In re Withington

594 B.R. 696

IN RE: Robert Ray WITHINGTON, Shelly Gail Withington, Debtors.

Bankruptcy Case No. 17-14318 EEB

United States Bankruptcy Court, D. Colorado.

Signed September 18, 2018

Nicholas Craig Horvath, Centennial, CO, for Debtors.

David E. Lewis, Louisville, CO, for Trustee.

ORDER OVERRULING OBJECTION TO HOMESTEAD EXEMPTION

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER is before the Court on the Objection of David E. Lewis, chapter 7 trustee (the "Trustee") to the Debtors' Amended Claim of Exemption. To resolve this dispute, the Court must interpret the 2005 amendments to 11 U.S.C. § 522(b)¹ to determine whether the Debtors are able to claim a homestead exemption. Having considered the parties' briefs, the Court hereby FINDS AND CONCLUDES:

The Debtors filed this chapter 7 case on May 10, 2017. Shortly before filing, they moved from Colorado to Illinois. The venue restrictions set forth in 28 U.S.C. § 1408(1) require individual debtors to file bankruptcy in the place of residence where they had lived for the greatest portion of the six-month period prior to filing. They had resided in Colorado from September 2011 through April 2017.² Thus, they were required to file in Colorado instead of their new home state.

Prepetition, the Debtors withdrew $28,900 from their IRA account to purchase a home in Decatur, Illinois (the "Property"). On the date of their bankruptcy, they lived in the Property and owned it free and clear of any liens or encumbrances. They initially claimed a homestead exemption for it under Colo. Rev. Stat. §§ 38-41-201(1)(a), 38-41-201.6 and 38-41-202, to which the Trustee timely objected. The Debtors then filed an amended claim of exemption, relying on both Colorado law and § 522(d)(1), to which the Trustee still objected.

I. THE PRIOR VERSION OF § 522(b)

When debtors move from one state to another shortly before filing bankruptcy, it affects not only where they must file the case, but it may also affect what exemptions they can claim. The Bankruptcy Code has a choice of law provision to govern this determination in § 522(b). Prior to 2005, § 522(b)(2)(A) contained the following domiciliary provision:

(2)(A) 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 ....

11 U.S.C. § 522(b)(2)(A) (2000) (amended 2005) (emphasis added). Thus, wherever the debtor lived for the greater portion of the six months prior to filing would be considered his domicile for purposes of claiming exemptions. This dovetailed nicely with the venue statute. In most cases, the state where the debtor had to file his case would also provide the applicable state law for claiming his exemptions.

However, the application of this domiciliary provision sometimes caused debtors to lose their exemptions. Many states have residency and property location restrictions on their exemptions. Some state exemption laws provide that they only apply to residents of the state. See, e.g. , Ind. Code § 34-55-10-2(c). Thus, if Indiana's exemption law applied under this formula and a debtor had moved his home and all of his possessions from Indiana to another state before filing, Indiana would deny him the use of any of its exemptions. A residency requirement coupled with a broadly worded opt-out statute could leave a debtor with no ability to substitute with bankruptcy exemptions. Such was the case in In re Hawkins , 15 B.R. 618 (Bankr. E.D. Va. 1981), where the court found the debtor could not claim Virginia exemptions because she was no longer a Virginia resident and Virginia had opted out of federal exemptions for all debtors. The court declined to strip the debtor of all exemptions, however, instead fashioning a de facto safety net by its conclusion that Virginia's residency requirement meant Virginia law was not "applicable to" the debtor under the prior version of § 522(b)(1) and, therefore, the debtor could choose the federal exemptions.

Colorado is one of many states that has a property location requirement. For its personal property exemptions there is no such requirement, but there is in its homestead statute:

Every homestead in the state of Colorado shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon: (a) The sum of seventy-five thousand dollars if the homestead is occupied as a home by an owner thereof or an owner's family....

Colo. Rev. Stat. § 38-41-201(1) (emphasis added). This unambiguous language dictates that it only applies to real property located within the state of Colorado. See also In re Jevne , 387 B.R. 301, 303-04 (Bankr. S.D. Fla. 2008) (plain language of Colorado's homestead exemption explicitly limits application to property within the state); In re Kelsey , 477 B.R. 870, 874 (Bankr. M.D. Fla. 2012) (same). Thus, the Debtors in this case cannot use the Colorado statute to exempt their Illinois home.

II. SECTION 522(B) AND THE BAPCPA AMENDMENTS

With the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Congress made two significant changes to § 522(b). It lengthened the domiciliary requirement in subsection (3)(A) and it added a safety net in an unnumbered paragraph following subsection (3)(C).³ For ease of reading, the Court has eliminated some language, highlighted other language, and added shorthand references for key provisions. In relevant part, it provides:

(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection ....

(2) Property listed in this paragraph is property that is specified under subsection (d) [the "bankruptcy exemptions "], unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize. [This last clause is referred to as the "Opt-out Clause "].

(3) Property listed in this paragraph is—

(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 [the "non-bankruptcy exemptions "] to the place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the petition [the "Qualifying Period "] or if the debtor's domicile has not been located in a single State for such 730-day period, 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 [the "Tiebreaker Period " and this paragraph as a whole is referred to as the "Domiciliary Provision "];

(B) ...; and

(C) ....

*If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d). [This paragraph is referred to as the "Hanging Paragraph " or the "Safety Net "].

11 U.S.C. § 522(b) (2005) (emphasis added).

Under the prior version of this statute, the bankruptcy court looked to where the debtor had resided for the longest portion of the six months before filing. The amendment requires the court to look back two years pre-filing. If the debtor did not live in the same state for the entire two-year Qualifying Period, then the court has to look back even further to the six-month period immediately before the Qualifying Period. In this six-month window, or the Tiebreaker Period, the court must determine where the debtor lived for the longest portion. This formula is almost always going to make applicable the law of the state immediately preceding the debtor's move to his new state. However, in rare cases, a debtor might reside in more than two states in the two and one-half years prior to bankruptcy. For example, if a debtor lived in Kansas during the greater portion of the Tiebreaker Period, then moved to Colorado for most of the Qualifying Period, and finally moved to Illinois shortly before filing, then in this example, the formula would make Kansas law the governing law.

Under both the prior version and the amendments, this statute has always given debtors two choices for claiming exemptions. They may choose to exempt the property listed in § 522(d) (the "bankruptcy exemptions") or property designated as exempt under applicable local, state, and non-bankruptcy federal law (the "non-bankruptcy exemptions"). There is, however, one large exception. Section 522(b)(2) allows states to "opt-out" of the bankruptcy exemptions, thereby preventing their residents from claiming the bankruptcy exemptions. Thirty-two states have opted out. Colorado is among them. Colo. Rev. Stat. § 13-54-107.

III. INTERPRETING THE 2005 AMENDMENTS

In lengthening the domiciliary requirement for claiming non-bankruptcy exemptions, Congress sought to curb forum shopping before a bankruptcy filing. Some legislators believed that the prior law's 180-day period made it too easy for debtors to relocate to states with more generous exemption laws, especially those with more generous homestead exemptions. Texas, Florida, Kansas, Iowa, Arkansas, and Oklahoma have unlimited homestead exemptions, meaning that their debtors may exempt an unlimited amount of home equity. Tex. Property Code Ann. §§ 41.001(a) and 41.002, Fla. Const. art. X, § 4 (a)(1), Kan. Const. art. 15, § 9, Iowa Code § 561.16, Ark. Const. art. 9, §§ 3 - 5, Okla. Const. art. XII, § 2, Okla. Stat. tit. 31, § 2. By way of...