Rockwell v. Hull (In re Rockwell)

968 F.3d 12

IN RE Jeffrey J. ROCKWELL, Debtor.

Jeffrey J. Rockwell, Appellee,

v.Nathaniel Richard Hull, Appellant.

No. 19-2074

United States Court of Appeals, First Circuit.

July 30, 2020

Nathaniel R. Hull, Portland, ME, and Verrill Dana LLP on brief for the appellant.

Christopher J. Keach, Biddeford, ME, and Molleur Law Office on brief for the appellee.

Before Thompson, Lipez, and Kayatta, Circuit Judges.

THOMPSON, Circuit Judge.

Jeffrey J. Rockwell filed for Chapter 13 bankruptcy and exempted his home from the bankruptcy estate under Maine's homestead law. Later, while the bankruptcy was still proceeding, Rockwell sold that home, and, despite Maine's law, did not reinvest the proceeds of the sale in another homestead within six months. When he converted his bankruptcy to a Chapter 7 proceeding, Chapter 7 Trustee Nathaniel Richard Hull objected to Rockwell's homestead exemption. The bankruptcy court denied Hull's objection and the district court affirmed. Hull then appealed to us. Holding that the Bankruptcy Code dictates that Rockwell's homestead exemption maintains the status it held on the day Rockwell filed his bankruptcy petition, we affirm.

BACKGROUND

In 2001, Rockwell purchased property on B Street in South Portland, Maine. He still owned that property and was living there on August 19, 2015, when he filed for Chapter 13 bankruptcy. As he was entitled to under Maine law, 14 M.R.S. § 4422(1), Rockwell claimed a homestead exemption for $47,500 of equity for the B Street property.¹ As part of his Chapter 13 reorganization plan, Rockwell proposed to pay the owner of the B street mortgage (i.e., one of his creditors) directly from his other assets and retain ownership and possession of the property. The bankruptcy court confirmed Rockwell's Chapter 13 plan in November 2015.

By December 2016, Rockwell's plans to retain the B Street Property had changed. Specifically, he sought the bankruptcy court's permission to sell the property for $160,000. Rockwell proposed that he would retain the $47,500 allowed by Maine's homestead exemption and contribute the remaining, non-exempt proceeds to his Chapter 13 reorganization plan. At the hearing on Rockwell's motion to sell the property, the Chapter 13 trustee expressed concern about Rockwell's proposed sale price, but nonetheless expected the court to grant the motion.

The bankruptcy court granted Rockwell's motion and ordered him to use the money from the sale to pay the closing costs and the mortgage. Rockwell was to pay any remaining, non-exempt funds from the sale to the Chapter 13 trustee to pay down Rockwell's debt.

On March 6, 2017, Rockwell finalized the sale of the B Street property. After paying the closing costs and the lender, $51,682.87 was left. He kept $47,500 (his homestead exemption as allowed by Maine law) and paid the remaining $4,182.87 to the Chapter 13 trustee. The Chapter 13 trustee did not object.

After the sale, Rockwell still lived at the B Street property, but he planned to move into a home on Bancroft Court, in Portland. Though Rockwell did not own the Bancroft Court property, in the months after the sale and prior to his move, he contributed to its upkeep. Specifically, Rockwell spent $18,806.23 of his homestead exemption on paint, tile, fuel oil, carpet, plumbing, tree-cutting services, and other miscellaneous repairs and supplies, all for the Bancroft Court property, and on moving expenses to move his own belongings from the B Street property to the Bancroft Court property. Then, on August 7, 2017, Rockwell converted his Chapter 13 case to a Chapter 7 case. Rockwell moved into the Bancroft Court property in September 2017 and continued to spend the money from his homestead exemption on repairs and improvements to the Bancroft Court property.

A few months later, the Chapter 7 trustee, Hull, objected to Rockwell's use of the homestead exemption. Hull argued that Rockwell was no longer using the exemption to protect his interest in a homestead because he had not reinvested the proceeds of the sale as required by Maine law. Therefore, from Hull's perspective, the previously protected money -- specifically, the $28,693.77 that Rockwell had not yet spent when he converted his case to a Chapter 7 case -- should become part of the bankruptcy estate and be used to pay off Rockwell's creditors.²

From Rockwell's point of view, he could take a homestead exemption of up to $47,500 when he first filed for bankruptcy in 2015 because he owned his residence at the time. Rockwell argued that the Bankruptcy Code and First Circuit precedent require that the bankruptcy court apply the "complete snapshot" rule, meaning the court evaluates Rockwell's affairs on the day he files for bankruptcy without considering any developments after that date (as if someone took a snapshot of the situation, leaving it frozen in time) to determine if assets are properly exempted from the bankruptcy estate.

The bankruptcy judge held a bench trial to resolve Hull's objection. The judge denied Hull's objection, explaining that "the complete snapshot view [of Rockwell's finances on the day he filed for bankruptcy] more faithfully adhere[d] to the Code, First Circuit authority, and the practicalities of administering a chapter 7 case."

On September 4, 2018, Hull appealed to the United States District Court for the District of Maine, which affirmed the bankruptcy court's decision. Hull filed a timely appeal to this court on October 22, 2019.

For the reasons that follow, we now affirm.

OUR TAKE

Before turning to the merits of Hull's appeal, we will give the reader some context on the Bankruptcy Code and law relevant to the instant litigation. When we review a district court's decision affirming a bankruptcy court's decision, as we do here, we review the bankruptcy court's decision directly. In re Sheedy, 801 F.3d 12, 18 (1st Cir. 2015). We review the bankruptcy judge's legal conclusions de novo and factual conclusions for clear error. In re Goguen, 691 F.3d 62, 68 (1st Cir 2012).

A. The Bankruptcy Code Framework

When a debtor files for bankruptcy, his interests in property are either compiled into the bankruptcy "estate" from which (to the extent the estate can afford) his creditors will be paid, or those interests are exempted from the estate for the debtor to keep. See 11 U.S.C. § 541. When the estate is created, a combination of federal and state law determines which of the debtor's assets are exempted (and will remain safe from creditor collection) and which belong to the estate (and will be lost to the debtor). See id. § 522(b); Owen v. Owen, 500 U.S. 305, 306, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). "[F]ederal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code." Law v. Siegel, 571 U.S. 415, 425, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) (emphasis omitted).

Pursuant to 11 U.S.C. § 522(b)(3)(A), a debtor can exempt from the bankruptcy estate any property permitted by his state of residence. Among those exemptions is an exemption commonly called a "homestead exemption" which protects, to varying extents, a debtor's interest in their home. See Homestead Law, Black's Law Dictionary (11th ed. 2019). Maine, Rockwell's state of residence, permits debtors to protect their "aggregate interest, not to exceed $47,500 in value, in real or personal property that the debtor ... uses as a residence." 14 M.R.S. § 4422(1)(A).

Exemptions are determined at the time the debtor files for bankruptcy. White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 69 L.Ed. 301 (1924) ; Myers v. Matley, 318 U.S. 622, 628, 63 S.Ct. 780, 87 L.Ed. 1043 (1943) ("[T]he bankrupt's right to a homestead exemption becomes fixed at the date of the filing of the petition in bankruptcy ...."); In re Cunningham, 513 F.3d 318, 318 (1st Cir. 2008). This maxim is called the "snapshot" rule because the debtor's financial situation is frozen in time, as if someone had taken a snapshot of it.³ In re Awayda, 574 B.R. 692, 697 (Bankr. C.D. Ill. 2017) (noting the "snapshot rule [ ] controls the moment in time upon which a debtor's right to claim exemptions is based"). When the snapshot rule applies to an asset and the snapshot is "complete," the asset will retain whatever status (i.e., exempt or part of the estate) it had when the debtor filed for bankruptcy and cannot be altered by circumstances that change later. See In re Williams, 515 B.R. 395, 401 (Bankr. D. Mass. 2014) (explaining that the snapsnot rule "focus[es] on the facts and law as they exist on the petition date"); see also In re Cunningham, 513 F.3d at 318. Other times, the snapshot is "incomplete," meaning that the right circumstances could later alter the status of that asset relative to the bankruptcy estate, much like one can edit a snapshot after it has been taken. See, e.g., 11 U.S.C. § 541(a)(5) (requiring that up to 180 days after filing of the bankruptcy petition, property that the debtor acquires by bequest, devise, inheritance, divorce, life insurance, or death benefit becomes part of the estate).

B. Chapter 13 and Chapter 7 Bankruptcy

Chapter 13 bankruptcy, the type of bankruptcy Rockwell entered when he first filed in August of 2015, is an entirely voluntary process. Harris v. Viegelahn, 575 U.S. 510, 135 S. Ct. 1829, 1835, 191 L.Ed.2d 783 (2015). During a Chapter 13 bankruptcy, a debtor contributes some of the income he earns after filing to the estate. 11 U.S.C. § 1306. A Chapter 13 debtor retains control of his property and works out a plan with the court to use the money from the estate to pay back his debt over three to five years. Id. § 1322.

If a debtor proceeds under Chapter 7, the chapter to which Rockwell converted his bankruptcy in 2017, all of his assets, other than the ones exempted from the estate per § 522, become a part of the estate. Id. § 541. The Chapter 7 trustee then sells or otherwise disposes of the debtor's property and pays off creditors from the estate. Id. §§ 704, 726. "Crucially, however, a ...