not lost by a lack of objection). By failing to object, then, the Trustee forfeited her right to attack the Montanezes' exemption. As a result, those exempted proceeds returned to them, and, more significantly, now fall beyond the reach of pre-petition creditors. Payne, 775 F.2d at 204. The Trustee certainly has a right to seek turnover of property of the estate that has not been exempted under § 522, but these proceeds do not fit within that category. See 11 U.S.C. § 542(a).

A. Ripe for Objection

The Trustee suggests that she lacked a good-faith basis for objecting to the Montanezes' exemption by the January 2019 deadline, given that the statute exempted their homestead proceeds for a year post-sale, which did not expire until June 2019. While that may be true, the Trustee was not without a remedy under these circumstances. She could have simply continued the § 341 meeting under Rule 4003(b)(1) until the one-year time limit ran or moved to extend the time period to object. See In re Stewart, 452 B.R....